2021/06 Coronavirus and the World Economy

Coronavirus and the World Economy

The coronavirus has arrived in the most remote place of the World and 213 countries and territories are affected. Namibia has currently 42 203 cases and 492 deaths. South Africa have currently 1 536 801 cases. The latest cases and deaths are the following:

Table 1: Coronavirus cases – 03 January to 21 March 2021

Region/Country	Cases03 Jan	Cases2 Feb	Cases16 Feb	Cases01 Mar	Cases21 Mar
China	87 117	88 594	89 788	89 912	90 099
Europe	19 867 286	25 123 464	26 570 303	28 066 750	31 112 327
Africa	2 777 596	3 571 207	3 664 643	3 747 852	4 035 460
North America	21 505 518	27 709 333	29 144 627	30 119 373	31 412 643
Rest of the World	40 864 891	47 626 517	50 206 999	52 742 253	56 799 511
Total	85 102 408	104 120 115	109 676 360	114 766 140	123 450 040

Source: worldometers.info

There is an increasing trend in the number of cases since the 12^th of February. The US remains on top of the list with reported 30.48 million cases and 554 871 deaths. Only 3.2% of the reported cases and 4.0% of the deaths are on the African continent. The number of newly reported deaths shows an increasing trend since 27 February, with a lag of three weeks after the increase in cases.  

Table 2: Coronavirus deaths – 03 January to 21 March 2021

Region/Country	Deaths03 Jan	Deaths02 Feb	Deaths16 Feb	Deaths01 Mar	Deaths21 Mar
China	4 634	4 636	4 636	4 636	4 636
Europe	472 906	612 444	658 961	699 603	744 263
Africa	66 481	91 909	98 613	101 873	110 097
North America[1]	374 458	474 898	519 514	547 774	577 514
Rest of the World	927 281	1 070 080	1 136 644	1 190 751	1 285 792
Total	1 845 760	2 253 967	2 418 768	2 544 637	2 722 302

Source: worldometers.info

^[1] North America is Canada and the US

The African continent reported 4 035 460 cases and 110 097 deaths. There are only 1 941 044 cases reported in the SADC region and 60 174 deaths. South Africa is dominating SADC with 79.2% of the cases and 86.6% of the number of deaths. South Africa also dominates the African continent with 38.1% of the cases and 47.3% of the deaths. Many African countries are underreporting and some countries are not reporting any new cases and deaths, like Tanzania since May last year.

 Table 3: Coronavirus cases and deaths in the SADC region – 03 January- 21 March 2021

SADC country	Cases03 Jan	Cases01 Mar	Cases21 Mar	Deaths03 Jan	Deaths01 Mar	Deaths21 March
South Africa	1 088 889	1 513 393	1 536 801	29 175	49 993	52 082
Zambia	21 582	79 002	86 273	394	1 098	1 178
Mozambique	18 968	59 350	66 064	168	641	743
Namibia	25 116	38 845	42 203	215	424	492
Zimbabwe	14 491	36 089	36 662	377	1 463	1 510
Botswana	14 805	28 371	35 493	42	310	458
Malawi	6 712	31 945	33 216	192	1 044	1 093
DRC	17 998	25 913	27 468	595	707	726
Madagascar	17 767	19 831	22 275	262	297	345
Angola	17 608	20 807	21 696	407	508	526
Eswatini	9 711	17 014	17 283	227	652	665
Lesotho	3 206	10 491	10 535	65	292	309
Seychelles	297	2 618	3 770	–	11	16
Mauritius	527	610	796	10	10	10
Tanzania	509	509	509	21	21	21
Total	1 258 187	1 884 788	1 941 044	32 150	57 471	60 174

Source: Worldometers.info

Czechia replaced Belgium on top of the list with the number of deaths per population and Andorra has the most cases. 

Table 4: Worst affected countries according to deaths and cases

Country	Deaths/1M pop.	Total cases/1M pop.
Czechia	2 288
Belgium	1 948
Slovenia	1 908
Hungary	1 874
UK	1 851
Italy	1 733
Andorra	1 461	148 422
Montenegro		138 161
Czechia		136 097
Slovenia		98 843
Luxembourg		93 502
USA		91 705
Germany	895	31 662
South Africa	870	25 680
Namibia	191	16 398

Source: Compiled from Worldometers data

The trend in the Namibian reported number of cases of Covid-19 experienced an increasing trend from the beginning of February with a sideways movement since 20 February. This is visible from the 3 day moving average (graph below). 

Graph 1: The Namibian Covid-19 cases

With an estimated world population of 7.8 billion in 2020, the total number of 123.5 million cases is 1.58% of the world population and the number of deaths is 0.035%. 

The World economy is improving and the Baltic Dry Index (The Baltic Dry Index provides a benchmark for the price of moving major raw materials by sea) surged 16% in the third week of March and it was the strongest gain since September 2020. The world economy is improving.  

