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EPAs with EU enters into effect – Implications

Five southern African countries – Botswana, Lesotho, Namibia, South Africa and Swaziland – and the European Union (EU) this week started a new chapter in their bilateral relations with the entry into effect of their Economic Partnership Agreement (EPA).

As of this week, the agreement will apply to trade between the EU and the five countries. Mozambique is in the process of ratifying the agreement and will join in as soon as the ratification procedure is completed.

Commissioner for Trade Cecilia Malmström said: "When I visited Botswana in June for the signing ceremony, I saw first-hand how important it is to build a stable trade partnership between Europe and Africa. Today we’re taking a crucial step towards making that a reality. The agreement that we’re putting in place will support sustainable economic growth and regional integration in southern Africa and is designed to help lift people out of poverty in the years to come.  Africa is the emerging continent and the Economic Partnership Agreements have been designed to maximise this dynamism."

The EPA takes into account the different levels of development of the partners. It gives Botswana, Lesotho, Mozambique, Namibia, and Swaziland duty-free, quota-free access to the European market.  South Africa will also benefit from enhanced market access, going beyond its existing bilateral arrangement with the EU.

The southern African markets will open only partially to EU exports, gradually over time, providing their industries with the intermediary goods they need to support growth.  It also provides for a number of protective measures in these countries, for instance for nascent, fragile industries or for food security reasons. Furthermore, the agreement increases the flexibility of southern African producers to put together products with components from various other countries, without the risk of losing their free access to the EU market.

BACKGROUND

The SADC EPA Group consists of six out of 15 members of the Southern African Development Community (Botswana, Lesotho, Mozambique, Namibia, Swaziland and South Africa).  Angola has observer status and may join the agreement in the future.

The EU is the largest trading partner of the SADC EPA group.  In 2015, the EU imported goods worth almost €32 billion from the region, mostly minerals and metals.  The EU exported goods of nearly the same value, consisting mostly of engineering, automotive and chemical products.  Total trade between the EU and the SADC EPA Group (including Angola) amounts to €63 billion.

In signing the agreement, participants commit to act towards sustainable development, including upholding social and environmental standards. Civil society will have a special role in monitoring the impact of the agreement. The Agreement is also of a new species in that it is the first trade deal that directly supports the economic integration of a specific region, favouring closer links within the six Southern African nations involved.

The EPA creates joint institutions to support dialogue, smooth handling of all trade issues, and monitoring of the impact of the trade deal. The EU will work with its SADC partners to ensure smooth implementation of the agreement, together with regional and national development cooperation bodies.

 

RIGHT CONDITIONS FOR TRADE AND INVESTMENT

Economic Partnership Agreements (EPAs) between the EU and African,

Caribbean and Pacific (ACP) countries are the main pillar of ACP-EU trade cooperation, and aim at creating the right conditions for trade and investment. In this context, the EPA between the EU and the SADC (Southern African Development Community) EPA Group establishes a long-term and stable trade relationship between both Parties, in compliance with international trade rules.

The current population of the SADC EPA countries combined is 89 million people. The two largest countries are South Africa and Mozambique, accounting for respectively 61% and 30% of the region's total population.

The average GDP per capita is roughly 3,700 EUR. In purchasing power parities (PPP), this value is much higher, at about 8,400 EUR.

Behind this average hides significant variation.

Per capita GDP in the region's richest country, Botswana is approximately

15,700 EUR, which is roughly 14 times as high as it is in the region's poorest country, Mozambique. The regional average GDP per capita is about 25% that of the EU. Real GDP grew by an annualised 3% over the last decade, a period in which the corresponding figure for the EU was 1%.

In total, the EU imported about 23.7 billion EUR worth of goods from the region whereas its goods exports were 27.2 billion EUR.

