Raising interest rates may harm

The 25 basis points increase in the repo rate from 7.0% to 7.25% announced on 19 April 2023 by the Bank of Namibia will not address the root causes behind the current inflationary pressure. If anything at all, it will only harm the economy.

Interest rates are a crude tool that poorly meets the challenge of today's inflation, especially for a country that is in a fixed exchange rate regime (CMA) like Namibia. A fixed exchange rate is an exchange rate where the currency of one country is linked to the currency of another country so that they can trade freely and smoothly with each other.

With this arrangement – nothing can stop highly-priced South African goods to come into Namibia - and create inflationary pressures.

The main issue with fixed exchange rates is that it limits a central bank's ability to adjust interest rates to affect a country's growth rate and other macroeconomic aggregates, such as the inflation rate.

The true cause of inflation in Namibia

The Bank of Namibia believes inflation is caused by too much money floating around in the economy, and thinks that the only way to lower it is to keep the amount of money in the economy relatively constant. Since the beginning of this interest rate tightening episode, the inflation rate has been on a serious increase! This approach called monetarism remains largely unsuccessful in combating inflation. Truth is that more money in the economy isn't a problem, as long as supply can keep up with the demand for goods and services. Besides, it is clear as daylight that the current inflation in Namibia is being driven by supply shortages, not too much money. Here is how!

Inflation happens when the demand for goods surpasses the supply of goods.

This has been and is currently caused by structural factors that have constrained and reduced our economy's ability to supply goods. We have recently witnessed the manifestation of this during the Covid-19 pandemic when lockdowns caused shortages throughout global supply chains – prices sharply increased. We have also seen it happen when the Russian invasion of Ukraine affected the availability and price of grain, fertilisers and fossil fuels. When this happens, the price people are willing to pay for available limited goods increases dramatically. Thus, the shortage of goods and the inflationary pressures this has created cannot be solved by quickly draining money out of people's pockets by raising (repo) interest rates. Namibia's productive capacity is very small and the manufacturing base is almost non-existence - setting up new factories is expensive and requires highly-skilled workers, something that could take months or years to complete.

Although it is obvious even to the Bank of Namibia that the current inflation is being caused by supply issues, the central bank is still adamant that draining money out of people's pockets is the only way to address inflation. This approach is detrimental to the economy because it reduces money circulation in the economy and does not stimulate economic activities - with this comes less investment in the economy and massive unemployment. This eventually hurts the economy and causes severe economic hardships for households. Instead of trying to solve a supply crisis with demand management, the bank should assist the government to reorganise the economy to address the supply constraints.

Alternative policy options

The current economic consensus which assumes that only the Bank of Namibia (with its submissive monetary policy) can address inflation and that government should stay out of its way, is flawed. It is because of this understanding that our government has been perhaps too silent on the damage high interest rates are causing to the economy, and hesitant to spend more money to cushion less privileged households from economic hardships caused by high interest rates. Nonetheless, there is a great deal that fiscal policy - instead of a submissive monetary policy can accomplish in the face of rising inflation.

Firstly, it is important to understand the causes behind inflation( and also to remember that the Bank of Namibia is not an inflation-targeting bank like the South Africa Reserve Bank (SARB), and try to understand what can and cannot be fixed. For example, governments should be helping to repair supply chains and transportation networks in the short-term, and thinking about how to make our country's industrial policy resilient to future challenges in the long-term. This can be fixed!

Secondly, in times of inflation such as these, our government should think of other ways to provide public alternatives for highpriced items. For example, if petrol and diesel prices are going to be high in the long-term, the government should think about how to make it easier and cheaper to get around without needing these pricey fuel-linked

forms of transportation. This is a more targeted and equitable way of reducing demand for a high-priced good without subjecting households to high interest rates the central bank religiously believes in. Thirdly, governments can also regulate the prices of administered goods and services without creating any material market distortions. Rent control is a good example of this. Wherever possible, policymakers

should think about how to maintain the supply of goods that are price-controlled.

Fourthly, the government can also play a big role in making life more affordable for everyone, especially the less privileged members of our society, by using alreadyexisting social safety/protection programmes. Government spending on everything from childcare and healthcare to public transportation and recreation can be tailormade to make life more affordable for people, and make everybody less vulnerable to periods of inflation and the subsequent high interest rates of the Bank of Namibia.