Windhoek, Feb. 17 — Namibia raised its key interest rate for the first time in six years, safeguarding its currency peg with South Africa’s rand. The monetary policy committee lifted the rate by 25 basis points from 3.75% to 4% respectively.
Interest rate is an important economic price. This is because whether seen from the point of view of the cost of capital or from the perspective of the opportunity cost of funds, the interest rate has fundamental implications for the economy. The interest rate has a negative impact on the performance of the Namibian economy. My view is that the hike in interest rate is not appropriate at this time. Business and the economy are grappling with too many shocks already, which are increasingly becoming impossible to bear. The high-interest rate has become a major burden for many investors and high non-performing loans are posing a serious risk to the stability of the financial system. Furthermore, the economy is still and essentially bedeviled by a large size and inefficient public sector, low rates of savings and investment, persistent large budget deficits, and an inconsistent macroeconomic environment.
These challenges underscore the need for policies that would stimulate the economy. I appreciate the concern about inflation, which informed the decision of the Bank of Namibia. But the bigger worry is how to stimulate growth and rebuild confidence in the economy. I believe the private sector capital, both local and foreign, would respond positively if confidence is restored and investment opportunities are created. On the financial sector front, banking institutions are dealing with new challenges such as loans restructuring and expected higher non-performing loans, subdued growth, along more exposure to unproductive sectors. Positive expectations about returns on investment could offset short-term worries about an interest rate rise. Eventually, an increase in productivity would ultimately improve output and moderate inflationary pressure. interest rates play a crucial role in the efficient allocation of resources aimed at facilitating the growth and development of an economy and as a demand management technique for achieving both internal and external balance with specific attention to deposit mobilization and credit creation for enhanced economic development.
The interest rate is expected to have either a positive or negative impact on economic growth. Thus decreasing the interest rate due to expansionary monetary policy may stimulate the economy because of increased economic activities. On the other hand, slow economic growth which may be due to a tight monetary policy via a relatively high-interest rate regime can lead to a fall in economic growth. The annual inflation rate in Namibia edged up to 4.6 percent in January of 2022, from 4.5 percent in December. Upward pressure came from prices of transport, food & non-alcoholic beverages amongst other things.
As the Namibia Statistics Agency said, current inflationary pressure did not result from monetary factors; it is, therefore, unlikely that it could be fixed by monetary policy. It is largely driven by the high transportation cost, food, and non-alcoholic beverages. Tackling inflation could only be effectively done within the context of these factors. It should also be acknowledged that monetary policy instruments cannot solve all the problems. It would be overambitious of the monetary authority to aim at doing this. What the Bank of Namibia did was actually the right thing to do, especially with the inflation rate hitting 4.60 percent. If it failed to do that, attracting investment would not be possible. But for businesses, the implication is that interest rates would go up, and the cost of borrowing would increase. Companies would have to borrow money at a higher rate, which is against the clamor for a single-digit interest rate. The cost of doing business would increase. This should be a thing of concern to us.
Businesses should engage the government to see how it could establish a special window for businesses to access funds at affordable interest rates. This is the only way out of the current challenge. We should set up more development funds in addition to the financial sectors so that there could be cheap loanable funds for businesses. Personally, I think it is too early to predict how the decision would affect the economy. It has to be tested first. But I don’t think it would do the economy much good. Some public policies appear good at their face value while their implementation may turn out to be counterproductive. Increasing interest rate means increasing the cost of borrowing. If the cost of funds goes up, local production would suffer. Increasing the interest rates is not consistent with the plan to increase local production.
A rise in interest rates would be a particular challenge for the government since interest payments are funded out of the operating budget the budget that must be balanced each fiscal year. However, given the long-term nature of outstanding state and local debt, it will take a prolonged period of higher interest rates to seriously impact the budget. One of the constraints to small-scale enterprises is the high-interest rate. Big companies may survive it but it would pose a serious challenge to small enterprises.
In conclusion, inflation is not necessarily caused by excess money supply. In Namibia’s case, the current inflation is imported. It is a response to scarce foreign exchange. High inflation can be extremely damaging to both consumers and businesses. Fortunately, since we have not yet started to see a buildup of inflationary pressures, the Bank of Namibia can afford to act slowly, with small, incremental interest rate increases.
