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Partnership and cooperation is vital to achieve economic growth

Partnership and cooperation is vital to achieve economic growth

AN effective partnership between the Government, local industry and Namibia’s development partners is absolutely vital for a more inclusive, self developed and sustainable economic growth trajectory for the Namibian national economy which has been under concerted recessionary pressure since the Second Quarter of 2016.

The Minister of Finance, Mr. Calle Schllettwein, said in an official statement that the half-year output data indicate recessionary pressures will continue for the remainder of the year and that a revised tax regime and strong dedicated partnerships will help to stem further decline of the economy where the private sector is supposed to serve as the catalyst for growth and job creation.

“Discussion and information sharing will go a long way to clarify the Draft Income Tax Amendment Bill, which proposes the enactment of new tax policy proposals, policy context and rationale. If unintended consequences are felt, it is necessary that we discuss the proposed bill further to identify mechanisms to mitigate the tangible and perceived impacts.”

The full statement by the Minister of Finance reads as follows:

Let me thank you for your kind response to our invitation. In two weeks’ time, I will table the Mid-Year Budget Review for 2018/19.
In the meantime, we have also shared the announced in the 2018/19 Budget in March this year.

As you may be aware, the anticipated Mid-Year Budget Review is for two main objectives: Reallocation of resources to their best alternative uses, based on the Mid-Year assessment of the budget implementation rate, and providing advance announcement of the medium-term policy proposals and spending priorities for the upcoming Budget and MTEF, thus allowing the public and the legislature opportunity to make input in advance of the preparation and tabling of the main budget.

In anticipation of the tabling of the Budget Review, I called for this consultative discussion to receive your input and practical proposals on initiatives to better support economic activity and addressing constraints affecting private sector-led growth and investment.

We should also discuss the main concerns being raised by the private sector on the Draft Income Tax Amendment Bill.

I should stress that this tradition of consultation remains embedded in our conduct of doing business. It is a broad-based consultation, based on trust and good faith. But there are those of us who opt, for whatever purposes, to disengage and revert to an “us and them” mode. This distracts from the spirit of partnerships.

Thus, to initiate this discourse, I would like us to concentrate on three main aspects, namely: The state of the economy and effective proposals on how best the Government and the private sector could work in partnership to better support economic activity and job creation, the fiscal policy position and medium-term fiscal policy framework, and the tax policy proposals which have been shared for consultation and the rationale behind the proposals, State of the Economy and Medium-term Prospects.

Considering the past, present and the outlook of our economy, we need to discuss and commit to an effective partnership between the Government, industry and the development partners for a more inclusive, home grown and sustainable economic growth trajectory, our economy has been under concerted recessionary pressure since the Second Quarter of 2016, the half-year output data indicate recessionary pressures which can be generalized for the remainder of the year, the defining principle of economic order is that we are a mixed economy, with the private sector supposed to serve as the equine of growth and job creation.

Looking at the structural challenges of our economy, the robust growth rates over the past years prior to 2016 have largely been driven by public investments and Government consumption of goods and services and the large foreign direct investment in the mining sector, as soon as the Government fiscal policy receded into the consolidative mode and mining sector foreign investments ran their course, economic activity plummeted and the needed fiscal consolidation is assessed to be the main cause of slackness as if fiscal expansion is forever, the private sector investment in the real and services sectors of the economy remains low and, in fact, declining, over the past two years. At the same time, the economy has witnessed perpetual outflow of investment and reinvestments elsewhere. the productive and processing capacity of the economy remain narrow and we still import the most basic consumables, continually eroding our balance of payments. In fact, our trade current account and international reserve balances are only getting better now inasmuch domestic demand conditions are weak.

The Government has rolled out a suite of generous manufacturing and export promotion incentives since early 1990s with the objective of shoring up industrial capacity and production of final goods for exports. In spite of such overly generous incentive regime, manufacturing as a share of GDP has been at best static or on the declining path, Specific considerations on economic performance.

A lot, therefore, needs to be done and effective partnerships are needed for us to achieve a sustainable development and different growth dynamics. I wish to invite for the private sector proposition on its active participation in the new growth resuscitation agenda.

Let me be more illustrative in respect to the above matters.

