The Impact Of Exchange Rate Regime On Balance Of Payments In Namibia

The central purpose of this paper is to analyze the impact of exchange rate regime on Balance of payments in Namibia and to determine whether this arrangement is beneficial or not for Namibia. For this concern, the paper uses the Ordinary Least Square(OLS) method of estimation with two equations. First equation consists of Export as a function of GDP, Money Supply, and REER with quarterly data covering the period of 1999 and 2011. Second equation consists of FDI as a function of Inflation, Interest Rate, Gross Domestic Product, Money Supply, and Nominal Exchange Rate with quarterly data covering the period of 1999-2014. The empirical results indicated that there is a statistically significance relationship between REER and export as well between NER and FDI. The paper found that, an appreciation of REER has a negative impact on export which results into locally produced goods & services becoming expensive in international markets and lose competitiveness hence worsening the BoP. On the other hand, when NER depreciates foreign direct investment flows to Namibia increases. Despite the two results, FDI is the key vital engine for Namibia’s export. This can be noticed in the mining sector which is the main sector whose Namibia’s export is dependent on. Hence, an increase in FDI inflow will boost export growth thus offsetting the effect caused by the appreciation of REER on export, leading to an improved BoP. The paper also found that GDP and money supply are key factors affecting export as well as FDI in Namibia. CPI was however found to have a negative relationship with FDI inflows which implies that investors investing in Namibia are sensitive to price instability. Another key factor is interest rate which has a significant positive impact on FDI. The paper suggests that, pegging to the rand is an appropriate exchange rate regime for Namibia. However, Namibia should consider exploring macro-economic policy independence and be involved in the determination of exchange rate within the CMA framework in order to avoid further deterioration of BoP. More investment opportunities should be created, and export should be diversified. The paper also further suggested that Namibia should reduce its dependency on import by promoting the base of its manufacturing and other sectors as this will help to protect itself from changes in foreign price developments particularly from South Africa.