It's the end of SACU as we know it!

Posted: June 06, 2009

Business Day's lead story on Friday 6 June suggests the end of SACU may be near.  See: "SA ready to tighten screws as EU trade row turns ugly".

The EU, in getting three of the five SA member countries to sign an interim Economic Partnership Agreement (EPA), may have handed the South African Government the excuse it has long been looking for to dismantle the world's oldest customs union.  And there are good reasons why South Africa would be delighted to see the back of SACU.  The Department of Trade and Industry (DTI) is reluctant to surrender South Africa's trade (and industrial) policy authority over to the SACU Tariff Board, on which it will have just one of five equal seats.  At the same time, the National Treasury has become increasingly bitter about the amount of hard-earned cash it hands over to other SACU member countries through the existing revenue sharing arrangement. 

What is astounding is that none of the parties seem to have considered the potential economic and human catastrophe that would result from the unshackling of Swaziland and Lesotho, in particular, from South Africa.  Currently, Lesotho earns about 60% of its total government revenue through the SACU revenue sharing arrangement.  In the case of Swaziland, it is closer to 70%.  Our own analysis reveals that as much as 70% of the money these countries receive through the revenue sharing formula is pure transfer from South Africa.  In other words, it is equivalent to development aid.  The total transfer to Botswana, Lesotho, Swaziland and Namibia (BLNS), at around 0.6% of South Africa's GDP, effectively makes South Africa one of the most generous donor nations world-wide (we disperse more than twice the OECD average of around 0.3% of GDP).

If South Africa pulls the plug on SACU, Lesotho could lose as much as 25% of its total GDP overnight, and Swaziland 20%.  Government revenue in both countries would be cut in half.  The impact on economic growth, employment and poverty would be devastating.  It is of course possible for these countries to raise taxes elsewhere.   But to make-up for just half of the loss in SACU revenues would require the VAT rate in Lesotho or Swaziland to double or income and company tax collections to increase three-fold.  The situation in the other SACU countries would be less severe but still extremely serious. 

It is easy to blame Lesotho and Swaziland for snubbing their noses at South Africa, their overwhelming benefactor; and the EU should also assume accountability for risking the livelihood of two of the world's poorest countries in order to save face over a trade agreement.  The behavior of all of these countries must be regarded as reckless.  But like it or not, South Africa has already acquired an absolute responsibility for the welfare of our SACU neighbors.  It is our actions or inaction that will matter most.

There is of course some chance that all of the noise coming out of the DTI is just that.  Trade negotiations are nasty affairs and this one is far from over.  South Africa, Namibia, Mozambique and the EU could all come to the party and SACU could be saved.  But this will unfortunately deal with only part of the problem.  Regardless of the outcome of the EPA, SACU revenues are falling fast in line with South Africa's imports.  The customs pool, from which the BLNS draw most of their share of SACU common revenues, is performing well below forecast.  Not only will the BLNS be required to pay in a substantial adjustment for last year's dismal customs performance (the SACU payment for 2008/09 was based on a forecast of around R32 billion; actual revenues were R23.1 billion), but future payments will be down big-time on previous years.  Customs collections in 2008/09 were almost 20% lower than in 2007/08, and more recently, customs collected in April 2009 were 25% down on April 2008.  The combined impact of all of these trends and adjustments could be a reduction in the SACU payment, of more than 50%, in the coming year.

The global economic crisis will clearly have devastating repercussions throughout SACU.   Any further economic shock emanating from the EPA negotiations will be unbearable.  What then should South Africa do? 

We can be sure that come next year, the troubled SACU members (Lesotho and Swaziland certainly, and probably Namibia too) will be desperately seeking financial assistance.  And we can be reasonably sure that South Africa will be their first port of call.  The magnitude of this problem and the required level of assistance can be calculated now.  The bigger question is will South Africa be ready and willing to assist, and in what form.  Unfortunately, for the BLNS, all of the cards are in South Africa's hands.  Now is the time for the Treasury and the DTI to put their heads together and come up with a rescue plan - that in the short-term, provides fiscal stability to its neighbours - and in the long-term, replaces the volatile revenue sharing formula with a more certain and transparent development fund.