The debate on Southern African Customs Union (SACU) revenue sharing formula has re-surfaced with new suggestions that South Africa should push for commencement of talks on a new arrangement.
The sharing formula is a contentious issue that has not been resolved and there are worries that should the current format be changed, Botswana could lose large sums of money it gets from the world’s largest customs union. An article on Business Day, the South Africa’s top financial newspaper, authored by Linda Ensor, pointed out the need for Africa’s second largest economy to review its customs agreement with members of the union.
“There are huge concerns about the SACU revenue-sharing formula, particularly insofar as customs duties are concerned,” Business Day quoted South African Institute of Chartered Accountants’ Piet Nel.
“That formula is heavily weighted against SA and the result is that, in effect, SA is giving away its customs duty tax base to the extent of about R30bn a year to the other SACU members,” he said.
A paper by Prof Roman Grynberg and Masedi Motswapong of Botswana Institute of Development Policy Analysis (BIDPA) on SACU Revenue Sharing Formula: The History of An Equation, points out that SACU revenue has become important to the country’s budgeting.??“However, the risk for even Botswana, the country with the highest GDP/capita in SACU, is that SACU revenue, which is used to cover both the recurrent as well development budget of the country, has now become such a significant portion of total government revenue that the macroeconomic adjustment to any change in the formula or movement to another trade regime would be extremely difficult and fiscally destabilising,” said the BIDPA scholars.
Finance minister, Kenneth Matambo said when presenting 2015/2016 budget speech that the current account of the balance of payments registered a surplus of P13.1 billion in 2014, a moderate increase of 1.5 percent from the P12.9 billion in 2013. He added: “This is attributable to the increase in receipts from the Southern African Customs Union (SACU), which increased from P13.8 billion in 2013 to P15.0 billion in 2014.”
The four member states had previously commissioned an Australian company, Center for International Economics Consultants, to undertake the revenue sharing review, but it was agreed that the report was not convincing, which led to an agreement that each of the five members come up with own proposals. SACU comprises of Botswana, South Africa, Namibia, Lesotho and Swaziland. There are three different types of revenue sharing formulas, namely customs, revenue, exercise tax and development formula.
The current formula gives South Africa the lion’s share by virtue of the size of the economy followed by Botswana, Namibia and then Lesotho and Swaziland. This put Swaziland and Lesotho at a disadvantage as the two economies are over 50 percent reliant on SACU receipts. The 2002 reforms removed this anomaly but, at the same time, increased the share that accrued to the BLNS. This in turn has meant that the share accruing to South Africa has diminished over time. The 2002 formula based on a share of intra-SACU imports constitutes in effect a compensation for polarisation effects of the customs union.
“If it is the intention of South Africa to deliver more of the SACU revenue as development projects rather than transfers to general revenue, this is more likely to positively impact on the development of the BLNS than the current arrangements and should in principle be supported,” said the BIDPA study.
Grynberg previously warned that the biggest risk to Botswana is SACU, not diamonds, as the Ministry of Minerals can project what will happen to diamonds. SACU members (BLNS) are highly revenue dependent with Swaziland and Lesotho being 60-70 percent revenue dependent and customs union revenues accounting for 35 percent of Botswana’s total revenue in 2012/13, similar to Namibia.
“Botswana and Namibia need to seek a ‘development agreement’ where SACU revenues are used to fund development projects. It needs a 15 year phase in. Collapse of SACU RSF could be worse than the ‘end of diamonds’,” he argued.