Namibia's Road Runner Housing Market

Namibia’s ‘Roadrunner’ Housing Market?

 Those who are fans of cartoons will no doubt recall the  Roadruuner where usually Wiley Coyote would run off a cliff and keeps running until he finally realized there was nothing underneath and  gravity would rapidly take over . In Business it is now known as the Roadrunner effect, that is when someone or a market continues to behave as the foundations for the earlier behavior still exist. Housing bubbles are very much part of this phenomenon and the big question that is now asked is Windhoek specifically and in Namibia more generally about to experience a  Road Runner effect?

While average asking prices for housing have continued to rise  what has happened is that that the volume of turnover has started to decline quite drastically. But averages disguise huge variations throughout the economy. In Windhoek for example the FNB(First National Bank) housing price index has continued to show growth on average but there the volumes of sales that underpin the market are not there and  the volume index has been dropping sharply. This is one key part of the Road-runner effect. People are demanding higher prices but the sales are simply not occurring. But as can be seen below in 2009 when volumes of sales dipped sharply in Namibia prices continued to grow so a decline in average prices is possible but a cliff is not inevitable. 

            According to FNB, the median house price was N$1.3mn in June which is 10.5% higher than average Windhoek house prices in 2015. High income suburbs have begun to show signs of decline. In KleineKuppe prices have dropped by 1.0%, while Ausblick and Olympia prices have declined by 12.1% and 2.2% respectively. Unsurprisingly as the more expensive suburbs become out of reach to middle income Namibians there strong price growth in  low income areas such as Okuryangava, Khomasdal, Katutura and Rocky Crest.

Unfortunately the elements that supported the housing bubble  in Namibia that peaked in 2014 and saw Namibia with the world’s fastest growing prices is now  well and truly over. Several well known factors have combined together to create  a market which cannot sustain prices at the top end. The first is the decline in commodity prices, including oil which effected the local economy severely. But more importantly than any direct effect this has had on Namibia the decline in oil prices has removed the Angolan buyer who would come to Namibia, a buy or rent an expensive property with a suitcase of US dollars. With the collapse of oil prices Angolans no longer have the petro-dollars to prop up the market and government

The second factor that has caused the decline in sales is that the economy has not been growing anywhere near as rapidly as in the past and may be entering a technical recession with the last quarter registering  -1.2% economic growth. A technical recession (ie two quarters of GDP decline) is unlikely because the exports  from the new Hauseb mine are likely to register shortly which is expected to provide a 5% boost to GDP.

What is also likely to put a severe damper on rising housing prices is the  austerityprogramme that will be necessary if the government is to rectify its budget deficit of 8.3% of GDP.  Government, as the largest sector in the economy will cause the greatest impact on other sectors.

The signs of a decline in the housing market are already there in not just the decline in the volume of sales but also in the rental rates. According to FNB, the largest decline in volume of transactions emanates from the high-end market (house prices over N$2.6mn) where volume growth contracted by 46.0% at the end of May. Prices in this segment, however, haven’t declined as one would expect with the extended drop in demand. Although in June of this year high-end property price growth remain 22.4% higher compared to last year June. Properties are spending significantly more time on the market, giving buyers the opportunity to negotiate prices down, a trend which was not available a year ago, when most properties were selling above valuation and top ups were the order of the day.

Speaking to real estate agents there have been serious declines in rental rates for not only top end houses but the increasingly over-supplied two-bed room units where rentals have, according to prominent real estate agent Ms Nadia Steenkamp  have decreased by some 10% over the last year. Declining rental rates tend to get translated into declining house price eventually.  It is however usually in the middle to upper levels of the housing market where prices tend to be stable though no sector is immune to temporary over- supply.

But house prices deflation which is a serious phenomena because it leaves those who have acquired bonds on their homes when prices are high in positions of having a house where they have negative equity. This is still unlikely to happen here because the problem that underlies the market is temporary. There remains a  structural shortage of housing in Namibia that, according to the IMF, is only getting worse with time and until land is made available is the increase in prices despite the  possibility of a price cliff in several segments of the market.

 But what is perhaps most interesting is why average housing prices in Namibia have increased by 250% between 2007 and 2016 . Part of the explanation is of course inflation but the structural shortage of land for development has strengthened this trend. In Africa’s most sparsely populated country it seems a great shame that a sector which can be such as vital source of semi-skilled and skilled employment is stymied by the structural shortage of land.

What is needed is a rethink of land policy in the periurban areas. Where the private sector is strong enough the government should make the land available and allow the private sector to get on with the job  of construction that will provide much needed growth and employment for the country rather than having local councils directly involved in allocation of land for those other than the very poor.

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

SACU's Great Moral Hazard

SACU’s Great Moral Hazard

Economists love talking about moral hazards. This is when an action has unintended consequence like insurance causing people to drive recklessly. Namibia and the other three small states Botswana Lesotho and Swaziland (BLNS states) which together with South Africa make up the membership of SACU live under a scheme of sharing customs revenue that create an exception moral hazard. The moral hazard stems from the fact that the smaller countries get customs revenue from South Africa that bears no relationship to what they actually import from outside the Customs Union. That means that these countries have no interest in collecting customs duties. I frequently complain to Customs Officers in the BLNS states that that they could collect millions of dollars more money if they just policed the importing of  second hand motor vehicles properly and forced people to declare proper prices. But several weeks ago a Customs official said something that clarified the SACU situation. His response was blunt and simple enough- ‘What do I care?’, he blurted’ If I collect all the money that is owed to us it all goes to Pretoria and what I get back from Pretoria has no relationship to what I collected.’

This position is absolutely correct and it is a classic definition of  what economists call a moral hazard. What the customs official gets back from Pretoria bears no relationship to what he collects. What is collected into the SACU pool is largely determined by how much South Africa imports from the rest of the world because SA is by far the biggest member of SACU and what each SACU member gets back is based,  bizarrely,  on what each SACU imports from other SACU members. But that is just as true of all the members of SACU, even South Africa. If some 80% of customs revenue goes to the four BLNS states as they are called then what possible incentive does South Africa have to tighten up on Customs collection.In effect it creates an incentive to turn a blind eye to the sort of tax evasion that is so pervasive in international trade today.

