THE MAGIC SACU STOKFEL WILL NOT LAST FOREVER (PART II of II)
...this is a continuation article. Please read part one of our two series here.
Read part one here.
"...Without SACU as a source of revenue we would be confronted by untold starvation in this country and other social ills I am even terrified to mention. The elderly grants would be compromised severely and the machinery of government would grind to the slowest pace ever. However, no one is talking about these potential problems except that everyone is happy to comment as to how much we will be getting from SACU this year or the next..." Jan Sithole 2013.
Understanding SACU
Perhaps the starting point is to understand what exactly are SACU revenues.
Customs duty: means any duty leviable under Schedule number one or two on goods imported into the Republic (South African Revenue Services)
Excise duty: means any duty leviable under Part two of Schedule number one on any goods manufactured in the Republic (South African Revenue Services)
BLNS States: Botswana, Lesotho, Namibia, Swaziland
SACU: the organization administering the pooled customs revenue for its member countries.
To be honest, the organisation managing SACU receipts does a good job mystifying the way pooled funds collected by the customs union are distributed to member countries.
Customs duties + Excise duties = SACU Revenue pool
Due to the size of its economy, most imports into the customs union are handled mainly at South African ports. Membership of the customs union generally means that customs member countries adapt their customs collections to the South African Customs and Excise duties Act. The Act identifies two categories of duty to be collected at the ports of entry - customs duties and excise duties (defined above). These definitions matter to this discussion because they are inputs into a revenue sharing formula we aim to explain.
The amount of revenue SACU manages is equal to the sum of the customs pool and the excise pool collected at all ports of entry from all the member states (see definitions above). The overwhelming proportion of the revenue collected at the ports emanates from the customs pool because it is a category levied on all goods/services entering into a country.
For instance, Value Added Tax (VAT) when applied to the majority of goods/services entering a country is an example of a customs duty.
What a rational customs formula would look like:
It would make sense for the customs union to allocate the pooled funds proportionally i.e. the customs value of good/services destined for a specific country would be divided by the total value of customs collected for the SACU region to give the percentage allocation of the pooled funds. e.g: percentage customs duties allocated for Swaziland = Customs duties on goods/services destined for Swaziland
Total value of customs collected for the SACU region
According to this formulation, South Africa would collect more than 95 percent of the customs duties because the size of its economy is much larger than the smaller BNLS countries.
The late trade unionist and President of the Swaziland Democratic Party (SWADEPA) Jan Sithole. Writer says he was one of the leaders who expressed concern about SACU revenue sharing formula
Deviating from what is rational
Instead, SACU attributions is based on a country's proportion of intra-SACU trade. At the point of revenue distribution, the revenue sharing formula therefore omits any consideration of goods entering into a country directly from outside the customs union into the country of final destination. For instance, imports that arrive at OR Tambo from outside the BLNS countries destined for any location inside the Republic of South Africa are not considered intra-SACU trade.
Intra-SACU trade is trade between the member SACU states only. Given that South African economy dwarfs the smaller BLNS states, it follows that there will be more goods and services transferred from South Africa into the BLNS states. South Africa has a population of 56 million people with a GDP in excess of 300 billion USD. The combined GDP of the BLNS nations is hardly a 1/10th of that number, sitting at 30 billion.
Strictly speaking, it doesn’t make economic sense for a 300 billion USD GDP economy to cede its customs revenue to a formula which only considers trade amongst itself and four minor neighbouring economies as the basis for the distribution of the total pool of funds collected, the majority of which was generated due to South African imports from countries around the world.
So how does the customs component work?
What happens is that each SACU member state is required to record the value of goods entering and exiting their border. The value of goods and services thus becomes the basis on which the share of the customs component is calculated. The mathematics behind this formula isn’t very complicated. However, given that there are four different states all trading with each other the calculation can seem daunting to comprehend. However, the key issues to take note of are:
1) South Africa being the largest and most developed economy will export much more to the BLNS states than it imports.
2) Smaller BLNS countries will import mainly from South Africa and the value of these imports will likely exceed their exports to South Africa.
3) Accordingly, customs duties are paid to the country in which goods are destined or imported into.
4) In effect, this formulation disadvantages South Africa considerably as it means that the revenue generated from customs paid for by South African residents for goods and services originating outside the SACU member states will be reduced significantly.
5) This has prompted some commentators to correctly argue that SACU is more of a developmental project than an organization whose function is to distribute customs dues.
