Sep 28

Effects of Trade Openness and Industrial Value Added on Economic Growth in Namibia

By Josef Kefas Sheehama

This article will look at the current relationship between exports, imports, and gross domestic product, to evaluate the problem of economic growth in Namibia.

Exports and imports are the most important components of Namibia’s economy. It is therefore important to know how these will affect trade openness and industrial value added to economic growth in Namibia. Namibia is an open economy where international trade accounts for a greater proportion of gross domestic product (GDP). The trade policy can potentially play a key role, amid limited fiscal space, policymakers must look to innovative solutions.

Furthermore, building and supporting economic resilience have become key strategies to reduce business interruptions and economic losses caused by shocks. We are now facing an environment of significantly higher commodity prices, which could persist for longer than many would anticipate, since the onset of the pandemic, Namibia has been encountering episodes of rising inflation, but the headline number has stayed fairly and has tended to revert to the target as each supply shock has receded. Global spillovers are impacting core inflation on an ongoing basis and keeping it elevated. Additionally, the most crucial negative impact of the sanctions over the course of 2023/2024 is likely to be from energy prices. We have seen a sharp spike in the price of oil and gas, which is going to impose a significant cost on our economy. The costs significantly impact both consumers and companies as well as force governments to consider ways to protect the economy from this energy price shock.

Namibia recorded relatively GDP growth rates, averaging an annual rate of 3.52% to 4.56% from 2021 to 2022. The Bank of Namibia anticipated GDP growth to slow down in 2023, mainly due to weaker demand in both global and domestic economies. It is not all doom and gloom, and the good news is that there is light at the end of the tunnel.  Namibia performs better compared to many countries. This impressive economic performance was attributed mainly to political stability, favorable terms of trade, and solid public investment. The Bank of Namibia anticipated that the real GDP growth is projected to moderate downwards to 3.3 percent in 2023, from 4.6 percent registered in 2022. Besides the weak demand, high base effects from the diamond sector, which expanded by more than 45.0 percent in 2022 have a dampening impact on 2023 growth. The weak growth that characterized the Namibian economy has been blamed largely on external shocks and structural weaknesses in the economy.

The high level of openness of the economy raised an important question on the relationship between export and economic growth in Namibia. This raises important questions on whether the relationship between export and economic growth is asymmetric. It also raises an important question on whether this relationship is sector specific. It must be noted that very little exploration has been conducted in Namibia on the relationship between trade and economic growth. Imports and exports show the importance of trade to Namibia’s economic growth, whereas trade openness shows the importance of trade liberalization. The effect of trade openness on economic growth varies between the short run and the long run. Based on the first ratio of exports to GDP, the ratio of exports to GDP, and the ratio of imports to GDP, the results show that trade openness has a positive and significant impact on economic growth in Namibia. Therefore, Namibia should engage in export promotion and import substitution with a view to strengthening the economy and consequently enhancing the living standards of Namibians.

Policymakers need to be abreast with knowledge and information pertaining to the factors of economic growth and how growth policies they enact may affect growth in order to sustain a higher rate of growth. This has the Namibia Chamber of Commerce and Industry (NCCI) hosting the first-ever Namibia’s State of Business Address on 26 June 2023 to address issues affecting the business community. The prioritization of promotion of the government’s policies of ease of doing business, job creation, poverty eradication, and industrialization, among others, appears to have taken centre stage, with the Namibia Chamber of Commerce and Industry (NCCI), seeking to reform the industrial and trade policy to promote competitiveness and facilitate long-run growth. Successful industrial and trade policy should be focused, flexible, and premised on the notion of embedded autonomy. At the NCCI State of Business Address, close to 99% of business owners are frustrated by the policies and few lashed out at ineffective service delivery.

Moreover, to promote the trade openness policy in Namibia, specialization in the production of certain commodities should be encouraged especially through tax-incentive policies and capacity-building programmes that contribute to an increase in export volume and risk diversification. This will help reduce the over-reliance of the Namibian economy on imports hence correcting the worsening terms of trade and balance of payment position of the country. Also, the policy-makers should give more credence and priority to the service sector by extending the current level of technical knowledge to increase the economy’s comparative advantage over the production of certain services. The policy-makers need to implement policies that may increase financial openness but restrict the outflow of capital from the economy. This will help stabilize the inherent volatility in the economy. This notwithstanding, stabilization in the flow of domestic funding via best lending rates in the financial sector to improve private sector participation.

Furthermore, in order to reverse the negative impact of trade openness on the economic growth in Namibia, the stakeholders and policymakers should increase the production and consequent exportation of secondary commodities and reduce the importation of secondary products.  To add to this, Namibia should diversify its exports by adding value to the existing ones, and further pursuing other new foreign market destinations. This would reduce trade deficits and stimulate economic growth and has the tendency to guarantee a positive impact of trade openness on economic growth.

To that end, industrial value proved to exhibit a positive influence on Namibia’s economic growth, the economic decision-makers of the country should concentrate on allocating more resources to the industrial sector in the country. This will increase the industrial value added to the country’s GDP and may even elevate the significant level of influence on economic growth to a satisfactory status.

Therefore, it would yield the preferred results if there is a commitment on the part of the government, institutional bodies, policymakers, and all stakeholders in the Namibian economy to adopt prudent strategies in implementing and sustaining them.