Botswana faces a financial shock should South Africa go ahead with its planned review of what it terms “generous subsidies to neighbouring countries in the Southern African Customs Union (SACU). “
In his mini budget speech last week, South Africa’s Finance Minister Pravin Gordhan urged that the proposed revision of the formula be completed urgently. The move could see Botswana’s proceeds from SACU shrinking from P 9 billion to P200 million.
The situation may even be worse should South Africa carry out threats to pull out of SACU. SA’s relationship with Botswana, Swaziland and Lesotho has been especially tense ever since those three countries initialed an interim economic partnership agreement with the EU in July. Department of trade & industry officials have warned of consequences, including that SA might pull out of SACU altogether. The trade spat may harden SA’s position over the formula.
Each year South Africa subsidizes Botswana and other SACU members by about R25bn out of its customs and excise receipts (SA administers customs for the whole union). Proceeds from the SACU pool accounts for up to 35% of Botswana’s national budget. According to the South African mini budget tabled last week, SA’s customs and excise receipts are expected to be down R9, 2bn from the budgeted R47, 2bn this fiscal year – a drop of almost 20%. However, in terms of the formula, SA is still obliged to pay over the full R27, 9bn to Botswana, Lesotho, Namibia and Swaziland (the BLNS countries) this fiscal year. South African treasury officials explained this week that, in terms of the formula, the BLNS countries will take a hit only two years from now, when the figures are reconciled.
According to reports in the Financial Times, Treasury head of financial sector & tax policy Ismail Momoniat concedes that such a drop in revenues would be a “fiscal shock” for these countries. “Until last year, actual revenue has always exceeded projections,” he explains. “The formula didn’t foresee something like this.”
Trade Law Centre for Southern Africa executive director Trudi Hartzenberg fears that regional sustainability is at risk. “The BLNS countries face significant development challenges.
Their options to broaden their tax bases, expand trade and diversify their economies are so limited that they’re in a tight corner. On the other hand, SA faces its own serious development challenges, and these have come into sharp focus with the recession, so one can understand SA’s concern around the transfers to SACU.”
She points out that Botswana, despite being wealthier than SA (as measured by GDP per capita), relies for around 35% of state revenue on the SACU revenue-sharing pool. SA paid R45,4bn into the SACU revenue pool in 2007/2008 from its customs and excise receipts, but got less than half of the money back (R21,5bn), whereas Botswana, which paid R200m into the pool, got 45 times this amount back (R9bn).
There are two main reasons why SA agreed to the asymmetry of the formula, according to Roodt. The first is that the subsidies used to be a way for SA’s apartheid government to keep its neighbours in check politically. The second is that SA industries benefit from certain import duties that its neighbours do not.
Take cars: SA’s automotive industry benefits from import duties, which make imported cars more expensive in SA as well as in the BLNS countries, where no such industries exist. SA is therefore obliged to compensate its neighbours.
Aside from what is legitimately earned by SACU countries on their imports, the transfers from SA are effectively development aid. Moreover, these transfers are unconditional. So though SA is footing the bill, it has no say in how the money is spent. SA may in effect be subsidizing the Swazi king’s lavish lifestyle. “It’s high time we had a discussion about this,” says Hartzenberg. “Right from the start it was clear that the formula was going to cause problems because of its structure.”
SA has been expressing its unhappiness about the formula in the SACU council for several years, but in September it was formally placed on the agenda for the first time. The council has subsequently directed the SACU commission to “explore the possibility of reviewing the 2002 SACU Agreement”.
The tentative language reflects the political sensitivity of the issue.