Dead-end debt
Government’s record deficit, resulting in a borrowing spree, means interest payments are now the third largest expense account in the budget.
28 October 2020 | Economics
This MTEF illustrates that government continues to spend beyond sustainable long-term levels, where despite strong revenue collection, large deficits are run. – Cirrus Securities
Jo-Maré Duddy – Government will spend about N$1.2 billion more in 2020/21 on interest on its debt than on its entire development budget for Namibia.
The Mid-Year Budget Review (MYBR) tabled recently by finance minister Iipumbu Shiimi estimates interest payments for the current fiscal year at more than N$7.7 billion. The revised development budget for 2020/21 is about N$6.5 billion.
Over the medium-term expenditure framework (MTEF) interest payments are set to increase significantly. By the end of March 2024, it will exceed N$10 billion.
The minister’s latest budget, however, does not contain projections for development spending over the MTEF and comparisons between interest payments and the development budget are therefore not possible.
Interest payments are now the third largest expense account in the budget, second only to the combined operational and development expenditure on education, arts and culture, as well as health and social services, Cirrus Securities points out.
It is worrying, the analysts say, that government in 2020/21 will spend only N$300 million less on servicing its debt than it will on total health and social services.
The ballooning interest payments are the result of the record deficit of nearly N$17.6 billion expected for 2020/21. As a result, total debt this year is projected at close to N$119.8 billion. Although Shimmi projects lower budget deficits over the MTEF, debt is set to increase to about N$158.4 billion by 2023/24. (For a complete breakdown of debt, turn to page 4.)
REVENUE WOLF
Around 14% of the money expected to flow into state coffers this year will be gobbled up by interest on debt.
Government’s ceiling for interest payments as a share of revenue is 10%. It has been breaching this benchmark since 2018/19, when interest payments guzzled 10.7% of revenue. This figure is projected to increase to nearly 16%, according to the latest MYBR.
Interest payments as a share of gross domestic product (GDP) is also exceeding government’s benchmark of 3%. In 2022/21, interest payments are projected at 4.4% of GDP, rising to 4.9% by 2023/24.
Cirrus says the finance ministry expects to service its debt at marginally lower effective interest rate levels than those of the last fiscal year.
“The effective foreign interest rate (in Namibia dollar) for FY2020/21 is expected to be 7.3%, whereas effective domestic interest is anticipated to equate to 4.2% (heavily influenced by the 0% rate assumed on treasury bills). These represent lower funding costs when compared to FY2019/20, for both domestic and foreign debt with respective decreases of 0.1 percentage point and 0.2 percentage points, respectively,” Cirrus says.
However, the subsequent decreases in the cost of funding will unlikely play out as forecast, the analysts believe. “Currency weakness, heightened credit risk and current funding pressures will remain and potentially worsen in coming years,” they add.
“It appears, however, that increased local asset requirements for pension funds and life insurance funds may be on their way, which may result in temporarily lower funding costs, albeit marginally so,” Cirrus says.
HOME SWEET HOME?
It is evident from the funding mix in the budget that government is “extremely focussed on the split of domestic debt relative to foreign debt”, Cirrus says.
This is clear as foreign debt as a percentage of total debt decreases from 36.7% in 2020/21 to 31% over the forecast period. The ratio of domestic debt stock to foreign in FY2021/22 is forecast to be 62:38, the analysts add.
“The cumulative budget deficit over the MTEF is forecast to amount to N$53.3 billion. This will see total debt increase to 77.7% of GDP. The borrowing strategy is to fund N$45.6 billion of this from within the domestic market,” Cirrus elaborates.
“This domestic funding requirement essentially represents 20.9% of the pension and life insurance assets as at the end of the 2019 calendar year. This suggests that a further increase in Regulation 13 domestic asset requirements is approaching,” concludes Cirrus.
Currently Regulation 13 of the Pension Funds Act stipulates that all pension funds in the country must invest a minimum of 1.75% and a maximum of 3.5% of the market value of its total assets in unlisted investments.
At the beginning of 2020, the chief executive officer of the Namibia Financial Institutions Supervisory Authority (Namfisa), Kenneth Matomola, said the watchdog is working on a proposal for government that would see more pension fund money poured into unlisted investments to boost economic growth and job creation in the country.
At the time, Matomola wouldn’t comment on speculation that government wants the ceiling lifted to between 5% and 7%.
