Maihapa Ndjavera
There is increasing discontent about the Bank of Namibia’s attempts to curb inflation by increasing the repo rate.
Economists who have departed from the traditional inflation-fighting ideology argue that the central bank’s stance has dire consequences for the economy and ordinary citizens.
They postulate that then increasing repo rate can significantly slow growth, to the extent that businesses and households are adversely impacted, and warn this could trigger a recession.
The average home loan rate in 2021 was 8.5%, compared to 11.75% currently. For a house valued at N$1.2 million, the monthly repayments have increased by
more than N$2 590 per month during the last two years.
FirstRand Namibia Group economist Ruusa Nandago said BoN’s decision stems from low growth in private sector credit extension.
“In order for this decision to deliver the required outcome for the Bank of Namibia as the custodian of monetary policy, commercial banks will soon hike lending rates accordingly,” she added. Nandago noted that Namibians should expect BoN to hike it by another 25bps during the course of the year, and for the hiking cycle to end with the repo rate at 7.50%. When asked for comment, the Bankers Association of Namibia (BAN) said it will “consider the relevant facts” of banks not being compelled to increase lending rates as the repo rates go up, and “respond in due course”.
The central bank on Wednesday increased the repo rate again, this time with 25 basis points, from 7% to 7.25%, bringing the prime lending rate to 11.25%. At the central bank’s announcement, governor Johannes !Gawaxab said it is not compulsory for banks to increase their lending rates when the repo rate
increases.
The increase means more misery on most Namibian consumers, who rely heavily on debt to survive. What’s more is that as the banks increase their lending rates, they make massive profits at the expense of their customers.
Managing director of Twilight Capital Mally Likukela said the increase in the repo rate will not address the root causes behind the current inflationary pressure and if anything at all, will only harm the economy.
“Truth is that more money in the economy isn’t a problem, as long as supply can keep up with the demand of goods and services. Besides, it is clear as day that the current inflation in Namibia is being driven by supply shortages, not too much money,” he stressed.
He contends that BoN’s approach is detrimental to the domestic economy, as it reduces money circulation and thus does not stimulate economic activity. With this, said Likukela, comes less investment and more unemployment.
He added that this eventually hurts the economy, and causes severe economic hardships for households. Instead of trying to solve a
supply crisis with demand management, the economist advised the central bank to fundamentally assist government to reorganise the economy and address supply constraints. Josef Sheehama, an independent economic and business researcher, also reasons that raising interest rates wouldn’t put out the fire.
“What we need are new ideas that tackle the imported inflation challenges’ headache, instead of increasing the interest rates. We have been doing this for many centuries, and it has been proven that increasing interest rates is not a solution to curb the inflation catastrophe,” he observed.
Sheehama asserts that commercial banks
are in the business to make profits.
“The central bank has the power to set its own interest rates, which effectively determines the price of money. This will influence the revenue the commercial banks expect to receive from a loan and, as a result, the lending rate it charges the borrower on loans, and on a mortgage
which is higher than at the level borrowed from the Bank of Namibia,” he explained.
Banks charge different rates of interest, based on the risk perception and risk attached to different loans.
Maximise profits
Adding his voice, Popular Democratic Movement (PDM) parliamentarian Maximalliant Katjimune said BoN’s announcement confirmed the public’s view that the increase in lending rates of commercial banks is not always genuinely informed by the increase in the repo rate.
“In some cases, commercial banks instead use the excuse of an increase in the repo rate to maximise profits, even if they are in a position to keep their lending rates at a fixed rate and give breathing space to borrowers. This does not only apply to commercial banks, but to other lenders and financial institutions as well,” said the politician.
Katjimune added that there is a need for a mechanism to regulate exactly how these increases are determined so that lenders do not use the repo rate as a cover for increasing the lending rates. In the same vein, he said Namibia will not address the issue of inflation, which ultimately impacts the repo rate, if it does not, as a matter of urgency, develop industries which produce and sell products and services.
There is also a fear of Namibia’s inability to decide its own destiny.
“We are a passive economy, with direct influence from the US Federal Reserve and the RSA Reserve Bank. It affects us, as we cannot block interest rate fluctuations and inflation. However, we can make economic
policies to target anything that hikes inflationary behaviour towards the key inflation drivers like electricity, petroleum, mortgage prices and transportation costs”, said Landless People’s Movement deputy leader Henny Seibeb. “The economy can impose policies to protect the poor from the rising cost of inflation by creating alternative remedies and affordable products and services.
“Government debt servicing held in US dollars will also rise. Thus, we should consider curbing debt and government outflows”.
Govt involvement
Meanwhile, Likukela further said the current economic consensus of assuming that only BoN can address inflation and that government should stay out of their way is flawed. He noted that there is a great deal that fiscal policy, instead of a submissive monetary policy, can accomplish in the face of rising inflation. He thus advised the government to help repair supply chains and transportation networks in the short-term, and to think about how the country’s industrial policy can be made more resilient to future challenges in the long-term.
“Governments can regulate the prices of administered goods and services without creating any material market distortions. Government can also play a big role in making life more affordable for everyone, especially the less privileged members of our society, by using already existing social safety/protection programmes,” Likukela reiterated.