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REPUBLIC OF NAMIBIA MINISTRY OF FINANCE 24 September 2015 PRESS RELEASE Status on Macro-fiscal situation and Policy Response Package I. BACKGROUND AND GUIDING PRICINPLES 1. There have been divergent and, sometimes, conflicting and sensational reports and analyses regarding the macro-fiscal position of Government operations and medium-term outlook. 2. The reporting and analysis made often tend to disregard the policy actions which Government has already undertaken and pursuing to address the current situation and mitigate any risks. Of particular reference is the article produced by IJG Securities and published in Die Republikein of 24 September, 2015 under the sensational heading: “Geld droog op”. This sort of categorization paints a public picture that meeting the financing needs of the budget is a difficult proposition for the Government. 3. I would like to lay out the factual matters and address the concerns raised. The Ministry of Finance also wishes to assure the public that Government will continue to execute the national budget, without compromising macroeconomic stability and sustainability of fiscal operations. These are 1 the fundamental principles which form the basis of our fiscal and financial management. 4. There are five main macro-fiscal risk areas and policy priorities which the Government is giving priority attention. These pertain to the following:4.1 Impact of the global economy and financial markets: The global economy as assessed by the International Monetary Fund and the World Bank is estimated to slowdown in 2015. This is due to the anticipated slowdown in Emerging Markets Economies, particularly the economies of China, the Commonwealth of Independent States, Brazil and South Africa. Sub-Saharan African economies are also expected to slow down. The main factors at play are the improving fundamentals in Advanced Economies, the normalization of monetary policy especially the exit from quantitative easing in the United States of America and the consequent outflow of capital from Emerging Markets. Commodity prices for both fuel and non-fuel commodities have also been on the downward spiral due to falling demand, especially in the light of the slowdown of the Chinese economy. For Namibia as a small open economy, our efforts are to pursue exportled inclusive growth through improving our productive capacity and diversifying the economy, while protecting budgetary allocations to social sectors. This is the budget policy emphasis as layout the FY2015/16 Budget Statement 4.2 Outlook on SACU Revenue: Revenue from SACU, which accounts for about 34 percent of Namibia’s revenue, has come under strain due to the weak growth outturn and prospects for the South African economy. The adjustments in SACU revenue means that Namibia is likely to bear the consequences of a negative adjustment in the next financial year. The outlook will only improve moderately, based on the growth prospects for the SACU economies, especially for South Africa. I wish to state that it is not the first time that volatility in SACU revenue has occurred. Namibia has, however, been able to navigate through the effects of such volatility. It is our plan to do so going forward, through expanding and deepening the domestic revenue base and most important, accelerating the tax administration reform agenda. I should 2 also emphasize that Namibia views SACU as a platform for achieving greater regional integration and industrial development than mere revenue distribution. As a country, we would advance these goals through the national Industrial Policy, the Growth at Home Strategy and other structural reforms. 4.3 Expansionary budget and future sustainability: The Government expansionary fiscal policy for the past years has supported the growth of the economy, provision of increased services to more Namibians and creation of jobs, especially in the public infrastructure development and construction sector. Government is, however, cognizant that prolonged fiscal expansion has exerted pressure on the stock of international reserves held at the Bank of Namibia and also, to some extent, on the liquidity position in the domestic market. To this effect, Government has commenced with the Mid-Year Budget Review, in line with the commitment made during the tabling of the FY2015/16 Budget. The review will allow Government to identify internal savings during the current fiscal year and also to align the outer years of the Medium-Term Expenditure Framework (MTEF) to the revised macrofiscal outlook. I intend to table the Medium-Term Budget Policy and Budget Review proposals at the end of October, 2015. I thus invite the public to embrace the Mid-Year review as a platform for enhancing the quality and targeting of expenditure, greater openness and participation in the budget process so that the input provided feed into the formulation of the budget and MTEF for the ensuring year. 4.4 Domestic liquidity conditions and financing of the budget deficit: The effects of increasing supply of credit to finance household and Government borrowings have benefitted from domestic financing by the local financial markets over time. This means that there is, to some extent, less liquid assets available to support increased borrowing activity, especially in the context of expected turns on assets elsewhere. This, however, does not take away the fact that substantial domestic capital continues to flow out of the country. If capital can still flow out of the country in substantial sizes, the claim of credit drying up needs to be fully substantiated. Let me, however, state that for each budget year, Government formulates a Borrowing and Deficit Financing Strategy that satisfies the borrowing 3 needs and mitigates risks. For the FY2015/16, the Government has successfully funded the budget deficit from both the domestic market and regional markets. For the record, the Government has managed to source funding from the domestic market up to 50% of the FY2015/16 fiscal year’s budget deficit financing needs. As stated, while the domestic capital market claims to be less liquid to support domestic borrowing needs, capital continues to flow out of the country unabatedly. Certain local capital markets investors go as far as being excessively speculative with over- price offers only to claim being overlooked when market diversification provides better avenues for raising capital. For these reasons, local auctions placed in September this year were undersubscribed under the guise of credit having dried up. Nonetheless, the Government has successfully funded 61 percent of the budget deficit through a combination of local and foreign sourcing, of which about 17 percent is earmarked for boosting the country’s foreign reserve position by borrowing on the South Africa market. Government will persist in its prudent execution of the Financing Plan to address the remaining needs. Government will also pursue other domestic policy options and leveraging alternative innovative funding means in order to alleviate pressure on the budget. We have issued the Rand denominated bond on the Johannesburg Stock Exchange (JSE) and will proceed to issue a Eurobond in the international market in support of these objectives. These instruments will be issued on the back of the proven financial strength of the Government. 4.5 Stock of international Reserves: Increasing private investment, especially in the mining sector, high investment in construction and imports of especially luxury goods has led to the relatively low level of international reserves. In practical terms, however, the reserves situation should not be overstated. The current reserves level is three times more than sufficient to support the currency peg of the Namibia dollar to the South African Rand. Furthermore, the Government has taken active steps to boost the foreign reserves position as stated above. We have also taken comfort of the fact that key private sector projects such as the Swakop Uranium will commence with production and export phase, while others will also 4 expand exports in the coming year. The reserve stock at the Bank of Namibia is further supplemented institutional investors. Conclusion The recent spate of commentary on the macro-fiscal status of the country and Government financial operations often fell short of recognizing the policy actions being implemented. In particular, the concerns raised about the “drying up of liquidity” in the domestic market do not go as far as indicating that capital is still flowing out of the country, in spite of the presence of secure investment instruments such as Government bonds and Treasury Bills. Government is satisfied that over 60 percent of the deficit financing needs is already met half-way through the budget implementation phase, with the remaining funding needs to be raised over the remaining calendar in line with the cash-flow needs. We have already commenced with the Mid-Year Budget Review to enhance the quality of spending and align the spending proposals to the dynamic macroeconomic environment. The outcome of the review will be announced in October, 2015. The necessary foreign reserve position will be achieved through the execution of the deliberate Financing Plan and increased benefits from increasing exports and domestic productive capacity initiatives. The Government, therefore, wishes to reassure the public that macroeconomic stability, fiscal prudence and sustainability remain key in the conduct of Government fiscal policy and economic management. Our policies will remain robust, pro-growth, pro-poor, pro-business and in support of the national development agenda in a dynamic and integrated global economy. Thank you. -----------------------------Calle Schlettwein, MP MINISTER 5