Borrowing costs

Opinion – Navigating market volatility, soaring inflation and rising borrowing costs

Josef Kefas Sheehama

CPI inflation in Namibia reached 6.80% as prices continued to rise in July 2022 from 4% recorded in July 2021, largely driven by higher prices for food, transport and soft drinks.

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

Escalating geopolitical tensions between Russia and Ukraine could increase car prices as more Namibians demand more new cars. The City of Windhoek has approved a tariff increase of 7.80%, effective July 1, 2022, to ensure a sustainable electricity industry at affordable tariffs.

The higher costs come at a time when bank interest rates have risen as well as fuel and food prices. The cost of living crisis will aggravate inequalities in Namibia; Yet no political party is seriously talking about meeting the enormity of this challenge by fixing our broken social safety net.

I’m talking here about people in real distress, who don’t have money to pay their bills because I think that human beings, in addition to having a right to water, have a 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 2022/2023.

Moreover, as inflation rises, it erodes the purchasing power of people’s hard-earned money. It is therefore important to ensure that his 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 feel like a big pressure for everyone. It’s going to look like a disaster for low-income households if nothing changes. The decision, if left unchallenged, will not only disrupt the industry but further suppress economic recovery, given the current threat facing the country’s economy.

This means that Namibia will increase the repo rate. It should be noted that although much of this inflationary pressure is supply-based, there is value in raising interest rates as a tool to try to slow inflation.

The Bank of Namibia Monetary Policy Committee may increase the repo rate by 0.75% basis points on August 17, 2022.

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 a large increase in interest rates is the threat to food security, since such a large increase will further increase the price of basic foodstuffs, leaving even more Food-vulnerable Namibians. Money will become very expensive.

It would also increase the cost of loans, reducing what consumers can spend elsewhere. Those saving money would see higher interest payments as a benefit to their investments.

The constant challenge of inflation appeared for almost 12 months. 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 inflation to rise in the future.

The economy is still fragile, 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 around 7.50% in October and then decline slightly towards the end of 2022.

The longer inflation remains 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 has.

Going forward, Namibia’s monetary policy aims to keep inflation low and stable. All of the inflationary forces, mainly linked to supply and resulting for the most part from international developments, are more complicated for monetary policy to control. This is especially the case in a small open economy like Namibia.

These forces were evident last year and intensified further in February 2022. Supply shortages and disruptions emerged as much of the global economy reopened from initial lockdowns, caused by the 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 just about every aspect of business. This means an increase in raw materials, packaging, transport and social conflicts.

This unusually high uncertainty will translate into volatility in energy prices and financial markets over the next five to seven months. This could create a feedback loop, driving prices higher.

That’s a concern because when you’re fighting inflation on multiple fronts, it’s not just the supply chain or labor unrest, but the consumer that’s in the mix. This only increases the difficulty of controlling inflation.

To that end, consumer purse strings are slowly being won over by 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 technical recession, drought and the pandemic, the subdued recovery, the Russian-Ukrainian unrest and now the persistence of high inflation.

Therefore, it is very difficult for many people all over Namibia to walk this tightrope.

* The opinions expressed in the article are those of the author and are in no way linked to his employer or its affiliates.

2022-08-17 Staff reporter