Table 5: % change in USD- selected international commodity prices

Commodity	Monthly	Yearly
Winners for Namibia
Copper	-0.50%	16.90%
Lead	2.86%	4.15%
Zinc	-1.51%	3.45%
Losers for Namibia
Energy: Brent oil	-1.24%	24.38%
Uranium	3.28%	-2.61%
Gold	-3.52%	-7.98%
Lead	-9.59%	-2.27%

 Source: Trading economics. 21 March 2021 

The commodity prices relevant to Namibia declined in the last three weeks, accept the price of lead. Oil prices decreased in the past month by -1.24%. The exchange rate has strengthened and the N$ is currently trading 14.75 to the US Dollar and 17.57 to the Euro. 

The 2021/22 Budget

The theme of the budget is “Boosting Resilience and Recovery”, an appropriate topic or theme within the Covid-19 experience. The Minister want to transform the economy by strengthening public finances, reduce inequalities, create jobs and eliminate extreme poverty. The four policy themes are mentioned for the last six years in each budget speech, demonstrating a certain resilience of repetition of policy themes or – from a different perspective – a resilience of policy failures. Total projected revenue for 2021/22 is N$ 52.07 billion and total projected expenditure N$ 67.95 billion with a total budget deficit of N$ 15.9 billion. 

Table 6: Budget analysis:

Item	Actual2019/20	Estimate2020/21	Projected2021/22
GDP estimate in million at market prices	178 940	174 979	184 778
Tax revenue	54 705	52 239	48 512
Other	3 720	3 218	3 553
Total revenue	58 425	55 457	52 065
Total expenditure	-67 343	-72 105	-67 950
Total budget deficit	-8 918	-16 648	-15 885
As % of GDP	-5.0%	-9.5%	-8.6%
Public debt	100 399	109 476	130 060
As % of GDP	56.1%	62.6%	70.4%

   Source: MoF

It is projected that total expenditure declines by 5.8% and total revenue also declines by 6.1%, more than expenditure. The estimated budget deficit is N$ 15.9 billion or 8.6% of GDP. The Minister announced also certain tax changes:

• A reduction in the non-mining corporate tax rate, more detail will be announced in October 2021.
• The sale of sanitary pads will become zero rated.
• 15% VAT on fees of asset managers registered under the Stock Exchange Control Act.
• 10% withholding tax on dividends paid to Namibians whilst ensuring that dividends are not paid more than once.
• Increase the deductibility on pension, retirement and educational policy contributions from N$ 40 000 to N$ 150 000.
• Strengthening of the administration of freight tax provisions as prescribed.
• Improve the tax administration on withholding tax on services.
• Review the withholding tax on interest from unit trust funds.
• The increase in excise duties increased sin taxes

Tax changes that were not addressed in the budget are the long awaited changes in the personal income tax brackets, the last time they were changed was in 2013 to an N$ 50 000 threshold and in the meantime inflation over the years has put pressures on low income groups. The accumulated inflation since 2013 was 40.5% and thus a threshold of N$ 70 000 or higher would be more appropriate.

In 2014 it was mentioned by the Minister of Finance that a different tax regime for small business (SME’s) will be investigated, but no announcement was made yet. Many countries introduced successfully lower tax rates for small business to boost entrepreneurship, business growth, innovation and employment. The importance of an appropriate SME policy should not be overlooked given the high unemployment rate in Namibia. Benchmarking Namibia against some progressive countries will demonstrate the current weaknesses of our policies regarding job creation.   

Allianz Research and Euler Hermes^[2] did international research on the business climate for SME’s and they found that the main obstacles/challenges for SME growth are administrative and regulatory burdens, access to finance, shortage of skilled staff, rising costs (labour costs, regulations, taxes) and competition. They took six components (tax policy, financing, export opportunities, red tape (ease of doing business), labour market flexibility and competition. The research benchmarked 13 countries according to the six components and concluded that the world’s best business climate for SME’s is in Canada; followed by Hong Kong, United States, Netherlands and Singapore.

Table 7: Benchmarking Namibia’s business climate for SME’s

	Canada	HongKong	US	Netherland	Singapore	Average	Namibia
Tax policy SME	9%	8.25%	19.8%	20%	17%	14.8%	32%
Tax rate corporate	23%	16.5%	21.0%	25%	17%	20.5%	32%
Red Tape[3]	78.2	89.1	76.7	77.0	89.4	82.1	60.9
Doing Business[4]	23	3	6	42	2	15.2	104
Labour Flexibility[5]	68.2	67.0	73.7	69.7	79.8	71.7	59.0
Competitiveness[6]	14	3	2	4	1	4.8	94
Unemployment[7]	5.6	3.3	3.5	4.1	2.3	3.8	34

In benchmarking the business climate for SME’s in Namibia, one can deduct where the problems or obstacles lie. The countries had on average an unemployment rate of 3.8% compared with the unemployment rate of Namibia at 34%, before the Covid-19 economic meltdown. Namibia is not competitive, lacks labour mobility, has not enough economic freedom, red tape and ease of business is a burden and the tax policy is not attractive. Namibia’s economic policies are not business friendly and thus an obstacle for SME’s and Start-Ups – the business climate has to improve if we want to create jobs.

