Windhoek
The Chamber of Mines and Energy will be hosting the 2016 Mining Expo & Conference scheduled for April 27 and 28 at the Windhoek Showgrounds. The annual conference, expected to bring in top global and local experts should be used to seek and craft credible policy responses to financial and operational risks currently facing the mining industry.
One of the key risks is the prevailing low commodity price of Namibia’s major mineral export-commodities. In order for this event to boost the ailing industry, it should draw its focus on finding policy measures to mitigate the impact of lower commodity prices. The main expectation from this event is a clear cut-policy response to low commodity prices and its impact on the future of mining in Namibia.
The ailing industry
Namibia’s mining sector, alongside the global trend, is in Intensive Care Unit (ICU), thanks to depressed commodity prices. The decline in prices experienced by most extractive commodities since 2011 has strained the economy and public finances of most resource-dependent countries, with implications for poverty reduction. According to the Namibian Statistical Agency, Namibia’s export revenue (of which the majority is mineral commodities) dropped by 9.8. percent in 2015 driven mostly by low prices of these commodities.
Weaker demand from China has caused commodity prices to fall to levels not seen since 2009, and mining groups are feeling the pain. Fears of more job losses have heightened as most mining companies have continued to operate at a loss. Surviving mining companies and sub-contractors are desperately seeking cash injections to stay afloat. China’s economy – which is in the red – continues to negatively affect commodity prices, which is not good for the likes of Namibia and commodity-producing companies in the country.
Significance of commodity prices to export revenue and growth
Mineral commodities – raw or partially processed – are the most significant exports of Namibia, and revenues obtained from them plays an important role in the domestic economy. Foreign receipts from minerals remained Namibia’s major exports earner, driven largely by diamond export receipts. Recent commodity price depression has led to profound decline in revenue from mineral exports and it has so far seriously affected the economy.
Lower commodity prices have negatively impacted on economic growth, the country’s financial resources and income distribution. Mining and quarrying are estimated to have registered negative growth in real value-added of 0.1 percent in 2015, compared to a decline of 6.2 percent recorded in 2014.
Policy measures
What policies should government adopt when faced with a commodity price bust? And which of these policies yield the greatest benefits for the poor? These are some of the pertinent questions that are expected to be debated at the Mining Indaba. As a starting point, the Namibian government should put in place fiscal rules for sovereign wealth funds and other mechanisms to buffer their economies and the industry from the commodities roller-coaster.
Experiences elsewhere have shown that sovereign wealth funds, for instance, can build savings for future generations and be used to manage investments rationally over time. To achieve this, sovereign wealth funds must target stabilisation and long term-saving objectives simultaneously.
Other measures include fiscal, exchange rate, and monetary policies to improve savings so that adequate resources are available to sustain expenditures once commodity prices fall. Over the long run, Namibia should diversify so as to minimise risk of price depression. Fiscal tools that should have been employed during the boom include saving funds and market-based hedging instruments, both of which can help smooth future revenues.
Monetary tools include explicit monetary goals that promote long-term decision-making by keeping inflation low, constant, predictable and flexible exchange rates, which in turn give monetary policy the independence required to attain an explicit inflation objective. The most effective long-term policy to resist a commodity bust is economic diversification. Broadening the portfolio of economic activities reduces vulnerability to both internal and external volatilities within a particular sector, while helping to secure long-term economic growth.
* Mally Likukela is Standard Bank’s manager of economic and market research.