Amadhila Defends Interest Rate Hikes

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By Wezi Tjaronda

WINDHOEK

As debate on whether it is justified or not for interest rates to be increased as often as they have recently rages on, Finance Minister Saara Kuugongelwa-Amadhila has said the central bank would not adjust the rates to levels that would be detrimental to the economy.

Although interest rate hikes increase the cost of borrowing and debt servicing, and put pressure on Government expenditure, Kuugongelwa-Amadhila said the bank applied its mind fully.

She warned that artificially low inflation rates in Namibia would force managers of capital to move their money elsewhere where the interest rates are high.

The Minister was speaking at a public discussion yesterday during a roundtable on the current interest rate policy and its impact on the Namibian economy.

Concerns from participants were about whether Namibia has a policy to target inflation, inflation was a problem for Namibia, limiting capital outflow and how an increase in interest rates benefits the poor.

The discussion stems from concerns over ever-increasing bank rates that have seen increases in interest rates. Since June last year, bank rates have increased by 350 basis points.

Commercial banks have increased interest rates from 14.75 percent to 15.25 percent, which is applicable to the prime overdraft rate, asset based finance and the mortgage rate pertaining to home loans.

Bank rate is the rate at which commercial banks borrow money from the Bank of Namibia, thereby putting more money into circulation within the economy.

When the bank raises the bank rate, it becomes less attractive for commercial banks to borrow money from the Bank of Namibia, leading to reduced money in circulation.

Due to this, the cost of borrowing money increases for both consumers and investors, leading to a decline in credit demand.

Feeling the heat of the interest rate increases are those that took home loans when the interest rates were still cheap and those who rely on overdrafts on their bank accounts.

In addition, service delivery levels might be threatened even if Government ministries have a programme budget due to increases in interest rates.

Namibia’s currency is pegged to the South African rand and cannot directly influence interest rates within the Common Monetary Area (CMA), to which the county has belonged since 1990.

But the Bank of Namibia said there is no need for Namibia to reconsider its participation in the CMA but rather participate in deeper integration both in the association and SADC.

BoN Director of Research, Dr John Steytler, who spoke on behalf of Bank Governor, Tom Alweendo, said the rate agreement Namibia is in has worked well considering the relatively low inflation rate experienced so far.

He said the CMA was an arrangement meant to support the fixed exchange rate system between the Namibian dollar and the South African rand.

Steytler said the monetary policy could assist in creating a conducive environment for sustainable economic growth and development but could not control interest or unemployment rates.

Consumers are forced to re-arrange their repayment schedule with their banker or even sell their assets when interest rates are increased. In addition, disposable income shrinks, leaving people with less money to spend on consumer goods.

Workers’ representatives have taken issue with the bank’s move to keep following the South African move to increase interest rates as it mostly affects low-income earners.

National Union of Namibian Workers’ Secretary General, Evilastus Kaaronda, said although one of the objectives of the monetary policy was to assist in attaining national economic goals, the bank was treating inflation as if it were the country’s only macro-economic challenge, yet Namibia has high unemployment, underemployment, widespread poverty and acute inequalities.

“These problems, to us, are likely economic structural problems which must be addressed urgently, but cannot be resolved though interest rates or any such parochially defined macro-economic policy interventions,” said Kaaronda.

He said rate increases not only made it difficult for businesses to raise capital and create new jobs, but could also lead to the collapse of some businesses and increase retrenchments and wage suppression.

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