Bank of Namibia’s Governor Iipumbu Shiimi believes the country’s reduced economic growth mirrors the global economic outlook, but warned that more should be done to reduce income inequality to avert an economic crash.
During an interview with this publication this week, Shiimi spoke about how the country compares to other emerging market players, the need for tougher lending rules and the strength of the banking industry in the country. Namibians have come to terms that 2016 has not been kind to the country on the economic front, a situation that was confirmed by the deceleration in economic growth and Namibia Statistics Agency (NSA) recent announcement that growth contracted by 1.2 percent during the second quarter of 2016.
It is the first contraction since quarter one of 2013. The -1.2 percent reading was considerably lower than the 7 percent growth recorded during the same period in 2015. Also, first quarter growth has since been revised down to 3.4 percent, from an initial reading of 3.5 percent. Some economists have even warned that Namibia is on the brink of recession.
Iipumbu attributed the tough economic times to the rampant drought in the country and the low commodity prices. “We had a drought for two years consecutively, this already means the agricultural sector is under serious pressure and you know that at a global level since 2009 the economic situation has been under pressure since the collapse of US financial system and it has not recovered to the levels prior to the collapse,” Shiimi said.
He also indicated that the slowdown of the Chinese economy is another contributing factor. “China has been the most significant buyer of our commodities, but now that they are slowing down mainly because they reached a mature economy status, the demand for commodity has dropped,” he said.
Shiimi also cited the poor economic performance of South Africa and Angola for the prevailing economic climate in Namibia. “South Africa is not growing so all of us in the region are not importing like before, therefore the inflow of revenue throughout the customs union is low. The overall story is that government revenue has declined, unlike in the past. Hence expenditure was also reduced,” he said.
Shiimi expects finance minister Calle Schlettwein to announce several measures aimed at reprioritizing government spending during the upcoming mid-term budget review.
Healthy banking sector
Despite the country’s economy struggling, the governor said the country’s banking sector is in a healthy state. “I believe the banking sector is quite healthy, they are well capitalised with enough capital to absorb losses. From that perspective I am not worried because they[banks] continue to be profitable,” he said.
Shiimi urged the banks to manage liquidity better and ensure that lending is done in a sustainable fashion. “A year ago they were aggressive in funding vehicles because loans were growing but the situation has since changed. All we are saying is that they must lend on sustainable basis, you cannot continue to lend if people are already in debt,” he said.
Shiimi added: “We are not worried about lending for productive purposes, we are worried about people borrowing for consumption purposes because it increases debt and it is not used to buy productive assets that can improve income.”
He warned that if loans become unsustainable it may cause the financial system to collapse, adding that “we know if the system collapse the whole economy is in trouble.”
After the economic crisis of 2009, government increased spending on capital projects to create jobs and increase productivity to boost the economy, but this time around government has opted to cut spending. Asked what he makes of this move, Shiimi said: “Increasing expenditure at the time was the right thing to do. When you see a possibility of the economy slowing down, any responsible government will spend money to keep growth at an acceptable level.”
He said after the 2009 crisis government could afford to boost spending because revenue was growing and the debt levels were sustainable. “There was fiscal space to spend money, what government is saying is that the situation has changed hence we cannot spend as much as before,” Shiimi noted, adding that increasing spending after the 2009 crisis was not a miscalculated move.
“Inequality is a problem for everybody, including Bank of Namibia. If you have an unequal society it impacts on growth because the buying power is concentrated in the hands of a few, and it therefore becomes difficult to grow the economy compared to when it is diversified,” he said. He also cautioned that inequality threatens peace in the country because those who ‘do not have’ might rise up and destroy the country’s peace.
“We all know that if there is no peace, there is no economic progress. In the long run income inequality may not be sustainable therefore we must work hard to reduce it by growing the economy. BoN must make sure that from a monetary perspective there is macroeconomic stability and the fiscus must ensure that there is fiscal stability,” Shiimi said. Shiimi urged government to spend tax money on activities that will grow the economy while at the same time ensuring strong safety nets to take care of the vulnerable segment of the population.
“We must look after the most vulnerable people such as pensioners and orphans by accommodating them in the social safety nets, if this is not done, they will be trapped down there,” he cautioned.
“We all have a role to play because if there is no macroeconomic stability the economy cannot grow,” he said. Shiimi also called for more structural reforms to make the country more productive and at the same time ensure that the cost of doing business is reduced so that investors have reason to invest in the country and create jobs.
“We must invest in our railways to move goods faster and in a cost effective manner, as well as invest in vocational education because for too long we did not make the necessary investments in education.”
Following the recent change of Namibia’s economic outlook from stable to negative by Fitch ratings agency, Shiimi said the change came as no surprise. “We all knew the economy was slowing down, but we need to remember that it was not a downgrade but a warning that if we do not do anything we face risk of being downgraded,” he said.
“Apart from the speed of adjustment, nothing was surprising. We need to work hard to grow economy and reduce spending for now because our revenue is not in a position to support spending,” he said, adding that his ideal Namibian economy is one that is stable in monetary terms; no high inflation; sustainable debt levels and creating jobs.