THE TROUBLE WITH TRADE

Much has changed in the last 18 months. Namibia’s trade balance, the difference between its imports and exports, has not. Global supply chains froze overnight. Supply bottlenecks formed around the world as ports shut down to control COVID-outbreaks, the Suez Canal was rendered temporarily impassable and lockdowns set off a sea-change in global consumption habits. Through it all Namibia’s trade balance remained constant. The figure looks broadly the same now as it did in 2014. Since imports and exports tend to rise and fall together, a trade balance is not so much a dynamic measure of economic performance but rather a structural characteristic of a nation’s economy.

A trade deficit may sound ominous, but it says little about the macroeconomic trajectory of a nation if viewed in isolation. The Gross Domestic Product (GDP), the most widely accepted proxy for prosperity, is the sum of national consumption, investment and government spending less the difference between exports and imports. A widening trade deficit, where imports are growing faster than exports, in an economy where GDP is growing rapidly is generally balanced out by increases in investment and fixed capital formation. Not all countries can export more than they import, and a country that has a negative trade balance may also have a populace that is spending healthily, attracting foreign investment and seeing meaningful government benefits. Trade deficits do not preclude prosperity. However, a growing trade deficit in an economy that is contracting, or experiencing low growth, is more of a problem.

Namibia has run a trade deficit throughout the year. This was also the case in 2020, at the bottom of what was a 4-year recession, as it was in 2015 after years of sustained growth. Namibia has a structural trade deficit: we import most of what we consume. In the years prior to 2015 the trade deficit mattered little. Foreign direct investment flows brought money into the country and contributed to rapid GDP growth. But now, in 2021, the year after the formal economy shrank by 8.5% and with the country mired in a low growth environment, a wide trade deficit is more of a cause for concern. If the economy shrinks it must follow that either consumption is decreasing, government spending is faltering or investment is drying up. If the trade deficit outweighs the sum of all foreign investment and other capital flows into the country, then Namibia’s foreign currency reserves will be drawn down by efforts to finance that deficit. These large foreign currency outflows are of particular concern to Namibia.

Namibia, Lesotho, Eswatini (Swaziland) and South Africa form the Common Monetary Area (CMA). The CMA is a multilateral monetary union that has, among other agreements, pegged the value of the non-Rand currencies to the value of the Rand. The smaller economies thereby forgo their ability to conduct independent monetary policy in order to benefit from the relative stability of the Rand. To remain in the CMA, Namibia is required to maintain foreign currency reserves – be that in Dollars, Pounds or Yuan – at least equivalent to the total amount of local currency in circulation.

The structural trade deficit necessarily means that Namibia requires capital inflows in either the form of foreign investment or repatriated savings to maintain a healthy international reserve position and the currency peg. At present the international reserve position is healthier than it has been in some time, largely due to the inflow of capital in the form of the IMF loan to the government. The last major boost in the reserve position came when

the government issued the second Eurobond in late 2015. Changes in domestic asset requirements for pension and long-term insurance funds have further supported the reserve position by repatriating savings previously invested abroad. The trouble with repatriation of savings and government debt derived from foreign currency inflows is that in a limited growth environment the government cannot borrow from abroad forever, and savings grow more slowly once repatriated into a slow growth environment. Thus, at some point the trade deficit will become a burden on the reserve position and currency peg. Thankfully, that should not be the case in the near term.

As mentioned, the reserve position is healthier than at any point in the recent past, even in hard currency terms. While some large foreign currency outflows may be expected when the first Eurobond is redeemed in November, pressure on the currency peg is currently low. It is equally heartening that the economy is expected to grow in the coming year. Thus there is precious little chance that a widening trade deficit in a shrinking economy becomes the reason that Namibia’s foreign currency reserves fall far enough to threaten its place in the CMA. Pandemic or not, this rarely scrutinized statistic has remained mercifully invariant. There is a way to go before the pandemic era has passed and much may still change. Namibia’s trade balance probably won’t.

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Kimber Brain is a junior economist at IJG, an established Namibian financial services market leader. IJG believes in tailoring their services to a client’s personal and business needs. For more information, visit www.ijg.net.