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EAN contributes every second week an editorial to Business 7, these articles can be found here.

Any New Year’s resolutions?

Another challenging year is coming to an end. However, not all is doom and gloom. The year has provided many example that with some more efforts it is possible to exploit existing opportunities.
Private sector companies have demonstrated that it is possible to increase local procurement and extend value chains through efforts to identify Namibian suppliers. The sourcing of company uniforms, plastic packaging material or cement bags locally are just a few cases in point. While the new public procurement act provides for preferential local procurement by the public sector, the private sector should follow with concerted efforts to identify products that could be produced locally and producers that have the capacity to supply the inputs.
Foreign Direct Investment into asparagus farming and – as joint venture with government agencies – into a car assembling plant are just two examples that indicate that it is possible to attract FDI into other areas than natural resource extraction. Other investment opportunities should be explored such as the assembly or production of solar panels and solar water heaters not only for Namibia, but for the region, or the shift to electric vehicles. While the private sector should be the driving force, it needs the active involvement of Government to design the policy framework to support the move towards new technologies such as e-vehicles. Furthermore, as the investor conference some two years ago has illustrated, Government agencies, such as ministries and diplomatic missions, play a crucial role in following up with potential investors on a regular basis in order for intentions to turn into action. Again, we need to go the extra mile to exploit the opportunities.
Another area that offers room for improvement is the timely submission of reliable data. Production data is often only available several months after the reporting period although they are, especially with larger companies, part of monthly and quarterly internal reports. The reliability of other data varies, because the response rate varies greatly. Furthermore, the frequency of some statistics, such as labour market statistics, needs to be increased. GDP growth rates provide an insufficient measure of what is happening on the labour market. The impact of a contraction or expansion of an economic sector on the labour market depends on the sector’s backward and forward linkages to other industries and whether it is a labour or rather capital-intensive industry. Frequent, timely and accurate data will not only improve economic analysis and forecasts, but also enhance evidence-based decision making in the private and public sectors.
There are many more areas where additional efforts will make a difference to the development of the country despite prevailing global headwinds. Let’s include these additional efforts in our New Year’s resolutions.

New Year’s resolutions

Unemployment benefits could smoothen economic downturns

The current economic downturn is caused by domestic, regional and global factors. Lower global demand for some of our minerals and consequently lower prices in USD, the oil price crash resulting in the crash of the Angolan demand for our goods and services and the recent price hike that affects production costs and the cost of living, the completion of major private and public sector investments and severe droughts led to a sharp decline in economic activities. Contrary to 2009, government not only lacked the fiscal space to respond with a countercyclical fiscal policy, but had to cut expenditure in order to rein in increasing public debts that have already contributed to Namibia’s downgrading by sovereign rating agencies.
Retrenchments among others in the mining sector and in particular the labour-intensive construction sector and related manufacturing industries led to a rise in unemployment and drop in household income. This in turn reduced consumer demand and resulted in a contraction in the wholesale and retail trade sector with additional pressure on the labour market.
An unemployment benefit scheme could have softened not only the social effects, but also the economic impacts. Unemployment benefits could ensure that employees who lost their jobs still have some financial means that could prevent them from falling into poverty. They would still be able to satisfy the most basic needs, including paying their rent or honour their financial obligation towards banks such as mortgages and instalments.
While in times of an economic boom the agency responsible for collecting and managing the unemployment insurance contributions and benefits will accumulate surpluses – a kind of forced savings for bad times – and hence will curb private demand, it injects some of these surpluses during an economic downturn back into the economy and hence raises private demand above the level without such as scheme. It follows almost the same logic like the countercyclical fiscal policy Government should ideally follow – curb public expenditure during a private-sector led economic expansion and expand public expenditure during declining private sector activities.
An unemployment benefit scheme would smoothen the economic impact of a contraction in an economic sector and prevent resultant increased unemployment to spread immediately to other economic sectors, in particular the retail trade sector and industries producing consumer goods, and hence lessen the number of potential job losses in these sectors that would have further exacerbated the economic downturn. The unemployment benefit scheme does not only benefit the recipient, but businesses as well since the decline in private demand, and therefore the demand for their own goods and services, is less severe than it would have otherwise been.

