VZCZCXRO9415
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHWD #0201/01 1541333
ZNR UUUUU ZZH
P 031333Z JUN 09
FM AMEMBASSY WINDHOEK
TO RUEHC/SECSTATE WASHDC PRIORITY 0555
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY

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 
 
------------------ 
The Budget Process 
------------------ 
 
¶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. 
 
----------------- 
Economic Forecast 
----------------- 
 
¶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. 
 
------------------------------ 
Budget Balance and Debt Levels 
------------------------------ 
 
¶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 
============================================= == 
 
WINDHOEK 00000201  002 OF 004 
 
 
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% 
--------------------------------------------- -- 
 
 
Table 1B: Debt as a Percentage of GDP 
============================================= = 
Year         2007-  2008-  2009-  2010-  2011- 
             2008   2009   2010   2011   2012 
--------------------------------------------- - 
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. 
============================================= == 
 
---------------- 
Revenue Forecast 
---------------- 
 
¶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 
--------------------------------------------- ----- 
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% 
--------------------------------------------- ----- 
Note: All figures (except for percentages) are in 
billions of Namibian dollars. 
============================================= ===== 
 
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Tax Policy 
---------- 
 
¶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. 
 
------------ 
Expenditures 
------------ 
 
¶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 
 
WINDHOEK 00000201  003 OF 004 
 
 
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 
--------------------------------------------- ---- 
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% 
============================================= ==== 
 
------------------ 
Education Spending 
------------------ 
 
¶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. 
 
--------------------- 
Defense Spending 
--------------------- 
 
¶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 
--------------------------------------------- ----- 
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 
--------------------------------------------- ----- 
Total              2,598,412  2,933,749  3,039,979 
============================================= ===== 
 
-------------------------- 
Health and Social Services 
-------------------------- 
 
¶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. 
 
------------------- 
Works and Transport 
------------------- 
 
¶13. (SBU)  The Department of Transport under the Ministry of 
 
WINDHOEK 00000201  004 OF 004 
 
 
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. 
 
--------------------------------------- 
Measuring Performance Remains a Problem 
--------------------------------------- 
 
¶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 
------- 
 
¶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