Josef Kefas Sheehama
The domestic economy remained in a positive trajectory in the first quarter of 2022, recording a growth of 5.3%, compared to a decline of 4.9% recorded in the corresponding quarter of 2021, according to the NSA. This is a good positive move, well done.
With the price of oil on the rise, more fuel hikes could be on the cards. Users of all grades of fuel will pay more in July when the Ministry of Mines and Energy adjusts the prices of fuels on 06 July 2022. Therefore, the Ministry of Mines and Energy will increase the fuel price for July by N$1.88 per litre for petrol and N$1.34 per litre of diesel.
With the Consumer Price Index (CPI) hitting 5.60% in April, the Bank of Namibia is poised to hike the interest rate by 0.50% basis points on 17 August 2022. Rocketing energy and food costs have precipitated the worst cost of living crisis, with the war in Ukraine threatening to worsen the price shock.
The increase in fuel prices has been noted as a concern for the global and local economy. These increases will certainly impact on every single Namibian, given the reliance the country has on fuels for transportation, manufacturing and in the agricultural sector.
As the economy emerged from the initial impact of Covid-19 and the sharpest decline in activities, the market looked towards a recovery. Therefore, a growth of 5.3% recorded in the first quarter of 2022 is not a surprise.
The economic recovery following the pandemic has differed from economic recoveries of the past. This has thrown up unanticipated problems in supply chains, which have been beset by bottlenecks.
Hence, I also see issues with labour markets, where companies have struggled with worker shortages. Bottlenecks and shortages have pushed inflation, and salary rates remain constant or are cut more than expected.
Furthermore, we are halfway through the year, but markets are beginning to fear. We are living in a global village, in other words we have evolved into a globally-integrated, fully-interdependent world. Nowadays, globalisation is a reality for businesses worldwide. It is important to take note that Ukraine’s exports of grain and oilseeds have mostly stopped, and Russia’s are threatened. Together, the two countries supply 12% of traded calories. Wheat prices, up 53% since the start of the year, jumped a further 6% on 16 May after India said it would suspend exports because of an alarming heatwave.
Both Russia and Ukraine are exporters of major commodities, and the disruptions from the war and sanctions have caused global prices to soar. Food prices have also jumped. Therefore, rising crude oil prices amidst escalating fears created by the conflict in Ukraine is one of the main reasons for an increase in Namibian fuel prices.
In recent weeks, business leaders ranging from Elon Musk to David Solomon have begun sounding the alarm bells about an impending economic slowdown.
In fact, CEO confidence has dipped to its lowest level since the beginning of the pandemic, according to the latest survey from the Conference Board, a business research group. Namibians are being impacted by the soaring price hikes.
Periods of high oil prices frequently lead to periods of recession shortly afterwards. With oil prices rising above US$166 because of the conflict in Ukraine, there are fears high oil prices, combined with rising costs of living, could lead to an economic slowdown at the end of 2022. Rising oil prices have a significant impact on inflation.
Higher oil prices cause a rise in the price of petrol, energy and the cost of transporting all goods.
Therefore, indirectly, all goods which are transported will see rising prices. There is a strong correlation between oil prices and inflation.
Namibia is a small country with an overreliance on diamonds, uranium and fish. Relatively large fiscal deficits, rapidly rising government external debt levels and slipping credit ratings are visible.
Fitch Ratings (Fitch) downgraded Namibia’s long-term foreign currency credit rating to BB- and changed the outlook from negative to stable on Friday, 24 June. This reflects high and rising government debt, exacerbated by the economic shock.
A downgrade means that when Namibia needs to borrow more money, as it inevitably will, investors will demand a higher interest rate because of the lower creditworthiness of the country.
I tell you this not to scare you, but the probability range that most attribute to an event with a real possibility of happening.
Therefore, if oil prices are rising, we face rising living costs, and our disposable income will not go as far leading to cut back on some purchases, because salaries cannot keeping up with inflation. With rising oil prices, we get both higher prices and less demand, a situation which can lead to stagflation. The Bank of Namibia has a target of keeping inflation around 4.4%, but if oil prices are contributing towards inflation at 5.4%, then the MPC may feel the need to raise interest rates.
Money will be expensive. Higher interest rates will slow down economic activity because higher rates increase the cost of borrowing, and discourage spending and investment. The problem is that we already face a squeeze on incomes from higher oil prices.
Therefore, the increase in interest rates and increased cost of mortgage repayments has a double effect of reducing spending.
At this end, on its own, higher oil prices do not cause a recession. However, if oil prices do cause substantial inflation, it presents policymakers with a difficulty to increase interest rates to reduce inflation and further reduce demand, or leave interest rates unchanged and accept higher inflation.
Although higher oil prices alone do not cause a recession, they can be a factor that makes it more likely.