The theme of the 2022 Bank of Namibia Annual Report is “Global Economic Shocks: Rewiring Namibia to Bolster Resilience”. Namibia is highly exposed to global risks and shocks as a resource-intensive and small open economy. Shocks can hit a small open economy like Namibia’s in different ways. They can reach Namibia through financial shocks, such as those emanating from global financial conditions or emerging as a result of the COVID-19 pandemic. On the other hand, real economic shocks that affect productivity and foreign demand can also impact investment and output, and through its trade linkages may filter into real sector developments in Namibia. Furthermore, global financial conditions can affect Namibia, mainly through the monetary and financial links to South Africa. It is therefore important for a small and open economy like Namibia to continue rewiring itself to bolster resilience. In the midst of a fragile global economic environment, the domestic economy demonstrated a degree of resilience during 2022. To boost the nation’s socio-economic resilience to external and domestic shocks, the Bank established the country’s sovereign wealth fund, known as the Welwitschia Fund. It is intended to promote intergenerational prosperity for all Namibians through the distribution of wealth generated from the country’s natural resources whilst serving as a stabilisation fund as well. The Bank has furthermore retained the COVID-19 relief measures in an effort to continue to assist households and corporates negatively impacted by the pandemic. In addition, the Bank has responded to rising inflation through monetary policy to prevent inflation from becoming entrenched.
Regarding the performance of the global economy in 2022, global gross domestic product (GDP) growth slowed in comparison to 2021. Global GDP growth slowed from 6.2 percent in 2021 to 3.4 percent in 2022, partly because of the Russia-Ukraine war that resulted in supply disruptions and high inflation, along with the lingering COVID-19 pandemic also resulting in further lockdown-related supply disruptions in China. Inflation rose significantly in 2022, and this triggered the majority of monitored central banks to embark on an accelerated path of monetary policy tightening to tame rising inflation. The stocks and commodity markets ended 2022 on a negative note, mainly due to skyrocketing inflation and aggressively rising interest rates. Slow growth in the global economy, underpinned by supply shortages, increased demand and rapidly tightening monetary conditions across the globe, also contributed to the weak performance in the markets. Looking ahead, global growth seems set to decelerate somewhat further in 2023, reflecting continued spill-overs from the Russia-Ukraine war and tighter monetary policy. Downside risks confronting global growth are a further prolonging of the war in Ukraine resulting in, rising prices that could potentially intensify food insecurity and social unrest; and geopolitical fragmentation, which may impede global trade and economic cooperation. Tight labour markets in major advanced economies (AEs) are likely to keep inflation intractable, resulting in continued tight monetary policy stances and financial conditions. High interest rates are expected to adversely affect the financial system. Two large commercial banks in the USA failed because of their huge exposure to the Treasury and mortgage bonds that lost market value following a steep increase in interest rates. This developing situation has negative implication on the banking system and could incite a banking crisis in the USA.
Notwithstanding the challenging global environment, the domestic economy built up further growth momentum during 2022, on the back of improved economic activity across all three main industry groupings. Growth in the economy accelerated to 4.2 percent in 2022 from 2.7 percent in 2021. The higher economic growth mainly emanated from improved economic activity across all industries but was most pronounced within primary industry. During 2022, primary industry was buoyant, chiefly supported by a significant increase in the production of diamonds due to additional production brought about by a new diamond recovery vessel. The improvement in economic growth for 2022 was further underpinned by higher consumption expenditure, as well as private and government investment. The growth was facilitated by a range of factors, including the further relaxation of COVID-related travel restrictions, favourable prices of export commodities, mineral and oil exploration activity, and new marine mining capacity.
Namibia’s headline inflation increased during 2022 compared to the previous year, exerting upward pressure on the cost of living. Overall inflation rose from 3.6 percent in 2021 to an average of 6.1 percent during 2022, thereby eroding consumers’ purchasing power. The elevated inflation was predominantly driven by transport inflation brought about by high international oil prices, aggravated by exchange rate depreciation. In addition, inflation for food and non-alcoholic beverages, housing, water, electricity, gas and other fuels accelerated in 2022, contributing to higher overall inflation. Elevated food prices, mostly basic food commodities and high fuel prices strained purchasing power of household, resulting in high cost of living, especially the lower income segment of the consumers.