But there are worse and yet more expensive moral hazards imbedded in the SACU customs rebate system. The  most expensive for countries like the four small  BLNS states which gets most of the SACU  customs revenue,  is the duty rebates which eats a huge part of the total SACU revenue. The country that use duty rebates the most is South Africa and the sector that employs them most extensively is the automobile export industry. How does this work.  Under the terms of the South African Automotive Production and Development program firms that produce cars in South Africa get all sorts of financial incentives. The most important are the duty remissions and rebates. The first is the so-called Vehicle Assembly Allowance whereby manufacturers with a minimumplant volume of 50 000 vehicles per annum are allowed to import a percentage of their components duty free (20%- decreasing to 18% over 3 years). The second is the ‘production incentive’ which is  an allowance for duty free import of vehicles or components, calculated at 55% of value added in the SA supply chain; reducing to 50% over 5 years. The cost of both all comes from SACU revenues. And how much? In 2015 the South African Department of Trade and Industry reported to its parliament that the ‘hypothetical’ loss of customs duty from these two parts of the program were a staggering ZAR 10 billion.

Why do the South Africans refer to the losses as ‘hypothetical’? It is because the South African government knows that most of those losses would have gone to the citizens of the BLNS, and not to South Africans, who would have otherwise received some 80% of this loss in customs duty. In short Botswana and Namibia would be about ZAR3-4 billion richer if they were not paying  forPretoria’s subsidies to the automobile manufacturers.

South Africa benefits by the 110,000 jobs that this industry createsand  represents some 7.2% of South Africa’s GDP. The South African government knows that  the industry would be as dead as its now defunct Australian counterpart, if these SACU subsidies were removed. But for South Africa, this is mana from heaven. It is virtually free money, there is no political pressure from South Africans and there is no incentive to contain the cost of these programs as it is the citizens of the BLNS that pay!

 This is a perfect example of a moral hazard. But like the entire SACU customs revenue sharing formula, the rebate scheme is based on the BLNS subsidizing South African, jobs production and exports. But because the BLNS states get more in subsidies under the revenue sharing formula than they pay out for rebates everyone just keeps quiet and accepts the continuation of this economic absurdity. And so it goes on until one day someone will pull the plug.

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

 

 

Vegetarian India is the Word's Biggest Exporter of Bovine Meat .... and has endemic FMD

Vegetarian India is the World's Biggest Exporter of Bovine Meat !

Global trade produces some of the most intriguing and often unexpected results. But they are only strange if you don’t understand the details of the particular commodity. For example, the world’s biggest exporter of green coffee is Germany which does so without a coffee plant for 5,000 km in any direction from Frankfurt .It exports more green coffee than all of Africa put together. Botswana exports boats from Maun in the Kalahari Desert and India regularly exports four times as much Darjeeling tea as it 87 registered plantations produces. Butperhaps  the oddest outcome I have seen in international trade is fact that largely Hindu and vegetarian  India is now the now the world’s biggest exporter of  bovine meat, bigger than Australia, US and Brazil. In 2015 India exported some 2 million tonnes of bovine meat and yet  has had endemic Foot and Mouth disease (FMD) which has played havoc with African exporters and confined many of them to local markets.

Germany exports more coffee than all of Africa because of its superb logistics to other countries in Europe. German transnational companies dominate the  European trade in beans used for making expresso. But coffee beans have a limited shelf life and therefore they need to be moved quickly to their final consumer. Germany is well located to do this for virtually everyone in Europe. Until Africa improves its logistics hubs beneficiation of coffee will remain just a dream.

Botswana exports aluminum boats to Mozambique and Namibia from the Kalahari because they have developed expertise in boats that manage hippos, crocodiles and logson the Okavango river. Mozambique, which is Africa’s biggest producer of aluminum makes no boats and does not even export the aluminum to Botswana, that comes from SA. SA boats are fiberglass and meant for rich people to play with on the beach and have little hope of surviving a collision with an unhappy hippo on one of Africa’s rivers

The reason why four times more Darjeeling tea is exported from India than is produced  is simple enough- its normally called commercial fraud. India also exports bovine animals but not beef.  The export is principallyof  buffalomeat which has a huge chunk of the bottom end of the meat  market in Asia and the Middle East. It is particularly popular in countries like Vietnam and the Gulf states which is not surprising given that the cost of deboned buffalo is US$3 per kilo in 2016, far below that of imported Australian beef which exports for about US$4.40 per kilo .

That a largely vegetarian country like India which reveres cows is the world’s biggest exporter of bovine meat is, like German coffee and Botswana boats,  not as surprising as it first seems. The fact that most Indians are vegetarians creates a far bigger exportable surplus than would otherwise be the case and moreover, buffalos are not revered like cows amongst  Hindus in India. Buffalo are needed as a very important part of India’s huge dairy industry and so being the world’s largest exporter of buffalo meat should not be surprising

What really is truly surprising from an African perspective is the fact that India has endemic FMD and yet is still the world’s biggest exporter of bovine meat.  From the perspective of the Ehiopian and Ugandan cattle herder as well as from Namibia and Botswana’s relatively  developed cattle industry this sounds very strange indeed. If you have FMD in your area the European Union and the US, our two main markets, simply block your exports. The EU in particular imposes absurd obligations on beef from Botswana and Namibia. Not only does the beef have to certified as coming from  FMD free areas it also has to deboned to make doubly sure that it is FMD free.

Countries like Ethiopia and Uganda where there is little effective management of the FMD are completely blocked from international trade. If you want to know just how damaging it is to be excluded from international trade in beef then ask the cattle farmers of the Caprivi strip in Namibia or in Ngamilandin Botswana.

There are perfectly legal ways of getting over the existence of FMD as a block to international trade but they are not used in Africa. It is called commodity based trade  under the terms of the OIE’s code allows countries to export  bovine beef from FMD areas as long as it is deboned,matured and has an appropriate PH level and the cattle do not actually have FMD. All this is well known and used by the Indians to develop export markets for its surplus buffalo. Namibia has been developing an extensive program in the Zambezi region (Caprivi). Botswana has done virtually nothing,

The  Chinese, hot on the heels of the Europeans and Americans,  take issue with India’s endemic FMD and have in 2014 blocked exports of Indian  buffalo meat but, given their  preference for cheap meat,  the Chinese have had no qualms about importing it from Vietnam which in turn brings in the meat from India. This so-called ‘grey market’ trade continues to be mutually beneficial and the Chinese have done nothing to stop it  but India has implied that if the block is continues it might consider taking the matter to the WTO. A WTO dispute on the Chinese regulations would be extremely valuable to Africa

There is nothing stopping African countries from developing their own protocol on commodity based trade fromFMD areas but they will not because those with developed  industries such as Botswana Namibia and South Africa desperately fear the implications of allowing imports from the massive herds of Ethiopia and Uganda, let alone buffalo meat from India,  and hence prefer to deal with the EU FMD measures. Commodity based trade, if it is to succeed,  will need to deal with the  relative lack of competitiveness of Southern African industry. 

