Shackled to a currency of ruin

“It is important to note that while a country can achieve some competitiveness in the short term through the management of the exchange rate, a sustainable way to achieve robust international competitiveness is through growth in productivity and improved efficiency among domestic economic entities. In this regard, [the Botswana] Government will continue to implement public sector reforms, and undertake other structural reforms to improve productivity in the economy.”
This quote comes from the budget speech by the Botswana finance minister to his parliament in February this year. In that same address, the minister referred to the review of the Pula exchange rate mechanism which was done in December last year. The Pula is pegged to a basket of currencies, notably the Rand (50%) and the IMF’s Special Drawing Rights (50%) which in turn is an accounting unit value based on the US Dollar, the Euro, the Yen and lately also the Renminbi.
The outcome of this arrangement is that during 2015, the Pula appreciated by 13.6% against the Rand and only depreciated by 11.6% against the SDR. Compare this to the more than 30% the Namibia Dollar lost in value during 2015 and it becomes obvious why I argue the Rand has become our albatross.
The statement put out this week by the Bank of Namibia after conclusion of the Monetary Policy Meeting on Tuesday, is far more revealing than any previous statements. It is not so much what the statement says than what it does not, that shows the true flavour of the relationship we have with the South African currency.
In the past, our foreign reserves were typically quoted as the benchmark that determines our ability to maintain the par link to the Rand. In this week’s statement, reference is made to the impressive growth in foreign reserves, conveniently omitting that it has put an enormous US$750 million burden on the economy. But again, since we now have so much foreign reserves, we do not need to worry about the peg, as if that will compensate us for the 30% decrease in the value of our own currency. It is a very simple comparison. If the Namibia Dollar lost more than 30% of its value, then the cost of servicing the interest on our offshore loans, including the latest Eurobond, goes up by more than 30%. So watch that item always indicated in the budget as “Statutory expenses.” This is where our interest payments are hidden and it is set to explode.
Comparing the performance of the Pula to our Dollar, I am struck by the neurotic attachment we have to the now maligned Rand. Granted, it is our door to international trade. Without a Rand link, we do not have access to any significant foreign market. The Rand is our gateway. Were we to consider listing the Namibia Dollar on the Chicago Currency Board for instance, I presume the financial world will regard it as a joke.
And to trade a currency internationally is fairly expensive. I do not think we will be able to afford it.
The emphasis in the MPC statement has clearly shifted to interest rate convergence between South Africa and Namibia. This is true since capital will flow where it earns the biggest return and if the repo rate in SA is higher than here, money will go that way, and soon our local banking system will be penalised by tight liquidity. This has often happened until about 2003 and we were always forced to maintain a (at that time) a bank rate between 1.5 and 2 percentage points higher than South Africa’s repo rate.
Since then, the dynamics have changed dramatically and I doubt we need to maintain a higher local interest rate regime to maintain liquidity. The same repo rate here as there is probably adequate to ensure sufficient local liquidity. This much is inferred in the MPC statement where it says the repo rate had to be raised to align it with South Africa’s.
In between all our development plans and the plethora of interventions and strategies, we also need to look at an exchange rate arrangement that is more to our benefit. This is where the Botswana example becomes a clear pointer.
The Botswana and Namibian economies are comparable in many aspects. If it works for the Pula, then there is not reason why it can not work for us.
A second, more daring venture will be to start investigating the options for pooling the Pula and the Namibia Dollar. In such a setup, our Dollar and the Pula will be linked on par, while the pool of both currencies will be linked only 50% to the Rand. If you doubt the benefits to us, just reread the first and second paragraphs. The data says it all.