Appendix I. SACU and SACU Revenues
The Southern African Customs Union (SACU), the oldest customs union in the world, was established in 1910.1 It aims to (1) facilitate trade between SACU members, (2) generate trade benefits for all member states, (3) promote fair competition and open investment opportunities, and (4) promote economic development and competitiveness through integration into the global economy. All customs and excise revenues collected in the member states are pooled into the Common Revenue Pool (with South Africa as custodian) and shared among the members according to a revenue-sharing formula (RSF) that was last revised in 2002.2 The revenues are comprised of the following three components:
The customs revenues are allocated according to members’ share in intra-SACU trade.
The excise component, 85 percent of the total excise pool, is allocated based on members’ share in SACU’s GDP.
The development component, fixed at 15 percent of the total excise pool, is distributed to all SACU members according to the inverse of each country’s per capita GDP.
Pooled SACU revenues are shared according to the following formula:
where Ri is the total revenue received by country i, C, and E are total customs and excise revenue, GDPi is country i’s GDP, and
The customs revenue base tends to move procyclically and display wider swings than output. Moreover, a high share of the customs pool comprises duties on imported vehicles, which tend to be even more volatile than overall imports. Ex ante revenues are estimated based on projected imports and excise collections, and are adjusted ex post with a two-year lag to reflect actual collections. As suggested by Figure A1, a shock could impart sizable changes in the SACU pool, including through retroactive adjustments. In 2010–11 Lesotho and Swaziland were hit twice: (1) by a lower forecast of current SACU revenues, and (2) by the downward adjustment of past SACU revenues. The size of adjustment was particularly significant for Lesotho and Swaziland—two countries with high dependency in SACU revenues.
Retroactive Adjustments for SACU Revenues for Botswana, Lesotho, Namibia, and Swaziland (BLNS)
(Percent of GDP)
Citation: Departmental Papers 2017, 005; 10.5089/9781484309575.087.A999
Retroactive Adjustments for SACU Revenues for Botswana, Lesotho, Namibia, and Swaziland (BLNS)
(Percent of GDP)
Citation: Departmental Papers 2017, 005; 10.5089/9781484309575.087.A999
Retroactive Adjustments for SACU Revenues for Botswana, Lesotho, Namibia, and Swaziland (BLNS)
(Percent of GDP)
Citation: Departmental Papers 2017, 005; 10.5089/9781484309575.087.A999
As Cuevas 2015 points out, the revenue transfer and adjustment mechanism embedded in the current SACU revenue sharing agreement can augment the variability of actual SACU transfers (forecast amount plus adjustment) in the presence of serial correlation in revenues that feed into the SACU Common Revenue Pool, with the variance of SACU transfers estimated to be 38 percent higher than the variance of the actual revenues that Botswana, Lesotho, Namibia, and Swaziland are entitled to receive.
Appendix II. Fiscal Rules: International Experience
Over the past two decades, a significant number of countries have adopted fiscal rules to deal with uncertain and highly volatile fiscal revenues. Emerging market and developing economies comprised close to two-thirds of countries maintaining fiscal rules (Schaechter and others 2012). The most prevalent fiscal rules are expenditure rules (ERs), albeit with differences in features between those in advanced and developing/low-income economies. The ERs tend to be combined with balance budget and/or debt rules to provide a stronger anchor for debt sustainability. This appendix summarizes the experiences of countries relevant for Swaziland and Lesotho.
Resource-rich countries often adopt fiscal rules to mitigate revenue volatility caused by commodity price fluctuations and to ensure intergenerational equity. These countries often target nonresource fiscal balances and choose price-based fiscal rules as fiscal policy anchors to mitigate boom-bust cycles and Dutch disease, and to address long-term vulnerabilities. These anchors allow the governments to smooth expenditures by delinking them from volatile revenues, helping to avoid procyclical policies. IMF 2012b points out that a price-based fiscal rule can mitigate the transmission of commodity price volatility in selected resource-rich countries.
