Namibia's position in the Southern African economy
"Opportunities and challenges for the future"

By Eline van der Linden
TRENDLINE Economic & Management Services

Commissioned by the Royal Netherlands Embassy, Windhoek
November 2000

Introduction
1.1 For Namibia to exploit the opportunities created by the opening up of the regional market in an effort to reduce its overall trade balance deficit (which includes a trade deficit with SADC of N$4.2 billion) much needs to be done. The export basket requires diversification towards the export of higher value manufactured goods. Increased local value adding in the resource sectors of the economy - mining, agriculture, fishing - and the establishment of other manufacturing activities is a prerequisite for Namibia's successful participation in regional economic integration.
1.2 Namibia has allowed itself to go with the flow in the regional economic integration process and has not made the necessary strategic choices. While the onus is on the private sector to take advantage of the opportunities offered by the various preferential trade agreements, the business community is not actively involved in the negotiation of these PTA's, let alone well informed on the product and country specific access conditions. Regional economic integration is not an end itself and should thus be closely guided by the prevailing economic realities and the needs of the private sector for trade facilitation. Namibia should limit, focus and direct its participation in the various regional trade groupings: SADC, COMESA and SACU.
1.3 The recently concluded EU-RSA Free Trade Agreement has provoked Namibian concerns about revenue losses and increased competition. As much as these concerns are real, they should be viewed against the bigger picture of globalisation. Namibia's (and SACU's) commitment to the WTO trade liberalisation process is a continuous force in this regard. Irrespective of an EU-RSA FTA, or any other regional trade liberalisation effort, the Namibia Government will have to prepare itself for lesser revenue from customs duties (currently channelled through SACU and contributing over 37% of total Government revenue) and take some candid decisions on future revenue sources and expenditure levels. At the same time, the business community will need to become more competitive and diversify its export basket through an expanded industrial base to reap the benefits from regional integration and globalisation. Public-Private Partnerships are an important tool in this economic adjustment and rejuvenating process. Furthermore, a well directed intervention by the donor community in the form of technical and financial assistance to fiscal, trade and public sector reform, combined with supply side measures in support of productive sector development will be well placed.
1.4 While at this point in time the regional market is important for a few product groups only, the potential it offers as a destination of exports and source of cheaper inputs for the emerging industrial sector should not be underestimated.

Situation Analysis
2.1 The structure of the Namibian economy has not changed considerably over the past years in terms of the contribution of primary, secondary and tertiary activity to the Gross Domestic Product. A continued strong and even slightly increased reliance on the primary sector for economic growth can be observed for the period 1993-99. This trend goes against the expectations from the economic diversification drive that characterised this period. Much effort has been placed by Government and private sector to develop industries and the services sector in a move away from the direct utilisation c.q. export of primary resources in an unprocessed format. Despite all intentions of downsizing, commercialisation and privatisation, the public sector continues to be a dominant player in the economy, in 1999 contributing some 22% to GDP, taking up 30% of final consumption expenditure and contributing 45% to total fixed capital formation. Today there are 25 parastatals operational in Namibia.
2.2 The performance in most sectors has been volatile during 1993-99 and those sectors with steady upward trends recorded low growth rates as such disqualifying themselves as 'growth sectors'. The tourism industry is generally regarded as a growth sector but this cannot be confirmed by the National Accounts as there is no dedicated tourism account. Overall the economy recorded a positive average growth rate of 4.4% annually during 1993-99.
2.3 The trade performance of the country shows a different picture. The terms of trade are rapidly deteriorating, reflecting the widening gap between 'proceeds from exports' and 'expenditures on imports'. The excess of imports over exports has become progressively larger as a proportion of GDP during this period, from 5% in 1993 to 12% in 1999. This trend can be attributed to the continuous devaluation of the Namibian Dollar (which is at par with the South African Rand), the relative faster growth in import volumes compared to export volumes and the unbalanced trade pattern of the export of mainly unprocessed goods against the import of consumer and capital goods.
2.4 The main contributor to export earnings are ores and minerals (40%), with diamonds as the key commodity, followed by raw and processed fish (22%) and services (20%). The export of animals and animal products contributed 12% to total export earnings in 1999 and other manufactured goods (excluding fish and meat products) 5%. Ores and minerals are exported to overseas markets and so most much of Namibian fish and meat.
2.5 Namibia remains closely linked economically to the South African economy in various dimensions, namely:
· trade - with 80% of exports into the region directed to South Africa and 90% of regional imports coming from that country which is equivalent to some 75% of total imports. On the policy front, Namibia's trade policy is largely determined by its membership to the Southern African Customs Union (Botswana, Lesotho, Namibia, South Africa and Swaziland) of which South Africa is the dominant member;
· financial sector - demonstrated by, inter alia, the direct monetary linkage through the pegging of the Namibian Dollar to the South African Rand, membership of the Common Monetary Area and double listings on the Namibian Stock Exchange (NSX) and the Johannesburg Stock Exchange (JSX);
· private sector ownership - many of the large retail chain shops are owned by South African companies and so are there numerous ownership relations between Namibian based financial institutions (including commercial banks) and their South African counterparts.

