Weakening dollar may not positively impact balance of payments- Analysts

The US Dollar opened 2018 on a poor note after weakening against major currencies and with the appreciation of the Rand, local analysts that spoke to The Villager are not convinced this will pose a major development to the country’s balance of payments (BoP). 

“A very strong Namibia dollar could be bad for our exports. But since Namibia is experiencing serious supply-side constraints – it begs the question as to what exports could be affected that could impact our balance of payments,” says University of Namibia based economist, Kakuhaja Matundu.

Cirrus’ senior analyst, Dylan van Wyk also submits that an appreciating currency will make exports more expensive to the international community, which may reduce the amount Namibia exports. 

Imports on the other hand will be cheaper as a N$1 will now buy a greater amount of international goods, he adds. 

Matundu submits that depending on how long the situation prevails, Namibia’s tourism sector could be negatively affected by a strong Namibia dollar and a weakening US dollar. 

“However, as an exporter of fuel, Namibia could benefit from importing fuel relatively cheaper, assuming that oil prices remain at current levels for the rest of 2018. So on the balance of facts I don’t see this current situation impacting much on the BoP. Namibia’s “knight on the White horse” in terms of improving its BoP is to embark on export-led industrialization,” says the Unam economist. 

Assuming demand is relatively elastic, one would expect an appreciation to worsen the current account position, which leads to a weakening balance of payments, says Van Wyk. 

He adds, “With lower export demand and greater spending on imports, we would expect a fall in domestic aggregate demand causing lower economic growth.”

However, the analyst submits that an appreciation tends to cause lower inflation because import prices are cheaper.

“As an example imported oil will decrease, leading to cheaper petrol prices. From a capital account perspective, our net debt decreased in N$ terms as the currency appreciated, which is balance of payments positive. Thus the effect is not clear cut and depends on a range of factors such as import/export elasticity and the current economic situation of the country,” he explains. 

So how best can the economy take advantage of the rallying Zar? 

Explicates Van Wyk, “In my opinion, Namibia can best capitalise on the stronger rand (vis a vis the US dollar), by making use of the opportunity to invest and import productive assets at cheaper prices. This will hopefully lead to increased production capacity and overall competitiveness globally.”

In layman’s language, Institute for Public Policy Research (IPPR) researcher, Max Weylandt defines BoP as the net of all imported and exported goods, services, financial capital and financial transfers.

As a small open economy, Namibia’s balance of payments is arguably the single most important indicator of the health of the local economy, he says.

“At present, Namibia faces challenging times with regards to the balance of payments. There are a few reasons for this. From a merchandise trade perspective, Namibia historically relied on primary sector outputs for export earnings, particularly diamonds, uranium, gold, meat, fish and grapes.”

“Through the commodity super cycle of the early 2000s, export prices were broadly favourable, especially for commodities. More recently, however, commodity prices have taken a dive, which has resulted in lower export earnings for Namibia, at least in hard currency terms. This has been partially offset by a weakening Namibia Dollar vis-à-vis major currencies, as well as some growth in sales volumes, particularly with regards to gold. Added to this risk is the ever-present possibility of drought, and the resultant negative impact on agricultural exports, particularly beef exports,” explains the researcher.

“It is the record of all economic transactions between the residents of the country and the rest of the world. Claiming it is the “single most important factor which reflects the health of the economy” is a bit of a stretch,” Van Wyk interjects.