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Issue 212
Money Matters
Understanding the Namibian
Financial System: Part 2 The Role of the Central Bank
Central banks play a very important role in any economy. Central
banks can be seen as the apex bodies of any financial system.
Generally, central banks are referred to as reserve banks, or
monetary authorities. In the case of Namibia, the central bank
is called the Bank of Namibia. In this 2nd edition of the Money
Matters series on the Namibian financial system, we will attempt
to unpack the important role that the Bank of Namibia plays in
the Namibian economy.
Dr John Steytler
Economist
The functions of the Bank of Namibia
According to the Bank of Namibia Act, the main functions of the Bank are to:
• Promote and maintain a sound monetary, credit and financial system in
Namibia and sustain the liquidity, solvency and functioning of that system;
• Promote and maintain internal and external monetary stability and an
efficient payment mechanism;
• Foster monetary, credit and financial conditions conducive to the orderly,
balanced and sustained economic development of Namibia;
• Serve as government’s banker, financial advisor and fiscal agent; and
• Assist in the attainment of national economic goals.
In the next few paragraphs, we would like to elaborate in more detail on two of these
functions, namely promotion of internal monetary stability or price stability and promotion of
a sound monetary, credit and financial system that is financial stability.
Fighting inflation
One of the core functions of the Bank of Namibia is that of ensuring low and stable inflation.
Rising inflation is not conducive for economic growth. This is because inflation erodes the
purchasing power of consumers and makes it difficult for firms to plan ahead for future
economic activity. Fighting inflation is not unique to the Bank of Namibia. Central banks
all over the world are given the responsibility to manage inflation. In this connection, some
central banks have an explicit mandate to ensure that inflation does not exceed a certain
level. This is referred to as inflation targeting. South Africa for instance, has an inflation
targeting monetary policy framework, which stipulates that inflation could fluctuate
between 3 and 6 percent.
The Bank of Namibia targets the exchange rate as a nominal anchor for price expectations.
In this regard, the Namibian Dollar is pegged on a one-on-one basis to the South African
Rand. The decision to peg the Namibian Dollar to the South African Rand has in part been
informed by the fact that most consumable goods in Namibia are imported from South
Africa. Through this arrangement, therefore, the Bank of Namibia hopes to import stable
prices from South Africa. In order to sustain the currency peg, the Bank of Namibia must
ensure at all times that international reserves is sufficient to cover currency in circulation, that
is currency in the hands of the public.
The Bank of Namibia also has other tools to conduct its monetary policy. These include for
instance tools such as interest rates and minimum reserve requirements. These tools are used
to ensure that inflation does not get out of hand to the extent that it will hinder economic
growth and development. The Executive Committee of the Bank of Namibia decides every
second month on the appropriate stance of monetary policy for the near term. An increase
in interest rates is also referred to as tightening monetary policy stance, while a reduction in
interest rates means a relaxation of the monetary policy stance.
Financial stability and banking supervision
One of the other core functions of the Bank of Namibia is that of promoting financial stability
through banking supervision. In the broader economic system, commercial banks are
analogous to the circulatory system in the human body. The banks keep a large part of the
nation’s wealth in the form of savings and provide funds to finance investments necessary for
economic growth (this is also referred to as financial intermediation). It is, therefore, important
that the banking system remains sound and stable for the nation’s savings to be protected
and for the country to prosper. To achieve this objective, banks are regulated with a view to
minimising disruptions to the economy. In Namibia, the duties to regulate commercial banks
are entrusted to the Bank of Namibia, by the Banking Institutions Act of 1998. In exercising
its supervisory functions, the Bank of Namibia also considers international benchmarks as
prescribed by the Bank of International Settlement from time to time. Furthermore, the Bank
of Namibia publishes a bi-annual financial stability review. In its latest review, the Bank of
Namibia concluded that the Namibian financial system was healthy and sound.
In the next edition of Money Matters we will deliberate on the role of commercial banks in
the Namibian economy.
Mr R Mabuku is the lucky winner of N$1000.00 in the Money Matters Issue 211 poll
draw.
BW 10/364
You could win N$1000!
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