Confidence is at its lowest ever
During the course of the week, in various meetings with a number of people, it transpired that the government owes contractors in the construction sector, hundreds of millions of dollars.
This is not a good sign. Contractors everywhere are under financial strain with several of them telling me they have severe cashflow problems to the extent that their employees were at risk of not getting paid this week. This has a major ripple effect which pans out to subcontractors and professional service providers. In an economy as small as ours, it is not possible to keep these developments under wraps with the result that confidence deteriorates by the day.
What began as a few ripples in May has now developed into a full-blown meltdown and all because government funding is under pressure.
If ever there was a stark reminder that the government’s involvement in the overall economy is way too big, it is now. Comparing the budget figures to the National Accounts, it reveals that the government contributes roughly 44% to GDP through direct expenditure. This is already uncomfortably high. If I consider the two main transmission mechanisms in the economy, the government wage bill and the tender channel, the government contribution can be as high as 65%. Not only is this scary, it shows the government’s overpowering dominance in the economy as a whole.
This may be good if a government is all powerful like the Chinese like to believe they are, but in our small pond it created risky distortions which quickly lead to a wider contagion that now affects the entire economy.
Our troubles are not isolated. They are only one aspect of a complex economic puzzle that permeates the southern African region. When oil prices came down, the Angolan economy collapsed. This economy is also controlled by the Angolan government so when their petro-dollars declined by an average 67%, the Angolan retail sector collapsed. Little did we realise at the beginning of this year, how severely that fallout will impact our own retail sector in the north.
In our own economy, 2016 was supposed to be the crowning year of a series of high growth years which started in 2010. But regardless of what label we put to one after the other stimulatory package, the unavoidable outcome was that both sovereign and national debt increased by the year.
When an economy posts nominal growth between 15% and 20% per year, nobody really worries. The growth rate carries everything else on the rising tide. When that translates to real growth between 5% and 6%, it is seen as a confirmation of the soundness of our development policies.
Why then has the government gravy train ground to a halt in such a short period?
Again, this is not due to a single event. It is a whole chain of events affecting us as well as every other country in the region. The weakness in our system is that the billions of dollars spent on civil servant wages and the ambitious infrastructure projects we undertook, did not translate into an increase in productivity, or to lasting jobs. Thousands of jobs were only temporary and that has now come to an end.
Take for instance the massive project to build a new double lane road between Windhoek and Okahandja. Count the number of workers on the extended site. It is quite revealing that one battles to find 200 people working on this very large project. Most are operators of heavy equipment, so it is the machinery who does the work and not people. Not much in the sense of lasting job creation there. And many of the people on that site, are also temporary. The ladies waving the red warning flags will certainly not join the permanent staff of any of the contractors, or even the Roads Contractor Company.
We are in the middle of a conundrum. If the government cuts back as it has done since May this year, then a large number of government-dependent value chains are impeded. If they continue with the borrowing-to-spend spree, then our economic stability is at stake.
Perhaps a sensible long-term approach would be first to reduce the government wage bill by a natural process of attrition. Fill only those positions that are crucial. Second, get rid of all the obsolete and redundant ministries, agencies and offices. Three, encourage a much bigger private sector participation in other words, stop crowding out those enterprises that create permanent jobs.
Four, kickstart the Public Private Partnership model so that it can start generating returns immediately and relieve some of the fiscal pressure. Finally, use this framework to pave the way for the privatisation of a myriad of institutions that now depend on subsidies.
In short, end the culture and mentality of entitlement, it is slowly killing us through a thousand small cuts, none of which is lethal, but together are toxic.