In 2022, the Bank pursued a tighter monetary policy stance, increasing its repo rate by a total of 300 basis points to close the year at 6.75 percent. These incremental increases were deemed to be necessary to strike a balance between anchoring inflation expectations and safeguarding the exchange rate peg, whilst supporting the domestic economic recovery. The repo rate is currently standing at 7.00 percent after it was increased at the Monetary Policy Committee (MPC) meeting in February 2023.
Growth in broad money supply (M2) and private sector credit extension (PSCE) remained subdued in 2022, falling below the current inflation rate, although growth in PSCE edged higher over the period. The relief measures that were introduced at the height of the pandemic in 2020 were extended in 2022 as they were deemed to be necessary to enable banking institutions to continue providing relief to economic sectors that were still in distress. Together with the Ministry of Finance and Public Enterprises, the Bank amended the SME Economic Recovery Loan Scheme, previously known as the SME COVID-19 Loan Scheme, with the objective of making it more affordable and accessible. The purpose of the revised scheme is to stimulate economic activity and growth, improve access to SME funding and credit extension, improve liquidity and business confidence for SMEs, and reduce unemployment and the level of poverty in the country, and thus indirectly reduce dependence on government grants.
With regard to Government finance, the budget deficit narrowed during the 2022/23 financial year (FY), while debt continued to rise over the same period. The narrowing of the deficit to an estimated 5.2 percent of GDP is ascribed to an increase in revenue collection. This resulted from increases in income tax on individuals, and diamond mining and nonmining companies, coupled with dividends declared by public enterprises. Government expenditure also rose, but at a slower pace in relation to revenue. As a result, the debt stock of the Government rose to 70.3 percent of GDP at the end of December 2022, representing an increase of 3.2 percentage points from a year previously. Looking ahead, the 2023/24 Government budget reveals an easing fiscal environment on the back of improved revenue outturn and economic growth prospects.
On the external front, Namibia’s external current account deficit widened in 2022 compared to 2021, but financial account inflows were sufficient to offset it and enable the stock of international reserves to rise over the period. The current account deficit as a percentage of GDP widened to 13.0 percent in 2022 from 10.0 percent in 2021, mainly due to a significant increase in the merchandise trade deficit. The financial account inflows were sufficient to counter the deficit on the current account and allow the stock of international reserves to rise on an annual basis by 8.4 percent to settle at N$47.5 billion at the end of December 2022. The foreign reserves translated into import cover of 6.7 months, higher than the 6.0 months reported a year earlier. In terms of competitiveness, the Real Effective Exchange Rate (REER) depreciated slightly on an annual basis, signalling a moderate gain in the competitiveness of Namibia’s products in international markets.
In terms of banking industry, overall the banks remained profitable, liquid and well capitalised. Both the capital adequacy and the liquidity position of the banking industry improved and remained above the statutory minimum requirements. Moreover, profitability improved with both return on assets and return on equity edging upwards. A key challenge for the banking industry during 2022 was the management of asset quality, as measured by the ratio of non-performing loans (NPLs) to total loans, which stood at 5.6 percent at the end of December 2022, lower than 6.4 percent recorded a year earlier. This was a welcome improvement, as the NPL ratio stood below the crisis trigger benchmark ratio of 6.0 percent, indicating that the quality of assets was satisfactory during 2022. Despite the improvement in this ratio during the latter part of 2022, the impact of inflationary pressures, interest rate adjustments and slow economic recovery is still filtering through and is expected to negatively affect the ratio. Overall, however, the banking industry remained sound, with the threat to financial system stability remaining subdued.
The overall financial system remained stable, sound and resilient enough to withstand elevated risks and vulnerabilities emanating from the global and domestic economic and financial environment. Both the banking and non-banking financial industries continued to perform adequately and remained profitable for most of 2022. The Non-bank Financial Institutions (NBFI) industry remained profitable and sufficiently capitalised. However, their profitable returns were impacted by high inflation, recessionary pressures, and the geopolitical tension in Europe which led to unfavourable developments in the financial markets. Nevertheless, the pension funds sector remained well funded, coupled with stable performance in the long-term insurance and collective investment schemes sectors, despite lower returns on investments. Given the large income-earning asset base and sufficient reserves held by pension funds, the shortfall of benefits paid in excess of contributions received could therefore be covered, thus posing no real risk to financial stability.
The Macroprudential Oversight Committee of the Bank will continue to closely monitor these developments going forward.
