“The ultimate objective of monetary policy in Namibia is to maintain price stability” – Bank of Namibia
It is painful to view the actions of the central banks in South Africa and Namibia, and then come to the inevitable conclusion that neither of the two institutions posesses the clout to understand the impact of international events on local markets.
The headline to this article is very noble, almost inspiring, were one to believe that the well-heeled banking leaders at the Bank of Namibia have the slightest concern for the well-being of ordinary Namibians. It is taken directly from the bank’s freshly minted, flavour of the month, new website under the Monetary Policy tab.
In conventional economics, the wisdom since Keynes is that inflation is the result of excess liquidity. In short, too much money in circulation leads to rapid economic expansion, resulting in what is popularly descrived as an overheating economy, producing rapid growth and inflation as a result of the combination between high liquidity and high demand. This is also known as a pull factor in inflation.
But as the art of economics developed and as economies themselves developed more or less since 1982, it became apparent that inflation is NOT always the result of excessive liquidity. It can also be the result of a supply shortage under a normal demand curve, or it can be the result of exogenous shocks on the manufacturing and supply side. This is referred to as push factors in inflation.
Then there is a third dynamic when it comes to inflation when prices, both producer and consumer, continue to go up but growth is either slow, lacking or negative. This is known as stagflation and it has proved to be the hardest phase in the inflation cycle to neutralise. This terminology is fairly recent, perhaps in use for about 15 years, but it also hints at the inability of researchers to determine convincingly what the real causes for rising prices and decelerating growth are. In fact, there are as many opinions in the literature as there are experts.
Given the level of sophistication that has entered economic research over the past forty years, it is somewhat baffling that we have to admit that there are certain dynamics in economics that fail to comply with the prevailing views of any group of analysts, depending on “which school you are from.”
Enter Namibian and South African inflation, and what do we see? Another case where local analysts merely parrot the rhetoric from Western experts without giving the unique conditions of the local market any consideration.
The narrative goes like this:
The Federal Reserve is doing all in its power to contain inflation in the United States. The obvious, conventional solution is to raise interest rates, like what the analysts were taught at university. Only, the experts at the Federal Reserve are so out of touch with post Covid developments, they still cling to their textbooks regardless of the in-your-face evidence that US inflation is not a result of too much liquidity. In any case, margins in the US monetary market have become so thin, they have been basically invisible for the past 14 years (since 2008). Their inflation dial has become so sensitive, no fed chair dare adjust it in increments larger than 15 basis points.
Move over to Europe and one finds a fairly similar scenario but more chequered. Still the muti is to raise interest rates, or at least, try to.
No we get to southern Africa, and because of a phenomenon known as the carry trade (sophisticated arbitrage in a sense), the perceived risk in the local markets can only be compensated by keeping the spread between US and European interest rates (non-existent or negative) and the repo rates in South Africa and Namibia, wide enough to still make it attractive.
I mean, in this way, using this obsolete analysis and conclutions, the central bank quasi experts are going to fix both inflation and the weak currency simply by punishing its own private sectors and its own citizens.
Local inflation, and by this I include most of southern Africa, is not the result of ingrained core inflation in the rest of the world. Althoug it is substantially imported via petroleum products, since neither South Africa, nor Namibia, nor any other southern African country excluding Angola, is a fuel producer of any significance, we still fail to understand that “our” inflation is not “our” inflation at all, but mostly restricted to energy in the form of oil and gas.
The fundamental implication that we fail to realise is that exogenous inflation is not our doing, hence regardless of what we do locally, we cannot address or contain it.
There is only one way to we could ride out the inflationary shocks from oil and that were through strong currencies. But alas, here also I am at pain to have to state that our local analysts do not see or do not understand the correlation between budget deficits and currency weakness.
As a matter of fact, they even fail to comprehend that a continuallly weakening currency only adds to inflation, nothing else.
So, if we have to go back to fundamentals, now is the time to make peace with the basic fact that the currency will remain weak as long as the South African and Namibian governments run their budgets on excessively large deficits, and keep pushin up sovereign debt, only to keep the state apparatus ticking over.
Our fundamental problem starts with a budget deficit, year after year. This then translates to over-dependence on the capital market selling guilts as if there is no tomorrow which in turn pushes up government debt, again year after year.
Eventually you get to the point where South Africa is now, and by association, we also: – there is now more room to manuevre. The end result is vividly illustrated by unforgiving foreign markets where the level of expertise is perhaps a tad more elevated than what we can field. This leads to a weakening currency, meaning we are debasing our own money so we have to pay more and more for the same amount of oil, causing fuel prices to rise and rise and just keep rising.
And since transport, like communications, is one of the pillars of any value chain, and by implication, the whole economy, the inevitable outcome is that everything just keeps getting more expensive and there is nothing we can do about it. The bad roots go back to 2010 when we got our first dose of daft economic bandaids in the form of a Targeted Intervention Programme for Employment and Economic Growth. Since then we had to swallow a myriad of economic wonders, none of which have actuallly produced the claimed results.
So, we as ordinary Namibians are going to continue suffering every time we have to buy a 2kg white maize because we no longer can afford the standard 5kg family size. And the Reserve Bank and the Bank of Namibia are going to continue to raise interest rates, applying the wrong remedy for the wrong malaise, sadly because they fail to understand the real dynamics behind the weak currency, the weak economy and inflation.
Stop running budget deficits, stop ballooning government debt, even for only one year, and you will be completely dumbfounded by the rapid recovery in the Namibian economy.