WINDHOEK, Aug. 17 – With the Repo rate that has been reduced to 6,75%, the cost for borrowing has also been largely reduced.
This means the lower interest environment could support consumption, which would directly benefit the wholesale and retail trade sector, and consequently the manufacturing sector. The Economic Association of Namibia (EAN) said lower interest rates could also encourage private sector investment, since lower interest rates reduce the cost of doing business and could make investment more viable.
“However, in order to support private sector investment, Namibia has to improve the policy environment. The decision is good news for the public sector, since it could cushion against potentially increasing costs of borrowing owing to the investment downgrading by Moody’s on 11 August 2017,” the EAN said.
However, the EAN stressed that lower interest rates dis-incentivise savings since returns from savings decline. Lower costs of borrowing could increase household indebtedness further, which is already at a high level.
“The repo rate determines the interest rates of commercial banks. An interest rate cut has therefore positive impacts on the cost of borrowing, since commercial banks usually adjust their interest rates by the same margin,” noted the EAN.
Foreign exchange reserves have seen a substantial recovery due to the African Development Bank loan issued in South African Rands and the repatriation of funds by financial institutions.
“The import cover increased from about three months to 5,5 months, which is a very good news. The low import cover in the past had been of concern. However, the Eurobond and AfDB loan have to be repaid at some point in time. The strong recovery of foreign exchange reserves reduces the need for an attractive interest rate environment to attract foreign financial investment,” EAN noted.
While the inflation rate surpassed last year’s average inflation rate for the first six months, EAN expects the annual inflation rate for 2017 to be lower than in 2016.
“Even though the annual inflation rate is expected to stay outside the band of 3 to 6%, the downward trend supports the interest rate cut,” EAN said. – Sharma Mundingi