The future funding of the large budgeted deficits throughout the MTEF period remain a material concern, Cirrus says. The analysts maintain that it is unlikely that the domestic market will be able to responsibly and sustainably fund the quantum of deficit proposed by the finance ministry.
“Moreover, increased Regulation 13 requirements will heavily prejudice the owners of the capital in question, being the pensioners (current and future) and savers of the country,” Cirrus says.
SACU
From a domestic revenue perspective, the outlook for the current year is poor, based on the Covid-19 shock, Cirrus says. All of the major revenue lines - income tax on individuals, company tax and value added tax – will record material reductions of 32.2%, 33.8% and 13.0% respectively, compared to 2019/20.
Total revenue of nearly N$55.2 billion is projected for 2020/21 in the MYBR, compared to N$58.5 billion in the previous fiscal year. For 2021/22, total revenue is expected to decline by an insignificant 0.2%, as recovery in major domestic revenue lines is offset by a major reduction in receipts from the Southern African Customs Union (SACU), which are expected to fall by 20.5%.
“Overall, SACU receipts are expected to represent 40.3% of the current year’s revenue, falling to 32.1% next year as SACU adjusts downward and domestic revenue recovers,” Cirrus says.
Total SACU receipts are expected to remain low for the rest of the MTEF period – from N$22.25 billion in 2020/21 to N$17.68 billion in 2021/22 and N$16.91 billion in 2022/23 - only recovering to 2020 levels in 2023/24.
“This will contribute to the country’s on-going twin-deficit problem, as it heightens the fiscal deficit, but also contributes to the current account deficit, where historically SACU represents approximately 30% of all current account credits,” Cirrus says.
Given the leverage effect on the current account deficit that this reduction in income will have, a doubling in the deficit in 2021/22 and 2022/23 is plausible, the analysts say.
Going forward, domestic revenue is expected to recover relatively slowly, and only return to pre-Covid levels in 2022/23.
STRONG POOL
While revenue has fallen dramatically, as a percentage of GDP it remains high by global standards, Cirrus says.
“At 31.6% in FY2020/21, falling to 29.8% in FY2021/22, Namibia remains amongst the top five countries in the world when measured by this metric.”
According to Cirrus, this strong revenue pool puts Namibia in a relatively strong position from a socio-economic development perspective, if these funds are well used to provide critical development and business-enabling services.
“However, the country has run substantial budget deficits for a number of years, despite the robust nature of the revenue pool. This gives a clear indication that the resolve of these deficits should be sought on the expenditure side of the budget, or through growth in GDP, rather than through seeking to extract more revenue from the current economic activity in the country,” Cirrus says.
As such, the analysts welcome the lack of additional tax proposals and pragmatic proposals around improving tax compliance in the MYBR, rather than increased taxation for the already compliant.
WAGE BILL
Total expenditure, including interest payments, for the current financial year remains unchanged at N$72.8 billion.
“However, excluding interest payments, total expenditure has slightly reduced from N$64.3 billion to N$63.7 billion. As a result, operational expenditure will represent 89.8% of total government expenses (excluding interest payments) for FY2020/21,” Cirrus says.
The civil service wage bill remains unsustainably high, and a major concern and contributor to long-term sovereign risk for Namibia, the analysts reiterate.
“Currently, personnel expenditure is projected to remain unchanged at N$28.7 billion for FY2020/21. Thus, personnel expenditure continues to represent more than half of total revenue at 52%, and represents 50.2% of total operational expenditure.
“Due to government expecting higher revenue collection, the personnel expenditure to total revenue metric improved to 52% from 55.9% in the previous forecasts. However, as a percentage of the operational budget, personnel expenditure now makes up 50.2% from the previous 49.6%,” Cirrus says.
“This MTEF illustrates that government continues to spend beyond sustainable long-term levels, where despite strong revenue collection, large deficits are run,” according to Cirrus.
“This is driven, in part, by the civil service wage bill, which as well as being one of the largest in the world relative to GDP, consumes the largest share of public revenue, without adding commensurate value and output to the local economy.”
In addition to the abnormally large wage bill, vast transfers to often sub optimally managed and/or non-viable state-owned enterprises drain much of the finite resources of the state.
“In this regard, and worryingly, no mention is made to Air Namibia or NSFAF [Namibia Students Financial Assistance Fund] in the MTEF or in the minister’s speech,” Cirrus says.
Given the known financial status of these, and other SOEs, as well as the contingent liabilities linked to Air Namibia particularly, this omission may well be a source of fiscal slippage going forward, they noted.
