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Deloitte commentary on Namibian Mid-Term Budget Review 2020/21

Together thriving again

“Amidst the prevalence of the Covid-19 pandemic at home, in the region
and across the lands and oceans, this Mid-Year Budget Review is tabled at the
time when coordinated actions to contain the pandemic have yielded results,
albeit at a heavy toll on the economy”

 

                         
Minister of Finance Mr Iipumbu Shiimi, 20 October 2020

Finance Minister Iipumbu Shiimi delivered his mid-term budget review on, 20 October 2020, against the backdrop of the COVID19 pandemic and at a critical juncture for the Namibian economy.

The Namibian economy has been impacted by recessionary pressures endured over the past four years with the pandemic worsening the situation and a huge impact on businesses, jobs, per capita income and public revenue.

The mid-term review offers a reallocation of resources rather than creating an additional budget for the year. It also aims at strengthening resources for the mitigation of the socio-economic impact of COVID-19 and sets out the fiscal consolidation policy for the coming months.
 

The review was based on the following key policy priorities:

  • Implementation of a comprehensive Economic Growth and Recovery Plan. The plan will form an integral part of the Harambee Prosperity Plan II;
  • Implementation of growth-friendly fiscal consolidation programs. These programs will be supported by a combination of reforms on expenditure, mobilisation of non-tax domestic resources and structural policy reforms;
  • Continued provision of essential services and improvement of administrative efficiencies;
  • Tax administration reforms and alternative forms of financing; and
  • Acceleration of the implementation of macro-critical structural policy reforms. 

We discussed these in more detail below.

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Economic snapshot

Since the tabling of the 2020/2021 budget, the global, regional and domestic economic outlook has deteriorated significantly. The global economy is now projected to contract by 4.4% in 2020 compared to the estimated contraction 3% at the time of the presentation of the annual budget (May 2020) with a projected recovery of 5.2% in 2021 (in May 2020 that prediction was 5.8%). Emerging Markets and Developing Economies are estimated to contract by 3.3% and, among the major economies, only China, is estimated to escape with a positive growth of about 1.9%.

The Sub-Saharan African economy is estimated to contract by 3% in 2020 (in May 2020 that prediction was 1.6%) and to rebound to a positive growth of 3.1% in 2021 (in May 2020 the prediction was 4.1%).

The South African economy is estimated to contract by 8% in 2020 (in May 2020 the prediction was 5.8%) and grow by about 3% in 2021.

The Namibian economy is now estimated to contract by 7.9% in 2020 up from a 6.6% estimated in May 2020. Due to supply and external demand disruptions, a decline is estimated in all major industries. The declines were, unsurprisingly, reflected in the tourism, transport, manufacturing, wholesale and retail trade and mining sectors and were mainly attributed to COVID-19 pandemic-induced effects. Livestock marketing activities also declined as a result of producers restocking after the drought.

In the primary industries the decline is estimated to be 11.1%, the decline in the secondary industries is estimated at 11.7% and by 5.8% in the tertiary industries.

Revenue is estimated at N$4.9 billion and the resultant budget deficit is now estimated at 10.1% of GDP. Public debt is estimated at 68.8% of GDP for the current financial year.

 

Budget snapshot

The preliminary revenue outturn for the half-year is estimated to be N$26.1 billion (51% of budgeted revenue) and about 3% better than average historical half-year collection rate. This is surprising especially in the light of the current circumstances.

The half year total expenditure execution amounted to N$35.8 billion (about 49% of the budget). The half-year non-interest operational budget expenditure execution is around 50.9% with the development budget implementation rate around 50.8%.

Total debt stock at the half-year mark stood at N$106.1 billion and was 60.9% of GDP.

The Repo rate was cut by a cumulative 275 basis points since March 2020 and Namibia’s inflation declined to 2.1% and 2.4% in July and August 2020 respectively.
 

Feedback on COVID-19 stimulus packages

The Minister of Finance provided feedback on the N$8.1 billion stimulus package that was announced earlier in 2020, to combat the impact of COVID-19. The stimulus package included repayment of VAT refunds, individual income grants, wage subsidies and tax-backed loan schemes. It also included an additional N$ 600 million for the provision of sanitation and hygiene facilities at public schools countrywide.

The Minister of Finance confirmed that by the end of July 2020, N$ 3.8 billion of undisputed VAT refunds and services provider invoices have been paid out.

