At independence in 1990, Namibia opted to remain in the Common Monetary Area (CMA) , whereby South Africa continued to set monetary and exchange rate policies. The Namibian dollar, which was first issued in 1993, has been pegged to the South African currency on the basis of one-to-one parity. The South African rand is also legal tender in Namibia. Such an arrangement requires that a major proportion of the Bank of Namibia’s monetary liabilities be backed by the reserve currency (the rand) or other foreign assets.

This paper outlines the monetary policy framework in Namibia, covering its historical evolution, its goals and instruments. As a member of a currency board arrangement, Namibia does not engage in any active discretionary monetary policy. This is primarily subordinated to South Africa’s conduct of monetary policy. It is hoped that the paper will contribute to a better understanding of monetary policy issues and challenges, particularly in small open developing economies. This is especially important in view of the debate as to whether floating or pegged exchange rates are optimal policy choices in the case of small open economies.

The paper is arranged as follows. Part II describes the monetary policy framework in Namibia by giving its historical evolution, the objective of monetary policy, and instruments being used to achieve this goal. Part III deals with the question as to whether the monetary policy strategy adopted is effective in meeting the primary objective of low inflation and price stability. Part IV entertains the debate as to whether there is an alternative policy stance, and the final part contains conclusions. Overall, it is argued that the present policy framework is an appropriate mechanism for ensuring monetary stability in Namibia.

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