Namibia needs to be cautious over new economic plans – experts

> Timo Shihepo

Windhoek – Experts have warned the Namibian government to be cautious when implementing new economic policies as part of efforts to alleviate poverty, because if not properly effected, they could lead to more borrowing from the international markets putting the country at further debt risks.

The government has introduced a raft of policies and interventions as part of its agenda to eradicate poverty and hunger by 2025.

The Ministry of Poverty Eradication and Social Welfare, which resorts under the Presidency, was created to spearhead the war on poverty and help narrow the gap between the rich and poor.

Among the anti-poverty interventions include the establishment of food banks to feed the destitute, provision of grants for low income earners and a solidarity tax to be introduced during the next financial year.

Proposals have also been made to implement the Basic Income Grant for all Namibians.

President Hage Geingob has also called on the student loans through the Namibia Student Financial Assistance Fund to be abolished and replaced it with a grant system.

The proposals come at a time when Namibia’s foreign reserves are worryingly low with the country also still continuing to borrow.

And experts warn that these contrasting dealings could have serious implications.

Dr Omu Kakujaha-Matundu an economist at the University of Namibia (Unam) said it’s not a bad thing if there is money to fund these programmes but if there is no money or clear plan then it becomes a problem as this might lead to the depletion of government coffers.

“The government is good at coming up with proposals but when it comes to say how it will be funded they are not so good at it. If there is no clear plan as to how all these new proposals are going to be funded, the country will be forced to invest heavily on these projects and these will put massive pressure on the foreign reserves,” he said.

Matundu said government already has so many projects and most of them are social grants and yet it continues to come up with even more grants.

“For example there is two sides with the Basic Income Grant (BIG). There was the old one, which focused on just identifying those that are poor but with the new BIG under the Ministry of Poverty Reduction and Social Welfare, it’s based on the means of testing whether a person has really a low income but the problem is that this method is costly because it requires more administration work to test the income status of thousands of people.

“Also with the old BIG it was proposed for it to be based on a consortium tax on top of the 15 percent tax that we already pay. But with the new one they are silent and they are not telling us where will they get the money to fund this,” he said.

On the proposal to replace student loans with a grant system, Matundu said: “If we have the money to pay for the student grants lets go ahead because it’s high time we stop importing skills that we ourselves can develop. Grants will help students later in the future because if you look at the salaries of these young graduates they are not in any way enough to help themselves and their families’ altogether.

“They simply can’t afford to pay it (loans) back while at the same time paying tax and supporting their families.  But then again this all has to be planned accordingly for example we need to redirect money from projects that are not so essential for example from the new government office complex and invest in projects that will plough back into the economy,” he said.

Matundu said in order for most of these new plans to work they needed a luxury tax to fund the poor, and in order to prevent future repercussions, government needs to cut down on borrowing.

“High government borrowing cannot simply go on anymore,” he said.

However, Klaus Schade, a research associate at the Institute for Public Policy Research (IPPR) said it was rather surprising that government intends to replace the study loans with grants.

He believes that most university graduates will earn a decent salary and should be able to repay their study loans over an extended period after a waiver period of five years or so.

About the social grant for low income earners, Schade said: “The fiscal impacts of the suggested interventions are not yet known.  The total costs of a social grant for low income earners depends on the definition of ‘low income’, the number of citizens that fall into this category and the monthly grant.

“A proper costing exercise would need to be done before the implementation of such a social grant.  The same applies to study grants, since it is not known whether these grants will be provided to students enrolled in certain subjects or for students from poor families.”

Schade also expressed his concern regarding the introduction of grants at a time when the country’s foreign reserves are at rock bottom.

The international benchmark for foreign exchange reserves is a three-month import cover; the Southern Africa Development Community (SADC) benchmark is even a six-month import cover.  This means a country should be in a position to pay the import bill for at least three months even if there is no inflow of foreign exchange.

“Namibia’s foreign exchange reserves are below these benchmarks, which could result in a downgrading in the country’s rating by rating agencies such as Moody’s and Fitch.  Both rating companies are currently reviewing Namibia’s rating.  A lower rating could result in increasing borrowing costs on international markets,” said Schade.

For now, Namibia is still able to honour her foreign loan obligations and to pay her import bill, but Schade said low commodity prices combined with low commodity demand and lower than expected transfers from the Southern African Customs Union (SACU) Common Revenue Pool imply that foreign exchange reserves are not likely to recover soon.

“We therefore need to find effective ways to reduce unproductive imports and prioritise the importation of goods that can stimulate exports.

“Furthermore, the involvement of more Namibian companies, which have a proven track record and the capacity to deliver, in infrastructure projects will contribute to keeping more financial resources in the country instead of profits being repatriated by foreign companies,” he said.

James Cumming, the head of research at financial services firm, Simonis Storm Securities has urged government to invest in productive assets such as railway, road and ports infrastructures.

However, he said to fund all these government also has to improve its tax collection to increase its revenue.

“In a nutshell, investing in productive assets will naturally result in economic growth which will result in money to fund the proposed new grants. With the solidarity tax, it is thought that government is earmarking to collect about N$600 million but my concern is with the students’ grant.

“It’s good to give students a grant okay, but what if they fail? Will there be some sort of penalties or will government continue funding a failure? I think there must be some sort of policy there,” he said.

Cumming also concurred with Schade saying that government has too look at many ways to increase its revenues especially now that the SACU revenues which makes up 1/3 of the country’s total revenue are expected to drop by N$3 billion next year.

“Government must look beyond the revenue from SACU because this is external revenue that the country has no control and the fact that Namibian revenue generated from SACU is predicted to drop next year it doesn’t help either,” he said.

Commenting on the foreign reserves, Cumming said they are determined by the imports and exports and as long as the country continues to depend on imports – the foreign reserves will be low.

“Mostly this is determined by the fact that government still imports machinery to build infrastructure because the country basically doesn’t produce anything and this will put pressure on the foreign reserves.

“But the hope is there, the fact that some companies like B2Gold and Tchudi mines produce goods for export, they are increasing the foreign reserves. Foreign reserves are not something that will resolve itself and I think government has placed its eyes on that,” he said.

November 2015
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