Central bank not responsible for country's debt

by Nghinomenwa Erastus

THE governor of the Bank of Namibia has indicated that the central bank has minimal influence on how much debt Namibia incurs.

Johannes !Gawaxab, the newly appointed central bank chief said this at the central bank's offices in Windhoek during a conference on his first 100 days in office.

“It's not our mandate to say debt is not sustainable. The bank cannot go beyond its mandate,” he said.

For the current financial year, treasury has a funding gap of N$21,4 billion as a result of a 7,1% increase in expenditure, while revenue contracted by more than 11%.

Covid-19's impact is blamed for the state of affairs, but this ignores the past five years of stagnant growth, a non-diversified export portfolio, a mining-dominated economy, and a shallow capital market.

Acknowledging the debt level, !Gawaxab said ballooning debt is not only a Namibian problem, it is an African and global problem.

Studies, however, show that debt is not necessarily a monster as long as the economy is growing, which enables treasury to collect enough to service its debt.

This cannot be said for the Namibian economy as it struggles to diversify and expand its private sector to grow with minimal government expenditure.

!Gawaxab acknowledged that indeed growth was slow, and the country's exports have been “stagnant for the past 30 years”.

As reflected by the Namibian Statistics Agency, the country's top-five export products are raw minerals, which are sent overseas for processing.

!Gawaxab said this could be why the country's average wages are low and why household income is stagnating.

As value addition takes place outside the country, “we cannot pay high salaries”, he said.

The most common measure of a country's ability to pay its debts is its debt-to-gross domestic product (GDP) ratio, which compares how much a country owes the rest of the world and how much it can produce to repay its debts.

A high ratio means a country is not producing enough to pay off its debts, and a low ratio means there is plenty of economic output to enable treasury to collect taxes and service debts.

The Bank of Namibia indicated the country's public debt is projected to increase from 50,7% (N$88,9 billion) in 2018/19 of GDP to 68,7% (N$117,5 billion) in the 2020/21 financial year.

“This is close to double the self-imposed debt threshold of 35%,” the current borrowing strategy indicates.

In its quarterly bulletin, it is indicated that in the past three to current financial years government debt has increased by around N$43 billion more than the country quarterly output.

In the first quarter of 2020 real GDP stood at N$34, 9 billion.

From 2017/18 to 2018/19 government debt has increased by N$14,4 billion; between 2018/19 and 2019/20 it has increased by N$11,5 billion; and it is projected to increase by N$17,1 billion in the current period.

The 2020/21 period could amount to even more, given a N$21,4 billion funding gap driven by social sector expenditure (education and health), which sucked up 50% of operational expenditure.

!Gawaxab said the central bank has submitted its debt analysis report to the Ministry of Finance a few weeks ago, and it is now up to the minister of finance, Iipumbu Shiimi, and his team to act upon it.

WHY WORRY

The finance ministry's expenditure framework for the current financial year shows that the country's interest payment has increased for this financial year, exceeding the development budget.

Total expenditure, inclusive of interest payments for 2020/21, amounts to N$72,7 billion, which comprises N$57,9 billion for operational expenditure and N$6,4 billion for development expenditure.

The budget shows it did not only increase due to Covid-19's impact, but also due to an increase in interest, which will amount to N$8,4 billion by the end of March 2021.

The World Bank has observed that emerging markets take about 2% of their overall production as funds are diverted to debt repayment.

This may not be the case due to limited data, but the jump in interest payments from 13% last year to 16% of GDP and exceedingly going beyond the developmental budget could be a red flag.

This raises questions about whether treasury may divert more funds to interest payments in the mid-term budget review to avoid defaulting. Defaulting which is missing a timely payment on interest, could be costly to a country such as Namibia, with a high appetite for debt.

Email: erastus@namibian.com.na