Weak vs strong – it is more than an ivory tower debate
A weak currency, or one weaker than what a country’s production dynamics require, is not necessarily a bad thing. It has many short term benefits, chief of which is its ability to artificially inflate the domestic value of foreign earnings.
But if you import far more than what you earn in export revenue, then a weak currency quickly catches up with fundamentals, and the only thing it accomplishes is to import inflation, without a commensurate increase in either production or productivity.
Were Namibia a jurisdiction where the majority of all consumables is manufactured locally, a weaker currency would have been to our benefit. This strategy is visibly demonstrated by many emerging economies for example India and Brazil. But the role of local producers and manufacturers is extremely limited, reflected in the statistic that we import about 84% of everything we use or consume daily. On the export side, we send out mostly unprocessed commodities, either from agriculture or fishing or mining. Even our economic mainstay, diamonds, see only a fraction value-adding take place locally. Tourism is arguably our most promising export product at this stage.
Our currency has lost more than 30% of its external value since December 2014. Our export earnings have not grown by more than 30%, instead there was a marked decline in output as reflected in the preliminary National Accounts. It is inevitable that this difference will eventually translate into inflation, and serious inflation at that. Adding to our perils is that domestic economic conditions have turned frosty since September last year, when Namibian bonds fell foul of the South African capital market. For this year the prognosis is not rosy. Every single analysis or economic overview I receive states flatly that 2016 is a year of consolidation and reduced growth.
Our saving grace is the fact that some 68% of the 84% we import, comes from South Africa. They are in the more fortunate position that they have a robust manufacturing base producing almost everything they need and consume. South Africa is therefore much less exposed to import inflation than we are and only by our economic connection, can we still afford what is produced or manufactured there. Since the SA economy is so big, it also has the benefit of economies of scale, helping a little to compete with cheap Chinese imports, but still not sufficient to stem the flood of oriental imports. Still, SA is big, some 30 times bigger than Namibia, and can weather poor economic conditions for a much longer time than we can.
The one area where we will not escape import inflation is in energy. Neither Namibia nor South Africa has any local extraction of crude. Every single drop has to be imported. Granted, South Africa manufactures a small amount of fuel from its vast coal reserves, but this is a drop in the ocean.
The delusion we are currently living under is that we believe oil prices can not go up again, or at least, will not go up significantly. This may be so or it may not. We do not know where crude prices will be six months from now. The stellar depreciation of our currency, fortunately for us, coincided with the stellar slide in crude but it is unrealistic to think this will continue. Still, the balancing-out of cheaper crude against a weaker currency, has saved us from N$15/litre fuel prices.
We must however not be so deluded to expect crude prices to remain so low so long. Since the beginning of April there has been a substantial increase in crude, taking it this week to the US$44 per barrel level. Our currency, on the other hand, has mostly stayed where it was at the beginning of the year, making us vulnerable to import inflation.
The external value of the Namibia Dollar and the Rand has become a standing joke. The currency’s condition is so appalling, we are only too happy to see an appreciation from R15.40 to the US Dollar, to R14.80. What a ridiculous situation when one compares the value to just eighteen months ago.
Nevertheless, the Rand has been losing value steadily over several years. We were shocked when it went through R10/US$1 threshold for the first time. Today we shall be very glad if we can see that level again.
The fundamental fact is that the weak-currency benefit is short-lived. If we, like it is our stated intention, want to build a manufacturing economy by 2030, the one absolute is a strong currency. Stronger currencies allow for cheaper imports which allow for cheaper production. A strong currency is the only way a country can remain competitive over the long term.