Of import: The Bank of Namibia's Monetary Policy Committee believes the current trade crisis is largely the fault of the country's strong demand for expensive vehicles.
COMMENT
Since 1993, when Namibia introduced its national currency, the country has maintained a policy of strategic parity between the Namibian dollar and the rand.
This was done for a number of reasons but principally to reassure business at the time of independence that the conduct of policy in Namibia was in safe hands and that when they invested in the country they could take out their profits at a fixed exchange rate.
This has been at the heart of macroeconomic and exchange rate policy for more than 20 years, but now it looks increasingly under pressure.
On June 17, the Bank of Namibia announced that the nation’s foreign exchange reserves had fallen to N$12.1-billion, down from N$15.7-billion just two months earlier. With its regular but increasingly perfunctory comments, the Bank of Namibia’s monetary policy committee (MPC) added its usual caveat that the reserves remain sufficient to sustain rand parity.
But are they? Certainly, Namibia has enough foreign exchange reserves to cover imports for a period of about seven weeks, given the most recent decline. Yet in 2012, Namibia’s foreign exchange holdings were enough to cover four months of imports.
By international standards anything above three months is considered reasonably adequate. But by the end of last year the import cover had fallen to two months and the substantial decline of reserves in 2015 should be a wake-up call to policymakers that the country is on an unsustainable path of importing far more than it is exporting. Unless checked, this will eventually lead to a balance of payments crisis.
From the 1990s up until the economic crisis of 2008, Namibia’s balance of trade was pretty much in balance, with exports and imports of goods growing in tandem.
Growing appetite
Then, with the beginning of the global economic crisis in 2008, imports started to balloon and, though export growth has been adequate, especially in 2014 when diamond prices and returns have been high, it has not been enough to pay for the growing appetite for imports.
The Bank of Namibia’s MPC puts the blame on the country’s demand for imported luxury goods, in particular expensive cars. The Namibia Statistics Agency data on imports of motor vehicles does show a rapid rise over the past few years but the figures are probably vastly underestimated, given the growth of normally under-valued second-hand cars. In 2014, Namibia is said to have imported some N$12.4-billion, up by N$3-billion or 37.4% from the year before.
Some argue that the decline in foreign exchange reserves is simply a result of imports of capital equipment for new mines such as the Huisab Uranium Mine and the B2 Gold Mine and that once this is over the balance of payments will stabilise as exports of minerals will increase. But after five years of ever widening trade deficits, such a view is now dangerously optimistic. Namibia’s worsening trade situation is no doubt compounded by the government’s budget deficits over the past few years, which is resulting in ever more imports.
None of the options for addressing the nation’s trade imbalance are pleasant for the government or for the Namibian people.
The politically safe approach to an impending balance of payments crisis in most countries is to use monetary policy to restrict access to credit. This puts less blame directly on government and shifts it to the Bank of Namibia. But a credit squeeze is a dull instrument that can often lead to the destruction of many otherwise sound businesses.
A similarly blunt instrument the government has to restrict spending is the use of its fiscal policy to cut government spending and raise taxes. This is a very unpopular approach for dealing with deficit problems – just ask the Greek people how much they like this sort of approach. Yet it may prove painfully necessary.
How should the government react? If the Bank of Namibia’s MPC is correct in its assertion that the purchase of luxury vehicles lies at the heart of the import surge, a number of more focused monetary policies to push the banks to limit access to credit in these sectors are in order.
But in an economy like Namibia’s, where funds can flow in from South Africa with ease, there are too many ways around credit restrictions to one sector or another.
The other option is to impose a series of new taxes on vehicles coming into the country, especially the larger and more expensive ones. It is not possible to impose import duties on vehicles made in the Southern African Customs Union but it is certainly possible to impose higher excise tax and a large scrappage or environmental fee on all new and second-hand cars.
Massively undervalued
With luxury new cars running from N$800 000 to well over N$1-million, many Namibians are moving to second-hand imports. Many of these, especially the older vehicles coming from Botswana, are massively undervalued and the government needs to stop the process of VAT collection based on fictitious valuations. Instead, taxes need to be imposed based on the international “Blue Book” values of second-hand cars.
Irrespective of what policy measures the government chooses to impose to deal with the unsustainable trade imbalance, it is slowly running out of foreign exchange reserves and time.
The time for government to act is now, before the reserves fall to what is often seen as a critical minimum – about four weeks of import cover.
Four weeks may be enough to cover imports but it is commonly seen as the point at which investors see the writing on wall for Namibian dollar-rand parity and start to move ever more foreign exchange out of the country. This exit of financial capital will only hasten a crisis.
After five years of increasing trade deficits it is time to act and use fiscal restraint and tax policy to ensure there is no “Nexit” – an exit from Namibian dollar parity with the rand and a devaluation of the Namibian dollar.
The immediate effect of devaluation would be a rise in the price of imported goods, which would not only lower living standards across the board but, in the long term, it would weaken Namibia’s reputation as a safe place to invest. The longer policymakers wait to address the issue of the trade deficit the greater the pain will be.
These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he may be affiliated