Nation on the ropes
In a frank budget statement finance minister Calle Schlettwein has given the nation a glimpse into just how precarious an economic state it is fighting back from.
Finance minister Calle Schlettwein has admitted that Namibia's young democracy has endured its most dangerous and precarious phase - due to an unfolding economic crisis - while presenting a N$65 billion budget, which is N$1.5 billion less than the revised N$66.5 national budget of the previous year.
Schlettwein, who was speaking yesterday in the National Assembly, said the Namibian economy was at a turning point, while raising much-needed optimism by saying that the 2018/19 budget was “a funding compact for growth, bringing about jobs, less inequality, less poverty and improved service delivery”.
Schlettwein admitted that Namibia's public wage bill, which constitutes 50% of expenditure, was one of the highest in the world.
He said effective measures should be instituted to reduce the bill from 16% of GDP to 12% over the next five years, through a combination of national attrition, lower-than-consumer price index wage adjustments and a vacancy replacement rule.
He laid before the nation a three-pronged set of fiscal policy actions, which includes tax policy changes which are expected to generate an extra N$500 million in government revenue annually.
Among these reforms is that taxpayers in the lower bracket will now pay 17% income tax, while new tax rates of 39% and 40% will be introduced for individuals earning over N$1.5 million and N$2.5 million.
“This proposal seeks to relieve the low-income earners and reinforce the progressivity of the tax system,” Schlettwein said.
Also introduced is a 10% dividend tax for dividends paid to residents and the abolishing of the current practice of a conduit (flow through) principle in the taxation of trusts to harmonise their taxation, in line with regional economies.
Subject to the income derived from commercial activities by charitable, religious, educational and other types of institutions under Section 16 of the Income Tax Act, such institutions will now be required to register as taxpayers and file annual income tax returns.
S&Ts slashed by 63.3%
The finance minister also announced that a total of N$972.02 million was collected from the recovery of outstanding tax through the tax arrears recovery incentive programme initiated last year.
Schlettwein said the government had managed to reduce its spending on subsistence and travel (S&T) allowances by 62.3% over the past three years.
This has resulted in government only allocating N$221.8 million in this year's budget for S&T, compared to the N$634.3 million allocation in the 2015/16 financial year.
Shockingly, the defence ministry has received an extra 4.9% more than last year and now boasts a N$6 billion allocation.
Basic and higher education will, as usual, receive the bulk of government money and have been allocated N$13.5 billion and N$3.2 billion respectively.
Of the N$3.2 billion, government has allocated N$960 million to the University of Namibia, N$600 million to the Namibia University of Science and Technology, while N$1.45 billion has been earmarked for the Namibia Students Financial Assistance Fund.
The public safety sector – which includes safety and security, defence, home affairs and the judiciary – gets the second largest share of the budget allocations. An amount of N$12.7 billion has been allocated and a whopping N$38.7 billion over the medium-term expenditure framework (MTEF).
Health receives N$6.5 billion and the poverty ministry N$3.4 billion.
Schlettwein, in describing the precarious position the country has been in, said the government had to make deep, but necessary budget cuts to ensure fiscal sustainability and protect macroeconomic stability. “The economy has now rebounded to positive growth territory, with a potential boost on jobs and incomes, after a mild contraction in 2017. We have realigned the macroeconomic framework and stabilised public finances.
“Domestic revenue has shown resilience, amidst subdued economic activity.
With the exception of uranium, commodity prices are rising, rekindling new opportunities for mining activity. Key macroeconomic fundamentals have strengthened, fast closing the current account and trade deficits and a strong international reserves position.
“And the global economy has regained unprecedented momentum since the 2007 financial crisis, offering favourable tailwinds for export-oriented open economies such as Namibia,” the finance minister said.
N$7.3bn loans for industrialisation
In the hope of boosting industrialisation and job creation, Schlettwein increased the revised development budget of N$5.6 billion in 2017/18 to N$7.3 billion this year and N$8.2 billion by 2020/21. “As a share of total non-interest expenditure, the development budget increases from 10.2 percent in FY2017/18 to 12.5 percent in FY2018/19 and reaches 13.7 percent by FY2020/21.” He said the amount of the capital expenditure is greatly enhanced by the off-budget project financing, comprising of:
African Development Bank (AfDB) project financing loan, amounting to N$4 billion over the next two years to fund agricultural mechanisation, road and rail infrastructure and the schools renovation programme, the Economic Governance and Competitiveness Support Programme;
Industrial and logistics hub infrastructure growth stimulus amounting to N$10 to N$15 billion over the next five years to be funded through bilateral concessional loan arrangements;
Water infrastructure development amounting to about N$590 million, to be funded by KfW;
Further capital injections for infrastructure development through specific public enterprises and public-private partnership (PPP) arrangements; and
Road infrastructure maintenance and rehabilitation amounting to about N$13 billion over the next five years, to be funded through the Road Fund Administration (RFA), and project financing in the power and water sectors by NamPower and NamWater, as well as PPP investments in public infrastructure.