THE RATIONALE AND CONTENT OF THE SADC EPA

The EU's trade relations with the ACP countries were historically framed by a series of conventions, which granted unilateral preferences to the ACP countries on the EU market. By the end of the 1990s, it was found that these conventions did not promote trade competiveness, diversification and growth as intended. They were also found to be in breach of the World Trade Organisation's (WTO) principles, as they established unfair discrimination between developing countries. A change was therefore required. EPAs were the response defined jointly by the ACP countries and the EU in the Cotonou Agreement signed in 2000. EPAs build a new reciprocal partnership for trade and development, asymmetric in favour of ACP countries. In keeping with the objectives set out in the Cotonou Agreement, sustainable development is a key objective of the EPA, which is explicitly based on the "essential and fundamental" elements set out in the Cotonou Agreement (human rights, democratic principles, the rule of law, and good governance). The joint EPA institutions are tasked with the function of monitoring and assessing the impact of the implementation of EPAs on the sustainable development of the Parties, also carving out a clear role for civil society and members of parliament.

In view of these objectives, the EPA differs from most Free Trade Agreements (FTAs) currently in place or negotiated by the EU with other trading partners: while it remains a reciprocal agreement, it weighs in favour of southern

Africa through specific provisions:

·Asymmetric market access: The EU has committed to opening its market more than the SADC EPA countries have committee to do. The agreement fully takes into account the differences in the level of development between the two regions.

·Safeguards: Under the terms of the agreement, SADC EPA countries continue to be able to protect their sensitive products from European competition either by keeping tariffs in place or, if necessary, by imposing safeguard measures. To support local agricultural production, the EU has also agreed not to subsidise any of its agricultural exports.

·Flexible rules of origin: companies in the SADC EPA region also have more flexibility to use foreign components while still benefitting from free access to the EU market. In the SADC EPA, the rules defining the origin are formulated in a way to support development of new value chains in the region. The so-called

"cumulation of origin" enables canned fruit exporters to source fruit from neighbour countries, or textile producers to use imported fabric. This type of flexible rules of origin will benefit companies in agri-food, fishery and industrial sectors.

·Development: The EU complements the market opening effort of its partners with substantial development assistance. This will contribute to development, sustainable growth and reducing poverty.

ESTIMATED EFFECTS OF TARIFF REDUCTIONS

The economic impact of the EPA was assessed using a dynamic general equilibrium model, tailor-made for trade policy analysis and adjusted to the specific characteristics which apply to the southern African countries. In a conservative manner, only the impact of the tariff reductions was assessed, i.e. what is easily quantifiable from the agreement. Essential provisions of the EPA (rules of origin, trade facilitation, cooperation on norms, and development assistance) were not considered in the model even though they weigh in favour of SADC EPA countries. The results presented in this study are therefore expected to be exceeded over time. Based on the simulation results,

SADC EPA countries' GDP will be positively affected by the agreement, albeit to a small extent: Individual countries see their GDP grow by between 0.01% and

1.18%, whereas the weighted average GDP increase, which is strongly dominated by South Africa, is about 0.03% (Importantly, all results refer to the situation in 2035 compared to a situation without the EPA).

The variation between countries reflects the extent to which the EPA and the baseline differ: in countries such as Namibia, the EPA provides duty-free quota-free access while the country, in the absence of EPA, would not benefit from a preferential treatment (hence the higher impact).

In Botswana, the main export items (e.g. diamonds) would still benefit from low duties without the EPA (hence the lower impact). For a least-developed country like Mozambique, which would still benefit from duty-free quota-free in the absence of EPA, the main benefits to be expected rather come from the flexible rules of origin, regional integration as well as cooperation on norms and standards to boost its exports (all factors which could not be quantified and therefore were not included in the model).Total exports from the SADC EPA Group to the world are positively affected by the EPA as are total imports.

SADC EPA exports are expected to increase on average by 0.13% and imports by 0.14%. In particular, SADC EPA exports to the EU are expected to increase by 0.91%. The agreement has no measureable impact on the EU's overall trade with the world. Exports to the SADC EPA countries are anticipated to increase by 0.73% against a scenario where there would be no EPA. The sectors with the highest expected increases in exports from SADC EPA countries are red meat (15.3%) and sugar (13.7%). Other sectors where an increase in exports is expected are beverage and tobacco, dairy products, fisheries, motor vehicles, "other food", textile, utilities, vegetable oil, vegetables and fruit, and white meat.

