• July 12th, 2020

EPZ Policy: Rise and fall in the diamond industry

Rodney Dan-Ao !Hoaeb

The Export Processing Zone (EPZ) Act (Namibia) was implemented to meet the country’s industrialization goals. The policy is currently in the process to be phased out and replaced by the Special Economic Zone Act (SEZ) which might take another year before being fully implemented. Its existence has drawn some good and negative arguments whether it yielded necessary investments for the economy or not. 

In my opinion I will say the world has changed tremendously and ageing policies will reach their absolute retirement stage, especially when confronted with the transformational needs of the global industrial landscape. I commend the Namibian government for implementing investment incentives and for passing the policy to promote positive growth throughout the 25 years of its existence – if there was no policy, we wouldn’t have learned lessons in the absence of a workable investment policy. 

Additionally, the government has also silently withdrawn its manufacturing tax incentives. I also commend the government for invoking a periodical exit strategy and planning a migration to a better SEZ policy regime. 

In 1995 when the policy was implemented, the country was barely five years old and industries were shaping an exit out of the second industrial revolution, entering into a digital age where automated robotics would replace people at preforming manufacturing tasks. In the same year Namibia joined the World Trade Organization (WTO) and their GATS protocol which liberalizes the free trade of merchandise goods came into force.

In essence, the industrial sector is very diverse and complex whereby a blanket approach to policy formation will not survive for too long – each sector has its own unique challenges and survival factors. What we view as incentives for one sector is considered as a necessity for survival for another sector. Currently there are 20 active EPZ members in Namibia of which 12 are diamond cutting and polishing factories, which are also registered and trading with the Namibia Diamond Trading Company (NDTC) which is 50% Government and De Beers owned. The EPZ policy utilization in the diamond industry attracted the entry diamond cutting and polishing factories over the years, which employs over 1 200 employees, with a combination of locals and expatriates for skills exchange. 

According trademap.org, the average number of diamond imports grew from N$98 million in 2001 to N$4.3 billion in 2018 in over 18 years. A portion of Namibian diamonds are shipped to Botswana for aggregation and sold at the De Beers international sight where global sightholders purchase their stock, and the buyers then export diamonds to their respective factories around the world for polishing and manufacturing. The international sight consists of sales volumes of approximately more than 140 million carats, compared to Namibia’s production of below 2 million carats annually. 

Namibia has formed the NDTC and Namdia to market and sell rough diamonds locally from their mining output, with the aim of boosting local value addition without fully depending on the Botswana sight. Namibia relies on the cutting and polishing factories to benefit more from the Botswana “hosted” International De Beers rough diamond sales. More than 60% of rough diamonds sold at NDTC are cut and polished in Namibia, which is recorded and monitored stringently by authorities. 

Thus, the EPZ policy enabled Namibia to become a key competitor in diamond cutting and polishing alongside India, Belgium, Israel, Canada, South Africa and Botswana to mention a few. The overall diamond exports averaged N$25 billion in 2018, compared to imports at N$4.3 billion leaving us with a positive trade balance of over N$21.4 billion (both rough and polished combined). 

In 2018, the manufacturing sector in Namibia contributed 15.3% to the total GDP, showing signs of lower industrial growth per annum. Diamond processing contributed N$2.2 billion to GDP, which is 8% of the manufacturing sector.

Price ratios and volatility for rough diamonds are structured at the primary level when rough diamonds are sorted and valued. The Namibian government through the diamond valuation contractors and NDTC ensure that they set the right value for the polished stones based on its worth and predicted outcomes. 
Before the diamonds are sold off to the sightholders, the government applies the correct market strategies to benchmark prices on the various assortments before they reach the sightholders (polishing factories). Any level of intervention between these two parties will set off prices disproportionately, i.e. taxation.

 Having this in mind the Namibian government does not apply taxes, but places focus on export levies and royalties. To realize its revenue placement mechanism and royalties, the government formed the NDTC  and entered a sales agreement with De Beers in 2007 to become a 50% partner on all rough diamond sales. In comparison to most primary industries, rough diamonds are subjected to various product transformation and pricing stages in the early stages of their lifecycle, making it move along a strenuous chain even before it is polished or added onto jewellery or watches. 

The secondary level of grading for polished diamonds is determined by grading agencies such as GIA and IGA, and final prices are set on Rapaport marketing benchmarks. The winning formula is abstract, therefore the Namibian government has ensured equitable representation during the formation of Debmarine, Namdeb, Namdia and the NDTC. The synergies safeguarded collection of levies, revenue and royalty collection and ensured competitiveness and profitability as well.

Namibia is currently ranked as the 14th diamond exporter with Botswana in 7th position and South Africa in 10th position. Botswana is taking the lead by ensuring progressive policies and flexible incentives to derive more value in their country through beneficiation. The country hosts an all-in-one diamond park for efficiency. For Namibia, policy uncertainty continues to hammer future growth and sustainability. In conclusion there is need for addressing sector specific policies to ensure progress and prosperity. 

*Rodney Dan-Ao !Hoaeb is an economic researcher and trade analyst.

Staff Reporter
2020-03-06 09:12:41 | 4 months ago

Be the first to post a comment...