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ECONOMY-SOUTHERN AFRICA: Threat of States Collapsing Looms Large

Nastasya Tay

JOHANNESBURG, Sep 16 2010 (IPS) - The mooted restructuring of the revenue-sharing agreement of the world’s oldest customs union could lead to at least two of its Southern African members collapsing into “failed states” status as well as macroeconomic crises in two of their neighbours in the sub-region.

SACU's smaller members states depend on import revenue transfers for their survival. Credit: Nastasya Tay/IPS

SACU's smaller members states depend on import revenue transfers for their survival. Credit: Nastasya Tay/IPS

Even before celebrating the centenary of its establishment in April 2010 the Southern African Customs Union (SACU) has been in turmoil because of the talks on a so-called economic partnership agreement (EPA), one among six that the European Union is currently negotiating with the African, Caribbean and Pacific (ACP) states.

Pressure from the EPA negotiations and decreasing customs revenues as a result of the global financial and economic crisis have pushed the grouping to reconsider some of its founding policies.

Matters have been elevated to presidential level. Heads of state from the five SACU member countries – South Africa, Botswana, Lesotho, Namibia and Swaziland – are meeting on a semi-regular basis for the first time to try and resolve these issues. They are due to reconvene in October.

The ensuing tensions have caused experts to question the future of the union, and its possible disintegration.

Peter Draper, head of the development through trade programme at the South African Institute of International Affairs (SAIIA), argues that, “the EU leans on the door of SACU and it almost falls in. It shows how weak it was to begin with”. SAIIA is an international affairs research institution.

But Matthew Stern, managing director of a consultancy called Development Network Africa, believes SACU will endure.

“SACU has been through so many squabbles, yet it always continues. When it gets down to the hard realities of the region, most member states cannot survive economically without this arrangement, so they have to make it work,” Stern believes.

But that is part of the problem. SACU’s smaller member states are so dependent on revenue transfers from the customs union that a re-evaluation of this arrangement could prove disastrous. And that is what is on the table.

The formula behind the revenue-sharing agreement — the economic calculation that determines how large a slice of the import tariff pie each country gets — is under review.

As the economic hub of the sub-region, South Africa accounts for over 90 percent of total revenue raised from import tariffs. This revenue is divided among all SACU members. Therefore, with the current arrangement South Africa contributes large sums of money to its significantly poorer neighbours.

Amid signs of political instability in South Africa, with citizens engaged in violent protests about lack of government service delivery and Africans from the rest of the continent increasingly being targeted for xenophobic attacks over the past decade, the government feels under pressure to explain why it hands money to its neighbours.

Draper describes the revenue-sharing arrangement as a ‘‘budget transfer system’’ and regards it as providing budgetary support with no accountability.

Stern, who helped write the current formula, believes the global economic crisis has provided the impetus for the countries to sort out revenue-sharing issues.

“While the countries were benefiting from the customs boom, it would have been difficult to get any of them around a table but Botswana, Lesotho, Namibia and Swaziland are experiencing severe fiscal problems now,” explains Stern.

Between 2003-2008, payments via the revenue-sharing agreement to Botswana, Lesotho, Namibia and Swaziland tripled. In the last two years, they have halved.

Botswana has applied for a one billion dollars loan from the African Development Bank, and both Swaziland and Lesotho are applying to the Washington-based financial institution the International Monetary Fund for assistance.

By Stern’s estimation, in 2008-2009 SACU payments made up 70 percent of Swaziland’s national budget and 55 percent of Lesotho’s. This has now dropped to approximately 30 percent for Swaziland.

“That is 40 percent of total government revenue in a year, gone,” Stern points out. “No country can deal with that scale of revenue volatility.”

There are also broader implications for regional cooperation.

Roman Grynberg, senior research fellow at the non-governmental Botswana Institute for Development Policy Analysis, (BIDPA), describes the revenue- sharing arrangement as the “elephant in the room of regional integration in Southern Africa”.

He believes that, without reform, not only SACU but also the Southern African Development Community cannot progress: “Finding a working formula is a precondition for regional integration.”

But, if fundamental restructuring is not done with prudence and consideration and with a long period of transition, the region will have two more failed states and major macroeconomic crises in Namibia and Botswana, warns Grynberg.

Zodwa Mabuza, CEO of the Federation of Swaziland Employers and Chamber of Commerce, agrees. From her perspective, a shift in the SACU revenue- sharing agreement would have disastrous implications.

“If the plug is pulled without any safety net, it would basically be creating a failed state,” Mabuza asserts.

The customs union also has a profound effect on the way the five countries conduct business among themselves, facilitating key determinants of trade, such as border access, and the stability that comes with being part of a common monetary area.

“Whatever happens to SACU, the ease of doing business should be ensured,” insists Mabuza. “We do not want to create another Beitbridge where trucks wait for days (on the border between South Africa and Zimbabwe). Trade facilitation is paramount.”

Mabuza describes the economic situation in the tiny Swazi monarchy as desperate. “If this continues, the government will not be able to provide services like health and education,” she says.

Grynberg concurs. He says it is time for careful reflection. “When you’ve got a 100 year-old foundation, no matter how antiquated it may be, and you pull out the bottom brick you cannot expect everything to be fine.”

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