BoN: Consumer, business ‘overstretched'

The Bank of Namibia (BoN) yesterday kept its repo rate unchanged at 7.75% for the second consecutive time, saying the higher rate in South Africa has not resulted in major capital outflows.

The repo rate of the South African Reserve Bank (SARB) has been 50 basis points higher than that of the BoN since June this year.

Because the Namibian dollar is pegged one-to-one to the South African rand, the BoN often follows the monetary policy of the SARB to prevent large capital outflows as investors seek out better returns in the neighbouring country.

However, BoN governor Johannes !Gawaxab yesterday said: “Overall, despite the interest rate differential between South Africa and Namibia, capital flows have remained orderly with no notable speculative behaviour, with the decline in the official reserves predominantly due to net commercial bank outflows and foreign payments by the government.”



Delinking

!Gawaxab also stressed that delinking from the rand was not on the cards.

“Delinking the currency is not something we are considering at all at this stage. The benefits outweigh the cost at this point in time,” he responded to a question from the media.

“If we get to that point that the economic structure of the country changes significantly, then we need to think about what exchange rate works for Namibia.

“But at this point in time there isn’t any thinking in the BoN to delink. And I just want to make sure that we understand that,” !Gawaxab added.



Support

While the rate decision was taken to safeguard the currency peg, it will also support domestic economic activity, “particularly the overstretched households and businesses”, the governor said.

Households and businesses have been buckling under the BoN aggressive rate hike since the beginning of last year.

To soften the blow of Covid-19, the repo rate dropped to 3.75% in August 2020. This resulted in a prime-lending rate of 7.5% and an average lending rate of 7.09% at commercial banks in Namibia.

In February 2022, the central bank’s rate hike started when the repo was increased to 4%. This lead to a prime rate of 7.75% and an average lending rate of 7.5%.

By June this year, the repo reached 7.75%, the prime 11.5% and the average lending rate 10.97%.

The Institute of Public Policy Research (IPPR) last week released a briefing paper on the cost-of-living crisis in Namibia, saying high interest rates in the country contributes to the issue.



Housing

Rising interest rates have had a direct bearing on the affordable housing crisis, said IPPR associate researcher and author of the paper, Kitty Mcgirr.

“This is because a majority of private sector credit extended by commercial banks is linked to mortgage lending accounts, implying that the majority of increased bond and loan repayment costs are being incurred at the household level,” Mcgirr explained.

She added: “The average Namibian household’s debt servicing costs rose from 9% in 2020 to 17.8% in 2022. In more concrete terms, monthly repayments for a house valued at N$1.2 million have increased by over N$2 590 over the course of the last two years.”

The BoN’s use of interest rates as a “liquidity tool to solve the inflation problem” has also been slated as an “ineffective” strategy by some pundits who regard the root of inflation in Namibia “not [as] a result of excess liquidity” but rather as “imported” and thus “entirely external” in nature, Mcgirr quoted local economist Josef Sheehama.

The widening gap between household income and expenditure has particularly impacted lower-income households who tend to be more “heavily indebted” and thus more susceptible to a “rapid increase in interest rates” than their higher-income counterparts, she quoted Cirrus Capital.

!Gawaxab yesterday said the non-performing loan (NPL) ratio at local commercial banks currently is between 5.4% and 5.5%.

On an industry basis, it is not something the BoN is concerned about “given the current economic environment we’ve got”, he said, adding that Namibia’s financial system remains sounds.