2.6 Economic relations with other neighbours are limited. Although Namibia has a Preferential Trade Agreement (PTA) with Zimbabwe since 1994, private sector trade transactions under that agreement have been minimal, mainly due to the adverse economic conditions in Zimbabwe. Interactions between the Namibian and Angolan private sector take place mainly in the form of cross border trade at Oshikango (where an Export Processing Zone is operational) and informal trade along the border in livestock and basic commodities. 
2.7 With the exclusion of South Africa, Namibia's trade with the Southern African Region is marginal. Although significant for some product groups, total imports from SADC (excluding South Africa) represent less than 1% of total imports and SADC (again excluding South Africa) is destination to nearly 5.5% of total exports. These figures jump up with the inclusion of South Africa to 83% for imports and 38% for exports. South Africa is an important export destination for the meat, fish, beverages and printing industries and for precious stones, metals and jewellery. Angola is an important destination for beverages (mainly beer and cold drinks), vehicles, electrical goods, furniture, household consumables and basic foodstuffs. In fact, Namibia's trade balance with SADC shows a deficit of N$4.2 billion. This trade performance is in sharp contract with the identified 'theoretical' market potential offered by the SADC market of some 200 million people generating an estimated combined GDP of US$176 billion.
2.8 Government is mainly concerned with the creation and improvement of the enabling environment for regional and international trade. The onus lies on the private sector to take advantage of the opportunities that are offered by the various treaties and preferential trade agreements. Direct assistance to the private sector is focused on (a) technical support to improve the country's competitiveness, (b) assistance for promotional activities and exposure and (c) the operationalisation of development corridors as part of the Spatial Development Initiative (SDI) .
2.9 Namibia has no formal trade policy. Its participation in the various trade forums, regionally and internationally, are guided by the following notions:
· country's endeavour to create and maintain just and mutually beneficial relations among nations;
· the identified need to be responsive to globalisation as a powerful trend and world-wide economic liberalisation;
· the need to extend the country's economic space to improve the viability of domestic production and trade in goods and services and as an important tool in the country's economic diversification drive;
· the opportunities regional co-operation and integration create i.t.o. joint trade negotiations with the WTO and other more powerful economic blocks such as the European Union and the USA.
2.10 Namibia is a full member of two regional economic integration groups, namely, SACU and SADC. SACU is a customs union between Namibia, Botswana, Lesotho, South Africa and Swaziland. The SACU partners have made a joint offer to the SADC in terms of the implementation instruments for the SADC Protocol on Trade. Namibia further holds membership of COMESA but due to its derogation status stemming from the fact that as a member of SACU it may not unilaterally extend trade preferences to third countries, Namibia does not enjoy the full preferential access benefits under the COMESA FTA.

