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It is not additional debt, it is tapping the credit strength of the African Development Bank

There certainly is room for irony in politics and economics. Earlier this week the Minister of Finance gave us an update on how strong or weak the economy is right now.

Nothing new was said except for some sober views on the detail of the N$10 billion “loan” we are receiving from the African Development Bank as bridge financing to paper over this year’s budget deficit.

I think it was a good point by the minister to remind us that this financing comes in tranches and that everything is in place for the first N$3 billion to be transferred. That should make a substantial difference to government cash flow, and I am sure the sinking construction sector will be extremely glad to hear this news.

However, it is paragraph 20 of the minister’s statement that caught my eye: “This is not an additional loan but a budget financing mechanism.” Does this imply, the loan, or facility if you want to call it that, will be forgiven after 15 years? I doubt it. The fastest way for the African Development Bank to shed its credibility is to acquire a debtor that will eventually turn into a creditor.

Be that as it may, the way it was presented is probably just a play on words to make the idea of having to borrow from a private institution to cover the deficit, a bit mor palatable from a political perspective. The way I get it, we still have to pay back the “loan” and we still have to service the interest for the next 15 years. Sounds very much like a conventional bond, does it not?

The most inspring remark in the ministerial statement is its cost of servicing. At least it now shows that some thinking has gone into taking up this money. The Johannesburg Interbank Acceptance Rate is a very stable rate, and 80 basis points is a conservative premium, very much in our favour seeing that we battled throughout last year to access the conventional capital markets in Windhoek and Johannesburg.

For the rest, it seems the statement’s intention is mostly to bring us up to speed regarding recent developments, and here I sense the underlying message is one of reassurance and confirmation that the contingency plans are working, or at least starting to work.

At this point, it is probably one of the most difficult things to try and make accurate predictions on economic performance for the rest of the year. The money from the African Development Bank will make a huge impact seeing that the shortfall that was anticipated in March, of around N$5 billion, will now be taken care of mostly by this injection. It is a good sign that our number one financial planner is confident enough to state in public that our entire deficit will be fully-funded from this money, together with what will be raised from the local capital market.

It means the financial authorities got together between March and now, and that there must be some form of tacit agreement between the government and investors. Whether it will be bonds as usual or so-called private placements, remains to be seen.

Still, I think it will turn out to be an irrelevant debate. The only important thing is that the deficit is financed and that we have reasonable guarantees for that. It implies that the budget can now be executed fully the way it was presented. The most important impact is on the expenditure side.

If provision is in place for the deficit, then it means the government can go ahead with its planned expenditure, and that should see a very substantial amount of money entering the local market in a relatively short time. It will also enable all the projects which have been interrupted, to carry on or be resumed. All in all, liquidity in the local market should bounce back fairly rapidly simply because government expenditure has been restored to normal levels.

Do not expect fireworks. The allocated expense items in this year’s budget are for all practical purposes on exactly the same level as last year’s budget. The big difference is that the plug will not be pulled with the Mid-year Review, indicating that we can expect a “normal” level of economic output (and growth) for this year.

I have much improved expectations for the second semester. I believe a number of outstanding government commitments will now be cleared and the projects that were put on hold will continue or be restarted. In combination with the list published earlier by the Ministry of Works and Transport, indicating which projects will carry on this year, some modicum of an operational base has been re-established.

Perhaps, not so much by luck but by solid planning, our economy will look far healthier come December, than what it looked when we started the year in January.

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