Namibia: 2017/18 Mid-Year Budget Review and Medium-Term Policy Statement
Mid-Year Budget Review Tabling Speech presented by Calle Schlettwein, Minister of Finance, on 2 November 2017
While the global economic landscape offers a window of opportunity for resurgent trade, the medium-term outlook is clouded with downside risks on revenue as a direct offspring from sluggish regional growth prospects. Low regional growth episode presents multiple risks for Namibia.
As a small open and resource-based economy, with a trade to GDP ratio of over 100 percent, Namibia is vulnerable to external shocks through the trade link. Commodity price volatility exert pressure on economic activity, public revenue, international reserves and the external position. Equally, weak external demand in our main trade partners presents challenges for the export sector, which limits potential growth. As such, measures to improve the productive capacity of the economy as well as economic diversification are critical for Namibia to bolster resilience.
The current conjecture of gradual growth and tightness of the fiscal adjustment path presents opportunity for the policy framework which balances between the consolidation policy stance and providing for a package of policy actions to protect the gains made through consolidating expenditure, while at the same time mitigate the unintended consequences.
At the current conjuncture:
domestic economic growth has slowed in tandem with the regional averages,
per capital incomes are stalling due to sluggish growth conditions,
gains in job numbers have narrowed and, in some sectors such as construction, have reversed,
allocative efficiency needs to be scaled-up to ensure that critical service delivery is not impaired by budgetary shortfalls,
efficiency gains are a priority target as there is no substitute for doing more with less,
fiscal space remains narrow, building buffers is indispensable for long-term sustainability,
fiscal consolidation has yielded gains which must be protected from reversals, while unintended negative consequences must be mitigated,
graft and fiscal indiscipline should be deterred and nipped in the bud,
the financial management system must prevent and deter incidences of budget over-commitments.
To recap, we had less options than to implement a steeper fiscal consolidation this time last year:
the domestic economy came under pressure, growth and income estimates were revised downwards sharply,
absent timely corrective action, financing needs were elevated beyond what the market could provide,
market confidence was at an all-time low and liquidity diminished, putting the financing of the budget deficit at risk,
a commensurate corrective action was urgently needed. We responded timeously,
as a result, the policy framework was recalibrated and expenditure realigned to a revised framework,
we have regained market confidence and growth is resuming again. Ascending to higher rates of growth requires patience and prudence to guard against reversals.
While the Mid-Year Budget Review allows for allocative efficiency and expenditure correction in respect to the FY2017/18, its Medium-Term Policy Framework proposes a package of policy actions to mitigate the unintended consequences.
This Budget Review and its Medium-Term Policy Framework:
provides limited additional resources to address spending on outstanding contractual obligations and meeting critical needs in respect of the delivery of essential public services,
maintains the fiscal consolidation policy stance with added impetus to enhance the growth friendliness of the fiscal consolidation policy stance, while guarding against excess procyclicality,
proposes to scale-up the development budget priority infrastructure spend through the establishment and operationalization of the Infrastructure Fund with a knock-on effect on growth and activity in the construction sector, which is currently contending with prolonged recessionary pressures,
additionally harness alternative means of financing through Public, Private Partnerships, SME Financing Strategy, targeted guarantee support to qualifying Public Enterprises and better leveraging of select state assets, and
proposes tackling the productive capacity and structural transformation of the economy through implementation of provisions of Public Procurement Act, Growth at Home strategic interventions and local economic development interventions contemplated in the Namibia Investment Promotion Act as may be amended.
Economic, fiscal and financial context
The global economic landscape presents differentiated speed of economic recovery. Globally, the International Monetary Fund projects an uptick in global economic activity and improvement in trade volumes. The global economic activity rate is projected to rise from 3.2 percent in 2016, to 3.6 percent in 2017 and reach an estimated 3.7 percent in 2018.
Equally, the world trade volume is projected to rise by 4.2 percent in 2017 and 4.0 percent in 2018, from 2.4 percent recorded in 2016. Non-fuel commodity prices are projected to taper off in 2018, after a moderate recovery in 2017.
growth for Advanced Economies hovers around 2 percent, reflecting demand improvements in the Euro Area and moderate growth for the US and UK economies, and
Emerging Markets and Developing Economies will anchor global economic performance with activity pitched at about 4.5 and 4.9 percent for 2017 and 2018 respectively, thanks for expansionary policies for China and India
The prospects for the Sub-Saharan African Region are anticipated to brighten moderately, with growth rising from the worst performance in two decades of 1.4 percent in 2016 to 2.6 percent in 2017 and 3.4 percent in 2018. This regional outlook is underpinned by low growth outlook for the region’s biggest economies of Nigeria and South Africa. On the other hand, the soft recovery in commodity prices, improvement in agricultural output as well as continued flow of capital to the region support a moderate growth recovery going forward.
growth for the South African economy stood at 0.7 percent in 2016 and it is projected at 1.1 percent in 2017 and averaging 1.5 percent over the next MTEF,
Angola, Africa’s third largest economy and a key source of demand for Namibia, is projected to grow at about 1.5 percent in 2017 and strengthening moderately to 1.6 percent in 2018.
