Africa, Development & Aid, Economy & Trade, Financial Crisis, Headlines

SOUTHERN AFRICA: Unexpected Low Custom Revenue Causes Budget Shortfalls

Servaas van den Bosch

WINDHOEK, Mar 17 2010 (IPS) - Plummeting revenues from the Southern African Customs Union (SACU) could cause severe financial difficulties in the region, economic experts warn. To make matters worse, the organisation is split over the future of its tariff pool that largely bankrolls the national budgets of its poorer members.

The drop in SACU revenue, caused by reduced imports due to the global economic downturn, is far more serious than foreseen and might seriously affect development goals in most of the union’s member countries, including Botswana, Lesotho, Namibia and Swaziland.

They will either have to cut expenditure in vital areas, such as health, education and infrastructure development, or accumulate additional debt, which would lead to lower international credit ratings and make it difficult to attract international investments.

Although the revenue shortfall doesn’t come out of the blue, southern African governments seem largely unprepared, despite the fact that SACU executive secretary Tswelopele Moremi, in an interview with IPS in August last year, warned: “It is clear that revenues are lower than estimated because of the global [financial] crisis.”

But the latest figures exceed her gloomiest expectations. According to SACU chair Namibia, total revenue from the tariff pool is down by 40 percent. This will have a drastic impact on Namibia’s national budget, to be announced on 24 March, for example, which largely depends on SACU revenue flows. Last year, the country’s government constituted a staggering 39 percent of its fiscal income from SACU revenue.

Namibia’s politicians seemed caught off guard by the severity of the revenue fallout. Last March, finance minister Saara Kuukongelwa-Amadhila said in her budget speech she still banked on 1.2 billion dollars from SACU coffers. But is has now become apparent that Namibia gets just more than half of what Kuukongelwa-Amadhila expected for this year – 699 million dollars.

This might have a negative impact on Namibia’s social spending capacity, especially since Kuugongelwa-Amadhila told IPS she doesn’t plan to raise taxes to finance the runaway deficit.

Despite the SACU shortfall, economists don’t expect Namibia to halt the counter-cyclical budget policy it embarked on last year and which acts against the tide of the economic cycle, but will rather spend money to stimulate the economy that’s in a recession.

“Given the slow recovery in Europe and the United States that affects exports and the domestic (Namibian) unemployment figure that now stands at 51 percent, it’s unlikely government will cut expenditure,” said independent economist and former head of the Namibian Economic Policy Research Unit (NEPRU) Klaus Schade.

“Although there will be marginal cuts here and there, ideally, spending will be increased with money flowing towards improvement of infrastructure and other projects that attract investment and generate employment. This means the deficit will increase,” he added.

The situation could be even worse for other SACU countries. Lesotho and Swaziland derive more than half (in some years up to 70 percent) of their national budgets from the customs union, while Botswana’s relies on 29 percent SACU revenue, according its central bank. Only South Africa is less dependent on the union, as it receives a residual payout, after all other member countries have received their share.

But South Africa, the strongest economy in the region, is not happy with its small share any longer and has requested to change the system of ‘enhanced payments’, which it says favours the BLNS-countries (Botswana, Lesotho, Namibia and Swaziland).

“The South Africans have formally proposed a change in the revenue sharing formula, which is discussed as part of a blueprint to overhaul the customs union,” confirmed Kuugongelwa-Amadhila’s permanent secretary Calle Schlettwein, who is in charge of the SACU working group tasked with this matter.

It appears that South Africa wants a system that instructs the BLNS countries to submit development plans that will be financed through the pool, instead of the union bankrolling national budgets.

“This would be closer to the original development goals of the SACU revenue sharing formula and in some sense fairer,” agreed independent Namibian trade analyst Wallie Roux, suggesting that “if countries play their cards, wisely they could theoretically get more money than they get now”.

South Africa’s demands have been adding oil to an already dangerous fire. Last year, disagreements over interim Economic Partnership Agreements (EPAs) – that regulate market access between SACU and the European Union (EU) – started to cause a schism in the world’s oldest customs union.

While Botswana, Swaziland and Lesotho decided to sign trade agreements with the EU, South Africa and Namibia stalled, demanding the EU to remove the Most Favoured Nation (MFN) clause, which would automatically extend SACU’s trade allowances to third parties.

As a result of this rift, different Common External Tariff (CET) regimes applied to different SACU member states, almost leading to a breakdown of the union.

Apart from the EPAs, SACU also struggles to implement the 2002 Agreement, which seeks to establish common industrial policies, manufacturing standards and other aspects of regional economic integration, with most members accusing economically strong South Africa of trying to dominate the union.

Although SACU finance ministers regrouped in Swaziland in September in an attempt to re-create unity, the union’s centenary celebrations later this year are bound to be sober – as there is little hope for a quick recovery of financial markets and SACU members continue to quarrel over the organisation’s future.