“As mentioned in the FY2019/20 MTEF report, a concerted effort by government is needed to achieve fiscal consolidation and steer the country away from a debt trap. Simply assessing options is not viable, swift action is needed if real results want to be realised,” Cirrus concludes.
The Mid-Year Budget Review (MYBR) tabled recently by finance minister Iipumbu Shiimi estimates interest payments for the current fiscal year at more than N$7.7 billion. The revised development budget for 2020/21 is about N$6.5 billion.
Over the medium-term expenditure framework (MTEF) interest payments are set to increase significantly. By the end of March 2024, it will exceed N$10 billion.
The minister’s latest budget, however, does not contain projections for development spending over the MTEF and comparisons between interest payments and the development budget are therefore not possible.
Interest payments are now the third largest expense account in the budget, second only to the combined operational and development expenditure on education, arts and culture, as well as health and social services, Cirrus Securities points out.
It is worrying, the analysts say, that government in 2020/21 will spend only N$300 million less on servicing its debt than it will on total health and social services.
The ballooning interest payments are the result of the record deficit of nearly N$17.6 billion expected for 2020/21. As a result, total debt this year is projected at close to N$119.8 billion. Although Shimmi projects lower budget deficits over the MTEF, debt is set to increase to about N$158.4 billion by 2023/24. (For a complete breakdown of debt, turn to page 4.)
REVENUE WOLF
Around 14% of the money expected to flow into state coffers this year will be gobbled up by interest on debt.
Government’s ceiling for interest payments as a share of revenue is 10%. It has been breaching this benchmark since 2018/19, when interest payments guzzled 10.7% of revenue. This figure is projected to increase to nearly 16%, according to the latest MYBR.
Interest payments as a share of gross domestic product (GDP) is also exceeding government’s benchmark of 3%. In 2022/21, interest payments are projected at 4.4% of GDP, rising to 4.9% by 2023/24.
Cirrus says the finance ministry expects to service its debt at marginally lower effective interest rate levels than those of the last fiscal year.
“The effective foreign interest rate (in Namibia dollar) for FY2020/21 is expected to be 7.3%, whereas effective domestic interest is anticipated to equate to 4.2% (heavily influenced by the 0% rate assumed on treasury bills). These represent lower funding costs when compared to FY2019/20, for both domestic and foreign debt with respective decreases of 0.1 percentage point and 0.2 percentage points, respectively,” Cirrus says.
However, the subsequent decreases in the cost of funding will unlikely play out as forecast, the analysts believe. “Currency weakness, heightened credit risk and current funding pressures will remain and potentially worsen in coming years,” they add.
“It appears, however, that increased local asset requirements for pension funds and life insurance funds may be on their way, which may result in temporarily lower funding costs, albeit marginally so,” Cirrus says.
HOME SWEET HOME?
It is evident from the funding mix in the budget that government is “extremely focussed on the split of domestic debt relative to foreign debt”, Cirrus says.
This is clear as foreign debt as a percentage of total debt decreases from 36.7% in 2020/21 to 31% over the forecast period. The ratio of domestic debt stock to foreign in FY2021/22 is forecast to be 62:38, the analysts add.
“The cumulative budget deficit over the MTEF is forecast to amount to N$53.3 billion. This will see total debt increase to 77.7% of GDP. The borrowing strategy is to fund N$45.6 billion of this from within the domestic market,” Cirrus elaborates.
“This domestic funding requirement essentially represents 20.9% of the pension and life insurance assets as at the end of the 2019 calendar year. This suggests that a further increase in Regulation 13 domestic asset requirements is approaching,” concludes Cirrus.
Currently Regulation 13 of the Pension Funds Act stipulates that all pension funds in the country must invest a minimum of 1.75% and a maximum of 3.5% of the market value of its total assets in unlisted investments.
At the beginning of 2020, the chief executive officer of the Namibia Financial Institutions Supervisory Authority (Namfisa), Kenneth Matomola, said the watchdog is working on a proposal for government that would see more pension fund money poured into unlisted investments to boost economic growth and job creation in the country.
At the time, Matomola wouldn’t comment on speculation that government wants the ceiling lifted to between 5% and 7%.
The future funding of the large budgeted deficits throughout the MTEF period remain a material concern, Cirrus says. The analysts maintain that it is unlikely that the domestic market will be able to responsibly and sustainably fund the quantum of deficit proposed by the finance ministry.
“Moreover, increased Regulation 13 requirements will heavily prejudice the owners of the capital in question, being the pensioners (current and future) and savers of the country,” Cirrus says.