In spite of the upswing in global economic growth, significant risks and uncertainties still linger on medium-term growth outlook. This is in regard to increasing protectionism, possible tightening of financial conditions in Emerging Markets and Developing Economies due to monetary policy rate normalization in the US expected by the end of 2017 and continued rising geopolitical tensions. The low growth environment in the region also come with revenue risks, especially on revenue from SACU.
The subdued regional economic outlook and the new growth normal for our largest neighbouring trade partners, continue to present a particularly challenging trade and economic environment for Namibia.
As a small and open economy, Namibia’s best hopes lies in economic transformation, regional integration and leveraging regional and global value chains. We enjoy a relatively good enabling environment, with political and macroeconomic stability and a predictable policy environment. It is, therefore, material and timely for policy interventions to improve the productive capacity of the economy, diversify economic activities, generate much needed jobs and bolster resilience to shocks. We need to improve the range of finished goods Namibia can trade with in SADC and the African continent.
Domestic economic developments and macroeconomic impacts
Turning on the domestic economic developments and outlook, the year 2016 presented challenging developments since the global financial crisis in 2009. Economic growth slowed to about 1.1 percent, down from 6.0 percent in 2015, in line with the 2016/17 budget estimates of 1.3 percent.
This outturn mirrors the regional economic performance and it is due to a confluence of factors:
primary industries remained in contraction since 2013 which was due to subdued commodity prices, especially for the uranium sub-sector, production constraints in the diamond industry and the severe drought condition and related water challenges in the agricultural sector. Primary industry sector has now eased out of negative growth territory and will be a key driver for growth going forward,
secondary industries declined as the construction sector adjusts to a bust period after completion of large private and public infrastructure projects and the end of unsustainably high expansion,
the tertiary services sector continues to anchor growth, but weak demand conditions have impacted on especially the retail and wholesale sector, while tourism and financial intermediation sectors remained relatively robust,
on the demand side, consumption has slowed as measured by the deceleration in private sector credit extension and the reduction in Government material consumption of goods and services,
the payment of outstanding invoices previously accumulated by Offices/Ministries and Agencies has injected liquidity in the market, this alleviating the burden on the balance sheets of service providers,
monetary policy has remained generally accommodative and the recent Repo Rate cut in August this year to 6.75 offers a good respite to support domestic demand and investment,
exports have started to regain momentum as large investment projects such as Swakop Uranium have commenced with export activity and imports have slowed to normal trend due to completion of major investment projects and fiscal consolidation measures,
the trade balance has improved and Current Account deficit has narrowed from 14.1 percent of GDP in 2016 to an estimated 5.8 percent of GDP by September 2017,
the Overall balance of payments remains in surplus of about N$3 billion as at September 2017, and
the international reserves have increased to 5.1 months equivalent of import cover which is more than sufficient to support the currency peg, thanks to Rand denominated loan proceeds and more inflows from export earnings going forward.
2017/18 Mid-Year Budget Review and Medium-Term Budget Policy Statement
for the 2017/2018-2019/2020 Medium-Term Expenditure Framework
Real GDP registered a slower growth of 1.1 percent in 2016 compared to a strong growth of 6.0 percent recorded in 2015, and below 1.3 percent estimated in the current Fiscal Strategy. The main factors behind the growth were the primary and secondary industries that recorded a contraction of 2.0 percent and a slower growth of 7.8 percent, respectively compared to estimated contractions of 1.7 percent 3.7 percent in Fiscal Strategy.
The contraction in primary industries were attributed to decline of 5.7 percent in the output from mining and quarrying subsectors, with both diamond and other mining and quarrying registered a decline. Another factor was the dismal growth in metal ores triggered by low production due to expected closure (ending of life of mine in 2017) of a zinc mine.
The contraction observed in the secondary industries was mainly attributable to a decline in the construction sector. The sector recorded a contraction of 26.5 percent in 2016 compared to a strong performance of 26.0 percent in 2015, and above the 11.5 percent estimated in the Fiscal Strategy.
