05/12/19

Namibia’s Debt Metrics: A Penny for Your Thoughts

The FY2019/20 Mid-Year Budget Review reinforced the fiscal consolidation pathway, seeing no significant changes to revenue or expenditure targets. This means that the budget deficit for the year is on track to remain as initially projected, at N$8.1 billion.

Government’s debt metrics make for interesting analysis. It has been well publicized that Namibia’s total public debt has grown significantly since the start of the decade – from N$13.8 billion in FY2010/11 to an expected N$96.9 billion in FY2019/20. This is an increase of over 600% in 10 years. The running of primary budget deficits (i.e. revenue less expenditure, excluding debt/interest payments) in nine of the last ten years have resulted in the staggering accumulation of debt. If interest payments are included, then Government has been running overall deficits for more than a decade. This implies that we borrow money not only for development and operational purposes, but also borrow money to make interest payments on current debt.

One fiscal metric often reported is the debt-to-GDP ratio. In its recent downgrading of Namibia’s sovereign credit rating, Fitch stated that the agency expects Namibia’s public debt to increase above 51% of GDP by FY2020/21, which is more than double the 25% level at the end of FY2014/15.

In this year’s Mid-Year Budget Review, the Ministry of Finance shows that total public debt as a percentage of GDP is expected to reach 49% by the end of the fiscal year before rising to 51% by the end of FY2020/21. While a debt-to-GDP ratio at these levels is not of itself a worry, the concern is rather with the rate of increases (more than doubling in six years) and that it will continue to increase – the Ministry’s forecasts show total public debt reaching 53% of GDP in FY2022/23.

To better illustrate the rate of debt increases, we can consider it on a per capita basis. Using the Ministry’s reported total public debt levels and population estimates from the Namibia Statistics Agency, we can estimate roughly how much government debt there is per person in a given year. In FY2009/10, with a population 2,066,398, there was public debt of N$5,769.71 per capita. By FY2014/15 this had almost tripled to N$15,622.98 per capita. For this financial year (FY2019/20), it has grown to total public debt of N$39,450.35 per capita. In other words, our total debt levels are increasing at a much faster rate than that which our population is growing.

It is not just our total debt levels which have been on the rise. Coupled with this have been large increases in the associated interest payments, i.e. the cost of the debt. Many factors can lead to increases in the cost of debt, such as growth in total debt (by taking on more debt), domestic liquidity and demand for debt, as well as sovereign credit ratings to name a few.

Namibia’s interest payments have been growing faster than nominal GDP for much of the decade and are forecasted to continue growing until FY2021/22. While interest payments make up just 3.5% of GDP, the implication is something worth noting. Essentially it means that our payments necessary on the money we (increasingly) borrow are growing at a much faster rate than the current growth in monetary value of goods and services produced within our economy. In other words, we’re growing our interest payments much faster than the rate at which we’re adding value within our economy. There is also an obvious link between GDP growth and government revenue, which revenue can be used to make interest payments or settle outstanding debt. An economy recording strong growth will see better tax revenues due to increased activity, whereas a slowing or contracting economy is likely to see low or flat nominal revenue growth.

The commitment to fiscal consolidation has been reassuring, as the pace of debt accumulation has been unsustainable. The ability to stick to expenditure caps remains vital, while there is a need to return to running primary surpluses in place of the recent primary deficits.