The country has also participated in the Cross Border Initiative since its inception and continues to use the facilities under the new agreement with COMESA (RIFF) to fast-track trade liberalisation and investment facilitation measures.
2.11 Industrial development - which is inter alia to contribute to export diversification - is promoted through the following key interventions: Export Processing Zones regime, construction of Industrial Parks country-wide, construction of Common Facility Centres, Special Industrialisation Program , Spatial Development Initiative Program (see above) and the SME Development Program (support services, training, SME modules/workshops, etc.).
2.12 Foreign investments are guided and guarded by the Foreign Investment Act of 1990 which gives investors the required confidence to invest in the country, provides for the repatriation of profits and the protection of investments with an option for international arbitration and guarantees investors against expropriation.

Topical Issues
3.1 The regional economic integration process in Sub-Sahara Africa has accelerated during the past few years with great strides and efforts placed on the creation of building blocks towards Africa-wide integration. Were the Lagos Plan of Action and the Abuja Treaty merely placing the concept of economic integration in an African context, both SADC and COMESA are forging ahead with the implementation of free trade areas in their respective blocks. At the same time, the SACU members have been negotiating a new dispensation for the management and administration of the customs union. In Table 1 the status and main features of these three important developments in regional economic integration are highlighted.
Table 1: Status of Namibia's Regional Economic Integration Efforts, 2000
SADC COMESA SACU
SADC Trade Protocol signed in 1996 with its implementation modalities adopted at the SADC Summit of August 2000 in Windhoek. Namibia has ratified the Trade Protocol but has as yet to deposit the instruments of implementation with the SADC Secretariat. A multi-speed approach is foreseen in three different product categories:· Immediate liberalisation;· Gradual liberalisation, over a period of 8 years;· Sensitive products, over a period of 12 years. SACU has made a joint offer in terms of the three product categories. This offer covers the concerns of Namibia. Implementation of the tariff liberalisation program will commence upon ratification by 2/3 of the members and their deposition of implementation instruments. It should be noted that 3 of the 14 SADC member states are not participating in the SADC FTA, namely, Angola, DRC and the Seychelles. To date only South Africa and Mauritius have ratified the Protocol and deposited their instruments with the SADC Secretariat. COMESA launched a Free Trade Area in October 2000.Namibia enjoys derogation on its obligations to COMESA up to October 2001. Under this derogation Namibia does not extend trade preference to its COMESA partners though enjoys preferential access into the COMESA market at tariff levels immediately prior to the establishment of the FTA. The Government's stated strategy is that of a cautionary approach to its membership of COMESA. Namibia and Swaziland are the only two members of SACU that participate in the COMESA. The re-negotiation of the SACU Agreement (SACUA) has been ongoing since November 1994. Although agreement has now been reached on the main components of the new SACUA - i.e. the establishment of a SACU Secretariat, a new revenue sharing mechanism to distribute the customs and excise duties collected through a formula applicable to all member countries, common policy framework for agriculture, industry, trade and tariffs, competition and anti-dumping - not all details have been sorted out. The location of the Secretariat still needs to be decided and although agreement has reportedly been reached on the components of the RSF (i.e. basis = value of imports with compensation based on the price raising effect of the Common External Tariff (CET)) the formula still needs to be tested with real trade data inputs to determine the actual shares of the Common Revenue Pool. Since a package approach has been taken, all has to be negotiated and agreed before a new SACUA can be drafted for ratification by the members. South Africa has been seen to delay the SACU re-negotiation process to allow for a conclusion of the SADC FTA and EU-RSA FTA negotiations, prior to SACUA. Under the new SACU dispensation the concentration of powers in the South African Government to run the SACU affairs is set to discontinue. A SACU Ministerial Meeting is reportedly planned for November 2000.