Countries under pegged exchange rate regimes also have adopted fiscal rules to ensure fiscal discipline, given the limited role of monetary policy in these countries. All members of currency unions (and about one-quarter of countries with no separate legal tender), currency boards, and fixed exchange rate regimes maintain fiscal rules, compared with only 17 percent of countries with more flexible exchange regimes (Figure A2). Countries under fixed exchange rate regimes need ample reserves to maintain the credibility of their peg. Furthermore, countries with limited or no access to international financial markets need even higher reserves to avoid abrupt and costly adjustment during bad times. Several countries—Kosovo, Hong Kong SAR, Lithuania, and Cabo Verde—used rules-based fiscal policy to maintain external stability, including through adequate international reserves. The implementation of fiscal rules in countries with fixed exchange rate regimes has been uneven.1 Hong Kong SAR, for instance, has been compliant with its fiscal rule, while Ecuador, Kosovo and Cabo Verde often deviated from them, as the rules were unclear and/or frequently modified. Countries with a stronger track record in implementing fiscal rules seem to have greater market access, more efficient markets, and stronger Personal Financial Management.2
Fiscal Rules and Exchange Rate Regimes
Citation: Departmental Papers 2017, 005; 10.5089/9781484309575.087.A999
Source: IMF, 2013 Fiscal Rule Dataset and staff estimates.1 Including countries with no separate legal tender, currency boards, and conventional pegs.Fiscal Rules and Exchange Rate Regimes
Citation: Departmental Papers 2017, 005; 10.5089/9781484309575.087.A999
Source: IMF, 2013 Fiscal Rule Dataset and staff estimates.1 Including countries with no separate legal tender, currency boards, and conventional pegs.Fiscal Rules and Exchange Rate Regimes
Citation: Departmental Papers 2017, 005; 10.5089/9781484309575.087.A999
Source: IMF, 2013 Fiscal Rule Dataset and staff estimates.1 Including countries with no separate legal tender, currency boards, and conventional pegs.Many countries with volatile fiscal revenues established nonrenewable resource funds that complement fiscal rules. Often these are stabilization funds, used as a mechanism for insulating the budget and the economy from revenue shocks. Experience to date has been mixed. Stabilization funds have contributed to enhancing the effectiveness of fiscal policy by making budget expenditure less driven by revenue availability and reducing fiscal policy procyclicality (Fasano 2000, 19). However, in some cases—Venezuela and Oman—stabilization funds were less successful owing to frequent changes in the funds’ rules and deviations from their intended purposes. While nonrenewable resource funds might enhance political acceptance for saving windfalls, they cannot substitute for sound fiscal management and may give rise to spending pressures (Davis and others 2001, 27).
A stabilization fund or a special account may be needed to operationalize a fiscal rule. The fund needs to be carefully designed to strengthen government incentives to save/invest windfall revenues, and to prevent excessive spending. Some key features of a well-designed fund include (1) effective integration with the budget, (2) an appropriate asset-management strategy, and (3) mechanisms to ensure transparency and accountability (Davis and others 2001, 28). An independent civil service and political stability may contribute to the success of a stabilization fund (Bagattini 2011).
Stabilization funds—if properly designed and implemented—can facilitate fiscal objectives and support the implementation of fiscal rules. Fiscal rules often determine the pace of accumulation of stabilization funds. For example, the replenishment of the Economic and Social Stabilization Fund in Chile is directly linked to budget performance. Similarly, the fiscal rule in Panama is consistent with the rate of resource accumulation in the Savings Fund. In Ecuador, the ceiling on government spending is supposed to secure resources for a partial transfer of oil revenues into the Oil Stabilization Fund, although this link is not direct. Some countries, like Costa Rica, do not have a stabilization fund because the fiscal rule (balanced budget rule) limits borrowing, without building a buffer.
Countries with Fiscal Rules and Managed Exchange Rate Regimes
Managed by central banks with different degrees of flexibility.
Countries with Fiscal Rules and Managed Exchange Rate Regimes
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|
|---|---|---|---|---|
| Ecuador Kosovo Panama |
Hong Kong SAR Bulgaria Estonia Lithuania |
Eastern Caribbean Currency Union (8) West African Economic and Monetary Union (8) Central African Economic and Monetary Community (6) Euro zone (18) |
Maldives Cabo Verde Denmark Latvia Namibia |
Croatia (sub-national) Jamaica Sri Lanka Botswana Costa Rica Liberia Singapore Nigeria Malaysia |
Managed by central banks with different degrees of flexibility.
