2015 was a tumultuous year. Namibia saw the inauguration of
our third president, and with the peaceful transition of power, our nation
received accolades not only for the departing President Pohamba’s leadership,
but also for the way in which new President Geingob took the reins, and set the
tone for his presidency. But not all was well in Namibia, because even though
our government was starting to deliver on its promises, the weather and its
accompanying drought started to threaten our capital.
Outside our borders, in neighbouring South Africa, the year
seemed to include more of the same, with continuing strikes and electricity
supply problems continuing to plague its economic growth. And then, as the year
drew to a close, Nenegate reared its ugly head, as South African President Zuma
unceremoniously replaced his finance minister twice in a week, co-incidentally
the same week that South Africa’s sovereign rating was downgraded. With some
loss of investor confidence, the South African Rand depreciated against the
major currencies, and while it recovered somewhat initially, the slide has
continued into this year.
Namibia, of course, has been part of the Multi-Lateral
Common Monetary Area agreement with South Africa, Lesotho and Swaziland since
1993, which pegs the Namibian dollar at 1:1 with the South African Rand. As a
result, a slide in the free-floating South African Rand is directly translated
to the Namibian Dollar. The huge media uproar about this slide has prompted
some Namibian citizens to vocally demand that the Namibian Dollar be
‘de-linked’ from the South African Rand. This, however, would most likely
cripple the Namibian economy.
It is understandable that Namibians would resent having
effects of an extra-territorial political situation affect us, but to be fair,
given the close geographical proximity of South Africa, and its status as our
largest trading partner, it would have affected us in any event. In addition,
foreign exchange is governed in the CMA by the South African Reserve Bank, not
the South African government, and the SARB’s independence and autonomy is
entrenched in the South African constitution.
By being in the CMA, our currency gains the credibility of
being managed by the SARB externally, and given its impressive track record,
notwithstanding the SA government’s track record, it gives our currency some
clout in the world markets. We also gain the ability to invest across the CMA,
and allows all CMA countries to invest here. We have no transaction costs with
regards to currency in imports and exports to the area, greatly expanding Namibia’s
market reach. And since the SARB’s target is an inflation band, their efforts
to remain in the inflation band assist our own BoN in limiting inflation.
If we ‘de-link’, then yes, our currency comes under the
control of the Bank of Namibia. But since our economy is relatively small in
comparison to South Africa, imports and exports will have a much larger role in
shaping the foreign exchange value of our currency. As can be seen in the
table, trade can vary a lot between Namibia and our different trading partners
year on year, which would translate directly into exchange rate volatility.
But consider the following. Suppose the exchange rate moves
so that N$1 is now R2. The Namibian economy remains the same, but suddenly all
imports from South Africa is now at half price to Namibian consumers. Conversely,
all exports are now twice as expensive to South African consumers. Our farmers
would no longer be able to export to the South African market, and Namibian
consumers would prefer half-price South African produce to Namibian produce. So
it would be in most industries, from meat to milk to fish to raw materials. And
since Namibia is now an expensive tourism destination for South Africans, our
tourism income would drop as well. The local economy would be decimated, and
Namibian businesses with South African subsidiaries would find their income
from foreign subsidiaries halved. We’re not even calculating the increased
transaction and accounting costs.
Now consider that N$1 devalues to R0.50. Yes, most of the
above would be reversed. Namibia would export easily, and our goods would be
much in demand, and tourists would flood our country. But with Namibian businesses
being able to sell in South Africa at twice the price, why would they sell to
Namibians unless we match that price? Inflation would run rampant, and thus the
exchange rate would move closer to parity.
Many Namibians point to Botswana and the Pula as an example
of a strong currency not linked to the Rand, but unfortunately, the Pula’s
truth is much stranger. While the Rand is a free-floating currency against
other currencies, the Pula is fixed as well – albeit to a basket of currencies
(mainly, the IMF’s SDR, and surprise, the Rand.)
In closely-linked economies such as Namibia’s with South
Africa, where one is so much larger than the other, market forces will
inevitably force our exchange rate to move in a band with our larger trading
partner – although with much more costs and administration than a simple peg.
Perhaps the solution to our quandary is not to cut ourselves off from our
neighbour, but rather to provide whatever assistance we can, to help it
transition out of this difficult period.
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