/ 17 September 2015

Diamonds aren’t Sacu’s best friend

Diamonds are prepared in Gaberone and then traded out of there rather than London. Namibia
Diamonds are prepared in Gaberone and then traded out of there rather than London. Namibia


If you were to ask most Namibians what the main source of government revenue is, they would tell you it is the profits and taxes on the diamond industry.

They would be wrong. Many would also tell you that the main source of revenue is import duty revenue from the Southern African Customs Union (Sacu), which is only partially right.

By last year, Sacu revenues made up about 37% of total Namibian government revenue. This is down from the peak of 47% in 2007.

But the problem is most of that money is not from customs duties raised on imports coming into Namibia from outside the customs union.

A customs union like Sacu is established when several countries get together and decide to set a common rate of tariff on all goods coming in from outside the member states. They then pool the tariff revenue on goods coming in from, say, the United States, the European Union and China, and the normal way to distribute this revenue is based on the “destination principle”. If 5% of the total Sacu imports went to Namibia, then it would get 5% of the revenues.

But Sacu has one of the strangest revenue-sharing formulas of any customs union in the world. Under it, tariff revenues are distributed among the five members based on their share of intra-Sacu imports.

At the end of each year, the five members get together and decide what was imported the previous year and then share it out based on a formula that means the four BLNS states (Botswana, Lesotho, Namibia and Swaziland) get the vast bulk of the revenue because they import almost everything from South Africa and South Africa imports very little from the four BLNS states.

And so, depending on the year, about 80% of Sacu customs revenue goes to the four small BLNS states. South Africa, which has 53-million people and imports the vast bulk of Sacu’s foreign imports, gets less than 20% of revenue.

The South African treasury, trade unions and much of civil society hate this arrangement, which has remained more or less intact since the apartheid era, because they are in effect transferring about R20-billion a year to the BLNS states, although Botswana, in particular, has a higher gross domestic product per capita than South Africa.

From Namibia’s perspective, it is being subsidised to import goods and not to produce them. Seen in this way, the Sacu is extremely successful, because Namibia and the other BLNS states have bloated governments but produce nothing, and it allows South Africa to produce almost everything that is consumed in the region.

The only things produced for export in the BLNS states are minerals, which generate what economists call high economic rents, and preference-dependent products such as sugar, clothing, beef, fish and grapes.

But, rapidly, something very new has been happening in Namibia’s trade. From being a minor trading partner, with few consumer goods coming in from Botswana, that country has suddenly become Namibia’s biggest market for its exports, amounting to about Namibian $11-billion last year.

Those exports are almost entirely Namibia’s diamonds. In the past, they used to go to the De Beers head office at Charterhouse in London and were sold to De Beers sightholders.

But, in the 2011 marketing agreement between De Beers and Botswana, the country finally got from De Beers exactly what it had wanted for a very long time – De Beers moved its sites from London to Gaborone.

Diamonds produced in the “De Beers zone”, that is, Botswana Namibia, South Africa and Canada, are now traded out of Gaborone. For Botswana, this agreement was the crowning glory of its diamond beneficiation policy.

At last Botswana is the go-to place if you want mined diamonds and the Batswana are rightly proud of this development. It is Botswana’s rightful place as the world’s largest mined diamond producer.

Namibia, as a good neighbour, which also seeks to beneficiate its diamonds, should rightfully support Botswana’s beneficiation efforts. But Namibia and the other Sacu members are paying a subsidy to Botswana for every dollar of Namibian, South African and Lesotho diamonds that are exported to Botswana because of the way in which the revenue-sharing formula is written.

The subsidy stems not from a commercial trade relationship in which the parties are trading with Botswana because they wish to but as a result of an agreement between De Beers and Botswana. It is symptomatic of everything that is wrong with the Sacu revenue-sharing formula. Rather than encouraging intraregional trade, the Sacu formula creates perverse distortions and incentives in behaviour.

In terms of government revenue, Namibia should be opposed to any exports to its Sacu neighbours, whether it is weaners to South Africa or diamonds, because this decreases Namibia’s Sacu revenue.

One way to deal with this is simply to modify the Sacu revenue-sharing formula. Gaborone should not expect a subsidy because of its agreement with De Beers and should agree to a modification of revenue sharing that excludes the intra-Sacu diamond trade.

According to normally well-informed sources, the agreement with De Beers and Botswana allows De Beers to walk out of the arrangement if other countries object to it, and that would be a far worse outcome for Botswana than a slight modification in revenue sharing.

Sacu members spend much of their time trying to agree on what imports were in any given year and the value of diamonds would complicate matters. But diamonds are the tip of the iceberg when it comes to distortions of the economy caused by Sacu.

Namibians are as rich and as comfortable as they are only because South Africa subsidises Namibians to import goods from them. In other words, the Namibian government is paid a substantial subsidy by Pretoria to keep Namibia’s children unemployed. Every time a Namibian farmer exports a weaner to South Africa or the Namdeb Diamond Corporation exports a diamond to Botswana, the Namibian treasury gets less money.

This is what economists call a perverse incentive, and it surely must come to an end.

These are the views of Professor Roman Grynberg and not necessarily those of the University of Namibia where he is employed.