Expenditure, deficit and debt
Schlettwein said the revised expenditure of N$66.5 billion for the 2017/18 financial year comprised of a 3.5% one-off increase in original budgeted expenditure to correct for spending arrears from the previous year.
This was a 6.9% increase from N$62.2 billion actual spending during FY2016/17.
By the end of February 2018, the preliminary expenditure outturn was recorded at N$58.2 billion, reflecting an execution rate of 87.4%. Non-interest operational expenditure outturn is estimated at 87.7% (N$48.6 billion), while the development budget expenditure outturn is approximately 64.1% (N$4.04 billion) over the same calendar. “The low spending rate for the development budget is of particular concern, with opportunity cost of foregone benefit to the economy. Measures to address the structural and administrative constraints for effective implementation of development projects are critical for the FY2018/19 budget and over the MTEF. “Based on the patterns of revenue and expenditure outturn, the budget deficit for FY2017/18 is estimated at 5.4 percent, in line with the mid-year review.
“The total debt stock for FY2017/18 is estimated at N$74.5 billion, equivalent to 43.3% of GDP, relative to the national threshold of 35%, and an increase from 42.6% in FY2016/17. Debt servicing costs stood at 8.8% of revenue, compared to 8.6% in FY2016/17, compared to the threshold of 10% of revenue. Contingent liabilities as a percent of GDP stood at 7.5%, seen against the target of 10 percent,” Schlettwein said, as he dealt with the nitty-gritty of the country's precarious debt situation.
Fiscal consolidation continues
Schlettwein said the initial successes of the government's fiscal consolidation policy should not, in entirety, give way to requests for new additional spending in non-core areas, which could only heighten expenditure levels. “The sharp fiscal consolidation resulted in the unintended consequences of reduced economic activity. Financial indiscipline displayed by wanton over-commitment of the (previous) budget undermined the fiscal consolidation effort and reinforced accumulation of spending arrears which placed a heavy burden on the balance sheets of service providers.
“The FY2017/18 Appropriation Amendment Act provided for adequate resources, which catered for the full extent of spending arrears without compromising the implementation of the budget. “The resultant negative impact on growth and high short-term additional expenditure increases due to the incidence of accumulated spending arrears slowed the pace of fiscal consolidation and attracted the credit rating downgrades.
“The government medium-term policy measures are firstly aimed at addressing the needs of the economy and the delivery of essential public services while, at the same time, addressing the concerns and risks cited by credit rating agencies, and we should continually take stock of the risks and deploy forward looking risk management strategies,” Schlettwein added.
OGONE TLHAGE & ASHLEY SMITH
Schlettwein, who was speaking yesterday in the National Assembly, said the Namibian economy was at a turning point, while raising much-needed optimism by saying that the 2018/19 budget was “a funding compact for growth, bringing about jobs, less inequality, less poverty and improved service delivery”.
Schlettwein admitted that Namibia's public wage bill, which constitutes 50% of expenditure, was one of the highest in the world.
He said effective measures should be instituted to reduce the bill from 16% of GDP to 12% over the next five years, through a combination of national attrition, lower-than-consumer price index wage adjustments and a vacancy replacement rule.
He laid before the nation a three-pronged set of fiscal policy actions, which includes tax policy changes which are expected to generate an extra N$500 million in government revenue annually.
Among these reforms is that taxpayers in the lower bracket will now pay 17% income tax, while new tax rates of 39% and 40% will be introduced for individuals earning over N$1.5 million and N$2.5 million.
“This proposal seeks to relieve the low-income earners and reinforce the progressivity of the tax system,” Schlettwein said.
Also introduced is a 10% dividend tax for dividends paid to residents and the abolishing of the current practice of a conduit (flow through) principle in the taxation of trusts to harmonise their taxation, in line with regional economies.
Subject to the income derived from commercial activities by charitable, religious, educational and other types of institutions under Section 16 of the Income Tax Act, such institutions will now be required to register as taxpayers and file annual income tax returns.
S&Ts slashed by 63.3%
The finance minister also announced that a total of N$972.02 million was collected from the recovery of outstanding tax through the tax arrears recovery incentive programme initiated last year.
Schlettwein said the government had managed to reduce its spending on subsistence and travel (S&T) allowances by 62.3% over the past three years.
This has resulted in government only allocating N$221.8 million in this year's budget for S&T, compared to the N$634.3 million allocation in the 2015/16 financial year.
Shockingly, the defence ministry has received an extra 4.9% more than last year and now boasts a N$6 billion allocation.
Basic and higher education will, as usual, receive the bulk of government money and have been allocated N$13.5 billion and N$3.2 billion respectively.
Of the N$3.2 billion, government has allocated N$960 million to the University of Namibia, N$600 million to the Namibia University of Science and Technology, while N$1.45 billion has been earmarked for the Namibia Students Financial Assistance Fund.
