It is time for pro-growth fiscal policy

It is time for pro-growth fiscal policy

I would like to address Namibia’s sovereign credit rating, in light of the release by Fitch Ratings on September 2 of their latest ratings opinion.

There have been some comments made in reaction to the release of this ratings opinion. First and foremost, Fitch Ratings has affirmed Namibia’s sovereign credit rating at the investment grade notch of BBB-. In this sense, the word ‘downgrade’ has been misused: this was not a ratings downgrade, as some have implied.

At the same time, it is recognised that the outlook for Namibia’s rating has been revised by Fitch, from ‘stable’ to ‘negative’. As outlined by Fitch, this was based on a number of factors. It is important to remember that Namibia does not exist in a vacuum – the current challenging global growth outlook, depressed commodity prices, and in particular the weak economic performance of our neighbours in the region have most certainly led to lower growth in Namibia than was previously envisaged.

One of the major factors in this ratings opinion was the elevated level of public deficit to GDP observed in the 2015/16 financial year. This was chiefly the result of actual government revenue coming in below its target. I agree with Fitch when they identify “a secular decline in SACU revenues” as one of the key challenges to Namibia’s public finances. SACU revenues have long constituted a large part of government revenue – around 30 percent in recent years. Many are estimating that the South African economy is bordering on a recession, and it is an unavoidable reality that a weaker South Africa means weaker government revenue in Namibia.

Government revenue growth has also been constrained by persistently low global commodity prices (particularly in the diamond and uranium industries) and spillovers from the slowing Angolan economy, which curtails consumer demand in Namibia. In this more challenging environment, one simply cannot expect to see the strong revenue growth of the 2012-2014 period repeated in the coming few years.

Earlier this year, I tabled the 2016/17 budget in Parliament as a means of pro-growth fiscal consolidation. This reflects a continuing commitment to making public service delivery more efficient, by reducing wasteful expenditure and achieving better value for taxpayers’ money. Allocations to areas such as travel allowances and overtime have been lowered significantly, while purchases of vehicles and furniture have been postponed in many cases, and Fitch has welcomed this approach in its statement.

Government will continue to address these challenges head-on, and the Ministry of Finance will not shirk its duty in maintaining the macroeconomic and fiscal sustainability that is crucial to our development.

Thus, the Government will reinforce its time-tested approach to responsible public finance management, pro-growth fiscal policy and macroeconomic stability in the upcoming Mid-Year Budget Review for 2016 and the next MTEF (Medium Term Expenditure Framework).

Insurance Industry

From a macroeconomic point of view, the insurance industry plays a key role in economic development. In the context of Namibia, the combined total assets under the management of the insurance services sector, both for short-term and long-term insurance amount to an estimated N$51.4 billion, equivalent to US$3.50 billion at today’s exchange rate, or some 35.1 percent of GDP.  The insurance industry, as part of the financial services sector, is one of the key contributors to the country’s GDP growth and employment. Growth in the Namibian financial intermediation sector has averaged 9.0 percent per annum since 2011, well above the average growth rate of 5.5 percent seen in the economy as a whole. In addition, financial and insurance activities in Namibia supported well over 13 000 jobs in 2014, and the industry is doing its part in building the skills of these employees through various training programmes.

Insurance contributes towards wealth creation and protection at both national and individual levels. In terms of wealth creation, the provision of insurance policies allows businesses and individuals to acquire properties and other capital, safe in the knowledge that they can recover part or all losses in the event of an accident.

One of the success stories of the Namibian insurance industry has been the country’s publicly owned reinsurer, NamibRe. NamibRe has performed commendably since its foundation in 2001, turning a healthy profit and, crucially, ensuring that more of the capital generated by the insurance industry stays in the country. This not only benefits the balance of payments, but also adds to the domestic resources mobilisation strategy by encouraging more domestic institutional savings to be put to work via investments that can improve the capacity of the economy.

Through its contribution to economic development and poverty alleviation, I see the insurance industry as a key partner of the Government. Nonetheless, I believe more can be done by the industry to promote the development of Namibia, and the economic advancement of the African continent more broadly.

For example, insurance penetration rates in Africa remain very low (in some countries below 1 percent) in comparison to the rates observed in global emerging markets (2.7 percent in 2014). This means that the majority of people are still excluded from accessing insurance and hence do not enjoy the protection offered by the industry. This status quo has to change. That is, insurance companies have to offer more innovative products targeting all income groups, especially those in low-income groups. Coupled to offering new and affordable products is the need to find alternative payment methods, which are aligned to new technologies (for example, the use of cell phones for payment).

Indeed, it is by extending insurance products to the marginalised populations that we can really begin to talk about financial inclusion. The Sub-Saharan African region has some work to do to improve access to financial services – in 2014, only 34 percent of adults in our region had an account at a financial institution, compared with a world average rate of 62 percent.

However, access to insurance products continue to lag behind the national averages and the cost of much needed products often are out of affordability range for low-income earners. Other recent initiatives, requiring banks to offer a basic bank account for low earners and mandating the removal of cash deposit fees for individuals, should be emulated to help to further improve financial inclusion in Namibia.

Sub-Saharan African economic growth is now facing strong headwinds stemming from a slump in commodity prices and adverse developments in major export markets.  Nonetheless, with its large, young population, Africa may hold the key to global growth prospects for the future, for example, it is expected that the world’s top 10 countries with the youngest populations will all be in Africa by 2050. This means that any company, which wants to survive and grow in the next couple of decades, should be looking to invest in Africa. Moreover, given that financial inclusion remains relatively low on the continent, there is tremendous long-term growth potential in sectors such as insurance.

However, the existing opportunities in the African insurance market will remain as such, if we do not address the constraints within the sector. Africa’s insurance industry is characterised by low levels of penetration, inadequate regulation and limited enforcement capacity, lack of reliable statistics and lack of technical skills (such as actuaries). A significant barrier to access remains the high cost of products and services, high transactional and administration fees, which bite into the premium contributions. All these weaknesses may hinder the continent’s ability to harness the growth opportunities, which are available. SADC countries, Namibia inclusive, have signed the Protocol on Trade in Services, which, when ratified, provides for free trade in services and an unhindered flow of technical skills in this sphere.

Therefore, I would like to strongly urge industry to work together with the governments in their respective countries to leverage the conducive policy environment and address supply side bottlenecks.

In the context of Africa, the need to roll out micro-insurance with products and services tailor-made to the requirements of the underserved segment of the population must be emphasised, taking into account the countries’ circumstances.

 

  • This is an edited extract from the speech by the Minister of Finance Calle Schlettwein at the 39th Annual Conference of the Organisation of Eastern and Southern Africa Insurers on 5 September in Swakopmund.

 

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