Mid-Term Budget Review: Never too late to reform
Finance Minister Iipumbu Shiimi delivered his 2023/24 Mid-Term Budget speech on 31 October 2023, taking note of the achievements, challenges, and the performances of State-Owned Enterprise (SOE).
The Mid-Term Budget Review plays a critical role in the entire budgetary process because it sets the tone for the fiscal framework for the next main budget. The budget is the most important economic instrument of government, as it reflects the country's socioeconomic policy priorities by translating priorities and political commitments into expenditures. This would include projections for inflation, productivity growth, unemployment, and balance of trade. The economic outlook is critical and watched closely by investors, rating agencies, taxpayers, and citizens at large. Economic and fiscal stability is possible if we maximize domestic resource mobilization, and come up with strong legislative policies that will curb revenue leakages and illicit financial flows. We should have debt management frameworks to avoid the debt that we keep incurring. The country’s external debt continues to burden the economy by restricting access to low-cost, long-term financing required to support the desired medium to long-term growth trajectory.
Therefore, the macroeconomic framework needs to be complemented by a range of reforms that are within the government’s control. The foundations for economic growth include prudent and credible fiscal and monetary policy, a well-functioning financial system, and respect for the rule of law. Achieving this requires decisive steps to build confidence, promote investment and job creation, reduce economic inequality, and eliminate regulatory blockages.
Gross revenue is estimated to grow at an average pace of 8.8% to reach N$74.7 billion in FY2023/24 and N$82.0 billion by FY2025/26, underpinned by the increase in receipts from the Southern African Customs Union (SACU) Revenue Pool and strengthening domestic revenues as the economy recovers. Expenditure maintained at 53.8% billion.
Debt
Gross government debt increased to 66% of GDP. Minister Ipumbu Shiimi cautiously indicated the government’s commitment to continued gradual fiscal consolidation, which provides much-needed fiscal policy certainty and sustainability. In my view, the extent to which the government is able to achieve fiscal sustainability will be dependent on the implementation of expenditure curb and accelerated growth-enhancing reforms. This is critical for supporting the ongoing fragile economic recovery and should counteract the negative impact of several headwinds, ranging from higher energy and food prices to a relatively less accommodative interest rate environment. The government is determined to implement reforms aimed at stimulating demand through investment in infrastructure; employment programmes and tax incentives that should boost consumption; ease the skills constraints; and modernize network industries, which should ultimately lead to increased productive capacity.
Furthermore, the Minister indicates that a modified Tax Relief Programme will be introduced for another period to offer much-needed relief to taxpayers. The Pro-Poor Tax Policy Changes or tax threshold increase from N$ 50 000 to N$ 100 000. Reduced tax rates may boost savings and investment, leading to further production and reduced unemployment. Well done!
Despite this being another market-friendly Mid-Term Review budget, implementation will again be key, particularly on the reform and expenditure fronts. Here political will to drive growth and boost revenue, keeping expenses in check, will once again prove to be vital. Facilitating faster private-sector involvement in the power sector will catalyze confidence and growth more broadly.
Unemployment
Namibia’s low growth levels and high unemployment reinforce the desire to protect existing industries and jobs. To achieve higher living standards, Namibia needs to adjust to global market demand. Climate change is starting to shape the manner in which the largest markets regulate imported and domestic products.
Weak domestic demand continues to limit firms’ ability to pass higher prices on to consumers. There is a risk that higher administered prices and exchange-rate depreciation could put upward pressure on inflation. In line with the government’s commitment to fiscal sustainability, the review Budget proposes a set of measures to reduce public spending as a share of GDP, improve the composition of spending by reducing growth in the wage bill, and maintain good budget execution.
The financial performance of several large state-owned companies continued to deteriorate sharply over the past years, leading to an increasing drain on public resources. Unlike their private counterparts, most state-owned companies hold developmental rather than profit-driven mandates. Nonetheless, these entities need to be financially self-sustaining. In recent years, a pattern of mismanagement and poor governance at major state-owned companies has led to operational failures, financial distress, and increased demands for taxpayer support through the national budget. This problem is compounded by broad, sometimes unfunded mandates and, in some cases, outdated business models. Increasingly, however, these entities rely on external funding, government-guaranteed debt, and bailouts to sustain operations.
SOE’s
Namibia State-Owned Enterprises are facing a wide range of issues, from insolvency to weak accounting systems, as well as serious corporate governance shortcomings. With public debt levels above 60% of GDP and in the face of many macroeconomic shocks such as the geopolitics in Russia-Ukraine and Israel-Gaza, the risks posed by a lack of reform are very substantial. Furthermore, a number of SOEs have been kept afloat despite overcapacity concerns and low profitability. Therefore, the Reform of SOEs should be a pivotal component of the government’s agenda for sustaining domestic economic growth and tightening the political control over all aspects of the nation. The current wave of SOE reforms has, however, focused on the state’s push for consolidation through mergers and acquisitions, rather than the pursuit of improving corporate governance.
Moreover, to resuscitate the Namibian economy would require massive investment in infrastructure, skills & and training; enacting and enforcing enabling-business incentives to stimulate the production of goods and services for local consumption and exports, and having a clear fiscal and monetary policy direction for the economy. Namibia must exercise caution as debts are paid by revenue rather than GDP and also given the low tax to GDP-ratio. Furthermore, incurring more debt in the current year would mean adding pressure on future budgets due to debt servicing obligations. One of the biggest risks facing the budget is the poor implementation of capital projects, which is a major concern for stakeholders in the economy, and to a large extent influences the level of impact of the budget on the private sector and the economy. Whether the budget will meet the expectations of Namibians and deliver the promised change depends largely on the implementation of institutional and structural reforms targeted at improving the budget process. To this end, the reward for fiscal discipline is strong economic growth even amidst the fragile economy.