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

 

 



Vets Impoverishing Africa

Vets Impoverishing Namibia and Botswana

 

It is hard to imagine a group of people who are more innocuous and of all the professions amongst the most highly regarded. After all it is the vet who often saves what are ‘man’s best friends’ and treats cattle, the source of traditional wealth in both Namibia and Botswana, when they faced deadly diseases. So how can a group of scientists who are the pillars of their community be the cause of poverty in vast swathes of Zambezi Region (northeastern Namibia) and in Ngamiland (in western Botswana).

 

For almost a decade now both regions have experience increased frequency of occurrence of foot-and-mouth (FMD)disease , which is a result of poor vaccines and apparently increasing proximity between cattle and buffalo, which are the main source of the disease in Southern Africa. If your cattle were raised in an FMD area then their meat cannot be sold to the EU, the USA, China or even in parts of your country that is recognized free of the disease. The traditional way in which all our vets have been taught in their studies throughout the world to deal with FMD has been through separation of animal populationsand vaccination against FMD.When an outbreak occurs, you stop movement of cattle and you vaccinate- set up a containment area of up to 60 km around the diseased animals and you wait six months until after the last case before you allow exports of beef to occur again. The only problem is that it no longer works. For a decade the Kavango-Zambezi region, which stretches across five countries, Angola, Botswana, Namibia, Zambia and Zimbabwe has been suffering from increasing frequency of outbreaks of FMD. The old way of resolving this problem is causing financial chaos in the effected regions and impoverishing the people of Zambezi and Ngamiland.

 

But vets, like most scientists are creatures of intellectual habit and have simply advocated the same response to FMD- more fences, more restrictions on livestock marketing and more vaccinations but the people of Zambezi and Ngamiland have suffered terribly as a result. They have not been able to move their cattle freely, often for many months and have experienced worsening poverty as a result. At least in Ngamiland there is an abattoir where cattle from FMD areas can be slaughtered and traded. The government of Botswana has provided massive subsidies to keep an otherwise unprofitable abattoir going because if it closed the cattle would be worthless except for domestic use or smuggling.

 

This is precisely the situation facing farmers in Zambezi Region of Namibia  where the abattoir at KatimaMulilo has been closed sinceAugust 2015. An abattoir is a factory and needs to run at a high and constant rate of utilization to make a profit. Because of the FMD, the lack of economies of scale and the regular closures of the abattoir due to FMD, the people have no external market for their beef. It can only be sold for local consumption or, more commonly smuggled across borders to make something of a profit. Since August this year Meatco has started a system of mobile slaughter in Kavango East Region and the Ministry of Agriculture, Water and Forestry is constructing a $110 million abattoir and meat processing facility in Rundu, which is near completion.

 

So in response to the problems confronting farmers the response is the development of another facility in Namibia, which proceeds without much policy analysis, or thought that perhaps the best way of dealing with this regional problem is through regional co-operation rather than pouring more money into the same type of responses. But the solution is for vets to adopt the changes to international standards in the Terrestrial Code of the World Organization for Animal Health, known as the OIE (acronym from its previous French name, Office International des Epizooties). Ironically, the vets have requested for these changes based on studies conducted in Namibia and they voted for them at their OIE General Assembly in May last year.

 

FMD does not cause any disease in people. It is also entirely possible to safely trade meat from an FMD area but the meat has to be maturated, deboned, and the major lymph nodes removed and handled hygienically. This beef can be traded and consumed safely without any risk to other animals. Angola imports large volumes of such beef from India,where FMD is endemic and is yet the world’s largest exporter of beef. Unfortunately Botswana tried to export beef from Ngamiland, an FMD area, to Angola but was blocked, without an iota of scientific justification, from even transiting Namibia for a few hours in seal-secured and leak-proof refrigerated trucks from Shakawe under escort to Katwitwi via Rundu. Beef from Ngamiland, although it is derived from cattle that were raised in an FMD area, is produced under the OIE standards rendering it safe for trade.  This decision of the Namibian Veterinary Authority is indefensible, has no basis in science and has caused real bitterness and mistrust on the other side of the border.Now Botswana can only make shipments to Angola via Beira Port in Mozambique, this despite having a dry port at Walvis Bay.

 

This alternative way of allowing meat to be moved and traded fromendemic FMD areas is well known to the veterinary services of the region, which have in many places, including Namibia, been the main block to change. The instant FMD is mentioned our vets instinctively shut down livestock movement and trade. In India they do the opposite, they encourage trade in bovine meat – FMD or no FMD. In Africa we impoverish our people by discouraging trade without any scientific justification whatsoever. 

 

It is absurd and outrageous that African nations block each other from trading with each other, and in the process allow India to dominate a trade that we can easily supply. But what it requires is a different mind-set from the region’s veterinary services and intervention by our health and trade ministers. The nations that border this Kavango- Zambezi basin urgently need political intervention from the Agriculture and Trade ministers and not from the vets to make real progress. It requires ministers to sign a protocol that would allow commodity-based trade, which is supported by OIE standards requested for and voted in by the Chief Veterinary Officers of OIE member countries including Namibia and Botswana. The benefits to Namibia and Botswana of such co-operation are potentially enormous. We waste enormous resources building national infrastructure and rather than allowing cross border trade e.g. from allowing cattle from the FMDareas of the Ngoma and Kasanetriangle to be slaughtered say in Katima Mulilo, Namibia, which is a stone throw away. Or allowing cattlefrom far eastern parts of Kavango East Region to be slaughtered in Maun, Botswana. All of this intra-regionaltrade is entirely possible but now requires ministerial intervention.

 

The people of the Kavango-Zambezi region suffered greatly during the long war against apartheid. They deserve better than to be impoverished by vets who are living in another century. The Trade and Agriculture ministers need to act now to allow trade and to facilitate international co-operation in beef or they, and not the vets, should be held responsible for their peoples’ suffering.

 

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

The Namibian fisheries and the allocation of quota rights ..... to some people

Too many small fish riding on our back?

Standing on the shore of the South Atlantic along the Skelton Coast you cannot fail to be in awe of the sheer stunning beauty of the meeting point of the barren Namib dessert and the freezing South Atlantic. The apparent lifelessness of the scene is only true for those who do not look hard and do not know. The dessert has many creatures that eek out an existence on what appears to be a bone dry dessert. But a real invisible world,teeming with life is to be found in the ocean with its massive marine resource that is amongst one of Namibia’s few renewable riches.

