Post-pandemic economic recovery and thoughts on inflationary forces
By Josef Kefas Sheehama.
The economic effects of the restrictions on economic activity following the outbreak of the pandemic have been accompanied by an extraordinary response by policymakers.
People are still getting sick, but the numbers are much more manageable so that our hospitals are no longer overflowing and health care personnel are no longer being worked to exhaustion and beyond.
Namibia experienced fair growth in 2021, despite a string of stinging disruptions, lockdowns caused by the COVID-19 pandemic, supply chain issues, and higher inflation in January 2022.
We have seen unprecedented measures taken both in terms of fiscal and monetary policy. Fiscal policy has provided direct support to businesses as well as payment moratoria implemented through the financial system. Monetary policy has provided liquidity support as well as enhanced credit facilities through interest rate policy and new exceptional measures of quantitative easing.
The post-Covid recovery need not be short lived. The pandemic has had a devastating impact on our nation. It has taken a horrible number of lives and caused immeasurable hardship in so many different ways. It is difficult to overstate the human costs of this tragedy. Economic developments over the past year have been largely dictated by the pandemic and our efforts to contain it.
We have been in a period of extraordinarily low interest rates, so it is not surprising that many businesses would take on a large amount of debt, since more debt can be serviced at a lower interest rate. We have seen decisions providing regulatory relief to financial intermediaries, as well as measures restricting the distribution of dividends, to increase the availability of capital to absorb losses and support lending in the face of increased uncertainty. In a context of extreme uncertainty, this policy reaction was essential to ensure that banks continued to fulfil their role of providing credit and liquidity to the economy. The degree of coordination between the authorities has been remarkable. National and international regulators and supervisors have acted with a common goal to promote financial stability and ensure that funding reaches those who need it the most.
A key reason for this resilience has been the ability of so many households, businesses, and non-profit organizations to adapt successfully and operate safely in the midst of the pandemic. Consequently, activity in many sectors of the economy, such as manufacturing, has returned near or even surpassed its pre-pandemic level. The efforts have been truly impressive. Part of this resilience also is due to the support provided by fiscal and monetary policies. Throughout the crisis and now in the recovery, low borrowing rates have helped support the economy.
One not-surprising feature of the recovery is that sectors of the economy where in-person contact is not necessary, are doing much better than those for which social distancing is more difficult.
Banks have also contributed, offering their own relief measures for clients such as extending payment moratoria, granting pre-approved loans or advancing the payment of pensions and unemployment benefits. All this has helped to preserve confidence and ensure credit and liquidity were extended to the economy at times of maximum need.
The regulatory response has been quick and, to a large degree, quite effective. Nevertheless, it has also brought into the open some of the shortcomings of the new regulatory framework. Specifically, the accounting framework is excessively procyclical and the capital requirements framework lacks the flexibility to be used as a countercyclical tool in times of stress. While understandable in times of extreme uncertainty, they have important adverse effects, both for industry performance as well as for the credibility of the overall regulatory and supervisory framework. As such, it should be an instrument left for truly exceptional circumstances and lifted as soon as possible.
The near-term economic situation continues to be dominated by high uncertainty amid the ongoing race between the roll-out of vaccination campaigns and the spread of the virus. Given the sudden nature of the onset of the pandemic and that ultimately, it turned out to be temporary, it should be no surprise to also see considerable volatility in inflation. It is also plausible that the relative price movements during the pandemic had a net impact on aggregate inflation due to a convexity effect on fixed-income instruments like the government’s bonds.
The elevated uncertainty about job prospects also points to vulnerabilities ahead. Consistent with this, wages are expected to remain moderate in 2022, with wage negotiations having been widely postponed. The expected volatility of inflation during 2021-2023 can be largely attributed to the nature of the pandemic shock. While we still anticipate that supply-demand imbalances will wane this year, a singular focus of monetary policy on supporting recovery may well fuel substantial and persistent inflationary pressures, with some risk of de-anchoring inflation expectations. Looking ahead, it is also vitally important that fiscal support is maintained and that the fiscal response to the unfolding of the pandemic and the requirements for a strong recovery is appropriately calibrated.
In summary, the banking industry has been able to provide the necessary response. It has been part of the solution, rather than a source of problems.
Going forward, it is of the utmost importance that the authorities strike the right balance between ensuring that the banking industry is adequately prepared to tackle the expected increase in non-performing exposures and their continued role in the provision of financing to household and non-financial corporations. Whilst it is understandable that prudential regulators may wish to ensure that individual banks are sound and solvent, it is important to consider also the aggregate, systemic perspective. Erring on the side of excessive caution and provisioning may frustrate the extension of credit to the economy and have a negative impact on the perception of the industry by capital markets. Ultimately it could undermine the role of the financial sector as a positive contributing factor to the economic recovery.