The Namibian Government’s deficit, debt and the financing thereof

Over the last six years the Namibian Government has been running a pro-cyclical budget, which has seen it spending an extraordinary amount of money despite the economy faring quite well. The antithesis of a pro-cyclical budget is a counter-cyclical budget or fiscal policy. Keynesian economic theory states that when times are good and the economy is doing well, government should rein in spending and increase taxes in order to save for the inevitable bad times that will come, and then use counter-cyclical fiscal policy by increasing spending and cutting taxes in the bad times in order to soften the blow to the economy. This is exactly what the Namibian Government did in 2009/10 after the Great Recession. By the end of 2010, real GDP growth had rebounded to 6% and the Namibian economy was recovering. However, despite spending significantly more relative to prior years in the wake of the Great Recession, Namibia still had very low levels of debt with a debt-to-GDP ratio of 15.4% relative to a 40% median for BBB-rated countries (our peer group) by the end of 2010. Therefore, we had the fiscal space to ramp up spending. One could argue that it was justified due to our infrastructure deficit, high unemployment rate and high levels of inequality. This, coupled with an accommodative monetary policy from the Bank of Namibia (BoN), meant that money was cheap and times were good. But as with any great party, there comes a time when the music stops and we all need to get back to normalcy. The tough economic conditions that many consumers and industries currently face are therefore not unusual, but part of the normal economic cycle. There is no need for panic on the part of Government, consumers, industry or investors. There is reason for concern, but a level-headed approach is required. The response by the central bank to start tightening monetary policy in 2014 and introduce 1.5% of interest rate hikes, as well as amendments to the Credit Agreements Act to discourage borrowing by businesses and consumers were correct. In the same vein the decision by the Minister of Finance to rein in spending aggressively in his mid-term budget 2016/17 was what the bond market anticipated. This was most evident from the fact that demand for government debt plummeted in 2016. As can be seen in the graph below, the bid-to-cover ratio for the BoN auctions all but dried up. This means that Government was struggling to finance the ever-ballooning budget deficit and the options were limited. Thankfully, the Namibian Government chose the more prudent approach, which was to cut spending aggressively. While the consolidation is severe in absolute terms (N$4.5 billion cut in expenditure in the mid-term budget 2016/17), in relative terms it is not, because it means that the expenditure ceiling was back to the levels of the 2014/15 fiscal year.Insert graph Bank of Namibia Bond AuctionsWhat is encouraging to note in the Minister of Finance’s budget for 2017/18 and the Medium Term Expenditure Framework (MTEF) for 2017 to 2020, is that he has managed to increase spending year-on-year – but in a more sustainable manner, mostly due to a positive surprise in SACU receipts. This means that the budget deficit for 2017/18 will be cut to a forecast 3.6% of GDP from 6.3% in 2016/17. In absolute terms this means that Government is looking to issue debt of about N$6.1 billion in 2017/18 relative to about N$10 billion issued in 2016/17, which is a decline of 39%. This is a positive development as Government was at risk of losing credibility with investors and the credit ratings agencies due to the fact that our debt metrics had deteriorated over the last few years, and the forecasts and the self-imposed benchmarks as presented by the Ministry of Finance have proved to be incorrect (forecasts) and in breach (benchmarks) year after year.What is important going forward is that the road map laid out by the Minister of Finance becomes gospel and that any surprises – and there will always be surprises – are dealt with in a consistent manner. Perhaps we can take a leaf out of the Keynesian handbook going forward and any positive surprises should be stockpiled. The current crisis is also a good opportunity for Government to step back from being such a dominant force in the local economy and make room for the private sector to pick up the slack. This will require policy that is consistent and clear in its directives. As the private sector we should be more collaborative in our approach to solving Namibia’s challenges.

The Namibian Government’s deficit, debt and the financing thereof

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Republikein 2025-12-23

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The Namibian Government’s deficit, debt and the financing thereof

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Republikein 2025-12-23

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