Bank of Namibia Governor Ipumbu Shiimi spoke to Toivo Ndjebela about various issues related to the country’s economy, including the origins of government debt, which is currently above the set benchmarks.
Toivo Ndjebela (TN): What is the mandate of the BoN?
Ipumbu Shiimi (IS): Our mandate is to support economic growth. We are there to act as fiscal advisor and banker to government. We provide banking services to government. We are also there to promote price stability, which in essence means making sure that the currency doesn’t lose value fast. This helps control inflation. The other task we have is to manage our foreign reserves. We are also tasked to ensure a sound financial system, which essentially means supervising the country’s banking sector to make sure that your deposits are safe.
TN: What does providing banking services to government mean?
IS: It means we provide government banking services. We are a bank to government and they have an account here, which we administer. When they are paying salaries or goods and services, such payments are done here.
TN: You were appointed fifth governor of the BoN in 2010. What notable successes have so far been achieved under your stewardship?
IS: What’s important is whether we, as an institution, are carrying our mandate effectively. That’s not for me to say.
So I would rather have the public answer that, instead of me.
TN: Government debt is 40 percent of GDP – above the budgeted 36,7 percent in the 2015/16 fiscal year. What is the role of the bank, if any, in helping to arrest escalating government debt?
IS: We share the same vision as the government, but our respective mandates differ. We only help government to administer the acquiring of debts, but the responsibility of what is the right level of that debt lies with government.
Government has set itself a debt target of 35 percent of GDP, which from our standpoint is a prudent benchmark.
Many countries are above that benchmark. Government has exceeded that benchmark and has reduced expenditure in order to stay within that benchmark and that’s something that we support. Forty percent is not excessive.
TN: How did we get ourselves in this situation?
IS: The world changed significantly since 2007 when a major financial crisis hit the US, which almost collapsed the world economy. In the US unemployment doubled. It was a result of people who borrowed money which they couldn’t pay back. As a result, the entire banking system collapsed. When that happens, it means the economy no longer has a system that provides credit for business to invest. The US being the biggest economy in the world, the whole thing affected the entire world.
This meant the demand for Chinese goods and services dried up and China, which is a leading buyer of our minerals, could no longer produce at the same level, because there is no demand for its products. So China couldn’t buy our products anymore. As such, some of our mines went on care and maintenance – Otjihase mine is still on care and maintenance.
It also meant countries like South Africa were no longer importing at the same level, and this affected our SACU income. We lost between N$5 billion and N$6 billion in income from the customs union. To make matters worse, oil prices also collapsed. This robbed Namibia of Angolan customers, who were no longer coming to buy in Namibia, which led to reduced VAT (value-added tax) for government.
Taxes from retailers were also no longer coming in at the same level. The whole thing had a knock-on effect on government revenue. So the gap between revenue and expenditure was widening, so government had to do the right thing, which is to consolidate (reduce) expenditure. It’s the only prudent way of doing it.
TN: So how did we reach these enormous debts levels under the watchful eye of the BoN, which you said is responsible for advising government?
IS: First of all, our job is to advise. We are not responsible for implementation of that advice. Secondly, our debts are manageable. In fact, our government debt is one of the lowest in the world. A benchmark of 35 percent that we set for ourselves is – in my view – very low. What has been of concern is that our debt was very low, but government expenditure started going up from 2010.
Our debt level at the time was 15 percent, which was really low for a country that doesn’t have adequate infrastructure. But the speed at which we increased that is what most people, including us here at the bank, were concerned about. Our debt level is still low, but if we do not arrest the speed at which our debt accumulation is going, things will get out of hand. This is what we have been saying to government and I believe we are on the same page.
TN: People often want to apportion blame for this debt level on either President Hage Geingob or his predecessor, President Pohamba. Was it the fault of either of them?
IS: I don’t think it’s fair to apportion blame on anybody. In my view, nobody was irresponsible in this regard. We are where we are today, because of the global economic crisis – and Namibia is comparatively in a better position still.
This dates back to 2007, but the impact on Namibia wasn’t felt immediately. The impact on China was slow and the same happened to Namibia. It’s an issue that’s been building up over time, so to apportion it on an individual won’t be a fair assessment.
TN: Must we be scared? How do we get out of this?
IS: Everything has an end. We are still on solid ground. We just need to cut expenditure and live within our means.
Let’s not spend money that we don’t have. Also very important is that we have to spend our money on things that are going to improve the productive capacity of this economy, such as education and infrastructure, so that we become more competitive. We need to streamline processes, so that the cost of doing business in Namibia is reduced.
