Namibia’s $N2.2 billion  diamond subsidy to Botswana

A wonderful thing has happened to Botswana over the last three years. As a result of its suite of agreements with De Beers and the government of Botswana signed in 2011 Botswana rather than London has become the centre of De Beers diamond aggregation activity. It is right and fitting that Africa’s biggest producer of diamonds and the world’s second largest by value should now become the centre of the trade in Africa. It is something that all Africans should celebrate. All diamonds produced by De Beers have to be sent to Gaborone. This includes Namibian and South African diamonds as well as those produced in Canada.

As a result of this De Beers- Botswana agreement however all  Botswana’s neighbors in SACU are, based on 2017-18 data,  paying a massive subsidy of ZAR 3.3 billion to Botswana. Botswana is the richest member of SACU and is being subsidized. This includes some of the poorest countries in SACU such as Lesotho which is  losing some ZAR 750 million because of the diamond trade.  

Botswana has become the third biggest export market for Namibia. In 2016 Namibia exported N$ 10 billion to Botswana. Much of this was diamonds that previously went to London. And for every dollar we export to Botswana or any other SACU member we lose money from the SACU customs pool. Why, you ask? The SACU customs revenues that each country gets from the SACU customs pool depends on the size of the pool and on the share of intra-SACU imports. In other words the more you import from say South Africa the more revenue you get. This may help explain why so many comfortable and relatively well paid servants are in no hurry to assure we produce more and provide jobs.

Of the many strange economic ideas invented by man,  the SACU revenue sharing formula must surely rank high amongst them. Countries are subsidized to import essentially from South Africa. The more you import from SA the more money you get and the more jobs SA has. But if  Botswana imports more diamonds from South Africa and Namibia then it will be richer. Botswana has gone from getting 30% of all SACU revenue before the De Beers agreement to getting 36% based on 2017/18 results.

In a recent paper sent to both SACU and the Namibian Ministry of Finance called ‘Unintended  Consequences’ the present  writer with Dr Nyambe and Dr Kalihowa of UNAM have calculated the biggest loser  of the Botswana- De Beers marketing agreements is Namibia which based on 2017 data will lose $2.2 billion in revenue as a result of the diversion of trade from London to Gaborone. For those not accustomed to such large numbers what this means is that Namibia would be able to pay the entire budget of NUST and UNAM if the trade would revert to the previous situation where we sent Namibian diamonds to London.

Normally well informed sources who have access to the De Beers-Botswana Agreement indicate that legally Namibia, or any other country,  has the right to  step away from this agreement if it so wishes. Such a measure would damage Botswana and undermine its rightful  attempts to beneficiate and aggregate diamonds. More importantly it is completely unnecessary as there are several ways to deal with this that would allow Botswana to continue to be Africa’s aggregation centre and not have an effect on SACU revenues.

The first way is for SACU members to agree not to include diamonds in the calculation of intra-SACU imports but this would create a precedent. For the small SACU members the current formula, which is such a large part of government revenues  is sacrosanct and they will do nothing that undermines that formula. So politically it would be hard to reach consensus.

Another way to do this to tell De Beers and Botswana that these completely unintended effects were not foreseen and that while Gaborone should remain the aggregation centre for De Beers diamonds ways should be developed  around the ‘SACU effect’ the easiest way to do this is to first send the diamonds to London ( or at least outside SACU ) and then send them to Gaborone. This would have no effect on each country’s share of intra-SACU imports and would add slightly to De Beers costs.

Gaborone, like everyone else in the region, is fairly desperate for revenue and might dig in its heels, even though there was not the government of Botswana’s intention of obtaining a  SACU subsidy when it shifted aggregation  from London. But now that it has a subsidy it will not be happy to give it up. In that case Namibia has the legal right to walk away from the agreement and this would be a serious blow to Botswana’s development effort.

The movement of diamond aggregation to Gaborone is what Africa wants- more economic power to mineral and gem producers. That SACU members would even think of ending it shows once again how distortionary the SACU customs revenue sharing formula is and how absolutely essential reform  of the formula must be for the sound development of the region. The South Africans have long argued that it should become a development formula and not an apartheid era subsidy to the BLNS. They are absolutely right. 

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