Figure 1: Real GDP Growth and Inflation in Namibia (2015-2021)
Sources: IMF 2018, Namibia 2017 Article IV Consultation Report. Note: (*) Figures from 2018 onwards are projections from the IMF, 2018.
The Government of Namibia (GoN) has maintained procyclical fiscal policy and been unresponsive to the economic trends until 2018/19. When real GDP was at its peak of 6.0% in 2014 and 2015, the GoN increased government spending equally by an average of 10.0% in 2015/16 and later moderated recurrent expenditure growth to 4.5% and cut capital expenditure by -16.5% in 2016/17[5]. This increased the fiscal deficit to -NAD 15.2 billion (approx. -9.3% of GDP) in 2016/17 (2015/16: approx. -NAD 13.1 billion, -8.7% of GDP)[6]. As real GDP declined to 1.1% in 2016 the GoN increased recurrent expenditure by 5.2% and cut capital expenditure by -16.6% in 2017/18[7]. Hence, the GoN maintained procyclical fiscal policy from 2015/16 to 2017/18 because it increased public spending at the height of its growth spurt when real GDP growth reached 6.0% and moderated public spending growth in following years despite the deteriorating economic growth context.
Figure 2: Sources of Government Revenue in Namibia (2015/16-2021/22)
Sources: IMF 2018, Namibia 2017 Article IV Consultation Report. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2018.
However, in 2018/19 the GoN increased public spending by 9.8% mainly driven by a 21.9% increase in capital expenditure[8]. This is the first fiscal response to the declining real GDP growth but it is a counterintuitive response. Typically, the countercyclical fiscal response to deteriorating real GDP growth is to increase government spending through recurrent expenditure in order to boost aggregate demand and enable real GDP growth. Given that inflation had risen above the 3.0 to 6.0% target, it is understandable that the conventional public spending stimulus to aggregate demand was not viable as this would have led to higher inflation. This highlights a complex challenge and incoherence in policy-making since monetary policy and fiscal policy would have been aimed at different ends with respect to their impact on real GDP in this instance of slow growth and rising inflation. Therefore, when real GDP growth is high, the typical countercyclical response is to increase public savings or investment through capital expenditure in order to accumulate fiscal buffers to deal with the next period of economic downturn. Since the GoN has maintain fiscal deficit and real GDP has been subdued throughout this period, the increased capital expenditure has been financed through public debt.
Figure 3: Government Revenue and Expenditure in Namibia (2015/16-2021/22)
Sources: IMF 2018, Namibia 2017 Article IV Consultation Report. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2018.
Public debt has increased from an annual average of 43.4% of GDP from 2015/16 to 2017/18, to a projected 51.4% of GDP in 2018/19[9]. Although total public debt has been increasing, the GoN has taken a prudent fiscal policy approach that has led to a decline in external public debt and increased reliance on domestic public debt. External public debt has declined from 18.2% of GDP in 2015/16 to 16.1% of GDP in 2017/18, before increasing to a projected 17.5% of GDP in 2018/19[10]. Domestic public debt has increased from 21.3% of GDP in 2015/16 to 30.4% of GDP in 2017/18, before increasing further to a projected 33.9% of GDP in 2018/19[11]. This rebalancing of public debt is reflected in the public debt-servicing costs with external public debt constituting an average of 28.2% of total debt-servicing costs from 2015/16 to 2017/18, which is projected to decline to 25.7% in 2018/19[12]. Therefore, the GoN has taken a mixed approach of implementing counterintuitive procyclical fiscal policy until the economy fell into a recession in 2017, after which the GoN implemented countercyclical fiscal policy. Nonetheless, the GoN has maintained prudent fiscal policy by increasing its reliance on domestic debt and reducing its external debt. The trend of counterintuitive procyclical fiscal policy is expected to continue in the forward-looking medium-term.
Figure 4: Government Expenditure Composition in Namibia (2015/16-2021/22)
Sources: IMF 2018, Namibia 2017 Article IV Consultation Report. Notes: (*) Figures from 2018/19 onwards are projections from the IMF, 2018.
Real GDP growth is expected to continue recovering from a projected 1.2% in 2018 to an annual average of 3.5% in the medium-term from 2019 to 2021[13]. The recovery in real GDP is expected to be driven by improving terms of trade and increased mining activity, especially in uranium, whose prices are projected to rise from USD 21.4 per pound in 2018 to annual average of USD 23.1 per pound from 2019 to 2021[14]. In addition, the revival of Namibia’s construction sector with financial support from the African Development Bank is expected to contribute to the recovery in economic growth.
