Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1698747101522.pdf (Namibia)
SPEECHBY - HON.NICO SMIT, MP DTA of NAMIBIA ON THE 2016117 MIn~YEAR BUDGET REVIEW AND MEDIUM~TERM BUDGET POLICY STATEMENT FOR THE FY2017/18-2019/2020 MTEF 08 November 2016 Honourable Speaker, Honourable Members, I rise today to contribute to the 2016117 Mid- Year Budget ReviewandMedium for the FY 2017/18~2019/2()20 MTEFas Term Budget PolicyStatement in this August House bythe Minister of Finance,Hon.

Calle Schlettwein.

tabled breakdown of Namibia's On 27 October this year, Hon.
Schlettwein provided this AugustHouse with a financial position.

This - work is comprehensive such a detailed account of our commendable; as it is not customary .toprovide current position in the tabling of the mid-year budget review.

From events that transpired since September last year, it is now obvious that a major realigning of expenditure to revenue is required.
This is the stated purpose of the revised budget; allow me therefore to provide some background, according to my view, on the factors that have necessitated this move.

PARLIAMENTARY OFFICE T: +264-61-288 25631 F: +264-61-226 494 E: g.martin@parliament.na Parliament Building, Southern Wing, Office 154, Windhoek, Namibia PO Box 41272, Ausspannplatz, Windhoek,Namibia 1 W: www.dtaofnamibia.org -p a ge 12 thatNamibia The financing constraints -means new.
The first sign of a significant presented Domestic Product for 2015 Was downgraded may not sound significant, but in reality it means that overall the economy performed some 7% worse compared to 20 14, That has not reverted, worsened.

is currently facing are by no slowdown in economic output itself.inthe National Accounts, where the growth in Gross from 5.7% to 5.30/0.
This in 2015 trend the situation has in fact during the current fiscal year, started its counter-cyclical When government the reasons for this move were obvious.

The rest of the world was in the midst of the great Financial Recession: Irt Namibiathesigns were clear.

The 2009 Fiscal Year showed a marked contraction with the economy shrinkingby impact of the international 1.10/0: This was as a result ofthedirecf financial crisis.
in 2010, budgets often by the .then Minister crisis and to restore growth to the Namibian The national budget for 201 0 was designed to counter financial mentioned Kuugongelwa-Amadhila, Namibia economies were contracting.

The result was an unprecedented of elevated economic growth.

But debt exploded, 40% at this point.

the fallout of the economy.

As Saara, that at a -tim-e when most other this came at a price.
Government to over from less than 16% of Gross Domestic Product, the budget was counter-cyclicalmeaning grew its budget ofFinance,Hon· substantially six years _ facts available, Fromallthe total economic output.

In any economy, andthishappens to disaster, financing for additional difficultor now.

it is clear that debt grew at a faster rate than this eventually inevitably leads -whenthe macro-economic tipping point it is where we are IS exceeded to take on new debt.
That govetnmentfinds very expensive andjhe.

in comparison What savedN amibia in 2010 was the very modest government national debt debt stood at only 15.7% of GDP, after Botswana, Zimbabwe, to Gross Domestic Product.

Government in southern Africa in South Africa, the and Angola.

This small debt created what the second lowest levels and very far from the debt Zambia and ==========m2!~========== P age 13 the subsequent former Minister of Finance called "Fisc.al Space.
"In years, from 2010 to 2015,theMinistry of Finance effectively used this fiscal space to aggressively .expand the budget.

This inevitably led to budget .deficits.call of which were financed very effectively through debt .instruments in the local capital market.

The result was average annual growth rates typically exceeding 5%, and even 6% in 2014, while the rest of the world stagnated or contracted.

Our peers in southern Africa only posted moderate growth rates below 25%.
Honourable Speaker, Honourable Members, .

.. impact on the local This expansion of our debt had a tremendous N$87 billion in 2010 to an estimated economy-Gfrl+grewfromaround N$190 billion in 2016.

It also grew the.

government's debt from the stated 15.7% level to an expected37% according to the- 2016117 MTEF published by the minister at the end of February this year.

