An analystÔÇÖs view
As a continuing theme from last year, the upcoming budget is likely to be a continuation of last years’ budget theme.
The Government’s Tipeeg program has been announced and certain strides have been achieved in the implementation phase, however, tangible measures of the impact of the programme are still to be assessed.
The challenge now should be on full implementation and adherence to the published Medium Term Expenditure Framework (MTEF) targets for 2012 to 2013/14 according to which debt is expected to increase to above the 31% of GDP by end of fiscal year 2013/14.
In keeping with President Hifikepunye Pohamba’s New Year message, against the backdrop of high and rising food prices, we expect a particular focus in the Budget for 2013/14 on food security and continued strengthening of the Green Scheme projects including provision of farming inputs to subsistence farmers (including seeds, fertilizer) and perhaps measures to discourage imports of foods that are available locally with possibly a greater focus on infant industry protection.
It still remains an open question as to whether this would place additional pressure on domestic food prices which remains a relevant concern.
There appears to be limited room to increase the tax burden on the current base. In 2009/10 total tax revenue stood at 27.8% of GDP. The MTEF included an estimate of 26.8% for 2011/12. Thereafter, however, the MTEF indicates an increase in tax revenue to 28.9% of GDP by 2013/14.
Of course, projections that far out are subject to change, given fluctuations in a number of factors including the actual outcomes for real GDP growth, inflation and the level of interest rates. The point, however, is that tax revenue takes up around 31% of GDP is relatively high and the trend in this ratio over the next three years is already up. Including non-tax revenue from own sources pushes total government revenue up to an expected hefty 32% by 2014/15. This however does not guarantee that there will be no additional taxes introduced at some point though. We do however expect a further focus on increased taxes as one of the key areas to try broadening this tax base. It seems one avenue that could be pursued is green taxes on companies at some point in the future, although not necessarily in the upcoming Budget for 2013/14.
The MTEF refers that the State Finance Amendment Bill (2009) was finalised and specifically aims to address financial management in the public sector, including strengthening revenue collection. With amendments of Sacu’s Revenue Sharing Formula, Namibia currently stands to receive a lesser portion from the customs revenue pool which has historically been Governments’ largest source of revenue. It hence is prudent to review the current taxpayer base, seek practical and efficient collection methods and widen an already stretched taxpayer base.
Namibia had fiscal space leading up to the 2012/13 Budget and it has used that space. By the same token, the space is not limitless.
To maintain its sovereign debt rating at its current level the debt ratio should not be allowed to stray too high. Overall, there are material advantages to constraining the Government’s debt level. Reflecting the expected increase in the Government debt level interest payments (domestic plus foreign) are budgeted to increase to 3.1% of GDP by 2014/15. But the debt ratio is unlikely to stabilise by 2013/14 and we are not exactly sure how high it will go beyond the medium term expenditure framework.
Importantly, the Ministry of Finance did suggest last year that it is looking towards keeping the government debt ratio below 40% of GDP.
Ultimately, for the debt level to stabilise Namibia’s primary budget balance (revenue less non-interest spending) will need to swing from a deep deficit to a surplus. However, the MTEF still shows a primary budget deficit in 2014/15.
A swing to a primary budget surplus would require either higher taxes (for which we think there is limited room) and / or less spending. For example, suppose we wanted to stabilise the debt level at around 34% of GDP in 2014/15. Given reasonable long term assumptions for real GDP growth and the real interest rate on government debt implies the primary budget balance would need to swing to a slightly positive balance. That’s quite a sharp turnaround. Fiscal tightening of this order of magnitude is further onerous considering the current high level of unemployment.
As regards to the specific outcome for the Budget in 2013/14 we have not seen any recent monthly revenue and expenditure data during the fiscal year. This compares with an initial expected domestic debt issuance of N$25.1bn. However, government has funded in the international market in the order of US$500m (about N$4bn), which was not initially budgeted for. In total, domestic plus foreign debt issuance amounted to around N$24bn by end Jan 2012 (not too far off the total N$27bn initially expected).
Fundamentally, a stated level of high unemployment of over 51% demands government intervention. Much of the unemployment relates to much needed infrastructure development, which should contribute to increasing the potential growth rate of the economy (and by extension the ability of the economy to provide additional jobs). However, when government deficits are large and debt ratios are climbing, the private sector may expect more taxes down the line.
Emphasis should be placed on capital expenditure in addition to education, healthcare and skills development. These factors can boost productivity, which ultimately drives economic growth.