Namibia: N$11.8bn State-Guaranteed Debt a Major Fiscal Risk

• Namibia faces N$11.8 billion in state-guaranteed debt for public enterprises, equivalent to 4% of its GDP.
• Finance Minister Ericah Shafudah reported a N$1.1 billion shortfall in non-tax revenue due to lower mineral royalties and public enterprise dividends.
• Diamond revenue is projected to decline significantly, contributing to a N$5.3 billion shortfall over the medium term.
• The government previously absorbed N$1.358 billion in legacy tax liabilities from public enterprises.
• The Ministry of Finance plans to strengthen credit-risk assessments for guarantees, and a new bill aims to improve public enterprise governance and accountability.

The Ministry of Finance has explicitly warned that the financial health of state-owned enterprises and the potential for defaults pose considerable risks to the national budget, emphasizing the need for rigorous management of sovereign debt dynamics and balance sheet exposures due to high borrowing costs and existing debt levels.

Namibia's public finances are currently under significant strain, primarily due to a notable decline in expected government revenues. The mid-year budget review for the 2026/27 financial year, presented to parliament by Finance Minister Ericah Shafudah, revealed a downward revision of non-tax revenue projections. This adjustment sees the forecast drop from N$6.1 billion to N$5 billion, resulting in an anticipated N$1.1 billion shortfall in non-tax revenue.

This reduction is largely attributed to two key factors: a decrease in mineral royalties and lower dividend contributions from public enterprises. The mining sector, in particular, has emerged as a primary source of financial weakness. Projections indicate that taxes and royalties from mining companies are expected to fall from N$6.1 billion to N$5.2 billion. Diamond revenue has been particularly hard hit, with a drastic reduction from N$5.8 billion in 2023/24 to a projected N$414 million by 2026/27, representing an estimated N$5.3 billion shortfall over the medium-term expenditure framework. Consequently, the government has lowered its total revenue forecast to N$88.1 billion, intensifying the pressure on the national budget and limiting the Treasury's capacity to meet its financial commitments without increased reliance on other revenue streams or borrowing.

Amidst these fiscal challenges, Namibian taxpayers face substantial exposure to N$11.8 billion in state-guaranteed debt, a sum equivalent to 4% of the nation's gross domestic product. This significant contingent liability underscores the financial risk the government bears should public enterprises struggle to service their loans. The Ministry of Finance has explicitly warned that the financial health of state-owned enterprises and the potential for defaults pose considerable risks to the national budget, emphasizing the need for rigorous management of sovereign debt dynamics and balance sheet exposures due to high borrowing costs and existing debt levels.

Adding to this concern, historical data indicates that the government has previously been compelled to absorb N$1.358 billion in legacy tax liabilities owed by public enterprises. Such instances highlight how the failure of these entities to meet their tax obligations, alongside potential defaults on state-backed loans, can further exacerbate the financial burden on the public purse. The substantial Namibia N$11.8bn state-guaranteed debt represents a critical area of focus for fiscal stability, particularly as government revenues from traditional sources continue to decline.

In response to these escalating risks, the Ministry of Finance is implementing measures to bolster its oversight and risk assessment frameworks. The Treasury intends to significantly strengthen its credit-risk assessment processes for government guarantees, ensuring a more thorough evaluation before commitments are made. This includes closely monitoring the solvency, cash flow adequacy, and debt-servicing capacity of beneficiaries to mitigate the risk of contingent liabilities crystallizing into direct sovereign obligations and to contain overall fiscal exposure.

Furthermore, legislative efforts are underway to enhance the governance of state-owned entities. The National Assembly has passed the public enterprises governance amendment bill, a proposed piece of legislation designed to improve oversight, financial reporting standards, and accountability across public enterprises. This initiative aims to foster greater financial discipline and transparency within these entities, thereby reducing the Namibia public enterprise debt exposure and minimizing the contingent liabilities government faces. These proactive steps are crucial for safeguarding the nation's financial stability and ensuring responsible management of public resources.

Lawyers advising clients on transactions involving Namibian state-owned enterprises or government guarantees should anticipate increased scrutiny on financial viability and debt-servicing capacity, as the Ministry of Finance plans to strengthen credit-risk assessments. Compliance officers should also monitor the proposed public enterprises governance amendment bill for new oversight and reporting requirements that could impact SOE operations and governance.

Source: Original reporting via The Namibian