Unemployment benefits

Strengthen regional cooperation to stimulate economy

After the financial and then economic crisis in 2008, Governments and Central Banks of some developed countries have tried to coordinate policy responses in order to avoid a further downfall of the global economy. It had helped stabilizing the economies, even though the cooperation was rather short-lived and limited in extent. However, there were hardly any coordinated policy responses in the Southern African region. The current global, but also regional and domestic headwinds call for concerted efforts on a regional level to stimulate the regional economies, since most of the economies are depending on commodity exports and hence are affected by similar challenges: Declining commodity prices (with the exception of oil and a few minerals such as lithium), depreciation of currencies owing to financial investor sentiments turning against emerging markets and consequently higher import prices, and subdued appetite for direct investment owing to uncertainties about market access to major economies and about global demand.
There are a number of areas where coordinated, regional policy responses would create synergies. Tax policies and investment incentives are one example where coordinated initiatives can avoid a race to the bottom, since countries could try to outpace neighbours in attracting scarce regional and international direct investments. Cooperation in the area of monetary policy is another example.
Moreover, the lack of competitiveness in the region needs urgent attention. Only four out of 15 SADC member states are ranked among the first 50% in the Doing Business Report and only two in the Global Competitiveness Report. Currently only four SADC member states are among the best 50% regarding trade across borders. Except for Botswana, all other countries bordering Namibia are ranked lower in terms of trade across borders. Even if Namibia addresses issues at border posts, trade won’t flow more easily if neighbouring countries do not implement similar reforms, move to electronic documentation and ensure reliable connectivity and electricity supply at border posts. In order to achieve SADC’s objective of creating regional value chains, goods and services need to flow seamlessly across borders. Furthermore, Namibia will only become a logistics hub for the region, and create new exports markets for Namibian businesses, if transportation costs, including waiting hours at border posts and other administrative costs, are competitive.
If these and other issues are addressed at a regional level, the region will become more attractive for investors and new cross-border business opportunities will arise. Driving these regional efforts needs a champion. Namibia is well placed to take up this role, because the country currently holds the chairpersonship of SADC, is well respected and is not a regional hegemon pushing through her own interests.

Regional Cooperation

Going the extra mile

The prevailing global economic climate is not in our favour – rising interest rates in the USA turn financial investor sentiments against emerging markets, trade wars disrupt global trade, Brexit adds further to economic policy uncertainties that all weigh on investor sentiments and their run for safe havens. Namibia can therefore not rely on or hope for an external stimulus for the domestic economy. Despite limited fiscal space there are opportunities to grow Namibian businesses and stimulate the domestic economy. A few cases should suffice where going the extra mile will bear positive results for Namibia:
The Ministry of Finance put the brakes on the awards of two multi-billion dollar tenders since the specifications disadvantaged Namibian companies. This is certainly not the only case, where tender specifications are used to favour specific companies. In other cases, specifications are deliberately kept vague in order to demand additional funds after the tender was awarded. A thorough review of specifications in public procurement, which would often require experts due to their technical nature, will ensure a more levelled playing field and hence potentially more business for domestic producers as well as the closing of loopholes for additional financial demands after the tender was awarded.
Taking pro-active steps in embracing new technologies will attract investment and result in other positive impacts. A case in point is the introduction of electric vehicles. The respective ministry should convene a meeting with all stakeholders in order to establish what needs to be done by whom and when in order to create the enabling environment for the shift from combustion engines to cleaner battery-driven vehicles – rather than waiting until the private sector approaches. Besides reducing the carbon foot print, such an initiative will attract additional investment in renewable energy sources and curb the outflow of scarce foreign exchange reserves currently spend on the importation of fuel. Moreover, Namibia could become an attractive destination for e-vehicle manufacturers.
Private sector companies have started sourcing inputs, including clothing, locally that creates benefits beyond the company producing the goods. Increasing fuel and hence transportation costs will be a blessing in disguise, if it results in more companies sourcing inputs locally in order to cut transportation costs. Other private sector companies including the wholesale and retail trade sector that has not yet fulfilled the expectations raised by the launch of the retail charter, could do more to grow and nurture domestic suppliers. Eventually they will benefit from increasing demand for their own goods and service owing to additional domestic purchasing power.
These additional efforts, including on the side of consumers, to support local production could mitigate the external headwinds.

Going the extra mile

Why not creating farmworker villages?

