Since 1993 when Namibia introduced its national currency, the Namibia dollar, the country has maintained a policy of strategic parity between the Namibian dollar and the rand.

This was done for a number of reasons but principally to reassure business at the time of independence that the conduct of policy in Namibia was in safe hands and that when they invested in the country they could take out their profits at a fixed exchange rate.

For over 20 years this has been at the heart of macroeconomic and exchange rate policy in Namibia but now it looks increasingly under pressure.

On 17 June, the Bank of Namibia announced that the nation’s foreign exchange reserves had fallen to N$12,1 billion – down from N$15,7 billion just two months earlier. With its regular but increasingly perfunctory comments, the Bank of Namibia’s Monetary Policy Committee (MPC) added its usual caveat that the reserves remain sufficient to sustain rand parity. But are they?

Certainly, Namibia has enough foreign exchange reserves to cover imports for a period of approximately seven weeks given the most recent decline but reserves are certainly moving in the wrong direction. In 2012, Namibia’s foreign exchange holdings were enough to cover four months of imports. By international standards anything above three months is considered reasonably adequate.

But by the end of last year the import cover had fallen to two months and the substantial decline of reserves in 2015 should be a wake-up call to policy makers that the country is on an unsustainable path of importing far more than it is exporting and that this, unless checked, will increase the country’s vulnerability to external shocks.

PRETTY

From the 1990s up until the global economic crisis of 2008, Namibia’s balance of trade was pretty much in balance with exports and imports of goods growing in tandem. Then with the beginning of the global economic crisis in 2008 imports started to balloon and, while export growth has been adequate, especially in 2014 when diamond earnings improved, it has not been enough to pay for the country’s growing appetite for imports.

The Bank of Namibia’s MPC puts the blame squarely on the country’s appetite for imported luxury goods, in particular expensive cars. The NSA data on imports of motor vehicles does show a rapid rise over the last few years but the figures are probably vastly underestimated given the growth of normally under-valued second-hand cars. In 2014 Namibia is said to have imported some N$12,4 billion up by N$3 billion or 37,4% from the year before.

There is a more benign interpretation of events in Namibia. Some argue that the decline in foreign exchange reserves is simply a result of imports of capital equipment for new mines such as the Huisab Uranium Mine and the B2Gold Mine and that once this is over the balance of payments will return to balance as exports of minerals will increase while imports will slow. But after five years of ever widening trade deficits such a view is now dangerously optimistic.

Namibia’s worsening trade situation is no doubt compounded by the government’s budget deficits over the last few years which is resulting in ever more imports.

None of the options for addressing the nation’s trade imbalance are pleasant for the government or for the Namibian people. The politically safe approach to an impending balance of payments crisis in most countries is to use monetary policy to restrict access to credit i.e. a credit squeeze.

BLAME

This puts less blame directly on government and shifts it to the Bank of Namibia. But a credit squeeze is a dull instrument that can often lead to the destruction of many an otherwise sound business. A similarly blunt instrument that the government has to restrict spending is the use of its fiscal policy to cut government spending and raise taxes. To say the least, this is a very unpopular approach to dealing with deficit problems – just ask the Greeks how much the people like this sort of approach.

So how should the government react? If the Bank of Namibia’s MPC is correct in its assertion that the purchase of luxury automobiles lies at the heart of the import surge, a number of more focused monetary policies to push the banks to limit access to credit in these sectors is in order.

But in an economy like Namibia where funds can flow in from South Africa with ease there are too many ways around credit restrictions to one sector or another.

The other option is to impose a new series of new taxes on automobiles coming into the country, especially the larger and more expensive ones. It is not possible to impose import duties on vehicles made in Sacu but it is certainly possible to impose higher excise tax and a large scrappage or environmental fee on all new and second-hand cars.

LUXURY

With luxury new cars costing from N$800 000 to well over a million, many Namibians are moving to second hand imports. Many of these, especially the older vehicles coming from Botswana, are massively undervalued and the government needs to stop the process of VAT collection based on fictitious valuations. Instead, taxes need to be imposed based on international ‘Blue Book’ values of second-hand cars.

Irrespective of what policy measures the government chooses to impose to deal with the unsustainable trade imbalance, it is slowly running out of both foreign exchange reserves and time. The time for government to act is now before the reserves fall to what is often seen as a critical minimum i.e. approximately four weeks import cover.

While four weeks is still enough to cover imports, it is commonly seen as the point at which investors will see the writing on the wall for the Namibian dollar – rand parity and start to move ever more foreign exchange out of the country. This exit of financial capital will only hasten a crisis.

Unless the optimistic and benign approach is taken then after five years of increasing trade deficits it is time to act and use both fiscal restraint as well as tax policy to assure that we do not have a ‘Nexit’ – an exit from Namibian dollar parity with the rand and a devaluation of the Namibian dollar.

The immediate impact of devaluation would be a rise in the price of imported goods. That would not only lower living standards across the board but in the long term it would weaken Namibia’s reputation as a safe place to invest. The longer policy makers wait to address the issue of the trade deficit the greater the pain will eventually be. As the old adage goes ‘a stitch in time still saves nine’.

Roman Grynberg is professor of economics at the University of Namibia. The views expressed are entirely his own.