Action SA leader Herman Mashaba. Writer says his party may very well pose a danger were they to discover the implications of the SA revenue sharing formula with countries like eSwatini.
How does the excise component work?
The excise component of the revenue formula is significantly smaller than the customs component, and it doesn’t significantly alter the allocations of the total pooled funds. The excise component is also the component by which South Africa recoups much of what ordinarily would be its own import revenue as it has the largest and most developed economy and manufacturing sector. The first or main part of the excise component is relatively straightforward.
The main part of the excise component to a large extent (85% of the excise component to be exact) is based on the size of each member state's economy when measured in terms of GDP. The principle used in distributing the 85% excise pool is that each country will receive a share directly proportional to the size of its economy when measured against the other member states.
If country A has a GDP of R10B and the sum of the GDPs of all the SACU countries is 100B, then it follows that it will be allocated 10 percent of the main part of the excise pool. Given the fact that South Africa is the most developed economy it follows that it will benefit most from the main excise component.
The excise component is made slightly more complicated by the introduction of the “so called developmental component” which amounts to only 15 percent of the excise pool. The developmental component does the opposite to the main part of the excise component wherein the GDP value of a member state is now inversely proportional to its share in the developmental component.
The introduction of the developmental component is relatively insignificant because the excise pool is generally much smaller than the customs pool itself.
What the current revenue formula in effect does
A study by DNA Economics in 2017 calculated the difference between a rational revenue sharing formula (green) and the current formula agreed in 2002 (orange) (Ramkolowan, 2021).
The calculations by DNA economics give credence to the idea that the SACU is a South Africa funded developmental project for the BLNS states. Amongst the BLNS states, the formula is benefits countries according to:
(i) How much they import from South Africa (and other BLNS states)
(ii) Size of their GDP.
Amongst the BLNS group, the formula seems to benefit the countries with a relatively larger economy (ie, Botswana and Namibia vs Lesotho and Swaziland).
Conclusions
• In strict terms the customs union doesn’t operate like a rational and traditional customs union. Instead, it is a union that benefits the smaller BLNS states and disadvantages South Africa. It is better described as a developmental project wherein funds ordinarily obtained through South African trade are redistributed to the BLNS states.
• Furthermore, SACU benefits BLNS states which have the highest imports from the other SACU countries. However, in practical terms means imports from South Africa.
• This has now become a driver for government policy in eSwatini in particular where all goods and private possessions are screened at the border, receipts are demanded and values are attributed to all goods entering the kingdom.
• The developmental component of the revenue sharing formula is, in a mathematical sense, just lip service as it only accounts for 15% of the much smaller excise component. To make it even more blatant, the remaining 85% of the excise component is attributed not by tallying up the value of goods falling subjectable to excise duties but is attributed proportionally to the member state’s GDP of that year.
• The current SACU agreement has the effect of putting the smaller BLNS states in competition with one another to record the highest South African imports each year.
• The fact that eSwatini is so heavily reliant on SACU for its government budget is a testament to governance failures.
• While South Africa is the most powerful player in the current SACU scheme, whatever its motivations for its generous stance towards the BLNS states in the 2002 agreement are most likely going to be reviewed soon.
• The success and rise of nationalist ideologies in emerging political parties in South Africa will likely place the SACU scheme under a new harsher spotlight.
• We recently saw the South African state discontinue the Zimbabwean Exemption Permits after more than a decade of its existence after pressure from groups such as #PutSouthAfricaFirst and political parties such ActionSA and the Patriotic Front. The SACU developmental project, which benefits the smaller BLNS states, is surely not well known by the South African public, who are growing evermore dissatisfied with the ruling government given the challenges besetting their country.
Discovering that in the midst of high unemployment, inequality and poverty, the South African state is willingly dishing out in excess of R50 Billion every year to foreign governments will not sit well at all given the rise in nationalist attitudes. In the case of Swatini, we can further suggest that the gross misuse of government funds, which rely heavily on the SACU, is a betrayal of the developmental project.
In short, the South African taxpayer is directly funding the largesse and excesses of the Swazi royal family and the Tinkhundla regime. This is of course a risky strategy as it unveils the workings of SACU and would jeopardize the SACU gravy train for the BLNS states and bring countries such as Lesotho and eswatini ever closer to failed state status. However, when compared to the dismal future we face if the Tinkhundla regime persists, it may be a necessary step.