While several of the increases are sizeable, decreases are usually below 0.1%, with the exception of wearing apparel (-1.2%), cattle (-0.8%) and electronics (-0.4%). The increase and decrease reflect the comparative treatment of each sector under the EPA by comparison to the baseline: in many sectors, EU customs duties are already low in the baseline scenario (especially when it comes to inputs into the production or primary products), while EU customs duties on finished goods and agricultural goods are much higher in the baseline than in the EPA, hence the higher positive impact in those sectors.

The remuneration of the factors of production is generally positively affected by the EPA even if only to a small extent. Remuneration of labour and land is generally expected to increase, while other factors such as capital and natural resources offer a more mixed picture.

The SADC EPA is expected to modestly reduce the poverty headcount in the two countries observed (South Africa and Namibia). As a result of tariff reduction, SADC EPA countries will collect less import duties, but the decrease is on average not higher than 0.59% of total import duty collection at the end of the liberalisation period. Revenue loss is therefore expected to be limited.

CONCLUSION

The EPA paves the way for a stable and long-term bi-regional trade relationship between southern Africa and the EU. The outcome of the negotiations is a WTO-compatible Agreement that offers asymmetry in market access. The duty-free access to the European market for the Botswana, Lesotho, Mozambique, Namibia and Swaziland (BLMNS) countries will no longer be at the discretion of the EU but will be anchored in a treaty between the Parties. South Africa has also negotiated better access than currently granted under the Trade, Development and Cooperation Agreement (TDCA) between South Africa and the EU.

OUTLOOK

The EPA, including through its development cooperation pillar, is expected to facilitate intra-regional trade as well as the region's trade with the world. The SADC EPA will also re-establish the common external tariff of the Southern African Customs Union (SACU) and thereby renew the proper functioning of the oldest existing customs union in the world. The EPA creates a joint Council and a joint Committee in charge of the implementation of the agreement. It will be the task of those institutions to ensure that the EPA is properly implemented, as well as to make proposals for the review of priorities set out in the agreement. For that purpose, constant monitoring of implementation is paramount.

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Slight growth in GDP as economy battles return

28th July 2021
Peggy-Serame

Botswana’s economy showed slight growth signs in the first quarter of 2021, following a devastating year in 2020.

During 2020, the entire second quarter was on zero economic activity as the country went on total lockdown in an effort to curb the spread of the virus.

Diamond trade plummeted to record low levels as global travel restrictions halted movement of both goods and people and muted trade.

The end result was a significant decline for the local economy, at an estimated 7 percent contraction, just marginally below the 2008/09 global financial crises.

According to figures released by Statics Botswana this week, the country’s nominal Gross Domestic Product for the first quarter of 2021 was P47.739 billion compared to a revised P45.630 billion registered during the previous quarter.

This represents a quarterly increase of 4.6 percent in nominal terms between the two periods.

During the quarter, Public Administration and Defence became the major contributor to GDP by 18.4 percent, followed by Wholesale & Retail by 11.4 percent. The contribution of other sectors was below 6.0 percent, with Water and Electricity Supply being the lowest at 1.6 percent.

Real GDP for the first quarter of 2021 increased by 0.7 percent compared to a contraction of 4.6 percent registered in the previous quarter.

The improvement in the first quarter 2021 GDP reflected continued efforts to reopen businesses and resume activities that were postponed or restricted due to the COVID-19 pandemic.

The real GDP increased by 0.7 percent during the period under review, compared to an increase of 1.2 percent in the same quarter of 2020.

The recovery in the domestic economy was observed across majority of industries except Accommodation & Food Services, Mining & Quarrying, Manufacturing, Construction, Other Services and Agriculture, Forestry & Fishing.

The overall slow performance of the economy was mainly due to the impact of measures that were put in place to combat the spread of the COVID-19 pandemic.

