South Africa Should Secure its own “Brexit deal”

South Africa Should Secure its own “Brexit deal”

Anna Ngarachu and Heinrich Krogman

Teressa May’s deadline to get a Brexit deal past the UK parliament is now less than eight weeks away and it is looking unlikely that a workable package will get approval from either side of the aisle. Depending on the generosity of EU negotiators, the UK might find itself in a position where multilateral rules, set out in the agreements of the World Trade Organisation (WTO), form the basis of their international commerce engagements at the time they leave the EU.

For countries not bordering the UK (to avoid getting bogged down in the nightmare of migration and border issues with Ireland), the terms of these agreements are not awful, but they are not as generous as the regional and bilateral arrangements currently in operation with the UK as part of the EU. The preferential movement of goods across borders afforded by the EU Economic Partnership Agreements (EPAs) is one critical aspect of EU/UK-Africa engagement. Fortunately, the UK has already signaled that they will be pushing for closer economic ties with Africa, regardless of the outcome of Brexit.

There were initial concerns about the impact of Brexit on South Africa, with the largest concern being an expected contraction of merchandise trade between the UK and South Africa. Putting the numbers in perspective, in 2018 the UK was South Africa’s fifth largest trading partner in terms of total trade (imports plus exports), the 4th largest destination for exports (worth R64 billion) and 7th largest source of imports (worth R43.5 billion).

The UK imports a significant amount of precious metals, vehicles aircraft & vessels, and vegetables from South Africa. A disruption in these value chains is likely to affect the domestic industries which could translate into job losses. However, there is also a significant amount of Outward Direct Investments (ODI) from South Africa to the UK. According to the IMF’s direct investment survey, South Africa has a reported $2.9 billion worth of ODI, which might require strategic adjustment should the Brexit deal impede their commercial interest in the EU.

To prevent trade repercussions from a no-deal Brexit, it became increasingly urgent that countries set up bilateral trade agreements with the UK. South African Trade Minister, Dr. Rob Davies, echoed these same sentiments, at a CNBC interview on 30 January 2019, where he emphasised the there should be no disruptions with trade, and that no different tariff arrangements should come into force post-Brexit.

On 31 January 2019, the UK Trade Policy Minister, George Hollingbery, signed the Eastern and Southern Africa trade continuity agreement in London with several representative governments. This agreement replicates the rules stipulated under the existing Economic Partnership Agreements with the EU and ensures continuity of tariff-free imports from Eastern and Southern Africa (ESA), while also removing several tariffs on British exports to these countries. Effectively the UK and South Africa (together with our SACU partners and Mozambique) will trade under a new arrangement that replicates or mirrors the SADC EU-EPA, as far as possible. In theory, it ensures no disruptions to trade or any ‘backstop’ disputes. From the UK perspective, these bilateral agreements are instrumental in supporting developing countries to reduce poverty through trade.

The new UK-ESA agreement comes into effect on 29 March 2019, if the UK leaves the EU without a deal, or once the implementation period ends in January 2021 should a deal be reached with the EU. There are still some technical issues to be resolved between the UK and the SADC-EPA countries. Discussions were continuing in Johannesburg last week on a draft text that seeks to deal with those matters where it is not possible to simply roll-over the EPA provisions.

For example, new levels need to be agreed for those products that benefit from tariff rate quotas, these are mainly agricultural products. The sticky issue of rules of origin is also important in the context of the post-Brexit trade arrangements, including for South Africa. Under the SADC-EU EPA it was possible to ‘cumulate’[i] value among EU members and parties to an EPA to take advantage of the preferential tariff rates. The UK has been pushing for this to be continued in its agreements with other trading partners, such as Chile. Yet, there remains uncertainty on the rules of origin between the UK and EU after the deadline of 29 March. There is definitely the shadow of the EU in the room whenever the UK meets with its trading partners, and this is difficult to ignore.

The continued uncertainty of the UK’s future relationship with the EU has, for instance, forced companies to reconsider their investments in the UK. Many have sought to pull out on production plans and shift operational headquarters to strategic EU positions instead. Examples include Nissan. The car giant reversed its 2016 decision to build the X-Trail SUV in the UK partly due to uncertainty about the application of rules of origin going forward.

The effects of slowbalisation, a new pattern of a slowdown in global commerce, have sent ripple effects across the world. This is the background against which UK delegations will be received at any negotiating table in the coming weeks. To compound this reality, many investors and traders are making plans to adjust their operations to account for the potential market loss of an EU exit. It is hoped that for South African exporters and investors will have the political will and show dexterity to manage the process as smoothly as possible.

[i] https://sadc-epa-outreach.com/publications/54-sadc-eu-epa-protocol-1-on-the-rules-of-origin

Case studies on Beitbridge and Chirundu

Case studies on Beitbridge and Chirundu

At the 2018 SADC Industrialisation Week I had the privilege to present the findings of a GEG Africa Study on standing times and the economic development aspects of the borders at Beitbridge and Chirundu. Presentations on case studies are available here. Full reports can be accessed by request and will be published on the GEG Africa website.

