8 November 2018

Namibia: Fiscal Consolidation Stays the Course Despite Economic Headwinds - Schade

Windhoek — Despite prevalent economic headwinds which have an adverse impact on revenue collection, government is staying the course to rein in the fiscal deficit and total public debt, as announced by Minister of Finance, Calle Schlettwein, when he presented the fourth Mid-year Budget Review at the end of October. This is according to local economist, Klaus Schade, who has noted that the mid-year review is not a proposal for allocation of additional funds, but instead serves two purposes: firstly to propose internal re-allocation of approved funds and secondly to provide a hint about the next Medium-Term Expenditure Framework.

"The private sector expansion has helped stabilise the government's income from income tax revenue. While there are a number of factors that are beyond our control, there are others that we can influence and that we have to address more forcefully," said Schade in his commentary on the review.

According to the Bank of Namibia, private sector activities expanded, while the contraction in public sector activities resulted in an overall contraction of the economy.

"The Minister of Finance made repeated reference to the need to improve our competitiveness. The recently released Global Competitiveness Report and the Doing Business Report both clearly indicate that there is room for improvement. Although becoming the most competitive economy in Africa has been a national priority since some time, very little has actually happened and consequently, Namibia is losing ground. Decisive action has to be taken to address issues that have been on the table since years. Improving the business and investment climate can attract domestic and foreign direct investment, and create jobs and income for the employed in terms of salaries and for government in terms of taxes," Schade commented.

A research associate at the Economic Association of Namibia, Schade feels that in order to reduce or even eliminate over-pricing for large infrastructure projects, government could consider contracting experts from the region that thoroughly review tender specifications and assist in the evaluation of tenders.

"A clear prioritisation of expenditure needs to include an evaluation of the Ministry of Defence's contributions to economic and social development. The ministry received the fifth highest reallocation in the Mid-Year Budget Review and 2.5 times more than the Ministry of Safety and Security. There are additional measures the government could consider in consolidating the budget. They will not only cut expenditure or increase revenue, but also address issues such as inequality: The cost of the Public Sector Employee Medical Aid Scheme amounts to about N$2.5 billion this year, while contributions from public employees amount to some N$378 million resulting in a subsidy of N$2.2 billion. Moving over time to a cost-recovery percentage contribution instead of the current flat rate that burdens low-income earners more than the better-off, would provide additional funds in the short term of at least N$1.5 billion for vital programmes," Schade stated.

He added that a number of basic food items are zero-rated for value-added tax in order to protect low-income earners and the poor. He suggests a review of the food items since the zero rating most likely benefits better-off households more than the intended beneficiaries that often do not have access or cannot afford these food items.

Schade continued: "Government could consider to raise the tax threshold and reduce the tax rate for the lowest income brackets and to adjust these tax brackets for inflation (fiscal drag), while ensuring that these measures remain tax neutral for the highest income brackets. In addition, withholding taxes on interests earned on the Basic Bank Account could be abolished, since this bank account caters for persons earning less than N$2 000 per month. Both measures would bring some relief for low-income earners."

Furthermore, he proposes that the reform of public enterprises should include a review of the fees for non-executive directors that are, according to media reports, often several times the monthly salary of, for instance, a teacher.

"It is necessary to thoroughly review the structure of the public sector that consists of more than 600 entities including offices, ministries, agencies, public enterprises, traditional authorities, councils, appeal committees, boards, etc. There is most likely room to streamline the structure and reduce the financial burden. Natural attrition alone will not address these structural issues. Finally, strengthening regional cooperation and aligning responses to the current economic challenges could result in synergies and stimulate regional and domestic economic growth," Schade concluded.

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