Namibia's Budget - Trying to Grow Responsibly?

UNCLAS SECTION 01 OF 04 WINDHOEK 000201

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON PGOV WA
SUBJECT: Namibia's Budget - Trying to Grow Responsibly?

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Summary
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1. (SBU) Minister of Finance Saara Kuugongelwa-Amadhila
tabled the Namibian government's (GRN) latest budget on March
20, shortly before the April 1 start of the new fiscal year.
Due to the global economic crisis government, revenues are
expected to fall for the next two years, while spending will
increase slightly above inflation. The MOF has loosened
deficit and debt targets, but it is unclear whether this is
temporary (to respond to the crisis) or permanent. The GRN
has reduced taxes for most Namibians while it has increased
spending on its top priorities - education, defense, health,
transport and the police. Some seemingly important
infrastructure priorities appear to have been overlooked ?
primarily rehabilitation of Namibia's aging rail network.
Observers of the budget process generally praise the GRN for
its transparency in making budget figures widely and promptly
available, while asserting that the GRN has far to go in
implementing a good performance measurement system for its
spending. End Summary

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The Budget Process
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2. (SBU) The Namibian fiscal year runs from April 1 to March
31, but the budget process usually begins in September of the
preceding year. After months of deliberations between the
line ministries and the Ministry of Finance (MOF) -- with
input from the National Planning Commission (NPC),Bank of
Namibia (BoN),and Namibia Economic Policy Research Unit
(NEPRU) -- the Cabinet eventually approves the national
budget. The budget consists of several documents, the most
important being the Medium Term Expenditure Framework (MTEF)
as well as the individual 31 line ministry and other
government organization budgets. The MTEF outlines the
government's three-year economic projections. With Cabinet's
approval, the MoF tables the budget before parliament. This
year, Minister of Finance Saara Kuugongelwa-Amadhila tabled
the budget March 20, just 12 days before the new fiscal year.


3. (SBU) The two houses of parliament vote on individual
ministry budgets which are in line-item form, not programmatic
or performance budgets as described in the MTEF. In the 19
years since Namibia's independence, no budget put forward by
the MOF has been changed in parliament. While
parliamentarians do debate the budget, the ruling SWAPO
party's majority has successfully prevented any alterations to
the budget once it has been tabled. All real budget
deliberations are hashed out in cabinet.

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Economic Forecast
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4. (SBU) The MOF forecasts nominal GDP growth of 2.9 billion
Namibian dollars (N$) or USD 365 million, to N$69.9 billion or
USD 8.7 billion (at the current exchange rate of 1 USD equals
8 N$) for the current fiscal year (April 2009 to March 2010).
This projection anticipates real GDP growth of just 1.1
percent in the next fiscal year. By contrast, more recent
projections by well-regarded private economists and the Bank
of Namibia forecast slightly negative (declining) GDP growth.
The MOF expects the Namibian economy to start recovering in
FY2010/2011, and claims some of the recovery will be due to
increases in government spending. Over the entire three year
MTEF period, the MOF anticipates real GDP growth to average
2.2 percent.

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Budget Balance and Debt Levels
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5. (SBU) The GRN projects it will run budget deficits
approaching or exceeding five percent of GDP over the next
three years. This will exceed the GRN's budget deficit target
of no more than three percent of GDP. The GRN will also
eclipse its stated debt target of 25 percent of GDP by the end
of the three year MTEF period. MOF officials could not
confirm whether the deficit and debts targets have been
permanently lifted or if they are simply a temporary (short-
term) response to the current global economic crisis.
(Comment: Given the GRN's fiscal prudence over the past few
years - when it ran surpluses, which allowed it to tame its
debt stock ? a short term rise in the targets does not appear
to be particularly alarming and makes sense given the global
economic crisis. End Comment).

