is the whole issue of the ability of the namibian economy to absorb external shocks. namibia is a highly open economy and - given its membership of the cma - it can hardly use exchange rates or interest rates to mitigate the impact of external shocks. namibia has had a number of unfavourable shocks in the past 20 years. the cumulative net loss in income due to the terms of trade shocks is estimated to have amounted to an average of 2. 1 % of gdp. the export earnings and investment were also negatively affected. from time to time a country could also suffer shocks that are specific to it. the inability of the country to embark on appropriate and timely policies, through for instance the use of exchange rate policy, to escape such shocks creates a feeling of frustration. but there can also be a trade - off between monetary policy credibility and smooth economic adjustments promoted by the exchange rate. the question is whether this trade - off exists in the case of namibia and south africa. flexible exchange rates hasten a country ’ s adjustment to country specific economic shocks by facilitating rapid changes in the terms of trade. however, when two countries experience broadly similar economic shocks, changes - if any - in the bilateral terms of trade may not significantly aid adjustments of specific economic shocks in any one country. moreover, if factors of production, particularly capital, are highly mobile, the use of the terms of trade as an adjustment mechanism may prove to be inadequate. finally, where the reserve currency country is also the peg currency country ’ s major trading partner, as in the case of south africa and namibia, exchange rate flexibility as a policy tool becomes less effective. stability of the rand as a reserve currency the issue of a choice of reserve currency is very crucial in deciding to peg the domestic currency. among factors that may have determined the choice of the rand as a reserve currency are the direction of trade flows, the denomination of imports and exports, the deep financial market offered by south africa and the correlation among cyclical movements between the economy of namibia and south africa. one other important consideration, which in recent times has become a source of deep concern, is the stability in the value of the rand. south africa has in recent years experienced rapid deterioration of the rand : the namibia dollar has depreciated in tandem with the rand, particularly during the financial crisis that engulfed south africa in the early part of 1998. the exit by investors from the emerging markets, south africa included, led to a speculative attack on the rand

does not lend credence to the assertion that this exchange rate arrangement leads to sluggish growth. ( b ) impediments to trade diversification there are, however, other aspects of this potential conflict between stability and development. in this regard, i would like to draw on experiences from the irish currency arrangement, which has strong similarities with our cma arrangement. the irish pound was introduced in 1927 at a one - for - one parity with sterling and the arrangement lasted until ireland decided to participate in the european monetary arrangement in 1979. full convertibility with sterling was ensured and all notes issued were to be backed 100 % by a reserve consisting of gold and sterling balances. one consequence of the sterling link was that trade to a large extent was directed towards the sterling area. it has been argued that for this reason ireland did not benefit from the “ post - war dynamism ” in europe following the second world war. having the alternative to avoid the costs of currency risk and foreign exchange transaction, the irish exporting enterprises were reluctant to establishing trading relationships with other markets in continental europe and elsewhere. because of the one - for - one link, trade with the sterling area involved no greater financial complexity than internal trade. the analogue to the namibian situation is striking. as mentioned, namibia is still importing close to 90 % from the cma countries. the arrangement therefore requires vigilance and determination to diversify our pattern of trade and commerce. ( c ) capacity building a similar argument can be made with regard to the financial system. the limited use of monetary policy instruments under the currency board arrangement and the use by the local banks of the london money market for their liquidity needs, were not conducive to the development of risk management and trading skills in ireland. the acquisition of such skills was largely delayed until the emergence of a domestic money market in the early - 1970s and of a foreign exchange market even later. again, these are relevant points when analyzing the namibian situation. one point that is often overlooked by those arguing for an adoption of an independent monetary policy, is the issue of preparedness. the development of an active interbank market and secondary markets as well as local capacity in liquidity forecasting and management is a pre - requisite for the successful implementation of monetary and exchange rate policy. this process requires active promotion and assistance by the central bank. while some progress has been made in this direction by the consolidation of government bonds, the fine - tuning