3.2 The key obstacles encountered in these processes of regional economic integration are identified as follows:
SADC The definition of the Rules of Origin and the establishment of an enforcement mechanism are holding up the ratification of the SADC Trade Protocol and deposition of implementation instruments by the remaining 9 member states. Only South Africa and Mauritius have ratified and deposited their instruments.
Namibia has initiated a study on the textiles industry, investigating the impact of the South Africa proposed double transformation requirement - as compared to the originally intended single transformation - to qualify for origination in SADC. For Namibia the concerns are mainly related to future economic activity in textile manufacturing.
COMESA Namibia regards itself bound by its commitment under the existing SACUA not to enter into bilateral preferential trade agreements with third parties but rather await the new SACUA under which SACU-wide bilateral PTA's are foreseen. It should be noted, however, that South Africa did not observe this commitment when entering into a bilateral PTA with the European Union. The derogation will run out by October 2001 and before such time, Namibia will need to decide whether or not to go along with the trade liberalisation process under the COMESA flag. 
SACU The drawn out negotiations on a new SACUA are putting a strain on the Namibian Government and the economy at large in the following ways:
· considerable financial resources have been and continue to be allocated to the SACU negotiations in terms of meetings, travelling, accommodation, consultants and officials' time opportunity costs;
· the uncertainty regarding future SACU revenues hampers proper financial planning. SACU revenues will go down if the pay-outs are to be directly linked to import values and the price raising effects from the common CET, elements reflected in the latest proposals on a new RSF. Namibia has not developed a strategy as how to deal with such a reduction. This is of particular concern in view of the strong reliance on revenue from SACU for the financing of Government operations (37.4% in 2000/2001);
· the uncertainties surrounding the new SACUA negatively affect Government's policy credibility in the trade sector. Moreover, private businesses are not given a chance to prepare for the new SACU regime and anticipate the opportunities created (e.g. in the long-awaited areas of competition policy and unfair trade practices).
3.3 By default has Namibia become party to the EU-RSA Free Trade Agreement. South Africa vigorously pursued and concluded this bilateral trade deal in lieu of the concurrence required as per Article 19 of the SACUA from the BLNS countries. And although the BLNS are no contracting parties to this FTA, the porous nature of the Namibian borders implies that goods entering the South African market under the FTA may easily end up in Namibia.
3.4 Namibia and the BLS will be affected by the EU-RSA FTA in different ways. For one, the Common Revenue Pool for customs and excise receipts will shrink, leaving lesser funds for distribution among the SACU members. A '98 study by IDS/BIDPA estimated the overall impact at R2.9 billion while a more recent study by the South African Foundation ('99) set the revenue losses for the BLNS at R3.5 billion. Although these projections are clouded by the inconclusive status of the Revenue Sharing Formula under a new SACUA, the estimated revenue impacts are of such magnitude that they should be taken serious. 
3.5 Other anticipated impacts of the EU/RSA FTA are of a more dynamic nature in terms of increased import and export competition for the products listed in Table 2. Import competition refers to competition experienced by Namibian producers from products of EU origin entering the Namibian market via South Africa. Export competition is experienced by Namibian exporters from exports of South African origin in the EU market or alternatively from exports of EU origin in the South African market.
3.6 Moreover, two of the more vulnerable, emerging industries show significant sensitivity to the implementation of the Agreement, namely, the horticultural and ostrich meat industry. Red meat is excluded from the FTA.
3.7 Of key concern is not the increased competition per se, but rather the absence of a levelled playing field. The EU extends significant producer subsidies to the agricultural sector.
3.8 Furthermore, the medium- to long-term structural changes in the South African economy (e.g. more competitive production, diversification, discontinuation of certain product lines) are likely to affect the Namibian economy. This may produce positive spin-off's due to the accelerated economic growth of the South African economy and Namibia's intimate linkage to that economy. It may also produce investment diversion towards the now more competitive and attractive South African economy.
3.9 Namibia and the other SACU partners have been invited by the EU and South Africa to submit proposals for assistance to minimise the adverse impact of the EU-RSA FTA. To date Namibia has not responded to this request.
3.10 The lack of consideration for the fiscal effects of the on-going trade liberalisation, not only in regional context but also in respect of the WTO tariff phasing down schedule, is alarming. Irrespective of the final format of the SACU Revenue Sharing Formula, the implementation of the SADC FTA and the EU-RSA FTA, the revenue from customs and excise duties is likely to drop in the near future. The dynamic positive effects of trade liberalisation i.t.o. increased economic activity may compensate for this to some extent, though not in the short-term. As such, the Namibian Government must find alternative sources of revenue and/or reduce Government expenditure. In the draft second National Development Plan no reference is made to this so much needed strategic intervention.

