Is the economy healthy or is it not?
The jury is still out on this all-important question. Few analysts concern themselves with the economy’s fundamentals, opting rather to take a short-term view and asking the question, How stable is the economy right now?
Fundamentally, there is only one overarching economic problem and that is, the government has gradually crowded out the private sector. Now that the government generates about two thirds of overall liquidity, it has become futile to ask any analytical questions about the economy’s inherent generative capacity.
For all practical considerations, the economy is the government (mostly) and the government is the economy (overwhelmingly). Since the end of the nineties, following the disastrous budgets of 1996 to 1998, it became government policy to turn itself into an active economic player. The groundwork was laid from 2000 to 2008. A year later the fallout of the international financial crisis struck us, setting the stage for the so-called counter-cyclical budgets of 2010 to 2015. This cycle has now come to a conclusive end with government finances hitting a brick wall at the end of 2015 and the aftermath harassing us throughout 2016.
Make no mistake, 2016 would also have been part of the extended gravy train were it not for the economic storm that hit us last year on several fronts.
The government derives its revenue roughly one third from international trade managed by the Customs Union, one third from sales tax and one third from income tax of both companies and individuals. Granted, this is a simplification of the fiscal picture but it is close enough to reality to serve as a quick reference to find out where the trouble started.
I think it is anybody’s guest which one of the three main revenue streams tanked first. That debate is academic, and for practical purposes, obsolete. The fact is government finances came under pressure from the third quarter of 2015, at one point so deep in the red that we were saved only by the Eurobond, and that with just a few days to spare. At that point, all high-ranking officials denied we had problems.
2016 was a gloomy year overall. By May it was evident we were in serious trouble. This culminated in the revised budget at the end of October, and from there until the end of the year, only some fancy footwork with capital market deals kept us afloat. So, for all intents and purpose, the answer to the question in the headline, is that the economy is not well.
But I have argued earlier that we have passed the bottom of the trough and that we are now in a consolidation phase. This will continue for at least another three years, or for the period of the upcoming Medium Term Expenditure Framework. This notion is corroborated by the Budget Midyear Review of 27 October last year.
In effect, this was more than a review. In a crude sense, it basically threw the old budget out of the window, introducing an entirely new set of figures. This shocked the nation since now it was apparent to everybody just how precarious the government’s financial position was. It also told us bluntly the economy is facing more than just the average headwind.
The shock on the system was enormous. Still, I believe the strategy to frontload the constriction on the budget have already started showing some positive results and that the adjustment over the next three years will be within the finance ministry’s control and direction.
Given the dearth of reliable and up to date statistics, the Bank of Namibia’s Money and Banking Statistics report released this week, provides a usefull overview of current credit conditions.
But it also reveals that we have probably entered a boom bust cycle, very similar to Apartheid South Africa’s economy of the middle and late eighties.
While overall credit to the private sector continued on its flat downward curve, corporate credit decreased slightly faster than household credit. This may be an indication that businesses have consolidated their expenditure and that households are almost there.
Growth in the M2 money supply aggregates shows me liquidity is on the rise. This is confirmed by the stats on overall liquidity in the banking system showing a very healthy 29% jump in a single month.
Banking liquidity can only improve if deposits increase while demands decrease and this is what I sense happened. The moment banking liquidity improves, credit stands next in line and I expect a considerable rebound in PSCE stats for the first semester of this year.
It is slightly disconcerting that foreign reserves went down again, but it is not a train smash and the stats underscores my point that the bottom of the trough was last year in June.
Opinions about the current health of the economy range over a wide spectrum. I maintain it is a short-term approach to a long-term problem. There is fundamentally very little wrong with the Namibian economy, except the government’s participation rate. When one assumes a long-term view, the Namibian balance sheet is healthy.
It took six years to get us in trouble. If we can ride it out within three years, that will confirm my point that the inherent generative capacity of the Namibian economy is sound.