A team of four researchers journeyed along the North-South corridor from Johannesburg to Lusaka, stationing first at Musina/Beitbridge for four days and thereafter in Chirundu at the border between Zimbabwe and Zambia. The team interviewed a range of stakeholders, situated at these borders and those passing through, to understand the local economies and major causes of standing time (border delays). Standing times for trucks have been found to be a large part of transport costs in Southern Africa and therefore unpacking the contributing dynamics is critical for the facilitation of trade in the region.

We conducted interviews with stakeholders that included: government officials, truck drivers, medical services volunteers, local business owners, clearing agents, cross-border traders, and touts and vendors. We learned their perspectives on the border towns and some of the reasons behind standing time. Our researchers paid particular attention to the involvement of women and youth. Some insights from stakeholder workshops in Harare and Pretoria were also included in our findings. The following is a summary of the key messages from our research.

Firstly, let me share why border posts are so ‘thick’. Economic development in Sub-Saharan Africa (SSA) continues to be constricted by transport and logistics inefficiencies. Standing time at borders has been shown to be the largest contributor to transport costs. Previously it was understood that a lack of backhaul opportunities contributed the most towards uncompetitive transport pricing in SSA. However, we now understand that the softer operational issues, rather than hard infrastructure constraints, contribute more towards standing time and hence, uncompetitive transport pricing.

According to truck drivers at Beitbridge, the average amount of time to clear out of the border, for a truck whose documents were in order, was 48 hours. In Chirundu, customs officials estimated South-bound trucks spend 2-16 hours, although some drivers estimated their waiting time at 36 hours; official estimates for North-bound trucks are 2-24 hours, with drivers and clearing agents reporting 2-4 days with extremes of 7 days. This is dependent, however, on the type of cargo being carried. When comparing this anecdotal evidence to comprehensive time release studies, some interesting parallels emerge, and the longer time estimates were confirmed. Official processes at borders definitely require a certain amount of time but it was the time beyond expected steps that we tried to uncover in our research.

We found that standing time was a result of many factors. If drivers used pre-clearance processes, this would reduce time at borders significantly. However, some of the key causes of standing time, include: (i) poor signage and a lack of disaggregated lanes; (ii) a lack of risk management processes for scanning and inspections, leading to numerous inspections and duplication of efforts among border agencies; (iii) low levels of staffing among customs officials and inadequate inspection bays; and (iv) driver behaviour.

Drivers interviewed complained of poor working conditions, including a lack of downtime between trips, and preferred to spend more time at the borders to rest even once clearance was completed. Some drivers would commute home to their families in nearby towns or as far as Harare, awaiting completion of their clearance documents. On average this ‘driver behaviour’ would add a day or two to total standing time.

It seems evident that the poor working conditions contribute to driver induced standing time and thus, drivers have little incentive to adjust their behaviour. Working conditions and driver behaviour aside, appropriate risk management processes would also go a long way to reduce standing times e.g. major queues form at the electronic scanner at Chirundu, where all trucks heading into Zambia must be scanned, and with weak inter-agency coordination, standing time increases.

We noticed that inefficiencies at the borders can benefit some firms operating at the borders e.g. clearing agencies and service providers. This results in a disruptive impact for some stakeholders of trade facilitation measures. For example, the extension of operating hours (to 24 hours) at Beitbridge contributed to the closure of two major hotels in Zimbabwe as travellers no longer sought accommodation by the border but preferred to travel onwards. We also noted that following the change to 24-hour operations, clearing agents did not extend their working hours, undermining the impact of the trade facilitation measure. Therefore, it is necessary to have a broad engagement with all stakeholders, through public-private interaction, to ensure the tension between trade facilitation measures and stakeholders engaged in border activities is minimised and the measures are not undermined.

It was a successful trip, no doubt, and we felt as if we were in the shoes of the drivers, traveling the miles to Lusaka and dealing with the brunt of inefficiencies, such as waiting for two hours before being issued a toll-gate pass, due to a system failure on the Zambia side of Chirundu; or being asked by eager touts if they could ‘facilitate’ our crossing! The key now will be translating the information and evidence picked up from our time on the ground into recommendations for policymakers that are tasked with the fundamental role of promoting stronger integration of Southern Africa.

The BRICS nations and their symbol of Independence

The BRICS nations and their symbol of Independence

The 9th BRICS summit is upon us, being held in Xiamen, this month from the 3rd to the 5th of September, under China’s Chairmanship. Despite the political and economic turmoil that underpins the BRICS states, one may conclude that these countries are just ‘too big to fail’. We consider the establishment of a Contingent Reserve Agreement (CRA), which may represent a possible mechanism to keep these countries’ economies from plummeting.

Dependence on the US dollar arises because its share within global combined reserves remains roughly above 60{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}, with 85{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of global transactions dollar-denominated. Traditionally, central banks in need of dollars would approach the Federal Reserve. There was no issue with the Fed providing dollar swaps, especially during the global financial crisis, but there is no guarantee that this will be the case for future swaps. Therefore, new monetary patterns have evolved where several countries, as an alternative to signing up for IMF credit lines, would engage in swap lines. Hence the need for the BRICS symbolizing their independence and creating a pool that member states can draw from.

