The Bank of Namibia (BoN) has emphasised the importance of maintaining equilibrium with South African interest rates to curb capital outflow from individuals seeking higher returns in the neighbouring country.
The central bank Governor Johannes !Gawaxab emphasised the delicate balance the BoN is maintaining to prevent a capital exodus seeking more lucrative opportunities across the border.
The Governor addressed the ongoing concern of aligning Namibia’s economic policies, specifically interest rates, with those of the South African Reserve Bank (SARB).
“When we became independent, we decided to fix the Namibia dollar on par with the South African rand,” !Gawaxab said on Wednesday when he appeared in Parliament, underlining a crucial decision made in the country’s early years.
He said the fixed exchange rate, however, triggers what economists refer to as the “impossible trinity” or the “Holy Trinity”, a concept suggesting that fixing a currency to another country’s while allowing a free flow of capital between them undermines an independent monetary policy.
“If our interest rates in Namibia are 2% lower than South Africa,” !Gawaxab explained, “you get an arbitrage opportunity between the two countries. Many people are going to seek that 2% in South Africa, draining liquidity out of our system.”
This scenario, he pointed out, challenges the ability to independently set monetary policy and poses a risk of capital flight.
To counter this, the BoN has chosen to keep Namibian interest rates closely aligned with South African rates.
“We need to make sure that the deviation between interest rates in South Africa and Namibia is not such that we see an outflow of capital, this strategy aims to maintain a delicate equilibrium, preventing capital flight while addressing the living challenges and cost of living issues faced by Namibians,” !Gawaxab stated.
Acknowledging the economic challenges faced by the people, !Gawaxab noted: “That’s why, last year, you saw up to a 1% difference between South African rates. We were up to 100 basis points lower than the South African rate. We are currently about 50 basis points lower than South African banks.”
He said this approach reflects the BoN’s commitment to balancing economic stability with the well-being of Namibian citizens.
“We are not following SARB. We are just doing what our country has mandated us to do as the central bank of the country,” he emphasised.
This comes after BoN’s Monetary Policy Committee (MPC) last month decided to keep rates unchanged after their fifth meeting for the year with the repo rate remaining at 7.75% and the prime rate at 11%.
This follows the current rate hiking cycle having been exceptionally aggressive as the repo rate increased by 400bps in 18 months, according to Simonis Storm Researcher Angelique Bock.
She noted that as a result, domestic financial conditions have tightened due to the recent increase in interest rates.
Bock notes that their decision to keep rates unchanged is primarily rooted in the preservation of the currency peg between the Namibia Dollar and the South African Rand.
She said this step is vital for ensuring a steady influx of imports, which, in turn, supports the broader goal of maintaining stable prices.
