Namibia Budget Statement 2018/19
Presented by Calle Schlettwein, MP Minister of Finance, on 7 March 2018
This budget comes at a time after the Namibian economy had endured its most precarious phase. It is an economy at a turning point and this budget is a funding compact for growth, bringing about jobs, less inequality, less poverty and improved service delivery. It is a fiscal proposition to further consolidate non-core spending and align resources to core national priorities. It is a budget which offers policy consistency with the pro-growth, pro-poor policy stance of long duration. It is a budget anchored on the gains of the necessary but difficult decisions which we have taken since 2016:
we had to make deep but necessary budget cuts to ensure fiscal sustainability and protect macroeconomic stability,
the economy has now rebounded to positive growth territory, with a potential boost on jobs and incomes, after a mild contraction in 2017,
we have realigned the macroeconomic framework and stabilized public finances,
domestic revenue has shown resilience, amidst subdued economic activity
with the exception of uranium, commodity prices are rising, rekindling new opportunities for mining activity,
key macroeconomic fundamentals have strengthened, fast closing the current account and trade deficits and a strong international reserves position, and
the global economy has regained unprecedented momentum since the 2007 financial crisis, offering favourable tailwinds for export-oriented open economies such as Namibia.
These early gains should be protected. We should rise up to the occasion to harness the growth opportunities and advance our national development agenda to new heights and with great latitude of quality of outcomes.
The effects of a low growth environment in our most important trade partners in the region, external shocks to our small open economy over the past two years, coupled with a weaker domestic fiscal space have led to our growth trajectory to be decoupled from the stronger global growth dynamics in the short-term.
Our policy interventions have reinforced the automatic stabilizers and yielded positive results. Domestic economic fundamentals are strengthening and the improving global economic and financial landscape offer a favourable environment for policy effectiveness.
We realize too well that a substantial lot still needs to be done, requiring a coherent and multidimensional set of actions to achieve the shared prosperity for an industrialized economy we aspire for in Vision 2030. To transform our economy, strategy implementation must now be greatly enabled and well-considered targeted action taken to implement the high impact initiatives engendered in the Harambee Prosperity Plan. We must do what we know must be done, we must do it with confidence and conviction and then we shall be more and better.
without timely and coherent policy interventions, resurgent growth will be weak for longer,
the structure of the economy remains dualistic and is in need of diversification and transformation,
poverty is on a declining path, but levels are still high for an Upper Middle Income Country and so is inequality,
at 34 percent, unemployment is structurally high and youth unemployment distinctively higher,
the skills deficit is wide, and
we need to hone competitiveness, productive capacity and innovation so as to expand our productivity frontiers and gains from trade, given the increasingly integrated and globalized regional economy.
The budget before you seeks to increasingly align resources to these key priority areas. It mobilizes and aligns resources to support long-term economic growth and social development. It retains the policy stance to entrench macroeconomic stability and fiscal sustainability.
Key Policy Priorities for the Budget
To realize increasing benefits of a successful fiscal consolidation and securing a firm sustainable economic growth trajectory which supports broadbased improvements in per capita income, we must have our priorities right and implement effective strategies to fend for these priorities. A sustainable growth trajectory is one which is underpinned by robust growth engines.
In line with the Harambee Prosperity Plan, this budget and MTEF summons resources and structural reform implementation agenda, centered on five key priority areas, namely:
maintaining a gradual fiscal consolidation policy stance to safeguard macroeconomic stability and long-term fiscal sustainability,
providing targeted support to fledgling economic growth,
protecting core spending in the social sectors of education, health, skills development and housing and sanitation,
improve domestic resources mobilization through fair and equitable tax policy, efficient and effective tax administration, mobilizing domestic savings as well as utilizing affordable alternative forms of financing, and
implementing supportive policies and structural reforms to enhance overall policy effectiveness and bolster the competitiveness of the national economy.
To support economic growth, provide resources and implement the strategy towards the achievement of these priority areas:
the development budget is increased by 30.0 percent relative to the revised allocation for the previous year,
an economic and social infrastructure investment stimulus is unveiled for capital projects in the logistics, industrial development, agricultural mechanization and social sector infrastructure,
initial funding is provided for the roll-out of SME Financing Strategy and youth entrepreneurship, comprising of the Venture Capital Fund, Credit Guarantee Scheme and Training and Mentorship Program. This is in addition to funding for the Equipment Aid Scheme and related SME support programs, and
targeted budgetary transfers to the Development Financial Institutions for private sector support.
