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Other Articles from The Villager

How the government is steering the economy

Mon, 28 July 2014 02:40
by Mr. T
Business

 

Many people do not have a clue of how they can invest their excess money.
Most understand that government should pay its huge salaries, pay for services to private companies.
This will be offset with taxes that coprorates and individual pay inform of VAT, PAYE, Income Tax, Import Tax and many more.  Incase when the imcome from taxes is higher than government expenditure- which is highly unlikely, the government will invest this money by buying more gold or foreign currency from countries they  see as will have a stable currency in future.
However, most of the times the income through taxes is outweighed by the expenditures accrued by the government and that will leave a deficit. This deficit will need to be finaced through debt instruments.
Bank of Namibia is the government agent which is mandated to act on behalf of the government when raising money. Government securities are essentially IOU (i owe you) declarations (or debt instruments) by the Government in terms of the State Finance Act of 1991. Namibian Government securities are issued in the form of Treasury Bills (TB’s) and Internal Registered Stock (IRS).

Government securities are a major means of financing Government deficits. The Namibian Government, like any other government, finances its operations largely through taxation and levies. In cases where revenue received from taxation and levies is less than expenditure, the government finances the difference (that is, the deficit) mainly through borrowing by issuing government securities. These securities also provide additional investment avenues for investors.

Although the public has various avenues in which to invest their savings, government securities offer the most secure investment. It rarely happens that a government fails to honour its obligations issued in its own currency.Therefore, these securities tend to be highly marketable and liquid, that is, they are in high demand and can easily be bought and sold in the secondary market.In addition, government securities provide an additional liquid investment outlet for financial institutions, mainly commercial banks, in which they can invest their surplus funds and which can also be sold when they need to supplement their cash resources. Banks can also hold Government securities at the Bank of Namibia as collateral against borrowing and for liquid asset requirements.


Auctions
The Bank of Namibia places advertisements on its website, on the Reuters System, and send e-mails officially inviting the public to participate in tenders for Government securities. Advertisements inviting tenders for Treasury Bills and bonds are placed one week prior to auction date.Tender forms may be obtained from the website and Bank of Namibia at 71 Robert Mugabe Avenue in Windhoek on each business day subsequent to the announcement of an issue. Completed tender forms are submitted in sealed envelopes addressed to The Deputy Director: Investments and Domestic Markets and deposited into the designated tender box by 10:00 at the Bank on the auction date stated in the advertisements. 

For TB’s allotments are made in a descending order of bid prices, meaning that the most attractive (i.e., relatively high) prices stand a better chance of getting an allotment, because a relatively high price subjects the Government to lower cost of borrowing. However, for IRS allotments are made in an ascending order of yield to maturity.

Bids for TBs must be for a minimum of N$10 000. For bonds the minimum is N$50 000, but, larger amounts can be tendered for in multiples of N$10 000. Successful bidders are required to provide payment at the Bank of Namibia, not later than 10:00 a.m. on the next business day following the announcement of the allotment on the auction date. Settlements by commercial banks can be made through NISS (Namibia Inter Bank Settlements System), or authorizations to debit the accounts of those banks with the Bank of Namibia. For others, that is, businesses and individuals, settlement can be made in the form of bank cheques. Personal cheques and cheques certified or guaranteed by banks are not acceptable for settlement. All amounts paid by individuals exceeding N$5 million should be paid through the NISS system.

Government Borrowings
The Bank of Namibia, as agent for the Government for the issue and management of Government Securities  went on tender for Internal Registered Stock on the 14th of July 2014, for GC17, GC18, GC24, GC25, GC27, GC30, GC32, GC35, GC37 and GC40  stocks and raised a total of N$970 million.
As mentioned before this money will be used by the government to finance deficit.

Namibia`s Debt-to- GDP ratio
Debt-to-GDP measures the financial leverage of an economy.
One of the Euro convergence criteria was that government debt-to-GDP be below 60%. In tour instants Namibia is very well in place and with about 24% ratio the country can still afford to borrow more.
The World Bank and the IMF hold that “a country can be said to achieve external debt sustainability if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth.” According to these two institutions, external debt sustainability can be obtained by a country “by bringing the net present value (NPV) of external public debt down to about 150 percent of a country’s exports or 250 percent of a country’s revenues.” High external debt is believed to have harmful effects on an economy.
Namibia has option to increase consumption and heat the economy, thereby providing more employment opportunities. Too much debt will causes recession.
 There is a difference between external debt nominated in domestic currency, and external debt nominated in foreign currency. A nation can service external debt nominated in domestic currency by tax revenues, but to service foreign currency debt it has to convert tax revenues in foreign exchange market to foreign currency, which puts downward pressure on the value of its currency. So all of the money used to service foreign currency debt has to come from a country’s balance of payments transfers.