Fiscal consolidation in the time of Covid-19

Risk to budget path

18 May 2020 | Ekonomie
Naufiku Hamunime - Given the rapid pace of developments, it’s difficult to accurately quantify the impact of the Covid-19 outbreak on the domestic economy.

However, the performance of the economy and the fiscus will depend on how effectively the virus can be contained and how well the national budget is managed.

According to the International Monetary Fund (IMF), almost every economy in the world will experience a reduction in output in 2020 as a result of the Covid-19 outbreak - with the global economy projected to contract by 3%.

In Namibia, the pandemic has reversed the positive sentiments we had at the beginning of the year of achieving at least 1% growth.

In the wake of Covid-19 the country’s growth prospects have weakened substantially with real gross domestic product (GDP) expected to contract by 6.9% in 2020 driven by contractions in the hotels and restaurants, mining, construction, transport and manufacturing sectors – among others.

While the current economic dip is comparable to other global downturns we’ve experienced in the past - the most recent being the 2009 global financial crisis, the IMF expects the impact of the pandemic to be much “worse”.

In 2009, the domestic economy was able to withstand the impact of the financial crisis due to the availability of fiscal buffers. However, with public debt approaching 60% of GDP and threatening (by some estimates) to reach as high as 70% of GDP (double the government’s debt threshold), it is clear that that fiscal space no longer exists – and as such, prudent public finance management is needed now more than ever.

Key risk

One of the key risks facing the fiscus is that the severity of the economic fallout could potentially jeopardise or disrupt the government’s ability to adhere to its fiscal consolidation strategy.

The outbreak has brought about the need for the government to increase expenditure in the short run in order to support hard hit industries and vulnerable members of society. This, in the midst of reduced tax collection will likely increase the deficit more than previously anticipated and undermine the government’s ability to stabilise the growth trajectory of the debt stock.

The pandemic and ensuing economic downturn have highlighted, yet again, just how vulnerable Namibia’s small open economy is to global headwinds. And while we know - due to the scale of the pandemic, the economic downturn was inevitable – the degree of the economic fallout was invariably heightened by structural weaknesses in the economy.

Rebuilding buffers

Looking forward, a recovery is anticipated.

The IMF projects the global economy to grow by 5.8% in 2021. Domestically, the Bank of Namibia (BoN) expects the economy to grow by 1.8% in 2021.

If this growth materialises, rebuilding fiscal buffers and investing in productive sectors will have to be key priorities.

Practically, this will mean that in future the development budget will need to be safeguarded to fund critical infrastructure and not be underspent or diverted to other uses – as has been the case previously.

Additionally, now more than ever, longstanding issues such as the wage bill, reliance on revenue from the Southern African Customs Union (SACU), high public debt, and growing interest payments – will need to be addressed in order to increase the country’s fiscal strength and ability to adequately respond to shocks.

* Naufiku Hamunime is an economist at Standard Bank Namibia.

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