SA’s pricey neighbours | Fin24

SA’s pricey neighbours

Aug 03 2017 12:32
Natalie Greve

Catherine Grant-Makokera is a former diplomat and senior consultant at Tutwa Consulting. (Picture: Supplied)

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The Southern African Customs Union (Sacu) is now 128 years old and in its fourth iteration.

First established in 1889 between the British Colony of the Cape of Good Hope and the Orange Free State Boer Republic to promote economic development through regional coordination of trade, the agreement today sets out policies that dictate the terms of trade between the five regional member states.

But despite being the world’s oldest customs union, and having undergone several amendments to its trade and customs policies, South Africa, Botswana, Lesotho, Namibia and Swaziland remain dissatisfied about what each country claims are nationally prejudicial rules and policies.

The economic structure of the union links the member states by a single tariff and no customs duties between them. The member states form a single customs territory in which tariffs and other barriers are eliminated on all trade between the member states for products originating in these countries.

A common external tariff also applies to non-members of Sacu.

However, following the most recent reworking of the revenue-sharing formula in 2002, the new customs component rapidly drew criticism from the union’s largest member – South Africa – after it became clear that the state was expected to essentially “donate” much of its customs revenue to its four union peers.
The Botswana-Lesotho-Namibia-Swaziland (BLNS) grouping has, however, consistently maintained that the share of revenue from the common customs Sacu pool is justifiable given the de facto control that SA exerts over the region’s tariff policy.

The current structure of the formula is such that BLNS member states get a significant share of their revenue from the customs component, while SA receives more than 90% of its share from the excise component.
“The last time I looked, SA would be some R18bn better off if it could tear up the customs subsidy portion of the revenue-sharing formula, but I think this has increased significantly,” says Professor Roman Grynberg from the faculty of economics and management sciences at the University of Namibia.

Stalled reform

The topic of Sacu reform has been on the agenda for several years, but the Economist Intelligence Unit (EIU) says that BLNS reliance on Sacu transfers, coupled with diplomatic sensitivity, means that little headway has been made.
Former finance minister Nhlanhla Nene told Parliament’s finance committee in 2015 that the existing union framework was unfair on SA, which was in effect subsidising the four other members.

“South African data show that transfers to Sacu rose from R43.4bn in fiscal year 2012/13 to a provisional R51.7bn in 2014/15, equivalent to 5.4% of South Africa’s total revenue and 1.3% of GDP,” the EIU said at the time.

“Notably, Sacu’s R51.7bn allocation in 2014/15 accounted for almost two-thirds of customs duties collected, leaving SA with just one-third, despite being responsible for the vast majority of trade.

South Africa is in effect losing about R30bn a year compared with a fairer formula, which is detrimental for the current account.”

Grynberg explains that, due to delays in the release of trade statistics, Sacu revenues are adjusted with a three-year lag. Revenues for 2017/18 are thus based on trade data of 2014/15. According to statistics provided by Sacu, total customs revenue in 2017/18 will amount to R57.16bn, with Botswana receiving R20.56bn of this, Namibia R17.30bn, Swaziland R5.42bn and Lesotho R4.59bn.

Despite making total payments over the period of R43.14bn, SA will receive only R9.28bn in customs revenue.
Over the years, the BLNS countries have grown increasingly dependent on the Sacu revenue.
According to a 2015 paper by the Institute for Security Studies, at the time, the union funded 50% of Swaziland’s entire government revenue, 44% of Lesotho’s, 35% of Namibia’s and 30% of Botswana’s.
PricewaterhouseCoopers technical tax expert Kyle Mandy also told Parliament in 2015 that SA contributed about 97% of the customs revenue pool and received only about 17% of it.
Tutwa Consulting senior consultant and former diplomat Catherine Grant-Makokera attributes the imbalanced contribution to SA being forced to pay for its sins of being the economic “big brother” by propping up the budgets of smaller neighbouring states.
“It’s a very contentious issue,” she tells finweek. “The revenue-sharing agreement sees SA transferring around 1% of its annual revenue to member states, making SA in essence the largest donor of development funds in the world.”

