TIME AND TIME Still, the conversation about the Namibian dollar’s depegmentation from the South African rand ensues, but the current times warrant the discussion to move on to the possibility of introducing a regional currency.
Africa has various regional integration initiatives involving the Southern African region, each with its own distinguished agenda, and the African continent has experienced various stages of economic development with episodes of inflation.
Given unstable macroeconomic policies, it is essential to use the regional currency bloc target to encourage greater discipline and better governance.
On that note, Namibia could benefit more from the evolution of the Common Monetary Area (CMA) towards a monetary union.
A union of regional currency blocs or a monetary union is an agreement between two or more countries or an economic bloc that agrees to use a single common currency and a fixed exchange rate policy.
The ideology is that the peg of a currency stabilizes the exchange rate between countries and therefore provides long-term predictability of exchange rates for business planning.
It is very important to recognize that none of Namibia’s growth rates could have been established without an exchange rate indexed to the rand.
However, to achieve an economic boom, Namibia needs a change in monetary policy to effectively manage certain aspects of the economy, especially export trade and consumer price inflation, given the opportunities. trade with many other African countries that are not members of the CMA.
Globally, the tendency to create currency zones has accompanied initiatives to strengthen regional integration and has therefore had an important political and economic component.
The evidence comes from Europe, where the euro has reached a period of 50 years of global policy coordination and institution building.
The creation of an African regional currency, for example an African dollar, will be an important symbol of the intensification of regional cooperation on the continent, and could do exceptionally well, just like the euro, the pound sterling and the US dollar. .
The strength of a currency depends on a number of factors, such as its rate of inflation, the interest rates prevailing in its home country, or the stability of the government.
In short, small economies that are particularly sensitive to currency fluctuations will âpegâ their currency to a single major currency or basket of currencies.
These currencies are chosen based on the country with which the small economy has significant business activity or the currency in which the country’s debt is denominated.
The adoption of such systems has proven to reduce the volatility of currencies used in developing economies and has prompted governments to be more disciplined in their monetary policy choices.
Under normal circumstances, countries like China, for example, which export most of their products to the United States, would wish to pair their currencies with the United States dollar to achieve or maintain competitive prices.
This keeps their currencies at a cheaper rate than the US dollar, and their export products automatically gain a comparative advantage in the US market.
In economics, comparative advantage refers to the ability of an economy to produce a particular good or service at a lower opportunity cost than its trading partners.
In other cases, developing countries or countries with volatile economies generally peg their currencies to the currencies of developed economies to guard against potential inflation.
With the African Continental Free Trade Area on board, by adopting a regional currency bloc, Namibia and many other African countries can achieve comparative trade advantages while protecting their own economic interests.
This would mean that the value of a dollar in Namibia would be the same as that of a dollar in Botswana, Ghana, Nigeria, Mozambique, South Africa, Cameroon and all other African states.
But it requires that political goals align with each other.
Without alignment, monetary policy would be inadequate at best, and at worst detrimental and therefore ineffective for all parties involved.
To effectively control the exchange rate of the currency, the government of Namibia must ensure that there is sufficient foreign exchange reserves by exchanging the national currency.
However, more foreign currency reserves can lead to higher inflation.
Amid the pandemic, Namibia’s central bank has been exceptionally successful in maintaining the one-to-one link between the South African rand and the Namibian dollar.
The country is committed to applying sufficient trade policies and deploying internal growth strategies that support national production.
The indexed rate under the monetary union can keep Namibia’s exchange rate low and simultaneously contribute to exports.
This is true for the rest of the African states.
As of May 11, the continent’s strongest currency against the US dollar is the Libyan dinar.
The peg of currencies to a single currency does not necessarily have to be determined by the strongest currency on the continent, as many other factors must be taken into account.
Notably, the conventional wisdom based on theoretical literature is that Namibia, like all countries with fixed exchange rates, cannot devalue.
If so, the cost of its foreign currency borrowing would skyrocket and private borrowers would go bankrupt.
Even if the Bank of Namibia (BoN) may drop the peg and let its currency appreciate as the market pleases, it will suffer huge immediate and long-term losses.
In economic theory, it is assumed that while maintaining the peg and avoiding immediate losses is an attractive option, the large and growing balance sheet carries an inherent risk.
When the balance sheet increases significantly, they suggest, the second choice becomes more attractive, and the central bank then chooses to drop the peg.
However, empirically, withdrawals from the anchor may have destroyed small economies.
Nonetheless, Namibia remains naturally subject to foreign influence.
As such, in the event of trade imbalances, it can be difficult to achieve automatic exchange rate adjustments, and a slight deviation from the peg at a later stage could spark strong speculative attacks.
While discussing Namibia’s exchange rate and its implications for the country’s monetary policy as governor in 1999, Tom Alweendo said that one of the biggest advantages of a fixed exchange rate deal is that ‘it ensures price stability in the domestic market.
He said that by fixing the national currency to the currency of a low-inflation country, its ability to maintain price stability is enhanced, provided the authorities firmly commit to maintaining the exchange rate.
The costs to Namibia resulting from the CMA deal include the loss of autonomy in monetary policy, the persistence of capital outflows, the loss of seigniorage and the ability of the central bank to act as a lender of last resort. is limited.
Seigniorage refers to the profit that the BoN derives from the issuance of a currency.
Although South Africa compensates Namibia for the rand to circulate in Namibia, it is worrying that we are losing significant amounts of seigniorage from our own currency.
The debate around the purely economic benefits of a common currency is still ongoing, given the disparities in macroeconomic policy preferences between African economies.
Despite the costs, the CMA agreement has significant advantages.
It provided a fundamental basis for the Namibian government’s planning and also fostered credibility and discipline in the country’s monetary policy ahead of Covid amid the pandemic and into the future.
The international market is currently dominated by the euro, the pound sterling, the US dollar and the yen.
The countries of the African continent must mobilize and commit to facing the entire process of resolving complex national conflicts of interest within their jurisdictions in a just and peaceful manner.
The need for a regional currency bloc is of crucial importance as it will strengthen intra-trade trade relations, bilateral agreements, facilitate monetary decision-making and pan-African economic activities, and play a vital role in price stability. , credibility and the exchange rate. fluctuations, reduced transaction costs and access to financial markets across the continent.
It is suggested to expand the CMA agreement to include countries in the region with similar economic structures, objectives and development priorities and to adopt a unified regional currency bloc.
The journey will be long because a lot of research and investigations will have to be undertaken.
* Enos Kamutukwata is an economist and parliamentary researcher, and Natalia Shilongo is a passionate young economist.