• October 21st, 2020

Impact of repo rate cuts on local economy

Some of the measures governments have put in place during the Covid-19 pandemic include the cutting of repo rates to provide some short-term relief to borrowers. 
However, the question remains whether such cutting is an effective tool to stimulate economic activity. 
According to Postrick Mushendami, deputy director of macro models and financial stability at the Bank of Namibia, the cut in the repo rate has been effective as Namibia has not seen a lot of closure by the commercial sector. 
Also, Mushendami stated, interest rates take time to affect real output. 

“Normally, the transmission between interest rates to the real economy takes a minimum of 18 to 24 months. So, we should wait for that period to start criticising the effect of repo rates,” he said. In clarification, he said, interest rates alone cannot be an answer because they have to do with demand management but what has been seen in terms of the Namibian economy is both the demand and the supply shock. 

To revive the economy, Mushendami outlined that besides the increase of the health expenditures, government has alluded to N$8.1 billion packages that was earmarked for the private sector and individuals. 

The central bank came in and reduced the repo rates cumulatively by 2.75% from February up to August. 
Furthermore, he stated, rom the macro-prudential point of view, some stimulus that the bank has put in place is the relaxation of the capital conservation buffer. Capital conservation buffer refers to the money that was packed by commercial banks to ensure banks have an additional layer of usable capital that can be drawn down when losses are incurred. 
The central bank allowed the commercial banks to use this money as excess liquidity for them to be able to grant credit. 
“This amounted to an excess of about N$6 billion that was released for the commercial banks to get used off. The other one was the loan repayment package where banks were allowed to provide for long repayments to its customers. For the first three months, banks were able to grant relief in access of N$10 billion, which is an enormous amount if one put all these figures altogether,” he explained. 

Mally Likukela, an economist and owner of Twilight Capital, said going forward, in terms of really putting a package for revival, very important will be to look at those sectors that were critically damaged – like the tourism sector.  
“Since there are still regulations with international tourists that are still not attractive enough due to the pandemic, we should allow the domestic tourist to a quick start. We already saw the government put in a plan for domestic tourist initiative, which has been receiving support,” stated Likukela. 

He said the government should look at packages that will stimulate job creation, which is very important because not only will it sustain growth but it will instill purchasing power in the domestic demand. Likukela believes that these put together with other measures that are already in place, the country will be able to face Covid-19.
- mndjavera@nepc.com.na

Maihapa Ndjavera
2020-10-16 08:34:59 | 5 days ago

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