Volatile SACU revenue a challenge, opportunity

Namibia’s reliance on fluctuating customs union revenues, to support the state budget, presents some challenges, while it also provides opportunity for growth and resilience, PSG said.

The Southern African Customs Union (SACU) receipts are a key source of government revenue, usually accounting for between 25% and 30% of total government revenue. However, SACU receipts are volatile because the size of the SACU common revenue pool fluctuates annually according to the uneven growth of non-fuel imports in the SACU region, which is mainly driven by South African imports. The outlook for SACU receipts is usually based on the South African National Treasury's forecast for the SACU common revenue pool.

At the time of the 2023 Mid-Term Budget Review (MTBR), these forecasts from the Treasury were not available. In the 2023 MTBR, the projection for total SACU revenues over the 2023 - 2027 period was lowered by 5.4% compared to the 2023 Budget figures in February. Despite this relatively large downward adjustment, our forecasts for South Africa's non-fuel imports suggest that the SACU common revenue pool could be lower than the Ministry of Finance (MoF) forecast. This is the result of our more modest real gross domestic product (GDP) growth projections for the SACU region, PSG said.

Looking at the composition of the rest of the revenue outlook, most of the forecasts for the various revenue categories look reasonable.

According to the 2023 Mid-Term Budget Review, diamond revenues (tax and royalties) are expected to grow at a compound annual growth rate of 28.3% from 2023/24 to 2026/27.

In 2022/23, diamond revenue was estimated to account for 4.9% of total revenue (N$3.1 billion), but according to the MoF, diamond revenues will rise to 8.6% of total revenue (N$7.7 billion).

Benguela Gem

Diamond revenue growth has been exceptional in 2022/23 and 2023/24 thanks to the introduction of Debmarine's new Benguela Gem mining vessel which has boosted diamond production by roughly 50% and a steep rally in diamond prices from January 2021 to March 2022.

The outlook for global diamond demand has moderated in recent months which pose challenges for the MoF's optimistic diamond revenue projections.

Diamond prices have fallen from a peak in March 2022 – just after the broader Russian invasion of Ukraine – to current levels which are near the coronavirus pandemic trough of July 2020. The Antwerp polished diamond index fell by 15.1% from January to end-September 2023 and is down 28.5% since the peak in March 2022. Similarly, the International Diamond Exchange's (IDEX) rough diamond index dropped by 18.3% from January to end-October 2023 and is down by 32.2% since the March 2022 peak.

PSG noted that the Namibian economy is on the brink of a promising transformation, with three key sectors - oil & gas, green hydrogen, and critical minerals - poised to significantly elevate the country's economic growth trajectory.

While these sectors are projected to fully materialize after 2026, they have the potential to make a significant contribution to government revenues and improve the country's debt metrics, PSG said.