The Second Land Conference held last week in Windhoek has covered a vast array of different land-related topics. Access to urban land, title deeds in communal areas, flexible land tenure systems, and the plight of farmworkers were just some of them. Farmworkers and their families often face uncertainties regarding a place to stay when they retire, resign or are being retrenched. Farm owners have to decide whether to allow them to stay on the farm even if they are no longer employed or to drop them somewhere. A solution could be to create farmworker villages:
Farm owners of two adjacent farms along major gravel roads could donate for instance one or two percent each of their farmland along the border with their neighbour, to develop a settlement area for their farmworkers. Farm owners on the opposite side of the road could donate land as well, while other farmers in the neighbourhood could contribute through investment in the necessary infrastructure, such as fences, water, sanitation, (off-grid) electricity. These areas will be reserved for farmworkers who have been employed for a minimum number of years on the farms that are participating in the scheme and for their immediate family members. They will receive a plot and title deed in this settlement area, where they can build their own house over time. The areas will also make provision for crop and livestock farming as well as public spaces, and some reserved areas for other facilities, such as clinics, kindergartens, pre-primary schools etc. Family members who are not employed on the farm, but stay with the farmworker could chose to continue staying on the farm or move already to their allocated plot in the settlement, while the farmworker could join them during off-times.
Family members can get involved in small-scale farming activities (livestock and or crop farming) or other business activities, such as shops where they sell basics including farm produce to other residents and passers-by. Over time the demand for other services will increase and these services can be provided more efficiently because of the higher population density. A mobile clinic can visit the place on a regular basis, while financial institutions will have an incentive to provide mobile ATM and other financial services, since cash is starting circulating, Depending on the number of children, a kindergarten could be set up and expanded to pre-primary and perhaps junior primary level over time.
Such farmworker villages can ease access to and cost of delivering basic services in rural areas, create additional business opportunities for family members, but most importantly provide a place to stay for farmworkers that they can call ‘home’. They will be enabled to create assets and wealth that they can pass on to the next generation.

Farmworker villages

Pursue a holistic transport sector strategy

Namibia has been investing heavily in public infrastructure from transport infrastructure to education and health. The investment is necessary to address existing backlogs as well as to accelerate the development of the country and achieve the main objectives of Vision 2030, namely to be a prosperous and industrialised country developed by her human resources.
Since domestic revenue has not been sufficient to finance such large investment, Government has borrowed domestically and abroad. This comes at a cost such as interest payments and costs due to exchange rate fluctuations. The costs can be justified by the expected return from the investment, be it a more productive and innovative workforce due to investment in health and education, be it additional private sector investment due to improved infrastructure and hence increased competitiveness, etc. However, some projects will most likely not yield the expected return due to substantial cost overruns and delays in their completion.
Other projects, such as the expansion of the existing and the construction of the new Walvis Bay harbour, seem to be quite ambitious in the current global economic and trade climate. There are currently about ten African ports with a capacity of more than 500,000 Twenty-foot-equivalent units (TEU) and only two with a capacity of more than one million TEUs. Walvis Bay harbour will be the third port once construction is completed early 2019.
Looking at South African and ports in other countries, they benefit from a ‘hinterland’ that is connected not only by roads, but by an extensive railway network. While Namibia’s road network is quite competitive, the railway network is not. With one exception, no neighbouring countries are connected by rail to the Walvis Bay harbour. However, before scarce resources are invested in fixing the existing network, Namibia needs to develop a clear vision for the railway sector which includes among others a decision about moving to the Standard Gauge, like countries in East and West Africa have embarked upon, or remaining with the narrow Cape Gauge. Without a clear vision and strategy, Namibia risks investing in a railway infrastructure that will not yield the expected returns and, by implication, will negatively affect the utilisation of the Walvis Bay harbour.
Furthermore, additional transport services focusing on sea-air transport should be explored to increase the utilisation of both the Walvis Bay seaport and airport. This could be an attractive alternative to road and railway transport not only for perishable, high-value or emergency cargo that would reach the destination in neighbouring countries within hours rather than days or weeks. Such innovative services could even tap into new markets.
Pursuing a holistic strategy for the whole transport (and logistics) sector will ensure that the considerable investment yield returns that justify the costs – and will ensure that we achieve the ambition of becoming the Logistics Hub.

Holistic transport sector strategy

Are we in for another perfect storm?

