Namibians have no choice but to keep on tightening their belts and reduce spending even more after the Bank of Namibia yesterday increased the repo rate again, this time with 25 basis points, from 7% to 7.25%. This brings the prime lending rate to 11%.
However, BoN governor Johannes !Gawaxab said while he is aware of the public’s suffering in light of increased bond and loan repayments as well as the escalating cost of food, it is not compulsory for banks to increase their lending rates. The increase pours more misery on most Namibian consumers who rely on debt to survive. The repo rate is defined as the lending rate offered by a central bank to commercial banks for its short-term funding requirements. The commercial banks then pass on the interest rate
levied by the central bank to their consumers through interest charged on loans.
“This is not good for people with mortgage and vehicle loans or people who are borrowing. We understand that it’s painful but if we do not do what we are supposed to do as a central bank, we are not only going to violate our mandate of combating inflation, but it’s going to be worse for the households. Inflation needs to be kept in check to avert the situation of having more difficult conditions for households in the future,” said the governor.
Knock on effect
Josef Sheehama, an independent economic and business researcher, said, “Banks are in it to make profits. The central bank has the power to set its own interest rates, which effectively determines the price of money. This will influence the revenue the commercial banks expect to receive from a loan and, as a result, the lending rate it charges the borrower on loans, and on a mortgage which is higher than at the level borrowed from Bank of Namibia,” explained Sheehama.
Therefore, commercial banks charge different rates of interest based on the risk perception and risk attached to different loans, he explained.
Sheehama went on to clarify that the interest rate depends not only on customers’ cost of funds but also their experience history in certain assets proving more difficult to recover costs associated with that recovery as well as loan losses in that asset class.
“It also depends on the restrictions placed by the regulator, and prudential norms for that asset class. Hence the rate of interest is different. The same asset class for different customers with different credit risks means different interests. It is now prevalent in business loans,” Sheehama shared.
Weighing in on the increase, an economist at Simonis Storm, Theo Klein, said an increase in interest rates is always good for those who save and invest, but bad for those who hold debt.
“When the repo rate increases, so do other short-term interest rates in the economy such as fixed deposit rates, credit card rates, and yields on treasury bills. So, if you invested some of your savings in a treasury bill with the government or a fixed deposit with a commercial bank, your return on investment will increase after a repo rate hike. In this way, pensioners who live off interest income actually benefit from repo rate hikes, provided they are not highly indebted,” Klein stated.
Klein advised consumers to account for repo rate adjustments when taking on a loan, especially if the loan contract is a variable rate loan.
Moreover, local economist Klaus Schade pointed out there is a time lag between interest rate changes and the impact on inflation. However, he noted it also depends on whether price increases are driven by domestic or external factors.
“Domestic demand changes are unlikely to have an impact on the prices of imported goods and services, since domestic demand is relatively small compared to demand in South Africa, let alone beyond the region. The repo rate increase has ended a long period of negative real interest rates that started in November 2021, meaning the inflation rate exceeded the interest rates,” Schade noted.
Importing inflation
Namibia’s inflation is fuelled by transport and food inflation and to a large extent by imported items. Transport inflation is dominated by fuel price increases initiated by international oil prices and the exchange rate. Any change in domestic fuel demand, Schade said, will not impact either of these two factors. The same applies to the prices of imported fruits, vegetables, and cereals which have increased by between 10% and almost 30%.
Furthermore, managing director of Twilight Capital, Mally Likukela, yesterday said increasing the repo rate will not address the root causes behind the current inflationary pressure and if anything at all, it will only harm the economy. According to Likukela, interest rates “are a crude tool that poorly meets the challenge of today’s inflation, especially for a country that is in a fixed exchange rate regime (Common Monetary Area) like Namibia”.
He rationalised that the main issue with fixed exchange rates is that it limits a central bank’s ability to adjust interest rates to affect growth rates and other macroeconomic aggregates, such as inflation.
“The Bank of Namibia believes that inflation is caused by too much money floating around in the economy and think that the only way to lower it is to keep the amount of money in the economy relatively constant. Since the beginning of this interest rate tightening episode, inflation rate has been on a serious increase! This approach called monetarism remains largely unsuccessful in combatting inflation. The truth is that more money in the economy isn’t a problem as long as supply can keep up with demand of goods and services. Besides, it is clear as day that the current inflation in Namibia is being driven by supply shortages, not too much money,” Likukela stated.
Rand relation
Meanwhile, announcing the increase yesterday, the central bank’s monetary policy committee (MPC) reinforced the view that the increase is appropriate to continue anchoring inflation expectations and safeguarding the peg arrangement with the South African Rand, while simultaneously avoiding harsh impulses to the domestic economy.
!Gawaxab added that inflation is not good for growth and equality in the country, as it perpetuates inequality in society. He warned once inflation gets out of control, it will be difficult to bring it back. He noted he has no doubt the increase in the repo rate is effective in fighting inflation, but cautioned it takes time for the rate adjustment to be effective.
BoN increased the repo rate by a cumulative 300 basis points from 3.75% to 6.75% during 2022. The central bank increases the repo rate to slow down the annual inflation rate that averaged 7.1% in the first three months of 2023 compared to 4.5% during the corresponding period in 2022.
Domestic activity
!Gawaxab noted annual growth in Namibia’s real gross domestic product (GDP) rose to 4.6% in 2022 from 3.5% in 2021. Domestic economic activity, he said, has continued to improve, primarily in sectors such as mining, manufacturing, transport, communication, and tourism as well as wholesale and retail trade. Activity in the construction sector, however, continued to decline in line with the subdued government and private sector work.
Going forward, !Gawaxab stated real GDP growth is projected to slow down to 3% in 2023, due to the anticipated moderation in momentum in the primary and secondary industries.
Additionally, he noted that risks to the domestic economic outlook remain and can emanate from external and internal factors. The governor noted external factors include weakening global economic activity, tightening of global monetary policy, and persistent inflation. Internal risks include water supply interruptions, particularly at the coast, and a looming drought.
Meanwhile, he stated the rise in overall inflation was predominantly driven by food and transport inflation. On a monthly basis, overall inflation, though elevated, remained unchanged at 7.2% during February and March 2023.
“Overall inflation for 2023 has been revised upwards and it is now projected to average 6.1%, from a forecast of 5.3% at the previous MPC meeting. The revision was on account of the second-round effects on food price inflation originating from a weaker exchange rate, as well as the prolonged stubbornness in core inflation,” !Gawaxab added.
Covid causes
Moreover, he observed that growth in private sector credit extension (PSCE) slowed, this is evidenced in the year-on-year growth in PSCE which declined to 3.1% in February 2023 compared to 4.1% in December 2022. The slowdown in PSCE growth stemmed from lower demand for credit by the business sector, partly due to the lingering impact of Covid-19.
!Gawaxab continued this is reflected across all business credit categories namely, mortgage loans, other loans, and advances and overdrafts as well as instalment sales and leasing credit. In contrast, growth in credit extended to households and remained relatively stable.