CHART OF THE WEEK

The Bank of Namibia Monetary Policy Committee elected to cut the repo rate from 7.75% to 7.50%, increasing the differential to the South African repo rate to 75 basis points (bps). With high levels of hard currency, moderated inflation, strong demand for local assets and strain on the consumer, the BoN MPC has found room to move ahead of South Africa in cutting central rates.

The Bank of Namibia (BoN) follows a legislative mandate to support economic growth and development by promoting price stability, adequate banking supervision, and reserve management. Since ‘93, Namibia has pegged its currency to the ZAR, a decision influenced by the country’s close ties to South Africa and historical use of the ZAR. The peg provides stability to Namibia’s economy because South Africa is its largest trading partner.

Given the implications (per the ‘impossible trinity’), the fixed exchange rate regime limits BoN’s ability to use monetary policy to address domestic economic issues. This has occasionally led to mismatches between economic performance and interest rate policy – as highlighted in the mid-’10s and in the current period This discrepancy is highlighted between two periods, pre- and post-‘16.

While the Namibian economy has seen somewhat of an economic rebound, the growth has been largely concentrated in small parts of the economy, while the consumer and local businesses continue to struggle, with little relief offered. The state of the Namibian consumer is reflected by increased non-performing loans (unsecured) and risk-mitigation from the banking sector, with limited credit extension growth. This is an affordability issue, the country has seen supply push inflation, elevated interest rates and little wage growth, placing pressure on the Namibian consumer. While the rate cut in isolation will have limited effects at offering reprieve, it is timely given the civil wage bill adjustment, and income tax amendments that are likely to improve the consumer’s affordability.