Jul 26

Macroprudential Policy: An Analysis of Effectiveness and Interaction in Namibia

By Josef Kefas Sheehama

The Bank of Namibia held its Macroprudential Oversight Committee (MOC) on the 10th of July 2023, to assess risks and vulnerabilities faced by the Namibian Financial System. The Committee emphasized continued monitoring of inflationary pressures and geopolitical tensions, which have the potential to undermine economic recovery and negatively impact the financial system.

The aim of macroprudential policy is to safeguard financial stability. In doing so, the macroprudential policy looks to ensure the financial system can absorb, rather than amplify, adverse shocks. This can be achieved by making the financial system more resilient, limiting the build-up of vulnerabilities, and mitigating systemic risk. The Bank of Namibia’s approach is to look to build resilience, proportionate to the level of systemic risk, when times are good so that this resilience can be used when times are bad. Policy measures will be forward-looking and seek to reduce the potential for imbalances to accumulate, given that they could lead to financial distress. The macroprudential policy of the Bank of Namibia plays a key role in ensuring financial stability not only at the level of individual countries but also on the scale of the entire global economy. In this regard, adequate measurement of its effectiveness is an urgent task for national and supranational financial regulatory authorities. This perspective has generated profound changes and impacts on our understanding of how the whole economy functions when the effects of financial policies and actions are taken into account, the role of monetary policy in the presence of macroprudential policies and the institutional framework for optimal policy coordination and cooperation between monetary, fiscal and prudential policies.

Therefore, macroprudential is still very much a work in progress. Macroprudential policy’s interaction with monetary and fiscal policies, its links with micro-prudential regulation, external shocks such as capital flows, and spillover effects of macroprudential policy tools and institutional frameworks.

The Bank of Namibia’s macroprudential policy included not only achieving financial stability but also achieving smoother economic and financial cycles, price stability as well as specific industrial policies. However, developing macroprudential policies is a work in progress since there are a number of issues related to the use of macroprudential policies. We should understand that the macroprudential policy aimed at preventing systemic financial risks can mitigate economic fluctuations and reduce the probability of economic crises, thus promoting economic growth. At the same time, the macroprudential policy also has a direct impact on both financial and real economies, affecting economic growth. The direct impact of macroprudential policy mostly suggests that such a policy may have negative effects on economic growth by generating economic costs while stabilizing economic growth. Thus, the Bank of Namibia anticipated real Gross Domestic Product (GDP) growth to decline in 2023 and 2024, due to weaker global demand. However, Namibia’s registered a growth of 4.6 percent in 2022, and the domestic real GDP growth is anticipated to moderate to 3.0 percent in 2023 and is expected to slow down further to 2.9 percent in 2024. With the tight monetary policy stance, inflation is projected to remain below the central bank target of 6.0% in the medium term.

Furthermore, the International Monetary Fund has revised its global economic growth outlook to 2.8 percent in 2023, down from 3.4 percent in 2022, with expectations of a recovery to 3.4 percent in 2024. The downside risks to the global economic outlook remain the debt distress in emerging markets and the implementation of stringent monetary policies to combat inflation and geopolitical tensions. Namibia is an upper-middle-income economy, and the implementation of macroprudential policy has a positive impact on economic growth. Contrary to the positive impact on economic growth, in Namibia a small open and upper-middle-income economy, macroprudential policy has both direct and indirect positive effects on economic growth. The implementation of macroprudential policy can maintain financial system stability, create a favorable investment environment, promote investment, and drive economic growth.

In addition, monetary policy should act first and foremost when credit booms coincide with periods of a general overheating in the economy. Effective macroprudential policies can help cushion the economy from volatile capital flows. Now policymakers understand the macro-prudential approach should be adopted to enhance financial stability and make sure to keep the financial risk at a prudent level with the aid of tighter regulations and supervision. Macroprudential policy tools diminish financial imbalances and protect the soundness of the economy.

Moreover, macroprudential indicators, however, can also provide false signals, so they should be interpreted with caution when used to formulate policy. In a nutshell, while the greater emphasis on financial stability is welcomed, several questions still remain unanswered to improve our understanding of how macroprudential policies work and their interaction with other policies such as monetary policy. Furthermore, to enhance the understanding of macroprudential policy and its relationship with other policies and thereby facilitate its implementation in practice. In particular, one of the pre-conditions for the successful maintenance of financial stability is efficient communication of the Macroprudential Oversight Committee. The policymakers with the professional and general public in all phases of a macroprudential cycle so as to provide timely warning of systemic risks and explain the rationale for introducing macroprudential measures, the method of their implementation, and the expected effects and mechanisms of these measures on the systemic risks detected.

In addition, this raises important questions about whether existing frameworks and governance need to be refined and improved. The implementation of macroprudential policy going forward poses several challenges. There is a lack of clarity on the appropriateness of instruments, the interaction among instruments, and how such interactions can be internalized in macroprudential actions. There is also a need to further improve the quantitative approach to macroprudential policy calibration and measurement, including the measurement of the macroprudential stance, and there is a need to consider to what extent the boundary of macroprudential regulation must be extended to non-banks. However, I want to congratulate the Bank of Namibia on a job well done, not only did you hit the mark, but you have also set a new standard of what can be accomplished through wise decisions mingled with dedication and know-how. It is worth noting that the Bank of Namibia collaborated with NAMFISA, the non-banking institutions regulator, to monitor risks and make the necessary interventions.

In conclusion, in order to maximize economic growth, macroprudential policies should be well-calibrated to allow for longer expansions and avoid economic crises. Therefore, from a macroprudential perspective, the relevant concern is the contribution of capital inflows to the build-up of systemic vulnerabilities, by facilitating the build-up of imbalances in the financial and non-financial sectors.