Emerging markets have come under severe pressure recently, partly owing to global events and partly to domestic – mainly policy – issues. The Argentinian peso lost about 50% of its value against the US dollar forcing the central bank to raise interest rates to 60%. The Turkish lira lost 40%. Following suit is the South African rand and hence the Namibia dollar that shed about a quarter of its value against the USD so far this year. The technical recession in South Africa is expected to put further pressure on the ZAR.
Interest rate hikes in the US, expected hikes in the UK and in 2019 in the EU coupled with multilateral trade war, unfinished business regarding the future of the North American Free Trade Area (NAFTA) as well as continuing uncertainties regarding the exit of the United Kingdom from the European Union has dampened global including China growth prospects and consequently demand for commodities resulting in declining prices and therefore dropping demand for currencies of commodity exporters, while increasing demand for in particular USD owing to a more attractive interest environment.
Namibia will not be spared the fallout. Despite fiscal consolidation efforts, fiscal space to respond to external shocks remains limited. The depreciation of the NAD will increase the value of existing foreign debt, unless denominated in ZAR, and the debt to GDP ratio. The trade deficit is not declining despite new mines having started production and might come under more pressure owing to the depreciation of the NAD. Inflation is on an upward trend, although well within the band of 3% to 6%, reducing consumers’ purchasing power and hence domestic demand. While the depreciation might benefit revenue from custom duties because of higher import values in local currency, the technical recession in South Africa dampen import demand and result in declining custom revenue and hence transfers from the SACU Common Revenue Pool. Although foreign exchange reserves at the end of July were at the highest level since almost a year translating into an import cover of 3.9 months, the above mentioned factors will exert pressure on the reserves.
While Namibia cannot influence the global demand for and hence prices of commodities and neither the exchange rate that is determined by politics in and the economic performance of South Africa, there is some policy space left, such as: Stronger shift of budgetary allocation from consumption towards building productive assets; ensure that infrastructure projects benefit Namibian producers of goods and services to the extent possible in order to create jobs and increase tax revenue; attract and direct domestic and foreign investment towards processing and manufacturing activities without duplicating existing, sufficient supply capacities in line with the sectoral growth strategies and focusing on future technologies; and abolish visa requirements for leisure tourists and business people alike, whose daily expenditure exceed any revenue from visa fees by far.
Another perfect storm?

Embrace technology (and the future)

Latest after the World Economic Forum’s Annual Meeting in Davos / Switzerland in January 2016, the Fourth Industrial Revolution and Artificial Intelligence are on the global agenda. It is often accompanied by fears and anxiety about job losses and robots taking over. These fears are certainly exaggerated, but clearly indicate that we need to start the debate about the potential impact on the current economic sectors, on employment and on the society.
Technological change has been around since millennia and has made life a lot easier for most of us. Recent technological development such as computers, laptops and smart phones enable us to connect easily, make payments and transfer funds even to those who do not yet have a bank account, order goods and services online etc. This results in shifts of employment from sectors that face automation to sectors that provide new goods and services.
Uber is being seen as a threat to the ‘traditional’ taxi operators. However, at least two Namibian companies have developed apps and offer services based on the Uber concept. Driverless vehicles are being introduced in some countries and sectors, such as the mining sector. Mining companies in Namibia will follow this trend sooner than later and use driverless haul trucks. Electric vehicles will result in a drop of employment at service stations and declining revenue for the MVA, Road Fund and Receiver of Revenue that derive (some of) their income from various levies charged on fuel. It can, on the other hand, lead to additional employment in the renewable energy sector.
Drones are being used in countries such as Malawi and Rwanda for transporting medication to remote hospitals and reportedly in Namibia to monitor movements in and around national parks in order to combat poaching. Countries such as Indonesia are making successful use of satellites to track the movement of vessels to curb illegal fishing, which led to an increase in revenue from fishing fees. Countries are wooing investors to build spaceports used to launch satellites that hardly weigh more than an adult. Spaceports will attract high-tech firms and professionals and support other technological spin offs. Namibia could be well positioned in the Southern Hemisphere, since the country is close to the South Pole and other uninhabited areas.
Technological change will result in a decline in employment in many traditional sectors and occupations, but will increase in other sectors and create new occupations. The impact of technology on our economy, labour market and society depends on how well prepared we are for it. We, therefore, need to start designing the necessary policy and legislative frameworks in order to ensure that the technology works for us and that work is equally distributed. And, we need to review the curricula at all levels of our educational system so that everyone is equipped with the skills and knowledge to exploit new opportunities.

