Nexit - Will Namibia be able to Sustain Rand Parity?

Nexit  – Will Namibia be able to Sustain Rand Parity?

Since 1993 when Namibia formally exited the Rand Monetary Areaand created the Namibian dollar the country has maintained  a policy of strategic parity between the Namibian dollar and the Rand. This was done for a number of reasons but principally to reassure business at the time of independence that the conduct of policy in Namibia was in safe hands and that when they invested in the country they could take out their profits at a fixed exchange rate. For over twenty years this has been at heart of macroeconomic and exchange rate policy in Namibia but now it looks increasingly under pressure.

On June the 17^th the Bank of Namibia  announced that the nation’s foreign exchange reserves had fallen to $N12.1 down from $15.7 just two months earlier. With its regular but increasingly perfunctory comments the Bank of Namibia’s Monetary Policy Committee  (MPC) added  its usual caveat that the reserves remain sufficient to sustain Rand parity. But are they? Certainly Namibia has enough foreign exchange reserves to cover imports for a period of approximately 7 weeks  given the most recent decline but it is certainly moving in wrong  direction. In 2012 Namibia foreign exchange holdings was enough to cover 4 months of imports. By international standards anything above three months is considered to be reasonably healthy. But by the end of last year the import cover had fallen to two months and the rapid decline of reserves in 2015 should be a wakeup call to policy makers that the country is on anunsustainable path of importing far more than it is exporting and that this will eventually lead toa foreign exchange crisis.

From the 1990’s up until the economic crisis of 2008 Namibia’s balance of trade was in balance with exports and imports of goods growing in tandem. Then with the beginning of the global economic crisis in 2008 imports started to balloon and while export growth has been adequate, especially in 2014 when diamond prices and returns, have been high it has not been enough to pay for the country’s growing appetite for imports. The Bank of Namibia’s MPC puts the blame squarely on the country’s appetite for imported luxury goods, in particular expensive cars. The data on imports of motor vehicles does show a rapid rise over the last few years but the figures are probably vastly underestimated given the growth of normally under-valued second hand cars. In 2014 Namibia is said to have imported someN$12.4 billion up by N$3 or 37.4% from the year before. Cars are by far the biggest import in Namibia and this figure probably massively undervalues second hand imports.

None of the options for  addressingthe trade imbalance are pleasant for the government or for the Namibian people. The politically safe approach to an impending balance of payments crisis in most countries is to use monetary policy to restrict access to credit i.e. a credit squeeze. This puts less blame directly on government and shifts it the Bank of Namibia. But a credit squeeze is a dull instrument that can often lead to the destruction of many an otherwise sound business..A similarly blunt instrument that the government has to restrict spending is the use of its fiscal policy to cut government spending and raise taxes. To say the least this a very unpopular approach to dealing with deficit problems- just ask the Greeks how much the people like this sort of approach.

So how should  the government react?If the Bank of Namibia is correct in its assertion that the purchase of luxury automobiles lies at the heart of the import surge a number of more focused monetary policies to push the banks to limit access to credit in these sectors is in order. But there are too many ways around credit restrictions to one sector or another. The other option is to impose a new series of taxes on automobiles coming into the country, especially the larger and more expensive ones. It is not possible to impose import duties on vehicles made in SACU Customs union but it is certainly possible to impose higher excise tax and a large scrappage or environmental fee on all new and second hand cars. With luxury new cars running from $N800,000 to well over a million many Namibians are moving to second hand imports. Many of these, especially the older vehicles coming from Botswana, are massively undervalued and the government needs to stop the process of VAT collection based on fictitious valuations. Instead taxes need to be imposed based on international ‘Blue Book’ values of cars.

Irrespective of what policy measures the government chooses to impose to deal with the unsustainable trade imbalance, it is running out of both foreign exchange reserves and time. The time for government to act is now before the reserves fall to what is often seen as a critical minimum i.e. approximately 4 weeks import cover. While 4 weeks is enough to cover imports it is commonly seen as the  point at which  investors will see the writing on wall for Namibian dollar – rand parity and start to move ever more foreign exchange out of the country. This will hasten a crisis. It is time to act before ‘Nexit’- an exit from Namibian dollar parity with Rand becomes inevitable and the currency has to be devalued. The immediate rise in prices of imported goods would not only lower living standards but in the long term it would weaken Namibia’s reputation as a safe place to invest.

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he may be affiliated.