The currency peg | a blessing or a curse?

Photograph by: Susan Nel

Namibia’s currency, the Namibian dollar, is pegged to the South African rand at a one-to-one ratio. This arrangement, in place since Namibia’s independence, rarely garners attention – until the rand weakens. Each time it does, Namibians start to wonder: Is this peg a blessing or a curse?

In this article, we unpack the pros and cons of the enduring financial ties between the two nations and the implications of the currency peg on Namibian financial stability.

When Namibia gained independence in 1990, it became a de facto member of the Common Monetary Area (CMA), although formal membership only commenced in 1992. Instead of introducing a completely new currency, Namibia made the strategic choice to peg its currency to the rand at a one-to-one ratio under the rules of the CMA. This decision was not arbitrary. Historically, Namibia’s economy was deeply intertwined with that of South Africa. As such, maintaining this monetary link was seen as a practical imperative, ensuring economic stability and continuity during a period of significant political transition in both countries.

The currency peg not only simplified trade and financial interactions between the two nations but also provided Namibia with a safety net of sorts, anchoring its young economy to the more established South African financial system. But while it certainly was the right decision in the past, the question of whether the currency peg is still a valuable tool for Namibian financial stability in the present, is one that is more and more frequently being raised. This despite the Bank of Namibia’s unequivocal stance that it remains beneficial.

Questions surrounding the peg are undoubtedly due to the very visible fluctuations in the rand and the associated inflationary pressures it brings. Fuel prices go up, and the rand is blamed. The rand depreciates due to the latest political drama in South Africa, and Namibians question why we are still tied at the hip to a country that seems politically extremely volatile.

Firstly, there are some very real negative consequences to a currency peg. The most notable one is that Namibia, to a large extent, relinquishes control over its own monetary policy. In the case of Namibia, by pegging the Namibian dollar to the rand, it inherently aligns its monetary policy with that of South Africa. If the South African Reserve Bank (SARB) decides to adjust interest rates to address South African domestic economic concerns, Namibia, due to the peg, will likely have to follow suit. While this is not a problem when the economic performance of the two countries is moving in the same direction, it does pose challenges when the economic performance between the two countries diverges. Namibia is less likely to be able to implement the ideal monetary policy during such deviations.

Furthermore, the currency peg means that the value of the Namibian dollar is dependent on South Africa’s economic performance and political regime. The Namibian dollar appreciates and depreciates with the value of the rand. Thus, any cost-push inflation due to the depreciation of the rand is passed along to Namibian consumers despite domestic economic performance. This is generally what concerns Namibian consumers and media the most. The rising cost of living in Namibia is often blamed on the volatile South African political climate. Rand depreciation undoubtedly has an impact on the cost of living in Namibia, as much of what we consume is imported.

Then why is the Bank of Namibia so steadfast in their conviction that the currency peg is beneficial to Namibia? This is a question that the central bank has answered many times in the past, but allow us to reiterate the benefits of the currency peg.

Namibia's currency, the Namibian dollar, is pegged to the South African rand at a one-to-one ratio. This arrangement raises questions about its impact on stability and financial ties between the nations.

The South African economy, being much larger and more diversified than Namibia’s, offers a foundation of stability, most importantly through reasonably stable inflation. Yes, the rand can be a volatile currency, but the fundamentals of the larger South African economy mean that the rand tends to depreciate at a steady rate over time. Currency stability improves the predictability and price transparency of trade, because a stable currency allows businesses to predict costs and revenues with greater accuracy. This is especially true for contracts that are negotiated months in advance. Stable currencies mean that the price of goods and services remains relatively consistent. Thus, price stability and predictability tend to result in lower inflation.

This is particularly evident in some sectors where it matters a lot. Namibia is far from self-sufficient when it comes to maize production, for instance. As a result, Namibia is forced to resort to trading with other countries that produce excess maize. The quantity of maize that Namibia requires is quite small by global standards, and buying maize from the international market in Namibian dollars is not possible. Here Namibia is able to rely on the large South African economy and its globally recognised currency to secure maize at relatively steady prices. Therefore, increases in the cost of maize are lower and more predictable than in most Southern African countries. This lower, more stable inflation is prevalent in most of the goods and services traded with South Africa, or in its currency.

Transaction costs are another benefit. The currency peg means that transaction costs when trading with South Africa are minimal, or even non-existent. And as roughly 60% of Namibian imports come through South Africa, this is a major benefit to Namibian consumers. Not only are the direct costs such as foreign exchange fees minimised, but the indirect costs of larger government departments dealing with things such as customs and excise are also much reduced.

Travel and tourism also benefit from the currency peg as the absence of exchange rate risk means that everything, from flight tickets to the cost of accommodation, is much more predictable. Tourists entering Namibia do not need to incur foreign exchange costs when transacting with rands in Namibia and the supply of rands in global markets is sufficient to ensure a relatively frictionless exchange from foreign currency into rand.

Even this brief evaluation of the benefits of the currency peg makes it clear why the Bank of Namibia is reluctant to entertain calls to abolish the arrangement. Yes, challenges do arise from this monetary alignment, most notably the loss of complete monetary autonomy. However, when one assesses the vast panorama of benefits – enhanced trade relations and simplified financial operations, not to mention the appeal to foreign investors and protection from speculative volatilities – it becomes clear that the currency peg has been, and will continue to be, a key financial stability tool enabling, rather than curtailing, economic activity.

Eric van Zyl – Managing Director Designate, IJG Securities

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