Structural policy reforms
Reforms targeting competitiveness, ease of doing business and investment climate have been identified through, amongst others, the successive business climate surveys and global competitiveness assessments. The reforms should facilitate enabling conditions for a successful fiscal consolidation, improve institutional capacity and coordination, administrative efficiency, local economic development and a more competitive investment climate.
the Ministry of Finance is addressing the institutional framework for implementing the Procurement Act, by strengthening institutional capacity and regulatory environment as well as effective implementation of the preference provisions. The envisaged repeal of the State Finance Act by the new Public Finance Management Bill will not only enhance public finance management, but also instil provisions for robust financial disciple across the entire public sector. The roll-out of ITAS in July this year and the establishment of NAMRA on 1 March 2019 are an integral part of this reform package.
The Ministry of Industrialization, Trade and SME Development is overseeing the implementation of the National Single Window facility in collaboration with Namport and the finalization of amendments to the Investment Promotion Act and the repeal of the Export Processing Zones Act this year,
the New Equitable Economic Empowerment Bill, is set for finalization this year under the leadership of the Office of the Prime Minister, following wide stakeholder consultation,
the anticipated Land Conference this year will give certainty with regards to land reform, land ownership and tenure as well as land utilization in both rural and urban settings.
the public wage bill should be managed more effectively, with specific wage bill reduction target ratios set for realization over the MTEF.
Public Enterprises reforms are indispensable to the realisation of a successful fiscal consolidation measures. Perpetual bail out of the public enterprises, especially those in the economic, financial and commercial sectors is unsustainable and should be reined in.
Macro-fiscal Developments and Medium Term Outlook
For 2018, growth is estimated to have returned to positive rates at about 1.2 percent and 2.1 percent for 2019. Over the MTEF economic activity rate is projected to average 3.1 percent, underpinned by robust export growth most especially from mining output, improvements in private and public investment as well as other components of final demand.
Recovery is expected to be led by increased activity in the mining sector on account of better commodity prices. While commodity prices have improved, the weak rain conditions this year threaten to slow the pace of continued better recovery in this sector since 2017. Thirdly, the easing of recessionary pressures in the construction industry and key sectors in the tertiary industry services sector comes to bear over the MTEF. Climate change is certain and comes with associated costs, requiring us to implement environmental fiscal reforms. Accessing the Global Climate Fund is a priority.
However, this growth outlook is generally too weak to support robust expansion of per capita incomes and requires supportive policy interventions going forward to reinvigorate the pace and quality of growth. Timely interventions set out in this budget and an improved external environment offer an opportunity to lift the growth potential.
Fiscal Policy Developments
The FY2017/18 Mid-Year Budget Review gave an account of the fiscal outturns in respect of the previous year and estimates for FY2017/18. The Appropriation Amendment Bill, 2017 provided for an additional budget of N$4.1 billion, equivalent to 6.5 percent of appropriated expenditure of which N$2.2 billion was for the settlement of outstanding spending arrears.
The Medium-Term Budget Policy Statement revised revenue for FY2017/18 upward by about ½ percentage point, from N$56.4 billion to N$56.7 billion on account of the estimated better collection. This outturn marks 11.5 percent growth from N$50.8 billion collected in FY2016/17, mainly due to better SACU receipts at that point in time and growth in some of the domestic revenue streams.
By the end of February 2018, the preliminary revenue outturn for FY2017/18 stood at N$52.4 billion, reflecting a collection rate of 92.3 percent of the revised target of N$ 56.7 billion, against the historical average of 89.0 percent collection rate. Against this backdrop, the revenue outturn is further revised to N$56.8 billion or some 1 percent better than the original budget. A total of N$ 972.02 million was collected from the recovery of outstanding tax arrears through the Tax Arrear Recovery Incentive Program initiated last year.
The moderate improvement in revenue collection is attributed to better performance of domestic tax revenue, particularly individual income tax and company tax from non-mining and other mining activities as well as the buoyancy arising from tax administration reforms.
For FY2018/19, total revenue is estimated at N$56.70 billion, about 1.3 percent decline from the estimated outturn for 2017/18, due to the decline in SACU revenue and the slowdown in diamond corporate tax and related income as a result of operational factors. Over the MTEF, revenue growth is projected to average 3.4 percent, at N$57.7 billion in FY2019/20 to reach N$61.3 billion by FY2020/21.
As a proportion of GDP, total revenue is estimated to moderate to 30.7 percent in FY2018/19 from 33.0 percent in FY2017/18 and average around 30.0 percent over the MTEF mainly on account of the expected decline in SACU receipts.
The most significant downside risks to revenue regards SACU receipts, which are projected to decline sharply by a cumulative of 18 percent during the next two years. As such, domestic replacement revenue, combined with increased tax administration effort is necessary to mitigate revenue volatility and support the budget implementation.