Over 30 000 more individuals than estimated benefited from the Emergency Income Grant with 769 130 individuals receiving the grant of N$ 750.

In collaboration with the Social Security Commission 15 656 employees and 4 006 employers benefitted from the Wage Subsidy program so far. The Social Security Commission continues with the program and committed to accelerate the disbursement of payments.

A total of N$ 1.4 billion allocation was made comprising of N$ 727 million to Health, N$ 600 million to the Education Sector and N$ 80 million to the Water Sector. Of these allocations, the Health Sector used 89.6% to procure personal protective equipment, testing and contact tracing, pharmaceuticals, isolation facilities and health personnel. The Education Sector used 38.2% of its allocation with an expectation of an accelerated use during the remainder of the fiscal year. The full allocation was used by the Water Sector.

Feedback on COVID-19 stimulus packages

The Minister of Finance provided feedback on the N$8.1 billion stimulus package that was announced earlier in 2020, to combat the impact of COVID-19. The stimulus package included repayment of VAT refunds, individual income grants, wage subsidies and tax-backed loan schemes. It also included an additional N$ 600 million for the provision of sanitation and hygiene facilities at public schools countrywide.

The Minister of Finance confirmed that by the end of July 2020, N$ 3.8 billion of undisputed VAT refunds and services provider invoices have been paid out.

Over 30 000 more individuals than estimated benefited from the Emergency Income Grant with 769 130 individuals receiving the grant of N$ 750.

In collaboration with the Social Security Commission 15 656 employees and 4 006 employers benefitted from the Wage Subsidy program so far. The Social Security Commission continues with the program and committed to accelerate the disbursement of payments.

A total of N$ 1.4 billion allocation was made comprising of N$ 727 million to Health, N$ 600 million to the Education Sector and N$ 80 million to the Water Sector. Of these allocations, the Health Sector used 89.6% to procure personal protective equipment, testing and contact tracing, pharmaceuticals, isolation facilities and health personnel. The Education Sector used 38.2% of its allocation with an expectation of an accelerated use during the remainder of the fiscal year. The full allocation was used by the Water Sector.

N$ 2.4 billion was allocated as other liquidity support i.e. Government guaranteed loans. It would seem if these schemes are now kicking off.
N$ 2.4 billion was allocated as other liquidity support i.e. Government guaranteed loans. It would seem if these schemes are now kicking off.
 

Priorities for 2020/2021

The Minister noted that targeted measures, private sector investment commitments and structural policy reforms are critical to improve both the quality and pace of economic growth going forward. As such he elaborated on the five key priority areas mentioned earlier.

Priority 1 - Comprehensive Economic Growth and Recovery Plan

Under this priority the following is intended –

The finalization and implementation of the Harambee Property Plan II and the leveraging of private capital through public private partnerships. The Minister also mentioned improving of the national investment climate and this acknowledgement is certainly welcomed.

Infrastructure investment will be supported through the improvement of the public procurement process and improving the turnaround time for public tender adjudication.

The AfD-funded projects (N$ 4 billion) will be implemented for agricultural mechanization, logistics infrastructure and school renovation programme and the completion of the on-going large capital projects in the road sector.

Support will also be provided for investment in energy generation and transmission capacity by Nampower and for upscaling of investment in the water sector.
A further N$ 500 million funding for SME’s will be rolled out to support the SME sector and youth entrepreneurship.


Priority 2 - Growth-friendly fiscal consolidation programs

There is an urgent need to institute timely and effective reforms to strengthen macroeconomic stability and fiscal sustainability and the following measures will assist to achieve a post COVID-19 growth-friendly fiscal consolidation:

  • Reducing the growth in public debt through expenditure containment and concerted reduction in the budget deficit;
  • Unwinding the once-off discretionary spending on COVID-19 impacts;
  • Reviewing the public sector wage bill and assessing the options for early voluntary retirement for individuals aged 55-60 years;
  • Continuing with vacancy freeze procedures;
  • Assessing the restructuring of the Public Service Medical Aid Scheme for alternative modes of benefits delivery, and 
  • Finalising and implementing the State Asset Ownership Policy and Public Enterprises reforms. These policy reforms will enable State divestiture options and the listing of portions of State assets, starting with the listing of shares by the Mobile Telecommunication Company next year.