Composition and engines of growth: Government spending has provided the engine of growth over the past good number of years. This is contrary to our aspiration for a private sector-led growth agenda. In playing is regulatory and policy making role, the Government sets forth policy frameworks to provide a conduce environment for private sector investment through a consultative process. Recent examples are the NEEEF and Namibia Investment Promotion Act on which the private sector provided input and such input considered to avert what is termed unintended consequences. Even when such consideration is given, not much of the private sector investment comes by. When nothing material happens, the Government is often left to make public investment decisions. Then an argument is put forth that Government is crowding out the private sector. We need to address this state of affairs and the private sector proposition is needed.

As far as local productive capacity is concerned, we still largely trade in unfinished goods. These are the unfinished goods in the mining sector, on the back of foreign direct investment with little or no local participation, agricultural outputs, especially beef which go to markets in bulk or on hoof. We have brought to the fore a Procurement Act which enables local sourcing of goods and services. I concede that we need to have the regulations in place to facilitate utilization of this policy space. But there has to be a critical mass of locally produced goods and services meeting the necessary quality standards. This is the business space for the private sector whose potential is yet to be tapped.

Private sector investment: There is no contention that Government fiscal consolidation continues to weigh on growth. These are times when the private sector investments in the real and services sectors are needed to support domestic economic activity and use this opportunity to elevate its role in the economy. To the contrary, the evidence which obtains from the International Investment Position data suggests year-on-year and quarter-by-quarter direct investment flows continually flows out of the country. For the past year, overall outflow in direct investment indicate a total of N$8.4 billion or some N$2.3 billion quarterly. This, in itself, does not support the role of the private sector as the engine of growth. A concerted partnership is needed to bring about sustainable domestic development.

Productive, value-addition and manufacturing capacity: I have talked about the paucity of domestic productive capacity, alongside weak value-addition and manufacturing capacity. Irrespective of the wide production possibilities frontier across the broad range of goods and services, we remain a main destination for basic consumer goods and staple food. Foodstuffs, account for over 11 percent of the total import bill. This is about N$10 billion annually. If a substantial lot could be produced, processed and sourced locally, this would imply large local flows.

Manufacturing sector and export of domestically manufactured goods (and services): First of all, we aspire to be a knowledge-based, industrial nation by 2030. Twelve years before finishing the race, the share of manufacturing averages at 11.7 percent over the last 10 years, not much different from 11.1 percent since introduction of the manufacturing incentive regime in 1995. This is especially so because the growth in manufacturing over past years have largely been driven by mineral beneficiation activity. The overly generous incentive regime has an associated tax expenditure outlay of about N$305 million. This is to be seen against the tax capacity of the beneficiary sector for which the effective tax rate, once all exemptions, deductions and loss carry forwards are considered, amount to an effective rate of about 5 percent. There is thus every reason to conclude that the incentive regime is run at a net loss to the economy.

From a cost-benefit point of view, we have proposed graduating this net-loss regime into a Special Economic Zone and cease perpetuating net economic loses. If the policy intervention does not contribute to the net economic gains but only perpertual net losses, it does not make economic sense to continue with the same.

Fiscal Policy and Budgetary Framework

The fiscal policy framework is set out in the Government Fiscal Strategy and MTEF. The policy stance is to maintain a paced consolidation path with the objective of stabilizing growth in public debt.

We have managed to make some progress, but not costless. Public expenditure as a ratio of GDP has reduced from 42.8% in 2015/16 to 34.2 percent this year. The budget deficit is reduced from 8.2 percent to an estimated 4.5 percent over the same calendar.

Yes, high public debt is concerning and this is the object of fiscal consolidation. Equally, private sector indebtedness, is in the order of 80 percent is equally concerning, not least to mention household indebtedness.

But growth is faltering. To resuscitate growth amidst a challenging environment, we need a package of measures, most of which I announced in the budget.
We need expenditure-based measures, revenue-based measures, targeted but limited debt uptake and a range of structural reforms. We need to improve the quality of spending.

For this purpose, special designated facilities are being introduced. The SME Financing Facility under the new approved SME Financing Strategy, comprising the Venture Capital Fund, Credit Guarantee Scheme and Training and Mentorship is funded and it is being set up.
A Youth Skill-based lending facility is also being set up to serve youth entrepreneurs. Cabinet has approved for the establishment of a Provident Fund at DBN.

In order to fiscal policy and the budget to support the growth objectives, a targeted public investment stimulus through AfDB funding to the tune of N$2 billion is set out, in addition to the Development Budget outlay, to be supported by PPP arrangements and other bilateral funding arrangements.

