Windhoek – A global economic slowdown coupled with headwinds faced in regional productivity will drastically impact domestic economic growth, which is now estimated to will slow significantly to 2.5 percent in 2016, down from initial forecasts of 4.3 percent projected in the budget and 5.3 percent achieved in 2015.
According to Finance Minister Calle Schlettwein, this state of affairs reflects the impact of shocks from low external demand, effects of low growth in Angola and South Africa, the severe drought in the agricultural sector, constrained water supply affecting industries such as construction and beverages as well as the long bust in the commodity price cycle.
“It is time for corrective action and the outcome of the budget review should be seen in this light. The objective of the balanced fiscal consolidation stance is to stabilise growth in public debt and bring government fiscal operations within the sustainable thresholds,” said Schlettwein.
As a result of revised growth figures, the shock on nominal gross domestic product (GDP) for the financial year (FY) 2015/16 is a 9.4 percent downward revision or some N$15.45 billion for the current 2016/17 financial year; budgeted GDP is revised downward by 16.1 percent or some N$30.54 billion.
“When GDP is so much down, the revenue and debt costs associated with these downward adjustments are large and the fiscal target ratios have deteriorated as a result of a low base factor,” said Schlettwein on Friday during a Post-Mid-Year Budget Review with the northern branch of the Namibia Chamber of Commerce and Industry (NCCI). He noted that, seen together, this build-up of vulnerabilities was not unnoticed by external assessors and credit ratings agencies and warned that if expenditure is not not cut and aligned to the revised revenue and macroeconomic outlook, then fiscal operations will become increasingly unsustainable.
“As you are aware, while reaffirming Namibia’s credit ratings investment grade at BBB-, Fitch Credit Ratings, in its latest assessment for Namibia, has revised Namibia’s credit ratings outlook from ‘stable’ to ‘negative’. The revision in the credit outlook was based on, among others, the rise in the budget deficit, public debt, current account deficit and weakening international reserves coverage. Given this material change for Namibia and the whole region, as I have stressed during the tabling of the mid-year review the emphasis now is on the highest priorities and living within our means. We should emphasise the ‘must have’ than the ‘nice to have’. And in the words of William Feather: ‘if we don’t discipline ourselves, the world will do it for us’.”
Namibia’s budget deficit for FY2015/16 has increased from the budgeted 5.3 percent to 8.3 percent, above the 5 percent target. For FY2016/17 the deficit would change from 4.3 percent to an estimated 7.8 percent, if no timely action is taken to contain current expenditure. Also, the country’s financing needs have increased as a result of the widening budget deficit. As such, public debt for FY2015/16 has increased from the budgeted 36.7 percent to 40.1 percent of GDP. Schlettwein cautioned that that this would rise to 42.4 percent of GDP by the end of this financial year, seen against the threshold of 35 percent, if no timely action is taken.
In addition, financing of high budget deficits for the past years has increasingly led to the mopping up of liquidity and weak market confidence in government debt instruments. The South African rand, to which the Namibia dollar is pegged, had depreciated by as much as 30 percent in 2015, with a negative impact on public debt, and the current account deficit has widened to 13.7 percent of GDP in 2015, compared to 7.6 percent in 2014, as a result of a high import bill driven by both private and public investment and the generally expansionary fiscal policy.
“Namibia’s official foreign reserves position has increased to 2.9 months of import cover by October this year, which is close to the international benchmark of three months and large enough to maintain the currency peg with the South African rand but this is a result of concerted policy interventions, which lifted the reserves from a low base of about 1.7 months of import cover during mid-2015,” said Schlettwein.
The finance ministry still expects growth to rebound to about 4 percent next year and over the medium-term, mainly in anticipation of new mining undertakings and more resilient services and tourism sectors. “For the medium-term fiscal consolidation path, we are proposing to reduce the budget deficit for 2016/17 from the revised estimate of 7.8 percent of GDP to about 6.3 percent as a result of the mid-year review expenditure cut. Further consolidation in the next MTEF will reduce the budget deficit to an average of 3 percent and stabilise public debt at about 42 percent of GDP in FY2018/19 and start declining thereafter,” Schlettwein added.
During the recent budget review Schlettwein proposed a budget cut and suspension of N$4.5 billion, equivalent to 2.8 percent of GDP, from the current 2016/17 budget, and proposed a further cut of N$1 billion for reallocation to urgent priority needs under the various budget votes. Over the medium-term, he proposed implementation of a much deeper, but balanced fiscal consolidation programme, consisting of about 5 percent of GDP’s cumulative cut on expenditure over the MTEF, to be accompanied by revenue mobilisation measures and structural reforms to cushion the impact of expenditure consolidation on growth and social development.