Low rates could boost social infrastructure
Social infrastructure such as classrooms, hostels, clinics, and land servicing and connect these facilities to basic infrastructure such as water, sanitation, electricity and the internet.
PHILLEPUS UUSISKU
The Bank of Namibia (BoN), like other central banks around the world, introduced substantial interest rate cuts at the beginning of 2020.
BoN lowered the repo rate from 6.50% in January 2020 to 3.75% in August 2020. The bank has kept the rate unchanged since then.
The central bank is expected to hold its fourth monetary policy announcement for the year next week, on 18 August 2021.
According to Simonis Storm (SS), low interest rates benefit those that have taken loans from banks since their debt servicing costs are lower and hence their disposable income higher, which could encourage further consumption.
In addition, it discourages savings because of the low returns and thus can further increase consumption and demand. However, this will not be sufficient to stimulate investment and restart economic growth, SS said.
Government could use the low-interest rate environment as an opportunity to borrow relatively cheaply and invest in much-needed social infrastructure, such as classrooms, hostels, clinics, and land servicing and connect these facilities to basic infrastructure such as water, sanitation, electricity and the internet, SS added.
Debt
SS pointed out that the Multi-dimensional Poverty Index (MPI) has highlighted the need for substantial investment in these areas to address the deprivation of large parts of the population. There are concerns regarding the lurking debt trap because of the high level of public debt relative to Gross Domestic Product (GDP).
Public debt is expected to rise to close to 80% at the end of the current Medium-Term Expenditure Frameworks (MTEF) period, which is close to the SSA average. In contrast, the debt level in the Euro Area stood at 98% at the end of 2020 with seven member states exceeding 110%.
The debt ratio not only rises because of growing debt, but due to insufficient economic growth caused by a lack of private domestic demand. Hence, public demand has to fill the gap with additional investment into infrastructure that will result in positive social and economic returns, SS added.
To avoid the debt trap, a clear and painful strategy of cutting recurrent expenditure is required. Cutting capital expenditure will prolong the period of low growth, and hence low GDP, which pushes up the debt ratio, SS said.
The Bank of Namibia (BoN), like other central banks around the world, introduced substantial interest rate cuts at the beginning of 2020.
BoN lowered the repo rate from 6.50% in January 2020 to 3.75% in August 2020. The bank has kept the rate unchanged since then.
The central bank is expected to hold its fourth monetary policy announcement for the year next week, on 18 August 2021.
According to Simonis Storm (SS), low interest rates benefit those that have taken loans from banks since their debt servicing costs are lower and hence their disposable income higher, which could encourage further consumption.
In addition, it discourages savings because of the low returns and thus can further increase consumption and demand. However, this will not be sufficient to stimulate investment and restart economic growth, SS said.
Government could use the low-interest rate environment as an opportunity to borrow relatively cheaply and invest in much-needed social infrastructure, such as classrooms, hostels, clinics, and land servicing and connect these facilities to basic infrastructure such as water, sanitation, electricity and the internet, SS added.
Debt
SS pointed out that the Multi-dimensional Poverty Index (MPI) has highlighted the need for substantial investment in these areas to address the deprivation of large parts of the population. There are concerns regarding the lurking debt trap because of the high level of public debt relative to Gross Domestic Product (GDP).
Public debt is expected to rise to close to 80% at the end of the current Medium-Term Expenditure Frameworks (MTEF) period, which is close to the SSA average. In contrast, the debt level in the Euro Area stood at 98% at the end of 2020 with seven member states exceeding 110%.
The debt ratio not only rises because of growing debt, but due to insufficient economic growth caused by a lack of private domestic demand. Hence, public demand has to fill the gap with additional investment into infrastructure that will result in positive social and economic returns, SS added.
To avoid the debt trap, a clear and painful strategy of cutting recurrent expenditure is required. Cutting capital expenditure will prolong the period of low growth, and hence low GDP, which pushes up the debt ratio, SS said.
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