Investigating alternative measures to curb debts

For the past three years, Namibia has experienced skyrocketing household debts from N$25.4b by the end of 2011 to N$36.62b by the end of 2013.
 Simonis Storm Securities (SSS)’s December 2013 report on money and banking statistics  shows year-on-year growth from 2012 to 2013 amounting to 15.18% from N$31.8bn to N$36.6b. This was spearheaded by the instalment credit that grew by 16.62% while other loans and credits grew by 24.37%.
According to SSS economist, Daniel Kavishe, the high debts were encouraged by the low interest rate environment, which seemed to be the catalyst.
However, the expectation of hiking the interest rates to curb the country’s indebtedness and the fact that the South African Reserve Bank had its interest rates recently hiked to 5.5%, was shot down by Bank of Namibia (BoN) in its latest monetary policy in which the repo rate remained at 5.50%.
Kavishe says Namibia is under a Common Monetary Area and having its currency pegged to South Africa’s has certain implications on the level of reserves that the Namibian central bank has to maintain. Thus, “the local repo rate has generally trailed higher than that of South Africa as part and parcel of maintaining capital controls”.
As such, the current repo rate is on the same level as South Africa’s, for once.
BoN governor Ipumbu Shiimi states it is not urgent, at this point, to raise interest rates, as the global and emerging economies have shown signs of recovery, with the most advanced keeping their repo rates the same while the emerging ones - mostly members of the Brics - taking the risk of hike theirs.
During the period under review, Brazil effected its seventh consecutive interest rate hike at 10.5%, which was an increase of 0.50 basis points while India increased its own by 25 basis point to 8%.
Shiimi notes; “The domestic economy growth in 2013 was better than the previous year, even if it is still short of the targeted growth of 6% underlined in the NDP4. Furthermore, the economic outlook for the year 2014 is optimistic. The economy is forecasted to grow by 5.3% in 2014, supported by high growth in the construction, mining and strong consumer goods sectors.”
But the central bank is still concerned by the rise of the country’s indebtedness and has thus started consultations with the Ministry of Finance, to set up interventions to address the current high debt level. It hopes to achieve this by getting the credit card payment rates high and expensive vis–à–vis making it accessible to those who can afford it and can adhere to the credit agreement laws.
On the other hand, local economists believe that although the repo rate remains the same, it is likely to rise in the course of the year.
FNB Namibia economist, Daniel Motinga, says the repo rate will rise in the not-so-distant future and therefore Namibians need to keep the levels of their borrowing in check.
Institute of Public Policy Research (IPPR) economist, Klaus Schades, echoes Motinga’s views saying; “At some point, BoN will have to increase the interest rates in order to reduce the inflationary pressure. If it is not done now, it will be done later in the year. In the meantime, households are likely to continue borrowing, which will make them even more vulnerable to future interest hikes and that could result in increased levels of non-performing loans.”
“But from a regulator’s perspective, it is important to deflate inflation expectations for the future by moving rates earlier. Looking at current data, growth is positive and inflation is at acceptable levels, so one can argue there is perhaps no urgency in hiking rates this early. However, BoN can make those decisions once all the micro-risks are assessed,” Motinga adds.
The main issue is not just the necessity of hiking the interest rates but how much it would need to rise, for its impact to take place on borrowing, if it was hiked in future, the economists concur.
As Kavishe stresses, “Spending patterns are often engrained in people; so higher income earners wouldn’t necessarily change their spending habits as quickly as those on the lower income side. Again, it is important to note there are individuals who are already highly indebted with car loans and house mortgages, which have floating interest rates. In this context, they will just have to bear the brunt and make the due payments as they watch their disposable incomes being pinched.”
He, nevertheless, highlights that the low interest rates, at this point, are not all a bad thing.    
“The Namibian economy is faring well, on paper. It is experiencing economic growth rates of higher than 4% inflation, averaging between 5.5% and 6% [over the past two years] and low public debt to GDP of about 24% (compared to other nations). Technically speaking, our biggest challenges are reducing the income inequality and increasing employment. These can be done through an expansionary fiscal policy, which Government has been pursuing over the past few years, as well as a low interest rate environment that would help stimulate growth in this regard,” Kavishe emphasises. -