Namibia: Treasury Carrot Fails to Spur Debt Uptake

7 September 2020

ONE would have expected that after the introduction of the N$8,1 billion Covid-19 relief package by the government, which included guarantees for at least N$2 billion, the private sector would rush to take up debt.

However, the opposite has happened with the banking sector's overall loan book taking a fall, and the banks not extending much business credit as it would have been expected.

This is shown by the latest Private Sector Credit Extension which continues nosediving as observed early in the year. At the end of July 2020, it moderated at 2,3%, decreasing by 0,6 percentage points between June and July.

The low interest rates and increased incentives to borrow have, however, failed to convince the private sector to borrow.

The latest statistics suggests that treasury and the Bank of Namibia must go back to the drawing board for a plan to entice the private sector to take up credit to revive and fund their business operations or for consumption.

All this resistance is taking place despite the central bank slicing the cost of money in the economy, the most efficient way to stimulate credit uptake in the economy, according to experts.

However, it seems reducing the cost money alone in the current economic situation is not working as the private sector continues being cautious in taking loans.

According to the central bank's latest (July 2020) Money and Banking Statistics "growth in credit extended to businesses was negative for the third consecutive month at the end of July 2020".

The credit extended to businesses contracted to 1,1% on an annual basis at the end of July 2020, which is considered as an improvement from a contraction of 3,6% a month earlier.

This is despite a loan guarantee promised by the Ministry of Finance in the government stimulus packages that businesses that paid their taxes for the previous year can borrow from banks up to 0,833% of their tax payment of last year with treasury guarantee.

However, this didn't work, as BoN statistics paint a different picture of PSCE going a different direction - with average business borrowing nosediving since January 2020.

The central bank attributed the low appetite for productive debt to "net repayments and stagnant economic activity during the period under review".

In terms of households, credit extended is generally referred to as money for consumption and cheap credit as it is supposed to stimulate aggregate demand in the economy as households borrow cheaply to supplement their income.

However statistics show that funds extended to households slowed in July 2020.

Households were offered the same guarantees as businesses, that those who had paid their taxes the previous financial year could borrow (0,833% of last year's tax payments) for their consumption needs, and treasury would guarantee that loan.

Annual growth in households borrowing slowed to 4,9% compared to 8,1% recorded at the end of June 2020.

The slower growth was reflected in all household credit categories, particularly overdrafts, other loans and advances as well as instalment and leasing.

The central bank said the demand for credit by households continued to be negatively affected by reductions in income levels, as retrenchments increased, coupled with salary cuts, and scaling down in business operations, on the back of lower economic activity.

The bank said the economic woes were worsened by the impact of the Covid-19 pandemic.

On aggregate, other loans and advances declined by two percentage points month-on-month to 9,4% at the end of July 2020.

The central bank said the decline largely emanated from repayments on Agri loans by businesses, reinforced by a lower demand from the household sector during the period under review.

Instalment and leasing credit growth remained as one of the worst performing at the end of July 2020.

The worst performing of these two categories also reflect the number of car sales in the country which has been performing below par compared to the previous year.

Leasing, which is credit extended to the private sector to cover the cost of renting a certain asset used in the production, has been following in the footstep of downward instalment sales.

The contraction in instalment and leasing credit remained broadly deeper at 8,5% at the end of July 2020, relative to 8,6% at the end of June 2020.

The persistent negative growth in instalment and leasing credit according to BoN was consistent with the general sluggish growth in the wholesale and retail sector and the overall domestic economy.

Property and residential loans, on a 12-month period rose marginally by 0,4 percentage points, between June and July, to 2,2% at the end of July 2020.

The rise in mortgage credit was broadly sustained by the growth in mortgage loans for households during the period under review.

ECONOMIC PROSPECTS

The doom and gloom that engulfed the local economy since 2016 keep worsening with overall production in the country being lower than the 2015 levels.

The 2019 preliminary GDP figures shows a contraction of 1,1% in the country's output, while the first quarter of 2020 also reported a reduction in the goods the country produced.

This was before what business calls the Greatest Lockdown Crisis, which Namibia experienced from April to June.

Namibia Statistics Agency data shows that the country's 2015 production (N$145 billion) was more than the 2019 overall output of N$143 billion in real terms, with worse being expected for 2020.

The central bank revised its economic outlook after analysing the country's six months' production data and said the overall output will contract further than what was projected in April 2020.

The bank said: "The domestic economy is projected to contract by 7,8% in 2020 (which represents a downward revision of 0,9 percentage point since the April 2020 Outlook)".

It added that they, however, project the domestic production will recover to a growth of 2,1% and 2,7% in 2021 and 2022, respectively.

However, it seems the business community is not convinced enough by the projection to take up debt.

The central bank explained that data for the first half of 2020 suggests that the impact of Covid-19 on the economy has been more severe than was anticipated in the April 2020 update, and hence underpins the revision.

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