The International Monetary Fund (IMF) has recommended the Bank of Namibia to implement countercyclical capital requirements as a means to bolster the nation’s economic stability.
Raising the countercyclical capital buffer requires banks to add capital at times when credit is growing rapidly so that the buffer can be reduced if the financial cycle turns down or the economic and financial environment becomes substantially worse.
In a recent exclusive interview with The Brief, IMF Senior Economist Mehmet Cangul noted that countercyclical capital requirements are a financial tool that the Bank of Namibia could adopt to regulate the capital maintenance of commercial banks.
“There’s something called a countercyclical neutral capital requirement that the Bank of Namibia would impose on commercial banks in the maintenance of that capital, and this would be adjusted based on where the economy is in the business cycle,” Cangul explained.
He also discussed the implications of these adjustments for the general public.
Cangul noted that tightening capital requirements during an economic boom could potentially have a negative impact on consumption.
“However, given the current downward trend in consumption, loosening these requirements might serve as a stimulus for increased spending,” he said.
Regarding the overall financial stability of Namibia, he underscored the importance of prudent financial management, even during relatively stable economic periods.
“This sort of tool would be most effective in mitigating some risks in the financial sector right now, although we’re not seeing really big risks,” he added.
The IMF’s recommendation comes at a time when discussions about Namibia’s currency peg to the South African Rand have been ongoing.
Cangul shared the IMF’s perspective on this matter, noting that “we think that the peg to the South African Rand has so far served Namibia well, and this is a sovereign decision by Namibia.”
He emphasised that Namibia has already taken steps to prevent excessive household borrowing and to intervene in cases of financial difficulties.
However, he acknowledged that there are currently no significant risks to the financial system.
This comes as Namibia is currently facing a worrisome trend where businesses are prioritising debt repayment over seeking new credit for investment, raising concerns about the country’s economic growth prospects, experts have said.
According to the latest data from Simonis Storm, with businesses prioritising debt repayment over investment and a high repo rate deterring borrowing, there is a risk that economic growth may stall.
“Going forward, there are concerns that slowed private sector credit extension growth figures will affect economic growth. The deepening decline in real private sector credit extension in September is concerning, indicating a real reduction in borrowing. Deleveraging by businesses and households, prioritising debt repayment over new debt for investment or consumption, can dampen aggregate demand and tighten credit availability. Factors like the high interest rates, rising inflation, and economic uncertainty likely contribute to this negative trend.”