SACU
From a domestic revenue perspective, the outlook for the current year is poor, based on the Covid-19 shock, Cirrus says. All of the major revenue lines - income tax on individuals, company tax and value added tax – will record material reductions of 32.2%, 33.8% and 13.0% respectively, compared to 2019/20.
Total revenue of nearly N$55.2 billion is projected for 2020/21 in the MYBR, compared to N$58.5 billion in the previous fiscal year. For 2021/22, total revenue is expected to decline by an insignificant 0.2%, as recovery in major domestic revenue lines is offset by a major reduction in receipts from the Southern African Customs Union (SACU), which are expected to fall by 20.5%.
“Overall, SACU receipts are expected to represent 40.3% of the current year’s revenue, falling to 32.1% next year as SACU adjusts downward and domestic revenue recovers,” Cirrus says.
Total SACU receipts are expected to remain low for the rest of the MTEF period – from N$22.25 billion in 2020/21 to N$17.68 billion in 2021/22 and N$16.91 billion in 2022/23 - only recovering to 2020 levels in 2023/24.
“This will contribute to the country’s on-going twin-deficit problem, as it heightens the fiscal deficit, but also contributes to the current account deficit, where historically SACU represents approximately 30% of all current account credits,” Cirrus says.
Given the leverage effect on the current account deficit that this reduction in income will have, a doubling in the deficit in 2021/22 and 2022/23 is plausible, the analysts say.
Going forward, domestic revenue is expected to recover relatively slowly, and only return to pre-Covid levels in 2022/23.
STRONG POOL
While revenue has fallen dramatically, as a percentage of GDP it remains high by global standards, Cirrus says.
“At 31.6% in FY2020/21, falling to 29.8% in FY2021/22, Namibia remains amongst the top five countries in the world when measured by this metric.”
According to Cirrus, this strong revenue pool puts Namibia in a relatively strong position from a socio-economic development perspective, if these funds are well used to provide critical development and business-enabling services.
“However, the country has run substantial budget deficits for a number of years, despite the robust nature of the revenue pool. This gives a clear indication that the resolve of these deficits should be sought on the expenditure side of the budget, or through growth in GDP, rather than through seeking to extract more revenue from the current economic activity in the country,” Cirrus says.
As such, the analysts welcome the lack of additional tax proposals and pragmatic proposals around improving tax compliance in the MYBR, rather than increased taxation for the already compliant.
WAGE BILL
Total expenditure, including interest payments, for the current financial year remains unchanged at N$72.8 billion.
“However, excluding interest payments, total expenditure has slightly reduced from N$64.3 billion to N$63.7 billion. As a result, operational expenditure will represent 89.8% of total government expenses (excluding interest payments) for FY2020/21,” Cirrus says.
The civil service wage bill remains unsustainably high, and a major concern and contributor to long-term sovereign risk for Namibia, the analysts reiterate.
“Currently, personnel expenditure is projected to remain unchanged at N$28.7 billion for FY2020/21. Thus, personnel expenditure continues to represent more than half of total revenue at 52%, and represents 50.2% of total operational expenditure.
“Due to government expecting higher revenue collection, the personnel expenditure to total revenue metric improved to 52% from 55.9% in the previous forecasts. However, as a percentage of the operational budget, personnel expenditure now makes up 50.2% from the previous 49.6%,” Cirrus says.
“This MTEF illustrates that government continues to spend beyond sustainable long-term levels, where despite strong revenue collection, large deficits are run,” according to Cirrus.
“This is driven, in part, by the civil service wage bill, which as well as being one of the largest in the world relative to GDP, consumes the largest share of public revenue, without adding commensurate value and output to the local economy.”
In addition to the abnormally large wage bill, vast transfers to often sub optimally managed and/or non-viable state-owned enterprises drain much of the finite resources of the state.
“In this regard, and worryingly, no mention is made to Air Namibia or NSFAF [Namibia Students Financial Assistance Fund] in the MTEF or in the minister’s speech,” Cirrus says.
Given the known financial status of these, and other SOEs, as well as the contingent liabilities linked to Air Namibia particularly, this omission may well be a source of fiscal slippage going forward, they noted.
“As mentioned in the FY2019/20 MTEF report, a concerted effort by government is needed to achieve fiscal consolidation and steer the country away from a debt trap. Simply assessing options is not viable, swift action is needed if real results want to be realised,” Cirrus concludes.
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