7 March 2018

Namibia: Lower Deficit Expected in 2018/19 Budget

Analysts expect the 2018/19 national budget to provide for a lower deficit and faster fiscal consolidation as a result of improved government income.

Finance minister Calle Schlettwein is expected to table the 2018/19 national budget in parliament today.

He indicated in November, when he tabled the 2017/18 mid-term budget, that it was government's aim to reduce the budget deficit to below 3% of Namibia's gross domestic product over the next three years, while limiting public debt to within 35% of GDP in the long term.

Cirrus Capital co-founder Rowland Brown said a lower deficit and better revenue would be the result of tax increases which can be expected with roughly four taxes introduced. Although none of the new taxes may be sizeable in nature, he said dividend tax was an exception.

"We expect to see a 10% tax on all dividends paid in the country. So, for small businesses paying out 100% of their dividend, the effective tax rate would be 38,8%," he said.

Brown stressed that it would, however, be unlikely for these taxes to be sufficient to get the country out of the fiscal deficit being experienced currently.

He added that the continuing budget shortfall was concerning because liquidity issues were slowly starting to resurface in the local economy.

"It is not nearly as bad as it was this time two years ago, but we are starting to see the repo facility at the central bank being used more often. We went through a period around May 2017 towards the end of 2017 during which commercial banks were relatively flush with cash," he said.

Brown noted that there is an expectation for government to ease or loosen expenditure taps, as well as for an upward revision of salaries and wages, which account for about 45% of government spending.

"We see that revision up from the mid-term budget. We also expect government to revise their allocation to state-owned enterprises slightly upwards because it has been very difficult to keep SOEs' expenditure under control," Brown said.

Economist Klaus Schade said fiscal consolidation should continue so that targets would be met.

"We also expect stronger prioritisation, aimed at using the available funds to invest in necessary infrastructure such as water, electricity, transport and agriculture. I, however, expect more pressure being placed on revenue because we will receive lower revenue from the Southern African Customs Union (Sacu) pool," he stated.

Junior analyst at Simonis Storm Securities, Indileni Nanghonga, reiterated that the budget should be tabled within the context of balancing the negative and positive impacts of fiscal consolidation.

"The prior financial period was dominated by negative economic growth, heightened concerns regarding governance in state-owned enterprises and ministries, credit downgrades and regional instability," she said.

Nanghonga said they were keen to know government's stance on two critical issues, namely fiscal consolidation and revenue collection, in a way that did not have a negative impact on economic growth, while at the same time maintaining or reducing the debt burden.Furthermore, revenue collection was clouded by Sacu revenue, which is expected to decline, coupled with low tax collections from individuals and corporates due to the soft economy.

As such, they expect tax revenue to undershoot by almost N$1 billion. In the 2017/18 mid-term budget, government spending was projected to total about N$66,1 billion in 2017/18, and to decrease to N$64,4 billion in the 2018/19 financial year, before rising to N$65,5 billion in 2019/20.

The revised budget projected government's income for 2017/18, 2018/19 and 2019/20 at N$56,7 billion, N$56,6 billion, and about N$59,8 billion, respectively. The difference between government income and expenditure would result in a budget deficit of N$9,3 billion (about 5,3% of Namibia's GDP) in the 2017/18 financial year, a deficit of N$7,8 billion in 2018/19 (4,2% of GDP), and a shortfall of N$5,7 billion in 2019/20 (2,9% of GDP).

Meanwhile, state debt is expected to increase to N$74,2 billion in 2017/18 - the equivalent of 42% of GDP - and to continue to rise thereafter to N$80,2 billion (43,5% of GDP) in 2018/19, and about N$86,2 billion (44,2% of GDP) in 2019/20.

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