CHAMWE KAIRA
Capital outflows from Namibia to South Africa stood at about N$10 billion year-to-date, compared with N$18 billion during the corresponding period last year, Bank of Namibia, governor Ebson Uanguta has revealed.
He added that the bank has not formally established a specific threshold for the interest rate differential it needs to maintain with South Africa, but warned that a widening gap could increase capital outflows and put pressure on the country’s foreign reserves and currency peg.
The central bank said it closely monitors capital flows when assessing the appropriate policy stance, particularly as Namibia’s economy faces subdued economic activity.
Namibia’s repo rate currently stands at 6.75%, while the South African Reserve Bank’s repo rate is 7%, leaving a differential of 25 basis points. The gap was narrowed from 50 basis points in June after the BoN raised its repo rate by 25 basis points.
Uanguta said the decision to narrow the differential was supported by Namibia’s foreign reserve position, which remains above the international benchmark of three months of import cover.
However, the central bank cautioned that a substantially wider differential could encourage capital to move from Namibia to South Africa, where financial markets offer a broader range of investment instruments and greater market depth.
“We have not formally decided on the threshold that we need to maintain,” the BoN said. “But we know when a threshold is in excess, 75 basis points, you see huge inflows of capital particularly moving from Namibia to South Africa.”
The central bank said it balances several considerations when setting monetary policy, including price stability, economic growth, capital flows and the sustainability of the Namibia dollar’s peg to the South African rand.
The BoN indicated that it would not allow the interest rate differential to widen to levels that could generate significant capital flight and put pressure on key economic indicators.
“We cannot allow the spread to become too big,” Uanguta said, adding that it continuously monitors capital flows and other indicators to ensure price stability and maintain the currency peg.
He also rejected the view that relatively high interest rates are currently the main obstacle to businesses and households accessing credit.
According to the BoN, subdued economic activity, rather than the level of interest rates alone, is a major constraint on credit demand. Business and household borrowing remains low amid weak economic activity.
The central bank warned that sustained capital flight would effectively export Namibia’s foreign reserves. If reserves were to fall below the level needed to support the three-month import-cover benchmark, it could place pressure on the country’s currency arrangement.
The BoN therefore said monetary policy decisions would continue to take into account the trade-off between supporting domestic economic activity and maintaining sufficient reserves to safeguard financial and external stability.
While the central bank has not committed to a fixed 25–50 basis-point differential, its comments indicate that it remains particularly attentive to the risks associated with a spread of 75 basis points or more.
The BoN’s latest position comes as the Monetary Policy Committee maintained the repo rate at 6.75%, with the bank continuing to assess domestic growth conditions, inflation, reserve adequacy and developments in South Africa when determining its monetary policy stance.
