Namibia: Severe Revenue Shocks Expected

The government has announced it plans to spend 49,5% of the N$64 billion non-interest expenditure on the social sector compared to 22,1% on the economic and infrastructure sector for the current fiscal year.

Economic observers are concerned about how the prioritised social sector will generate enough revenue to fund the government in the next financial year, given less investment on income generating sectors.

The national budget tabled by minister of finance Iipumbu Shiimi last week indicates that in the next 10 months, the government will spend N$31,7 billion on the social sector and only N$14,2 billion on the economic and infrastructure sector.

In other words, the budget is a consuming budget through the health and education ministries.

The challenge is whether the consumption of the social sectors (health and education) will be procured within the economy or be the catalyst of capital flight since the country barely produces what it consumes.

According to a Cirrus Capital analysis, the budget has front-loaded funding to the health sector; deployed the once-off emergency income grant; maintained capital expenditure for ongoing capital projects; included off-budget financing for critical infrastructure; and maintained allocations for social safety nets.

"The expectation for the 2020/21 financial year is, frankly, dire," Cirrus analysts say.

Total revenue is projected at N$51,4 billion, a 14,3% (or N$8,6 billion) decrease from the N$60 billion forecasts in the 2019 mid-term budget.

It is also about N$7,2 billion less than what was collected for 2019/20.

The analysis shows that expected revenue collection for the current financial year "takes total revenue back five years to 2015/16 levels (N$51,2 billion).

Southern African Customs Union (Sacu) revenue has traditionally been the single largest source of public revenue with total receipts for 2019/20 amounting to N$18,9 billion, and for this year is set at N$22,3 billion - a 17,6% increase.

"A serious concentration risk has been run in Sacu typically accounting for a third of revenue, and in 2020/21 it will account for a record 43,3% of total revenue," the analysis shows.

Is also says the slowing down in member countries' economies, as well as the lower volumes in international trade, will lead to the material decline of collections going into the revenue sharing pool.

"The danger is that without a recovery in domestic revenue sources and a material decline in Sacu receipts, the government will be faced with another revenue shock."

Without being able to contain expenditure, this suggests that further large deficits can be expected.

Furthermore, job losses and wage reductions this year will see a major decline in personal income tax collections, with the ministry estimating total collections of just N$9,6 billion - levels last seen in the 2013/14 financial year.

The researchers explained the fall is a far cry from the N$14 billion forecasts in last year's midterm budget, a decrease of 31,6%.

"The tax base, as far as individuals are concerned, will see a large decline in numbers this year as well. A recovery in personal income tax collections will be slow, taking several years," Cirrus researchers say.

They attribute the expected shocks to initial lockdown restrictions.

The adverse impact on wages and employment will see households left with reduced disposable income, thereby further reducing their ability to spend.

The fall in disposable income will obviously impact Value Added Tax collections, which are forecast at N$10 billion for 2020/21.

"This is a decline of 22,2% from October's forecasts, and a decline of 16,3% from last year's collections. These levels are similar to those last seen in 2014/15," the analysis shows.

Without a recovery in employment, VAT collections will remain subdued as well.

Cirrus also indicates that mild recovery can be expected for 2021/22, but will hardly make a dent in the decline of Sacu revenue.

Corporate profits are, unsurprisingly, expected to plunge this year; the previous year's mid-term budget anticipated company taxes of N$7,5 billion for 2020/21, but this has now been lowered by 36% to N$4,8 billion.

This will be the first time in several years that Namdeb's contribution to the state's coffers is below N$1 billion.

Non-mining companies are expected to pay just shy of N$4 billion in taxes, a N$1,6 billion decrease from 2019 mid-term budget.

Cirrus states that quick recovery in the non-mining source of revenue is out of the question.

Expenditure is projected to increase by 9% from N$66,5 billion in 2019/20 to N$72,8 billion in the current financial year.

Expenditure is increasing from an already high base.

Total expenditure is expected to represent 42,5% of gross domestic product (GDP), while revenue to represent 30% of GDP, resulting in this record deficit.

*This article has been updated.

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