Easy way for South Africa to save R90 billion

South Africa could save R89.9 billion in the next year if it received a fairer share of the revenue generated by trade among the Southern African Customs Union (SACU). 

This was revealed in the full Budget Review presented by the National Treasury following the Finance Minister’s Budget Speech last week.

The Review showed that South Africa paid R79.8 billion to SACU in the 2023/24 financial year and will make a R89.9 billion payment in the coming financial year.

SACU is the world’s oldest customs union and is made up of Botswana, Eswatini, Lesotho, Namibia and South Africa.

Its first iteration dates back to the 1889 Customs Union Convention between the British Colony of Cape of Good Hope and the Orange Free State Boer Republic. 

A new agreement, signed on 29 June 1910, was extended to the Union of South Africa and the British territories Basutoland (Lesotho), Bechuanaland (Botswana), and Swaziland. 

South West Africa (Namibia) was a defacto member since it was administered as part of South Africa before it became a full member following Namibian independence. 

The primary goal of the organisation is to promote economic development through regional coordination of trade.

However, South Africa is not getting a fair share of the revenue generated by customs duties collected within the union relative to its economic size and position as the dominant trading partner in the region.

The 2002 SACU Agreement, the first signed by democratic South Africa, created a new revenue-sharing model. 

SACU, headquartered in Namibia, pools together the revenue collected from trade between its members. This revenue is collected by local authorities and paid over to SACU to distribute to its members according to its revenue model. 

The model is made up of three components determining how revenue is split between members – the customs component, the excise component, and the development component.

The excise component is distributed according to each country’s share of the total SACU GDP, meaning South Africa gets the largest portion at around 90%. 

However, the customs component and the development component do not favour South Africa as they are intended to help SACU’s less developed economies by sharing more of the revenue with them. 

Thus, the customs component is allocated according to their share of imports – not according to each country’s share of total trade within SACU nor their share of exports to SACU nations. 

This disadvantages South Africa, which – as the most developed country in the union by far – exports the most goods throughout the region while importing very little from its neighbours. 

In other words, the greater a country’s imports from SACU nations, the higher their revenue share from the customs component. And so, South Africa receives the least revenue. 

The development component is distributed according to the inverse of each country’s GDP per capita to help the less developed members grow their economies and catch up. 

Thus, South Africa also receives the least revenue share from this component. 

However, the vast majority of trade among SACU members involves South Africa as either the importer of goods or the exporter.

Therefore, SARS collects the majority of the union’s revenue through customs and excise duties levied on goods that cross the country’s border.

This results in South Africa paying vast sums of money to SACU, which pools the revenue collected from trade between members to distribute according to the above model. 

The amount paid out is recorded by the National Treasury and is considered an expenditure item in the budget. 

In the 2023/24 financial year, South Africa paid R79.8 billion to SACU, and this is expected to grow further next year to R89.9 billion. 

An easy way for South Africa to save this money, or at least part of it, would be to negotiate a new revenue-sharing model with SACU’s members. As the dominant economy in the region, South Africa should be able to get a favourable agreement. 

The amount the government will pay to SACU is shown below in the table, summarising the main elements of the National Budget.