Lientte Goosen
26 June 2009
Windhoek — Almost 20 years after independence and more than 15 years following the introduction of the Namibian Dollar, the local currency is still one-to-one with the South African Rand.
The Bank of Namibia's corporate communication department, nevertheless, explained the central bank's monetary policy decision to keep the Namibian Dollar pegged to the South African Rand as follows:
"Namibia's monetary policy framework is underpinned by the exchange rate system that is linked to the South African Rand. This link, which requires that Namibia's currency in circulation be backed by international reserves, ensures that Namibia imports price stability from the anchor country, which is South Africa. Under a fixed rate regime, monetary policy remains submissive to the fixed rate peg. Maintenance of the fixed rate peg, which is the intermediate target, ensures that the goals of price stability are achieved by importing stable inflation from the anchor country."
According to André Heymans, senior lecturer at the School for Economics, Risk Management and International Trade at the North West University in South Africa, the trend over the past 10 years indicates that more developing countries have moved from a fixed exchange rate system to managed floating and free floating exchange rate systems.
"Even though every such case was driven by a unique set of circumstances, the majority of the countries experienced some kind of financial crises before changing their exchange rate policy from fixed to floating. Since every case is unique, the decision to move from a fixed to floating exchange rate regime, or vice versa, should be guided by the type of developing country, and the specific economic and political circumstances.
Should a country such as Zimbabwe for example change to a fixed exchange rate regime now, it will be critical to peg the Zimbabwean dollar at the correct value. Failure to do so would only encourage speculation against the currency, forcing the monetary authority to revalue or devalue it soon thereafter. This will only add to economic uncertainty and discourage international trade, defeating the purpose of the peg in the first place," Heymans said.
"The advantages of the fixed exchange rate," he added, "are that all exchange rate risk is stripped and international trade is promoted. This is not only a cost saving exercise (costs of hedging currency risk), but also allows economic role players to manage their costs much more efficiently. In some cases, such as the Namibia dollar that is pegged to the South African Rand, Namibia ensures that trade with South Africa is made very easy and fairly cost effective. In this case it makes sense for Namibia to peg its currency to a stronger one in the same region. The fact that it is pegged to the South African Rand, however, is to my opinion not because the South African Rand is a stronger currency. This peg is in place because Namibia's financial sector and that of South Africa is intertwined. South Africa is also Namibia's biggest trading partner, meaning that the peg against the South African Rand makes much more sense than a peg to the Pula for example (which is a stronger currency than the South African Rand)."
Namibia is however not the only country whose currency is pegged to the South African Rand. The currencies of the two independent states within the South African borders, Lesotho and Swaziland, are also pegged to the Rand.
According to the Bank of Namibia, South Africa, Namibia, Lesotho and Swaziland form the Common Monetary Area (CMA), a monetary union, where free movement of capital is allowed within the area, and a common exchange control regime is maintained with the rest of the world.
"Therefore, the currencies of Namibia, Lesotho and Swaziland are pegged to the South African Rand on a one-to-one basis. As a member of the Common Monetary Area, Namibia has opted to surrender its right of having a completely independent monetary system. Nevertheless, the country has some level of monetary policy discretion, because of capital controls and other prudential requirements," it says.
Unfortunately, according to Dr. Heymans, there are also some negative aspects regarding a currency peg.
"Any country whose currency is pegged against that of another country will be hit by the same economical misfortune as the original country. Having a currency peg in place also renders any inflation targeting via the interest rate system useless.
Although a free-floating exchange rate system (such as South Africa's) is more volatile and expensive (hedging costs) than a fixed exchange rate, there are various advantages. The country in question does not have to possess a large amount of foreign currency to defend the peg (which could be difficult to attain if you are a net importer). Such countries also have the option to manage inflation via the interest," he said.
"If a country decides to follow a fixed exchange rate regime, they will "peg" the value their currency to the value of another country's currency. The currency being pegged against would normally be a stronger currency, or a basket of currencies chosen from a list of the country's trading partners. When deciding to peg, the monetary authority simply announces that the currency will be pegged against the target currency at a specific rate. All revaluations and devaluations will be announced by the central bank as deemed necessary thereafter," explains Dr. Heymans.
Responding on the possibility that more countries in the SADC region may peg their currencies against the South African Rand, Dr. Heymans said that since most SADC countries have South Africa as a major trading partner, it would be beneficial.
"It is difficult though to speculate on the possibility of this happening. As mentioned before, the benefit to the region would be that international trade would benefit (if the correct rate is used), bringing the cost of currency risk management down.
However, should some external shock hit South Africa; these countries will suffer directly as a result. This regime will also make such African countries vulnerable to speculative attacks on their currency, which will defeat the purpose of wanting to create financial and economic stability," he said.
"Another option would be to create a new currency similar to the Euro. Each currency is valued against the new basket, and then replaced by this currency. This would be good for other SADC members but not for South Africa and Botswana due to inflationary outcomes in these two countries."
A third, and more viable option would be for other SADC members to have a managed floating system against the South African Rand. Such a system will necessitate the particular SADC country to allow its currency to appreciate or depreciate up to 15% (any percentage they choose) against the South African Rand before the central bank steps in to defend the peg.
This will allow them to benefit from currency stability without giving up their monetary policy capabilities.
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