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Understanding recent policy changes to Bank of Namibia’s Determination

2021-10-29  Staff Reporter

Understanding recent policy changes to Bank of Namibia’s Determination
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Natangwe Sheehama

Since 1 April 2020, the Bank of Namibia implemented the determination to deal with and mitigate the risks to the economy as a result of the Covid-19 pandemic.

On 22 October 2021, the Bank of Namibia decided to amend the determination (BID-33). The bank asserted that, “These measures were taken to safeguard a sound monetary, credit and financial system, whilst providing much-needed relief to borrowers”.

The bank’s monetary and fiscal policy responses during the initial phase of the crisis were swift and significant.

In my view, these policies were successful in helping many parts of the nation’s economy respond effectively to the waves of the pandemic.

At first, the goal is to help Namibians bridge this difficult period by making credit affordable and available.

As many economic activities are temporarily shut down, companies rely on credit to continue to pay their employees and household needs to continue meeting their basic needs.

However, they may be unable to borrow if financial turmoil curtails lending activity.

The Bank of Namibia must, therefore, intervene to prevent a sudden contraction of credit when it is most needed.

If Namibians can’t borrow to weather an economic storm, the impact on the economy could be worse, the recovery will take longer, and there will be long-lasting damage to Namibia’s productive capacity.

Achieving the primary mandate of keeping inflation close to the target requires stability in the economy and employment first.

In normal times, the Bank of Namibia can achieve the inflation objective by setting the policy interest rate at the appropriate level.

However, during major disruptions to the economy and financial markets such as those we are experiencing with Covid‑19, the Bank of Namibia needs to take more comprehensive measures to ensure the financial system continues to play its role of providing credit where it is needed.

For these reasons, the Bank of Namibia is acting in several ways to support the economy and financial system, and it stands ready to take any and all actions to protect the well-being of Namibians during this difficult time.

The Bank of Namibia amended the loan repayment moratorium from the current 6-24 months to a period of 1-24 months.

It is saying you do not need to meet your monthly loan payments for that amount of time, and you will not be penalised for it.

My aim is to help you understand, and to recommend you to further download the Bank of Namibia Determination (BID-33) to read.

This article is to help Namibians to understand and make sound decisions.

It is best to check with your bank on the options available to you for the loan moratorium.

If you can afford the monthly repayment now, it’s better to start paying again, as the longer you delay means the loan period would be extended.

There are many options to explore if you are a business owner, such as getting an equity partner to invest in your business.

If you are considering structuring your business this way, or entering into an equity partnership, it is wise to first ensure that your business’ growth projections will reflect the capital injected by the equity partners.

If you are considering buying into an equity partnership, make sure you’re in a financial position to afford the buy-in amount, and that you are financially and mentally prepared to wait to see the benefits.

Furthermore, the Bank of Namibia revised the Determination of collateral haircuts.

The term ‘haircut’ is most commonly used when referencing the percentage difference between an asset’s market value and the amount that can be used as collateral for a loan.

When collateral is being pledged, the degree of the haircut is determined by the amount of associated risk to the lender. These risks include any variables that may affect the value of the collateral if the lender has to sell the security due to a loan default by the borrower.

Variables that may influence the amount of a haircut include price, volatility and credit quality of the assets, amongst other things.

These are my opinions; hence, I recommend you consult other related materials to enhance your understanding.

In response to the economic impacts stemming from Covid-19, the Bank of Namibia lowered interest rates to support economic activity.

These moves support consumers and businesses by lowering payments on existing and new loans throughout the economy.

The enormous economic and social costs of the crisis have greatly reinforced the alternative view, which I share that in some circumstances, the Bank of Namibia needs to act pre-emptively – even when price stability is not at stake – to defuse risks to financial stability that can morph into a systemic crisis.

The Covid-19 pandemic constitutes an unprecedented challenge, with very severe socio-economic consequences.

These measures are aimed at ensuring that all sectors of the economy can benefit from supportive financing conditions that enable them to absorb the Covid-19 shock.

Where necessary, the Bank of Namibia stands ready to take further actions, including legislative measures, if appropriate to mitigate the impact of Covid-19.

To conclude, I reiterate that one of the critical consequences of the crisis has been the much greater prominence of crisis prevention, which pertains not only to the Bank of Namibia, but to the entire spectrum of macro-financial policies.

This emphasis requires reliance on the broadest possible set of policies and tools, together with careful consideration of the interactions, complementarities and potential conflicts among them. Relying on a broader set of complementary policies and tools is crucial, particularly in the current circumstances of ultra-low interest rates.

2021-10-29  Staff Reporter

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