The South African Savings Institute, an independent non-profit organisation, has echoed the sentiments of some Namibian economists that ever-increasing interest rates are driving many into poverty and is pushing the domestic and regional economies onto the edge of a recession.
Namibian consumers have been told to be prepared for the worst as the central bank is expected to increase the repo rate by another 25 basis points (bps) to 7.50% from 7.25% at the next Monetary Policy announcement set for mid-June.
Meanwhile, in neighbouring South Africa, the Savings Institute’s Gerald Mwandiambia has warned that homeowners, in particular, will be hardest hit. “Speak to your financial institution, look at getting an extension on the term. This will reduce your home loan payments and remember this is a last resort. Also look at spaces in your home that could generate income.
Try and get a tenant. Salaries are not going up as much as inflation and the cost of living. Most of us are living on 50% of what we were earning in 2018 but servicing the same bills. Anything more than this will lead to an economic recession,” Mwandiambia cautioned.
His remarks came after the South African Reserve Bank last week Thursday increased that country’s interest rate for the 10th time since November 2021. Thursday’s 50 basis points hike took SA’s prime lending rate at commercial banks from 11.25% to 11.75% marking a 14-year high.
Inflationary pressure
According to managing director of Twilight Capital, Mally Likukela, hiking the interest rate will not address the root cause behind current inflationary pressure.
“Interest rates are a crude tool that poorly meet the challenge of today’s inflation especially for a country that is in a fixed exchange rate regime (CMA) like Namibia,” Likukela stated.
In a recent statement, Likukela said 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 this amount relatively constant.
“This approach, called monetarism, remains largely unsuccessful in combatting inflation. 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 daylight the current inflation in Namibia is being driven by supply shortages, not too much money,” Likukela stated.
He further explained that inflation happens when demand for goods surpasses the supply of goods, adding this has been and is currently being caused by structural factors that have constrained and reduced the Namibian economy’s ability to supply goods. Likukela continued that when this happens, the price people are willing to pay for available limited goods increases dramatically. Thus, he emphasised, the shortage of goods and the inflationary pressures this has created cannot be solved by quickly draining money out of people’s pockets by raising (repo) interest rate.
“Even though it is obvious, even for the Bank of Namibia, that the current inflation is being caused by supply issues, the central bank is still adamant that draining money out of people’s pockets is the one and only way to address inflation,” said Likukela.
He thus advised that instead of trying to solve a supply crisis with demand management, the central bank should fundamentally assist government in reorganizing the economy to address supply constraints.
Deviate
Namibia’s annual inflation increased by 6.1% year-on-year in April 2023, noticeably lower than the 7.2% y/y recorded in March 2023.
According to local stock brokerage, Simonis Storm, a higher base effect can mathematically lead to lower annual inflation being recorded in coming months, but the firm warned that general living costs will remain elevated.
Meanwhile, the Bank of Namibia’s Monetary Policy Committee (MPC) is scheduled to meet on 12 and 13 June 2023 to determine the repo rate for the next quarter.
“We believe that the Bank of Namibia will only hike by 25 basis points in their June meeting. In the past, one out of five MPC members were always in favour of hiking in step with the Reserve Bank in South Africa, with the majority of MPC members favouring a more conservative approach,” said Theo Klein, an economist at Simonis Storm.
According to Klein, if this sentiment has not changed among MPC members, “we believe a 25bps hike to be more realistic.”
Klein is of the view that Namibia has allowed the local repo rate to deviate from South Africa in the past when foreign currency reserves were high. “This also supports the view that our repo rate will remain below the repo rate in South Africa,” he added.
Josef Sheehama, an independent economic and business researcher, also believes the MPC will take the same route and increase the rate as South Africa, but by 25 bps.
“The decision reflects Namibia’s central bank’s ongoing view that the current repo rate is appropriate to support the still weak domestic economy and to protect the Namibian dollar’s one-to-one peg to the South African rand,” said Sheehama.
“The deterioration in foreign exchange rates, especially Namibia dollar/US dollar to 19.7768 will further encourage the Bank of Namibia to tighten its monetary policy,” he added. Sheehama said the increase in food prices has been noted as a concern for the global and local economies.
“Driving up such inflation was the rise in the prices for items such as electricity, gas, fuel, food and transport. These increases will certainly impact every single Namibian given the reliance the country has on imports. The softening Namibia dollar is doing little to fuel confidence and will no doubt add to pricing pressures,” he said.
Sheehama also said Namibia’s economic rebound is expected to continue, albeit at a slower rate, as policy stimulus fades and terms of trade retreat from the recent record highs.
In a previous statement, Sheehama said the honest answer is that raising interest rates will not put out the inflation fire.
“Short of throwing thousands of people out of work in a depression, higher rates wouldn’t bring supply and demand back into balance, which is a necessary condition for price stability,” Sheehama stated.
He explained that by raising interest rates, the Bank of Namibia hopes to slow down the economy by making it more expensive for consumers and businesses to borrow money.
Sheehama added: “The usage of interest rate hikes as a tool to solve the inflation problem could trigger a recession. A rise in interest rates make it more expensive for companies to expand. That, in turn, could lead to cuts in investments, ultimately hurting employment and jobs. Therefore, raising rates would have little impact on the economy because credit growth is already weak.”
-Additional reporting by Xinhua
Photo: Recession