The public safety sector – which includes safety and security, defence, home affairs and the judiciary – gets the second largest share of the budget allocations. An amount of N$12.7 billion has been allocated and a whopping N$38.7 billion over the medium-term expenditure framework (MTEF).
Health receives N$6.5 billion and the poverty ministry N$3.4 billion.
Schlettwein, in describing the precarious position the country has been in, said the government had to make deep, but necessary budget cuts to ensure fiscal sustainability and protect macroeconomic stability. “The economy has now rebounded to positive growth territory, with a potential boost on jobs and incomes, after a mild contraction in 2017. We have realigned the macroeconomic framework and stabilised public finances.
“Domestic revenue has shown resilience, amidst subdued economic activity.
With the exception of uranium, commodity prices are rising, rekindling new opportunities for mining activity. Key macroeconomic fundamentals have strengthened, fast closing the current account and trade deficits and a strong international reserves position.
“And the global economy has regained unprecedented momentum since the 2007 financial crisis, offering favourable tailwinds for export-oriented open economies such as Namibia,” the finance minister said.
N$7.3bn loans for industrialisation
In the hope of boosting industrialisation and job creation, Schlettwein increased the revised development budget of N$5.6 billion in 2017/18 to N$7.3 billion this year and N$8.2 billion by 2020/21. “As a share of total non-interest expenditure, the development budget increases from 10.2 percent in FY2017/18 to 12.5 percent in FY2018/19 and reaches 13.7 percent by FY2020/21.” He said the amount of the capital expenditure is greatly enhanced by the off-budget project financing, comprising of:
African Development Bank (AfDB) project financing loan, amounting to N$4 billion over the next two years to fund agricultural mechanisation, road and rail infrastructure and the schools renovation programme, the Economic Governance and Competitiveness Support Programme;
Industrial and logistics hub infrastructure growth stimulus amounting to N$10 to N$15 billion over the next five years to be funded through bilateral concessional loan arrangements;
Water infrastructure development amounting to about N$590 million, to be funded by KfW;
Further capital injections for infrastructure development through specific public enterprises and public-private partnership (PPP) arrangements; and
Road infrastructure maintenance and rehabilitation amounting to about N$13 billion over the next five years, to be funded through the Road Fund Administration (RFA), and project financing in the power and water sectors by NamPower and NamWater, as well as PPP investments in public infrastructure.
Expenditure, deficit and debt
Schlettwein said the revised expenditure of N$66.5 billion for the 2017/18 financial year comprised of a 3.5% one-off increase in original budgeted expenditure to correct for spending arrears from the previous year.
This was a 6.9% increase from N$62.2 billion actual spending during FY2016/17.
By the end of February 2018, the preliminary expenditure outturn was recorded at N$58.2 billion, reflecting an execution rate of 87.4%. Non-interest operational expenditure outturn is estimated at 87.7% (N$48.6 billion), while the development budget expenditure outturn is approximately 64.1% (N$4.04 billion) over the same calendar. “The low spending rate for the development budget is of particular concern, with opportunity cost of foregone benefit to the economy. Measures to address the structural and administrative constraints for effective implementation of development projects are critical for the FY2018/19 budget and over the MTEF. “Based on the patterns of revenue and expenditure outturn, the budget deficit for FY2017/18 is estimated at 5.4 percent, in line with the mid-year review.
“The total debt stock for FY2017/18 is estimated at N$74.5 billion, equivalent to 43.3% of GDP, relative to the national threshold of 35%, and an increase from 42.6% in FY2016/17. Debt servicing costs stood at 8.8% of revenue, compared to 8.6% in FY2016/17, compared to the threshold of 10% of revenue. Contingent liabilities as a percent of GDP stood at 7.5%, seen against the target of 10 percent,” Schlettwein said, as he dealt with the nitty-gritty of the country's precarious debt situation.
Fiscal consolidation continues
Schlettwein said the initial successes of the government's fiscal consolidation policy should not, in entirety, give way to requests for new additional spending in non-core areas, which could only heighten expenditure levels. “The sharp fiscal consolidation resulted in the unintended consequences of reduced economic activity. Financial indiscipline displayed by wanton over-commitment of the (previous) budget undermined the fiscal consolidation effort and reinforced accumulation of spending arrears which placed a heavy burden on the balance sheets of service providers.
“The FY2017/18 Appropriation Amendment Act provided for adequate resources, which catered for the full extent of spending arrears without compromising the implementation of the budget. “The resultant negative impact on growth and high short-term additional expenditure increases due to the incidence of accumulated spending arrears slowed the pace of fiscal consolidation and attracted the credit rating downgrades.
“The government medium-term policy measures are firstly aimed at addressing the needs of the economy and the delivery of essential public services while, at the same time, addressing the concerns and risks cited by credit rating agencies, and we should continually take stock of the risks and deploy forward looking risk management strategies,” Schlettwein added.
OGONE TLHAGE & ASHLEY SMITH
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