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 VECM method of estimation with two equations with yearly data covering the period of 1990 and 2018. The empirical results indicated that there is a negative statistically significance relationship between REER and export also between REER and FDI leading then into the expensiveness of the local production of goods & services in international markets and lose competitiveness hence worsening the BoP. On the other hand, when REER 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. 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. 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. The study will help the Namibian policies makers to pay a closer attention to exchange rate regime policies and the researchers in their academic works.