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Namibia needs to investigate alternative exchange rate arrangements

Namibia needs to investigate alternative exchange rate arrangements

By Ian Patterson Petherbridge
Director at Norton Rose Fulbright law firm in South Africa

Flexible but stable exchange rates are critical to national and global economic stability but the recent volatility may force Namibia to consider alternative exchange rate arrangements. The Namibia Dollar is pegged one to one to the South African Rand.

Depegging from the Rand will ensure better efficiency of monetary policies and the bolstering of economic growth in Namibia.

Although the ultimate aim of Namibian monetary policy is to ensure price stability in the interest of sustainable economic growth, the convenience of the current exchange rate arrangement has come at a cost.

These costs include i) the loss of autonomy in monetary policy, ii) persistent capital outflows in favour of South Africa, iii) the loss of inflation tax and iv) the inability of the Bank of Namibia to be the “lender of last resort”. Some analysts even argue that pegging the Namibian currency to that of South Africa may lead to sluggish economic growth in the long run.

Depegging of a currency may occur if the peg is causing inflation or if the central bank is unable to sustain the peg for other reasons. Pegging a domestic currency to a fixed rate has undeniable advantages such as price stability, credibility of monetary policies, reduction of transaction costs, the avoidance of exchange rate fluctuations and access to financial markets. But part of the economic crisis Namibia is currently facing, amongst the myriad of contributing factors, is the pegging of the Namibia Dollar to the South African Rand, the latter having performed poorly over the past two years, causing the Namibia Dollar to follow suit.

The South African Reserve Bank has kept its benchmark lending rate of 6.75% unchanged for a third consecutive meeting as the risks of a credit downgrade persist, muddying the outlook of the Rand and inflation. The continued economic downturn experienced by Namibia’s biggest trading partner has put additional strain on Namibia’s already sluggish economy, due to the peg.

The prevailing consensus is that Namibia should not depeg from the Rand because of the size of the local economy which would not be able to sustain a free floating currency.

A move to depeg can cause financial mayhem irrespective of the size of an economy or whether it is an export or import based economy. Africa’s largest economy, Nigeria, pegged the Naira to the United States Dollar a few years ago to stabilise the Naira but amid plummeting oil prices, the Central Bank of Nigeria had to spend about 20% of its foreign reserves defending the peg. Nigeria depegged from the dollar on 20 June 2016 which resulted in an inflation spike and prompted the central bank to increase interest rates in an attempt to prevent a cycle of rising inflation and a weakening currency.

The Swiss made the same move when the Swiss central bank depegged the Swiss Franc from the Euro in January 2015 after it introduced the Franc-Euro peg in 2011 at the height of the euro zone crisis to fend off deflation and a recession. Due to rapid appreciation of the Swiss Franc, fear of deflation, and a host of other economic risks, the Swiss Franc-Euro peg ultimately dissolved in January 2015, as the Swiss National Bank tried to stabilize the Swiss economy. The depegging resulted in massive losses for hedge funds, investment banks, corporations and individuals alike.

It is a reality that a country can at times be left with no option but to depeg considering prevailing global economic conditions. Some economists argue that the decisions by the central banks of Nigeria and Switzerland to pursue more flexible exchange rate systems will bear the fruits of achieving greater fiscal stability and growth in the long run despite the initial disruption it created in their respective economies. The existing economic climate experienced in Namibia and South Africa alike may necessitate the revision of the existing pegging arrangement.


About the author Ian Petherbridge
Namibian born Ian Petherbridge is an admitted legal practitioner in Namibia and in South Africa. A law graduate from the University of Natal, he has worked in private practice in Rosh Pinah and Windhoek before joining the legal team at Standard Bank Namibia. He has recently relocated to KwaZulu Natal for professional reasons. He is a keen follower of Namibian business and economics.


 

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