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Opinion - Cost of Living Crisis Deepens

2022-05-23  Staff Reporter

Opinion - Cost of Living Crisis Deepens
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Josef Kefas Sheehama

Increased bills were prompted by growing wholesale energy prices, which have shot up since Russia’s military operation in Ukraine. The Namibian government faces a plethora of challenges as a result of the recent social unrest and economic stress. 

The current situation calls on the Namibia Revenue Agency (NamRA) leadership to find amicable solutions to engage affected parties to avoid a further economic disruption. The magnitude of these mass demonstrations present a critical threat to the domestic economy, over the short and medium-term, in a country that is among the worst-afflicted by the pandemic and international financial contagion. The traditional system of enforcing power from top to bottom is increasingly being challenged. There is a social revolution, with a growing demand for participatory democracy. It is important to know that civil unrest can disrupt economic recovery. Civil unrest can increase risk perception of investors by increasing expectations about the potential for future outbreaks and instability. It is also critically important to address societal inequities immediately and effectively, as their significance cannot be overstated. 

While communities work to address these issues, corporations and other business owners should also prioritise their ability to continue operations. It is clear that preventing civil unrest, or at least containing its economic damage, is critical for long-term development, and thus understanding when and how recovery works is a priority.

Furthermore, the Namibian economy is closely linked to South Africa, with the Namibia dollar pegged one-to-one to the South African Rand. Pegs can overshoot as well as undershoot, and either can be economically disruptive. Currency peg is dangerous for it can produce the wrong political and economic implications. South Africans are set for another fuel price shock in June 2022. The South African Reserve Bank increased the repo rate by 50 basis points on Thursday, the steepest increase since 2016.

This means that Namibia will increase fuel prices as well as the repo rate.  

It should be noted that although much of this inflationary pressure is supply-side based, there is merit in increasing interest rates as a tool to try to slow down inflation. The fundamental debates about inflation are really concerned with whether the central bank is an inflation creator or an inflation fighter. The responsibility of monetary policymakers is to adequately respond to inflation. Those who see the central bank as an inflation fighter must, therefore, believe that inflation has some source other than the central bank, that it has non-monetary factors. The job of the central bank is to adjust its policy in response to these shocks.

Moreover, Indonesia, the world’s top cooking-oil exporter, banned exports of the oil since April 2022. The ban on palm oil exports is to increase domestic availability and check the rising prices of the commodity in that country, according to president Joko Widodo. In another economic catastrophe, India, the world’s second-largest wheat producer, has decided to suspend its exports. Russia’s operation in Ukraine poses a serious threat to global food security as now India has decided to ban the export of the grain with immediate effect. The conflict is a major blow to the global economy that will hurt growth and raise prices. Ukraine is the world’s main supplier of sunflower oil, and Russia is the second-largest supplier, so global prices have been hit by the conflict. Volatility in global commodity prices and ongoing supply chain disruptions will continue to stoke price pressures. The result will be even higher costs for businesses, and a deep squeeze in the cost of living for households. 

Furthermore, it is now or never to save Namibia from this cost of living crisis and food insecurity. The agricultural sector is one of the critical segments in the Fifth National Development Plan (NDP5) to advance Namibia’s economic growth. On the economic side, the focus needs to be on enhancing inclusiveness and ensuring that the benefits of growth are widely shared. At the same time, more needs to be done to increase rural living standards, reduce regional income differentials and lower the rate of rural-urban migration, while concomitantly increasing agricultural production and enhancing Namibia’s food and nutrition security. The government of Namibia should implement a rural development strategy with the focus on large modern farms and family farming. The effective implementation of NDP5 and HPP2 will strengthen Namibia’s position in agriculture. To increase production further, a sustained effort is required towards introducing improved breeds, sourcing animal feed, and fighting animal diseases. Farmers tend to be vulnerable to risk. It is, therefore, required to build resilience and response mechanisms against adverse events in farming communities, and provide social protection for vulnerable groups. Achieving these objectives requires paying particular attention to poorer and less-developed regions that mainly depend on agriculture for livelihoods. Rural poverty in Namibia is about three times higher than urban poverty, and the majority of the rural poor depend directly or indirectly on agriculture for their livelihood.

Going forward, monetary policy in Namibia is oriented towards keeping inflation low and stable. The Bank of Namibia’s Monetary Policy Committee is set to meet on 15 June 2022. So, if the Bank of Namibia wants to curb inflation, it may raise the repo rate. I believe that the Bank of Namibia will increase the repo rate by 0.50% basis points. The economy is still on a weakish footing with not all of the sectors in positive growth territory, and consumers remain under pressure, with higher inflation and higher interest rates. My expectation is that inflation will probably peak around 6% in August, and then slightly scale down near the end of 2022. However, one of the most serious repercussions resulting from such a heavy interest rate increase is the threat to food security, as such a sharp increase will once again drive up the prices of basic foodstuff, leaving even more Namibians food- vulnerable. Money will become very expensive. It would also increase the cost of loans, cutting what consumers have available to spend elsewhere. Those who are saving money would see higher interest payments as benefit to their
investments.

To this end, it is likely that people will see the downsides of those increases before any improvement on inflation. Basically, that means consumers may have to pay more to borrow money, and still see higher energy and food prices. That scenario is particularly tough on low-income workers, who have seen wages rise but not keep pace with inflation. Of course, ideally, the central bank would like to raise rates gradually so that the economy slows just enough to bring down prices without creating too much additional unemployment. They have to carefully walk that tightrope.

Therefore, on top of that is whether the spike already seen in inflation will scare Namibian households into speeding up purchases to get ahead of any further price increases. That could create its own feedback loop, driving prices higher. It’s a concern because when you’re battling inflation on multiple fronts, it’s not just the supply chain, it’s not just the labour market shortages, but now you’ve got the consumer who’s in the blend. It just increases the difficulty in bringing inflation under control. We will overcome.

 


2022-05-23  Staff Reporter

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