A weak exchange rate is inflationary

A weak exchange rate is inflationary as imports become expensive, Market Watch recently reported.On Monday, Fin24 reported that the rand, which is pegged to the Namibian dollar, took a hit, breaking through the R19/$ level and trading around its weakest level in a month. It has lost almost 5% to the dollar over the past month. The rand hit a record low of R19.80 in May this year. According to PSG’s Economic Outlook released in mid-July, the Namibian dollar will continue to depreciate slowly during the rest of 2023, ending the year at N$19.01/$, according to PSG’s baseline scenario. “We project the local unit will average N$18.60/$ in 2023 – losing nearly 12.0% of its value against the greenback this year.”Simonis Storm’s Economic Outlook report also released mid last month highlighted that the Rand/US dollar exchange rate averaged 18.68 in the second quarter (2Q2023), compared to 15.59 in 2Q2022. The Rand is one of the worst performing emerging market currencies against the US dollar since the start of 2023.Peg ControversyMarket Watch in June reported that analysts have warned that the controversy surrounding Namibia breaking the peg arrangement can lead to hyperinflation as South Africa is a key import market. Hyperinflation is when the prices of goods double.The analysts further cautioned that the discussion surrounding adopting a different regime should be considered very carefully as it could have huge implications.Meanwhile, the governor of the Bank of Namibia (BoN) at the third monetary policy announcement in June also defended the peg arrangement and stated that is serves Namibia well. “Whether Namibia will have to delink from the rand in the future, that is not an argument that we need to get into at this stage,” he said at the time.The benefits of Namibia currently being a member of the Common Monetary Area (CMA) outweigh the costs.Trade statisticsAccording to the Namibia Statistics Agency (NSA), Namibia’s import bill averaged N$10.5 billion in the first half of 2023, while Namibia’s export earnings averaged N$8.6 billion in the first six months of 2023. This led to an average trade deficit of N$1.9 billion during the period under review. A weak exchange rate makes exports cheap.One of the risks to Namibia’s growth outlook in 2023 highlighted by the Bank of Namibia is the high costs of key import items. Year to date (January to July), inflation averaged 6.2%. The central bank projects the domestic economy to grow by 3.0%, while inflation is projected to average 6.1% in 2023.Namibia’s real gross domestic product (GDP) grew by 4.6% in 2022. During the first quarter of 2023, the domestic economy expanded by 5.0%, a slow growth when compared to a growth of 7.3% posted in the corresponding quarter of 2022. -phillep@nmh.com.na

A weak exchange rate is inflationary

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Republikein 2026-10-06

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A weak exchange rate is inflationary

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