In Budget Country

Originally published in the Informanté newspaper on Thursday, 3 March, 2016. 

In 1710, the United Kingdom was in financial difficulty. The Kingdom was involved in two wars and the government’s finances were in shambles. To raise money, parliament first instituted a national lottery, but when they had problem paying the winners, they consolidated their debts into a private company – the South Sea Company. Government debt paid to the company would be repaid to shareholders as dividends, and at first it seemed to work well. But soon speculators entered the market, and the value of the shares skyrocketed in excess of their value. A bubble formed on the back of government debt.

Like all bubbles, though, it eventually collapsed. Thousands of investors were ruined, the UK economy suffered, and the people lost faith in their government’s ability to conduct its own affairs. Thus, in 1720, Robert Walpole, Chancellor of the Exchequer, in an attempt to restore the confidence of the public, presented the government’s budget to parliament. While budgets were not always well received, given their tendency to introduce new forms of taxes or tax increases, it did usher in a new era of accountability and transparency of government that still persists to this day. 

It should thus be no surprise that on 25 February this year, Finance Minister Schlettwein presented the Namibian Government Budget to parliament as well. As Namibian citizens, it behoves us to take a look at the presented documents to keep our government accountable to the promises they’ve made.

Let’s start with government revenues – the money the government receives. In total, the government expects to receive about N$ 57 billion from various sources. N$ 54 billion will be from taxes. N$ 24 billion will be from income taxes – as paid by us every year, and paid by the various companies operating in Namibia. Another N$ 30 billion is collected via indirect taxes, like VAT, that you pay when purchasing products or importing products, and transfer duties and property taxes. 

That leaves about N$ 4 billion that is collected from other sources. About N$ 1 billion of these is from dividends and profit shares from government investments and interest of loans and investments. About N$ 2.5 billion is collected as royalties on minerals mined, with about N$ 1.4 billion of that from diamonds alone. The remaining amount is collected as fines and administrations fees the government levies. 

So far, so good. Let’s take a look at the expenditure now. Minister Schlettwein’s budget indicates that the government intends to spend N$ 66 billion this year. Of that, a staggering N$ 12.8 billion is budgeted for education. It has been noted that education is the greatest equaliser, and the Namibian government is certainly striving toward it, as government spending on education dwarfs other spending by a significant amount. In fact, Namibia is one of only three countries in the world where education is the top spending priority for government. 

Health and Social Services receive N$ 7.2 billion in the budget, and in particular, the budget increases the old age pension grant to N$ 1 100 per month, allowing our oldest and most vulnerable of citizens to be placed above the national poverty line. The Ministry of Defense and the Police receive N$ 6.6 billion and N$ 5.1 billion respectively. Together, the abovementioned ministries receive more than 50% of the budget. 

The rest of the ministries are funded by the remainder, as well as several infrastructure development programme, which inter alia include the rehabilitation of the national railway, the on-going expansion of the Port of Walvis Bay, several national roads, water infrastructure, the Mass Housing Programme and increased funding to the Public Financial Institutions for private sector support and SME development.

The more astute reader may have noticed the government expenses seem to exceed government revenues, and you would be correct! This is what is known as the budget deficit. When you run out of money to cover your expenses, you sometime borrow some money to make ends meet. In a similar way, when the government wants to spend money it does not have, it needs to borrow as well. In most cases, this is done via Treasury Bills or Government Bonds, that it then needs to pay interest on. But just as you and I need to be careful when we borrow, and make sure that we are able to cover the interest and principal repayments in the coming months, so too the government must be careful. 

In our case, we can take into account possible salary increases, and stop spending money on frivolous things. In the government’s case, the equivalent of salary increases would be growth in future revenue, made possible by economic growth. But the government ran into a different problem this year.

Treasury Bills and Government Bonds are usually sold locally, so in essence the government is borrowing from its citizens, in its local currency. But if the government needs to borrow more than we can give, it needs to go to foreign markets. During the year, the government had to borrow US$ 750 million in the international markets, and these bonds are in US dollars. When the exchange rate weakens, this adds to the cost of the government’s interest, and as a result, foreign interest payments are budgeted to increase from N$ 560 million this year to N$ 2.5 billion in the budget.

As a result, Minister Schlettwein has opted to be exceptionally prudent in his budgeting. His budget this year only has minimal increases from last year, and in addition there are several expenditure items that have been severely curtailed, inter alia non-essential operational expenditure items such as materials and supplies, subsistence travel, overtime, furniture and office equipment and vehicles, as well as the postponement of other non-productive capital spending on office buildings. In addition, government wage increases have been capped at the inflation rate, and a moratorium on new hires for government service have been put in place. These measures should allow the government to reduce the debt as a percentage of GDP from 37% to 34.6% at the end of the 2016/2017 financial year. 

