'Deficit of N$13 bn the new normal'

If government sticks to its current savings approach, it will take 16 years before Namibia can boast a budget surplus again.

Analysing finance minister Iipumbu Shiimi's mid-year budget revision (MYBR) which was tabled on Tuesday, Cirrus Securities said Namibia had a normalised budget deficit of around N$8 billion prior to Covid-19.

Post-Covid, it seems as if the budget deficit has structurally reset, with a normalised deficit of around N$13 billion, the analysts said.

According to the MYBR, the revised budget deficit for 2020/21 is nearly N$17.6 billion, down from the estimated N$21.4 billion in the main budget in May, but still double the actual deficit recorded in 2019/20.

“Nonetheless, the deficit is expected to remain the largest on record for the country,” Cirrus says.

Shiimi is aiming to shrink the deficit in the medium-term expenditure framework (MTEF), targeting a budget balance of nearly -N$8.3 billion by 2023/24.

“Historically, the budget deficit has always been forecasted to recover in outer MTEF years,” Cirrus says.

“However, it has proven difficult for government to achieve this consolidation in reality, and large-for-longer deficits had become the pre-Covid norm,” they add.

Government's total debt will rise from N$100.4 billion in 2019/20 to nearly N$119.8 billion in 2020/21. As a result, the ratio of debt to gross domestic product (GDP) will jump from 56.1% in 2019/20 to 68.8% in the current fiscal year.

By 2023/24, debt is estimated to total nearly N$158.5 billion or 77.8% of GDB.







FORECASTS

If government fails to deliver on current forecasts, there is a risk is that the debt-to-GDP ratio will expand to unsustainable levels, Cirrus warns.

Current projections forecast average revenue growth of 4.2%, while expenditure is targeted to remain flat in real terms, increasing 2% on average over the MTEF.

“While it appears that revenue is growing twice as fast as expenditure, it is growing off a lower base. Therefore, in dollar terms, revenue is only growing 40% faster than expenditure. As a result, given the base effects, the budget deficit will decrease by approximately N$862 million per annum,” Cirrus says.

“The current approach of saving N$862 million a year on the budget deficit means that it will take government approximately 16 years to return to a budget surplus, which was last witnessed in 2012/13,” the analysts say.

FUNDING MIX

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 says.

According to the analysts, 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,” they say.

Cirrus continues: “The future funding of the large budgeted deficits throughout the MTEF period remain a material concern, as it is unlikely that the domestic market will be able to responsibly and sustainably fund the quantum of deficit proposed by the ministry [of finance].

“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.

Jo-Maré Duddy –