In the NationalAccounts, published in August, the actual debt level came out atabbve4()O/o.
This indicates that the finance ministry was well aware - of the headwinds that -undermiried the economy this year when it published it820 16 budget just before the start of the new fiscal.

year.

the negative impact What the Ministry did not foresee, though,was from a range of other economic variables.

.

- debe of South' Africa.--Locally; The risks continued to grow during 2015, slow at first, but faster during the second half of the year.
This lead to perceived higher risks on Namibian debt instruments .inthe South Africanmarket and the spreads between Namibian bonds and the benchmark South African bonds widened.

In effect, the interest Namibia paid for itsdebt washigher than the similar-rated the risk on government bonds were seen to increase, leading to bigger discounts in the allotment of debt underexisting bonds.

In simple terms, it meant that government.debtwas -becoming increasingly expensive.
At some auctions, Cthelack of market participants forced the Bank of Namibia, notto allocate any new issuances.

At the end of October 2015, Namibia was already in trouble.

The finances were only saved by the issuing of the now government's infamous US dollar-denominated Eurobond to the value of US$750 .

==========.O]!?

!e ========== Pag el 4 million.


This money gave the dwindling foreign reserves a major boost, the government increasing with the liquidity it required to keep the wheels turning until the next budget That was in February this year.

reserves by some 57% while it provided Honourable Speaker, Honourable Members, structures, programme.
Were the economy From a policy point of view, an expansion of government construction between 5% and 60/0, the commensurate would have maintained the fiscal factors, as I will explain later, all contributed revenue,the worsening of the debt toGDP ratio.

This quickly brought a precarious position.

the increase indebt was required to fund and to· start an ambitious growing revenue integrity.
When various negative to reduce government in revenue growth and a rapid the fiscus into to continue growth in government result was a reduction Honourable Speaker, Honourable Members, One can ask, What is different this year?

The appropriate Finance himself.

was used up.

answer In his budget to this question comes from the Minister of review speech he said the fiscal space the Ministry of Finance, factors, which had an impact on GDP leading This is exactly what happened.
Our economy was beset by a number of to alower negative remained as budgeted last year, outturn of revenue.

Since expenditure a bigger deficit.

Already at the beginning of this lowerrevenuesmeant in its published figures, assumed fiscal year, that total debt as a percentage ofGDP for 2015, will marginally exceed it became 35%.

During and that apparent less than the budgeted N$56.8 that revenue was considerably the billion.

is a very big shortfall.


this year,as more data became last year's growth rate must be adjusted downward it was lower by some 8%, which in budgetary terms, available, In fact ==========m!?

!~ ========== Pa gel 5 , - ~- - ,,- .

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theminister That shortfall carried over into this year with the resultthat in his mid-year review estimated that government debt as a percentage ofGDP, will probably exceed 43% ifsome drastic saving measures are not introduced.
The need for curbingthe expenditure side of the budget andreduction by the Finance Minister, is what has led tothesuspension announced a little over a week ago.

On this particular point, let me refresh our minds on the seriousness of our current quotetheministerto predicament.

And I quote the minister: "The overall appropriation expenditure was reduced by 7.40/0(N$4.5 billion billion from the Appropriation billion), N$3.S interest payments.
The revised Development Budget reduction of ceiling for all()/MlAs billion-while from N$52.1 billion to N$50;2 ceiling fell the OperationalBudget is a response to weaker-than- billion.

This expenditure.

reduction anticipated levels of·GDP and government revenue.

With this fiscal consolidation, ·the forecast high deficit will be mitigated somewhat, which will support continued fiscal stability.

and put the public debt on a more sustainable path."
fell from N$9.1 billiontoN$6.5 and N$l (Minister of Finance, Hon Calle Schlettwein III Parliament on 27 October 2016) Honourable Speaker, HonourableMembers, Government must accept responsibility for allowing such a crisis to develop; and in this regard it is deserving of severe criticism.

As I pointed out-in my introduction, the crisis was already apparent at the as almost zero growth in budgeted beginning of this+fiscalyear; expenditure attests to this.
Perhaps what was not foreseen .was the drastic reduction in revenue, but again, the signs were visible last year.

The weakest point of the whole six-year counter-cyclical budgeting process, was the complete lack of an escape route, or an exit strategy.