Thanks to the nutrient -rich Benguela current ecosystem  which support high abundance of valuable species, Namibia   has one  the richest fishing grounds in Africa. Namibia, after Morocco/Mauritania and South Africa produces the third largest catch in Africa. The catch includes low value species like pilchards and horse mackerel which are principally exported to DRC,Mozambique as well as Angola Cameroon Ghana Zambia and Zimbabwe. The much more valuable exports like hake, rock lobster and crab go to EU, China and Japan and fetch apparently good prices.

If one looks at what the government permits to be harvested from the Namibian Exclusive Economic Zone, the so-called total allowable catch the volumes have been declining for virtually every species over the last 15 years. The more valuable species hakepeaked in 1999 when the TAC was a massive 275,000 tonnes and has subsequently declined to slightly over half that figure at 140,000 tonnes in 2015/16. For the biggest species by volume, Horse Marckerel  the TAC has decreased from a peak of half a million tonnes in 1994 has decreased to 335,000 tonnes in 2016. Does this mean that the country is over- exploiting its one significant renewable resource? Namibia has an excellent reputation for fisheries management but few countries have ever sustained their fisheries for very long. Even what was the world’s the most sophisticated fisheries management system in Canada failed to protect the country’s massive cod fisheries from complete collapse. Fisheries science is often far more of an art than a precise science and so knowing what happens in fish populations in any given year. In the end the economic pressures on the country’s N$10 billion per year fish export industry may be what kills the sector.

The industry is showing clear signs of the sort of commercial pressures that result in the failure of fishery. The first factor is over-capacity. The horse mackerel industry worth about N$2.5 billion on average between 2010-2014 there has been a massive growth in the number of vessels operating in the industry. While the TAC in Namibian waters is 335,000 tonnes the fishing capacity of 445,000 tonnes. This means that that they are operating , on average at 70% of capacity. One of the most significant factors that puts commercial pressure of vessel owners to catch more and push catch level to and beyond sustainable levels is already in Namibian waters. The country has allowed Icelandic, Dutch Chinese and Russian vessels to operate in the local waters.

This raises the second source of commercial pressure on the fisheries and that is the cost structure. Unlike other fisheries in order to catch fish one must have quota rights which are held by the country’s 358 rights holders. They are allocated these quotas for a relatively short periods of time, between 7 to a maximum of 20 years and then on top of this they are allocated a quota each year based on the country’s total allowable catch. The minister has dramatically increased the number of these quotas rights from 135 at the beginning of his tenure in 2010 to 358 in 2015.

This has created a large number of rights holders who each have such a small share of the total quota that they have to either form a joint venture with other rights holders and start-up new firms which has been happening. But as overcapacity becomes a dominant fact of commercial life in the industry along with declining profits then starting new firms looks less and less commercially viable. As a result these rights holders, who are strictly speaking not allowed to sell their quotas, then turn around and sell these ‘usage and access rights’ to other companies. This a legal sleight of hand and amounts to the same thing as selling the quota.

The current market price for these in the horse mackerel usage fee is between N$3250-$3,500/tonne. With a quota of say, 5,000 tonnes that is available for only a few years experts in the fisheries sector feel  that the quota  is simply too small to be ‘bankable’ and hence the most profitable thing to do with the quota is to on-sell it someone who wants the access to Namibia’s rich fisheries. Selling the rights for such a 5,000 tonnequota would bring in some N$18 million without the bother of starting a business that may or may not succeed.

If Namibia wishes, as its legislation says to Namibianize the fishing industry, then creating hundreds of sub-economic quotas may spread the economic benefit of the industry around but will not create a health and profitable industry in the long term. The old South African owned/ controlled duopoly which dominated the Horse mackerel industry and was controlled by Bidvest (Namsov) and the Erongo group have seen their quotas cut dramatically from 240,000 tonnes or in 2011 to some 100,000 in 2016. This has squeezed profits of the foreign owned companies in the industry without, as yet, creating a new viable and profitable local industry.

The current policy runs the risk that it will result in the in the delocalization of production and a shift to simply foreign owned vessels who buy up quota rights. There are many ways to ‘Nambianize’ the fishing industry. The most common is to get local institutions such as pension plans and other financial institutions which are concerned with a profitable industry to buy out foreign interests. Another  policy  would be to create a locally owned industry is that of ‘Ramaposaization’ that is,  creating a rich businessman like Cyril Ramapoza  from within the political elite that is both big and rich  enough to run the industry profitably.  But in either case, no Namibian businessman or financial institution will want interests in an industry that is being squeezed by government.

The name horse mackerel derives from the myth that small fish ride on the back of the mackerel . This is untrue but nonetheless it seems an appropriate caricature for the case of the Namibian industry where there many ‘small fish’ riding on the back of the industry and what the industry needs is economies of scale and efficient businesses run by Namibians. The current policy of issuing so many quota rights needs to reconsidered for the sake of the country’s most important renewable resource.

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

African Infrastructure, World Bank Responsibility and the Economics of 10%

African Infrastructure, World Bank Responsibility and the Economics of 10%

When you drive into Gaborone, Botswana’s capital from the airport there area number of iconic buildings on the right side of the road. The most imposing is the Diamond Trading Corporation  buildingwhere most of the nation’s diamond wealth is traded. Next to it is the Bank of Botswana and not far down the road is a building that is also a metaphor for everything about Botswana that seems to make no sense. The imposing structure is the Botswana Bureau of Standards (BOBS), a huge building that, was when I last visited in 2015 was largely empty. It is large enough, it is said,  to  hold two large Boeing jets and is frequently used for religious ceremonies and marriage celebrations. The obvious question is why does Botswana, a tiny country of two million which is a member of SACU and which draws on the standards of its larger neighbor South Africa need such a large Bureau of Standards building? The superficial answer so commonly heard is that  BOBS is a classic  case of African gigantamania, a condition that appears  to be common to those who design infrastructure projects throughout large swathes of Africa. But there is a better and simpler explanation that can explain what we see and that is the economics of the kick-back and the consultancy fees for construction. It is regrettably common practice to receive a kickbackfrom largeinfrastructure projects and when a project like BOBS does not make cents (read sense) then it is invariably making someone a lot of dollars. More simply put, a 10% kick-back on   $40 million project is much more than 10% of$4million and this may be a much more useful economic explanation for the apparent Africangigantamania than any psychological condition.

The World Bank has long argued that Africa needs to invest more in the development of infrastructure whether that is in electricity, water roads and railways. The continent is commonly said to require US$38 billion of investment per year, and a further US$37 billion per year in operations and maintenance; an overall price tag of US$75 billion. The total required spending translates into some 12 percent of Africa’s GDP. There is currently a funding gap for infrastructure in Africa of US$35 billion per year.