The Non-mining GDP increased by 4.1 percent in the first quarter of 2021 compared to 4.0 percent increase registered in the same quarter of the previous year.

Agriculture, Forestry and Fishing industry decreased by 2.0 percent in real value added during the first quarter of 2021, relative to a contraction of 5.2 percent registered during the same quarter of 2020.

The main driver of the unfavorable performance stems from a decrease in real value added of Livestock farming by 3.0 percent.

Mining and Quarrying registered a decrease 11.4 percent in the real value added, this was mainly influenced by the drop in the Gold and Diamond real value added by 17.5 and 12.5 percent respectively.

Diamond production in carats went down by 12.1 percent while the tonnage of Gold produced went down by 17.5 percent.

The poor performance of the diamond sub-industry is attributed to the reduction in production due to a lower grade feed to the plant at Orapa in response to heavy rainfall and operational issues, including continued power supply disruptions.

With regard to Gold is due to diminishing resource base which affect production.

The Manufacturing industry recorded a decline of 7.4 percent in real value added during the first quarter of 2021, compared to a decrease of 2.3 percent registered in the corresponding quarter of 2020.

The deep low performance in the industry is observed in the two major sub-industries of Beverages & tobacco and Diamond cutting, polishing and setting by 57.0 and 38.5 percent respectively.

The reduction in Beverages is attributed to alcohol sale ban imposed during the quarter under review in order to reduce the spread of the COVID-19 virus. On the other hand, exports of polished diamonds went down by 24.9 percent compared to a decrease of 11.5 percent registered in the same quarter of the previous year.

The construction industry recorded a decline of 4.8 percent compared to an increase of 4.3 percent realized in the corresponding quarter in 2020.

This industry comprises of buildings construction, civil engineering and specialized construction activities. The industry is still showing signs of the consequences of COVID-19 pandemic. The industry recorded a negative growth of 7.4 percent in the previous quarter.

Water and Electricity Water and Electricity value added at constant 2016 prices for the first quarter of 2021 was P506.2 million compared to P378.2 million registered in the same quarter of 2020, recording a growth of 33.8 percent.

In the first quarter of 2021, Electricity recorded a significant growth of 62.4 percent compared to a decrease of 67.6 percent recorded in the corresponding quarter of 2020.

The local electricity production increased by 22.4 percent while Electricity imports decreased by 33.3 percent during quarter under review. The water industry recorded a value added of P231.3 million compared to P209.0 million registered in the same quarter of the previous year, registering an increase of 10.7 percent.

Wholesale and Retail Trade real value added increased by 11.4 percent in the first quarter of 2021 compared to an increase of 5.5 percent registered in the same quarter of the previous year. The industry deals with sales of fast moving consumer goods.

Diamond Traders recorded a significant growth of 112.7 percent as opposed to a decline of 22.7 percent recorded in the corresponding quarter last year. The positive growth is due to improved demand of diamonds from the global market.

The Transport and Storage value added increased by 0.6 percent in the first quarter of 2021, compared to a 2.4 percent increase recorded in the same quarter of the previous year.

The slight improved performance of the industry was mainly attributed to the increase in real value added of Road Transport and Post & Courier Services by 4.3 and 2.1 percent respectively.

The slow growth was influenced by a significant reduction in Air Transport services of 69.7 percent due to reduced number of passengers carried. Rail goods traffic in tonnes went down by 6.4 percent and passenger rail transport was not operating during the quarter under review.

Accommodation and Food Services Accommodation and Food Services real value added declined by 31.7 percent in the first quarter of 2021 compared to a decrease of 4.4 percent registered in the same quarter of the previous year. The reduction is largely attributed to a decrease of 42.1 percent in real value added of the Accommodation activities subindustry.

The suspension of air travel occasioned by Covid-19 containment measures impacted on the number of tourists entering the borders of the country and hence affecting the output of Hotels and Restaurants industry. COVID-19 restriction measures resulted in reduced demand for leisure and conferencing activities, as conferences are largely held through virtual platforms.

