Beware the Nollar !

Beware the Nollar!

 THIS WEEK, the rating agency Fitch downgraded Namibia’s status to BB, from BB+ plus. Being downgraded is a regular occurrence over the last three years when we have been in our current depression.
We pay the ratings agencies to tell us the truth about our economy in a way that the good people at the Bank of Namibia or the Ministry of Finance, who we also pay, will never do. It is perhaps understandable, because those who tell their employers the harsh truth don’t stay long because the ‘emperor’ never wants to be told that his fly is undone.
The problem is that Fitch said a couple of things that were surprising. The first is that government does not intend to refinance the US$500???? million Eurobond loan in 2012 and that the peg against the rand will remain for the ‘forseeable future’. I have little faith in economic forecasters, they get it wrong more often than not and I have less faith in their ability to write concise English. What does ‘foreseeable future’ really mean?

I have long argued that if Namibia ever wishes to be internationally competitive what it needs to do is to decouple our currency from the South African Rand and have a currency of its own… the nollar. International economists argue that if Namibia really wishes to be internationally competitive then it would have set the value of the nollar at 0.80 cents to the Rand. That might make us competitive against the South Africans, if nothing else happened, but would do almost nothing to make us internationally competitive against Vietnam or China with whom we must also compete. That would require a nollar worth about 50 rand cents. If you are not up to date with how currency changes affect you that would mean the government would have to cut living standards by at least 50% in order for us to compete against the most competitive Asian producers. You can well understand that as much as any politician wants Namibia to be competitive with Asia none are willing, before 27th November or probably even after, to say that they want to lower your standard of living by that much in order to be competitive.

Now, if the nollar sounds too painfully close to the recently reintroduced Zimbabwean dollar or zollar, as it is called, then you are right. The zollar has slumped mercilessly in Zimbabwe from an exchange rate on introduction earlier in June this year when at 2.5 to the US dollar. The exchange rate stood at 15 to the dollar just last week.
For 10 years after the last fiasco with the Zim dollar ended in 2009 when trillions of the local currency were being sold for a US dollar, the government reverted to the US dollar as the medium of exchange. But it is now trying the same currency experiment again, which sounds to many like the Einstein’s definition of madness … doing the same thing again and again and expecting a different outcome. Zimbabwe now has what is estimated as the world’s highest rate of inflation at 900% and makes Venezuela’s Nicholas Maduro look like the vision of monetary prudence.

But is what Zimbabwe doing simply financial madness? For the average Zimbabwean the answer is an unequivocal yes, but if you have access to both the official and unofficial (black) market for US dollars it is quite another matter. The last time around when Zimbabwe had its own currency in 2009 some well connected people made vast fortuntes from the hyper-inflation that occurred in Zimbabwe.
If you could get access to US dollars at the official rate and then sell on the black market you could make serious money. But that was not for the average Zimbabwean, who is not a high cadre of Zanu-PF or otherwise connected to the political elite. The situation is so bad that Zimbabweans are now going hungry yet again and can no longer afford the one way ticket to neighboring countries and a lifetime of evading officials and bribing the immigration police.

So what awaits Namibia if we eventually decouple from the rand as is widely expected? The only real question is when. Many believe we are OK until 2021 but others in the financial community think decoupling may come sooner.
What is commonly said in financial circles is that senior finance officials would like to see a new peg of nollar at rand 0.80 cents. That peg would last as long as an ice cream in Windhoek in February. The reason is that a decoupling from the Rand is not motivated by any desire to be competitive but a desire to end the austerity, i.e. "fiscal consolidation" by being able to print nollars.
You can print nollars but we can’t legally print rand and unless you decouple you lose control of monetary policy and the ability to behave like Mugabe did in 2009 and Mnangagwa is behaving now in Zimbabwe.

Assuming that the reporting of the finance minister’s statement in New York in Bloomberg late last year is correct, he would eventually like to see an end to the austerity by decoupling the nollar from the rand . President Hage Geingob in April said no way at the G77 meeting but in the end what and when it happens depends on how much foreign exchange we have.
At the end of July this year we had US$2.5 billion in reserves. However when we repay the Eurobond in 2021 our forex reserves will fall dramatically and Fitch tells us that we can expect another two years of declining GDP until 2021.

If we were to behave like Botswana did when it decoupled the Pula from the rand in 1976 and kept a solid peg against a basket of currencies then the policy might help correct our problem of international competitiveness. But devaluing the currency often fails to increase competitiveness because it is seen as a signal to the market that the country is in trouble and not really trying to correct its competitiveness but solve its fiscal and balance of payments problems.
Under the kleptocratic misrule of South African President Zuma and his cronies the rand fell in half (from 7 to 15 rand to the US dollar) and in theory it should have made SA a great place to invest as labour and other local costs were cheap in US dollars.

The problem is that just the depreciation of the rand under Zuma was a market signal that much was amiss in the country and rather than invest more foreigners lost faith in SA in the same way as depreciation of the Zimbabwe dollar will do nothing to enhance investor confidence in that country. Unless decoupling is done when the economy improves and is more solid, beware the nollar!

•These are the views of professor Roman Grynberg and not necessarily those of Unam where he is employed.