Some governments like that of resource rich and middle income  Botswana and Namibia, having proven the economic viability of a particular project,can still readily obtain loans from the World Bank and the African Development Bank. These are after all banks and they make their profits principally from providing loans to their customers and hence these same institutions have a strong interest in expanding infrastructure. If the AfDB and the World Bank provide a very large loan for a particular infrastructure project they commonly set up what is called a project management unit where their own consultants or staff work for the life of the project  to make sure that the sort of backhanders that are common in Africaninfrastructure don’t happen. But in some cases the AfDBand World Bank view particular African governments as having an internal governance structure to make sure that the project was implemented properly and on time without a project management unit. This is certainly the case, or at least has been in the past but in countries like Botswana where the international community has helped foster the common myth that good governance prevails in infrastructure tendering and so loans can be provided directly to the state with only limited oversight.

Recently the bankers in Washington and Tunis fell victim of their own propaganda about good governance in Botswana. Botswana, like Namibia is trying to transition from an energy model where it relies on the South Africans for its  supply where the National power authority, the BPC in Botswana or Nampower in Namibia become power generators in their own right. In Botswana, to achieve that objective.In 2009Botswana the World Bank, the AfDBand the government of Botswana and the Chinese government provided roughly equal parts  for financing of US $1.66 billionproject to build the Moropula B,  a simple and straightforward 600MW ( 4x 150MW) coal fired power plant. The power plant was supposed to be completed by 2012 but  was eventually handed over in 2014 with many technical problems.

Such 600 MW thermal plants are extremely common and had the project worked properly it would have put Botswana well on the path to energy self-sufficiency which it still aims to achieve by 2019. Botswana has an estimated 212 billion tonnes or 2/3 of Africa’s coal resource. Alas,nature makes coal but men make power stations and at least in the case of Moropula B, was pretty much of a disaster which has, since commencement, rarely operated anywhere near its design capacity. Recently the Botswana Minister of Minerals and Energy MrKitsoMokailahas suggested in parliament that he wants to sell the project to a private developer. It has been such a disaster that Botswana onceseen as the paragon of good governance and the epi-center  of what is called by visitors, ‘Africa-lite’ now seesGaboronesitting in the dark, like so many other less well endowedand corrupted African capitals. Botswana continues to buy power from Eskom at very high spot market prices linked to the cost of diesel power generation.

How did this grand and expensive disaster occur?There are many reasons but there has never been, nor shall there ever likely be a public or parliamentary enquiry into the failure of Moropule B which has so retarded private sector development in the country. The failure to investigate what happened and possibly punish those responsible is part of Botswana’s culture of complete legal impunity for the great and the powerful.  In what is as close to a World Bank criticism of the way Botswana chose the contractor,  a recent review of the project by the World Bank  listed the  projects undertaken by the contractor, China  National Electric Corporation, none had ever been as big as this. The then Chinese Ambassador to Botswana, Ding Xiaowen, in 2009 had reportedly advised  then Minerals and Energy Minister PonatshegoKedikilwe that CNEC was not qualified for the job and yet Kedikilwestill went ahead with the company.  The ambassador suggested that there were other Chinese firms tendering that had considerably more experience in such projects.

The World Bank and AfDB say they believe in open government and transparency and given that  both know that Botswana will never investigate what happened  at Moropula B then it is incumbent that they to do so if they are to have even a shadow of credibility in a the sector where they intend to lend heavily. These banks need to conduct  an open and transparent review of this Moropule B but they will almost certainly never do so  and sadly it will be buried.

In Namibia there is the creeping suspicion that policy makers making decisions over $7 billion dollar airport up-grades  anda new $2.2 billion parliament buildings  may not necessarily be pursuing the public interest. What is needed in both countries is the equivalent of the South African Office of the Public Protector,but for such infrastructure projects with same funding and modus operandi as the US Congressional Budget Office which has assured funding and  provides independent analysis to the US Congress. What would stop such an agency from also becoming corrupted like so many tender boards- only vigilance and an independent reporting route directly to parliament?

For a real economic transformation to occur  in Africa massive infrastructure investments will be necessary as the World Bank and AfDBcorrectly point out but  citizens need a completely open and independent assessment of how new projects are chosen, ranked,designed, costed and implemented. Under the current system the economics of 10% commonly prevails in many infrastructure projects and hence a completely independent and authoritative public assessment of new infrastructure projects is needed to assure that the citizenry are getting value for their money.

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

 

 

Cartels are Great...if you own them!

Cartels Good, Competition bad… at least in Namibia and Botswana

The spread of economic ideology is  truly fascinating. For years now the Competition authorities of Namibia and  Botswana  and the entire African continent for that matter have been trying to spread the good book of the free market. Just get rid of cartels, which are associations of companies that act to limit competition and maintain prices above what would otherwise be market levels, and we will reach the nirvana of free markets and free trade. However, nothing could be more wrong in the case of Namibia and Botswana.

Recently the Namibian competition Authority acting chief executiveMrVitalisNdalikokule, said the commission will continue fighting cartels operating in the country's economy. He has commissioned an essay writing competition for Namibian students to explain that Hallelujah , the market is good and cartels are the viscous nasty enemy of the free market that  we all believe in. If MrNdaalikoukule really wants to tackle anti-competitive practices then perhaps he should start with the country’s biggest firm De Beers. But perhaps MrNdaalikoukulewouldsimply prefer to keep hisjob and leave De Beers alone.

For 90 years until about 2002 De Beers maintained what is widely regarded in economics as  the world’s most effective cartel. The De Beers Central Selling Organization maintained strict control of the supply of diamonds and severely punished anyone who tried to get in their way. Ask  diamantaire Lev Leviev or those who managed diamonds in Mbotu’s Zaire or even the Soviets how effective they were in policing the global diamond market to make sure they maximized profits and they will tell how good they were at their job. With the massive profits accumulated by De beers in the 19^th century Cecil Rhodes,thegrand father of all African war lords and the the founder of the De beers cartel,  plundered Zimbabwe all in the name of British civilization.