FY2018/19 Budget, Medium-term Expenditure Outlook and Fiscal Policy Stance for the MTEF
Tax Policy, Revenue enhancement and Tax Administration Reforms
The successful implementation of the fiscal adjustment and placing the economy on a firm inclusive growth trajectory needs to be funded.
In this respect, I wish to propose the following tax policy changes:
phasing out the preferential tax treatment that is only granted to some existing manufacturers to achieve equity and equal treatment of all operators. As an intervention to encourage business development and job creation, support instruments for SMEs and start-ups will be introduced and developed over the MTEF,
repealing the Export Processing Zone Act and introduce the Special Economic Zones, with a sunset clause for current operators with the EPZ status,
re-adjust the current tax brackets for Individual Income Tax, reduce the lower bracket tax rate from 18 percent to 17 percent and introduce new tax rates of 39 percent and 40 percent for individuals earning over N$1.5 million and N$2.5 million respectively. This proposal seeks to relieve the low income earners and reinforce the progressivity of the tax system,
introduce a 10 percent dividend tax for dividends paid to residents to enhance the fairness of the tax system,
abolish the current practice of a conduit (flow through) principle in the taxation of trusts to harmonize the taxation of trusts in line with regional economies,
subject income derived from commercial activities by charitable, religious, educational and other types of institutions under Section 16 of the Income Tax Act to normal corporate tax. Such institutions will be required to register as taxpayers and file annual income tax returns,
deepen the current hybrid tax system by taxing all income earned from foreign sources. Namibian residents will have to declare such income in their annual tax returns,
explore a profit tax of 37 percent on betting and gaming entities,
introduce VAT on income of listed asset managers, and
introduce VAT on proceeds on the sale of shares or membership in a company owning commercial immovable property.
The following excise levies and duties will also be introduced:
increase the fuel levy by 25 cents per litre for all levied fuel products in terms of the Section 54 of the Customs and Excise Act,
expand coverage of export levy to include other specific agricultural, forestry and game products and other mining products currently not covered,
introduce additional 5 percent national “sin” tax on alcohol and tobacco products for national revenue purpose.
The tax proposals for national revenue purposes are anticipated to generate about N$500 million. Income tax changes will come into effect in 2019 after drafting and tabling of the specific tax proposals. Excise duties will become effective upon the tabling and gazetting of the schedules.
It is an unfortunate error that Namibia has been classified by the European Union as a tax haven. Tax havens by their nature wield below average or zero tax rates and used as a conduit for transfer pricing. Multinational companies would tend to establish their principal office in tax haves to serve as conduits for transfer pricing and tax planning activities. We do not subscribe to the subjective classification of Namibia as a tax haven because we are not. We are now engaging the EU authorities and we trust that Namibia will be delisted.
In fact, Namibia as a resource-based economy is wary of the pervasive transfer pricing, illicit financial flows and misinvoicing prevalent on the African continent which leads to an estimated US$50 billion illicit financial flows from the continent annually, based on the evidence from the African Union Report by Former President Thabo Mbeki Report. As a resource based economy and a transparent sovereign, Namibia stands to benefit from international tax cooperation and exchange of information for tax purposes.
The FY2018/19 Appropriation Bill
Economic and infrastructure sectors
Economic and infrastructure sectors take up the third largest share of the budgetary allocations, with a total sectoral share of 21.7 percent and in line with the increased weight accorded to the Development Budget. For FY2018/19, an amount of N$12.7 billion and about N$37.7 billion are allocated over the MTEF.
Transport receives N$3.5 billion, and over the MTEF, the allocation stands at N$9.7 billion. This allocation is mainly for the completion of on-going phases of road capital projects with contractual awards. The amount is supported by N$2.6 billion from the Road Fund in FY2018/19 or about N$ 13 billion over the MTEF as well as N$2 billion annually for project financing under the AfDB loan arrangement over the next two years. The envisaged industrialization and Logistics hub investment stimulus will further reinforce this allocation.
The Ministry of Agriculture, Water and Forestry receives N$2.1 billion, and about N$6.7 billion over the MTEF,
The Ministry of Finance is allocated N$4.0 billion and about N$12.1 billion over the MTEF. Out of this amount N$2.5 billion or 62.5 percent is allocated for PSEMAS or some N$7.5 billion over the MTEF, N$124 million is earmarked for transfers to DBN over the MTEF to support implementation of the SME Financing Strategy, N$70.5 million is earmarked for transfer to AgriBank over the MTEF to support the AgriBank’s loan book and lending activities. A total of N$319.9 million is earmarked for the transitional arrangements for the establishment of NAMRA over the MTEF on top of the allocations made for the Departments of Inland Revenue and Customs and Excise. N$ 2 million is allocated annually for the Financial Literacy Initiative.