The Bank of Namibia is expected to raise interest rates by 0.50 basis points on 19 April 2023 to curtail ravaging inflation and a fast-depreciating Namibia dollar.
We are expecting BoN to continue raising interest rates over the medium-term.
As an independent economics and business researcher, I strongly believe that the Monetary Policy Committee (MPC) of the BoN will increase the repurchase rate by 0.50 basis points, if not
0.75 basis points. When it comes to the direct impact of these moves, increases in interest
rates will create higher mortgage repayments, especially for new borrowers, as well as those on variable rates. This will mean people have less money to spend elsewhere.
Increasing inflation and therefore uncertainty about the future can also lead to reduced
consumer and business confidence, dragging
down household and business spending even further. Therefore, business and start-up owners in the country will have a hard time dealing with rising inflation, higher borrowing rates and a fast-depreciating currency as ease of doing business worsens in the economy.
With higher interest rates, Namibians are likely to find themselves paying more for loans this year. Tightening monetary policy raises the costs of borrowing for consumers and businesses, weakening demand and curbing prices. But it could also pinch people’s budgets, and as the BoN continues to normalise policy over the rest of 2023, money will become more expensive. Note that the money supply is not just cash, but also credit, loans and mortgages. When the money supply expands, it lowers the value of the dollar. When the dollar declines relative to the value of foreign currencies, the prices of imports rise. The Small and Medium-Sized (SME)
businesses may feel the pain of rapid interest rate rises for the impact of tighter credit conditions exacerbated by economic turmoil. As financing costs jump and become harder to access, the risk of a spike in default rates is becoming increasingly tangible. Liquidity is the lifeblood of any SME, making cash flow more important than the magnitude of the profit, or the return on investment. Therefore, the government recognises that at least every one of us does some sort of micro or small businesses, so creating an enabling environment for all of SMEs to thrive is cardinal.
Hence, the BoN and the Ministry of Finance and Public Enterprises have relaunched the SME Economic Recovery Loan Scheme on 2 February 2023 with a share capital of N$500 million to enhance liquidity. The banks will be facilitating a loan amount from N$50 000 and N$10 million, based on the SME’s balance- sheet and subject to the banking institution’s credit assessment, according to the BoN. The loan amount is linked to the current prime lending rate, which is 10.50%. However, the BoN proposed the prime lending
rate minus 50 basis points. The six-month moratorium for affected SMEs is perceived as a medium to long-term solution in the fragile economy.
Moreover, the current expectations are that inflation and interest rates will remain
undesirably high for some time. The BoN will play a major role in striking the balance needed to bring down the cost of living, without stalling the economy. Furthermore, the Namibian economy is closely linked to South Africa, with the Namibia dollar pegged one-to-one to the South African rand.
The South African Reserve Bank’s monetary policy committee increased the repo rate by 50 basis points on 30 March 2023. This means that Namibia will increase the repo rate to strike a balance. South Africa’s repo rate stands at 7.75%, compared to Namibia’s repo rate at 7.00%. This resulted in a difference of 0.75%. It should be noted that although much of this inflationary pressure is supply-side-based, there is merit in increasing interest rates as a tool to try to slow down inflation.
The fundamental debates about inflation are really concerned with whether the central bank is an inflation-creator or an inflation- fighter. The responsibility of monetary policymakers is to adequately respond to inflation. Those who see the central bank as an inflation-fighter must, therefore, believe that inflation has some source other than the central bank, that it has non-monetary factors. The job of the central bank is to adjust its policy in response to these shocks.
The ongoing Russian invasion of Ukraine poses a serious threat to the global economy. The conflict is a major blow to the global economy that will hurt growth and raise prices. Ukraine is the world’s main supplier of sunflower oil, and Russia is the second-largest supplier, so global prices have been hit by the war. Volatility in global commodity prices and ongoing supply chain disruptions will continue to stoke price pressures. The result will be even higher costs for businesses, and a deep squeeze in the cost of living for households. Hence, it is exceptionally hard to say what this will mean for headline inflation in the coming years because there is exceptionally elevated uncertainty about exactly where key commodity prices such as oil and others will settle. There is also massive uncertainty about the impact of various supply chain disruptions, and the degree to which businesses can pass on their higher input costs to consumers in the face of a significant negative demand and confidence shock. The biggest uncertainty for the trajectory of headline CPI, in my view, is exactly where prices will go, given that for years to come, the market is now likely to be precariously balanced, deeply disjointed and volatile. In conclusion, given fragile economic conditions, any new adverse development such as higher-than expected inflation, abrupt rises in interest rates to contain it, and escalating geopolitical tensions could push the global economy into recession. According to World Bank Group president David Malpass, the global economy is projected to grow by 1.7% in 2023, and 2.7% in 2024. The sharp downturn in growth is expected to be widespread, with forecasts in 2023 revised down for 95% of advanced economies, and nearly 70% of emerging market and developing economies.
Therefore, with higher interest rates, interest payments on loans are more expensive. This discourages people from borrowing and spending. People who already have loans will have less disposable income because they spend more on interest payments. Interest rates affect consumer and business confidence. A rise in interest rates discourages investment, and makes businesses and consumers less willing to take out risky investments and purchases. Hence, other areas of consumption will fall.
*Josef Kefas Sheehama is an independent economics and business researcher.