Wednesday, April 24, 2024

SACU Costs South Africa Rand 30 Billion per year

An accountant’s view
The 105 year old customs union agreement between South Africa and the so- called neighbouring BLNS states (Botswana, Lesotho , Namibia and Swaziland) distributes revenue collected on import duties and excise based on a number of  criteria. The import duty revenue is collected on all imports coming into the customs union from outside. Excise duties are distributed by country based on the share of the GDP of the countries involved. The excise revenue goes mostly to South Africa which is by far the largest economy and GDP but import duties are the problem, being distributed based on a formula where  each country gets its share based on its share of intra-SACU imports. This results in the vast bulk of the revenues going to the four BLNS countries because they export almost nothing to South Africa and import almost everything from South Africa. In 2014, South Africa  exported R132 billion to the 4 SACU countries , while it imported only R28 billion. So the R104 surplus formed the basis for what is in effect a massive export subsidy to the BLNS.  

According to PWC if the revenue share were based on share of trade, then 80% of the customs revenue would go to South Africa and the balance to the BNS and not the other way around. Thus the current loss to South Africa is approximately  R30 billion from this  system. For several years now the members of SACU have been quietly negotiating to achieve a new formula that would  be fairer but agreement has been hard to achieve. The reason is very simple. The four BLNS countries have over the years become desperately dependent upon the revenue flows from Pretoria and rather than treat them as transitory with all of them treating them as permanent spending them every year. While some like Botswana and Lesotho have generated what appears to be a budget surplus their position, like the other countries is completely unsustainable.
An Economists perspective
Since the apartheid era there have been massive transfers from Pretoria to the BLNS states. The end of apartheid changed nothing about this relationship even after the 2002 renegotiations and arguably the BLNS dependence has only become worse over time.┬á What South Africans do not generally know is that there was a deal made in 1967 renegotiations, commonly known as the ‘secret protocol’ because it only became┬á known after the end of apartheid in 1994. Under the provisions no BLS state ( no Namibia) could ask Pretoria to use the external tariff for protecting a local industry if that industry could┬á not produce 60% of SACU production. For the tiny BLS states this was impossible and hence the Faustian bargain made with the apartheid regime was- you give us revenue and we will agree not to develop competitive industries. Despite the post-apartheid renegotiations of SACU the relationship between Pretoria and the BLNS did not really change, in fact the dependence worsened. After 2002 the BLNS were supposed to form a Tariff board where all countries would, in theory all as equals,┬á together set the tariffs for SACU. But the BLNS know perfectly well that if they try to interfere with South Africa’s monopoly on tariff policy the┬á South African government will consider it a step too far and tear up SACU. So instead the BLNS still sit in an apartheid era time warp where tariffs are unilaterally set by Pretoria and the BLNS are rewarded with stagnant economies but bloated budgets.

Put another way the BLNS get a major subsidy, equivalent to 30% of net exports from South Africa. So South Africans get the jobs and the BLNS get the revenue or put alternatively the BLNS are paid a subsidy whenever they create jobs in South African by importing South African  products. At the same time are being subsidized to keep their own children unemployed. From a revenue standpoint the SACU revenue sharing formula is a heaven sent for the BLNS but from a developmental standpoint it is simply disastrous.
A cesspit of Economic Distortion
Almost every sector you look at in the BLNS is distorted by SACU and its revenue implications. The BLNS all import electricity from Eskom and yet South Africa does not have enough for itself. The reason is that Botswana at least pays for a small portion on contract but the bulk is now imported at spot market prices which are according to engineers  in Gaborone at astronomic levels. Eskom would be in an even worse financial hole without the huge prices paid by Botswana.  But Botswana is subsidized under the revenue sharing formula for every rand of electricity it buys from South Africa.

South Africa can unilaterally raise the subsidies it pays to its automobile producers at will because it knows that the subsidies are based on customs duty rebates, 83% of which is paid by the BLNS states.  Botswana signs an agreement with De Beers to relocate diamond aggregation to Gaborone  from London and that means that the diamonds from South Africa Namibia and some Lesotho from are sold to Botswana and as its imports rise then the level of South African revenue transfers increase. The list goes on and on.

But by far the worst distortion is that the BLNS cannot possibly maintain their living standards and balance their budgets without SACU transfers from Pretoria and will do whatever it takes to defend these transfers.  Botswana now earns more government revenue from SACU than from diamonds.

 The biggest distortion is the effect SACU revenue sharing has on African development. In 2011 SADC was supposed to form a customs union as well. You can only have one external tariff and one customs union and so the SADC negotiations  collapsed because all the BLNS, which are also members of SADC, were opposed because they knew that they would lose revenue if it were shared with all SADC members. As a result the famous SADC time lines receded into oblivion and we are now left with a tripartite free trade area instead. Everyone is kicking SADC integration can further down the road so as not deal with an intractable problem. But the consequence is that a larger SADC economy cannot develop  because the SACU revenue sharing formula stands in the way. Yet the real economic future of the smaller states lies in deeper integration with  a large region which would eliminate the problem of  tiny local markets for businessmen.  And so Zimbabwe and Mozambique could not join SACU and SADC cannot become a customs union.
Comrade Davies leads the way! 
The South African Trade Minister Cde Rob Davies has time and again proposed a ‘development SACU’ where the funds from SACU are used for regional integration and development rather than funding public budgets. This makes infinitely more sense than what is being done now under SACU. He would help his cause along if he could get the South African government┬á not to suggest that this could be done as part of ‘South African aid’. The idea that Pretoria would dole out aid money instead of revenue from SACU which is seen as a legal entitlement has absolutely no appeal to the BLNS.

SACU is an excellent building block for the southern African region but the revenue sharing formula is simply an economic disaster with continental consequences. It retards African integration and continues an apartheid era relationship that should have ended two decades ago. While  R30 billion is a lot of money it is peanuts to a South African government that has tax  revenues of R  1.1 trillion in 2015 and needs no more Zimbabwean style basket cases on its border. South Africa will bear the cost of SACU revenue sharing because removing it would result in an economic catastrophe for its neighbours. The SACU revenue sharing formula will only really be reformed when South Africa can no longer afford the luxury.

Source pwc
These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he is affiliated.


Read this week's paper