Prospects for regional economic integration
Strengths Weaknesses
Due to its membership of SACU, Namibian business is already exposed to the strongest economic force in the region and this has introduced a relatively high level of competitiveness and standard of production. To open up the economy to imports from the region should therefore not create too much stress for Namibian producers; Namibia belongs to the group of relatively more developed economies in the SADC and COMESA groups of countries; Namibia's public finance sector is relatively well managed providing sufficient space for trade liberalisation efforts (provided that financial planning on revenue diversification is undertaken, see next block). Much of Namibian exports are destined for overseas markets where they fetch premium prices. There would be no point in re-routing these exports to the regional markets. Moreover, there is a large degree of similarity in the economic production structure of members to SADC and COMESA restricting the benefits of trade; Regional economic integration efforts are not guided by a consolidated trade policy and related strategies. First and foremost such policy should limit, focus and direct the participation of Namibia in the various trade forums as guided by the private sector needs for trade facilitation. Namibia has no immediate access to advanced economic modelling tools to project the impact of the various trade co-operation agreements and scenarios; No consideration is given to the revenue impact of trade liberalisation nor strategies devised to diversify the revenue basis. There are no clear lines of responsibility between the Ministry of Trade & Industry and the Ministry of Finance in the trade negotiations. Conflict of interest: revenue preservation vs. trade creation and economic development at large? Ministry of Trade & Industry suffers from on-going "brain drain" with just trained staff leaving for greener pastures in or outside government. The area of trade policy formulation is becoming increasing specialised and requires well trained staff; Trade promotion activities (direct support to exporters) are limited and the 1998 formulated Export Development Strategy has still to be implemented. To outsource this function to a private sector based entity would be a preferred option; Customs officers are not well trained in trade management to ensure the effective implementation of the various schemes, in particular in relation to the enforcement of the SADC FTA rules of origin; Private sector is ill-informed about the trade opportunities provided under the various preferential trade arrangements and there is no standing mechanism in place for on-going consultations with the private sector on trade negotiations; Private sector does not take an active interest in regional economic integration and the regional market, with the exception of South Africa, is not an important market for imports and exports; There are no targeted incentives in place to encourage private sector to explore the Southern African market for alternative sources of inputs and destination of exports.

Opportunities Threats
Both existing and emerging industries can access the larger economic space created by regional economic integration; Increased competition and access to cheaper sources of inputs may support the economic diversification drive and improve on industrial efficiencies; SDI development may open up new transport routes for both commercial and tourism traffic; Trade liberalisation may provide the impetus for more fundamental tax reforms and review of expenditures; The new SACUA will provide for more democratic decision-making in the customs union. Namibia's interests in SACU will be represented in a more balanced manner; The Trade & Investment Development Programme (TIDP), funded by the EU, may provide the necessary technical assistance to build adequate capacity for trade policy formulation (based on proper research and analysis); Teaming up in regional blocks can assist a small country like Namibia to more firmly place its issues on the international trade agenda; Public-Private Partnerships (PPP's) may be a powerful tool in the utilisation of the opportunities offered by regional integration and the direction of trade facilitation and promotion efforts. Continued political instability and war in various parts of the Southern African Region; Continued deterioration of the economic situation in some of the SADC member countries, whether or not linked to political instability and war; Private sector is not participating in the regional economic integration process and does not utilise the opportunities offered; Namibia continues to "go with the flow" and does not make clear, strategic choices in the regional economic integration process; South Africa continues to exercise its economic power to the detriment of industrialisation, infant industries and economic diversification in the rest of the region; The economic integration process does not move fast enough resulting in the region lagging further behind global economic developments; In the absence of 'agencies of restraint' participating countries re-instate tariff barriers in times of adverse economic conditions; Africa continues to be marginalised in the world economy and regional economic integration efforts cannot halt this powerful, on-going trend ;No closer links between public and private sector (PPP's) are established in the trade arena.