So how can anyone say that De Beers was good for Namibia and Botswana. Most of the profits in the diamond value chain come from  mining and De Beers protected the value of its assets ie the mines. In 1900 there were 1 Mcts of diamonds mined. Global diamond production peaked in 2005 at 176Mcts. So how can a product which has increased so enormously in supply maintain its  market value?  While commercially valuable deposits of diamonds  are very  rare, diamonds are nothing more than a semi-precious stone in terms of absolute scarcity. But diamonds  are certainly not  a semi-precious stone in terms of price.  What makes them valuable and what made Namibia and Botswana, as important global producers,  as rich as they are today is the very cartel that  competition authorities would like to destroy. The cartel engaged in what was voted the 20^th century’s most successful marketing campaign  ‘Diamonds are forever’ , diamonds are a girls’ best friend etc etc. This really worked and after World war II  De Beers convinced the average American that they had to part company with two months’ salary to show their intended that they really loved them. But perhaps even more stunning has been the incredible success of De Beers  in the 21^st century in convincing Indian and Chinese women in the merging middle classes that diamonds are to be preferred to gold and jade as parts of the wedding exchange. It is with this marketing success in emerging Asian markets that  De beers maintained the export value of Namibia and Botswana’s diamonds and hence the nation’s prosperity . 

Of course there is no longer a cartel in the diamond industry because there is no longer any need for the CSO because after 2002 De Beers embarked upon the ‘Supplier of Choice’ marketing strategy which saw the company move to those parts of the value chain where serious profits are made ie. Mining where it had been for over 120 years and into luxury marketing in a partnership with LVMH. If the reported published accounts of De Beers are to be believed then this was the biggest flop in the history of the diamond industry. Up till 2014 the company was reported to be losing money.  But there is no cartel in the diamond industry now because, as the IMF has recently written Botswana, the junior partner (Botswana owns 15% of De Beers) but dominant  supplier of De beers diamonds ( 65%),   is now the buffer in the global diamond market. When there is excess production there is no need for the old CSO to use up scarce working capital and buy up the excess when you get just Botswana to cut supply and do, in effect,  the same thing. De beers has declined from 80-90% of the world market for diamonds in the mid 1990’s to less than 40% now but it is still the dominant firm in the industry and its supposedly secret prices are the most important commercial artefact in the diamond market. Despite all of the apparent competitive trappings in the industry it remain highly concentrated and run by De beers which is a powerful and dominant oligopoly.

Namibia exports some of the best and most valuable diamonds in the world. If you look at the most Kimberly Process statistics the export price is amongst the highest in the world.In 2013 Namibia exported diamonds at an average price of US$550 per carat while Botswana was receiving only $137/carat. Those diamonds would certainly not be as anywhere as valuable as they are today had it not been for the De Beers cartel/market power  and its continued domination of the global diamond market and its assurance that the consumer continues to believe in the long term scarcity of diamonds.  So what may be true when you are the consumer of the products of a cartel is completely wrong when we are the beneficiaries of that cartel. So MrNdaalikoukule,  cartels are wonderful as long as you are not the receiving end of the cartel price.

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

South Africa Declares War on Namibia's Rural Poor

 South Africa declares war on Namibia’s rural poor

In 2014, South Africa gave notice to Namibia that it was going to impose what it claimed were internationally recognized standards on the huge and long standing trade in live cattle from Namibia. Namibia has long exported millions of dollars of live cattle to South Africa for fattening in feed  lots and for slaughter at abattoirs. For many it seemed at the time that South Africa was not serious and that the new standards were such that  Namibia could not possibly comply and that South Africa would not kill off a trade that was  had gone on for decades and was mutually beneficial for both After all Namibia’s exports provided their feed lots with more cattle that their rich agricultural sector could feed and we exported weaners which put relatively little environmental pressure on the Kalahari veld. It was possible for Namibia to have a much larger herd than if we were to feed these cattle ourselves or to import fodder from abroad for feed lots because weaners consume their mothers’ milk rather than grass.

Then suddenly South Africa pulled the plug on this trade by imposing much higher standards on cattle coming from Namibia than on its own. It  required Namibian cattle arriving in South Africa to be certified that they were free from Bovine Tuberculosis, Bovine Brucellosis, that they be treated against internal and external parasites as well as vaccinated against Infectious Bovine Rhinotracheitis and Anthrax. None of this was required of South African cattle. In 2014, the last year in which normal levels of trade occurred South Africa imported some US$48 million (N$550 million )of cattle, sheep and goats, almost entirely from Namibia.

So then why was South Africa so anxious to destroy a trade that had existed since long before independence. It is said that in international commerce there are two reasons for every action – there is the good reason and then there is real reason. The good reason is that South Africa wanted to bring its trade in beef into conformity with international standards of International Office of Epizootics which is the Paris based organization which rights the book of beef standards. But that begs the question of why now? The real reason for Pretoria’s actions arefar more complex and subject to considerable debate. There are at least two reasons commonly posited for why South Africa decided to impose these standards now. The first is that the South African beef farmers simply wanted higher prices and by restricting imports from Namibia the supply of beef would decrease and prices would rise. Beef framers are never known for their generosity towards consumers no to their foresight of its actions. The Red Meat producers Association which lobbied the government of South Africa  for these measures and Pretoria agreed to impose these fairly draconian measures on its close ally and neighbor Namibia.

This then raises the question of why the government of South Africa would agree to these measures when they knew it would hurt Namibia. The answer is unclear but trade experts suspect that the underlying cause is that Pretoria is becoming more and more annoyed with the restrictions that are imposed by the smaller SACU members including Namibia on the imports of South African poultry and milk and that this is merely a retaliatory measure. As far as  thishypothesis goes, it cannot be a retaliatory measure if no-one in Windhoek is quite sure why it is being done.

There is the increasing view that this is all a minor matter that largely effects the large white owned farms. According to Dr Anja Boshoff – de Witt, the Manager of Standards for the Namibian Meat Board 60% of the live cattle trade comes from  the communal areas and as result the decrease in the trade will effect the livelihoods of many low income Namibians. Moreover in 2014 farmers were receiving prices in South Africa prices that were reportedly 20% higher than in Namibia for the 160,000 animals that were exported in that year.

In March 2015 Namibia took the entire matter to the WTO, an unprecedented measure in Africa for two close neighbors that are both members of SACU, the customs union that should deal with such regional disputes. But SACU is a crippled organization which has what it needs on paper but has no functioning institutions to deal with this sort of a dispute or any other dispute for that matter. The last 2002 agreement was supposed to have a host of committees and agencies and in fact there was an Agricultural Liaison Committee in SACU but it ceased to function in 2010.

In July this year, following high level consultations, the media in Namibia proudly announced that there had been a concession from South Africa. As a result there is the commonly held view that the matter is now resolved but nothing could be further from the truth. This South African concession was not for weaners and was only for cattle going straight for slaughter which is a very small minority of the total volume of cattle exports. The trade figures speak for themselves. During July 2016, only 2 cattle were exported as opposed to 24 720 in the same month 2015.  During August 2016, 153 cattle were exported as opposed to 33 658 in the same month 2015. The government needs to act to come to an agreement with South Africa on the weaner trade as it is the rural Namibian farmers living in the communal areas who are paying the price of what is almost certainly a  trade war fought by regulation.

