If you were to ask most Namibians what is the main source of government
revenue they would tell you that it is the profits and taxes on the diamond
industry. They would be wrong. Many would also tell you that that the main
source of revenue is actually import duty revenue from the Southern African
Customs Union (SACU) which is only partially right. By 2014 SACU revenues
derived by the government of Namibia was estimated at 37% of total government
revenue. This is down from the peak of 47% of Namibian government revenue in
2007.
But the problem is that most of that
money is not from customs duties raised on imports coming into Namibia from
outside the customs unions. A customs union like SACU exists when several
countries get together and decide to set one 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 USA, the EU or China and the normal way to distribute this
revenue it in a customs union is based on what is called the ‘destination
principle’. If 5% of total SACU imports went to Namibia then Namibia would get
5% of revenues. But SACU is special and has one of the strangest revenue
sharing formulas of any customs union in the world. Under the SACU revenue
sharing formula tariff revenues are distributed amongst the five members based
on the share of intra-SACU imports. At the end of each year the five SACU
members get together and decide what was imported the previous year and then
share it out based on a formula that means that 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, some 80% of SACU customs
revenue go to the four small BLNS and South
Africa which has 53 million people and imports the vast bulk of SACU’s foreign imports
but gets less than 20% of revenue. To say the least the South African treasury,
unions and much of civil society hate this arrangement which has remained more
or less in tact since the apartheid era, because they are in effect transferring about
ZAR 20 billion a year to treasuries of the four BLNS states with Botswana, in
particular, having a higher GDP/capita
than South Africa.
Looking at from Namibian perspective we are subsidized to import and
not to produce. And on this basis SACU is extremely successful because Namibia
and the other BLNS states have bloated governments but produce nothing while
the allowing South Africa to produce virtually everything that is consumed in
the region. The only things produced for export
in the BLNS states are minerals that generate what economists call high ‘economic rents’
and preference dependent products like
sugar, clothing, beef,fish, grapes etc.
But suddenly something very new has happened in Namibia’s trade.
From being a very minor trading partner where a few consumer goods came in from
Botswana , it has suddenly become Namibia’s biggest destination market for its
exports at somewhere close to $N11 billion in 2014. Those exports are almost
entirely Namibia’s diamonds. In the past diamonds from Namibia used to go to De
Beers head office at Charterhouse in London and sold to De Beers sightholders.
But in the 2011 Marketing Agreement between De Beers and Botswana, Botswana finally got from De Beers precisely
what they had been asking for a very long time and De Beers moved its sites
from London to Gaborone. Diamonds produced in the ‘De Beers zone’ i.e Botswana
Namibia, South Africa and Canada would be 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 Batswana are
rightly proud of this development. This
is certainly Botswana’s rightful place as the world’s largestmined diamond
producer.
Namibia as a good neighbor, that also seeks to beneficiate its
diamonds, should rightfully support Botswana’s beneficiation efforts. But right
now Namibia and the other SACU members are paying a subsidy to Botswana for
every dollar of Namibian, South African and Lesotho diamonds that areexported
to Botswana because of the way in which the revenue sharing formula is written.
The subsidy stems not from a commercial trade relationship where 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 intra-regional trade the
SACU formula creates perverse distortions and incentives in behavior. From the
perspective of the government revenue Namibia should be opposed to any exports
to its SACU neighbors – whether it is weaners to South Africa or diamonds
because this decreases Namibia’s SACU revenue.
One way to deal with this is simply by modifying the SACU revenue
sharing formula. Gaborone should not expect a subsidy by virtue of its
agreement with De Beers and should agree at SACU 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 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 actually were in
any given year and the value of diamonds would only complicate matters. But
diamonds are merely 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 subsidizes 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 a Namdebexports a diamond to
Botswana the Namibian treasury gets less money. This is what economists
correctly 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. Next week- how to reform SACU and survive.
