Namibians have little choice but to continue tightening their financial belts and keep expenses at a minimum after the Bank of Namibia yesterday kept the repo rate unchanged at 7.75%. This decision by the central bank’s monetary policy committee means the prime lending rate at commercial banks stays at a relatively high 11.50%. 

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 repo rate in the form of interest rates to their consumers through bank loans.

Economic analysts are becoming increasingly concerned about rising household and business debt levels. This, combined with inflationary pressure and stagnating disposable income, has
created concerns about households’ and businesses’ ability to service debt. 

Despite these concerns, BoN governor Johannes !Gawaxab yesterday said this is not the right time to start decreasing the interest rates.

“Inflation is decelerating, but it is not defeated yet. So, the last thing to do is to make policy errors to just reduce rates now. We are not yet out of trouble, we know inflation is
not good for our people,” said !Gawaxab.

Namibia’s annual domestic inflation rate continued a rapid downward trend for the second consecutive month to 4.5% in March 2024, compared with February’s reading of 5%. Meanwhile, the repo rate started its uptick as of January 2021 from 3.75% to 4% in February 2022, to 6.75% in December 2022 up to the current 7.75%. 

A homeowner, who prefers anonymity,
said she bought a house in 2020 and was
paying around N$5 000 per month. However, with high interest rates, her monthly payment is now close to N$8 000.

“This is not a joke. When buying a house, you need to prepare financially because with these interest rates, it is like a gambling game. I now dramatically have to adjust my monthly expenses. Nothing is the same,” she said.

This state of affairs prompted deputy finance minister Maureen Hinda-Mbuende to express her dissatisfaction with commercial banks’ earnings at the expense of consumers who are struggling to keep up with rising living costs. 

Last month, the deputy minister said she is concerned about the growing financial strain on households, who are constantly tightening their belts, just to put bread on the table in a high-interest rate environment.

 Hinda-Mbuende emphasised that the banking sector must do more, as the market cannot withstand continuous interest rate increases.

Struggle

An increase in commercial banks’ prime lending rates has a direct impact on domestic households’ debt repayment costs. This puts additional strain on already vulnerable households, significantly reducing their capacity to service both interest and capital repayments. This is supported by the increase in household debt. In addition, many households have been forced to borrow from banks to eke out a living, through this exacerbating a vicious debt cycle. 

According to the financial stability report for 2022 released by the Bank of Namibia and the Namibia Financial Institutions Supervisory Authority (Namfisa), households’ debt servicing costs almost doubled from 2020 to 2022. The household debt servicing costs increased from 9% in 2020 to 17.8% in 2022, reflecting a combination of higher debt levels as well as high interest rates.

Banks profit

Meanwhile, income from the higher interest rate has been the main contributor to profits made in recent years by Namibia’s commercial banks. Despite this, local commercial banks are not compelled to adjust their interest rates in line with quarterly repo rate changes by the BoN. 

Instead, Namibia’s commercial banks actually prefer to alter their interest rates so as not to lose out on the profitable interest margin on some deposits.  

Standard Bank Namibia’s profit for 2023 increased by 23.3%, up from N$624 million to N$770 million. The main contributors to this growth were the increase in net interest income of 24.6% to N$1.8 billion year-on-year, mainly due to the positive endowment
effect ensuing from continued repo rate increases. Standard Bank financials also showed a 32.2% growth in trading revenue, 28.5% increase in bancassurance, and an increase in property- related revenues. 

Also, Capricorn Group Limited, the parent company of Bank Windhoek, achieved solid results with profit after tax for the six months ended 31 December 2023 increasing by 18.5% to N$827.6 million, compared to a profit after tax of N$698.2 million reported in the comparative period in the prior year. Capricorn Group experienced a noteworthy 12% year-on-year increase in net interest income, driven by higher interest rates, an 8.5% year-on-year growth in the loan book, and prudent management of cost of funding. 

Nedbank Namibia reported a profit after tax of N$460 million for the year ended 31 December 2023. 

According to the FirstRand Namibia 2023 annual integrated report, FNB continued to deliver strong performance, with profit before tax increasing by 20% year-on-year to N$1.7 billion, representing 76% of FirstRand Namibia group profit. The primary drivers for this growth were a 27% increase in net interest income before impairments attributable to growth in the balance-sheet, and improvements in margins due to pricing adjustments and interest rate hikes. 

Right time

Independent researcher Josef Sheehama noted that the high rates will make it difficult for low-wage workers and individuals to keep up with the growing costs, which is lowering their purchasing power and lowers their quality of life. 

“There is no denying that the people’s financial situation is not ideal right now. This is disastrous for the business community and homeowners because the repo rate has remained unchanged. Energy prices are still high, though, and the cost of living is still pinching homeowners. The cost of living has not decreased, even with inflation down to 4.5%,” said Sheehama. 

Also weighing in on the high rates, economist Omu Kakujaha-Matundu said there are still upward risks to inflation, given the geopolitical tensions and load shedding in South Africa. He, however, agreed with the central bank governor that it would not make sense to decrease the repo rate, just to increase it again. That  would create havoc in economic decision-making across all sectors of the economy. -mndjavera@nepc.com.na