Table 1A: Budget Deficit as a Percentage of GDP
============================================= ==

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Year 2007- 2008- 2009- 2010- 2011-
2008 2009 2010 2011 2012
-------------- --
Deficit 3.3B -0.5B -3.1B -4.0B -3.8B
As % GDP 5.2% -0.7% -4.6% -5.5% -5.0%
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Table 1B: Debt as a Percentage of GDP
============================================= =
Year 2007- 2008- 2009- 2010- 2011-
2008 2009 2010 2011 2012
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Debt Stock 11.9B 13.8B 15.1B 19.4B 23.2B
As % GDP 18.9% 20.5% 21.7% 26.3% 29.3%
-------------- -
Note: The 2007-2008 is an actual result, whereas
other figures are estimates and projections.
All figures are in billions of Namibian dollars.
============================================= ==

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Revenue Forecast
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6. (SBU) The MoF predicts it will collect N$21.4B in
revenues, a 1.4 percent decrease over the prior fiscal year.
Revenues will continue declining in FY2010/2011 until a
rebound in the third year of the MTEF (FY2011/2012),according
to the MOF's estimates. The decline in government revenues
marks a sharp contrast to prior years where double digit
increases were the norm. Domestic tax receipts are predicted
to drop quite considerably (12 percent) in the current
(FY2009/2010) fiscal year. The precipitous drop in diamond
revenues will be the single largest contributor to the
decrease in domestic tax receipts. Given the economic
downtown, the revenue from diamonds (mining as well as cutting
and polishing) which contributed over N$500 million to the
government coffers last year is expected to drop to N$10
million this fiscal year.


7. (SBU) Drops in revenue from the Southern Africa Customs
Union (SACU) could also strain the treasury. Namibia's share
of the SACU revenue pool historically makes up around 40
percent of total GRN revenues. SACU will likely collect
significantly fewer import duties in the current fiscal year,
but there is a lag effect in SACU revenue pool distributions.
This delay means lower SACU receipts will likely not affect
Namibia until the FY2010/2011 distributions.

Table 2: Government Revenues
============================================= =====
Fiscal Year 2009/10 2010/11 2011/12
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Total Revenues N$21.42 N$20.84 N$22.44
Domestic Taxes N$ 9.84 N$10.60 N$11.61
SACU Receipts N$ 9.33 N$ 7.87 N$ 8.36
SACU Percent of Total 46.2% 40.4% 39.8%
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Note: All figures (except for percentages) are in
billions of Namibian dollars.
============================================= =====

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Tax Policy
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8. (SBU) The GRN has introduced a number of tax cuts, some of
which are intended to serve as an economic stimulus.
Corporate taxes have been cut from 35 to 34 percent, although
mining companies remain at the 35 percent rate. The
government also adjusted personal income tax rates to provide
relief to lower income earners. The GRN has raised the tax
exemption threshold for severance packages paid out to
recently laid-off workers and pensioners. The VAT holiday
enacted in 2008 on staple food products, such as milk and
sugar, has been extended. Fees on transfer payments ?
payments on property transactions ? have also been reduced.
Conversely, the GRN has begun requiring financial institutions
to enforce a 10 percent tax on interest earned by their
clients. Previously, the burden was on customers who rarely
reported the income.

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Expenditures
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9. (SBU) The GRN describes its budget as expansionary in
response to the global economic downturn. Overall spending
this fiscal year is indeed forecasted to grow by 13 percent
over the prior fiscal year. Much of the spending increases
are tied to an across-the-board salary increase to civil

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servants. Some economists have argued that with inflation at
10 to 12 percent, the budget is not expansionary enough. The
budget has two broad expenditure categories: current (or
operational) spending and development (investment) spending.
Development spending in FY2009/2010 will increase more than 50
percent over the previous fiscal year from N$2.9B to N$4.4B,
while operational spending is expected to increase by seven
percent. State-owned enterprises -- AirNamibia, NamWater,
NamPower and Transnamib (rail operator) ? will continue to
receive sizeable government subsidies over the coming three
years.

Table 3: Top Five Recipients of Government Spending
As A Percentage of Total Budget
============================================= ====
Budget Year 2008-09 2009-10
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Education 20.62% 21.5%
Defense 8.8% 10.4%
Health and Social Services 9.0% 9.6%
Works and Transport 7.3% 7.5%
Police 5.2% 5.7%
============================================= ====

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Education Spending
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10. (SBU) The Ministry of Education still tops the list of
government recipients, receiving just over N$5 billion or 21.5
percent of the budget. The general (primary and secondary)
education program receives the lion's share, or 76.5 percent
of the ministry's budget. General education, nevertheless,
has seen its share drop six percentage points from two years
ago. Tertiary education is the big winner in this year's
budget receiving 17.2 percent of spending; it only received
12.3 percent two years ago. The percentages for vocational
education and adult education remain largely unchanged, with
each receiving about three percent of the education budget.

