19/03/19

Election Year Stimulus

Since mid-2016, the Namibian Government has been on a drive to bring about fiscal consolidation. This is the result of several years of large budget deficits which saw public debt expand rapidly from 16% of GDP in 2011 to nearly 45% of GDP by 2018. As it stands, debt is on a steady course to reach 50% of GDP by 2021.

Fiscal consolidation has largely taken the form of trying to cap spending at a fairly constant level in nominal terms, while allowing inflation to increase revenue in real terms. This withdrawal of Government spending in the economy has played a role in the economic contractions since mid-2016. Given that 2019 is an election year, however, expenditure is likely to breach the levels previously forecasted. This expected overrun will likely manifest as an increase in the civil service wage bill, increases in social grants, and ongoing bailouts to state-owned enterprises.

It has been well publicized that the civil service wage bill absorbs half of total revenue and is one of the most expensive globally relative to GDP. As a result, efforts to reduce this expenditure burden and bring it under control have seen Government propose below-inflation wage adjustments over the medium term. While endeavours to bring about a sustainable wage bill are commendable, such low wage adjustments are unlikely to materialize. With the elections later this year – which public servants and unions are well aware of – the State will be pressured and eventually accede to higher salary adjustments in an effort to retain support at the polls.

According to the Namibia Financial Inclusion Survey 2017 (NFIS), collectively 13.9% of Namibians over the age of 16 (the ‘eligible population’) are reliant on social grants as their main source of income. Of the eligible population, 9.9% rely on Government’s old age pension whereas just 0.3% indicate that they receive a company pension. In other words, for every 1 person relying on a company pension, there are 33 who rely on the old age grant. An additional 2.4% of the eligible population is reliant on the child grant, 1.3% on the old age grant and 0.3% on the war veterans/ex-combatants grant. Thus, of the 573,932 households in Namibia as estimated by the survey, 13.9% (or almost 80,000) are reliant on some form of government grant as their main source of income. The NFIS also shows that, unsurprisingly, most salaried persons reside in urban areas while most reliant on some form of grant stay in rural areas. A significant portion of the voting-age population is therefore dependent on social grants, and increases in these would be a relatively easy way to secure votes.

These expenditure increases need to be funded somehow, and inevitably come at the expense of other expenditure lines as illustrated in the last mid-term budget. In October 2018 it was announced that N$390 million would be redirected towards the wage bill and that the previous year’s wage bill was overshot by some N$414 million. Most of this funding is typically redirected from capital expenditure. In his budget speech, the South African Minister of Finance indirectly announced a lifeline of sorts for Namibia. SACU receipts for FY2019/20 have been revised upwards, with Namibia receiving 16.7% more than previously expected. SACU revenue, historically making up about a third of total revenue, will increase by some N$2.7 billion to N$18.9 billion.

If the entirety of this additional revenue were to go towards funding the deficit, it would see the deficit forecast fall by nearly a third from 5.4% of GDP to 4.0% of GDP. The reality is that much of this additional revenue is expected to go towards operational expenditure, such as higher-than-budgeted wage adjustments, increases in social grants, and greater willingness to bailout state-owned enterprises. In the short-term, this additional expenditure will boost the weak growth that is anticipated, however high recurring budget deficits and excessive public debt accumulation will impact growth thereafter. Simply put, a fiscal stimulus can be expected for 2019 but it will come at the expense of growth in future.