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Home / Opinion - Mid-term budget review: Walk the fine line

Opinion - Mid-term budget review: Walk the fine line

2022-10-28  Josef Kefas Sheehama

Opinion - Mid-term budget review: Walk the fine line

The mid-term budget review plays a critical role in the entire budgetary process because it sets the tone for the fiscal framework for the next main budget. The budget is the most important economic instrument of government, as it reflects the country’s socioeconomic policy priorities by translating priorities and political commitments into expenditures. This would include projections for inflation, productivity growth, unemployment and balance of trade.  The economic outlook is critical and watched closely by investors, rating agencies, taxpayers and citizens at large. Economic and fiscal stability is possible if we maximise domestic resource mobilisation and come up with strong legislative policies that will curb revenue leakages and illicit financial flows. We should have debt management frameworks to avoid the debt that we keep incurring. 

The country’s external debt continues to burden the economy by restricting access to low-cost, long-term financing required to support the desired medium- to a long-term growth trajectory. Therefore, the macroeconomic framework needs to be complemented by a range of reforms that are within government’s control. 

The foundations for economic growth include prudent and credible fiscal as well as monetary policy, a well-functioning financial system and respect for the rule of law. Achieving this requires decisive steps to build confidence, promote investment and job creation, reduce economic inequality and eliminate regulatory blockages.

Gross revenue is estimated to grow at an average pace of 7.9% to reach N$64.1 billion in FY2023/24 and N$78.3 billion by FY2025/26, underpinned by the increase in receipts from the SACU Customs Revenue Pool and strengthening domestic revenues as the economy recovers. Expenditure is maintained at 56.9% billion. 

Gross government debt (total debt stock) increases to 69% of GDP, therefore minister Iipumbu Shiimi cautiously indicating government’s commitment to continued gradual fiscal consolidation, which provides much-needed fiscal policy certainty and sustainability. 

In my view, the extent to which government can achieve fiscal sustainability will be dependent on the implementation of expenditure to curb and accelerate growth-enhancing reforms. 

This is critical for supporting the ongoing fragile economic recovery and should counteract the negative impact of several headwinds, ranging from higher energy and food prices to a relatively less accommodative interest rate environment. Government is determined to implement reforms, aimed at stimulating demand through investment in infrastructure, employment programmes and tax incentives that should boost consumption, easing the skills constraints and modernising network industries, which should ultimately lead to increased production capacity. 

Furthermore, the minister indicates that a modified tax relief programme will be introduced for another period to offer much-needed relief to taxpayers. The pro-poor tax policy changes or tax threshold increases from N$50 000 to N$100 000. Reduced tax rates may boost savings and investment, leading to further production and reduced unemployment. Well done, Hon. Shiimi! Despite this being another market-friendly mid-term review budget, implementation will again be key, particularly on the reform and expenditure fronts. Here, the political will to drive growth and boost revenue as well as keep expenses in check will once again prove to be vital. 

Facilitating faster private sector involvement in the power sector will catalyse confidence and growth more broadly. Namibia’s low growth levels and high unemployment reinforce the desire to protect existing industries and jobs. To achieve higher living standards, Namibia needs to adjust to global market demand. Climate change is starting to shape the manner in which the largest markets regulate imported and domestic products. 

Climate challenges also represent opportunities to generate new economic activity. Jobs and investment can be created by drawing on private-sector skills and capital, while demand for carbon-intensive products can be managed with incentives and penalties. Industrial policy should support businesses that can respond to these challenges. A future-focused policy that takes cognizance of climate change would support efforts to raise youth employment as announced in the National Budget in sectors such as business-process outsourcing, tourism and technology.

Weak domestic demand continues to limit firms’ ability to pass higher prices on to consumers. There is a risk that higher administered prices and exchange-rate depreciation could put upward pressure on inflation. 

In line with government’s commitment to fiscal sustainability, the review Budget proposes a set of measures to reduce public spending as a share of GDP, improve the composition of spending by reducing growth in the wage bill, and maintain good budget execution. Although local economic development projects often focus on small areas, they usually require collaboration among stakeholders across government, the private sector and community organisations to succeed.

The financial performance of several large state-owned companies continued to deteriorate sharply over the past years, leading to an increasing drain on public resources. Unlike their private counterparts, most state-owned companies hold developmental, rather than profit-driven mandates. Nonetheless, these entities need to be financially self-sustaining. 

In recent years, a pattern of mismanagement and poor governance at major state-owned companies has led to operational failures, financial distress and increased demands for taxpayer support through the national budget. This problem is compounded by broad, sometimes unfunded mandates and, in some cases, outdated business models. Increasingly, however, these entities rely on external funding, government-guaranteed debt and bailouts to sustain operations.

To resuscitate the Namibian economy would require massive investment in infrastructure, skills and training; enacting and enforcing enabling-business incentives to stimulate the production of goods and services for local consumption and exports, and having a clear fiscal and monetary policy direction for the economy.  Namibia must exercise caution, as debts are paid by revenue, rather than GDP – and also given the low-tax to-GDP ratio. Furthermore, incurring more debt in the current year would mean adding pressure on future budgets due to debt servicing obligations.  One of the biggest risks facing the budget is the poor implementation of capital projects, which is a major concern for stakeholders in the economy – and to a large extent influences the level of impact of the budget on the private sector and the economy. Whether the budget will meet up to the expectations of Namibians and deliver the promised change depends largely on the implementation of institutional and structural reforms targeted at improving the budget process.

To this end, it was evident that during the Covid-19 pandemic people lost their means of earning and ability to access capital. By allowing partial access to retirement savings, the government will be providing room for people to use some of their retirement savings in times of distress. 

Therefore, it is argued that the problem is the limited number of resources – and that, therefore, there is no good mechanism for allocating resources.  In other words, the limited amount available imposes choices that are always far from perfect. But if we reverse this perspective, then it is exactly because there are limited resources that a transparent mechanism and procedure are needed to ensure minimum standards and the best value for money.

2022-10-28  Josef Kefas Sheehama

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