THE COST OF DEBT

In the 2014/15 fiscal year Namibian government debt amounted to roughly 24% of GDP, by the fiscal year 2020/21 it was over 60%. The higher the debt, the larger the debt servicing costs become. With GDP still well below 2019 levels and government tax revenues lagging, the burden of these payments on the national budget will only increase. In the coming year Namibia will spend approximately 16% of its annual revenue on debt servicing. The portion of the budget available for public services, from education to healthcare and infrastructure development, will shrink accordingly. Namibia’s public debt is growing, and its effects will be pervasive.

The cost of the public debt is a function of its total amount, the rate of GDP growth and the interest rates on the debt. Debt servicing will always detract from more useful forms of expenditure and, given a constant interest rate, larger sums of debt require larger repayments. If GDP grows faster than the interest rates due on government debt, then the increase in government revenue will over time exceed debt repayments and the cost of debt will be less significant. The country will grow out of debt. High levels of public debt are almost always a bad sign, but it is less bad if the growth rate exceeds the interest rate.

Over the past year and a half Namibia’s economy has contracted but global interest rates have been kept low. They won’t be low forever. As the world continues its recovery from the pandemic, interest rates will start to pick up and the cost of Namibia’s debt will increase. Managing public debt is difficult and sovereign debt crises are not uncommon. Argentina, Russia, Lebanon and Zambia have been high profile examples in the last three decades of governments defaulting on their debts. Regardless of how it happens, the outcome is the same. Defaulting on debt will damage a nation’s credit score, making it more expensive to secure future loans which in turn slows down the improvement of lives and livelihoods. Fortunately, the Namibian economy is growing again, and with institutions like the IMF actively invested in preventing debt crises, Namibia is unlikely to default on its debt in the immediate future.

This hasn’t kept Namibia’s public debt figures away from scrutiny. A recent report by AidData, a research lab based at William & Mary University in Virginia, USA, that studied 13,427 Chinese international development finance projects, found that low- and middle-income countries across the world have been accumulating billions of dollars’ worth of hidden, off-balance sheet debt from state-owned and private financiers in China over the past two decades. The report estimates that Namibia has hidden debts worth 10% of GDP. While according to the report, this debt is largely issued to public enterprises, many of them benefit from government guarantees, or liability protection. The upshot is that the full extent of Namibia’s public debt is unknown.

There is no recourse to say whether this hidden Chinese debt, issued as part of Beijing’s Belt and Road Initiative, is strictly better or worse than other forms of public debt. This debt, however, is different. The projects which it finances are often inherently riskier than conventionally financed projects, and therefore the issuers are entitled to demand stronger repayment safeguards. In other words, these loans are collateralised in novel, unconventional ways. Yet this hidden debt is not by itself the main problem, nor is it that public debt limits the amount that can be spent on other government services, although both issues clearly do matter. Instead, what this article hopes to alert you to is that Namibia has developed a multi-dimensional public debt burden that has left it accountable, in ways known – and if the AidData report is accurate, also unknown – to both its own citizens and foreign entities. This makes developing a coherent public debt repayment strategy more challenging.

Over the past few years, the Namibian government has allowed Chinese-fronted companies to log in the forests of the Zambezi Region. According to the Organised Crime and Corruption Reporting Unit logging in certain protected parts of the region may be illegal, and the San who are indigenous to the area have bemoaned the loss of ancient rosewood trees that provide them with food.

There are no profound conclusions to draw from this particular example. To blindly assess why the logging was allowed is to engage in pure speculation. It may represent a good opportunity to extract resources, boost revenue and increase employment – or it may not. It is certain, however, that with a ballooning official public debt burden and unknown, unwieldy hidden debts to consider, the government needs more revenue. The more desperate the need, the more influence those who contribute large amounts of tax revenue now, or in the future, may gain. Managing the public debt will require sacrifices and there may be times where the best interests of Namibians take a back seat to debt servicing payments. Namibia’s public debt is growing, and it is growing more complex. The bill is likely to become due in unexpected ways.

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Kimber Brain is a junior economist at IJG, an established Namibian financial services market leader. IJG believes in tailoring their services to a client’s personal and business needs. For more information, visit www.ijg.net.