IJG: Spending, debt financing

It should be noted from the outset of this piece that the budget announced in 2014, for the 2014/15 to 2016/17 Medium Term Expenditure Framework (MTEF) period, is a budget aimed very much at 2014/15, rather than the MTEF as a whole. As such, the analysis contained herein too shall focus primarily on the 2014/15 financial year, and not the MTEF as a whole.
Introduction:
In the 2014 budget announcement, the expansionary budget, which was introduced in 2011 for the first time and has remained in force for since, not only remained, but was dramatically up-scaled. This move was somewhat surprising given the dramatic recovery in global conditions and a very positive growth outlook for Namibia. As such, the current budget can no longer be deemed counter-cyclical, and with growth projections of 5.2% for 2014 (before the additional expansion was announced), the current budget is now very much pro-cyclical.
While the counter-cyclical budget will have helped Namibia to ride out a challenging economic time given prevailing headwinds from Europe and North America, particularly, the current pro-cyclical expenditure may start to cause the economy to overheat if not reined in over the MTEF period. However, it should be noted that the current size of government in the local economy is such that should the tightening of the fiscal tap be hasty in nature, the growth slowdown too could be notable.
The pro-cyclicality of the current budget is further reinforced by the breakdown of expenditure between developmental activities, aimed at growing the local economy through public works and other multiplier-type activities, and operational activities. The current budget is highly focused on operational expenditure, which represents over 83% of total expenditure, with the remaining 17% going to developmental expenditure. The operational budget is the recurrent part of the budget which is utilised to provide and fund general governmental services to the economy and her citizens, while the development budget is focused on key projects to provide infrastructural and developmental services to the economy.
Operational expenditure:
Over the past 10 years, the operational budget has grown by 16.3% on average (CAGR), while nominal GDP has expanded by just 14.2% (GAGR) over the same period. As a result, the operational budgets share of nominal GDP has grown from 30% in 2004/05, to 36% in the current financial year. In this regard, the current budget is no exception, and in fact sees the single largest increase in nominal operational expenditure in the past 20 years, with an increase from N$39.5bn in 2013/14, to N$50.5bn in 2014/15, or some 27.9%. Given that this increase is coming off an already high base, thanks to the expansionary fiscal policy implemented since 2011/12, the absolute and relative increase are both vast by historical standards.
Moreover, the current increases in expenditure are not, as was the case in 2011/12, part of an expansionary policy aimed at driving growth and employment creation, but rather the result of large wage increases and a general civil service re-grading that took place through 2012/13 and 2013/14. Thus, a large percent, approximately 33%, of the increase in expenditure between 2013/14 and 2014/15 can be attributed exclusively to increased personnel expenditure, particularly for the Ministry of Education, and Ministry of Defence. As such, personnel expenditure now represents 36.6% of total expenditure, and 43.5% of operational expenditure.
As well as large increases in personnel expenditure, transfers from Government to State Owned enterprises rocketed up between 2013/14 and 2014/15, going from N6.6bn to N$8.3bn, with the Veterans Subvention Fund receiving the single largest transfer of nearly N$1.5bn.
Additionally noteworthy in the 2014/15 budget was the large increase in expenditure on vehicles, which more than doubled from N$466.5m in 2013/14, to N$984.4bn in 2014/15.
In terms of a breakdown of expenditure by Ministry, in the current budget, three Ministries make up nearly 50% of total expenditure, namely Education (24%), Finance (12%) and Defence (12%). The allocations to Education and Defence go, predominantly, to fund personnel costs, while the large allocation to Finance represents transfers to State Owned Enterprises and social transfers.
Debt Financing:
The projected deficit for 2014/15 is 5.4%, despite the highly expansionary position taken by the Ministry of Finance, particularly with regard to operational expenditure. The reason for this is that the Ministry is projecting huge growth in revenue, along-side growth in expenditure. As such, debt financing for 2014/15 is expected to be fairly moderate at just N$7.7bn for the year. Nevertheless, given the redemption of the GC14 (N$1.53bn) and GC15 (N$1.647bn) during the fiscal year, gross issuance of debt will be more like N$9.7bn all told. The majority of this gross issuance is expected to be locally placed, with around N$3bn worth of issuance on foreign platforms.
Shortfalls:
Sustainability:
The current budget raises a number of concerns, most notably issues of sustainability. As previously stated, the wage bill of Government is large and ever increasing in absolute and relative terms. Given the nature of employment and unionisation in Namibia, reversing this trend is all but impossible, however efforts need to be made to stem this unsustainable growth in the wage bill.
Additionally, the size and nature of transfers to State Owned Enterprises is of concern, as once again issues of sustainability are focal. While the existence of SOE’s is not in itself a concern, and while government transfers to such are not a concern per se, the nature of the actual budgeted transfers may be. From a sustainability point of view, not only are a number of SOEs (not all) underperforming and reliant on government hand-outs to cover operational and capital expenditure, but accountability for funds transferred to SOE’s is similarly sorely lacking. A number of SOE’s have failed to issue financial reports for a number of years, and as such there is little accountability for any funds that are received by such.
Accountability:
On the issue of accountability, the challenges go far deeper than just the State Owned Enterprises, as many Ministries, Offices and Agencies also fail to report back to Finance on the use of funding, and the effectiveness of such in achieving general development goals. As such, the allocation of funding is often far from optimal when looking to move towards long and short-term developmental goals.
Allocation:
The allocation to defence spending is counterproductive with regards to development, and given that finances are finite, the opportunity cost (that is to say the foregone opportunity to spend the funds on a more productive developmental activity) is huge.
Projections:
The projections, particularly on the revenue side of the tables, appear somewhat unrealistic. Should the Ministry fail to realise the projected revenues, while spending at estimated levels, the deficit could be significantly larger than projected. This too raises concerns as to sustainability, as well as the potential cost of financing a large deficit.
Company profile: IJG Securities
IJG is one of Namibia's leading financial services companies, with a strong focus on stockbroking, and as such is a registered member the Namibian Stock Exchange. In addition to offering stockbroking services, we provide our Clients with a full range of investment-related services, including money market, private equity and advisory services. We are also well-known and respected for our research activities within the country and region.
IJG has assisted in listing 20 out of the last 22 companies and five (5) of the last six (6) Domestic Medium Term Note Programmes (DMTNP”) on the Namibian Stock Exchange and has helped raise over N$2.0 billion on the Namibian Stock Exchange through bond and equity issues since 1999 for its clients. As a result, IJG is currently the sponsor to approximately 50% of all the companies listed on the Namibian Stock Exchange.
Through our international associates, we have access to regional and international expertise to provide a superior service to our Clients. We are on-the-ground professionals, driven by outcomes and adding real value by drawing on our collective skills and experience to develop solutions for our Clients.