The debate about domestic liquidity is turning into a farce
When the so-called counter cyclical budgetary process was presented to us the first time early in 2010, nobody with a rational mind believed then that his process could endure forever. I have also not found any mention in any official document or policy paper, of unlimited fiscal stimulus continuing until doomsday.
In fact, to the contrary, the first budget filed by the new administration in March this year, clearly indicates that 2016 will be the last of the expansionary years, and then only as a spill-over from this year’s budgetary growth. Indeed, for all practical purposes, this can be viewed as the last of the counter cyclical (expansionary) years. From next year onward, the budget will focus more on mopping up and consolidating, than on blind stimulus.
Given that the government’s finances are as transparent as a pane of plate glass, it it thus mildly annoying but hugely entertaining to comb through all the unfounded opinions emanating from the perceived liquidity crunch. This week I even saw a reference to a banking liquidity crisis. Amusing at least, but very far from reality.
It is true that government finances are in a tight spot, and it is true that local institutional investors recently demanded higher yields on government debt instruments, but it is completely false to say there is a liquidity crisis.
To bring some perspective to the state of the local capital market, one first has to observe what the available pool of capital looks like. And in this regard, the Finance Minister was spot on a week ago when he addressed parliament, pointing out that more than N$61 billion in long-term savings still leave our jurisdiction every year. The only point on which I can fault the minister is to raise the counter argument that that money does not belong to the government but to the individuals who took out the life insurance policies, or who contribute to a pension fund or to some other type of savings fund. Still, the observation that more capital flows out than stays behind, is a valid consideration. In practical terms, it means the economy does not operate optimally. It generates more in current income, than what it can absorb in future investment. In short, it grows below par.
I think what is more disconcerting is the observation that our cut from the SACU revenue pool, may be in for a trim. But again, as the minister rightly said, it will not be the first time we have to make do with a substantially leaner contribution from the customs union.
In the end it is all about financing the budget deficit. Now it may be easy, or simple to say, just cut the deficit, but the budget is not designed in a vacuum. It has built-in policy objectives and targets, and no one that is serious about Namibia’s development, can fault these objectives. Since 2010 we have become slightly complacent believing that government debt instruments will always provide the additional funding required, but even now, with a bit of a reality check knocking on our door, the safety margins are so wide, the risks are minimal. Granted, the budget deficit ratio has been moderated every year by much higher growth than even the most optimistic planner expected, but as far as debt goes, we are way below our regional peers (except Botswana) and way below international thresholds for middle income countries. Even if the national debt does reach 35% of GDP, in terms of what it achieves, this is trifling.
Perhaps it is necessary to remind all the doomsayers at this point that the commercial banks do not issue the government with its debt. The commercial banks certainly has the power to increase whatever liquidity the government pumps into the system, by a factor of nine, given local capital adequacy requirements, but this happens only after it has been paid out as someone’s salary, or paid to a supplier who sold the government either services or goods. The commercial banks can only increase their lending AFTER they have increased their deposits.
There is only one issue at stake here and that is how to finance the government’s borrowing requirements. That may be more than reflected in the budget, especially if there is a reduction in SACU receipts, or it may be less, if as has often happened, a combination of underspending and higher tax collections, reduces the deficit. So, the basic issue is not one of liquidity, or solvency, but access to the capital market at rates that are both fair and affordable.
And if investors demand higher returns in the local capital market, I beg to be shown where those higher returns are in the South African market, or in any other foreign market. If domestic risks are deemed excessive, then what shall one say about risks in the South African market where, in my opinion, they are off the charts.