In this exclusive interview with Southern Times Editor Moses Magadza (MM), Namibia’s Central Bank (BoN) chief Tom Alweendo (TA) shares his thoughts on Namibia’s progress towards Vision 2030, on whether it would be a good idea to delink the Namibian dollar from the Rand, on the state of the real sector as well as challenges ahead for the economy.
MM: Mr Governor, I wish as a starting point to acknowledge your efforts in maintaining a stable financial sector which is supportive of the development of the real sector of the Namibian economy.
TA: Thank you.
MM: Vision 2030, which aims to see Namibia become a developed country by the year 2030, expects the economy of Namibia to be growing at an average rate of 10% per year. Are we on track with respect to this expectation and if not, what are the challenges and how are you, as the head of the Central Bank, addressing the challenges?
TA: The five-year average growth is below five percent and certainly below the minimum growth to achieve Vision 2030. Given the small size of our local consumption, the Namibian economy can grow faster only if we grow our exports. We therefore need to pay more particular attention to sectors such as mining, tourism and agriculture. We also need to continue to promote and encourage value addition in these sectors. The best contribution the Central Bank can make is to ensure a low inflation environment where investors are able to plan with some sense of certainty.
MM: It is generally accepted that a stable financial sector promotes the development of the real sector. Are you happy with the level of stability of the financial sector of the economy of Namibia, and in your opinion, has this stability translated into actual development of the real sector of the economy?
TA: Financial stability is where the financial sector is able to withstand unforeseen shocks. Our banking and non-banking financial sectors are both profitable, with a strong capital base and this is one measure of financial stability. It is true that for the real sector to grow, you need a stable financial sector that is able to fund development. In Namibia you have a situation where our savings are much higher than our investments. This could well be an indication that the real sector could be growing below its potential. Most of the larger investments in the real sector are Foreign Direct Investments (FDI). While we certainly do welcome FDI, there is a need for more local investors to be active in the real sector.
MM: Economists in Namibia have been quoted in the media as arguing that stability of Namibia’s financial sector is attributable to a good extent to the country’s membership to the Common Monetary Area (CMA). To what extent do you agree or disagree with this thinking?
TA: While the CMA membership might have helped, in itself it is not a sufficient condition for stability. Macro-economic stability is a product of many things. For example, you cannot wish to achieve macro-economic stability without a stable political environment; without a functioning legal system; without prudent management of the economy. These are some of the issues the Namibian government should be credited with that promoted the current macro-economic stability we are enjoying today.
MM: There have been instances of high fluctuations in the value of the Namibian dollar as a result of fluctuations in the performance of the economy of South Africa to whose currency (the Rand) the Namibian dollar is pegged. In your view, is it a good idea to continue to peg the Namibia dollar to the Rand?
What problems would arise if the Namibian dollar was delinked from the Rand?
TA: Here one has to understand the initial reason for the peg. Namibia’s largest external trade and financial flow is South Africa. We still get over 80% of our imports from South Africa. When Namibians engage in ZAR denominated transactions, whether trade or credit, the peg eliminates uncertainties in the prices of goods and services and the value of the debt due to the fluctuations in the value of the currency. It will also make no sense now to delink when SADC is planning to have a single currency in 2018.
MM: Botswana delinked the Pula from the Rand several years ago, and since then, the Pula has exhibited greater stability and strength than the Rand. Given that the economy of Botswana has greater similarity to the economy of Namibia in terms of dependence on imports from South Africa, one may argue that the Namibian dollar may also exhibit greater stability and strength when delinked from the Rand. What is your view on this?
TA: I would like to differ with the view that the Pula has exhibited greater stability and strength than the Rand. Historically the Pula/Rand exchange rate has always been stable, even when the Rand depreciated or appreciated against the other major currencies such as the US$. This is an indication that although the Pula is not administratively pegged to the Rand, it consistently tracked the Rand.
MM: In view of the objectives of Vision 2030, which Namibia is very much interested in, what monetary policy modifications are you contemplating to facilitate the realization of these objectives?
TA: Here one must remember that monetary policy is not a silver bullet that will cure all economic ills. All what monetary policy can do is to ensure an environment where the inflation is relatively low; the rest monetary policy cannot do. The current inflation levels are still relatively low compared to the region.
MM: The rate of interest was increased about six times in 2007, and this has led to huge increases in loan repayments, especially house loan payments. The main reason given for these increases is management and control of inflation. Would you agree with me that these interest rate increases are discouraging the real sector investments which the country needs for the realization of Vision 2030 objectives?
TA: I would agree that high borrowing costs will discourage those investors who have to borrow in order to invest. What is equally important, if not more, is the fact that no investor is going to invest in a high inflation environment. Investors want to invest in an environment where the inflation rate is low and stable. So far the most effective weapon to fight inflation is interest rate. It is therefore justifiable to endure high interest rates in order to secure long-term low and stable inflation, and therefore higher growth.
MM: Are there any other measures which could be used to deal with the problem of inflation apart from interest rate increases?
TA: There are some less effective tools, such as reserves requirement. Some have even tried to control prices admini-
stratively.
MM: A related problem, which could be slightly out of your mandate as Governor of the Central Bank, seems to be Namibia’s membership of the Southern African Customs Union (SACU). The economy of Namibia is flooded with commodities from South Africa, some of which could easily be produced in Namibia. What is the government doing about this situation in view of the high and increasing rate of unemployment in the country?
TA: I am not sure whether the prevalence of South African produced goods is as a result of SACU. Obviously any economy should be in a position to produce certain commodities, especially where you have a competitive advantage or where such production is in the strategic interest of the country. In this respect, we could do more.
MM: What is the outlook of the Namibian economy in 2008? Are we expecting any significant improvements over 2007?
TA: There are a number of factors that do not augur well for 2008 economic growth. First, the international oil price is now at a record high of US$100 a barrel and is projected to continue to increase during 2008. This has the potential to fuel inflation. Second, food prices continue to increase faster than the average of other commodities. For the region, this will cause a number of problems. The regional rainfall is displaying mixed signals and it may turn out to be a bad year for the agricultural sector. Third, the major economies are experiencing some financial market turmoil that might impact on the growth in the developing countries.
MM: Thank you, Hon Governor.
TA: You are welcome. – The Southern Times