South Africa’s R74 billion headache

South Africa is expected to lose out on R73.5 billion as part of the revenue-sharing formula within the Southern African Customs Union (SACU). 

Renegotiating this formula, while difficult, could save the country billions of rands annually, which could be spent elsewhere or prop up the government’s finances. 

The SACU is an often overlooked part of South Africa’s Budget, with the focus rightly being on tax increases, revenue collection, and government spending. 

However, in recent years, more attention has been paid to the customs union’s revenue-sharing agreement due to South Africa’s deteriorating financial health. 

SACU is the oldest functioning customs union in the world and has undergone several changes in recent years, with it now facing serious challenges. 

Experts at PwC said the union’s revenue-sharing formula is a significant concern for South Africa, with efforts to address this challenge having stalled in recent years. 

The union was first established in 1910 to promote trade between South Africa and the British-controlled territories of Bechuanaland, Basutoland, and Swaziland. 

Under this agreement, the Union of South Africa would administer the revenue-sharing formula, based on each country’s imports. As the largest economy in the region, South Africa collected 98.7% of the customs revenue collected in the union. 

As the British-controlled territories gained independence, the agreement was renegotiated in 1969, with revenue now being shared based on relative imports and consumption. 

The revenue-sharing formula also included an enhancement for the payments to members other than South Africa by a factor of 1.42 to try to provide a more equitable distribution of revenues and support the development of SACU members. 

As a result, South Africa’s share of the revenue fell to around 62%, despite it still dominating the regional economy and the collection of customs revenue. 

The agreement was renegotiated again in the early 2000s by the ANC-led South African government and independent Namibia. 

Once again, the revenue-sharing formula was changed, and an entirely new method of calculating the revenue collected and how it would be shared was introduced. 

Under this agreement, customs revenues are shared based on relative intra-SACU imports and are split into two, with 15% of the revenue allocated to a development component shared between countries based on GDP per capita and weighted in favour of less developed countries. 

The remaining 85% of excise revenue is shared between the countries based on their share of total SACU GDP. This has resulted in South Africa’s share of the revenue falling to 46%. 

South Africa losing billions

While the revenue-sharing formula is intended to drive more equitable outcomes and help less developed countries in SACU grow their economies, it has come at a significant cost to South Africa. 

Under this new agreement, PwC’s calculations show that South Africa averages around 82% of all imports from other countries, but only receives around 20% of intra-SACU imports. 

The opposite is true of other members who import mainly from South Africa, resulting in South Africa only receiving around 25% of its proportionate share of customs duties relating to goods imported into the country. 

The other countries, Botswana, Namibia, Lesotho, and Eswatini, received between three and five times their proportionate shares. 

Considering that South Africa collected around R62 billion in customs duties in 2023/24, the cost to the South African fiscus of this redistribution of customs revenues for that year would have been around R47 billion.

The National Treasury has indicated, in its various Budget documents published this year, that the government will pay around R73.5 billion into the union. 

What is particularly costly is that South Africa bears the entire cost of reallocating revenue collected to the other countries for the development component. 

PwC said South Africa has little to complain about regarding revenue sharing based on its GDP, as it takes home the lion’s share in this regard. 

However, the development component, which it bears the cost for entirely, is significant and may be considered unfair, with even Botswana benefiting despite it having a higher GDP per capita than South Africa. 

In 2023/24, South Africa collected some R62 billion in excise taxes. This constitutes the bulk of excise taxes that would have been collected in SACU. 

The result is that the sharing of the development component would have come at a cost of some R7 billion to South Africa in 2023/24. 

In aggregate, then, the cost to South Africa of SACU through the sharing of revenues from customs and excise duties would have been in the region of R54 billion in 2023/24 through the transfer of taxes from South Africa to the other members. 

Arguably, there are additional costs in the form of customs duties foregone on intra-SACU imports that would have been collected in the absence of the SACU agreement, PwC said. 

This cost amounts to around 0.8% of GDP and is equivalent to nearly a 2% increase in the VAT rate. 

From a different perspective, it amounted to more than 20% of the total social grants distributed that year and 60% more than the expenditure on the social relief of distress grant. 

It goes without saying that those funds would make a valuable contribution to the pressures faced by the South African fiscus.