Bank of Namibia (BoN) governor Johannes !Gawaxab has likened the Namibia dollar and the South African rand peg to a marriage.
The governor said the Namibia dollar is better off linked to the South African rand, even though there is still a lot of volatilities within South Africa.
This was said during the central bank's repo rate announcement in Windhoek yesterday.
!Gawaxab said Namibia is a small open economy, and therefore the benefits of being linked to a stronger currency outweigh the costs.
"From all the simulation, all the work we've done so far, the answer is that still we are better off in that arrangement, with its weaknesses," he said.
However, !Gawaxab said preparation needs to be done in case Namibia becomes a key player in the green energy and oil sector.
During the event, the central bank opted to keep the repo rate unchanged at 7,75%, leaving the prime lending rate at 11,5%.
"To continue safeguarding the peg between the Namibia dollar and the South African rand while supporting the domestic economy, the monetary policy committee (MPC) decided to keep the repo rate unchanged at 7,75%.
"This decision was taken following a comprehensive review of domestic, regional and global economic developments," !Gawaxab said.
The repo rate is the rate at which the central bank lends money to commercial banks.
If the repo rate goes up, the bank's prime lending rate, which is the rate it charges borrowing customers, would increase.
A change in the repo rate would affect the amount of interest a loan holder pays.
It would also increase or decrease monthly loan repayment amounts.
One of the greatest declines over the quarters has been private sector credit extension (PSCE).
According to !Gawaxab, the annual growth in PSCE has remained weak despite slightly going up to 1,9% in December 2023.
"The slight improvement in PSCE growth was characterised by a higher credit uptake by the corporate sector in the form of instalment sale and leasing finance. On average, growth in PSCE slowed from 3,6% in 2022 to 2,4% in 2023, and is projected to improve marginally to 2,8% in 2024."
Economist Josef Sheehama says the decision to keep the repo rate unchanged is shocking, since inflation rates are stable, and international reserves remain strong. Decreasing the repo rate would provide many Namibians relief, he says.
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"We are aware that Namibia's currency is pegged to the rand at a one-to-one ratio, and they will do all in their power to protect the peg.
"I am aware that with the decrease in the repo rate Namibia would be behind by 75 basis points. However, this was a perfect opportunity to provide Namibians with relief.
"With high global market volatility, a chance to disturb global markets cannot be overruled due to geopolitics," Sheehama says.
He says Namibia's narrow export and industrial base makes it difficult for the economy to withstand external shocks.
"Our current economy is very reliant on a limited number of sectors, such as fishing, diamonds and uranium mining. Namibia needs to gradually move away from a single country concentration.
"We can't rely on South Africa for almost everything. We need to ask ourselves why we can't produce our own. As a country, we cannot afford to depend on other countries," he says.
Sheehama says the economy has been experiencing economic uncertainties like high inflation, a high unemployment rate, high exchange rate, depreciation, low investment and negative growth, and the country should reduce its commodity dependence, which may expose it to volatile markets.
"We need to understand that concentrated trade relationships may create levels of risk beyond the appetite of the country, for instance: If policies restrict flows between countries, it may make sense to spin off or divest such flows, while pursuing new domestic markets.
"Therefore, Namibia should stand on its own feet," he says.
- e-mail: shania@namibian.com.na; Twitter: @ShaniaLazarus