4.1 The vehicles for economic integration are available to Namibia - SACU, SADC, COMESA - and it is now up to the Namibian Government and the private sector to make strategic use of the facilities and resources. In a first step towards this objective, a Namibian Trade Policy needs to be formulated, based on proper research and analysis. The absence of a robust economic model for trade policy simulation is a serious shortcoming in the present policy-making environment and should be addressed as a matter of priority. 
4.2 Another area of concern that requires immediate action is the role of the private sector in the regional economic integration process. The organised private sector, i.e. chambers of commerce, trade unions, professional and sector associations, appear to have inadequate capacity to engage in an on-going dialogue with Government on the strategic choices to be made in regional economic integration. The advocacy role of the organised private sector needs to be strengthened. 
4.3 Much is expected from the EU financed Trade & Investment Development Programme 2000/2002 with capacity building interventions in both the Ministry of Trade & Industry and the Namibia Chamber of Commerce and Industry. However, the resources directed at the private sector are limited and may need to be supplemented by other initiatives. The private sector needs to take charge of the process for regional economic integration to make a valuable contribution to the so much needed diversification of the Namibian economy. In addition, supplementary resources may be required for the development of a trade policy analysis model and more broadly, a useful model for the Namibian economy as a whole. Such forecasting capacity will assist in national development planning.

4.4 While it is appreciated that South Africa is under immense pressure to deliver on the economic front, the lack of openness towards its long-standing trading partners in the SACU cannot be justified. The conclusion of a new SACUA does not appear to be a priority for the South African Government, contrary to its dedication to the conclusion and implementation of the EU-RSA FTA and the SADC FTA. For Namibia, and the BLS, the continuation of the present SACU regime is not conducive to the desired industrialisation and diversification of their economies. In fact, many of the current provisions hamper such development. It is therefore opportune for Namibia that the SACU negotiations are concluded as a matter of priority. The alternative of breaking away from the union has not been given serious consideration by the Namibian Government but such scenario may require investigation if a new SACUA does not come into existence in the next few months. 
4.5 Namibia may further require assistance to deal with the impacts of the EU-RSA FTA on its economy.

4.6 Should a multi-dimensional approach be taken towards the minimisation of any adverse impacts of the EU-RSA FTA, targeting both the pubic and private sectors, the entire trading community stands to benefit. A stronger competitive edge will not only "protect" Namibian producers against import and export competition but will also place Namibia more firmly on the Southern African map, ready to exploit the potential created by regional economic co-operation and integration.

Documentation
Central Bureau of Statistics (2000), National Accounts, 1993-99, National Planning Commission, Windhoek, Namibia.
IDS/BIDPA (1998), Study to Assess the Economic Impact of the Proposed European Union-South Africa Free Trade Agreement on Botswana, Lesotho, Namibia and Swaziland, Sussex U.K. and Gaborone Botswana. 
Ministry of Trade and Industry (2000), Chapter 19: Trade & Industry, draft chapter for NDP2, National Planning Commission Secretariat, Windhoek, Namibia.
Ministry of Trade and Industry (2000), Chapter 44: Regional Economic Integration, draft chapter for NDP2, unpublished.
SACU (1999), SACU Negotiating Proposal to the SADC members, Windhoek Namibia, Gaborone Botswana, Mbabane Swaziland, Maseru Lesotho and Pretoria South Africa. 
The Namibian (1998-2000), Compilation of Newspaper Clippings on Regional Economic Integration, Windhoek, Namibia.
Van der Linden, E. (1999), Briefing Paper on EU-RSA FTA for Namibian Government, unpublished.

Interview/Discussion
Noko Murangi, Deputy Director Trade Policy in the Ministry of Trade and Industry
Robin Sherbourne, independent Economist

Database
CBS EUROTRACE data base

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