Priority 3 - Essential services and administrative efficiencies

Under this priority, the Minister is looking at increased funding and partnerships to provide for land serving, provision of affordable housing and improved sanitation and other basic utilities.

The Minister has also referred to the establishment of a Central Registry System to improve administrative efficiency in social service delivery.

Priority 4 - Tax administration reforms and alternative forms of financing

For this priority the Minister is looking at the launch of the Namibia Revenue Agency (NamRA) in 2021 and enhancing tax compliance, protecting the tax base from base erosion and leveraging international tax cooperation to boost national tax administration capacity.

Namibia signed the inclusive framework agreement in 2019 and we believe a next step would be that some of the base erosion and profit shifting actions be implemented.

A further Electronic Filing Tax Relief Programme has been announced with effect from February 2021. We provide more details later.

A very welcomed announcement made by the Minister is the re-engineering of the VAT refunds audit process to reduce the turnaround time for the payment of undisputed VAT refunds. The aim is to make payment of VAT refunds not more than 90 days after receiving the VAT claim. Although the re-engineering of the VAT refund verification audit process is welcomed, we need to note that the VAT Act already refers to a specific timeframe within which refunds need to be made. It would therefore be interesting to see how the provision is amendment given the announcement made earlier today.

Lastly, domestic investment opportunities will be brought to the market through public divestitures and private public partnerships.


Priority 5 - Maco-critical structural policy reforms

The Minister noted the following macro-structural policy reforms that can no longer be delayed – 

  • Finalisation and promulgation of amendments to the Namibia Investment Promotion Act;
  • Finalization of the Special Economic Zone Policy. This policy is required to replace the current manufacturing and Export Processing Zone incentives. We hope to see timeous consultation with relevant stakeholders before this policy is finalised; and
  • Improve the ease of doing business and national competitiveness. Here the Minister specifically mentioned the re-engineering of the National Single Window Facility and the Integrated Client Facility.
     

Tax Incentive Programme

The Ministry of Finance has extended the Integrated Tax Administration System (“ITAS”) incentive programme to 31 March 2021. The programme would have ended on 30 September 2020 and entails the remittance of all penalties, if a taxpayer submits all outstanding tax returns on ITAS. This announcement of the extended deadline was made in September already.

During the mid-term budget review, the Minister announced a further relief programme that will commence in February 2021 and will end in February 2022. We assume the programme will start on 1 February 2021, but we will provide an update once more details are made available by the Ministry.

Only taxpayers that file their returns on-line will qualify for the programme. The relief provided in terms of the new programme differs based on how quickly the tax debt is settled as follows:

Payment within three months

If capital tax debt is settled within three months from commencement of the programme, i.e. by April 2021, 100% of outstanding penalties and 95% of outstanding interest will be written off.

Payment within twelve months

If capital tax debt is settled within twelve months from commencement of the programme, i.e. by February 2022, 100% of outstanding penalties and 75% of outstanding interest will be written off.

Tourism, hospitality, aviation, travel and construction sectors

For the tourism, hospitality, aviation, travel and construction sectors all penalties will be written off and 95% of interest will be suspended. The Minister did not provide any further details on this category and we therefore do not know if taxpayers in this category have to settle outstanding capital tax debt to qualify for the programme. It is also not clear what is meant by the suspension of the interest balance and whether the interest needs to be settled at some point. We will provide feedback as information becomes available.

Tax announcements

In the presentation of the main budget in May 2020, the Minister noted that this is not a time to introduce new taxes. Therefore no changes were announced at the time to individual income tax rates, corporate tax rates, indirect taxes and any other taxes. With the mid-term review, the Minister has not mentioned the proposals that were made in previous years and did not announce any further proposals for tax changes either.

Contact

For more information on the topic covered in this newsletter please do not hesitate to contact:

Gerda Brand: gbrand@deloitte.co.za

Indileni Nambala: inambala@deloitte.co.za

Never Muleya: nmuleya@deloitte.co.za

Aron Haifene: ahaifene@deloitte.co.za

Marikka Nekwaya: mnekwaya@deloitte.co.za

Olivia Nghaamwa: onghaamwa@deloitte.co.za

Katja Büttner: kbuttner@deloitte.co.za

Shoopala Angombe: sangombe@deloitte.co.za
 

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