Avoid policy mistakes or face multi-year stagnation

Lazarus Shigwedha, Portfolio Manager at Investec Asset Management

THIS is the second article in our three-part series on the Namibian economy. In this article, Lazarus Shigwedha, portfolio manager at Investec Asset Management, highlights policy proposals, which if implemented, could pose serious risks to Namibia’s growth outlook.

The major risk we run at this stage of the economic cycle is policy mistakes. We must avoid policy mistakes to circumvent extended multi-year stagnation.

Over the first six months of 2019, proposals such as a once-off 2.0% contribution by all Namibian income earners has been advocated to shore up resources to fight the current drought. Another suggestion has been for public procurement for certain goods to be directed at majority Namibian-owned entities. While these ideas appear sound and noble, it begs the question: are these proposals feasible and in alignment with the nation’s developmental goals that will steer the economy in the right direction? Or are they merely a knee-jerk reaction, short-term remedies? Furthermore, what are the second round and third round effects of the policies that we are advocating in general as a nation?

History tells us that once certain actions are taken, it becomes very difficult for them not to be repeated in the future. Therefore, we would argue that there is no such a thing as a once-off tax, especially in the medium to long term. Climatic conditions are increasingly unpredictable, adverse weather conditions have become persistent and certainly common. Therefore, if as a nation our 2019 solutions is a once-off 2.0% levy on household incomes to fight a persistent drought challenge, what is our medium- and long-term solution? We need policies that are aimed at securing local long-term food supply and increasing the sustainability of both commercial and rural farmers. For example, we need a genuine solution to address the challenges around rural farm produce access to the formal supply-chain. The implications on rural incomes and impact on the import bill would be materially positive.

On the second proposal, which advocates for public procurement from majority Namibian-owned firms our thinking is that government needs to clearly articulate what it is this policy seeks to achieve. Because, if it is aimed at merely increasing purchases from majority locally-owned organisations then we would argue that it would have a limited multiplier effect on the local economy. Economic policies aimed at local procurement that excludes targeted efforts towards local manufacturing could and will result in increased public procurement costs and higher inflation, unless there is local latent spare manufacturing capacity for those goods which the government is seeking to procure locally. At this juncture, we also need to ask the policy makers...what happened to the growth-at-home strategy?

The IMF recent report on Namibia points to a local economy that is expected to contract in 2019 and gradually recover thereafter. If Namibia is to experience a step change in GDP growth, we need structural reforms to increase competitiveness. This involves identifying our potential competitive advantages, removing bureaucratic impediments to growth and pursuing coherent economic policies rather than simply reacting to short-term impulses.

As a start we need to create an enabling environment that allows for local firms to produce locally and compete in regional and global markets. Local production will create jobs, while trading in markets outside the local economy will aid in reducing trade imbalances and earn foreign currency. Firms that compete outside of their core local markets will be faced with competition, which should lead them to innovate, create more jobs and move the economy up the value chain.  We need to build regional and global recognisable brands and services that will move the economy from an over-reliance on commodities, with which we have absolutely zero pricing power. For example, how is it that Argentina is synonymous with great beef around the world and one cannot talk about salmon without thinking about Norway, but we are yet to build a global brand around Namibian beef or fish. As African examples go, Mozambique is synonymous with prawns, Kenya and Tanzania for safaris, Mauritius is a regional financial hub, Kenya has an impressive cut-flower offering and Ethiopia is increasingly doing well in textiles.

As a small nation, solving the unemployment challenge should not be arduous compared to our peers on the continent and other emerging economies whose populations are multiples of ours. Local procurement which is inward looking is regressive to say the least; the opportunity lies in exploiting the massive regional and global markets.

In our final article in the series, we dig into the practical tools we need to build to kick-start the economy and put it on a sustainable growth path.

The full series can be read at: iam.investecassetmanagement.com/unwind

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