MDC Alliance targets closer links with regional bodies

MDC Alliance targets closer links with regional bodies

The MDC’s bold plan to join Southern African customs and currency blocs has implications beyond Zimbabwe’s borders, write Catherine Grant Makokera and Brian Mureverwi.

If it came off, a proposal by Zimbabwe’s official opposition to join the oldest customs union in the world, one that is anchored in SA’s membership, would be far-reaching.

Even more profound would be the move to join the region’s monetary union.

The recently released “Smart” manifesto of the Movement for Democratic Change (MDC) Alliance proposes that Zimbabwe will join both the Southern African Customs Union (Sacu) and the Southern African Common Monetary Area (CMA) should the party be successful in July’s elections. These bold moves would have implications beyond the borders of Zimbabwe. They are particularly relevant this week as the Sacu heads of state meet in Gaborone.

Sacu is a little understood but critical regional structure in Southern Africa. Its members are Botswana, Lesotho, Namibia, SA and Swaziland. These five countries have been joined together in this partnership for 108 years, making the group the oldest customs union in the world.

The CMA of Southern Africa (affectionately known as the rand zone) has a similar membership base, with the exception of Botswana. Botswana retained its monetary policy sovereignty.

To appreciate the implications of the MDC Alliance proposal it is important to understand a few key points.

Sacu is a customs union that shares a common external tariff and therefore negotiates trade agreements as a bloc. For countries outside Sacu, it does not matter if they are exporting goods to Lesotho or to Botswana. The same tariff rates and other relevant duties will apply. Trade in goods among the five members of Sacu moves relatively freely with few internal barriers.

Customs duties collected at the borders from trade with non-Sacu countries are deposited into a revenue pool, administered by the South African Revenue Service.

At the heart of the Sacu arrangement is a formula that determines how the revenues jointly collected from trade will be shared among the five member countries. This includes a customs component based on tariffs charged on imports, an excise component related to the size of the economies of the members and a development component that seeks to compensate the lesser-developed members. Much can be said about this formula, but the main point is that it is complex and controversial. Sacu member states often question the fairness of the distribution of revenue. The formula is under review.

The CMA is allied to Sacu but not formally linked. It is a partial monetary union based on the rand. While Lesotho, Namibia and Swaziland all have their own local currencies, these are irrevocably pegged to the rand and are controlled through bilateral agreements with SA.

The arrangement gives access to South African financial markets for the smaller members and provides significant benefits given that SA is the major trading partner.

The MDC Alliance notes a number of these benefits of Zimbabwe joining Sacu and the CMA in its Smart manifesto.

For example, it mentions “efficient, low-cost trade with SA” for Zimbabwe plus access to “significant revenue from Sacu contributions” and “favourable trade agreements enjoyed by Sacu”.

Each of these points is worth unpacking in detail but at the outset the first thing that comes to mind is that the membership of Sacu has remained unchanged for over a century. There has also been little shift in the CMA for decades, ever since Botswana left and Namibia joined. That means no clear precedent is available for managing Zimbabwe’s accession to these institutions. The Sacu agreement does leave space for new members to join on the basis of a unanimous decision (or discretion) by the existing members. How negotiations with new members would take place would be determined by the Sacu council of ministers.

The arguments for joining the CMA are clear-cut and, based on current trade flows, it would make sense for Zimbabwe to seriously consider pegging its currency to the rand.

SA is an important trading partner and such a move is likely to lessen some of the liquidity challenges associated with paying for imports. CMA membership would require a bilateral negotiation with SA, but this is likely to be a much less complicated process than seeking membership of Sacu.

Joining Sacu would require a complete overhaul of the tariff schedule of Zimbabwe to align it to the common external tariff of Sacu, including the preferences given to others such as the EU and South American trade bloc Mercosur, under trade agreements. This could undermine existing objectives of Zimbabwe’s trade policy aimed at protecting local producers and reindustrialising some sectors. In simple terms, Zimbabwe has to align its trade policy instruments with those of Sacu, including external tariffs, rules of origin, trade remedies and others.

Trade revenue would also be affected by the revenue-sharing formula, which is largely administered by SA, and therefore Zimbabwe would need to give up some of its trade revenue collection sovereignty. Without economic modelling it is hard to determine the impact of Zimbabwe’s membership on the revenue flows in Sacu under the current formula. It is unlikely that a new member would be admitted to the customs union without some reform to the formula.

The process of revising the Sacu revenue-sharing formula is fraught. The challenge of negotiating admittance of a new member might spur Sacu states to resolve their differences.

A change in membership might be just what is needed to breathe new life into the world’s oldest customs union.

It is equally hard to understand the motive of joining Sacu at a time when talks of escalating the African Continental Free Trade Area to a Continental Customs Union are under way. That said, all this hinges on the MDC Alliance winning the July 30 elections.