Finance, Insurance and Pension Funding industry registered a positive growth of 8.3 percent due to the favorable performance from monetary intermediation and Central Banking Services by 16.4 and 5.4 percent respectively during quarter under review.

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Chobe Holdings secures P16 million for dark days

28th July 2021
Chobe Holdings

It is still tough in the tourism industry — big players in this sleeping giant are not having it easy, but options are being explored to keep the once vibrant multibillion Pula sector alive until the world gets back to normalcy.

One of the primary measures against the spread of Covid-19 is to stay home; this widely pronounced precaution against the global contagion that has claimed over 4 million lives across the world is however a thorn in the flesh of one of the major industries in the global economy — the tourism sector .

This sector is underpinned by travel – an act which is the virus‘ number one mode of spread, especially across borders.

Chobe Holdings Limited, one of Botswana’s leading high end eco-tourism giants said its survival strategies are underpinned by well-crafted stakeholder engagements in the mist of these unprecedented times of muted trading activity.

“Throughout the COVID-19 pandemic, Chobe continued to invest in and strengthen its relationships with key stakeholders in both its traditional markets and the SADC region,” the company directors updated shareholders this week.

To keep the business afloat, the company which owns and operates some of the exquisite tourism destinations along the banks of the mighty Chobe said it has triggered its existing available debt financing avenues.

Chobe revealed that its current overdraft of BWP 25 million has been extended on favourable terms.

The company shared that it has negotiated a further USD 1.5 million (over P16 million) standby loan with a flexible settlement terms and preferable cost implications to the bottom line.

“We are confident that the Group has sufficient cash inflows, cash reserves and un-utilized prearranged borrowing in place to settle any liabilities falling due and support the smooth recovery of operations in the short and medium term,” the company directors said, noting that they will retain the flexibility to vary operations should market conditions change.

Early this year, Chobe announced that the ongoing crisis in the tourism industry forced the company to draw from its prearranged overdraft facility of P25 million to the extent of P11.6 million.

Last year Chobe’s occupancy levels around its lodges and hotels went down 89 percent. This resulted in unprecedented revenue decline of 93% to P27.78 million from the P373.94 million in the previous year ended February 2020.

Operating profits went down 159% with profit after tax down 170%, mirroring a loss of over P67 million.

Chobe management said during the last half of the financial year they have done all they could to contain costs across the company’s operations.

During the last half of the year Chobe’s marketing and reservations teams continued to pursue the “don’t cancel but defer policy”.

“We thus continue to hold advance travel receipts, to the value of about P34 million at the financial year end,” the company revealed early this year.

Chobe said it continues to engage Government, through HATAB and BTO to prioritize the vaccination of workers in the tourism sector.

“Throughout the pandemic we have ensured that employees are trained in and comply with COVID-19 infection mitigation protocols as well as ensuring that all visitors to our remote camps and lodges as well as our staff and contractors are tested for COVID-19 before reaching the camp or lodges,” the company said.

However, the company said vaccinating the tourism staff will provide the best way to ensure that both employees and guests are protected from the virus.

“We continue to manage our cashflow through stringent cost control measures, balanced against the protection of the Group’s physical assets and the wellbeing and retention of its people,” the company said.

Chobe has successfully retained its top management through the pandemic.  To this end the company directors continue to closely monitor the Group’s recovery from COVID-19 and adjust salary reductions to support operations and aid retention.

Domestic and regional travel resumed during the second quarter of the 2020/21 financial year with the Group opening a strategic mix of camps and lodges.

A comprehensive domestic, regional and international marketing plan was put in place to support these openings.

International travel resumed in the first quarter of the 2021/22 financial year with occupancies forecast to steadily increase, albeit from a low base, through the second quarter.

The company is optimistic that forward bookings are strong for the 2022/23 financial year.

“There is pent-up demand from our traditional source markets to travel now, but this is tempered by uncertainty and access constraints,” the company stated.

