By Josef Kefas Sheehama
The Bank of Namibia is expected to increase interest rates by 0.50 basis points on April 19, 2023, to curb inflation and a fast-depreciating Namibian Dollar. It is expected that interest rates will continue to rise over the medium term. As an independent economist and business researcher, I believe that the Monetary Policy Committee of the Bank of Namibia will increase the repurchase rate by 0.50 or 0.75 basis points.
The impact of increasing interest rates means that mortgage repayments will be higher, especially for new borrowers and those on variable rates. This will result in people having less money to spend elsewhere, leading to reduced consumer and business confidence, and a decrease in household and business spending. Business owners in the country will have a hard time dealing with rising inflation, higher borrowing rates, and a fast-depreciating currency as the ease of doing business worsens in the economy.
Namibians are likely to find themselves paying more for loans this year. Tightening monetary policy raises the costs of borrowing for consumers and businesses, weakening demand and curbing prices. As the Bank of Namibia continues to normalize policy over the rest of 2023, money will become more expensive. The money supply is not just cash, but also credit, loans, and mortgages. When the money supply expands, it lowers the value of the dollar. When the dollar declines relative to the value of foreign currencies, the prices of imports rise.
Small and Medium-Sized Enterprises (SMEs) may feel the pain of rapid interest rate rises, and the impact of tighter credit conditions exacerbated by economic turmoil. Financing costs will become harder to access, and the risk of a spike in default rates is increasingly tangible. Liquidity is the lifeblood of any SME, making cash flow more important than the magnitude of profit or return on investment. The Bank of Namibia and the Ministry of Finance and Public Enterprises have re-launched the SME Economic Recovery Loan Scheme on February 2, 2023, with a share capital of N$ 500 million to enhance liquidity. The banks will be facilitated a loan amount from N$50,000.00 and N$10,000,000.00, based on the SME’s balance sheet and subject to the banking Institution’s credit assessment. The loan amount is linked to the current prime lending rate, which is 10.50%, however, the Bank of Namibia proposed a prime lending rate minus 50 basis points. The six-month moratorium for affected Small and Medium Enterprises (SMEs) is perceived as a medium to a long-term solution in the fragile economy.
Expectations are that inflation and interest rates will remain undesirably high for some time, and the Bank of Namibia will play a significant role in striking the balance needed to bring down the cost of living without stalling the economy. The Namibian economy is closely linked to South Africa, with the Namibian dollar pegged one-to-one to the South African Rand. The South African Reserve Bank’s Monetary Policy Committee increased the repo rate by 50 basis points on March 30, 2023. This means that Namibia will increase the repo rate to strike a balance. The South Africa Repo Rate stands at 7.75% compared to the Namibia Repo Rate at 7.00%. It should be noted that although much of this inflationary pressure is supply-side based, there is merit in increasing interest rates as a tool to try to slow down inflation.
The ongoing conflict between Russia and Ukraine poses a serious threat to the global economy. Ukraine is the world’s main supplier of sunflower oil, and Russia is the second-largest supplier, so global prices have been hit by the war.
– Namibia Daily News
