By Staff Reporter
The repo rate reduction, on Wednesday came as no surprise to many financial analysts, who expected a cut of at least 0.25 percent with some estimating that the central bank might go as high as 0.50 basis points.
Speaking to Robert McGregor, Economist at Cirrus Capital and dubbed the ‘interest rate prophet’, it becomes quite clear that the decision is no surprise. “We expected them to cut,” he says bluntly.
“25 Points is very little, especially from a very low base; essentially what it means is that it should make administered cost of borrowing figures lower; you will see the prime rate coming down. The big thing (that will happen) is that if you have debt already it will make it cheaper to repay.”
For the average person this reduction may not really make a difference in their day to day dealing, depending on the quantum of debt that they possess.
The BoN lowered its repo rate from 6.5% to 6.25%. As a result, local commercial banks will decrease their prime-lending rate from 10.25% to 10.0%.
Generally, as interest rates fall, it becomes easier to borrow money, causing many companies to issue new bonds to finance new ventures, which is a spin-off that effect the central bank is hoping to encourage, i.e. the investment in productive assets rather than consumption.
“Domestic economic activity contracted in 2019 relative to 2018. The inflation rate declined, while the growth in Private Sector Credit Extension (PSCE) increased marginally in 2019. The stock of international reserves remained sufficient to support the currency peg,” said Bank of Namibia governor, Iipumbi Shiimi.
The domestic economy is projected to improve in 2020. Available indicators suggest that domestic economic activity contracted in 2019, when compared to a marginally positive growth rate in 2018.
The deterioration in 2019 was mainly due to declining economic activity in sectors such as mining, agriculture, manufacturing, as well as wholesale and retail trade. Activity in other sectors including transport and construction improved during 2019, relative to the corresponding period of 2018.
Annual average inflation for 2019 declined to 3.7 percent from 4.3 percent in 2018, mainly on account of declining housing and transport inflation.
On a monthly basis, the overall inflation rate declined further to 2.1 percent in January 2020, from 2.6 percent registered in the previous month as inflation for housing rental payments turned negative. Going forward, overall inflation is projected to average below 5 percent in 2020.
The Central Bank Governor hopes that business will use the respite wisely. “Hopefully businesses will begin to respond and invest wisely with these lower rates. Domestically we remain upbeat.”
The governor of BoN said the central bank is not “complaining that households aren’t borrowing”, when it was pointed out that the revised repo rate does not a significant impact on existing loans, and in fact, Namibians are no longer frequently approaching banking institutions for short-term loans.
The Governor said that the party is over for Namibian households. He holds that “we were all having a party a few years ago. Consumers borrowed up to their limit and are over extended.”
Annual credit growth to households has been growing at single-digit levels since 2016, which saw the beginning of Namibia’s economic contraction.
Non-performing loans (NPLs) currently represent about 4.8% of the total loan book of the banking sector, an increase from the 3.6% it was last year, which is in excess of 4% which is the norm in the industry, the Governor confirmed. “But we are not overly concerned about this.”
He holds that commercial banks in Namibia are highly profitable and can absorb the NPL’s. “The Bank of Namibia has started the conversation with banks where NPLs are particularly high”, Shiimi said.
Banks now are extra careful, and only lend to those who are able to pay loans back, the governor emphasized.