Comparing Namibia’s tax policy regarding our neighbouring countries provides us with an indication of our competitiveness regarding tax policy and especially corporate tax which impacts on the cost of doing business. 

Table 2 below demonstrates that Namibia’s corporate tax rate is not competitive and above the African average and the Global average. The average corporate tax for SME’s in the top 5 countries regarding SME business climate is 14.8% whilst in Namibia it is 32%.A remarkable difference of 17.2%. 

 Table 8: Corporate tax rates – Namibia is not an attractive investment destination

Country or region	Corporate tax
Zambia	35%
Namibia	32%
Angola	30%
Africa average	28.45%
South Africa	28%
Zimbabwe	25%
Global average	24.18%
Botswana	22%
Botswana (Manufacturing)	15%
Top 5 countries on SME Business Climate	14.8%

 Source: Trading Economics

To restart the Namibian economy and at the same time improve the SME business climate, Namibia should consider reducing its corporate tax rate to 28% and introduce a different tax rate for small and medium enterprises at 18%.

Funding the deficit

The Minister did not provide any detail of how the budget deficit of N$ 15.9 billion will be financed; he only indicated that approximately 70% of the funding will come from the domestic market. In July last year Namibia applied for an N$ 4.13 million from the IMF under the RFI (Rapid Financing Instrument) and the African Development Bank offered N$ 5.0 billion under GERSP (Governance and Economic Support Programme). The economic appraisal reports were submitted to the respective boards last months and the Ministry of Finance is expecting an answer soon. Treasury was also silent on the redemption of the USD 500 million Eurobond at the end of October this year. 

Can Namibia avoid a debt trap?

At the turn of the 21^st Century the World Bank and IMF decided (HIPIC Programme) under the Development Committee that billions of debt be written off for countries in Sub-Saharan Africa. This created fiscal space for many countries and economic growth resumed. In the last years the debt to GDP ratio of SADC countries is on the rise again and some countries have to reschedule their debt payments again or are in default. This calls for a reflection of public debt in development and the question arises when a country is facing a debt trap, meaning that higher debt has a negative correlation to economic growth and eventually default like Zimbabwe, Greece or Argentina. 

Reinhart and Rogoff^[8] argued in a paper titled “Growth in a Time of Debt” that high debt creates investor uncertainty, deter investment and innovation and have a negative impact on economic growth. Various empirical studies in OECD countries^[9] conclude that the debt threshold is close to 85-90% of GDP. This means that debt beyond the 90% level becomes harmful for economic growth and a country is caught in a debt trap. Developing countries have a lower threshold; depending on the bond yield in the respective countries and debt beyond 60-70% of GDP is normally already an indication of a debt trap in making. Comparing the debt/GDP ratio of some selected SADC countries gives an indication of how fiscally vulnerable the region has become:

Table 9: SADC countries Debt/GDP ratio

Country	Date	Debt/GDP ratio
Angola	Dec/19	111%
Mozambique	Dec/19	109%
Zambia	Dec/19	92%
South Africa	Dec/20	81%
Zimbabwe	Dec/19	77%
Namibia	Dec/20	70%
Mauritius	Dec/19	65%
Malawi	Dec/19	62%
Lesotho	Dec/19	52%
Botswana	Dec/19	23%

Source: Trading Economics

The debt to GDP ratio of Namibia is about 70%, meaning that Namibia is caught in a debt trap already. Another indicator of a debt trap is statutory expenditure as percentage of total revenue. If statutory expenditure exceeds 10% of total revenue a country is in fiscal difficulty.

Graph 2: Statutory expenditure as percentage of total revenue

It is projected that statutory expenditure will be 16.5% of total revenue in 2021/22. The estimated statutory expenditure is N$ 8.5 billion, funds that could have been used to fund necessary capital projects – but unsustainable spending in the past is catching up with us. Past consistent fiscal imbalances (budget deficits) caused our current fiscal misery. The following graph depicts the budget deficits in the last years:

Graph 3: Budget deficits are too high and on average -6.2% of GDP in the last 12 years

The Maastricht criteria are that budget deficits should not be more than 3% of GDP and in Namibia it is more than double. Consistent high budget deficits lead to a rise in public debt as the next graph illustrates:

Graph 4: Rise in public debt since 2010

It is projected that public debt will reach N$ 130 billion in 2021/22 and in 2010 total public debt was N$ 13 billion, a ten times increase. Namibia is clearly on an unsustainable fiscal path and has to reduce the budget deficits even further. Fiscal consolidation and reducing the budget deficit should receive full political support. The focus should be on reducing public spending even further, reform SOE’s and improve investor confidence. Sustainable job creation should be on top of the agenda.

Compiled by: Rainer Ritter                   

21 March 2021