The CRA was introduced during the 5th and 6th BRICS Summit (2013-2014) with the establishment of the New Development Bank (NDB). Its main intention is to lessen BRICS countries’ dependence on the US dollar and the US Federal Reserve System. According to Article 1 of the treaty that sets up the BRICS CRA, its objective is to offer a “framework for the provision of support through liquidity and precautionary instruments in response to actual or potential short-term balance of payments pressures”. The BRICS nations committed a total of $100 billion of their foreign exchange reserves to the CRA. China, with the largest reserves, committed $41 billion, Russia, Brazil and India $18 billion each and South Africa $5 billion. These are available as swap lines, that members can draw on if they experience balance of payments difficulties, as foreign reserves become necessary to remedy a run on the currency. Each country retains possession of its committed resources until a country is granted support, upon requesting for assistance. Article 5 of the treaty specifies the maximum withdrawal limits, indicating that China can draw up to half of its commitment, Brazil, Russia and India their full commitments and South Africa can access twice its commitment, of $10 billion.

In its current state, the CRA is said to act as ‘symbolic and exploratory’ rather than something that challenges the International Monetary Fund (IMF). However there has been a dissatisfaction from the fact that the BRICS possess only 11{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of the votes in the IMF, while they account for over 20{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of global economic activity. This is indicative of the criticism by developing states towards the Bretton Woods Institutions for being favourable towards western economies. By setting up the CRA the BRICS leaders have started a symbolic process to advance and strengthen their own institutions to counteract certain western biases. It is no surprise that the 9th Summit theme revolves around “Stronger Partnership for a Brighter Future”.

It is evident, however, that turmoil exists in and among the BRICS nations. Certain instances relate to geopolitical tensions between the BRICS nations themselves, such as India’s boycotting of the One Belt, One Road Summit, hopefully to be resolved in the upcoming summit. For South Africa, it is apparent that internal political and economic complications are stewing from a sovereign debt-crisis perspective. The commercial banks remain heavily exposed to state-owned enterprises’ (SOE) debts and the government has become the acting ‘defibrillator’. The news that CITI Bank would not extend South African Airways’ (SAA) debt comes as no surprise, it being the second bank after Standard Charted Bank in June, to refuse to rollover a bankrupt SOE’s debt obligation. SAA’s debt comes due this September and currently sits at R6.8 billion, which would render an additional R7.8 billion payable by the South African government, weakening its fiscal position further. The question remains as to whether banks will unite in declining to roll-over existing SOE debt or will protect themselves from the debt exposure, relying on government to bail out the SOE and settle public debt. The government’s total exposure to SOE’s debt is currently at R19 billion.

Is it then likely for a debt crisis to trigger a rescue from the IMF or a draw down from the specified CRA? Precursors to balance of payments difficulties are usually aligned with a growing current account deficit. According to the IMF’s Article IV assessments, South Africa shows a lessening of the current account deficit but they note that the public sector’s balance sheet remains critically exposed to liabilities from SOEs.

The intention of previous CRAs such as the East Asian Chiang Mai Initiative Multilateralization (CMIM), which reportedly constitutes about $240 billion compared to the IMF’s $720 billion, was the same. However, it has not been used even in the wake of the global financial crisis. This was largely due to the conflicting interests between borrowers and lenders. For instance, countries like South Korea, Indonesia and Singapore experienced major balance of payments issues, in 2008, but resolved to use currency swaps rather than draw-down from the CMIM. This is because the set-up of the Initiative is IMF-linked, where draw-downs exceeding a specified amount require countries to negotiate a programme with the IMF. During the crisis years, these countries required larger reserves, such as South Korea needing $30 billion. It resolved to use a currency swap with the US, as its CMIM portion that was not linked to IMF conditions was only $3.7 billion, which was in any case insufficient. Taking on the $30 billion from the CMIM is said to have been ‘political suicide’ from their perspective.

In the case of BRICS, these large diverse countries have differing interests. Any country in need of balance of payments assistance could require a draw-down from the CRA. If the amounts are significant, certain members may be hesitant and want to impose conditionalities and a monitoring mechanism, especially if there are doubts about repayment. This raises questions on whether certain countries would be willing to use the CRA.

Imposing monitoring conditions may solve the problem of a lack of repayment but it would seem impossible that BRICS nations would want to receive policy conditions from each other. Ironically, within the CRA, the IMF steps in again as a monitor in the treaty. Essentially, when countries draw more than 30{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of their swaps, they need to negotiate a program with the IMF, defeating the purpose of independence. This questions the relevance of the BRICS CRA. It is also important to note that substantial funding may be necessary to support balance of payments issues. For instance, South Africa’s non-IMF-linked portion of $3 billion, is smaller than its public debt commitments; one wonders how effective the CRA would be if South Africa were to request assistance. One can take the view that countries would rather choose independence over drawing large amounts that would involve taking on conditionalities from the IMF and oversight from member countries.

Photo credit: GovernmentZA via VisualHunt.com / CC BY-ND