Namibia’s Central Bank Governor Talks Maintaining Economic Stability

The Bank of Namibia is seeking a balance between economic growth and fiscal stability, having implemented several lending rate increases in the past year to steer off inflation. The central bank is aiming to establish an effective and transparent fiscal regime for the country’s extractive industries – ahead of new developments in oil and gas exploration and green hydrogen production – along with a clear and stable local content framework that supports the growth of local businesses. 

Energy Capital & Power spoke with Johannes Gawaxab, Governor of the Central Bank of Namibia to understand how the bank is supporting the country’s burgeoning oil and gas industry to advance socioeconomic development.

What is the Bank’s operational scope and how does it support socioeconomic development in Namibia? 

 The Bank of Namibia‘s most important role in promoting socioeconomic development is to  maintain monetary and financial stability. In other words, its monetary policy seeks to  balance price levels with income levels and encourage output levels that will increase  employment in the long term. This means that inflation is kept low over both the medium  and long term, and that the financial system remains secure and steady.

High inflation destroys the purchasing power of the money in an individual’s pocket, leads  to the misallocation of resources, and redistributes income towards the rich, who can  better hedge themselves against inflation through, for instance, ownership of property and  shares. High inflation also eventually leads to much higher interest rates once savers fully  anticipate the inflation and demand an interest return high enough to compensate them  for the erosion of the purchasing power of their savings. The Bank, therefore, combats  inflation with its monetary policy, aided by the one-to-one exchange rate link between the  Namibia Dollar and the South African Rand since the South African Reserve Bank also  targets low inflation. This link makes it necessary for interest rates in Namibia to broadly follow those of South Africa, as significant interest differentials may trigger capital flows to South Africa. 

However, the Bank of Namibia has a degree of freedom to set its policy rate somewhat  higher or lower than South Africa, mindful of domestic economic conditions. As an  example, Namibia’s policy interest rate is currently slightly lower than South Africa’s to  support its domestic economy. However, it is set responsibly to maintain enough foreign  reserves to meet international obligations without risking the exchange rate peg. A stable financial system, where people have confidence that their deposits are safe and  that financial institutions are properly supervised, is equally necessary for socioeconomic  development. Otherwise, confidence evaporates, uncertainty paralyzes the economy, and  development is stunted. The Bank of Namibia, therefore, plays its part in ensuring a stable  financial system in our country and is inter alia responsible for bank supervision and  macroprudential oversight.

At the micro level, the Bank of Namibia provides seed capital to the Development Bank of  Namibia (DBN) for funding small and medium-sized enterprises (SMEs) to support  socioeconomic development. The Bank has also initiated the SME Economic Recovery  Loan Scheme in conjunction with the Ministry of Finance and Public Enterprises for eligible  SMEs to obtain working capital to revive their operations after the devastation of the COVID-19 pandemic. The Bank also provides advice and applied research capabilities to several  government institutions, not least in the energy sector, in order to ensure Namibia  optimizes the benefits from these burgeoning industries. Furthermore, the Bank  continually develops its staff through appropriate training and exposure and provides scholarship opportunities to Namibians in relevant fields for our economic development.

How would you summarize the Bank’s most recent Financial Stability Report?

Overall, the financial system in Namibia remains sound, profitable and with no disruptions, despite the economy performing below  potential. Both household and corporate debt increased during the reporting period; however, risks to financial stability remained moderate. The banking sector, in particular, remained liquid, profitable, and well-capitalized, with capital levels well above the minimum prudential requirements. Despite the current inflationary pressures, the banking sector’s asset growth outpaced the  prevailing inflation rate, which bodes well for financial stability.

Similarly, the non-bank financial institutions sector remained resilient despite the  macroeconomic headwinds. The payment system and infrastructure remained stable,  while efficiently contributing towards reliability in payments in order to facilitate financial  stability in the country. Overall, risks to domestic financial stability remained stable;  however, some risks are anticipated to increase on the back of uncertainty in the global  macroeconomic environment, particularly global geopolitical tensions such as the war in  Ukraine, slow recovery in China, and the impact of contractionary monetary policy to fight  inflation, which appears to be more intractable than previously expected.

