Borrowing costs

Dealing with market volatility, soaring inflation and rising borrowing costs

Josef Sheehama

INFLATION IN NAMIBIA REACHED 6.8% as prices continued to rise in July, from 4% recorded in July 2021, largely driven by higher food, transport and utility prices. soft drink.

The most likely outlook remains a continuation of the current trajectory of economic stagnation and a worsening of Namibia’s protracted financial crisis. Right now, we know volatility is high, which means the markets are pretty “emotional”.

The escalation of the war between Russia and Ukraine could increase car prices as Namibians demand more new cars.

The City of Windhoek has approved a 7.8% tariff increase from July 1 to ensure sustainable electricity at affordable rates.

The higher costs come at a time when bank interest rates are rising and fuel and food prices continue to rise.

The cost of living crisis will deepen inequality in Namibia, yet no political party is seriously talking about addressing the enormity of this challenge or fixing our broken social safety net.

I’m talking about people in real distress, who don’t have the money to pay their bills.

The human being, in addition to having the right to water, has the right to light and heat.

It is unclear how long the cost of living crisis will last.

The world’s ability to foster collective action in the face of urgent major crises has reached crisis levels, with deteriorating international relations hampering action in the face of a growing range of serious challenges.

Meanwhile, the darkening economic outlook, partly caused by geopolitical tensions, is expected to further reduce the potential for international cooperation in 2022/23.

Also, as inflation rises, it erodes the purchasing power of your hard-earned money.

So it’s important to make sure your money is working hard for you. But it’s nearly impossible to find a savings account to beat inflation right now.

Everyone is going to be affected, and it will mean a big squeeze for everyone. It will be a disaster for low-income households if nothing changes.

The status quo will not only disrupt the industry, but will further hamper economic recovery.

This means that Namibia will increase its repo rate.

It should be noted that while much of this inflationary pressure is supply-based, there are benefits to raising interest rates as a tool to try to slow inflation.

The Reserve Banks Monetary Policy Committee may raise the repo rate by 0.75% basis points today.

Global commodity price volatility and continued supply chain disruption will continue to fuel price pressures.

However, one of the most serious repercussions resulting from such an increase in interest rates is the threat to food security, as such a sharp increase will further increase the price of basic foodstuffs, leaving even more Namibians vulnerable. to food.

Money will become very expensive.

It would also increase the cost of loans, reducing what consumers can spend elsewhere.

Those who save money would see higher interest payments benefit their investments.

The ongoing inflation challenge appeared about 12 months ago.

What started as supply disruptions affecting a few products in a few industries, has expanded to include a wide range of everyday items.

High inflation for long periods can also complicate the Bank of Namibia’s ability to bring inflation back to its target inflation rate.

Indeed, inflation can become self-fulfilling if it leads households and businesses to expect higher inflation in the future.

The economy is still on a fragile footing, with not all sectors in positive growth territory, and consumers remain under pressure with higher inflation and interest rates.

I expect inflation to probably peak at around 7.5% in October and then decline slightly towards the end of 2022.

The longer inflation stays well above our target, the more likely it is to fuel inflation expectations and the greater the risk that inflation will become self-fulfilling.

History shows that once high inflation becomes entrenched, it is difficult to bring it down without seriously hampering the economy.

Preventing high inflation from taking hold is far more desirable than trying to stifle it once it’s there.

Going forward, Namibia’s monetary policy aims to keep inflation low and stable.

The set of inflationary forces linked mainly to supply and stemming mainly from international developments is more complicated to control by monetary policy.

This is especially the case in a small open economy like Namibia.

These forces were evident last year and further intensified in February 2022.

Supply shortages and disruptions emerged as much of the global economy reopened after initial lockdowns caused by the Covid-19 pandemic.

The war in Ukraine has further amplified supply problems, while causing a spike in the prices of oil, wheat, fertilizers and other production inputs.

The entire economic sector faces inflation in almost every aspect of business.

This means increases in the prices of raw materials, packaging and transport, and social unrest.

This unusually high uncertainty will translate into volatility in energy prices and financial markets over the next five to seven months.

This could create its own feedback loop, driving prices higher.

It’s concerning, because when you’re fighting inflation on multiple fronts, it’s not just the supply chain, it’s not just labor unrest, but now you have the consumer in the mix , which only increases the difficulty of controlling inflation .

To this end, the consumer’s purse strings are slowly tightening due to high inflation, rising borrowing costs and gloomy confidence.

Namibians and the economy have been through a lot in the past five years – the extreme and uneven economic effects of the technical recession, the drought, the pandemic, then the subdued recovery, the Russian-Ukrainian unrest and now persistently high inflation.

It is a very difficult time for many people all over Namibia to walk the tightrope.

* Josef Sheehama is a banking professional with 19 years of experience. He writes on a personal basis.