A June summit between the heads of state of Sacu members, in Swaziland, seemed to yield little progress in revenue-sharing reform. 

While a subsequent Sacu communiqué confirms that the summit endorsed the review and development of a “suitable architecture” for tariff setting, rebates, duty drawbacks and trade remedies as well as a review of the revenue-sharing formula, this appears to be largely lip service at present. 

While it seems that SA’s position under newly appointed finance minister Malusi Gigaba remains one that lobbies for reform, several attempts by finweek to secure government’s official position from National Treasury and the department of trade and industry proved unsuccessful.
But it appears that there does not exist the same momentum for reform of the formula under the current fiscal leadership.

“There was a big push for reform following the impact of the financial crisis, which created a time of low economic growth and uncertainty around the trade inflow, but we’ve lost that to a certain degree.

It’s not as immediate in people’s heads anymore, as trade has stabilised a bit more,” says Grant-Makokera.

During the height of SA’s lobbying efforts, the country essentially stalled on any Sacu-wide discussions with member states, opting instead to engage in bilateral negotiations with the head of each member state.

“We saw this when President Jacob Zuma went to Botswana about once or twice a year at one point.

That process of bilateral discussion didn’t necessarily go as well as planned and it didn’t resolve the issues that SA had hoped for.

That was part of the process and took momentum away from Sacu as a whole for quite a long time over about three years,” she remembers.

But Grant-Makokera points out that SA’s inclusion in the Sacu grouping, while expensive, does hold significant benefit for the region’s largest economy. 

SA private-sector firms are able to treat Sacu as one market, which meaningfully benefits local exporters as well as neighbouring markets.

Sacu has also arguably ensured the retention of a degree of economic stability in the region.
“I do understand why the agreement is the way it is and I think that there is some merit in it. We shouldn’t underestimate the fact that SA businesses are able to capitalise on the expanded market. 

We also don’t want failed states on our borders, so there is a political and economic stability argument. I think that on balance, the benefits outweigh the costs,” she tells finweek.

But Grynberg asserts that the most insidious effect of Sacu is that it prevents economic integration in Southern Africa.
“Every time Mozambique or Zimbabwe want to join Sacu the BLNS [refuse] because they would lose revenue. This has resulted in Sacu being prevented from widening, and the failure of the Southern African Development Community (SADC), which could not evolve into a customs union in 2011.

This is the true price of this absurd revenue-sharing formula,” he argues.

Exit ahead?

Analysing the current formula, DNA Economics economist Yash Ramkolowab outlines in a May analysis piece that, if Sacu’s customs revenues were split between member states according to each country’s extra-Sacu imports and the tariff applied on these imports, SA would retain 96% of customs duties collected.

But based on the existing Sacu customs sharing formula, the BLNS receives more than 83% of import duties collected. 

“Put differently, the BLNS would have to raise their individual aggregate tariff on non-Sacu imports by between seven and 34 times in order to achieve the same level of duty collection.

The conclusion is clear: the BLNS currently receive significantly more customs duties from the Sacu customs revenue pool than the revenue ‘due’ to them based on their extra-Sacu imports,” he comments.

While the SA government must have considered a possible withdrawal from the union over the last decade, Grant-Makokera sees this as an unlikely possibility going forward.

“So far, the ‘let’s stay in it and reform’ camp has won. There’s no doubt that an exit was an option on the table and that there were advocates of it, but the current level of engagement from SA seems to want to get it working as best as possible,” she says.

But Sacu critic Grynberg remains hopeful that a possible political leadership change in SA may lead to a Sacu exit.

“SA does not need Sacu or the SADC. Trade will continue without them, because the entire regional retail sector is dominated by SA transnationals, which will continue to source from SA.

“Zuma can’t just pull out of the union, as it would cause complete economic chaos in the near abroad. [Presidential hopeful Cyril] Ramaphosa might, however, opt to do so if the SA economy enters a steep decline as a result of Zuma and if the International Monetary Fund forces a change,” he concludes.

This article originally appeared in the 10 August edition of finweek
Buy and download the magazine here.

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