A look at the 2021/22 Mid-Year Budget Review
By IJG Research.
The Minister of Finance tabled the Mid-Year Budget Review and 2022/23 to 2024/25 medium-term expenditure framework (MTEF) fiscal policy review to a sombre National audience this afternoon. Eighteen months since the onset of the Covid-19 Pandemic and five years since the Namibian economy entered the recessionary territory, economic opportunities still seem to be decreasing for many, if not most, Namibians.
And while the National Budget is not meant to solve all these challenges, as we have repeatedly pointed out, it can’t, it is a measure of the Fiscus’s ability to underpin stability and the policy direction needed to create an enabling environment for growth. In this light, the Minister reiterated the theme for the year, “Boosting Resilience and Recovery”.
Revenue collection is crucial to Fiscus’s ability to undertake developmental investment that has the ability to boost capacity and future revenues. In this regard, and contrary to the May 2020 budget estimates, revenue collection for 2020/21 exceeded all expectations, coming in 4.3% higher than estimated in March this year at N$57.84 billion.
This is the third-highest nominal revenue figure for the fiscus, ever. Of course, the influence of an uncharacteristically large SACU Revenue Pool Share masked much of the contractions in taxes on income and profits and VAT, a much more appropriate guideline on domestic economic performance.
The outlook for revenue going forward is decidedly more gloomy though. Revenue is estimated to contract by 7.3% to N$53.60 billion in the current year, 2021/22, and remain around these levels in the next. It is only in 2023/24 that any meaningful increase in fiscal revenue is expected, and even then, this figure is projected to surpass 2017/18 revenue by only 3.3%, some six years after the fiscus recorded that peak.
The revenue outlook thus reiterates the need for a prudent fiscal budget and a
structural reallocation of expenditure away from consumptive activities and toward projects and activities which enhance the productive capacity of the country.
Given this conclusion, it is concerning to note that the reallocations tabled in this Mid-Year review are primarily a shift from the development budget to the operational budget. The additional funds availed in this 2021/22 budget are also directed at operation expenditure rather than development.
As a result, the net impact of the N$1.73 billion increase in the expenditure ceiling is a decrease of N$279.8 million in the development budget and an increase of N$2.21 billion in the operational budget (the difference being a slightly lower statutory cost than estimated). The development budget now accounts for only 7.5% of total expenditure including statutory payments.
For much of the MTEF however, expenditure is encouragingly set to remain below the N$69.68 billion estimates for the 2021/22 year before reaching more or less this level again in the outer year 2024/25. And while flat expenditure ceilings in the past have been to the detriment to the development budget, the projections are for higher allocations to the development budget in the 2022/23 and 2023/24 years.
This is encouraging, especially as transfers to Public Enterprises (PE) such as NamPower are included in these higher allocations at the same time that progress is being made on the Public Procurement Amendment Bill which is envisioned to allow PE’s to deploy capital more efficiently. Flat projected expenditure ceilings coupled with revenue growth post-2022/23 once again results in projections for narrower budget deficits in the outer MTEF periods. Next year, 2022/23, poor revenue collection projections are still expected to result in a large projected deficit of 7.3% of GDP.
Thereafter the deficit is expected to moderate to 3.7% of GDP in 2023/24 and 3% in 2024/25. It is difficult to be optimistic regarding projections for smaller deficits however as they seldom materialise.
That said, revenue projections are more conservative than they have been in the past and expenditure has been reasonably well-maintained bar the necessary Covid-19 induced increases. Additionally, the current leadership at the ministry of finance have yet to establish a track record in terms of achieving estimates and forecasts, with the minister taking the helm in the midst of the
Covid-19 pandemic last year, and an exodus of high-level officials in the current year replaced by new faces. The team at the ministry of finance may be relatively fresh, but the significant challenges they face, being slow revenue growth, large deficits, and rapidly growing debt stock and corresponding interest costs, have become the norm.
The latter is a particular challenge as debt-to-GDP is projected to reach 74.1% and debt service costs to reach 17.1% of revenue by the end of the MTEF. Thus not only is revenue growing slowly, but debt costs are taking up a growing proportion of that revenue. Should what is becoming a status quo of revenue growing at a slower pace than debt service costs, not be contained in this MTEF period, it is likely that even in the absence of further economic shocks, the fiscus may delve into a debt trap.
Thus, prudent fiscal management is of the essence. The short- to the medium-term fiscal outlook, while by no means rosy, is somewhat bolstered by the large regulated savings pool that has enabled the last nine years’ worth of deficits.
We have previously elaborated on the comfort that this asset provides the fiscus given regulation dictating the level invested domestically. The lack of assets in the Namibian market means investing in government debt is unavoidable, thus supporting deficits. However, as previously pointed out, this remains a temporary solution and very much ties the livelihoods of the nation’s citizens to the performance of its government.
If the fiscus remains consumptive in nature and does not structurally adjust expenditure toward productive activities that generate future revenue, a point will be reached when debt service costs start reducing the consumptive/operational expenditure of the fiscus, reducing the provision of social services to those in need, while at the same time resulting in the erosion of the savings pool which so many have worked so hard for.
Such a scenario should be avoided at all costs as the impact thereof will be doubly detrimental to the livelihoods of Namibians. Such is the need for prudent structural reforms to the expenditure profile towards developmental expenditure to improve the nation’s productive capacity.