Embrace technology

Public spaces create business opportunities

The purpose of urban development and planning is not only to provide serviced or un-serviced land for business of residential purposes and to provide necessary infrastructure (transport, water, electricity, communication), but it should also support social cohesion, innovation, creativity as well as business and employment opportunities. Instead of separating residential from businesses areas, which consequently results in increasing demands for transport services and infrastructure, these should be combined in mixed developments including residential (low to upper income), office and light manufacturing areas as well as public services such as education, health and civil registration and other amenities such as shops. Such a design would reduce the need for ever larger roads separating neighbourhoods and incentivise other forms of transport including non-motorised transport (walking, cycling). Furthermore, increasing the density of residential areas by building multi-storey flats will not only increase the efficient use of scarce serviced land, but will reduce construction costs and increase the viability of public transport since bus stops serve a larger number of potential passengers.
In addition, urban planning needs to create public spaces in neighbourhoods and city centres, where people from all walks of life can mingle. Beyond connecting people within neighbourhoods, public spaces can create new business opportunities. For instance, closing the Independence Avenue in Windhoek between the Hilton Hotel and the Kudu for traffic (only allowing access for delivery vans in the early morning hours and small municipality busses during the day) will not only reduce air and noise pollution – and would most likely increase the value of properties because the centre becomes even more attractive – but it could create opportunities for a number of income-generating activities and make the centre more lively: Musicians could play their music and sell their CDs, fashion designers can display their latest creations, acrobats can entertain the public and receive a token of appreciation, artists can sell their crafts and paintings and other vendors all kind of other things to locals and tourists. Moreover, the newly created space can attract specialised small shops, cafés, restaurants, etc. that all create jobs and generate income (and may be even generate tax revenue).
The same holds for the proposed (dry) river walk, promoted a few years ago that would run from the Goreangab Dam to the Avis Dam. It will not only connect very diverse communities and strengthen social cohesion, create space for out-door activities, but again provide income-generating opportunities like in the proposed pedestrian mall. A more innovative, creative and inclusive approach to urban development will ensure that we create sustainable cities in line with the Sustainable Development Goal 11 and create business opportunities.

Public spaces create business opportunities

Not the source, but the level of income matters

Benjamin Franklin reportedly said that there were only two things certain in life: death and taxes. Taxes have been with us for many thousand years dating back to ancient civilisations including in Africa. Taxes have been collected to finance public services ranging from safety and security (police, military) to health, education and other vital infrastructure, and have been used among other to redistribute wealth. Some see paying taxes as a responsibility of every citizen, such as the Tax Justice Network Africa that stated “Taxation is therefore needed to underpin the contemporary African version of Ubuntu as one of the fundamental responsibilities of every citizen”. Therefore, taxes are here to stay. The question that arises is who should pay taxes.
Adam Smith in his well-known book ‘The Wealth of Nations’ referred to four principles of taxation. One of the principles states that it should be “in proportion to the revenue which (the citizens) enjoy under the protection of the state”. This principle has been fine-tuned over time and is referred to as horizontal and vertical equity of taxation. While the latter refers to the taxation of different income levels at different tax rates, for instance through progressive taxes, the first refers to non-discrimination of taxpayers, meaning irrespective where the income is derived from or irrespective of how you buy goods the same tax rates should be applicable.
This brings us to the public debate whether the informal sector should be taxed. It will contravene the principle of vertical equity if someone who happens to be employed in the formal sector and earns for instance a salary of NAD60,000 per annum has to pay income tax, while the neighbour, who runs an informal business and makes a profit of NAD60,000 at the end of the year, does not need to pay income tax. Both ought to pay income tax on the amount that exceeds the tax threshold of currently NAD50,000 per annum, which would also level the playing field between formal and informal businesses. The tax threshold ensures that low-income earners whether they are employed or self-employed, whether they are involved in the formal or informal sector are protected from being taxed. As argued earlier1, taking inflation into account, the tax threshold should be increased to at least NAD65,000.
However, collecting taxes from the informal sector will increase costs, since tax inspectors have to go out identify un-registered businesses and determine their profit. In the absence of any or at least incomplete records of turnover and input costs, this will be challenging. These challenges touch on another principle, namely the cost-effectiveness of tax collection. If cost-effective ways are found, everyone who earns an income or makes a profit that exceeds the tax threshold should contribute to Government coffers in order to finance public services.

Taxing the informal sector