In these turbulent economic times we cannot expect Namibia not to feel the effects of the global economy. This budget, at least, should give some reassurance that the government is keeping its eye on the ball, and practising some prudence in managing its finances. Still, this quick summary is no replacement for your own – every citizen should avail themselves of the documents as presented on the Ministry of Finance website, and make their own assessment. It is our duty to keep the government accountable and transparent. Namibia expects every man and woman to do his/her duty.

Gravity of the Situation

Originally published in the Informanté newspaper on Thursday, 25 February, 2016.

A few weeks ago, scientists revealed an amazing discovery. 100 years after Albert Einstein had formulated his General Theory of Relativity, an experiment had confirmed the existence of one of the predictions of his theory – gravitational waves. Prof Karsten Danzmann, from the Max Planck Institute for Gravitational Physics and Leibniz University in Hannover, Germany said that "It is the first ever direct detection of gravitational waves; it's the first ever direct detection of black holes and it is a confirmation of General Relativity because the property of these black holes agrees exactly with what Einstein predicted almost exactly 100 years ago."

Of course, all this seems rather esoteric to the average man, whose only recollection of Einstein is his famous equation E = mc² and his letter to Franklin Delano Roosevelt concerning the atomic bomb. Few know the implications of his work, and perhaps that is why the confirmation of his theories even a 100 years later don’t quite shake up the world as much as it should.

And while we may wonder what effect this could have on the average person, consider the following – in most cellphones these days, you have a GPS transceiver. This transceiver receives precise time signals for the up to 24 GPS satellites around earth, each with an atomic clock accurate to 1 nanosecond (1 billionth of a second). To determine your position, the transceiver compares the time signals from 4 different satellites, and trilaterates your position from the time difference in the satellite signals, and their known positions above the earth. 

These satellites are 20 000 km above the ground, orbiting the earth at 14 000 km/h. Special Relativity predicts that due to their speed, they’ll be slower than your clock by 7 microseconds per day. General Relativity predicts that because they’re further from a gravitational object, they’ll be faster than our clocks by 45 microseconds per day. For the navigational calculations to work, the clocks on all our devices should remain accurate within 30 nanoseconds. A microsecond is 1000 times longer than a nanosecond – if Einstein’s theories were not taken into account, the GPS system would be inaccurate in about 2 minutes, and off by 10km in a day. 

Because E = mc² is only the start of the story. It is part of a solution to a paradox Einstein encountered in formulating his Special Theory of Relativity. Einstein’s Special Theory of Relativity was originally proposed to reconcile the Laws of Motion of Isaac Newton with electromagnetism as described by James Clerk Maxwell. 

Einstein started from the proposition the speed of light was constant regardless of the motion of the observer, and from that, a lot of what sounds counter-intuitive flowed. Einstein’s work on Special Relativity showed not only that mass and energy are equivalent (E = mc²), but also that space and time cannot be separated from one another – that time was a dimension just like any other. From this, a few other strange features emerged. 

Since the speed of light in a vacuum had to remain constant, something else happened when objects started travelling close to the speed of light. In order for light observed by such an object to remain at constant speed, time had to slow for such objects, since light could not. This is commonly known as time dilation. And in order for the speed of light to be constant, those observing an object travelling close to the speed of light would see its length shorten in the direction of travel. This is called a Lorentz contraction. 

But Einstein’s Special Theory of Relativity only explained motion in bodies without the effect of gravity, hence the term ‘special.’ Even so, up to today, it is still the most accurate model of motion tested. But ultimately, all bodies are under the influence of gravity. And thus Einstein worked for 8 more years, and in 1915, he published his General Theory of Relativity. 

This General Theory of Relativity combined the Special Theory of Relativity with Newton’s Law of Universal Gravitation, describing gravity as a property of the curvature of space and time, or spacetime. Einstein postulated that heavy objects curved spacetime in much the same way a heavy iron ball on a bed curves the surface of a bed. And in the same way a smaller ball would fall into the curve created by the heavy one, so too do all objects in space curve toward the heavier one. In fact, Einstein showed gravity bends even light. It predicts gravitational time dilation, to allow the speed of light to remain constant as it goes deeper into and then out of gravity (i.e. time passes slower the stronger gravity is), it predicts gravity can be used as a lens to focus light (gravitational lensing), it predicts gravity can be too strong for even light to escape (black holes), and then also predicts that when two spinning black holes collide, they’ll set off waves in spacetime similar to the effect that waves have on a puddle if you drop a stone in them.

