Testing times for Namibian economy

By Timo Shihepo

Windhoek – The Namibian economy is facing its tough test yet, as the Ministry of Finance faces a huge task of balancing expenditure cuts and spending at a time when the country needs Treasury to both spend and save money.

The finance ministry will have to weigh the two options at a time when the country has started earnestly with the process of reducing poverty and inequality but also a time when slow economic growth persists.

In his 2017/18 Mid-Year Budget Review speech last week, finance minister, Calle Schlettwein announced plans to continue cutting expenditures – a practice that has been going on for a year – but also announced that about R4.9 billion has been allocated/reallocated to address shortfalls experienced in various areas.

It is the first time in almost two years that the finance ministry is reallocating or allocating funds instead of cutting during the Mid-Year Budget Review.  This time last year, Schlettwein, in the budget review announced a 10 percent (R5.5 billion) cut of the national budget.

While some analysts have read into the issue of allocating funds during the Mid-Year Budget Review as a desperate measure, others see it as a sign that the economy is recovering after almost two years of turbulent times.

The new allocation sees R2.2 billion going to expenditure arrears whose payments were frontloaded in August 2017. The remaining R2.7 billion is allocated to the ministries, with the ministry of basic education getting the largest chunk of R899 million.

This came as a shock to the public who feared that more cuts were going to be announced. The 2016/17 steep expenditure reductions resulted in implementation difficulties in some sectors, necessitating the amendment of the fiscal consolidation path to avert prolonged negative effects on growth and reversals in the delivery of essential services.

However as result, economic activity slowed, in part due to the corrective policy response to reaffirm sustainability. Furthermore, higher than expected expenditure on outstanding spending invoices arose out of a combination of fiscal indiscipline, budget over-commitment and forced spending cuts, hence the public should be forgiven for being surprised at new allocations.

The 2017/18 Mid-Year Budget Review, according to Schlettwein, has taken all these aspects into consideration and decided to free up financial resources while also being mindful that of consequences that could arise if measures are not put in place to curb unnecessary spending.

“As such, this Budget Review, provides for a half-year assessment of the budget execution and the freeing up of resources to enhance allocative efficiency and contribute to the consolidation and growth stimulus efforts,” said Schlettwein.

He added that the review provides additional resources to plug allocation gaps arising from the one-off settlement of unpaid invoices from the previous financial year, while providing a limited envelope of resource allocation to address shortfalls in priority areas.

“This budget review further provides the macro-fiscal framework and make advance announcement of the medium-term policy framework and spending priorities for the next Medium Term Expenditure Framework, thereby enhancing transparency and openness of the budget process to the legislature and the public.”

The minister also reiterated the pro-growth fiscal consolidation stance announced in the 2017/18 budget to stabilise and eventually reduce public debt. He said there is also a need to strengthen institutional capacity, policy frameworks and appraisal capacity to manage fiscal risks effectively and fast-tracking implementation of the announced structural reform measures to support higher, inclusive growth.

Economic analyst, Dr Omu Matundu told The Southern Times that the ministry is caught between a rock and a hard place.

“The Ministry of Finance will have to dig deep to balance the spending and the saving in these tough economic conditions. The public needs the money but government also has to be mindful of its expenditure. So, it is tough,” he said. Adding that the problems started a long time ago when the country could not put an end to those who were wilfully stealing government money.

“The global economic crisis has also played a very big part.”

Simonis Storm analyst, Indileni Nanghonga said government will be forced to spend on the public sector wage bill, as more students are expected to graduate.

Government had earlier frozen vacancies as measures to curb spending but, according Simonis Storm that is expected to change in the coming years.

“Although the Government froze new vacancies, we believe that due to the number of student graduates and the high demand of public workers in the Health and Education Sector will lead to a number of social unrest going forward. This will force the government to open up some vacancies, thus our expectation for increase in personnel expenditure,” said Indileni.

The public-sector wage bill has increasingly crowded out other areas of spending. Namibia’s personnel expenditure stood at 43 percent as a percentage of total expenditure and at 48 percent as a percentage of operational expenditure in the budget review.

Indileni said further increases in personnel expenditure are likely to be seen in the next financial period.

Namibia is easily affected by global effects due to its small open and fragile economy.

As a small open and resource-based economy, with a trade to GDP over 100 percent, Namibia is vulnerable to external shocks through the trade link.

Commodity price volatility exerts pressure on economic activity, public revenue, international reserves and the external position.

“Equally, weak external demand in our main trade partners presents challenges for the export sector, which limits potential growth. As such, measures to improve the productive capacity of the economy as well as economic diversification are critical for Namibia to bolster resilience,” said Schlettwein.

November 2017
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