A fiscal consolidation budget which stimulates growth

Tjivi Mbuende - 2016 was a challenging year for the local economy as commodity prices declined significantly and the severe drought had significant implications. It is against this backdrop that the recently tabled national budget for the 2017/2018 financial year was submitted with two main objectives. Primarily to reduce the underlying fiscal deficit by reining in high debt levels the Government is currently experiencing. Furthermore, the aim was to allocate scarce resources to stimulate growth following wide spending cuts in the 2016 mid-year review.

Mining continues to be one of the top contributors to Namibia’s GDP. A low commodity price environment and a slowdown in diamond and zinc, which have the highest weighting in the local Namibian quarrying sector added additional pressure on this sector. Additionally, the agricultural sector’s was impacted by drought which resulted in a decline in marketing activities and food production. The GDP is expected to have slowed down to 1.3% in 2016. 2016 was also a challenging year as Fitch Ratings revised the nation’s outlook from stable to negative whilst affirming a BBB- rating. Lower than expected revenues, increased debt and expenditure contributed towards the negative outlook.

Fiscal deficit reduction

Following the midterm budget review, expenditure was fairly stable. Total expenditure of N$62.54 billion was budgeted for the 2017/18 financial year. Close to 50% of government expenses will be due to personnel cost. Whilst Government’s role in the economy in terms of employment creation is important, allocating such a high wage bill will not be sustainable over the long term. Government has recognised that and has taken measures such as freezing the size of the civil service and reviewing the current costly medical aid coverage.

The social sectors received the lion’s share of the budget which amounted to N$27.44 billion. The Ministry of Basic Education, Arts and Culture is set to receive N$12 billion which is higher than the midterm review. An additional N$3.1 billion was allocated to the Ministry of Higher Education, Training and Innovation.

Defense spending also remained high on the agenda with the Ministry of Defense being set to receive N$6.5 billion. Although the allocation is significant, it represents a reduction relative to the 2016/17 financial year.

Although our debt servicing costs are below the limit of 10%, there was an increase from 8.4% in 2016 to 8.8% in 2017. Should the debt burden not be contained, it would become more challenging for the nation to pay which would imply additional measure would need to be taken in order to meet the large debt obligations.

The budget also aimed to decrease the budget deficit from 6.3% in 2016 to 3.6% in the 2017 financial year. This is a positive step in the right direction but is still above the “BBB” category median which could continue to concern international rating agencies’ outlook.

Over the 2016 financial year, revenue was expected to be N$51.5billion and is projected to increase to N$56.6 billion. The largest component of revenue was from taxes followed by SACU receipts. Income tax on individuals was the highest contributor to taxes as it has been over the last few years.

Conclusion

The national budget is a good indicator as to what can be expected in terms of the state of our economy. Fiscal consolidation was high on the agenda due to a slight increase in expenditure relative to the previous year and increased revenue. However Government spending does not necessarily translate into economic growth. Only time will tell if effort inspires growth.

* Tjivi Mbuende is Standard Bank Namibia’s Head of Public Sector.