This all sounds very counter intuitive, which is why Einstein’s theories have always been the subject of extensive testing. Thus, when on September 14, 2015 at 09:51 UTC, the Laser Interferometer Gravitational-wave Observatory (LIGO) detectors, located in Livingston, Louisiana, and Hanford, Washington, went off, the scientific community cheered. Einstein’s theories had their reliability to predict confirmed. 

As our technology advances, we become more and more dependent on them being built to model and anticipate the universe as it is, not as one wishes it would be. The confirmation of scientific theories not only provides us certainty about the universe we live in now, it also gives us hope that we can find answers in the future. After all, if simple theories on the progression of time was capable of providing us pinpoint navigation to the entire human race a mere few decades later, who knows where this one will take us?

Money’s Worth

Originally published in the Informanté newspaper on Thursday, 18 February, 2016.

Yesterday, the Bank of Namibia raised its repo rate by 25 basis points, or 0.25%. This means that interest rates for loans across the board should rise by 0.25%, and borrowers across the country have to adjust their expectations based on this. But what is the Bank of Namibia? Why do they have the right to control money flowing out of our pockets?

The easy way to answer this, is simply to state that the Bank of Namibia is a central bank, and it derives its authority from our constitution – Chapter 17, Article 128. But that is what is called a mathematician’s answer – entirely accurate, but entirely useless.

As with most institutions in the modern age, central banks originated from the last great empire – the British Empire. Back in the 1690’s, the Kingdom of England was involved in a war with France, and King William III’s government found it difficult to procure funds for this war. Credit of a government, up until that point, was tied to the reigning monarch, and different ones had different levels of fiscal responsibility. Monarchs are notorious for not wanting to relinquish authority until they have no other choice, and so too here. 

Up until that point, the printing of currency was under the sole authority of the king, which is why he was having credit issues. Lenders did not want to lend money to a king who would just print more currency, and thus devalue the money they lent to him. Thus, the Bank of England was born, to which was entrusted not only the accounts of all of government, but also the exclusive right to issue bank notes. When the Bank of Namibia was established this was one of the responsibilities it gained.

Initially, all of the money printed by the bank was backed by gold, but the first cracks in this system appeared in 1797, when a bank run to convert paper money into gold occurred. The Bank of England suspended conversion into gold, and in the analysis of the bank run afterwards, it was resolved that the central bank should not only act to stabilize the currency, but also act as a lender of last resort for other banks. And so the final few functions normally attributed to central banks was born.

As wars proliferated, so did central banks, as kings and presidents were unable raise the necessary debt to sustain their war efforts. But central banks survived the wars, and in peacetime they grew to serve an important function. After all, stabilizing the currency is of great importance for economic development – and although it was originally meant in terms of foreign exchange, central banks increasingly saw the need to stabilize price levels, or inflation. 

Inflation, in a sense, is the result of the printing of money. After all, money is a claim to goods and services. If we have the same amount of goods and services available, but more money was printed, a greater ‘share’ of this money would be required to acquire the same goods and services. If money were printed recklessly and in excess of economic production, the value of money would fall rather quickly, and we’d have high inflation. In extreme cases, such as that of Zimbabwe, when the money printing reaches such levels that you get hyperinflation, people lose faith in their currency, and no longer transact in it.

This is quite important, because while as previously mentioned money could in the past only be printed provided it was backed by gold, that is no longer the case. Until 1971, this was still broadly true, but after US president Richard Nixon suspended the convertibility of the US dollar into gold, no country was willing to do so any more. 

Our money, right now, is backed by our faith in the money being able to be exchanged for goods and services. You trust that that N$10 note you have can buy goods and services to that value, and when you hand it over, it will be accepted. But without control, that faith could be shattered, and the Namibian Dollar could go the route of the Zimbabwean one.

That is why the Bank of Namibia has a mandate to ensure inflation remains in the range of 3% to 6%. Well enough above zero that we are not in danger of sliding into deflation, small enough that it can be reliably modelled for, and not disruptive to the general economy. It is also why the Bank of Namibia is independent from government, so that it can focus on this mandate without interference, and without the executive influencing policy. 

But where other central banks have a bit more policy options, the Bank of Namibia has only a few due to the currency peg to the South African Rand. And its main policy instrument is thus the Repo Rate. After all, most money creation these days happens via commercial banks, who extend credit. This is via fractional reserve banking, a topic for another day. But suffice it to say that by increasing the cost at which bank can lend from the central bank, the Bank of Namibia thus reduces the amount of credit commercial banks can extend, thus reducing the money in circulation. By reducing money in circulation, there is less money chasing the same amount of goods and services, and inflation subsides, ceteris paribus. 

With inflation in January having peaked at 5.3%, there is certainly currently upward pressure on inflation, and it seems a measure of inflation control is needed right now. After all, if you ‘spare the interest rate,’ you spoil the nation…