While lending agencies, such as the International Monetary Fund, advised Namibia to continue with its fiscal consolidation strategy to preserve its fragile debt sustainability, local economic analysts are concerned about the finance minister’s fiscal space, which is facing escalating pressure from rising inflation and interest rates.
This is as finance minister Iipumbu Shiimi is scheduled to table the mid-term budget review today.
Shiimi is faced with this daunting task in the face of worsening global economic conditions, exacerbated by the Russia-Ukraine conflict that sent energy and food prices soaring. This deteriorating global situation subsequently saw the IMF revising global growth downward from 4.4% in January 2022 to 3.2% in its October update. According to the Namibia Statistics Agency, in September 2022, the annual inflation rate continued an upward trend increasing by 7.1%, compared to 3.5% in September 2021.
Transport, food and non-alcoholic beverages continued to be the main contributors to the annual inflation rate, with a contribution of 2.8% and 1.7%, respectively.
To add insult to injury, Namib Mills earlier this month announced an increase to the price of maize meal, flour, pasta and other products – effective from 14 November.
Maize meal will increase by 13%, instant porridge by 9%, Pasta Polana by 3%, Pasta King by 3%, wheat flour by 5%, Complete Mix by 5%, bread by 4%, while sugar will cost 6.5% more.
Although the domestic economy has started showing signs of recovery, financial experts have reiterated the advancement of structural reforms as well as protecting the society’s most vulnerable to nurture private sector-led inclusive growth and to reduce unemployment and inequality.
According to a senior lecturer at the University of Namibia, Omu Kakujaha-Matundu, the finance minister is caught between a rock and a hard place when he tables the mid-term budget review.
“Reduce the public budget via constrained public spending and stimulate the economy through increased public spending. Unfortunately, both actions seemed foreclosed. He has just run out of fiscal space,” Kakujaha-Matundu pointed out.
The Unam lecturer explained under current circumstances, Shiimi is expected to shore up the poor by zero-rating value-added tax (VAT) on some basic foods. But he questioned how the minister is going to fund tax expenditure from zero-rating basic foodstuffs.
Most importantly, he said, one could have expected Shiimi to spell out how he could stimulate the economy, but the economist noted the minister has no tools to do so.
Meanwhile, head of research at High Economic Intelligence Salomo Hei expects Shiimi to pronounce himself on the delayed census: “It is an important tool when it comes to measuring the impact and economic planning in the country; it can’t be ignored”.
He added Namibia has been in fiscal consolidation for the past financial circles, and cautioned that this has consequences.
Hei suggested Shiimi should highlight challenges brought about by this approach and how to overcome them.
Also weighing in, MD of Twilight Capital Mally Likukela expects the budget to be a continuation of the main budget, tabled on 24 February 2022, in terms of macroeconomic objectives set out in the Medium-Term Expenditure Framework (MTEF).
“Contrary to the IMF’s wish of a contractionary budget, the minister will maintain an expansionary stance. This is necessitated by the fact the economy is still not out of the woods yet, and it still requires a stimulation policy,” Likukela commented.
“The deficit will expand, and so will the total debt. The social sector will remain a priority for now, as many people are still counting the losses from Covid-19. Special mention will be on the energy sector, particularly the green hydrogen agenda.”
Contributing his analysis, local economist Klaus Schade explained that both rising inflation and rising interest rates have a negative impact on the national budget, as it squeezes fiscal space further due to increased costs for goods and services as well as borrowing costs – even though he feels domestic economic growth could be slightly stronger (3.2%) than anticipated in the budget (2.9%).
“In addition, the government agreed to a wage and salary agreement that increases expenditure further. Since there is usually limited space to reduce operational expenditure, the government has the choice between cutting capital expenditure further, which is already at a very low point – and which will affect future growth opportunities or increase borrowing, although interest rate payments already account for more than 15% of revenue against Namibia’s own fiscal target of 10%,” Schade stated.
Schade does also not expect government to make major adjustments to the current budget, despite the changing economic environment, but he noted it will be interesting to see plans for the next financial year.
Said Schade: “There is a need to adjust the tax threshold and the lower income tax brackets that have remained unchanged for a decade. This would ease the burden on low-income taxpayers. A major reform of PSEMAS [Public Service Employee Medical Aid Scheme] could also reduce the current subsidy of about N$2.3 billion, while increasing the share of fishing quotas that are auctioned have the potential to increase revenue”.
He further proposes reviewing existing tax-deductible allowances and delaying the announced increase in tax-deductible pension fund contributions, since they do not benefit low-income earners most in need of support for their retirement age.
Likewise, Schade suggested, the current zero-rated VAT for a number of items should be reviewed as well, as they do not benefit the poor.
“The State Ownership Policy should provide guidance on how to transform public enterprises and leverage other State assets. A decision on the way forward for the RCC (Roads Contractors Company), for instance, is overdue as are subsidies for other commercial public enterprises. In this regard, we expect an announcement regarding the merger of the Ministry of Finance with the Ministry of Public Enterprises,” Schade added.
Overall, Schade called for clear prioritisation of expenditure that he said “contributes to a well-educated and healthy population, and supports job creation, equality and wealth creation for all. Some hard choices have to be made”.
Another economic analyst Josef Sheehama predicts overall growth estimates to be lowered. He also foresees the finance minister will review revenue forecasts for this year in the wake of inflationary pressures.
“Furthermore, Shiimi should provide clarity on how government proposes to reprioritise scarce funds, stimulate economic growth and create jobs. A combination of global shocks, currency instability and the effects of the Russia-Ukraine [conflict] have weighed down on Namibia’s economic performance. The review is really necessary, taking into account the currency volatility, exchange rate movements and inflationary pressures, so basically, it is the fiscal authorities’ role to cushion ordinary consumers,” Sheehama stated.