How can Namibia implement local content and ownership requirements, while maintaining  an attractive environment for foreign investment?

Foreign direct investment is better secured and sustainable if it contributes to broad-based benefits to the local  economy. Local content, where such investment makes use of locally available goods and  services as well as skills, will ensure sustainability and mutual benefit between the country  and the investors. Investors accept this fact, and the balance needed is in terms of  flexibility when goods and services, or skills are not locally available. If so, businesses should be able to acquire such goods and services or skills with ease from elsewhere. 

It is very important that local content comes at a competitive price and with competitive quality and reliability. Otherwise, the investments will just go elsewhere in the world. In general, our regulatory and business environment should be friendly to all investors, whether local  or foreign. After all, they have to take the risk that goes with investment. However, everybody should also pay their fair share of tax, so it is sensible to have uniform tax rates across local and foreign-owned firms. Thus, as a country, Namibia should facilitate that where capacity does not exist, it is created over time, in terms of increasing capacity for local content, skills and competitiveness. In order to stay competitive in emerging  industries, it is essential to strike a balance between regulating and promoting local  content. This requires designing a policy that supports fairness, accessibility, and growth  for local businesses. That would be a sustainable solution, especially in high unemployment environments such as Namibia.

How should Namibia position itself within global decarbonization efforts and a shift away from fossil fuel lending?

The shift from fossil fuels to renewables is gradually taking place. However, it is reasonable to also continue investing in  fossil fuel development, as consumer preferences, the stock of transport equipment and the energy infrastructure cannot be changed overnight. At the same time, investment in carbon-saving areas such as green hydrogen is the way to go for the long haul. Namibia is seeing action in both areas.  Like many countries on the continent, Namibia is confronted by an energy deficit,  which for the short and medium term, can only be met through a mixture of carbon fuels  and green sources. In the domestic financial sector, we have observed some activities,  with the local banks soliciting funds through green bonds aimed at being disbursed for  renewable energy projects such as solar PV and wind farms. 

The energy sector is important for the Namibian economy and ensuring energy security is of paramount importance. The Bank acknowledges this importance, and in line with the discoveries that were announced last year, the Bank themed its 2022 Annual Symposium, “Maximizing economic growth from renewable and non-renewable energy sources in  Namibia.” The symposium brought together key role players in the sector and the key  recommendations from the symposium reflected the importance of building accountable  and transparent resource governance institutions to avoid the resource curse, ensuring  an effective fiscal regime in the extraction industry, and providing a clear and stable local  content regulatory framework.

How competitive is Namibia’s financial market?

Currently, the real effective exchange  rate of the Namibia Dollar is undervalued by historical standards. Therefore, production in Namibia is more competitive in international markets than before. The great road system, recent improvements to and expansion of the Port of Walvis Bay, sound macroeconomic policies, and due attention to the environment that Namibia is known for contribute to competitiveness. We are excited by the oil and gas developments, and also by green hydrogen, the expansion of solar power capacity, and developments around lithium and other materials that are helpful in the transition to low-carbon energy. We remain broadly aligned with  and committed to Vision 2030. 

As for the future of domestic financing, our government is committed to living within its  means and managing its deficit so that it can be readily financed, with the lion’s share financed in the domestic financial market. The COVID-induced large deficits of 2020/21 and  2021/22 have made way for much smaller ones, with further deficit reduction in the coming years. Fiscal sustainability is a high priority of the Government. The private sector’s  financing needs will continue to be met by a combination of domestic and foreign sources. Foreign direct investment will be prominent in the oil, gas and green hydrogen initiatives. We believe our ready access to the South African capital market is a strong point and an important benefit of our membership in the Common Monetary Area.

This interview is featured in Energy Invest: Namibia 2023, the official investment report for the country’s energy and mineral resource sectors. The publication will be rereleased at the upcoming Namibia International Energy Conference in Windhoek on April 23-25, 2024. To download a full copy of the report, click here.