The 2007/08 National Budget Made Easy: Part 5

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By Martin Mwinga Development Role of the Budget: Poverty, income inequalities and rising unemployment remain the central challenges facing Namibians. In this situation, massive inequalities and the associated poverty prevent economic growth and development, which in turn deepens poverty. One fundamental reason why Namibia and other African economies fail to restructure their economies and move to a new economic frontier is that poverty reinforces low economic growth, which in turn makes poverty worse. Specifically, poverty lowers the productivity of the labour force by making it harder for people to acquire skills and by undermining social cohesion. Since poverty reduces household incomes, it limits aggregate domestic demand and constrains economic growth. Poverty reflects the power relations in our society, which are based on market and property relations. Without fundamentally altering the balance of power between the poor and the rich, Namibia will never be able to reach the goals of eradicating poverty. The Government is therefore expected to step in to empower the poor economically and socially, both by improving social protection and by redirecting the economy. The question is rather whether current strategies and policies significantly restructure society in ways that will reach the long-term goals of reducing inequality, creating quality jobs and eradicating poverty. While accelerated economic growth is a necessary condition for reducing poverty, it is by no means sufficient. The way in which the fruits of economic growth are invested and distributed becomes important for poverty reduction strategies. More to the point, higher economic growth rates have a positive impact on the fiscal balances of governments due to higher tax receipts, but the use and misuse of fiscal resources determines the outcome of poverty reduction strategies. With the above in mind, this article seeks to focus on the allocation to Air Namibia, which has received massive financial injection from government since independence. I look at the opportunity cost of this expenditure on the economy and argue that the cost of maintaining Air Namibia far outweighs the benefits both directly and indirectly. Air Namibia: Namibia’s own airline is technically insolvent, that means the company does not have enough money from its own resources to pay what it owes. From 2004 to 2007/08 Air Namibia received a total of N$1.5 billion from government, with N$538 million provided for in the 2007/08 budget (see Air Namibia financial statements 2005). Despite this massive capital injection by government, the financial position of the airline continues to deteriorate with debt levels exceeding assets by 61 percent in 2006 from 39 percent in 2004. What this means is that air Namibia does not borrow to increase its productive assets, but most of its borrowing is to service current debts and pay for operational expenditures. Total assets of air Namibia have been declining over the past years from N$600 million in 2004 to N$172 million in 2005, while revenue (income from core business) declined by 5 percent in 2005. For the year ending 2005, Air Namibia made losses of more than N$200 million. The company’s own external auditors have expressed an opinion that the going concern principle for Air Namibia depends on the continued support from government and the company’s ability to use these resources to trade itself into a profitable business. As things stand, Air Namibia is a failed business venture and tough decisions will have to be taken to either liquidate/close the airline or sell it should anyone be interested and have the right resources and strategy to turn the business around. Why Government continues to support Air Namibia: Despite its limited resources Government continues to inject funds in Air Namibia with the hope of turning around the airline? The arguments advanced by Government are that closing air Namibia will lead to decline in numbers of tourists visiting Namibia, leading to loss of income and will have a negative effect on the economy. Empirical evidence shows that there is no positive relationship between owning an airline and numbers of tourists visiting the country. The causation runs from having better tourism facilities, good road network, competitive pricing to increase in numbers of tourists. When Zambia closed its airline in the 1990s the initial reaction was that Zambia will lose tourists and its tourism sector will collapse, but to the contrary the number of tourists visiting Zambia doubled by early 2000 from the time the airline closed. By closing the airline that depended on government support, Zambia used the savings to improve tourist facilities, spend on road network that connect tourism centres (it used to take more than 12 hours in the 1990s to drive from Katima Mulilo to Livingstone, it now takes less than two hours) and used some of the funds to market Zambia internationally. Tourism is now a major contributor to the Zambian economy, more than the time when Zambia tried to maintain an unsustainable airline. Botswana does not have an airline that flies internationally but attracts the highest number of tourists in Africa and tourism is the biggest contributor to the country’s GDP. This is a small sample of countries without airlines flying internationally, but very successful in tourism and proves that owning an airline is not a prerequisite in attracting tourists and therefore Government’s argument that closing air Namibia will lead to the contraction of tourism sector is guesswork, not based on fundamental research. Costs of maintaining Air Namibia: 1. Cost to taxpayers: Billions of Namibia dollars have been injected into Air Namibia while the airline’s financial position continues to deteriorate. Namibia’s income tax rate at 35 percent is one of the highest in Africa, and for government to be taxing hard-working Namibians and throw these funds into projects that generate negative returns is unfair and encourages citizens to look for ways to avoid tax. Taxpayers are happy to see their money spent on schools, police, clinics and productive projects because they benefit from these expenditures indirectly. The money given to Air Namibia could have been used to reduce the tax burden on citizens, something that will impact positively on the economy. 2. Opportunity Costs: The allocation to Air Namibia over the past four years including the allocation to air Namibia in 2007/08 amounted to N$1.5 billion. If these funds were allocated to NHE to build low-cost housing for the poor, this would have resulted in more than 10 000 houses built. This money could also have been given to Agribank or Development Bank of Namibia for direct lending to the productive sectors of the economy. I have indicated above that the attraction of tourists to Namibia is not dependent on Air Namibia, as tourists travel through other airlines, cars and buses. If the millions we allocate to Air Namibia were spent on infrastructure, the country’s capital stock could have increased faster. Namibia’s multiplier effect is estimated at around 1.8, meaning if government spends N$100 million in the economy, through the multiplier effect the 100 million multiplies to N$180 million, and the N$80 million is an addition to the local economy. Because investment in Air Namibia generates negative returns as indicated in the airline’s financial statements, then the N$100 million invested in air Namibia could over time approach zero. 3. Cost on the country’s Foreign Reserves: Air Namibia is a major consumer of the country’s foreign reserves, which is below the international norm of three months of imports. While most of its revenue is generated in foreign currencies, air Namibia does not even repatriate a cent of this foreign revenue to Namibia because what it generates through ticket sales is immediately used to pay its foreign service providers. In addition to its failure to generate foreign reserves for the country, air Namibia continues to be the main consumer of foreign reserves generated by other successfully run companies. Successful airlines like South African Airways, Kenya and Ethiopian airlines are major generators of foreign reserves for their countries and one would have expected air Namibia to help the country increase its foreign reserves. I mentioned in previous articles that the current minister of finance has succeeded in turning around Government’s financial position to a surplus and managed to reduce Government debt. The challenges to ensure that this new fiscal path is maintained are not only to look at the Government revenue side, but to critically re-look at the priorities of fiscal policy and eliminate some unnecessary expenditure such as the annual unproductive allocation to air Namibia. Studies were commissioned before to help turn around the national airline, but all failed to come up with innovative strategies. Time has come for politician to stop their egotism, and for them to remember that Government revenue belongs to the nation and should never be used to finance projects that do not generate social returns for citizens. If Government wants to boost tourism, then it should spend the money directly on improving tourist facilities.