Weak exchange rate makes imports expensive

A weak exchange rate makes imports expensive, while exports become cheap, according to economic theory.

In addition, a strong exchange rate makes imports cheap and exports expensive. An exchange rate is one currency expressed in terms of another.

Fin24 recently reported that on Friday morning, the rand was in free fall, hitting a record R19.47/USD amid the South African arms-to-Russia scandal. The previous record-low level (R19.35/USD) was reached during the pandemic panic of April 2020.

“Even before the Russian crisis, the rand was bleeding due to continuing concerns about the economic impact of load shedding and greylisting. Also, following aggressive US rate hikes the differential between the US and local rates has now shrunk, and South African rates are not that attractive anymore.”

Market Watch recently reported that Namibia and South Africa import most of what is consumed and a weak Rand/USD rate is inflationary.

According to the Namibia Statistic Agency (NSA), Namibia’s imports bill averaged N$10.3 billion in the first quarter of 2023. In March 2023, the bill stood at N$ 12.4 billion, the highest recorded this year.

Inflation in the first quarter of 2023 averaged 7.1% compared to 4.5% during the same period last year.

High prices of commodities for which Namibia is a net importer could weigh on the country’s economic growth forecast for 2023.

The Bank of Namibia identified the high costs of key import items as one of the key risks to its 3% economic growth projection this year.

As at 31st March 2023, the stock of international reserves increased to N$48.5 billion, from N$47.4 billion in February 2023. At this level, the stock of international reserves is estimated to cover 5.1 months of imports, the central bank said at the last monetary policy announcement.

The import bill was mainly driven by petroleum oils which account for 17.4% of total imports, followed by copper ores and concentrates (12.4%), motor vehicles for the transportation of goods (5%), diamonds and civil engineering and contractor's equipment 3.1% each.

USD

According to independent economic analyst Joseph Sheehama, countries are using USD for international trade around the world. This means countries keep USD as a foreign currency reserve for acquiring commodities. Countries cannot pay for foreign goods in their currencies since much of international trade is done in US dollars. Major commodities like oil are sold in US dollars.

The Namibian economy is closely linked to South Africa with the Namibian dollar pegged one-to-one to the South African rand. “South Africa is Namibia's major import partner about 66% to 80% of total imports. The effects of Rand depreciation will affect Namibia's economy and local market, even if we don't have the same problems as South Africa, we are still exposed to all the external factors,” Sheehama said.

The tight fiscal discipline and anti-inflationary monetary policies can promote a strong currency. Again, this is all relative, both Namibia and South Africa have their fiscal problems, but so do many other nations around the world. It is very difficult for NAD/Rand to be stronger than the USD. Hence, such pressures are especially acute in emerging markets, reflecting their higher import dependency and greater share of dollar-invoiced imports compared with advanced economies. Therefore, temporary intervention can support monetary policy in rare circumstances where a large exchange rate depreciation could de-anchor inflation expectations, and monetary policy alone cannot restore price stability.

Lastly, geopolitical shifts are likely to put incremental pressure on the Rand/NAD over time. However, cumulatively, they may start to change investors’ minds about the currency. If they do, the Rand/NAD has a long way to fall given relative depreciation. If momentum builds behind a weakening Rand/NAD, it will have significant repercussions across financial markets, he said. [email protected]