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Opinion - The fatal error of borrowing

2022-09-30  Maihapa Ndjavera

Opinion - The fatal error of borrowing

Government’s public debt has been increasing at a rapid speed over the years, leaving behind a much-needed component of economic growth. 

One would question what the main purpose of such borrowings is if results are not visible.  So, the analysis would be that a country cannot have debt growing in double digits while the economy is growing only at very low single digits.

One big reason is that debt is used for consumption purposes and debt servicing, which economic experts view as dangerous for economic growth for future generations. The Namibian economy is reeling from the impact of an economic downturn, prolonged drought and effects of the Covid-19 pandemic.  Currently, the three aspects force the economy to go through very high unemployment rates and a questionable poverty rate. The domestic economy grew by 5.3% for 2022’s first quarter.  According to the 2022/23 budget statement as at January 2022, the total debt stock stood at N$124.8 billion, which is 66.7% of the gross domestic product (GDP). 

Total revenue for the medium-term expenditure framework (MTEF) was projected at around 29.8% of GDP by the finance ministry.

In simple terms, the total debt stock is growing at a faster pace than the revenue government is expected to collect.

Another fact is that interest payments are expected to rise to N$9.2 billion in the 2022/23 financial year, which is equivalent to 15.4% of projected revenues for the year.  Also, this is above Namibia’s internal benchmark of 10%. It is, thus, clear that much of the revenue collected for the financial year will be absorbed by the servicing of this accumulating debt. Finance minister Iipumbu Shiimi, during his budget statement, said there will be adverse impacts on allocations to key programmes in furtherance of Namibia’s national development objectives.  For the last 10 years, to a great extent, domestic debt has been growing at a faster rate than foreign debt.  This translated into higher debt servicing costs as a percentage of revenue for the country.

In view of the stated, he advised Namibians to continue with concerted efforts to live within their means and stem the pace of debt accumulation.

Furthermore, Namibia’s operational budget lays out the development budget in terms of allocation.  As has been the case, the operational budget is mostly dominated by civil servants’ salaries, which bear no fruits when it comes to economic growth. So, most of the expenditure is going towards consumption purposes, and not integral placements.  In terms of the 2022/23 national budget, the operational budget received a percentage share of 91.8 of the total budget, while the development budget received an 8.2 percentage share. 

This is according to the medium-term expenditure framework for 2022/23 to 2024/25.

This, with no doubt, has negative long-term effects on the domestic economy and future generations. 

Looking at the consequences, with high debt figures, future generations are expected to inherit this huge amount of debt.  The generation will have to work harder and bear their parents’ sins of debt accumulation by producing high revenues for the country and investing in productive means that will be able to yield results, such as economic growth and much-needed employment.

Secondly, if much of the debt is for consumption purposes, then less will be available for developmental projects, such as health and education. 

This will, therefore, deteriorate the living standards of citizens.

 If debts are poorly managed, Namibia can expect a further drop in living standards. Unemployment is another aspect that one can link to the poor management of debt in Namibia. 

The country failed to tackle the skyrocketing unemployment rate, meaning this remained meaningless. 

Imagine, Namibia with one of the youngest populations on the continent has youth unemployment at a staggering 50.30%.  According to figures from the Namibia Statistics Agency (NSA), the country’s overall unemployment rate dropped slightly from 34% in 2016 to 33.4% in 2018, which is when the last census was done.  Surely, if a census is done soon, one can expect a shocking new percentage, given the impact that happened due to Covid-19. 

Government is, thus, expected to come up with initiatives to tackle that elephant in the room – debt accumulation.  Furthermore, government should see how it can increase developmental allocations from loans it acquires to make sure these debts are able to yield fruits that will tackle the socio-economic challenges the country is going through. 

Finally, a framework should be in place to make sure these loans are not for consumption purposes and debt servicing.  This should be the least to have a bite from the loans.

Debts are not all bad, but it is just how it is managed and allocated, and keeping them at a reasonable level will not put the economy under threat in the future.

Let us take a small personal example and treat public debt as personal debt. 

I am sure one does not sleep peacefully at night when they have a high debt that keeps knocking at their savings door.  It simply robs your future savings, as you keep servicing it. 

The feeling is good when you acquire it, seeing those triple zeros in your account, not knowing the headache if it surpasses the healthy level. 

The word on the side for government debts is that borrowing should be for production and not for consumption purposes. -

2022-09-30  Maihapa Ndjavera

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