Sacu's day of reckoning has arrived
South Africa has requested an urgent meeting with members of the Southern African Customs Union (Sacu) for as early as February next year in what could be a make-or-break conference for the struggling union.
In July this year, a clearly frustrated Trade and Industry Minister Rob Davies told Parliament that there had been little progress on a 2011 agreement intended to advance the region's development integration, and it was stifling its real economic development.
South Africa's payments to Sacu currently amount to R48.3-billion annually — a substantial amount, considering the budget deficit is presently R146.9-billion, an estimated 4.5% of gross domestic product.
In the past, South Africa has had some room to reposition itself, but as Finance Minister Pravin Gordhan has pointed out, the South African fiscus has come under a lot of pressure as a result of factors such as the global slowdown, reduction in demand from countries such as China for commodities, and reduced demand from trade partners such as the European Union.
South Africa, which according to research data, last year contributed 1.26% of its GDP, or about 98% of the pool of customs and excise duties that are shared between union countries including Swaziland, Botswana, Lesotho and Namibia, wants a percentage of this money to be set aside for regional and industrial development.
The four countries receive 55% of the proceeds, and are greatly dependent on this money, which makes up between 25% and 60% of their budget revenue. South Africa has very little direct benefit, except when it comes to exporting to these countries. It receives few imports.
Changing the revenue-sharing arrangement
Efforts to change the revenue-sharing arrangement so that money can be set aside for regional development would result in less money going into the coffers of these countries.
It would also mean that a portion of the revenue that South Africa's Sacu partners now receive with no strings attached would in future include restrictions on how it is spent.
A source close to the department said adjustments to the revenue-sharing arrangement and the promotion of regional and industrial development were issues on which the South African government was not willing to budge.
So seriously is South Africa viewing the lack of progress on the 2011 agreement, a document prepared for Cabinet discussion includes pulling out of Sacu as one of its options, a source told the Mail & Guardian.
This could not be confirmed by the government, but two senior sources said South Africa was very aware of the dependence of its neighbours on income from the customs union, in particular Swaziland and Lesotho, and the impact its collapse could have on these economies.
Professor Jannie Rossouw of the University of South Africa's department of economics believes a new revenue-sharing arrangement is essential for the long-term sustainability of Sacu countries.
South Africa's contribution
He also said that South Africa's contribution as it presently stands should be recognised as development aid and treated as such by the international community.
Between 2002 and 2013, total transfers amounted to 0.92% of South Africa's GDP, which exceeds the international benchmark of 0.7% set by the Organisation for Economic Co-operation and Development, he said in his research.
"It is noteworthy that South Africa transfers nearly all customs collections to Sacu countries. Total collection since 2002 amounted to about R249-billion, while transfers to Sacu were about R242-billion," Rossouw said. The South African Revenue Service (Sars) recognises that inclusion of trade with Sacu would have a substantial impact on South Africa's official trade balance.
South Africa's total trade deficit for 2012 was R116.9-billion and, according to Sars, had trade with the union been included, it would have been much reduced to R34.6-billion.
South Africa has budgeted to increase its allocation to Sacu from R42.3-billion in the 2012-2013 financial year to R43.3-billion this financial year and in the 2014/2015 financial year.
In 2002, the Sacu agreement was modified to include higher allocations for the most vulnerable countries, Swaziland and Lesotho, and it established a council of ministers, which introduced a requirement for key issues to be decided jointly. In 2011, a summit was convened by President Jacob Zuma in which a five-point plan was established to advance regional integration.
Review of the revenue-sharing arrangement
This involved a review of the revenue-sharing arrangement; prioritising regional cross-border industrial development; making cross-border trade easier; developing Sacu institutions such as the National Bodies (entrusted with receiving requests for tariff changes) and a Sacu tariff board that would eventually take over the functions of South Africa's International Trade Administration Commission (Itac); and the development of a unified approach to trade negotiations with third parties.
Davies told Parliament that there had been little progress in the past three years on these five issues.
Xavier Carim, the director general of the international trade division of the department of trade and industry, said there had been positive developments regarding agreements on trade negotiations, such as those with the European Union and India on trade, and progress had been made on the development of Sacu institutions, but progress was slow on the other issues.
Davies told Parliament it was difficult to develop common policy among countries that varied dramatically in economic size, population and levels of economic, legislative and institutional development.
He cited differences over approaches to tariff settings as an example.
"South Africa views tariffs as tools of industrial policy, while for other countries tariffs are viewed as a source of revenue," Davies said.
A proposal that cause all the problem
"A key problem that led to differences was the proposal by one member for lower tariffs to import goods from global sources that were cheapest, which ultimately undermined the industry of another member. This was primarily an issue of countries who viewed themselves as consumers rather than producers."
The South African government is trying diplomacy as its first option. A senior government source said issues around Sacu made up a large part of talks last week between Botswana and South Africa on the establishment of co-operative agreements on trade, transport and border co-operation.
Catherine Grant of the South African Institute of International Affairs said Botswana had long been considered the leader of the four countries. It would make sense for South Africa to bring Botswana on board before the meeting.
Grant said the Sacu agreement needed to be re-examined and modernised.
"There needs to be a review of the revenue-sharing formula that is less opaque and is easier to understand. The present system is complicated, making it hard to work out exactly how much countries are getting. It's clear that Rob Davies feels hamstrung by Sacu and has done for some time, because decisions cannot be made without the agreement of all five members, who have different needs and requirements."
The trade balance is one of the elements that resulted in South Africa's current account, which has recorded significant deficits in recent months, coming in as high as 6.5% of GDP in the second quarter of 2013.
Trade between South Africa and Sacu has always been recorded, but for historical reasons it has been kept separate from official international trade statistics.