Bidding and procurement processes are lengthy and repetitive such that were are yet to see the implementation of these interventions. In the same light, the overall development budget, for which a total allocation of N$7.3 billion is made, only about 23 percent was utilized by the end of September 2018.
No doubt, procuring entities and the Central Procurement Board and the Government in general have to find effective working arrangements for the sake of efficiency and for timely realization of the development impacts.

Through fiscal consolidation program, non-core expenditure has been reduced to the bare minimum. Public sector personnel hiring has also been reduced and, in most part, frozen.

Nonetheless, we have to contend with declining SACU revenues. This year, SACU receipts for Namibia have reduced by some N$2.2 billion or 11.3 percent from the previous year. Similar reduction is expected next year.

This situation calls for revenue raising measures, both on tax policy and tax administration side to partially raise replacement revenue, without which frontline services will be severely affected.

The Government has not initiated to raise tax rates as the main policy tool at the beginning of the fiscal consolidation programme. In the context of declining SACU revenue and rationalized expenditure, the contribution of everybody for us to pull through is necessary.

Tax Policy Proposals

Let me now clarify the policy rationale and communication to the business community and the public in this regard.
First, it is never the policy intention for the proposals to cause unintended consequences. When such is deemed to occur this should be brought forth through consultation and discussion.

Second, as a standard, the tax proposals are announced a year in advance. The formulated proposals under consideration were announced in the 2018/19 Budget in March this year and repeated at post-budget consultation. In fact some such proposals were announced in the 2017/18 Budget.
Policy behind the proposals

It is important that the policy behind the proposals is understood.

First is the principle of equity. The proposals seek to tax trusts at the same rate as non-mining company tax for equity purposes. Entities which earn the same levels of income shall be treated similarly.

Second, is the principle of progressivity. The whole tax system should be progressive, to avoid integration across company tax, trusts and individuals. The tax burden should be equally shared than the current state whereby individuals bear a disproportionately large share of burden than companies and trading trusts.

For Individual income tax, this principle is reinforced in the proposals for Individual Income Tax. The tax threshold is increased, recognizing that bracket creep has actually affected this group for quite some time now. Reinforcing progressivity is material policy for Namibia, noting that ours is the send highest unequal society in Sub-Saharan Africa.

During 2013/14, the high growth period, substantial tax cuts were effected across the board benefiting every individual taxpayer. With tightness in revenue streams arising from SACU revenue declines, it is expected that every taxpayer must contribute to the provision of frontline public services then for us to cut the supply of these basic services, especially in health and education sectors where pressures are already being felt.

Third are the principles of fairness and economic efficiency: This mostly relates to the current package of manufacturing incentives, which are just nice to have and neither attracted investments or increased the share of manufactured exports. Instead there is a net- loss in maintaining this incentive regime. Thus, irrespective of the economic sectors, economic agents earning the same income attract the same tax liability, with only a few exceptions such as the mining sector.

Protecting the tax base from erosion:
One of the new generation tax administration measures is the protection of revenue base erosion.
Numerous exemptions and extended loss carry forwards go beyond investment promotion to base erosion. The proposals to eliminate unnecessary exemptions and limit the duration of loss carry forwards are to achieve these objectives. Exemptions tend to create a moral hazard that they are forever, which is not.

In respect to the mineral royalties, the fundamental principle is that of rent capture. Royalties are a rent to the owner of the resource which are not part of the cost of extracting the resource.

Certain comments made in respect of the draft Income Tax Bill seem to be objecting to high income earners paying tax such as tax on dividend income and foreign income. Also, certain comments seem to be advocating for protecting the loopholes that currently allows certain big industry players to operate as trusts, thereby avoiding paying taxes.

Taxing income earned from foreign sources will expand the tax base through deepening the current hybrid system. Namibian residents will have to declare such income in their annual tax returns. This measure will not only generate additional revenue but will also enhance neutrality in the tax system by discouraging distortionary tax effect on investment decision.

Currently only interest on deposits is subject to a final withholding tax. Introducing tax on dividends provides for equal tax treatment of different types of investment.

Similarly, charitable organizations and churches own shopping complexes and engage in various other business activities, yet they are not paying taxes.
I trust that the discussion and information sharing will go a long way to clarify the policy context and rationale. If unintended consequences are felt, it is necessary that we discuss such, as well as the mechanisms to mitigate the impacts.

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