Price Hikes Put Damper on Economic Prospects

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By Desie Heita

Windhoek

The economy is in for a shock despite earlier forecasts of a buoyant 2008.

Consumers, already hit by high interest rates and a credit crunch, will have to brace for higher food prices and of other commodities as manufacturers pass on the escalating production costs because of increased electricity and fuel prices.

“We are facing many economic shocks,” said Martin Mwinga, an economist.
The fuel price shot up last week reaching the N$10 per litre mark in the case of diesel, as the price of crude oil reached the US$105 per barrel. The Electricity Control Board has announced an 18 percent increase in electricity tariffs and warned of possible future load-shedding.

“These increases would result in much higher prices of finished products and increase inflation significantly,” said Henie Fourie, Chief Executive Officer of the Namibian Manufacturing Association.

The current national inflation is estimated at 8.4 percent and food inflation is estimated at 15 percent, said Mwinga.

The increase in electricity – and the looming possibility of load-shedding – coupled with the increase in diesel price – is putting a serious strain on the primary and secondary sectors of the economy.

The central bank relied heavily on these two sectors in forecasting a 4.7 percent economic growth for this year, up from an estimated 3.8 percent of last year. Strong metal prices and the expansion of mineral production, such as uranium and diamonds, were to be the driving forces behind the growth.

However, expectations of electricity disruptions and a likelihood of oil prices remaining high have led economists to revise the GDP growth downwards to below 4 percent.

“Mining companies such as Skorpion Zinc and Weatherly’ copper smelter, are likely to find production very difficult. Because of a high electricity price, the cost of production will increase,” said Mwinga.

The fishing sector alone is estimating a 5 percent increase on its annual operational costs because of diesel prices, says an industry representative.

Cost of raw material in the plastic manufacturing industry has already gone up by 60 percent since last year because of escalating oil prices, said Fourie.

“We do not expect much from this. I have reduced my [GDP growth] forecast to 3.6 percent,” said Mwinga.

Fourie said there might not be a reduction in production in the manufacturing sector because of the increase in electricity tariffs. “[But] significant load-shedding will result in lower production,” he said, adding that the industry is “reasonably” prepared for load-shedding.

“Unless there is a substitute [to electricity], which is very difficult, the costs of production are going to be very high. The only way to curtail that would be to cut on production,” said Mwinga.

Members of the manufacturing association are worried about decreasing demand for their products, which will have a negative result on growth.
“Their concerns are that they might lose markets due to Namibia becoming uncompetitive,” said Fourie.

Fourie said the fears are based on the fact that “our electricity prices are already significantly higher than that of our neighbours, our transport costs are much higher than our neighbours’ due to much longer distances from raw material sources and markets, and our tax rates are presently significantly higher than those of our neighbours.”

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