Continued Inflation Puts Pressure On Households …may increase financial stability risk

By:Justicia Shipena
Inflationary pressures continue to mount on households, potentially affecting their ability to service debts.
This is according to the Bank of Namibia’s (BoN) and Namibia Financial Institutions Supervisory Authority’s (Namfisa) latest financial stability report.
The report emphasises unique risks posed by the macroeconomic climate, domestic household and business debt, the banking sector, Non-Banking Financial Institutions (NBFIs), and the payment and settlement system.
“Increasing inflation continues to put pressure on households, and may affect their ability to service their debts, increasing financial stability risk,” the report stated.
Namibia’s overall inflation rate increased to 6.1% in 2022, up from 3.6% in 2021, primarily due to price increases in transport, hotels, cafes and restaurants, as well as furnishing, household equipment and routine maintenance, which registered 17.5%, 9.7%, and 8.7%, respectively.
While some threats to Namibia’s financial system stability have abated, others, especially those arising from the macroeconomic climate, have worsened.
“These are risks associated with developments in the macroeconomic environment which have a subsequent impact on household and corporate debt, and the banking sector, among others,” said the report.
According to the two financial institutions, the increase in macroeconomic risks was primarily due to a significant slowdown in global output, increased global financial turbulence, Namibia dollar depreciation against major trading currencies, and sovereign credit rating downgrades.
It also indicated that risks from a slowing home economy and a drop in international reserves in 2022.
Furthermore, the threats to financial stability posed by unsustainable public sector debt have increased.
“The probability and impact of this risk materialising in 2023 is medium. The probability and impact of risks to financial stability emanating from the macroeconomic environment in 2023 are projected as broadly medium,” said BoN’s Director for Financial Stability and Macro-prudential Oversight Florette Nakusera.
According to Nakusera, banking sector risks have decreased in 2022, while family debt, business debt, the national payment system, and non-bank financial institutions (NBFI) have recorded mixed results.
She went on to say that the banking sector was still strong and resilient.
At the same time, the risk of family and business debt increased.
However, Nakusera said, the likelihood and impact of them expanding further in 2023 are both medium.
The risks associated with greater settlement in the last window decreased in 2022, whereas those associated with retail payment security remained the same.
The chance and impact of payment system hazards materialising in 2023 are determined to be medium going ahead.
Furthermore, non-bank financial institutions reported a reduction in risks related to cash flow risk, while risks related to the sector’s solvency remained generally stable.
“Conversely, market risks and risks emanating from the funding position of NBFIs went up during the period under review. The probability of materialising and the potential impact of the majority of the NBFIs risks, are projected to remain medium.”
Nakusera said the overall risks to financial stability in Namibia, though stable, edged up in 2022 and are expected to remain broadly medium in 2023 as economic uncertainty persists.
According to statistics, Namibia’s economy has improved but is expected to slow down in 2023 and 2024.
According to the Namibia Statistics Agency (NSA), Namibia’s average inflation rate increased in 2022 compared to 2021, owing primarily to a rise in transport inflation.
When it comes to domestic concerns, she said the main ones are continued global monetary policy tightening and high import costs, both of which are projected to endure during the forecast period.
“The war between Russia and Ukraine is expected to last longer, as are the high costs for related goods, such as fuel, wheat and cooking oil, of which Namibia is a net importer. Additional internal hazards include drought and floods, water supply disruptions that continue to impair mining output along the coast, the possible spillover of South African power outages to Namibia, and uncertainty about the effects of further climate change going forward.”
The financial stability report assesses the stability of the Namibian financial system and its resilience both to internal and external shocks.