The central bank says the government could expect less tax revenue this year as the wholesale and retail sector, where indirect tax such as VAT is collected, comes under pressure.
The Bank of Namibia said this on Tuesday when they announced that the local economy is expected to contract by 1,7%, a complete turn from their April 2019 projections of a 0,3% economic growth.
According to the bank, the slump in the wholesale and retail sectors pose a fiscal challenge to the government as it cuts its projected revenue collection, especially from value-added tax (VAT) revenue, which is the second-biggest source of revenue after income tax, domestically.
The 2019/20 national budget documents show that the government estimates to collect N$12,4 billion in value-added tax, which is about 35% of the N$35 billion total revenue, excluding Southern African Customs Union receipts. Robert McGregor, an economist at Cirrus Capital, told The Namibian that VAT collections might be disappointing, given the poorer retail prospects.
He, however, was quick to add that a shortfall in collections would not have such a drastic impact, depending on its extent.
McGregor said it is not only the VAT from retail and wholesale that is declining, but also on the production side of the economy due to depressed economic activities.
He said although the shortfall might not be substantial, any shortfall requires government expenditure to align with the revenue shortfall, otherwise the budget deficit would widen.
McGregor indicated that the projected decline in economic output could worsen the country’s debt-to-GDP ratio, as the level of value addition reduces while the level of debt stays the same or increases.
“Should public debt remain unchanged, the debt-to-GDP ratio will worsen, given the lower growth, compared to what was used for the initial forecasts. If public debt were to increase as well, not only would the GDP figure be smaller, but the debt portion would be larger, thereby leading to an even larger debt-to-GDP ratio,” he continued.
At sector level, the central bank’s outlook shows that the wholesale and retail trade sector is expected to contract by 5,7% after recording an actual slowdown of 7,2% last year.
Both the primary and tertiary sectors are projected to contract by 6,7% and 0,8, respectively, while the secondary sector is expected to be above the waters at 1,8%, mainly aided by non-metallic minerals, expected to grow by 12% from a 16,6% slump.
Key sectors such as agriculture and forestry are expected to contract by 17,5%, crop farming by 20,8%, livestock farming by 14,3%, while diamond mining is forecast to close the year with the fourth spot in primary industry declines at 12,5%.
The only positives in the primary sector were projected for uranium, with an expected growth of 11%; mining and quarrying at 4,4%; and fishing at 1% growth.
The Fitch macro research mining team had earlier this year said it was only local uranium mining that could push the economy out of the negatives in 2019.
The central bank has also forecast the transport industry to record a growth of 5,6% after contracting in 2018 by 9%.
“Growth in the domestic economy is expected to remain elusive, as a deeper contraction is expected in 2019. The domestic economy is projected to contract by 1,7% in 2019 before recovering to a positive growth of 0,8% and 1,2% in 2020 and 2021, respectively, ” read the central bank’s outlook.
The bank said the projected contraction in 2019 will be in line with the anticipated contractions in major sectors such as diamond mining and wholesale and retail trade, as well as the prevailing drought, which is expected to have a negative impact on agriculture.