I want to start with thanking the Paris Club for having invited Namibia to partake in this Forum and share our thoughts about this very relevant topic, that is “putting into practice the Addis Ababa Action Agenda: Trends in official debt and towards operational principles for sustainable financing for development”. It is an honour to be here today and I want to thank Hon Michel Sapin, the French Minister of Finance and Chair person of the Forum for availing this great opportunity to Namibia.
From the global perspective, we start from the premise that debt capital, when properly structured, well-targeted and prudently managed forms an important source of financing for development, given the substantial financing needs such as those engendered in the Addis Ababa Action Agenda
We note, however, that a significant build-up of debt, whether private or public, domestic or sovereign, impedes growth on account of limiting the ability to conduct countercyclical fiscal expansion during bust cycles. This is, by and large, the state of play in the global economy today, with heterogeneity across economic groups and countries.
The recent stock-taking by the International Monetary Fund (IMF) brings out that global debt is at record highs and still rising. Total non-financial sector debt is estimated at US$152 trillion by 2015, some 225 percent of world GDP. One-third of this global debt trajectory is public, which has increased from about 70 percent of GDP in the early 2000s to over 85 percent of GDP today.
The build-up in the stock of debt is a major headwind against global economic recovery and of course, a risk to financial stability. With a zero, near zero or even negative interest interest rate environment in some Advanced Economies, there is a quantum of sovereign debt capital that is seeking investment, but its uptake is constrained by lingering sustainability concerns and related matters of structuring.
The Africa growth narrative that we have witnesses for the past decade or so, has been underpinned by better macroeconomic management and supported by tailwinds emanating from commodity price booms. Commodity prices are expected to stay lower for longer.
The debt sustainability concerns are exacerbated by shocks to the economy, financial markets and public revenue. The question that could be raised then is what policy options do Governments have when confronted with elevated public debt portfolios and the need to lift inclusive economic growth? I will return to this matter from the experience of Namibia.
Fundamental Principles of Public Debt Management
The second important consideration for debt sustainability relates to the economic growth implications of incremental debt update and the effectives Public Debt Management. To avert public debt overhang or excessive indebtedness, four key best practices are emphasized in the context of country circumstances, namely:-
First, debt uptake should be sustainable and growth enhancing. The sustainability perspective is embedded in the set financing objectives that the debt capital will serve and that the returns from investments made justify the expansion of the debt portfolio. Most countries have fiscal rules, legalized or not, as safeguards for sustainability. Presumably, debt capital is invested in productive needs of the economy.
Second, institutional and technical capacity is needed at country level to assess and manage the cost-risk premia associated with increasingly complex debt structure and volatilities in the market.
Third, promoting efficient domestic capital markets from the resource allocation point of view as well as deep and liquid markets for Government securities, and fourth, sound debt management is no substitute for sound macroeconomic management which is an important underpinning to spur market confidence and set the necessary condition for growth and investment.
That said, let me now turn to the case of my own country Namibia and the experience to date.
Namibian Economy in Perspective
As a small, open economy with a trade-to-GDP ratio of over a 100 percent, Namibia has not been able to escape from the impact of the exogenous shocks on the economy through the trade and commodity price changes.
The Addis Action Agenda for development places significant emphasis on domestic resources mobilization as a sustainable means of financing development at the national level.
In Namibia we have been able to maintain macroeconomic stability, grow the economy and reduce poverty over time.
Namibia is one of the five investment grade sovereigns in Africa.
Within the past 26 years of political independence, the economy has grown on average by 4.6 percent, per capita income has more than quadrupled to propel the country to reach an upper middle-income status by 2010 according to the World Bank classifications.
The economy is ranked the fourth most diversified in Africa, with the tertiary services sector accounting for over 50 percent of GDP.
About 17 percent of GDP or about 40 percent of expenditure is allocated to social sectors in terms of social safety nets and to education and health. The safety nets have provided an effective shield against poverty and vulnerability.
Namibia is a net creditor country, with net capital outflow and a consistently positive Net International Investment Position, thanks to strong institutional investor assets. The total assets under management of institutional investors are in excess of 260 percent of GDP and remain an important source domestic resources mobilization agenda to finance development.
Domestic capital market and the financial sector are relatively developed and the stock market is the second highest capitalized after the JSE in South Africa.
While we have been able to increase life expectancy to about 63 years and reduce poverty by about xx percent in the past ten years to 26 percent of the population, income inequalities and unemployment still remain high a key focus for development policy.
he shocks to commodity prices and low-growth episodes for Namibia’s main trading partners of South Africa and Angola, compounded by the prolonged drought in the Sub-region have contributed to a significant reduction in economic growth for Namibia this year, falling from 5.3% in 2015, to an estimated 1.6% in 2016.
