Although the world economy is slowly but surely showing signs of recovery, Botswana faces imminent economic jeopardy with the shaky Southern African Customs Union (SACU) threatening to break up.
If that happened, it could result in the country losing billions of Pula, forcing it to take drastic measures like imposing a higher Value Added Tax, raising income tax and charging higher tariffs on imports from South Africa and other neighbouring countries to make up for the losses from the SACU Revenue Pool.
According to a study conducted by the Botswana Institute For Development Policy Analysis (BIDPA), the Interim Economic Partnership Agreement with the EU has had a divisive effect on SACU after Botswana, Lesotho and Swaziland initialled the treaty last June while Namibia and South Africa balked at it, probably because of little accruing to them.
In the event South Africa dithers and SACU breaks up, the BIDPA study estimates that Botswana will lose an equivalent of up to 29 percent of the total revenue required for the 2009/2010 budget.
Statistics show that Botswana received R5,634 million from the SACU revenue pool in 2006. "Botswana's dependence on the SACU revenue has grown steadily over time," the BIDPA study says. "By 2008, Botswana's dependence on SACU revenue had grown to 27 percent of (the) total revenue (for the) 2007/8 budget. It is estimated by the Bank of Botswana to rise again to 29 percent in the 2009/10 budget.
"As a result of the global downturn and its impact on diamond exports, the transfers from Pretoria, of SACU revenue, will be Botswana's single largest source of revenue in 2010."The study also shows how Botswana, Namibia, Lesotho and Swaziland have been benefiting from a generous but skewed SACU revenue formula. "Botswana accounted for some 4.5 percent of the total SACU GDP in 2006/7 but received almost 25 percent of the customs revenue from (the) SACU customs pool, while South Africa, which accounted for 92 percent of the SACU GDP, received only 20 percent," it says.
"Why is this? It is because the revenue sharing formula for customs revenue is based on a share of intra-SACU imports and not a share of global imports or GDP. South Africa imports very little from other SACU members, while Botswana and the other BLNS (countries) import most of their goods from South Africa. The formula thus benefits Botswana and the other BLNS (countries) because of their dependence on South
Apparently the democratically elected South African government accepted the skewed revenue sharing formula during renegotiations of the SACU agreement in recognition of historical inequities in the old SACU and the constraints it placed BLNS development.
Other than the formula that favours BLNS countries, SACU pays out R2 billion as a development component, out of which Botswana receives R500 million.
This has also stirred some opposition within South Africa's civil society that feels that their country is subsidising medium-income countries like Botswana when their own people wallow in poverty and unemployment.
It is estimated that due to the controversial SACU formula, South Africa is probably losing up to R13 billion in tax revenue. The BIDPA study concludes that Botswana, Lesotho, Namibia and Swaziland are all financially dependent on SACU revenue. Botswana's import duties account for 7.8 percent of imports, what it actually earns from customs revenue is approximately 21 percent of imports.
The absence of such revenue could be catastrophic for Botswana. "In the absence of SACU and the revenue formula, Botswana would have to raise a level of import duty equivalent to 21 percent of imports in order to ensure that there is no loss of government revenue," says the study. Based on 2007 figures, Botswana would have to collect approximately P3 billion to P4 billion if import duty collections were based upon the share of GDP rather than the current SACU formula.
The study warns that the implications for a Botswana without SACU would mean that the Botswana Unified Revenue Services (BURS) would have to be strengthened in order to be able to shoulder the administrative and financial burden of raising customs revenue.
With 80 percent of Botswana's imports emanating from South Africa, it might be imperative to impose very high tariffs to raise the current level of duties or alternatively impose tariffs on South African and other SACU imports, an action that could have serious ramifications for the economy and relations with South Africa, the other BLNS countries and SADC.
"The other far more probable but unpalatable alternatives available to the government of Botswana, in the event that SACU broke up, would be to significantly raise Value Added Tax or Income Tax to compensate for the loss," the study says.