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

Namibia's New Diamond Trading Firm

Namibia’s new Diamond Marketing Firm

Several weeks ago a member of the Namdeb board asked me what I thought of the new ten year agreement between Namibia and De Beers. My very cheeky response was ‘Why don’t you give me a copy and I’ll tell you?’ Of course there was no way that the agreement would be revealed. It was an agreement that would be seen only by De Beers and a few government officials.It is normal business procedure that the contractual arrangements between the governments and De Beers aresecret  but the degree of secrecy in the diamond industrysimply beggars belief.

In comparison to Botswana, Namibia’s diamondindustry  has, by the exceedingly low commercial standards of the global industry, long been a ‘paragon of openness and transparency’  withNamdeb at least publishing its income statement and balance sheet. The equivalent company in Botswana, the 50%/50% De Beers/ Botswana partnership called Debswana has never published its accounts and neither the  parliament nor that country’s  Auditor General have any access to the most rudimentary financial accounts of the country’s biggest state owned enterprise. 

The new agreement between De Beers and Namibia stipulates that Namibia can sell up to 15% of its own diamonds through an independent local agency. This is proportionately more  than the original amount traded by Okavanago diamonds in Botswana  which originally  marketed 12% of national production of Botswana in 2012 is legally expected to grow to 15%  by the end of this year. The Botswana ministers MrKitsoMokaila has said he wants 25% of Botswana’s diamonds to be eventually marketed by Okavango,The Namibian equivalent of Botswana’s Okavango Diamonds is the recently created Namib Desert Diamonds (Namdia) which is a 100% state-owned company and potentially a source of considerable earnings for Namibia. It is estimated that Namdia will sell N$2.1 billion (USD150 million) in diamonds every year.  This is a considerable volume of diamonds and given that Namdia will almost certainly be buying its diamonds at a standard discount (normally 10% ) from the De Beers Price Book,  there is room for considerable profit for either the people of Namibia or the buyer, depending on how the diamonds are priced and sold . That Namibia benefits assumes a number of things which are not immediately given; namely that Namdia is run efficiently and on a sound commercial basis and that prices are set in such a way so as to capture the benefits of trading diamonds for Namibia’s people rather than  for those who may have connections.

At the moment we know almost nothing about how the government intends to market these diamonds. The minister Mr Obe Kandjoze has been quoted as saying that said that .“Namdia will for the first time in the entire history of the Namibian diamond industry be selling exclusively Namibian diamonds, with the primary objective of price discovery that will be used to inform government diamond policy, going forward.”

In Botswana the government has done precisely the same thing and  while it has not said so it is for ostensibly the same reason i.e. price discovery. The polite explanation is that both countries want price discovery which means that given that De Beers still sets the world price and most other producers tend to follow, a system of independent diamond auctioning would help these  countries  determine whether they are actually getting a fair deal or not for the diamonds they sell through De Beers.

If the intention of the government in establishing Namdia is price discovery then it will have a very difficult task.  De Beers sets its price by itselfand  in secret  and then on-sells to its siteholders and to the governments of Namibia and Botswana at a discount to the Price Book. Any auction will ultimately rest on that price. In some of the De Beers related companies such as Lucara, which also auctions diamonds supposedly independently in Botswana , the management uses the De Beers price as reserve price for its own auctions. In other words real price discovery is not possible as long as the central commercial artefact of the diamond industry remains  the De Beers Book Price. De Beers has long ceased to be a cartel  since 2000 and  it is now what economists  call a dominant, price leading oligopolist.

There is much to learn from Botswana’s experience with its recent marketing arrangements through Okavanago Diamonds. First,  Okavango is run by diamond professionals straight  from De Beers and hence is unlikely to ever stray too far from the parent. In some countries relatives of the president are given such plum jobs in these companies and in Namibia it is worth avoiding such tendencies as they give an unfortunate impression of entrenched cronyism. Second, there is a relatively open and transparent auctioning system in Botswana which assures that sales do not occur just to cronies of the government at discounted prices who then simply on-sell them at a much higher profit. But price discovery is for government, not for the public and so the prices remain secret. No doubt the Namibian diamond commissioner, Mr Kennedy Hamutenya,  who has recently been appointed as acting chief executive officer of Namdia, and himself a long time diamond professional, will  wish to emulate many of the better lessons from Botswana.

If Namibia is going to follow the Botswana model for Namdia then its buyers will not be obliged to beneficiate any of the diamonds they purchase from the company. This is unfortunate as beneficiation ( ie cutting and polishing ) will only be undertaken by De Beers siteholders. This in effect puts a tax on being a De Beers siteholder who cuts and polishes in Africa, which is becoming an increasingly rare phenomenon. As neither Namibia nor Botswana have the stomach to introduce policies that will make cutting and polishing thrive in Africa then it appears that the future will be in trading and there will only be a few jobs at the top.The jobs at the bottom will go to India.

Whether  diamond trading  becomes a vehicle for cronyism or a genuine asset  that will help Namibia’s people will depend on the rules that MinisterKandjoze and  MrHamutenya establish for Namdia. In an industry where transparency is considered to be merely a nice idea for children and  credulous politicians, and opacity is the general rule, one should not be overly optimistic.

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

Ricardo China and Compartive Advantage

China, Ricardo and  Comparative Advantage

Almost 200 years ago to the day the illustrious Scottish economist, David Ricardo wrote a theory that is to this day is taught, almost as Gospel,  to every first year economics student in Namibia, Botswana and rest of the world. In his famous theory of Comparative Advantage there were two countries, Portugal and England and even if Portugal is more efficient at producing say, cloth and wine than England it would be to the advantage of both countries if they were to specialize in that area in which the relative cost of production were lower. Bringing this from the early 19^th century to the 21^st century, even if China is absolutely more efficient at producing manufactured goods, it is in the advantage of both China and America if  China specialized in manufactures and America is services  and agriculture. The upshot is that even if the Americans are less efficient than the Chinese they will still have jobs.

Nice theory, but to theear of the average businessman who actually understands  comparative advantage it sounds like the commercial equivalence of the tooth fairy. But no businessman or economist will tell you publicly that they think that this orthodox theory of trade is simply so much rubbish because to do so would leadto  beinglabelled an ignoramus. If you are better at everything and you are big enough to do so, then you just produce everything and wipe out your less efficient competitors- that is, after all,  the way of the market! Ricardo was, amongst many things a very astute businessman like so many economists of his day. Unfortunately economists today rarely read Ricardo, know little about business and rely on these orthodox theories so they can help the children and the politicians sleep at night.