The Bank’s Strategic Plan is linked to its mission and functional priorities. Since the launching of the Bank’s new three-year Strategic Plan (2022–2024) in 2021, the focus of the Bank has been on the execution of the plan, which sets the direction to be followed and establishes clear priorities to align departments towards a common goal. It envisages a digitally transformed Bank with a fully modernised financial system that can help restore economic growth and sustain economic development. It is particularly pleasing to note that the Bank delivered on the promises made for the first year of the 2022–2024 Strategic Plan with an overall achievement rate of more than 80 percent. The Plan has also provided a compelling reason for the Bank to reflect on its current culture to enable the execution of the strategy. In this regard, the Bank launched its Culture Statement defined as ACT: Embracing “Agility, Collaboration and Trust” on 28 October 2022. All employees are encouraged to align their behaviour with the defined culture of the Bank to ensure the achievement of the goals established in the Bank’s strategy and to contribute to a prosperous Namibia.
Digital Transformation has been identified as a key enabler for the Bank’s Strategic Plan. During 2022, the Bank invested in systems and platforms to support digitisation for increased operational efficiency. Platforms for data analytics and Robotic Process Automation capabilities were successfully deployed within the Bank. Some business units have already started to realise the benefits in terms of time and efficiency gains due to end-to-end digitalisation and automation of some business processes, and the use of data-driven insights. These new platforms enabled the development of bots, including the chatbot which is integrated with the Bank’s newly revamped interactive website. Furthermore, the Bank started exploring opportunities offered by central bank digital currencies to achieve financial inclusion objectives. Consultations with relevant stakeholders in this regard are expected to commence in 2023.
The Bank’s financial results demonstrated further resilience in 2022. Year-on-year increases of N$4.0 billion in deposits from the issuance of Bank of Namibia bills and commercial banks’ deposits fueled an increase in investment levels from N$40.0 billion in 2021 to N$44.0 billion in 2022. Coupled with higher average interest rates during 2022, the operating profit increased by 11.5 percent from N$584.2 million in 2021 to N$651.2 million in 2022. Therefore, the reserves available for distribution increased year-on-year from N$672.7 million in 2021 to N$772.6 million in 2022. The Bank, will therefore, declare a consistent dividend of N$413.7 million (2021: N$413.7 million) to the Government and still able to set aside N$100 million in the Development Fund Reserve.
Going forward, for Namibia to mitigate the economic impact of global shocks and protect vulnerable groups, the prioritisation of the building of fiscal buffers will be required as an immediate policy action. In the medium term, policies should focus on structural reforms and the modernisation of policy frameworks to boost growth, support the vulnerable, strengthen governance, and tackle rising levels of debt. To support private sector-led growth that is underpinned by exports and investments, structural reforms should focus on improving governance, diversifying exports, increasing productivity, and building climate resilience to lift the economy’s growth potential. This will enhance diversification efforts, which will help the country to manage volatility and provide a more stable path for equitable growth and development. The country should enhance its food production capacity and resilience to climate change through access to water, resilient seeds and fertilizers, amongst other things. The Bank stands ready and is committed to delivering monetary, price and financial stability, while navigating the elevated energy prices and continued supply disruptions from the global economy, now also complicated by increased geopolitical tensions. As fiscal advisor, the Bank is committed to providing practical advice on implementing structural reforms, improving fiscal sustainability and accelerating Namibia’s recovery to sustainable growth.
The Board, the staff and our stakeholders played invaluable roles in the Bank’s ability to deliver on its mandate. I want to thank the Board of the Bank for their meaningful insight, stewardship and support. I am equally grateful to the staff and our stakeholders for productive engagement in 2022, despite its being another difficult year. We must never let our guard down.
During the period under review, the Bank revised the Determination on the Conduct of Card Transactions within the National Payment System (PSD-4) and gazetted the revised version on 25 July 2022. Due to the ever-evolving payments landscape, the Bank conducts periodic reviews of its regulatory framework to ensure that it remains relevant and robust. As such, PSD-4 which provides guidance on how domestic, regional and international card transactions.
During the review period, the Bank continued to support I look forward to working with the Board, my colleagues at the Bank, and all our stakeholders in pursuance of the Bank’s Vision and Mission. Namibia’s resource-intensive and open economy is highly exposed to global economic shocks, and this will require us to strengthen our resilience and commitment to maintaining and enhancing fi nancial stability for sustainable economic development in Namibia.
Johannes !Gawaxab
Governor
31 March 2023