Namibia Debt Struggles Despite Promising Economic Prospects

1 November 2022
The Exchange Africa
analysis By James Ndwaru

Namibia's debt-to-GDP ratio has continued rising further above the central government debt ceiling of 35% of gross domestic product as of March 2021.

  • Namibia has consistently put out a series of measures to restructure the economy, enhance economic development, generate employment, and alleviate poverty and inequality.
  • Improving the business environment, promoting access to capital, improving governance, and reducing skills mismatches are crucial for stimulating growth and achieving long-term debt sustainability.
  • Implementation of the government's fiscal reduction agenda is essential for debt sustainability.

Since its independence, Namibia has had an outstanding political stability track record.

Sound macroeconomic policies, moderate economic growth, poverty alleviation, and natural resource protection define Nambia's stability. The country has made significant accomplishments despite geographical limits. Namibia has confronted apartheid, colonial legacies, and the difficulties of establishing a national government. However, considerable obstacles persist.

Chronic massive unemployment, the devastation of HIV/AIDS, and one of the world's most lopsided economic inequalities plague Namibia's economy. Since independence, the country's economic structure has remained profoundly intact. Metals and minerals account for the majority of exports.

The public sector is still the largest employer. However, there has been minimal investment in labour-intensive manufacturing, which has absorbed low-skilled labour exiting traditional agriculture in many nations.

Namibia has consistently put out a series of measures to restructure the economy, enhance economic development, generate employment, and alleviate poverty and inequality.

These actions have resulted in considerable changes in the level and content of national debt. Over time, bringing debt closer to Namibia's budgetary goals. These have resulted in new challenges with debt sustainability in Namibia.

READ MORE: Namibian Ambassador to China sees great prospects for cooperation

Understanding Namibia's debt situation

Discussions regarding African nations' debt-to-GDP ratios are particularly crucial now. The continent's public debt stock has been rising to unprecedented levels in modern history.

Trading Economics global macro models and experts forecast that Namibia's Government Debt to GDP ratio to reach 78 per cent of GDP by the end of 2022. Namibia's debt to GDP could reach 80 per cent in 2023 and drop to 75 per cent in 2024. Regarding its overall indebtedness, Namibia ranks in the top 20 countries with the highest debt-to-GDP ratio in sub-Saharan Africa.

The debt consists of Nam01 and GI22 bonds. According to the national budget plans for 2022/23, these bonds will mature in October and November, respectively. Although Namibia's government was ready to redeem these bonds, using reserved funds to fight Covid-19 and the redemption of certain bonds last year resulted in a reduction in the reserve's balance.

Due to limited national reserves, the government may have to roll over term debt obligations. This move might prove detrimental for the nation, whose total government debt could reach a record high of 7.74 billion U.S. dollars (N$140 billion) by the end of the fiscal year 2022/23. Consequently, this could prove disastrous for the nation's credit ratings.

Namibia's government debt vulnerabilities are weighted to the upside. Thus credit rating agencies have raised concerns about the projected surge in the public debt-to-GDP ratio over the medium term since this threatens debt sustainability.

The issue of debt sustainability has been looming for years, with experts regularly urging the government to spend prudently, but this advice tends to be disregarded annually. The harsh reality is that continuous fiscal slippage has resulted in higher-than-anticipated debt levels, increasing interest payments (which now account for roughly 16 per cent of income), pushing out other government expenditures and requiring stricter austerity measures.

Debt sustainability measures

After a dramatic decline caused by the COVID-19 epidemic, the economy of Namibia has begun to recover. In 2021, the real GDP growth rate reached 2.7 per cent as mining activity, and tertiary sector activities started to rebound. The recovery became more potent in the first half of 2022 due to continued mining expansion and increased industrial activity.

Rising international food and energy prices have passed through to the local economy. This has escalated inflationary pressures from the crisis in Ukraine. In August, average headline inflation increased to 5.6 per cent due to higher food and transportation costs.

Real GDP growth is anticipated to reach 3 per cent in 2022 and 3.2 per cent in 2023. The healthy production of diamonds, gold and uranium and a resurgence in tourism will define this growth. Inflation will average 6.4 per cent in 2022 before beginning to decline in 2023. Foreign direct investment in oil and gas and one-off transactions will continue funding the current account deficit. Experts project that the budget deficit will decline due to increased tax receipts and fiscal reduction measures.

The crisis in Ukraine, a worldwide economic downturn, and lower non-oil commodity prices might raise inflation, exacerbate imbalances, and hinder recovery. It is essential to preserve macroeconomic stability, advance structural reforms, cushion the most vulnerable to support private sector-led and inclusive development, and reduce unemployment and inequality.

The government must act

Implementation of the government's fiscal reduction agenda is essential for debt sustainability. It remains vital to contain the wage bill, advance the reform of state-owned companies, and bolster tax administration. Concurrently, it is crucial to preserve social expenditure and growth-promoting public investment. This will help offset the effect of rising food and energy costs on the poorest. Strengthening the public financial framework will aid in the consolidation of government finances.

The Central Bank of Namibia has steadily increased its policy rate in response to the South African Reserve Bank's (SARB) tightening monetary policy. Maintaining a policy rate roughly matched with the SARB's rate and an appropriate amount of reserves would sustain the currency peg and contain volatility as inflationary pressures increase. Bolstering the financial sector's resilience and addressing macroeconomic risks will boost financial stability.

Namibia has made progress on structural changes to foster economic diversification and boost productivity. Improving the business environment, promoting access to capital, improving governance, and decreasing skills mismatches are crucial for stimulating growth and managing Namibia's debt-to-GDP ratio.

READ MORE: Why Namibia Is Establishing Itself As An International Oil And Gas

Read the original article on The Exchange.

Tagged:
Copyright © 2022 The Exchange Africa. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

AllAfrica publishes around 400 reports a day from more than 100 news organizations and over 500 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.