Botswana's P8bn SACU nightmare

| Friday January 21, 2011 00:00

It is a worrying image of a group of small economies namely Botswana, Lesotho, Swaziland held hostage by the dominating economic power of South Africa. Botswana is set to suffer irreparable damage if South Africa has its way and the new revenue calculation system is implemented. This country will lose as much as 2 per cent of its GDP. Other SADC countries watch with trepidation for the future of further regional economic integration hangs in the balance.

Mmegi publishes Grynberg's article, entitled SACU Revenue Sharing Formula and the Future of SADC. He writes in his personal capacity and his views are not necessarily those of BIDPA.

If you opened the Sothern African Development Community (SADC) home page last year it would tell you that by the end of 2010 there was supposed to be a customs union in place between the 15 SADC members. It no longer appears on the web site. A customs union is where the members, decide collectively on one common external tariff for goods coming from outside the area. All goods traded internally are supposed to be duty free. SADC is at present just a free trade area where all goods traded are duty free but there is no common external. Such a common external tariff as has existed for 100 years between the Southern African Customs Union (SACU) countries (i.e. South Africa, Botswana, Lesotho Namibia and Swaziland) which are also all members of SADC. Like so many things on the international agenda that people don't really want to do, the 2010 SADC customs union deadline was just allowed to slip. Several reasons are commonly given for why.

First, the SACU countries have a revenue sharing formula that Pretoria hates because it sees it as a massive burden on its treasury and until the SACU countries can figure out how to distribute their customs revenues they simply will not agree to extend the customs union membership to the rest of other 10 members of SADC. As one South African official put it, 'As soon as you started to discuss the SADC customs union at a meeting the non-SACU members of SADC would say they want the SACU revenue sharing formula, something to which none of the SACU members will agree'. As you simply cannot indefinitely have two separate revenue sharing in one customs union, until this SACU revenue sharing issue is resolved no SADC customs union is possible. But getting a new formula that will be agreeable to all SACU parties and does not discourage new members will be a hard ask as it will involve real sacrifice and pain.

The second reason why SADC is not proceeding is because southern African countries have watched the SACU integration process and increasingly they don't like what they see. South Africa has grabbed all the production benefits - virtually everything produced for the SACU market is made in South Africa and almost nothing is produced in the four other members. This is what economists call polarization- where one country in a common area gets all the benefits. As a result, while SADC members are increasingly signing all sorts of trade agreements to liberalize, the trade ministers are going home and in fact raising ever more non-tariff barriers to trade because they do not believe that liberalization will actually benefit anyone other than South Africa and hence they jealously hold on to what little industry they have at home. The third reason why the SADC integration is not deepening is that South African business no longer needs it and the South African government doesn't want it. South African ministers may make lovely speeches at both SACU and SADC meetings about their support for deepening integration but behind closed doors their officials say the exact opposite.

The nature of trade in southern Africa has changed profoundly since the end of apartheid and while South Africa once exported goods to all the SACU and most of the SADC countries, it now exports wholesale/retail firms which are owned or based in South Africa and are increasingly dominating all of the southern Africa retail trade.

Their trucks rumble across the Tlokweng border post every morning to Botswana loaded with South African goods bound for South African supermarkets and retail outlets located all over the country. This scene is repeated daily throughout SACU and SADC. The reasoning of South African officials and business is that these trucks will continue to cross the border whether there is a SADC or SACU customs union or not. All they need is free trade. South African officials don't want the SADC customs union either because they are now playing in the big league - they are now formally BRICS, working with the likes of Russia, India, China and Brazil and don't want their trade policy dictated by a collection of small developing and least developed countries which is what would happen under a SADC customs union. Not wanting trade policy dictated by the interests of someone else is certainly one thing all SACU and SADC members appear to have in common.

What is emerging in the region is a dangerous cocktail that is undermining Southern African integration with South Africa seeing itself as paymaster in SACU with no on-going commercial interests in further deepening integration with the rest of SACU or SADC. SADC countries, on the other hand, see themselves as victims of a self-interested hegemonic South Africa where all the benefits of a customs union have gone to Pretoria and SACU countries have had to pay much higher prices in order to protect South African made cars and clothes. The only thing South Africa really wants in terms of regional trade policy and strongly supports is the free trade agreement between SADC, the East African Community and COMESA. This idea is a modern metamorphosis of a very 19th century vision which would allow the trucks to keep flowing across the Limpopo with Pick n Pay and Woolworths selling South African goods from the Cape to Cairo. Sounds familiar? Cecil Rhodes would have felt right at home in this vision of Africa!

On Friday 21st SACU officials will meet to consider the very first issue blocking further SADC integration which is the SACU revenue sharing formula. They are considering a report which, if implemented would have the most far reaching implications for SACU customs union and may well result in its demise.

The draft report proposes a huge increase in customs and excise revenue for South Africa, upwards of 12 billion rand per year, at the expense of Botswana, Namibia and Swaziland. Under the proposals Botswana would be the greatest loser paying 2/3 or eventually 8 billion rand of South Africa's 12 billion rand increase in revenue. By a clever sleight of hand Lesotho, the poorest SACU member, will be slightly better off thereby dividing it from its traditional allies in SACU.

The SACU secretariat consultants proposed formula would see revenue decline by a maximum of 2 percent of GDP per year in Botswana, Namibia and Swaziland for a period of eight years. This according to the SACU report the decreases in government revenue would be seen as 'incremental' and not a decrease in revenue of catastrophic proportions. Nothing could be further from the truth. Swaziland, with over 60 percent of government revenues coming from SACU transfers is of questionable economic viability without these funds. The implications for Namibia and Botswana would also be very serious indeed. For Botswana, the most prosperous and stable SACU country, a 2 percent of GDP annual decline in government revenue for eight years from 2012-2020 followed by what will almost certainly be an even more substantial decline in diamond mining revenue as the huge Jwaneng diamond mine starts to wind down (see National Development Plan 10) will have dire long term consequences for the country. The current SACU proposals will only serve to further increase the perception of inequity in SACU where South Africa, which will get a further 12 billion rand in revenue, and is seen to have gained all the production benefits from SACU which stem in no small part from the billions in subsidies it has offered industry to locate there. Late last year the South African Trade Minister announced a further 13 billion rand in subsidies for firms locating in South Africa. These are subsidies that no small SACU country like Botswana can possibly hope to compete with.

The current SACU proposals will not solve the basic problem of bringing more members into SACU or creating  a SADC customs union but, if accepted , will create long term economic instability in all of South Africa's near neighbors and may well turn Swaziland, the most vulnerable of all the SACU members into a failed state. The proposals will almost certainly be rejected and should be rejected by the South African political leaders if they are actually concerned about the stability of the region than its revenue flows.

*Grynberg, Senior Research Fellow at the BIDPA and the views expressed are his own and not necessarily that of BIDPA.