“Both the domestic and international markets are sensitive to such uncertainty, and it is critical that both the private and public sector work together to develop and publish clear, authoritative and consistent travel information in order to build confidence”

Chobe entered the pandemic with the Shinde camp rebuild in progress — one of its high end camps and this was completed in the first half of the 2020/21 financial year accounting for the majority of the Group’s capital expenditure for that period.

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Business

De Beers Q2 production jumps in response to strong rough diamond demand

28th July 2021
De-Beers -jwaneng-mine

De Beers Group, the world’s leading rough diamonds producer by value and Botswana’s partner in the diamond business, ramped up its production in the second quarter of 2021, in response to stronger demand for rough diamonds in the global markets.

The London headquartered diamond mining giant revealed in its production report this week that rough diamonds output  increased by 134% to 8.2 million carats in the three(3) months  of quarter 2 2021, “reflecting planned higher production to meet stronger demand for rough diamonds”.

This was against the backdrop of curtailed demand in the same quarter last year, mirroring the impact of Covid-19 lockdowns across southern Africa during that period.

In Botswana, where De Beers sources majority of its rough diamonds through partly government owned Debswana, production increased by 214% to 5.7 million carats. The percentage jump mirrored planned low production in the second quarter of 2020 where output was adjusted to market demands and implemented Covid-19 protocols.

Debswana operates four (4) Mines: Jwaneng Mine- being its flagship producer and largest revenue contributor. Jwaneng Mine which is the wealthiest diamond mine in the world by value is envisaged for multi-billion expansion to an underground operation in future to stretch its existence by few more decades.

The underground project which is anticipated to cost a whooping P65 billion will be the world‘s largest underground diamond mine.

The company which accounts for over 65 % of De Beers’s global production also operates Orapa Mine- one of the world’s largest by area, Letlhakane Mine currently a tailings treatment operation and Damtshaa Mine which is under care and maintenance following market shrink in 2020.

Namibia production decreased by 6% to 0.3 million carats, primarily due to planned maintenance of the Mafuta vessel which was completed in the quarter and another vessel remaining demobilized.  In Namibia De Beers sources diamonds both in land and marine through Namdeb and Debmarine respectfully.

In South Africa-the spiritual home ground of De Beers Group, production increased by 130% to 1.3 million carats, due to planned treatment of higher grade ore from the final cut of the Venetia open pit, as well as the impact of the Covid-19 lockdown in Q2 2020.

Production in Canada increased by 14% to 0.9 million carats, primarily reflecting the impact of the Covid-19 measures implemented in Q2 2020.

De Beers said consumer demand for polished diamonds continued to recover, leading to strong demand for rough diamonds from midstream cutting and polishing centers, despite the impact on capacity from the severe Covid-19 wave in India during April and May.

Rough diamond sales totaled 7.3 million carats (6.5 million carats on a consolidated basis), from two Sights, reflecting the impact of the reduced Indian midstream capacity on Sight 4, compared with 0.3 million carats (0.2 million carats on a consolidated basis) from two Sights in Q2 2020, and 13.5 million carats (12.7 million carats on a consolidated basis) from three Sights in Q1 2021.

The H1 2021 consolidated average realized price increased by 13% to $135/ct (H1 2020: $119/ct), driven by an increased proportion of higher value rough diamonds sold.

While the average price index remained broadly flat, the closing index increased by 14% compared to the start of 2021, reflecting tightness in inventories across the diamond value chain as well as positive consumer demand for polished diamonds.

Full Year Guidance Production guidance is tightened to 32–33 million carats (previously 32-34 million carats (100% bases)), subject to trading conditions and the extent of any further Covid-19 related disruptions.

When commenting to 2021 quarter 2 production figures, Mark Cutifani, Chief Executive of Anglo American- De Beers parent, said the entire Anglo American Group delivered a solid operational performance supported by comprehensive Covid-19 measures to help safeguard the lives and livelihoods of its workforce and host communities.

“We have generally maintained operating levels at approximately 95% of normal capacity and, as a consequence, production increased by 20% compared to Q2 of last year, with planned higher rough diamond production at De Beers” he said.

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