… Namibia and others protecting rand peg, battered!
By Hilary Mare
AS the South African rand continues to fluctuate, it is true that South Africans aren’t the only ones struggling through the country’s economic slump.
The fortunes of Namibia together with Lesotho and eSwatini, formerly known as Swaziland, are beholden to developments in their larger neighbour with their exchange rates pegged to the rand, the worst-performing major currency against the dollar this year.
The three nations, together with Botswana, also derive revenue from a customs-sharing pool that gains and falls on South African trade.
The continent’s most-industrialised country is struggling through a recession, and a 13 percent drop in the rand versus the dollar.
That’s made it tough for officials in Namibia, Lesotho and eSwatini to stimulate sluggish activity through looser monetary policy because they have to keep their rates in line to maintain the peg. Botswana, whose currency is not tied to the rand, has cut its benchmark to 5 percent.
“Lesotho and Swaziland remain very susceptible to the effects of regional developments,” said Jee-A van der Linde, an economist at Paarl, South Africa-based NKC African Economics in South African newspaper last week.
With South Africa being the largest contributor to the customs union, revenue for other countries “is therefore likely to be lower in the near term,” he added.
Receipts from the 108-year-old Southern African Customs Union – the world’s oldest such arrangement – account for about 40 percent of government revenue for Lesotho and eSwatini, and about 30 percent for Namibia and Botswana. South Africa has paid an average of almost N$50 billion to the pool in each of the past four fiscal years.
South Africa’s National Treasury has reduced its estimates for payments to SACU this fiscal year and next, and there is “material downside risk to these forecasts” because the economy isn’t expanding as much as first predicted, said Mamello Matikinca-Ngwenya, the chief economist at FirstRand’s First National Bank retail-lending unit.
All the economies in the union, barring that of Botswana, will expand by less than half the 3.1 percent average rate the International Monetary Fund forecasts for sub-Saharan Africa this year, the IMF said in an October report.
Namibia’s economy shrank for a ninth quarter in the three months through June, the longest streak of contractions since at least 2008. While the central bank usually mirrors moves by its South African counterpart, it diverged from this in April for the first time since 2015, holding its key interest rate at 6.75 percent. It did this to entice investors to keep money in the nation, helping it to build currency reserves, Bank of Namibia Governor Ipumbu Shiimi said at the time.
The Namibian dollar however would be highly vulnerable to external shocks if it were to break the link to the rand, due to Namibia being a small economy with highly concentrated industries and exports, Gerrit van Rooyen, an economist at NKC, also highlighted last week.
With a lot of individuals, economists included, having put a near future ‘collapse tag’ on the Namibian dollar premised on fear of the unseen, it is imperative to understand why it is important to continue using the rand in cahoots with the Namibian dollar.
Firstly, the global terrain coupled with globalisation has made room for integration protocols to be signed between nations to make trade and other economic elements much easier with Namibia and South Africa being no exception. The two countries have signed various protocols that pave way for arrangements that have to this day created an atmosphere relevant and beneficial to Namibia to adopt the South African rand as legal tender.
While it benefits Namibia and to a larger extent makes economic sense to keep it legal tender, constant assessment of this NAD-Rand link arrangement is pivotal in ensuring that Namibia would disengage at the correct time – which is not now.
In his remarks recently, Bank of Namibia Deputy Governor Ebson Uanguta, posited that it would be considerable to de-link the rand as and when South Africa becomes mismanaged economically and also when imports from South Africa are no longer at such high levels.
“At the present time we feel that South Africa’s economy is well managed and there are no signs that show that it will not be in the near future. We find it therefore best that we keep the link that has huge rewards in our favour. Further, if our imports from South Africa go down as low as 10 percent we are likely to reconsider the link as well, as such a reality presents a whole different scenario,” he remarked.
While Namibia has a developed mining industry, the country – bigger than France by land area – has a population of just 2.6 million people. Botswana is Africa’s largest producer of diamonds, income that has helped it progress into one of the continent’s wealthiest per capita.
Lesotho, a mountainous nation encircled by South Africa, and eSwatini, Africa’s last absolute monarchy, are unlikely to decouple their currencies soon, said NKC’s Van der Linde.
“South Africa serves as a fuel bank and exporter of fuel to Lesotho and Swaziland,” Van der Linde said. “What’s more, the majority of Lesotho and Swaziland’s products cross the borders of South Africa to their ultimate destination.”
In Namibia and with the industrialisation agenda on the cards, the implications of a continued South African recession would without doubt continue to increase the cost of construction materials, including steel, roofing, flooring, aluminium and paint, which will be further aggravated by the rising transport costs for bricks, sand and cement, which are very bulky inputs.
The cost of importing goods, particularly machinery and other technology used in production is exorbitant or unaffordable. Sharp currency depreciation also causes the trade deficit to balloon, as the cost of oil imports and capital equipment climbs. The costs of labour, electricity, transport and the like also rise sharply, driving up the cost of exports and driving down their competitiveness.
Whilst emerging markets most exposed to lower growth prospects and subdued commodity prices have seen the sharpest falls, further ambiguity around domestic economic policy is likely to keep the rand under pressure in the near term, prolonging the downward pressure that the Namibian dollar is experiencing under the weight of the sinking rand.
Confidente. Lifting the Lid. Copyright © 2015