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Defense Spending
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11. (SBU) The Ministry of Defense continues its long trend of
increasing budgets. The defense budget will increase from
N$2.4 billion last fiscal year to almost $2.6 billion for
FY2009/10, a 9.5 percent increase. At independence defense
received slightly less than five percent of the budget, while
in the current fiscal year it will receive ten percent.
Current projections have defense spending eclipsing 11 percent
of spending in the subsequent two fiscal years. Most military
spending is devoted to personnel, including salary increases
and recruitment of new employees. Table 4 breaks down the
defense budget by major categories.

Table 4: Defense Spending ('000)
============================================= =====
2009-10 2010-11 2011-12
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Salaries/Admin 1,460,749 1,776,414 1,878,344
Acquisitions 340,000 384,000 300,662
Disaster relief 334,748 366,505 449,903
President security 311,990 232,140 192,400
Soldier assistance 34,629 42,341 45,860
Regional deployments 36,296 42,849 60,810
Construction (bases) 80,000 89,500 112,000
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Total 2,598,412 2,933,749 3,039,979
============================================= =====

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Health and Social Services
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12. (SBU) The Ministry of Health continues to run third in
terms of spending priorities at 9.6 percent of the budget.
Total health and social service spending is increasing from
N$2.13 billion in FY2008/09 to N$2.41B in FY2009/10, a 13
percent increase. Renovation and construction of hospitals
and regional clinics receive the bulk of the funding
increases. The USG continues to be the single largest
bilateral donor in the health sector, with the President's
Emergency Plan for AIDS Relief (PEPFAR) contributing 39
percent of all health-related assistance funding, or roughly
five percent of the ministry's total budget.

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Works and Transport
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13. (SBU) The Department of Transport under the Ministry of

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Works and Transport will see a 70 percent increase in its
development (long-term investment) budget in FY2009/2010. The
focus on transport infrastructure improvements is viewed as an
economic stimulus. Road construction and rehabilitation
comprise 49 percent of the total transport budget (operational
and development) while rail receives 14 percent. Of the rail
work, most is focused on extending a new rail line to Angola
in the north of the country.

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Measuring Performance Remains a Problem
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14. (SBU) In the 2008 Open Budget Survey, an initiative of
the Center on Budget and Policy Priorities (funded by the Open
Society Institute and Ford and William and Flora Hewlett
Foundations),Namibia scored in the middle of the pack of
countries evaluated. The GRN ranks well on the dissemination
of budget documents. Indeed the budget appeared on the MOF's
website shortly after it was tabled on March 20, and the 835-
page MTEF document provides significant detail on how the GRN
plans to spend its resources. Where the GRN falls short,
according to most critics, is measuring performance. The MTEF
contains metrics for each ministry, but the indicators are not
well designed. The Institute for Public Policy Research, a
local think tank, states in its budget analysis that
"indicators are at best indirectly related to a [Ministry's]
performance, most do not stipulate numeric targets with
deadlines and many are filled in sloppily (e.g. confusing
absolute numbers with percentages, leaving blanks or having
numbers that are quite obviously made up)."

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Comment
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15. (SBU) The GRN's budget documents are readily available to
the public. IPPR's criticism notwithstanding, the fact the
GRN has defined and published how it measures its performance
is encouraging, given the absence of any such metrics prior to

2008. While education remains the top budgetary priority,
systemic problems still impede the delivery of quality
education in public schools. The continual increase in the
health budget is encouraging as PEPFAR focuses more on
sustainability and integration of HIV/AIDS programs with
broader health and development efforts. Unfortunately,
personnel costs for the military will continue to rise as the
Namibian Defense Force is expected to recruit larger numbers
of unemployed youth. The small allocation of funding for rail
upgrades is surprising, given that major portions of Namibia's
existing rail network is dilapidated. Critical links within
the rail infrastructure (Walvis Bay to Tsumeb),which are
vital to the GRN's plan to turn the port of Walvis Bay into a
regional transshipment hub, require a robust rail network.
MATHIEU