The Mid-Term Budget Review plays a critical role in the entire budgetary process because it sets the tone for the fiscal framework for the next main budget. The budget is the most important economic instrument of government, as it reflects the country's socioeconomic policy priorities by translating priorities and political commitments into expenditures. This would include projections for inflation, productivity growth, unemployment, and balance of trade. The economic outlook is critical and watched closely by investors, rating agencies, taxpayers, and citizens at large. Economic and fiscal stability is possible if we maximize domestic resource mobilization, and come up with strong legislative policies that will curb revenue leakages and illicit financial flows. We should have debt management frameworks to avoid the debt that we keep incurring. The country’s external debt continues to burden the economy by restricting access to low-cost, long-term financing required to support the desired medium to long-term growth trajectory.
Therefore, the macroeconomic framework needs to be complemented by a range of reforms that are within the government’s control. The foundations for economic growth include prudent and credible fiscal and monetary policy, a well-functioning financial system, and respect for the rule of law. Achieving this requires decisive steps to build confidence, promote investment and job creation, reduce economic inequality, and eliminate regulatory blockages.
Gross revenue is estimated to grow at an average pace of 8.8% to reach N$74.7 billion in FY2023/24 and N$82.0 billion by FY2025/26, underpinned by the increase in receipts from the Southern African Customs Union (SACU) Revenue Pool and strengthening domestic revenues as the economy recovers. Expenditure maintained at 53.8% billion.
Debt
Gross government debt increased to 66% of GDP. Minister Ipumbu Shiimi cautiously indicated the government’s commitment to continued gradual fiscal consolidation, which provides much-needed fiscal policy certainty and sustainability. In my view, the extent to which the government is able to achieve fiscal sustainability will be dependent on the implementation of expenditure curb and accelerated growth-enhancing reforms. This is critical for supporting the ongoing fragile economic recovery and should counteract the negative impact of several headwinds, ranging from higher energy and food prices to a relatively less accommodative interest rate environment. The government is determined to implement reforms aimed at stimulating demand through investment in infrastructure; employment programmes and tax incentives that should boost consumption; ease the skills constraints; and modernize network industries, which should ultimately lead to increased productive capacity.
Furthermore, the Minister indicates that a modified Tax Relief Programme will be introduced for another period to offer much-needed relief to taxpayers. The Pro-Poor Tax Policy Changes or tax threshold increase from N$ 50 000 to N$ 100 000. Reduced tax rates may boost savings and investment, leading to further production and reduced unemployment. Well done!
Despite this being another market-friendly Mid-Term Review budget, implementation will again be key, particularly on the reform and expenditure fronts. Here political will to drive growth and boost revenue, keeping expenses in check, will once again prove to be vital. Facilitating faster private-sector involvement in the power sector will catalyze confidence and growth more broadly.
Unemployment
Namibia’s low growth levels and high unemployment reinforce the desire to protect existing industries and jobs. To achieve higher living standards, Namibia needs to adjust to global market demand. Climate change is starting to shape the manner in which the largest markets regulate imported and domestic products.
Weak domestic demand continues to limit firms’ ability to pass higher prices on to consumers. There is a risk that higher administered prices and exchange-rate depreciation could put upward pressure on inflation. In line with the government’s commitment to fiscal sustainability, the review Budget proposes a set of measures to reduce public spending as a share of GDP, improve the composition of spending by reducing growth in the wage bill, and maintain good budget execution.
The financial performance of several large state-owned companies continued to deteriorate sharply over the past years, leading to an increasing drain on public resources. Unlike their private counterparts, most state-owned companies hold developmental rather than profit-driven mandates. Nonetheless, these entities need to be financially self-sustaining. In recent years, a pattern of mismanagement and poor governance at major state-owned companies has led to operational failures, financial distress, and increased demands for taxpayer support through the national budget. This problem is compounded by broad, sometimes unfunded mandates and, in some cases, outdated business models. Increasingly, however, these entities rely on external funding, government-guaranteed debt, and bailouts to sustain operations.
SOE’s
Namibia State-Owned Enterprises are facing a wide range of issues, from insolvency to weak accounting systems, as well as serious corporate governance shortcomings. With public debt levels above 60% of GDP and in the face of many macroeconomic shocks such as the geopolitics in Russia-Ukraine and Israel-Gaza, the risks posed by a lack of reform are very substantial. Furthermore, a number of SOEs have been kept afloat despite overcapacity concerns and low profitability. Therefore, the Reform of SOEs should be a pivotal component of the government’s agenda for sustaining domestic economic growth and tightening the political control over all aspects of the nation. The current wave of SOE reforms has, however, focused on the state’s push for consolidation through mergers and acquisitions, rather than the pursuit of improving corporate governance.
Moreover, to resuscitate the Namibian economy would require massive investment in infrastructure, skills & and training; enacting and enforcing enabling-business incentives to stimulate the production of goods and services for local consumption and exports, and having a clear fiscal and monetary policy direction for the economy. Namibia must exercise caution as debts are paid by revenue rather than GDP and also given the low tax to GDP-ratio. Furthermore, incurring more debt in the current year would mean adding pressure on future budgets due to debt servicing obligations. One of the biggest risks facing the budget is the poor implementation of capital projects, which is a major concern for stakeholders in the economy, and to a large extent influences the level of impact of the budget on the private sector and the economy. Whether the budget will meet the expectations of Namibians and deliver the promised change depends largely on the implementation of institutional and structural reforms targeted at improving the budget process. To this end, the reward for fiscal discipline is strong economic growth even amidst the fragile economy.
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