Figure 5: Gross Government Debt in Namibia (2015/16-2021/22)
Sources: IMF 2018, Namibia 2017 Article IV Consultation Report. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2018.
The GoN is expected to continue implementing procyclical fiscal policy in the medium-term with government expenditure increasing by an annual average of 8.8% from 2019 to 2021[15]. This will be driven by recurrent expenditure growth at an annual average of 9.9%, compared to the average growth of 0.1% in capital expenditure during this period[16]. Despite the recovery in real GDP which is expected to have a positive impact on government revenues, a significant portion of the recurrent expenditure increase will be financed through public debt. The fiscal deficit increased from -NAD 15.8 billion (approx. -8.5% of GDP) in 2018, to an annual average of -NAD 20.4 billion (approx. -9.3% of GDP) from 2019/20 to 2021/22[17]. Public debt is projected to increase from 51.4% of GDP in 2018/19 to an annual average of 61.6% of GDP over the medium-term[18]. The procyclical fiscal policy is deteriorating Namibia’s fiscal position and at a macro level, increasing both the size of public debt and debt-servicing costs, in spite of the prudent fiscal policy of rebalancing of public debt towards depending more on domestic debt.
External public debt is projected to decline from 17.2% of GDP in 2019/20 to 15.5% of GDP in 2021/22. Meanwhile public debt is projected to increase from 40.1% of GDP in 2019/20 to 50.3% of GDP in 2021/22. In spite of the positive impact of the rebalancing of public debt, the higher public debt levels are projected to increase debt-servicing costs from NAD 7.9 billion (approx. 13.1% of total government revenue) in 2019/20 to NAD 12.0 billion (approx. 16.1% of total government revenue) in 2021/22[19]. Therefore, the GoN will be under increasing pressure to find cheaper domestic financing rather than simply substituting foreign financing with domestic debt.
The GoN has had a tendency to implement counterintuitive responses to real GDP growth performance. As earlier noted, fiscal policy has been procyclical because the GoM increased recurrent spending when real GDP growth was at its peak of 6.0% and decreased spending as real GDP growth declined since 2016/17. In the historic period from 2015/16 to 2017/18 the GoN responded to declining real GDP growth with procyclical fiscal policy using a prudent fiscal stance, which changed in 2018. Therefore, as real GDP growth declined from an annual average of 2.0% from 2015 to 2017 to 1.2% in 2018, the GoN increased its recurrent expenditure growth from the medium-term average of 6.5% to 8.4%; compared to the increase of 21.9% on its capital expenditure in 2018/19 (2015/16-2017/18: -7.7%)[20]. The typical countercyclical fiscal response to deteriorating real GDP growth is to increase government spending through recurrent expenditure in order to boost aggregate demand and enable real GDP growth; and when real GDP growth is high, the typical countercyclical response is to increase public savings or investment through capital expenditure.
During this time domestic public debt has increased from an average of 26.9% of GDP from 2015/16 to 2017/18, to a projected 33.9% of GDP in 2018/19; which is prudent fiscal policy given that the GoN would have only increased its external debt slightly to a projected 17.5% of GDP in 2018/19 (2015/16-2017/18: 16.6% of GDP)[21]. In the forward looking medium-term, as real GDP growth continues improving to an annual average of 3.5% from 2019 to 2021, the GoN is expected to continue increasing its recurrent expenditure at an annual average of 9.9% compared to its capital expenditure which is projected to grow at an average of 0.1% from 2019/20 to 2021/22[22]. Domestic public debt is projected to increase to an annual average of 45.3% of GDP from 2019/20 to 2021/22, meanwhile external public debt is projected to also decline to an average of 16.4% of GDP[23]. Thus, the GoN is expected to continue its procyclical fiscal policy taking its prudent approach in the forward-looking medium-term..
[1] NPC 2018. Status of the Namibian Economy, National Planning Commission: Windhoek. Available At: https://npc.gov.na/ [Last Accessed: 18 August 2019].
[2] NPC 2018. Status of the Namibian Economy, ibid.
[3] NPC 2018. Status of the Namibian Economy, ibid.
[4] IMF 2018. Namibia 2017 Article IV Consultation Report, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 18 August 2018].
[5] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[6] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[7] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[8] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[9] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[10] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[11] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[12] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[13] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[14] IMF 2017. Commodity Forecasts, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 13 July 2019].
[15] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[16] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[17] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[18] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[19] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[20] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[21] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[22] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
[23] IMF 2018. Namibia 2017 Article IV Consultation Report, ibid.
