Forex exchange is on the rise in Namibia; resulting in more people wanting to learn how to trade to try to increase their income so that they can enhance their standard of living. Forex Foreign exchange identifies the process of converting domestic currency into international banknotes at particular exchange rates (Bofah, 2017, para.1).
As the number of foreigners in Namibia is increasing, more Namibians and foreigners are participating in forex trading. Foreign exchange rates affect international trade, capital flows and political sentiment (Bofah, 2017, para.1).
After acknowledging the mentioned effects; a question arises. How does forex trading affect economies? This essay focuses on the impact of forex trading on economies looking at how it may affect the Namibian economy.
The impact forex trading has on the exchange rates
Forex, or foreign exchange, trading is an international market for buying and selling currencies. It is similar to the stock exchange, where you trade shares of a company (Amadeo, 2018, para.2). The forex market is the backbone of international trade and global investing. It is critical to support imports and exports, which are necessary to gain access to resources and to create additional demand for goods and services (Lander & Preece, 2014, para.4).
Forex trading has become essential to governments all over the world as it affects the exchange rates. The exchange rates fluctuate therefore inducing the change in the economy in turn which then affects markets such as tourism.
So the increased activity in forex trading increases the fluctuations in the markets; affecting the exchange rates by making them rise or fall at an accelerated rate.
The advantages of forex trading
Segal (2018, para.5) states that the value of Such a significant factor has to have negative and positive implications with some real implication being, low costs and there are no middlemen as implied by Brahmachary (2018, para. 4-7). There are low transactional costs as a retail price in transactions in forex trading is less than 0.1%. ( Brahmachary, 2018, para.11).
This is a major positive for any Namibian interested in forex because it means that unlike starting a business or venturing into an entrepreneurial career, there is much less risk involved. Unemployment usually encourages people to venture into business, but this means many dangers typically as the money required to start up a business generally includes acquiring loans or deploying large amounts of personal savings.
Forex trading however largely decreases these risks as one does not necessarily need to start trading with massive amounts of money. Forex trading also ensures that people are not demanded to go through lengthy and extensive registration requirements (Brahmachary, 2018, para. 7); nor do they require assistance from any agents or companies (intermediaries) although, training institutions for specialisation in this field are recommended.
One of the significant benefits is that the forex market is always open so it becomes readily available at any time for anyone to use.
This became essential to the growing popularity of forex trading in Namibia because it is appropriate for any schedules. It then makes forex trading easier to work with as it does not have to interfere with personal plans or programs since it is a 24-hour market. Since the foreign exchange is so large, one entity cannot control the market for a prolonged period. There are benefits to forex trading the major one being that it is available to anyone who wants to join.
The disadvantages of forex trading
Forex trading seems to be a lucrative venture, but it is plagued with its problems. Forex trading is hazardous. The broker stands a chance of potentially losing large amounts of money. Due to the future being a total mystery, forex traders are often involved in an estimation game. The profit of a forex trader entirely depends on their prediction skills about future exchange rates compared to current exchange rates.
This is an extremely risky prospect as one unfortunate decision could cost them a large amount of money. Brahmacharya (2018, para. 13) implies since the exchange rate fluctuates rapidly, there are peak time and off-peak times and brokers might trade unknowingly in the off-peak times resulting in the loss of money.
There is intense competition when it comes to forex trading (Brahmachary, 2018, para. 17).
Larger firms have departments which specialise in forex hence making it difficult for individuals to compete. Another troublesome issue that arises because of forex trading is that it quite often becomes addictive to its participants. This happens due to the similarities between forex trading and gambling as forex trading is all about taking a chance, which may result in the acquisition of large sums of money or the loss of it.
Impacts of Forex trading in Namibia
Unfortunately, forex trading is negatively affecting the Namibian economy as more people are becoming aware of it. The Bank of Namibia’s director for strategic communications and financial sector development, Emma Haiyambo, said the Bank of Namibia had observed incidents of illegal trade in foreign exchange from time to time (Haula, 2017, p.16).
It is negatively impacting a portion of the income the government receives through tourism. In coastal towns like Swakopmund and Walvis Bay, which are also tourist magnets, we have seen in some instances people who work in the hospitality industry – mostly the front desk staff or drivers – giving advice to tourists to exchange their money (both foreign and local currency) at certain individuals’ places (illegal forex traders), who operate in the townships like Mondesa, Narraville and/or Kuisebmund (Haula, 2017, p.16).
The increase in tourism tends to tempt opportunistic individuals trying to make extra money with them operating illegally as they are not registered which in turn causes problems for financial institutions. This illegal trading has erected a black market in Namibia dealing with illegal forex trading. These illegal forex traders are not registered with the central bank to facilitate such a service, and they usually give better rates than the banks and bureaux de change and pay commission to any person who refers customers to them (Haula, 2017, p.16).
With more illegal trading occurring, there is more pressure on Financial institutions to compete with the illegal traders so rarely there might be an instance that happens when the black market is flourishing than the financial institutions, working legally, has to drop their rates to attract more people.
It is clear that such activity damages the financial sector institutions which are critical to economic growth reduces productivity in the economy’s real sector by diverting resources, and encourages crime and corruption, which slow economic growth and can distort the economy’s external sector( Haula, 2017, p.16).
Namibia already faces the problem of high corruption in the government, so the negative implications are doubled by the illegal trading.
In conclusion, contrary to popular belief, forex trading is not only a prospect that entails riches for every individual that was to join but is, in reality, a risk that an entrant must be willing to take in order reap the rewards that it includes. Forex trading comes with plenty of benefits for the society with the most significant advantages including the potential of profit to be made and the fact that anyone can attempt to trade.
However, it also comes with its back draws with the largest one being the risk of losing money. Despite this being an enticing offer for most Namibians, it does have an undesirable effect on the economy with more and more Namibian Dollars being dropped on the international market. Forex trading in Namibia has become a subject of intense debate that causes uncertainty due to people having mixed opinions about it.
It could be an unusual feature of the economy but only if used correctly, hence the importance of education on how it can be used efficiently and how it affects the economy.