It was only after the tabling of this budget,when the Minister provided.

his first 'economic overview in May this year that he issued a warning danger.

Yet despite this no meticulously thought out ofhnpending ====================IlCI!
?j[~==================== P a g 16 strategywas developed,save for the age old adage of the need to tighten the belts.

Honourable Speaker, Honourable Members, Negative impact of a slowdown in the broader economy It must be understood that ifnominalGDP continued to grow as it did in the period 2010to 2014, Namibia would not have had any problems.

But it did not.

For various reasons, cited by several local institutions, the economy started slowing last year, continuing into this year.
In this regard, I want to borrow from the Bank of Namibia's November 2016 Economic Outlook Update.

Citing worldwide economic conditions, the Bank of Namibia has stated that the global economy is projected to grow by only 3.1% this year.

For this estimate, the bank hasreferenced the International.Monetary Fund which downgradedtheir 2016 global economic outlook three times this year alone.

Namibia will not escape the impact.

Furthermore, the Bank of Namibia stated: 1.

2.

3.
2.

3.

Growth in Sub-Saharan Africa is expected to slow down to 1.4 percent in 2016before recovering to 2.9 percent in 2017.

Risks to global growth have eased, following improved financial market sentiments, reduced concern about China's near-term prospects and the recent uptick recovery in some commodity prices.

The domestic economy is projected to slow down in 2016, before rising in 2017.
Namibia's real GDP growth is projected to slow 2016, before accelerating to 4.0 percent in down to 2,5percentin 2017.

The projected growth rates represent a slowdown from the for 2015.

This national estimate of 5.3 percent in decline contraction is mainly attributed to a projected construction, diamond mining, [the] electricity and water sectors and the planned reduction in government expenditure.
accounts 4.· Over the medium-term, .growth will mainly be .supported by the anticipated recovery in both agriculture and diamond mining as =========== Ol!

?Je ====:::========== Pi> ge r 7 well as improved growth in uranium mmmg, manufacturing, transport and communication.

in the same way as Again, the Bank of Namibia is referencing theIMF, MinisterSchlettweindid when he offered us abreakdown of global and regional economic conditions in his mid-year review.
Honourable Speaker, Honourable Members, While it is true that the direction of the global economy is not :under our control, prudence in managingour own affairs required that we cut expenditure when it first exceeded the 400/0 threshold as a percentage ofGDP.

We should have donethis last year.

When expenditure reaches 40% ofGDP, and debt grows faster thanGDP, it is axiomatic that debt will also continue to grow as a percentage ofGDP.

Thewaming signs in 2015.


This fact is evident in this year's main were already apparent time, according to projections by the budget, where for the first would exceed 370/0·.

This exceeds Ministry of Finance.ithedebtlevel the maximum 35% debt to GDP ceiling as determined by Cabinet.

- .

Members must make a clear distinction between the expenditure/GDP ratio and the total Debt/GDP ratio.

They are not the same, but if the the 'latterinvariably follows.
first deteriorates, Honourable Speaker, Honourable.Members, On can ask, What must be done?

- '", - ",.

," Minister Schlettweinhas necessary action.tobe taken,and lquoteagain: been clear and unambiguous in terms of the .

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"The key.priority.

forthe FY2016/17Mld-YearBudg~t in public revenue to changes alignexpencliture finances on a sustainable path.
The elevatedpublic deficits response implementing a three-pronged setof Review is to and place public debt, high budget require timely policy entails actions comprising expenditure increased liquidity constrains these vulnerabilities.

This to address package and.

==========[02!e========== revenue enhancement and implementing supportive P agel 8 consolidation, structural reforms."
this revenue estimated but what the Minister exactly _does is saying, intends to achieve this goal by what he calls "Operational The Minister and Development Budget Suspensions."

