A soaring public debt bill, underperforming State-owned entities and a need to urgently diversify the domestic economy were some of the main concerns that emerged at yesterday’s tabling of the mid-year budget review.
As such, Finance and Public Enterprises minister Iipumbu Shiimi kept additional expenditure broadly aligned to anticipated additional revenue collections and re-allocated N$167.3 million across votes within the development budget.
In summary, Shiimi increased the operational budget by N$2.5 billion, while the development budget remains unchanged at N$6.5 billion and an additional N$2.3 billion has been allocated to debt servicing and honouring of contingent liabilities.
Also, based on better-than-expected revenue collection from businesses and individuals, Shiimi adjusted national revenue collection estimates up by 22% or N$3.8 billion from N$74.7 billion that was anticipated previously in the main budget.
“These were the items we deemed unforeseeable and unavoidable, and warranted additional allocation from the available resources,” Shiimi explained.
Over the Medium-Term Expenditure Framework (MTEF) period, revenue is forecast to grow by an average of 8.8% to reach about N$82 billion by the 2025/26 financial year.
“For the current financial year, 2023/24, the preliminary indicators point in many respects to continued improvements in fiscal fundamentals, driven in part by, among others, positive economic growth prospects and strong revenue mobilisation,” said Shiimi.
The minister explained that positive adjustments in revenues thus far for the current financial year reflect strong mid-year tax collection rates.
This includes income tax on individuals, corporate tax on both diamond mining companies as well as non-mining companies, value added tax and dividends from companies, such as Debmarine Namibia, the Namibia Post and Telecom Holdings, the Namibia Desert Diamonds and the Namibia Port Authority.
Said Shiimi: “Significant upward revisions were also done on the categories of non-resident shareholder’s tax and withholding tax on services, for which mid-term collections are more than 90% and 130%, respectively. These outcomes partially reflect early tax gains from the ongoing exploration activities in the natural resources sector”.
SACU uncertainty
During February this year, Shiimi tabled a total budget of N$86.4 billion, consisting of N$66.1 billion in operational expenditure, N$6.5 billion in development expenditure, N$2 billion in projects to be funded outside of the State Revenue Fund and N$10 billion in interest payments.
Now, to properly plan for the next financial year, Namibia awaits its exact share from the Southern African Customs Union (SACU) pool, which will only be known in a few weeks.
However, Shiimi has already warned that he is concerned about a notable reduction in SACU revenue: “The volatility in SACU revenues further underscores the need for Namibia to aggressively diversify her economy with the view to reduce dependence on SACU receipts”.
Being cognizant of this potential downside development in revenue, Shiimi noted that Namibia’s strategy has been developed to ensure fiscal sustainability by supporting ongoing allocations to existing programmes.
But the minister admitted that as long as the revenue outlook for the next financial year remains uncertain, there is a constraint on undertaking new significant expenditure commitments as well as committing to new policy proposals.
Public debt
The minister further cautioned that the public debt servicing bill has increased beyond the levels anticipated in the main budget. This is as the debt portfolio rises, coupled with prevailing tight financial conditions.
This means Namibia is paying N$1.7 billion more, up to a total N$11.8 billion, which is equivalent to 15% of projected revenues for the year, during the current financial year to service its national debt.
“The sharp increase in interest costs reflect unanticipated sharp movement in money market rates, relative to the increase in the benchmark rates. Debt servicing costs continue to absorb an increasing portion of the resource envelope, now exceeding expenditure on key social services, such as health and social protection.
“As a developmental state, it is important to always prioritise economic and social development objectives in the design of fiscal policy. The degree to which debt servicing is increasingly crowding out such key developmental objectives adds further impetus to the call to prioritise stabilising the pace of debt accumulation going forward,” Shiimi warned.
The overall budget deficit is projected to remain steady at 4.2% of the GDP during the current financial year, with a slight improvement to levels estimated in the main budget.
In nominal terms, however, the budget deficit is revised upwards slightly by N$579 million.
Shiimi noted that over the MTEF, the deficit is projected to average about 4.4% of GDP, subject to the revenue path materialising over the next two years.
“The positive economic performance registered over the past two years and further projected over the medium-term augurs well for our fiscal indicators. In FY2023/24, the public debt stock is expected to increase to N$153.8 billion, equivalent to 66% of GDP, a slight improvement from 67.9% in the previous financial year,” said Shiimi.
Public enterprises
The minister continued his annoyance with public enterprises, stressing that continuously bailing them out takes away resources needed for critical social investments, such as education, healthcare, housing, agriculture and social protection.
Emphasising that the situation at some public enterprises warrants urgent and bold actions to ensure the sustainability, Shiimi said: “The fiscal risks from the operations of public enterprises have increased significantly through both requests for budgetary allocations as well as settlement of government guaranteed loans”.
Tax relief
Meanwhile, Shiimi confirmed that with a view to providing some tax relief to low-income earners, government was increasing the threshold for income tax on individuals from the current N$50 000 to N$100 000.
Also, government will be reducing the non-mining company tax rate by two percentage points over the next two years to 31%, effective in April 2024 – and a further reduction to 30% in April 2025.
Additionally, the finance ministry will make some adjustments on personal income tax tables and will introduce an Internship Tax Incentive Programme, aimed at incentivising employers to enrol more interns by providing an additional corporate tax deduction. The total financial implication of these measures for the government is estimated at N$126 million.
First impressions
Reacting to yesterday’s mid-term review, Josef Sheehama, an independent economic and business researcher, took an issue with State-owned enterprises, saying they must develop and implement sustainable turnaround plans for a sustainable future.
“We cannot continue bailing them out. Drought relief is welcome, and we need to implement a sound strategy. Furthermore, the extent to which government can achieve fiscal sustainability will be dependent on the implementation of expenditure curb and accelerated growth-enhancing reforms,” said Sheehama.
He added 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 productive capacity,” the researcher applauded.
Also, local economist Klaus Schade felt there is some good news in the mid-year budget review statement.
“The budget deficit has fallen below 5% to 4.8% in 2022/23 and an expected 4.4% in 2023/24. Public debt has not surpassed the 70% mark but remains below 67.9% in 2022/23, and an anticipated 66% in the current FY 2023/24. However, the monetary policy decisions by the Bank of Namibia are having a negative impact on government finances as statutory expenditure climbs back to 15% of revenue in contrast to the 10% target,” Schade stated.
He added that despite higher revenue, no additional allocation to the development budget is envisaged because of the low execution rate so far.
However, Schade feels higher revenue could have been used to build, for instance, more classrooms to support the Namibian construction sector, create employment and support GDP growth positively.
“While the minister reiterated the fiscal policy amendments envisaged for the next years – income tax threshold increase, etc. – he has not mentioned the PSEMAS study that was conducted some time ago. A reform of PSEMAS is urgently needed to reduce the government contribution of more than N$2 billion that could be put to better use; for instance, investment in social infrastructure,” Schade stated.
“The Internship Tax Incentive Programme is a good step forward, but it needs to be ensured that businesses do not replace full-time employees with interns (where possible) to reap tax incentives. Also, replacing food distribution under the Drought Relief programme with food vouchers is a step in the right direction to increase efficiency and decentralise the benefits,” he concluded.