Sanlam Investments expects a more stringent budget

Home Business Sanlam Investments expects a more stringent budget

WINDHOEK – With the Medium Term Expenditure Framework (MTEF) cycle coming to an end, and a new Minister of Finance, we expect a similar programme rolled over on a similar basis, albeit a more stringent budget.

The challenge now should be on full implementation and adhering to whatever new MTEF targets for the next three years are rolled out, according to which debt is expected to increase to above 30 percent of the GDP threshold. On a sub-Saharan perspective, this is still relatively low but we believe there is not much further scope.

In keeping with President Pohamba’s new year message, against the backdrop of the drought, high and rising food prices, we expect a particular focus in the Budget on food security and strengthening the green scheme projects, including provision of farming inputs to subsistence farmers (including seeds, fertiliser) and perhaps measures to discourage import of foodstuffs that are available locally with possibly a greater focus on infant industry protection. It still remains an open question as to whether this would place additional pressure on domestic food prices, which remain a relevant concern.

In addition, we see more government infrastructural spending and creation of an enabling environment for the private sector to grow income and jobs. This, we expect, will be an ongoing theme.

There are already tax incentives for manufacturing and manufacturing of export goods in place. Specifically, though, in keeping with the old MTEF and TIPEEG there should be a particular focus on youth and skills development in the upcoming budget.

SACU revenues, a likely expansionary budget and the need to maintain fiscal stability and alternative sources of revenue.

There appears to be limited room to increase the tax burden on the current base. In the past, we have seen the MTEF showing an increased trend in SACU revenues and it would seem that this theme would continue on Namibian expectations. This is contrary to statements recently made by the South African Minister of Finance in his recent budget speech. Of course, projections that far out are subject to change, given fluctuations in a number of factors including the actual outcomes for real GDP growth, inflation and the level of interest rates.

The point, however, is that tax revenue that takes up around 31 percent of GDP is relatively high and the trend in this ratio over the next three years is already up. Including non-tax revenue from own sources pushes total government revenue up to an expected hefty 32 percent by 2014/15.

This however does not guarantee that there will be no additional taxes introduced at some point though. It seems one avenue that could be pursued is green taxes on companies at some point in the future.

The introduction of such a tax would be in keeping with the National Climate Change Policy that had already been drafted at the time the budget was done a few years ago. There are complications, given the relatively high level of electricity imports.

In theory, green taxes should be used to alter behaviour rather than a targeted revenue source. Hence, we still believe that taxes elsewhere should be cut to keep the overall tax burden unchanged and furthermore the time is ripe to strengthen and widen an already stretched tax base.

The strength
of revenue

The Medium Term Expenditure Framework does refer that the State Finance Amendment Bill (2009) was finalized and specifically aims to address financial management in the public sector, including strengthening revenue collection. With amendments of SACU’s Revenue Sharing Formula, Namibia currently stands to receive a lessor portion from the customs revenue pool which has historically been governments’ largest source of revenue. It hence is prudent to review the current taxpayer base, seek practical and efficient collection methods and widen an already stretched taxpayer base.

The MTEF and government
deficit going

Namibia’s fiscal space has over recent years started shrinking given the large infrastructure spending to further stimulate the economy. By the same token, the space is not limitless. To maintain its sovereign debt rating at its current level the debt ratio should not be allowed to stray too high.

Overall, there are material advantages to constraining the government’s debt level. Together, low government debt levels and low inflation help keep the structure of interest rates low, which helps underpin investment and job creation.

In economic theory, low interest payments free up resources for spending elsewhere. Reflecting the expected increase in the government debt level interest payments (domestic plus foreign) are budgeted to increase to 3.1 percent of GDP by 2014/15.

But the debt ratio is unlikely to stabilize by 2014/15 and we are not exactly sure how high it will go beyond the Medium Term Expenditure Framework. Importantly, the Ministry of Finance did suggest previously that it is looking towards keeping the government debt ratio below 40 per cent of GDP…

Ultimately, for the debt level to stabilize Namibia’s primary budget balance (revenue less non-interest spending) will need to swing from a deep deficit to a surplus. However, the MTEF still shows a primary budget deficit of 4.1 percent of GDP in 2014/15.

A swing to a primary budget surplus would require either higher taxes (for which we think there is limited room) and/or less spending.
Given reasonable long term assumptions for real GDP growth and the real interest rate on government debt implies the primary budget balance would need to swing to a slightly positive balance. That’s quite a sharp turnaround. Fiscal tightening of this order of magnitude is further onerous considering the current high level of unemployment.

What we do know is that government domestic debt issuance reached N22bn in 2013. We certainly have seen more debt issuances from state owned enterprises in the recent past and we expect this activity to continue. This compares with an initial expected domestic debt issuance of N$25.1bn. However, government has funded in the international market in the order of US$500m (about N$4bn), which was not initially budgeted for. In total, domestic plus foreign debt issuance amounted to around N$24bn by end of January 2012 (not too far off the total N$27bn initially expected).

Thoughts on infrastructure spending

Fundamentally, a stated level of high unemployment demands government intervention.
Much of the employment relates to much needed infrastructure development, which should contribute to increasing the potential growth rate of the economy (and by extension the ability of the economy to provide additional jobs). However, when government deficits are large and debt ratios are climbing, the private sector may expect more taxes down the line. This being the scenario, prudence may encourage savings today, instead of a willingness to invest and create additional jobs.

Emphasis should be placed on capital expenditure in addition to education, healthcare and skills development. These factors can boost productivity, which ultimately drives economic growth.

Final comments

It should be borne in mind that the greater the decline in government saving, the more the private sector needs to save. In the absence of an improvement in domestic private sector savings, additional savings will need to be sought abroad to finance investment spending.
With the inauguration of Dr Hage Geingob as Namibia’s third president, we expect a very strong performance-driven Cabinet with a focus on implementation of strong economic policy.

Although there has been concerns on the establishment of additional ministries, we believe that there will be an additional focus on efficiency, management and accountability.

An introduction of more youthful ministers to Cabinet indicates a focus on readying the younger politicians for succession. This being a move from transforming the ruling party from a liberation movement to a politically focussed one.