A positive growth of 3.4 percent in the manufacturing sector is observed in 2016 compared to a decline of 4.6 percent recorded in 2015. This performance is mainly attributed to diamond processing and other food products sub-sectors that recorded growth rates of 65.9 percent and 4.0 percent in 2016 compared to declines of 24.1 percent and 12.3 percent in 2015, respectively. The recovery in diamond processing owes to the increased supply of rough diamonds. This follows an intervention by government and De Beers to increase the number of quality stone to processors1 as well as the processing of diamonds that were held in inventory during the previous year due to low market absorption capacity.
The tertiary industries registered slower growth of 3.9 percent in 2016 compared to 7.6 percent in 2015, despite that it remains the biggest contributor to GDP, with a contribution of more than 50 percent share to GDP. Year-on-year, all the sectors within the tertiary industries slowed down indicating slower economic activities across the service sector except for financial intermediation which remained flat.
Trade and Balance of Payments
Merchandise exports from Namibia decreased by 2.8 percent during the first half of 2017, when compared to the corresponding period of 2016. Specifically, noted decreases in merchandise exports came from diamonds, other mineral products and other commodities. Meanwhile, exports for food and live animals as well as for manufactured products recorded strong increases over the same period. Merchandise imports fell by 13.3 percent between the first half of 2016 and the first half of 2017.
The fall in merchandise imports were more visible amongst mineral fuels, oils and products; base metals and articles of base metal; products of the chemical industries; vehicles, aircraft and vessels; as well as machinery, mechanical and electrical appliances. There was, however, a substantial increase in imports for precious and semi-precious stones during the same period.
On the net basis, the above developments in in merchandise trade led to the easing of Namibia’s merchandise trade deficit (covering goods only), which reduced by 32.6 percent from N$14.0 billion during the first half of 2016 to N$9.4 billion during the first half of 2017.
Current Account Balance
Namibia recorded high trade deficits since the year 2012, and this was due to factors such as increased investments in the mining sector, which required the importation of construction materials and equipment; expansionary fiscal policy as well as expansionary monetary policy. With many construction projects at mines and in government having come to an end, imports started to stabilise, while exports increased faster in 2016 and during the first half of 2017.
At the same time, SACU inflows increased during 2017 in line with SACU estimates for 2017. Namibia’s revenue share from SACU revenue pool increased to N$19.6 billion in 2017, from N$14.8 billion in 2016. Namibia’s current account deficit narrowed to N$1.8 billion during the first half of 2017, compared to N$8.6 billion during the same period of 2016. The improvement in the current account deficit was primarily attributed to the narrowing of the trade deficit, a reduction in net investment income payments and increased inflows in the secondary income account, particularly SACU receipts. Although SACU revenues are expected to decrease after 2017, the combination of a moderation in import growth and increased mineral exports are expected to sustain an improved external position for Namibia going forward.
Outlook for the domestic economy: Demand-side projections
Gross Fixed Capital Formation
Gross fixed capital formation is expected to decline by a lower 2.3 percent in 2017, an upward revision from the earlier estimated contraction of 7.4 percent, as a result of the slowdown in economic activities that caused lower investment due to fragile investment confidence as well as the completion of major capital projects (Namport port expansion due to reach completion during mid-2018, Neckartal dam reaching due to be completed in first quarter 2018 and suspension of the mass housing project).
In 2018, gross fixed capital formation is expected to bottom out with a growth of 2.1 percent (upward revision from 0.1 percent), backed by increased investments in private property developments. Going forward, gross fixed capital formation is projected to grow at an average of 2.7 percent on the back of improved government and private investment as economic activities stabilizes.
Total exports are estimated to record 7.9 percent growth in 2017, a slight upward revision from 7.8 percent, based on the anticipated increases in the production of most minerals due to the prospects of improved commodity prices (zinc, lead, and gold prices) as well as improved infrastructure4 in diamond mining. In 2018, growth is expected to slow down to 3.2 percent (downward revision from 3.5 percent) as diamond production reached full capacity the previous year and, consequently, diamond exports start to slow down. In 2019 and beyond, exports are envisaged to grow by an average of 2.8 percent riding on increased uranium production and processed zinc.
Imports are estimated to contract by 2.4 percent in 2017 (upward revision from 7.8 percent) on the back of reduced spending by government, the completion of major investment projects as well as subdued final consumption expenditure. In 2018 and beyond, imports are expected to grow marginally by 1.9 percent average on the prospects of improved private consumption and investment growth.