Forget the outlooks and the opinions, work with real figures
Following the cue from the Bank of Namibia earlier this year, Rand Merchant Bank this week joined the chorus of analysts who have all recently downgraded GDP growth expectations for this year.
It is a common phenomenon worldwide that analysts find it very disconcerting not to be aligned with consensus and the moment a central bank starts advocating a particular economic outlook, the herd instinct eventually drives all other analysts to fall in line and help reinforce the central bank gospel.
But it must be stated at the outset that downgrading growth expectations, is a theoretical exercise only. In the final analysis it only reflects the opinion of that particular analyst and he or she may be spot on, too optimistic or too pessimistic.
My own experience is that both the reasoning and the methodologies behind gauging future outcomes, are more often than not flawed, or so academic that it hardly holds any practical value for managing the finances of a country.
Let us go back to basics and work with the available figures keeping in mind that actual figures for this year will only be available (of sorts) by about August next year. And even after that, the statistics will be revised and adjusted up or down to fit the model.
In the Fiscal Policy Framework released at the end of February this year, GDP for 2012/13, 2013/14, 1014/15 and 2015/16 were indicated respectively as N$110 billion, N$125 billion, N$141 billion and N$160 billion. The first two values are actual outcomes while the second two are so-called estimates. The Ministry of Finance has a track record of being conservative so that it is not too far-fetched to say that actual outcomes for this year and the next, will probably exceed budgeted values. Excepting 2009, this has happened for nine out of the last ten years.
If I calculate the nominal increases, it immediately show that there is a very steady and regular pattern emerging. Nominal growth (on paper) comes out as 13.7%, 12.8% and 13.48%. That takes us to February 2016 which for this moment is sufficient to demonstrate how precarious any other calculations are. These growth percentages reveal a little bit of the ministry’s methodology, and I assume it says a lot about the annual Article IV Consultations with the IMF, which incidentally carries some weight with the ratings agencies.
A second set of comparisons can be calculated when one arbitrarily assumes 2012/13 as a base year and calculate all ensuing years as if they followed immediately upon the base year. Calculated this way, nominal growth for the first comparative year stays 13.7% but for the second year it grows to 14.55% and for the final year, it shows a very respectable 17.27%, i.e. 2015/16 compared to 2012/13.
This somewhat extraordinary methodology reveals another unique statistical phenomenon, that of the effect of a so-called high base.
Throughout my chosen comparative four-year period, nominal growth was always positive growing incrementally by N$15 billion, N$16 billion and N$19 billion. Do you see where this is taking us? Nominal growth remains in an accelerated curve but only because the previous two years’ growth beat the projections. The base has now been set slightly higher, and consequently, the percentage growth slows. So it is the comparative growth that slows but not the actual (nominal) growth. The latter keeps growing faster and faster.
This brings me to the strategic question why the Bank of Namibia seems to be preparing us for a sentiment that is based on an assumption of slower growth. It also raises the question of the reliability of our inflation measures, methodology and eventual statistics, and it casts a particularly dark spot on the so-called GDP Deflator published earlier this year by the Namibia Statistics Agency in the Preliminary Annual National Accounts.
Nobody expected the sudden downturn in monthly inflation, and if the Bank of Namibia has to stand or fall with their own economic overview published when the first 25 basis points interest rate was increased, then they must now lower the repo rate again.
I realise we do not operate in a very mature economy, but I still stick to my conviction that the government as development agency must provide all the liquidity the economy can possibly absorb. I sense that an agenda has been drafted behind closed doors and the ordinary person is not privy to that information. That agenda demands an increase in interest rates, and by hook or by crook, the figures will be made to fit the assumed model.