Ricardo argued that if workers in the city of Liverpool are more efficient at producing everything in comparison to London then manufacturers will simply move to Liverpool and wipe out the less efficient London based competitors.  And yes, the businessman would say that this makes commercial sense. But in  Ricardo’s early 19^th century world moving to Liverpool is not the same as moving to Portugal. Ricardo’s theory which is the basis of all orthodox theory of trade  was based on the assumption that investors would not move from Britain to Portugal which may well have been valid at the time. Portugal was just too alien for the average 19^th century Englishman. Fast forward 200 years and the assumption that investors will not move from one country to look for higher levels of efficiency looks like so much nonsense.

If capital is hyper mobile, as it is today, there is no reason to believe, as Ricardo himself would have argued, that countries will specialize in the area in which they have a comparative advantage. China, a nation of 1.3 billion people has an absolute cost advantage in just about everything and is large enough is perfectly capable supplying everyone else in the world simply because it is cheaper.

The new right in the developed world eg Trump in the US and Le Pen in France have tapped into a deep well of anger amongst the once prosperous high school educated western working man who has seen their real wages fall or stagnate as a result of global trade, automation and fierce competition form  low cost labour. It is these that have been the bulwark of support for the new-right. They know that China is now big enough to produce virtually everything the world needs or more accurately, has been convinced to want and their jobs and prosperity is on the line.

And while modern free market economists have never lost an opportunity to remind the world that globalization and liberalized trade have helped  lift  hundreds of millions of Chinese workers out of poverty, they are less likely to even mention that globalization also lifted their employers from the status of multi-millionaires to billionaires. It is the combined effect of diminished prospects for working people in the developed countries combined with deep resentment of the massive wealth accumulated by those at the top who benefited that is at the heart of the right wing reaction to free trade and globalization.

But even those, like the present writer,  who recognize that freer trade has been of benefit to large swathes of humanity,  the so-called ‘new generation trade agreements’currently being negotiated as the Trans-Pacific Partnership risks giving enormous powers to large firms to litigate against governments that change laws that undermine their profitability. If governments introduce laws on environmental or health matters the investor to state dispute settlement mechanisms allow companies to sue governments for changing laws. This is a step too far as it is a massive intrusion on the right of democratic societies to pass laws that they deem to be in the national interest. This constitutes a shift in power in favor of big business and has little to do with little with any common understanding of a freer trading system.

Unless the comfortable elites of the developed world who have benefited from 35 years of free market economics shift their thinking and start to advocate and aggressively drive a more just and equitable globalization then the writing is on the wall and we are in for trouble. Finally there is starting to be some change of thinking and that very bastion of reaction, the International Monetary Fund  has become open to new ideas about globalization under the leadership of Director Christine Legard and is showing the way about thinking about a new and fairer world order. Change will come one way or another but whether it will be ordered change or follow a period of great human ugliness is yet to be determined.

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

We're not broke - but SACU is broken !

‘We’re not broke’- but SACU is broke(n)!

Last week at the 17th Annual Bank of Namibia Symposium, the Governor of the Bank of Namibia Mr Ipumbu Shiimi, in response to a question from the media emphasized that ‘Nambia is not broke’. For those skeptical souls in the audience who don’t immediately believe everything they are told by people in authority this of course raised the question  of what  does ‘broke’ actually mean. This is especially relevant  when the country is running a record budget deficit of 8.3% GDP and has a current account deficit of what is above 13%.  Normally, ‘broke’  means that you have no more money left and you cannot spend any  more. On that basis Namibia is not broke, it can continue to spend for a while as long as the government continues to borrow in the domestic economy or from the foreign markets as it  did with such a vengeance in the last quarter of 2015. The Governor is right, we are not broke but we are certainly digging an ever bigger hole for us to climb out of when someone in government finally realizes the basic truth that small developing countries cannot indefinitely spend more than they earn.

The Governor defended the government’s position by saying, quite correctly,  that the current budget deficit is a result of a decline in SACU revenue and that government will need to rein in spending temporarily. But even I, a mere professor,  knew in the middle of last year that this decline in SACU revenue was coming this year and certainly if I knew, Mr Schlettwein, the Finance Minister  knew more and knew even earlier. And yet government spending did not decline  to deal with the loss of revenue. 

SACU revenues are what economists call ‘pro-cyclical’ which means that  they fluctuate in line with  the trade cycle and the revenues are paid two years in arrears so anyone who knows what is happening in South Africa will be aware of what Namibia has in store two years later. We are now desperately dependent on the transfers we get from Pretoria through SACU– 33% of Namibian government comes from the largesse of South Africa because the Namibian government could not readily make up the lost customs revenues if SACU collapsed and it had to impose duties on everything coming into the country.

 

This is by no means the first time  as we have had one of these cyclical downturns in SACU several years ago . In 2011 SACU revenues owed to the four BLNS countries ( Botswana. Lesotho Namibia and Swaziland) dipped disastrously as a result of the decrease in the size of the SACU customs pool. This was caused by the global economic crisis of 2009. Swaziland, arguably the country that is most dependent upon SACU  went into  an economic tail spin. What we are seeing now in 2016/17 is a repetition of 2011 with a decline in South African imports which contributes approximately 80% of the revenue  to the customs pool but South Africa being by far the biggest member of SACU only gets 20% of the revenue the share of the pool depends upon the share of intra-SACU imports and South because it imports so little from the smaller SACU countries. The decline in the size of the pool is a result of economic events around the world but also because of South Africa’s very slow growth rate.

Normally well informed sources say that by 2018 the SACU customs pool will have rebounded strongly to ZAR60 billion and, , we in Namibia will be able to go on spending beyond any sustainable levels as we have up to now. Namibia’s fiscal position is now precarious. It has, as its biggest source of revenue, the SACU revenue sharing formula which is not only opposed by the government in  South Africa and has created serious fluctuations in government revenue. The down-side is that if South Africa had its druthers we certainly would be getting much less than we are getting now.

While reforming the basis upon which SACU revenues are distributed amongst its members is politically fraught and will still take a number of years there is another task that finance ministers should address and that is, at least in theory, politically easier. There is a need to for MrSchlettwein and his other ministerial colleagues to reform SACU and iron out the huge year-to year fluctuations of customs receipts by creating a revenue stabilization fund within SACU. That would mean that members would get only a portion of what is owed them in good years and this would be made up in bad years from the Fund. Even if other SACU members did not accept such a proposal there is nothing stopping Namibia from developing a stabilization fund unilaterally.

 

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