Public Finance Management, In terms of Public Finance Management, our fiscal operations are governed by the soft fiscal rules, which among others, anchor the budget deficit at 5 percent of GDP which we now intend to tighten to 3 percent of GDP, while public debt is capped 35 percent of GDP. These rules have historically served the country well:-
The revenue-to-GDP ratio averages some 32 percent in the past five years, while non-trade related revenue-to-GDP ratio stands at an average of 24 percent,
Public debt has for the five years averaged 26.1 percent. But the shocks to the economy and public revenue have reduced policy buffers, limiting the scope of conventional fiscal policy responses to mitigate shocks. The impact of such shocks are that fiscal operations have exceed the benchmarks, with budget deficit in excess of 8 percent of GDP and public debt exceeding 40 percent of GDP.
This outcome has compelled Government to frontload fiscal consolidation in a rather procyclical circumstances of the year.
Namibia has accessed the international debt market other than South Africa, twice for a cumulative Eurobond of US$1.25 billion since 2011 at an average coupon rate of 5.xx percent.
We responded to re-set our fiscal operations to the revised macroeconomic outlook, underpinned by a much more private sector-led growth from recent investment projects in the mining sector.
We have also looked at a menu of alternative means of financing and mobilizing domestic resources to harness private capital, mobilize domestic resources and implement structural reforms to support growth and relieve pressure on the budget during a rather tight fiscal consolidation path.
Namibia’s national Development Agenda
Our key national development agenda is articulated in the fast-track national Harambee Prosperity Plan, which prioritizes development interventions engendered in the Five-Year National Development Plans. Chief among these interventions are in areas of:-
•strengthening effective governance,
•social progress and
•effective international relations.
The medium-term policy response package to finance the development agenda emphasize the following: Mobilizing domestic resources. This is in the form of revenue base-broadening by exploring the sources of alternative forms of revenue generation, casting the tax net wider and implementing tax administration reforms which entails the establishment of a semi-autonomous Revenue Agency. It also entails mobilizing domestic savings to reduce the savings-investment gap that resulted from perpetual capital outflows, alongside the optimization of domestic debt take up with no or low foreign currency risks.
Structural reforms to leverage state assets and SOE reforms to provide bankable assets to the market.
The composition of these outflows also challenges the traditional thinking about illicit money. According to estimates by Global Financial Integrity, corrupt activities such as bribery and embezzlement constitute only about 3% of illicit outflows criminal activities such as drug trafficking and smuggling make up 30% to 35% and commercial transactions by multinational companies make up a whopping 60% to 65%. The most common way illicit money is moved across borders is through international trade.
The extent of such outflows remains a matter of speculation, with the figures on Africa ranging between $50 billion and $80 billion per year.
Investment streams into Africa have followed resources by and large. Good governance and macro economic stability alone did not attract similar interest. In Namibia we can offer an investment climate that includes investments opportunities into the resource sectors while at the same time a relative diverse economy offers equally promising growth potential in the secondary and tertiary sectors of a stable economy.
The political and social environment, governance architecture and democratic institutions are robust and stable.
Industrialization and value addition that improved productive capacity brings about has to be at the core of the Addis Ababa Action Agenda.
Not only has value to be added to our raw materials and natural resources, but also the value share from these resources has to be improved.
Moving up the value chain and participating in regional and global value chains is required.
Harnessing Public, Private Partnerships in the sectors of renewable energy, water generation, rail infrastructure, housing, tourism and specialized service units in public health as well as encouraging local procurement.
We have enacted the Public Procurement Act last year with a rather autonomous central procurement board to embed transparency and efficiency in the public procurement process. Likewise, the PPP Bill has been laid before the legislature and it is expected to come into operation in 2017.
We have also taken on a comprehensive reform agenda for State Owned Enterprises to enhance governance, efficiency and reduce reliance on the national budget.
We hosted an international investment conference earlier this month in Windhoek, and over 20 potentially bankable and high growth projects are open to foreign and domestic investment.
Namibia offers a prime destination for tourists across the globe, its unique coastal landscape and pristine environment offers unique tourism sites.
To conclude with, we believe that the quantity of investments is important and in need to be increased. It is however at least of equal importance that the quality of such investments is good. Bad and one sided investment agreements are more often than not detrimental to developing economies and are therefore undesirable.
The Addis Ababa Action Agenda for Development needs win-win scenarios through which inclusive economic growth and shared prosperity is brought about. Nothing less than that is good enough.
• This is the presentation by Namibian Minister of Finance Calle Schlettwein at the Namibia Fourth Conference of the Paris Forum, in Paris, during the 29 November session titled ‘Putting into practise the Addis Ababa Action Agenda: Trends in official debt and towards operational principles for sustainable financing for development.’