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SACU: Dead man walking?

The Trade Beat (South African Institute of International Affairs)

SACU: Dead man walking?

By Roman Grynberg

SACU: Dead man walking?

In the second of our SACU Perspectives series, Professor Roman Grynberg gives his take on the future of the Southern African Customs Union (SACU). Talks are scheduled to be held in Lesotho from 30 to 31 January on SACU and the revenue-sharing formula.

Late last year, the African cyberspace was buzzing with rumours that the region’s oldest trade agreement, the Southern African Customs Union or SACU (Botswana, Lesotho, Namibia South Africa and Swaziland), was about to be finally killed off by South Africa. From Windhoek to Cape Town to Mbabane, trade policy wonks were debating what the most recent moves from Pretoria regarding SACU really meant.

The Southern African Customs Union is 101 years old and is the oldest trade agreement in Africa. When one very senior BLNS treasury official was asked whether he thought South Africa would soon pull the plug on SACU he answered honestly: ‘Maybe’.

No-one really knows whether what is widely perceived as a very tough negotiating position from Pretoria with a ‘take it or leave it offer’ expected soon, reflects a desire to finally just kill off SACU or whether it is just a negotiating position to soften up Botswana which is seen in Pretoria as the ringleader of the BLNS states (Botswana, Lesotho, Namibia and Swaziland). The fact that Pretoria has recently finished a series of bilateral agreements with Lesotho, Swaziland and Botswana that include trade issues lends credence to the idea that what is currently happening is not just a negotiating tactic and that Pretoria is preparing a SACU exit strategy.

SACU- No friends in Pretoria or Washington
The SACU agreement is a particularly odd trade agreement because, unlike other agreements, it is run by the treasuries or finance ministries of the five members and not by the trade ministries. This is because SACU remains principally about the issue of distributing the billions of rand of customs revenue earned by the five members on their international trade with other countries. SACU has devised a method of distributing these import duty revenues in a way that benefits the smaller members (the BLNS) by each country getting a share of the customs revenue based on their share of intra-SACU imports. That means South Africa gets precious little because it imports very little from the other SACU members and ends up paying the BLNS about R15-18 billion per year more than it would if SACU did not exist.

This has not only annoyed the treasury in Pretoria and the IMF which hates the bloated BLNS budgets that result, but a third bedfellow Cosatu sees no reason why South African workers and taxpayers should subsidize the huge and over paid public services in Lesotho and Swaziland or subsidizing Botswana which has a higher GDP/capita than South Africa. But this is not news.

What is news is that normally well informed sources indicate that now South Africa’s Department of Trade and Industry has begun to see SACU as a threat to its own ability to set policy. For a hundred years Pretoria in effect determined the external tariff unilaterally. Until 2002 the piddling neighbours did not have any legal say but after the end of apartheid a new ‘more equal’ SACU was signed in 2002 where the BLNS would all establish national tariff bodies and then a SACU tariff board which would agree on the external tariff. This would mean an end to Pretoria determining the external tariff unilaterally. You would actually have to genuinely consult with the neighbours. For ten year after the signing of the 2002 SACU agreement the BLNS did not move to establish those national bodies. The ‘good reason’ was that the BLNS did not have the ‘technical capacity’ and needed training. The ‘real reason’ is harder to determine but a common line heard in many BLNS states was that if the BLNS actually tried to implement the Tariff Board and remove South Africa’s sovereign right to set its tariffs in effect unilaterally that would be a step too far and Pretoria would not accept it. Botswana has now moved to establish a national tariff body.

This, it is felt,will limit South Africa’s ability to raise and lower tariffs at will and there is simply no appetite in Pretoria for coming to agreement with the neighbours formally when raise import duties.

SADC-Get out of Jail Free
So if Treasury, DTI, Cosatu, and the IMF all hate SACU why is it still alive? The continued existence of SACU is all the more perplexing when one considers that the BLNS states in effect committed fiscal suicide by signing the SADC free trade agreement in 2005 and implemented it in 2008. This agreement which includes all the SACU members gives South African exports similar but not identical market access to that available under SACU. That means Pretoria was given a ‘get out of jail card’ for free. Pretoria could walk away from SACU at any moment, save R15-18 billion and South African exports would still continue to flow across the Limpopo basin in more or less the same uninterrupted way.

Zuma to the rescue?
So why didn’t the South African government just tear up the SACU agreement in 2008 after SADC was implemented? SACU has achieved what the apartheid regime had meant it to do. All four of the BLNS are completely financially dependent upon the SACU transfers and if they were to stop there would be an economic catastrophe in Swaziland and Lesotho ( which are 60-70% dependent for revenues from SACU) and just a serious financial disaster in Windhoek and Gaborone which are somewhat less dependent (30-40%). In Botswana SACU has over the last few years become more important to the revenue of the country than diamonds, the country’s main export. This then explains SACU’s only real ‘friend’ on the other side of the Limpopo basin - the South African Presidency. Despite the desire of most of the lesser parties in South Africa to end SACU and the massive fiscal transfers that it entails and transferring the funds for service provision the question that President Jacob Zuma has to face is whether he wants to go down in the region’s history as the man who crippled the Namibian and Botswana economy and created two more ‘Zimbabwes’, i.e. Swaziland and Lesotho, right in and on the country’s border. It is for this reason alone that SACU remains alive but on death row - in effect, dead man walking - just waiting for someone to pull the switch and end its life.

A time for Radical Reform

There is of course no need to end SACU if only the BLNS would recognize that the political reality which underpinned the revenue sharing of SACU for 100 years simply no longer exists. These transfers were needed during the apartheid era when SA needed to buy its neighbours. SA now has pressing needs for development inside its own borders that will one day overcome the political and economic risks of pulling the plug on its neighbours. There is no longer any political basis for the old SACU and it needs to be revised into a development SACU in ways similar to what South African Trade Minister Rob Davies has often suggested. What needs to be done is that SACU funds should be used to create a development community which ends the old revenue sharing arrangements and creates a new one based on mutually beneficial and agreed development spending. Needless to say a 10-15 year period would be needed for adjustment away from the current system. Unfortunately we are still a million miles from this and the BLNS treasury officials continue to ‘negotiate’ over minor revisions in the old formula when radical reform is the only thing that will save SACU from the executioner.

Let Mozambique in!
The SACU revenue sharing formula needs wholesale reform now in order to bring it into the 21st century and to eventually deepen the integration between members of SACU. The best way to start is to let Mozambique, which has long expressed its desire for SACU membership, join the organization. Under the current formula this would result in a very substantial decline in revenues for the BLNS and is the reason why Mozambique has never joined. But accepting SACU as a fraternity of genuinely equal nations would necessitate a complete rethink of its revenue-sharing arrangement.

This would radically shock SACU, which is precisely what is now needed. As it stands, without real reform, the SACU revenue-sharing formula is the single and most immediate impediment to the integration of Southern Africa. The SADC free trade area can never deepen into a Customs Union and SACU can never widen to include countries like Mozambique under the current formula.

It is in the longterm interests of the BLNS to lead a real and radical reform of SACU rather than to try to negotiate minor revision of the formula and wait until Pretoria (or worse still, the IMF, in the context of a South African structural adjustment programme), give the ‘coup de grace’ to this very profitable apartheid-era formula and finally end the dysfunctional relationship it has created between the BLNS and South Africa.

An announcement on the future of SACU is widely expected from South Africa early this year.

These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed.

 source: Trade Beat