He also refers to this as fiscal he mean in consolidation, regard?
is that we need to align our Essentially ,what for expenditure with our of the 2016117 fiscal year, and that wethenneed to extend this realignment over the Medium Term Expenditure Framework so that.we can reach a manageable, is the slowly realizing impact on the execution of while, this has to be done with the least spending on the core areas policy, which is to focus the government's and for that are important supporting the most vulnerable It seems Government live beyond one's means.
All segments of society.

social development, that one cannot the remainder sustainable economic in 2019. growth, level debt In my opinion, the economy needs to regain-its momentum, not through continued growth in debt.but through a decisive process ofdetermining priorities, and then putting those areas of lowest priority, on the back- bllrner, or suspending them indefinitely.
By suspending non-core and non-essentialexpenditureitems; it is hoped to save N$5.5 billion, a saving that includes about N$l billion in future interest payments.

Honourable Speaker, Honourable Members, impact on overall economic growth.

to continue suspending certain expense items without It will be difficult If the ministry wants a noticeable to save between 8% and 9% on expenditure, the impact on GDP may be as high as 12%.
When the stalled growt.h in private sector credit extension is considered, growth will have a dramaticeffect It can lead to much- bigger problems becomes economy, maintain them now.

than what we now have.

Once this downscalirig into the value chains of the bigger than to a 120/0 reduction in nominalGfrl' on the overall economy.

structural, it will be more expensive in future to revive them, i.e.vstructured ===========m!
?l~=========== Page 19 Honourable Speaker, Honourable Members, The Perfect Storm the reasons for the slowdown in economic Without repeating all activity, important.

The government's revenues ,-\,ere impacted consistently through 2015 and 2016 by the following factors: let me state only the most Continued low commodity prices 1.

There are many references in the mid-year review to the effect lower commodity prices have on the profitability of mining companies.
Reduced profits, or even losses, mean reduced royalties and revenue for the government.

Implosion (47%) in diamond production 2.

The diamond industry is the biggest contributor to government income production 'slumps, sector.

from the government revenue slumps.

'When diamond extractive The Impact of the drought on agriculture 3.

Prevailing drought conditions have caused a severe-contraction in agricultural output for the second year in a row.
When agriculture suffer, putting more pressure on limited declines, rural households inthe commercial government farming sector.

It also affects employment reserves.

- -- - central areas.

4.

Watercrisisin The shortage of water has had a major impact on industries in the Khomas region, to such an extent that water-intensive industries have to South Africa.

Reduced local output moved some of their output translates to reduced turnover and reduced profits, leading to reduced government revenue.
Fishing 5.

The fishing sector .is moving into its third year of declining revenues, mostly due to biological reasons.

This has an impact on profit, and for =====::::::::==== m!?

!~.=============== Page 110 the government on revenue.

6.

Mining - delay in full production ramp-up As mentioned by the minister, operational hick-ups delayed the progress at the Husab mine, while the expansions at B2Goid will only lead to higher output during 2017. .

SACUtransfers which only grew negligibly 7.


Namibia's cut from the revenue pool constitutes roughly one third of fiscal income.

When SACU revenues decline due to a slump in economic activity in South Africa, Namibia gets less from this very important source of revenue.

Retail contraction in Angola due to low oil prices 8.

Over a two-year period, crude oil came down from around US$80 per barrel to below US$50 per barrel.
This had ahuge impact on Angolan government revenues,which in turn, lead to a disastrous reduction in retail spending; This is having a major impact on Namibia's retail sector.

Honourable Speaker, Honourable Members, Cumulatively, these factors have contributed to a worsening of the local economy, creating a perfect storm at a time when the economy was expected to be more robust.
Honourable Speaker, Honourable Members, Growth Versus Inflation A lower nominal growth rate is not necessarily bad but then inflation must be much lower, in the order of only 20/0given the real growth of 2.50/0.

As a result of the economic stimulus from 2010 to 2014, the economy's output as a whole, doubled.

Since such a large part of the liquidity in governl11ent's expenses comprises personnel remuneration, the retail sector was enhanced.
In short, the very large number of people its offices and its agencies, poured a employedby the government, ==========m2!6 =====:===== Pagelll sales.

This massive am0LInt of money into the system through the items they bought.

As disposable incomes grew, so did retail sales, and more lead to a very high level-of importantly.vinstallrnent families.

During 2013 this figure indebtedness .ofordinaryworking came close to 90%-buthas receded to around 88% this year.

