Financial stability premised on sound macroprudential oversight
By Josef Kefas Sheehama.
The Bank of Namibia held its Macroprudential Oversight Committee meeting on 10 July 2023 to assess risks and vulnerabilities faced by the Namibian Financial System. The Committee emphasized continued monitoring of inflationary pressures and geopolitical tensions, which they believe have the potential to undermine economic recovery and negatively impact the financial system.
The purpose of a macroprudential policy is to safeguard financial stability. In doing so, it looks to ensure that the financial system can absorb, rather than amplify, adverse shocks. This can be achieved by making the financial system more resilient, limiting the build-up of vulnerabilities, and mitigating systemic risk.
The Bank of Namibia’s approach is to look to build resilience, proportionate to the level of systemic risk, when times are good so that this resilience can be used when times are bad. Policy measures will be forward-looking and seek to reduce the potential for imbalances to accumulate, given that they could lead to financial distress. A sound macroprudential policy plays a key role in ensuring financial stability not only at country level but also on the scale of the entire global economy. In this regard, adequately measuring its effectiveness is an urgent task for national and supranational financial regulatory authorities.
This perspective has generated profound changes in our understanding of how the whole economy functions when the effects of financial policies and actions are taken into account. This applies in particular to the relationship between monetary, fiscal and prudential policies, and how these, separately and collectively, impact the financial system.
Therefore, macroprudential is still very much a work in progress. Macroprudential policy’s interaction with monetary and fiscal policies, its links with micro-prudential regulation, its ability to prevent external shocks from capital flows, are all part of the macroprudential policy tools and institutional framework. The Bank of Namibia’s macroprudential policy targets not only financial stability but also achieving smoother economic and financial cycles, price stability as well as specific industrial policies.
However, there are a number of issues related to the use of macroprudential policies to prevent or mitigate systemic financial risks to smooth out economic fluctuations and reduce the probability of economic crises, thus promoting economic growth.
At the same time, the macroprudential policy also has a direct impact on both financial and real economies, ultimately affecting economic growth. The direct impact suggests that such a policy may have negative effects on economic growth by generating economic costs while stabilizing economic growth. Thus, the Bank of Namibia anticipates real Gross Domestic Product (GDP) growth to decline in 2023 and 2024, due to weaker global demand.
However, Namibia’s registered a growth of 4.6% in 2022, moderating to 3% in 2023 and to 2.9% in 2024. With the tight monetary policy stance, inflation is projected to remain below the central bank target of 6% in the medium term.
Furthermore, the International Monetary Fund has revised its global economic growth outlook to 2.8% in 2023, down from 3.4% in 2022, with expectations of a recovery back to 3.4% in 2024. The downside risks to the global economic outlook remain the debt distress in emerging markets and the implementation of stringent monetary policies to combat inflation and geopolitical tensions.
Contrary to the positive impact on economic growth, in Namibia a small open and upper-middle-income economy, macroprudential policy has both direct and indirect positive effects on economic growth. The implementation of macroprudential policy can maintain financial system stability, create a favorable investment environment, promote investment, and drive economic growth.
In addition, monetary policy should act first and foremost when credit booms coincide with periods of a general overheating in the economy. Effective macroprudential policies can help cushion the economy from volatile capital flows. Now policymakers understand that the macro-prudential approach should be adopted to enhance financial stability by containing risk at a prudent level with the aid of tighter regulations and supervision. Macroprudential policy tools diminish financial imbalances and protect the soundness of the economy.
However, macroprudential indicators can also provide false signals, so they should be interpreted with caution when used to formulate policy. In a nutshell, while the greater emphasis on financial stability is welcomed, several questions still remain unanswered to improve our understanding of how macroprudential policies work and their interaction with other policies such as monetary policy.
In particular, one of the pre-conditions for the successful maintenance of financial stability is efficient communication of the Macroprudential Oversight Committee to provide timely warning of systemic risks and explain the rationale for introducing macroprudential measures. The committee must further inform the public regarding the method of their implementation, and the expected effects and mechanisms of these measures on the systemic risks detected.
There is also a need to further improve the quantitative approach to macroprudential policy calibration and measurement, including the measurement of the macroprudential stance, and there is a need to consider to what extent the boundary of macroprudential regulation must be extended to non-banks.
In conclusion, I want to congratulate the Bank of Namibia on a job well done, not only did the committee hit the mark, but has also set a new standard of what can be accomplished through wise decisions mingled with dedication and know-how. It is worth noting that the Bank of Namibia collaborated with NAMFISA, the non-banking institutions regulator, to monitor risks and make the necessary interventions.
