HIGH government budget deficits could impair monerary policy objective price stability, the Bank of Namibia said.
The bank made these observations in a working paper on the 'Impact of Fiscal Deficit on Inflation in Namibia' recently.
According to the working paper, and unsustainable fiscal policy could lead to higher inflation expectations.
The central bank further advised that fiscal and monetary policy needs to be well-synchronised to bring the fiscal deficit to acceptable levels.
"Given that the main monetary policy goal in Namibia is to achieve price stability, the results in this study suggest that monitoring budget deficits and price developments in South Africa to develop informed policies, is one way to achieve this objective," they said.
According to the bank, the objective of the study which ran between the first quarter of 2008 and the fourth quarter of 2017, was to examine the effect of fiscal deficit on inflation in Namibia.
"The results show evidence of a long-run positive effect of fiscal deficit on inflation in Namibia. There is also evidence that a fiscal deficit causes inflation in the short run. It was further observed that variations in the South African inflation could lead to significant variations in the Namibian inflation in the long run and short run," BoN said.
Moreover, a substantial long-term relationship also exists between the prime-lending rates and inflation in Namibia, according to BoN.
In the short run, the central bank further noted that the direct (positive) effect between the prime lending rate and inflation was obtained, however, it was not statistically significant.
'It was further concluded that there is a unidirectional causality (cause) running from fiscal deficit to inflation, which confirms the existence of a long-run and short-run relationship between fiscal deficit and inflation in Namibia," the bank said.
According to the budget tabled in March by finance minister Calle Schlettwein, the budget deficit was estimated at N$8,2 billion or 4,1% of the gross domestic product (GDP) and averaging 3,4% over the Medium-Term Expenditure Framework, compared to 4,4% in the 2018/19 financial year.
"Faster reduction in the budget deficit would require deep expenditure cuts that would hurt growth and service delivery. The deficit will be financed through a combination of domestic, multilateral and bilateral borrowing," the minister said at the time.
Meanwhile, the March consumer price index released by the Namibia Statistics Agency showed that the inflation rate was at 4,5% year-on-year, up marginally from 4,4% y-o-y in February.
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