| The Rand is just a round flat shiny metal disc |
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| Written by Daniel Steinmann | ||||
Page 2 of 2
The one statistic that caught my eye is our provision for forex cover.
This particular statistic is not often cited as it only applies to
countries that determine the value of their own currency by pegging it,
at whatever ratio, to the value of another currency. In our case, the
Namibia Dollar is pegged one to one to the South African Rand. The
practical implication of this beneficial situation for us is that we
must ensure, in terms of the actual volume of currency in circulation,
we do not undermine our own currency’s value, thereby negatively
affecting the value of the parent peg.As it turns out now, the South Africans have nothing to worry about. Our currency is in a much better shape than they would like to believe. According to the governor, our foreign exchange reserves stood, at the end of May, at a “healthy” N$9.3 billion while we only have about N$1.3 billion in circulation. “This implies that foreign exchange reserves were seven times higher than what is required to sustain the currency peg.” Now that is indeed healthy. Apart from Botswana, I am not aware of any other similar arrangement anywhere in the world supported by such a solid base. What does it mean for us? I believe the strength of our domestic economy enables us to review our currency peg where and when we want. I further believe that if the ZAR remains on a track of relative weakness, we may come to the point where we decide to keep the peg, but change the ratio very similar to what Botswana has been doing rather successfully for the past almost twenty years. And I believe that, given our propensity to generate long-term saving and then watch it leave the local market to help fuel the insatiable South African capital market, not too far into the future, we are going to reach that point where the Bank of Namibia seriously will have to reconsider the present arrangement. It is true that our contribution to the Common Monetary Area only constitutes about 3% of total volume of broad money supply, but our 3% is a very healthy 3%. It adds to the value of the whole CMA monetary system, instead of having to be carried by the strong partner. I do not foresee us dissolving the peg. For that we are indeed too small and our ability to weather any external shock over any extended period of time will be greatly diminished if we are entirely on our own. But it seems to me that local conditions, and by that I mean our ability to grow faster than South Africa, will eventually force us to insist on our (somewhat bigger) pound of flesh. Underscoring my notion of domestic conditions versus SA prospects is another remark by the governor when he said the last two interest rate increases in SA did not lead to “adverse movements of capital flows”. That simply means a respectable amount of our own money remains in our own country. This was not usually the case in the past when, traditionally, we maintained slightly higher interest rates only to ensure domestic liquidity. It seems the wheel has turned and very much in our favour. |
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