But even at 88%, it is stillveryhigh.


It shows that only 12% of disposable income is available to families for discretionary spending after all the monthly payments have been made.

the Bank of To prevent further growth in household indebtedness, Namibia started increasing interest rates.

From the middle of 2014 to the first quartet of this year, the so-called repo rate increased from 5.5% to 7%.
This added to the economic pressure from the resultant decrease in retail sales and installment sale transactions.

Ida not need to point out to you how precarious installment sales have become.

Just talk to any car dealer and you will know that new vehicle sales have lost more than 40% of its momentum during 2015 and 2016.

The difficult conditions for households are further illustrated by the gradual decline in new credit to the privatesector.

borrow from a recent management company .


report by PSG Namibia, a local In this regard,letme investment .

- I quote: sector credit extension (PSCE) growth ticked lower "Private in September, mainly as a result of a decline in demand for credit from the residential sector.

Therefore, PSCE growth remains on a broadly downward trend as August's slight rebound proved to be short-lived.

PSCE growth decreased from 11.30/0.year on year in August to 11.1% year on year in September.
Growth in credit extended to businesses picked up by a l Otibasispoints to 12.70/0.in September, while .credit growth to individuals moderated by 70 basis points to 9.7%.

The growth in mortgage credit, which accounts for more than 500/0.of total PSCE, slowed to 10.2% in September, compared to 10.60/0.in the preceding month."

==============mE!~========== Pa gel 12 Honourable Speaker, Honourable Members, It is very important to take note of this trend.

Families are borrowing rate.


It indicates that the majority of Namibian less, or ata muchslower families are overextended and now have to consolidate their debt This is more or less the same position the government is in.

It also shows that the explosive growth in the housing market is coming to an end as reflected by the considerable reduction in the demand for mortgage financing.
Honourable Speaker, Honourable Members, Desperate Measures - Certificates of Good Standing The Ministry of Finance issued this directive in August, that as from 01 September 2016 all Government departments, agencies and offices will refuse to settle accounts with private suppliers were thesearenot able to furnish Certificates ofGood Standirig.

This lead to animmediate freeze in SME cash flows and the Ministry of Finance quickly had .to rethink its strategy.
On 22 September 2016, the Certificate of Good Standing policy was dropped overnight.

Government resumed paying its accounts but some agencies like the Roads Authority are still under the drastic measure was severe it undermined necessary, credi bility.

I read, very effective, constraints.


Although and from what funding Suspension of infrastructure projects The comprehensive list of reductions and suspensions at the end of the indicates that this revision has been done diligently mid-year review, and with a consideration of the detail of every single intended project.

However, this will have a major impact on the construction sector and may lead to a second year of contraction.
One also needs to consider who will be those hardest hit by such a suspension, namely those employed in the constructionsectorwho are low earners and therefore fall into the low-income group, in other words, the poor will suffer the worst.

=============Dl2!e ============ Debt Stabilization Page 113 than debt.

The budgeted total expenditure This is the first aridmost if GDP grows faster yearisN$66 total restraining effect on economic growth and it may turn out, that to GDPratio pressing priority.
This can only be achieved for this billion on this figure will reduce it will have a the debt remains above 400/0.

billion.

SavingN$5.5 billion.

But expenditure aboveN$60 to just .

.

.

Development Finance Institutions This strategy mentioned by the Minister of Finance needs more careful consideration.

Many of the projects that feature in the capital budget, to Public Private Partnership which will relieve a can be transformed lot of pressure on the primary budget.
Honourable SpeakerHonourable Members, problems periphery.

of Europe's the Namibian economy ranks high, with productivity In my opinion, Namibia does.not find itself at the horizon of a financial black hole.

The problems we are experiencing are.mild compared to the In an African debt and financing context, being and our small one of its strongest pillars despite our small population economy.

than an economic output challenge.


Asthe Minister rightly said, local output as more and more capital projects come on stream.

For will us, it-is a matter of finding appropriate, affordable financing -.Once the financing should be much easier, allowing us to momentum is restored, to build the Namibian policy return to our primary economy.

I see the monthsahead more as a financing challenge interventions improve Honourable Speaker, I support the Bill.

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