By: Nghiinomenwa Erastus
The next Monetary Policy Committee meeting is a month away, on the 15th of August and then on the 16th the governor delivers what is expected to be another repo hike.
The expected hike is coming at the back of early hikes this year, in the footsteps of the South African Reserve Bank which has already hiked its benchmark rate in May to 4.75, currently at par with Namibia.
Economists in South Africa have also projected a 50-basis points increase this month by the Reserve Bank after annual inflation breached 6% target range.
Despite the constant increase making money expensive in the economy the prices of goods and services are on the rise domestically and around the world.
Moreover, the central bank is trying to contain supply induced inflation with interest rates especially in the domestic economy where credit uptake has not been moving much.
It has become quite clear and well documented by the World Bank in its early reports that the factors pushing average prices of goods are more than demand related with supply disruption and fuel prices.
According to the World Bank, Russia’s war with Ukraine and its effects on commodity markets, supply chains, inflation, and financial conditions have steepened the slowdown in global growth.
One key risk to the outlook is the possibility of high global inflation accompanied by tepid growth, reminiscent of the stagflation of the 1970s, the bank wrote.
“This could eventually result in a sharp tightening of monetary policy in advanced economies, which could lead to financial stress in some emerging market and developing economies,” wrote the World Bank.
In a quest to tame inflation, it does not only worsen the situation for households and companies that are servicing debts but it also makes capital for investment costly as a result dragging the recovery process.
The World Bank advises forceful and wide-ranging policies response are required to boost growth, bolster macroeconomic frameworks, reduce financial vulnerabilities, and support vulnerable groups.
Inflation and repeated inflationary shocks trigger interest rate increases as one of the tools required to bring inflation back to target.
This raises the spectre of the steep increases in interest rates that bring inflation under control but also triggering a global recession.
According to the World Bank, oil price shocks and supply shocks have become more influential in pushing inflation up since early 2021, especially for core inflation and CPI in advanced economies.
Young economist and chairperson of Kalahari Rethinking Economics Society, Henok Meameno, explained that with the peg of Namibia and South Africa still in check, Namibia have to closely match South Africa’s economy, inflation rates, and repo rates.
He said the consideration came about as the elevated global and domestic inflationary pressures were a huge factor in what the country is going through.
The supply chain disruptions, energy markets, and several other factors are affecting the inflation rates in the country.
Meameno explained that the unstable increase of prices globally is causing Namibia’s economy to be fragile to recovery operations even though adjusting the repo rates is one way to try and control inflation in the country.
When lending money becomes more expensive across the economy, it discourages people and businesses from taking loans for consumption or productive purposes.
That should mean less spending, which in turn should mean prices of goods and services falling.
As rates rise, people are also less likely to borrow or re-finance existing debts, since it is more expensive to do so, he added.
With more repo hikes expected in SA, Meameno indicated that how much of an impact will all depend on whether you are a lender or borrower and the outstanding debt.
He said the Bank of Namibia does not really favour higher rates in general, they just want a moderate level of rates that is steady, predictable and conducive to a healthy level of both growth and inflation in the economy.
“Because ultimately, the market values steady, predictable growth and hates uncertainty above all else,” Meameno wrote.
He said the constant interest rate hikes have a negative impact on the performance of Namibian economy.
Meameno stated in his assessment that the domestic hikes are just not appropriate.
Tthis is because business and the economy are grappling with too many shocks already, which are increasingly becoming impossible to bear.
High interest rates have become a major burden for many investors and non-performing loans are posing a serious risk to the stability of the financial system.
Meameno said, “The economy is still essentially bedevilled by the large size of an inefficient public sector, low rates of savings and investment, persistent large budget deficits, and an inconsistent macroeconomic environment”.
“If the cost of funds goes up, local production would suffer. Thus, increasing interest rates is not consistent with the plan to increase local production,” he wrote.
Moreover, a rise in interest rates would be a particular challenge for the government, since interest payments are funded out of the operating budget which must be balanced each fiscal year.
He added that one of the constraints for small enterprises is access to cheaper capital and with high rates, they face serious threats to expand.
Another young economist Ndateelela Amukuhu, indicated that for as long as fuel prices continue to increase, inflation will persist and similarly, the cost of living.
The high inflation is causing the depreciation of the purchasing power as well as the depreciation of the currency, yielding high costs of living and high prices for imports.
To mitigate the repo pain, the upper range inflation targeting regime needs to be jerked up in order for the inflation rate to remain low.
Thus, one should note that Namibia does not have full discretion of deciding on the repo rate level, hence such monetary policy amendments is subject to South Africa’s monetary policy, she added.
Inflation hurts the common man, through the corrosion of the purchasing power, as such policy makers, in this case the central bank, are duty-bound to prevent a persistent inflation rate in the economy.
However, the current inflation is from supply side and fuel induced and these factors are not in the control of the central bank nor does increasing interest rate deter them.
In fact, expensive capital in an economy will hinder suppliers’ ability to produce more.
Another aspiring economist, Shiwanapo Mwaafa, agrees that the Repo rate does assist in controlling inflation especially expenditure-pushed-inflation through the increase in the cost of capital/money that will automatically affect consumption.
He, however, indicated that making capital expensive means that aggregate supply would be constrained, as in many cases production and operations are debt funded through drawdowns and overdrafts.
Mwaafa advised households who can to pay their mortgage instalments in advance to reduce the principal amount and the interest.
“Clearing of debts as soon a possible will help them stay afloat in this forever-increasing inflation economy. Furthermore, they must stay financially disciplined by keeping in check their expenses and trying to saving as much as possible”.
In Namibia’s case, a bigger portion of the current inflation is imported mainly from SA.
Email: erastus@thevillager.com.na