TN: There’s massive debate surrounding the widely publicised N$3.5 billion saga uncovered recently by the police. Some people say stashes of cash were found, but that version changed later, as per the BoN statement, to say it relates to under-declared taxes and illicit flows of money…
IS: The highest denomination in terms of Namibian notes in N$200. For you to have N$3.5 billion in a container is simply not possible. One box can only take N$2 million. So the truth is that there was no cash found. What has been found – or alleged, because the matter is now in court – is fraud involving N$3.5 billion. The potential outflow because of this fraud is estimated at N$3.5 billion.
Our involvement was because currency matters are within our mandate. The bank hosts the Financial Intelligence
Centre. But we involved ourselves after it was alleged that this money was counterfeits manufactured in China.
Counterfeits are something that we take serious, so we worked with the police and it was found that this is not true.
TN: Tell us about the currency exchange agreement between BoN and Banco Nacional de Angola. What was the principle of it?
IS: The goal was ‘how do we lock in the Angolan customers to continue supporting economic activities in Namibia, and particularly at Oshikango and other border points?’ Our research team conducted a study to try and identify the obstacles to further improve the business in Oshikango. They came back saying that they are a bit worried about the low-income customers who come there to buy things like bread.
If they come and buy bread there, first they of all they earn their income in Kwanza, so before they come to Namibia they have to go to a bank in Angola and exchange Kwanzas into US dollars – because they can only come and buy in Namibia with US dollars. They are charged a commission (at Angolan banks). When they arrive in Namibia they don’t go straight to a shop, but to an authorised currency exchange dealer to exchange US dollars into Namibian dollars for them to be able to buy in Namibia.
For this (Namibian exchange transaction) they again have to pay commission. These are low-income people, who were paying commission twice. So, we felt if we remove these obstacles then we’ll attract more low-value customers into Namibia. We then started talking to the Bank of Angola to say: ‘Can we remove these obstacles by agreeing between ourselves that these customers can come with Kwanzas and go to authorised (currency exchange) dealers in Namibia, and then pay the commission once, not twice?’
Then we will receive the Kwanzas from the commercials banks and we will repatriate the money back to Angola and they will pay us once we have reconciled our books. They were to pay us in US dollars, because we have no use for the Kwanzas. So, the goal was to enhance business in Oshikango.
Now, the timing of the implementation was not good, because that’s when the price of oil collapsed. When we were negotiating this deal, a barrel of oil cost US$100, but by the time of implementation the price fell to US$28 a barrel.
This was a significant loss of income for Angola, because about 95 percent of their foreign exchange comes from oil.
They lost about 70 percent of their income in US dollars.
When we implemented this decision on 18 June 2015, the problem (oil price collapse) was at its peak. Many people then realised they can actually convert their Kwanza to Namibian dollar and flocked to Oshikango, including Namibian businesspeople – who had stashes of Kwanzas at their businesses in Angola – yet this was not the original principle of the agreement.
While we thought the monthly exchange will be in the region of $20 million, within a few weeks that amount stood at about $200 million. We and the Angolans decided to put up some limits, which worked for a few days then people found ways around this. First, Angola had problems bringing in US dollars, so it was unthinkable that they would pay $200 million in one month. We had to change the way the agreement was structured.
After having realised that things are not working, we decided to change the method of operation. There were no longer debts accumulating against Angola. We then agreed on the repayment schedule, because this amount cannot be paid off in one month. By then the debt had escalated from $200 million to $426 million (about N$5 billion). so it was impossible to pay it at once. The initial agreement was to pay $20 million a quarter, and they have been honouring that.
TN: How much does Angola owe Namibia today as a result of that agreement and are they honouring their obligations in repaying the money?
IS: So far they have paid $120 million (1,6 NAD billion). They now owe us $306 million. In December 2016 we renegotiated the repayment period, by shortening it. We are very transparent. If I had informed the minister of finance and government properly I would have given you details, but we will engage the media after this. I can confirm that the repayment schedule has been shortened and therefore the money they are going to pay during these intervals has increased tremendously.
I must make clear that there was no time that the Angolans indicated that they were not going to pay back this money. They have always shown strong commitment towards this by paying according to existing timelines.
TN: What are Namibia’s economic growth prospects for the year ahead and what influences it?
IS: Recovery from the 2007 global economic crisis has been very weak and Namibia has been affected by this. Unless recovery strengthens, it would remain difficult. The year 2016 was very difficult for Namibia and this is expected to continue in 2017.
So, growth prospects are projected to be between three and four percent on the basis of the mining sector. We hope Husab will start actual production of uranium. This will make a significant impact on the economy. Diamonds are also expected to do better this year. The rain would also have a major impact on the country’s economy.