"Collapse of SACU could sink Botswana - study" - a response

| Thursday January 7, 2010 00:00

According to the article, Botswana is facing economic jeopardy due to the Southern African Customs Union (SACU) which is threatening to break up after the signing of the Interim Economic Partnership Agreement (IEPA) by Botswana, Lesotho, Mozambique and Swaziland; while other SADC EPA Member States, namely, Angola, Namibia and South Africa did not sign.

The article is based on the BIDPA Briefing of September 2009 and gives the impression that if SACU were to collapse, Botswana would face unprecedented challenges that would threaten her current and future economic stability.  My objective is to clarify issues and allay fears among those who might think Botswana is a helpless dependant of SACU.

First, I would like readers to know that the SADC-EC Economic Partnership Agreement negotiations started in 2004.  The SADC EPA configuration consisted of Botswana, Lesotho, Namibia and Swaziland (the BLNS countries), Angola and Mozambique, while South Africa was an observer then. 

The latter had already signed a bilateral trade agreement with the European Union (EU) called, Trade, Development and Cooperation Agreement (TDCA), the reason why she was given an observer status in the negotiations.  However, in 2005, both the SADC EPA group and the European Commission agreed that, in the interest of maintaining regional integration and cohesion, South Africa should become an active member of the SADC EPA group.   A framework document was developed to this effect. 

This document was submitted to the EC, in March 2006, who took a year to respond to it.  After their approval, South Africa participated fully in the negotiations that led to the initialing and finally signing of the IEPA. 

Most importantly, a Ministerial Meeting of the SADC EPA states, held on May 20 2009, in which South Africa participated, decided that Member States who were ready to sign the IEPA should go ahead while those who were not ready were also free to refrain. 

While there has been speculation of an imminent  SACU collapse, more especially in South Africa, after the signing of the IEPA, several SACU meetings were held at both Senior Officials and Ministerial levels. 

So far the position that has been maintained is that the SADC EPA group should continue to negotiate as a block and work towards resolving all the issues that would otherwise make it difficult to implement the IEPA, namely, the alignment of the TDCA and IEPA tariffs and rules of origin, among others.  As it is normally the case with all Unions, differences among SACU Member States exist, but these are more of an expression of differences in national interests than a desire to break up SACU as alleged in the BIDPA Briefing and the Mmegi article.

It is our expectation that the on-going negotiation process will result in a mutually beneficial outcome for all parties, including Member States who have not yet signed the IEPA. 

Further, one of the key objectives of the 2002 SACU Agreement is to 'enhance the economic development, diversification, industrialisation and competition of Member States'.  In their most recent meeting in Namibia, the SACU Council have rededicated themselves to a United SACU and for common policies to be developed as envisaged in the Agreement.  With these developments, SACU is repositioning itself to be the anchor for deeper regional integration and regional economic development.

According to the BIDPA and Mmegi article, Botswana receives a share from the SACU revenue pool which cannot be justified on the basis of the country's share of GDP or imports into SACU.  In fact, on the South African side, some people even think that the SACU revenue share accruing to Botswana is an unjustifiable income transfer that is denied the poor in South Africa in favour of the rich in the Middle Income Botswana. 

What readers need to understand is that from its origin in 1910, the SACU agreement gave South Africa the privilege of setting and managing the SACU tariff.  Therefore, the 2002 SACU Agreement tariff formula was set with a view to, among other things, compensate the BLNS, in particular Botswana, for:

(i) The loss of fiscal discretion for setting the tariffs as South Africa set and administered the Common External Tariff (CET);
(ii) The CET price-raising effects which adversely affect the industrialization process of the BLNS countries, especially in cases where the tariffs affect the cost of imported capital and intermediate inputs;
(iii) The industrial polarisation effect in which, because of the level of development of the South African economy, industries tend to locate in South Africa, from where they supply the BLNS markets with duty-free exports; and
(iv) The volatility in the SACU CET due to the influence of the South African business community in the setting and amendments of the tariffs which adversely affect the BLNS countries' private sector production, and the stability of government revenue.

This, therefore, means that what Botswana has suffered as a result of the current SACU structure is mainly in terms of the loss in industrial development and the employment opportunities which go along with it. 

The SACU revenue, which is partly meant to compensate for this loss is by far less than the loss, more especially that due to the World Trade Organisation and regional integration developments, tariffs, along with tariff revenues, which are generally declining globally.

Botswana and the other SACU member states were aware of the magnitude of the loss to their countries when they negotiated the current revenue sharing formula during the negotiations leading to the 2002 SACU Agreement.  They are currently setting up a SACU Tariff Board and national tariff bodies so that they can exercise their right to participate in the SACU tariff setting and management.

Further, Botswana has in place the Competition Policy of 2005 and, in addition, Parliament has recently passed the Competition Bill of 2009, which seeks to address problems of unfair competition that have inhibited the growth and development of industries in the country.

The paper further alleges that South Africa would raise up to R13 billion Rands if she were to quit SACU.  Unfortunately, it does not inform the reader what South Africa stands to lose in the process.  Botswana imports from the Common Customs Area were R15,483 million; R20, 948 million and R27, 340 million in 2006, 2007 and 2008, respectively.  

These imports mean that Botswana supports South African industries and employment which will be seriously affected if SACU were to break-up and Botswana chooses to import from cheaper sources like China, India and other regional trading partners. These figures suggest that South Africa will think very hard before they can take any drastic action leading to the collapse of SACU.

Finally, the paper postulates that if SACU were to collapse Botswana would have to raise income tax, value added tax and import duties.  It is important for the reader to understand that this would not be the optimal response by Botswana.  The best option, which the country has already started working on, is being driven by the need to reduce the country's dependency on tariff and mineral revenues.   This involves the use of tariff policy, together with membership to regional integration groupings, as a tool for agricultural and industrial development. 

Botswana is currently working on the development of six hubs, namely, the Agricultural hub, the Botswana Innovation hub, the Diamond hub, the Education hub, the Health hub, and the Transport hub.  In addition to this, Botswana is developing a Special Economic Zones (SEZs) Policy that is meant to develop government SEZs, Public - Private Partnership Zones and Private Sector SEZs.  These will lead to Botswana's industrialisation and economic diversification, as well as broadening the country's tax base.

It is therefore clear from the above discussions that indeed Botswana needs SACU and stands to benefit more from being a member of SACU than being outside.  It is equally clear that South Africa, which has unfortunately been portrayed as an indispensable member of SACU, equally needs SACU.  As such, the relationship is symbiotic. 

The current global trade policy changes require countries to move towards defining the benefits of regional integration on the basis of agricultural and industrial development for the mutual benefit of all, rather than on raising tariff revenues.  The benefits of this policy stance, which have hither to been down played in SACU when it comes to the BLNS, are by far greater than those of the status quo.   

B G Mphetlhe
Acting Permanent Secretary
Ministry of Trade and Industry