Countries with Fiscal Rules and Managed Exchange Rate Regimes
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|---|---|---|---|---|
| Ecuador Kosovo Panama |
Hong Kong SAR Bulgaria Estonia Lithuania |
Eastern Caribbean Currency Union (8) West African Economic and Monetary Union (8) Central African Economic and Monetary Community (6) Euro zone (18) |
Maldives Cabo Verde Denmark Latvia Namibia |
Croatia (sub-national) Jamaica Sri Lanka Botswana Costa Rica Liberia Singapore Nigeria Malaysia |
Managed by central banks with different degrees of flexibility.
Appendix III. Baseline Calibration: Parameter Setting
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|---|---|---|
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| Degree of home bias | φ | 0.54 |
| Elasticity of substitution between traded and nontraded goods | χ | 1.5 |
| Elasticity of substitution between variety | θ | 12 |
| Elasticity of substitution between consumption and money demand | η | 8.5 |
| Frisch labor supply elasticity | ψ | 2.5 |
|
|
||
| Labor income share | αT, αN | 0.7 |
| Investment adjustment cost | κT, κN | 25 |
| Productivity of traded sector in the steady state |
|
1 (normalization) |
| Persistence of learning-by-doing (LBD) externality | ρZ | 0.03 |
| Depreciation of private capital | δ | 0.015 |
| Depreciation of public capital | δg | 0.02 |
|
|
|
|
|---|---|---|
|
|
||
| Degree of home bias | φ | 0.54 |
| Elasticity of substitution between traded and nontraded goods | χ | 1.5 |
| Elasticity of substitution between variety | θ | 12 |
| Elasticity of substitution between consumption and money demand | η | 8.5 |
| Frisch labor supply elasticity | ψ | 2.5 |
|
|
||
| Labor income share | αT, αN | 0.7 |
| Investment adjustment cost | κT, κN | 25 |
| Productivity of traded sector in the steady state |
|
1 (normalization) |
| Persistence of learning-by-doing (LBD) externality | ρZ | 0.03 |
| Depreciation of private capital | δ | 0.015 |
| Depreciation of public capital | δg | 0.02 |
|
|
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|
|
|---|---|---|---|
| SACU revenue (in % GDP) |
|
27.4 | 18.4 |
| Share of public investment (out of total public spending) | μs | 35.7 | 17.4 |
| Capital mobility | ν | 500 | 500 |
| Private consumption (in % GDP) | 80 | 80.5 | |
| Private investment (in % GDP) | 17 | 5 | |
| Public consumption (in % GDP) | 28.1 | 21.1 | |
| Public investment (in % GDP) | 12.6 | 4.5 | |
| Export (in % GDP) | 42.2 | 56.1 | |
| International reserve (in % GDP; equivalent to five months of imports) | 40.5 | 29.1 |
|
|
|
|
|
|---|---|---|---|
| SACU revenue (in % GDP) |
|
27.4 | 18.4 |
| Share of public investment (out of total public spending) | μs | 35.7 | 17.4 |
| Capital mobility | ν | 500 | 500 |
| Private consumption (in % GDP) | 80 | 80.5 | |
| Private investment (in % GDP) | 17 | 5 | |
| Public consumption (in % GDP) | 28.1 | 21.1 | |
| Public investment (in % GDP) | 12.6 | 4.5 | |
| Export (in % GDP) | 42.2 | 56.1 | |
| International reserve (in % GDP; equivalent to five months of imports) | 40.5 | 29.1 |
Appendix IV. Baseline Calibration: Policy Parameters
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|---|---|---|---|
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| Spending policy (deposit accumulation) | γ | 0 (no saving) | 1 (full saving) |
| Efficiency of public spending | s | 0.4 | 0.4 |
| Efficiency of aid-financed public spending | A | 0.4 | 0.4 |
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| Degree of sterilization | g | 0 | 0 |
| Inflation targeting coefficient | ϕπ | 1.5 | 1.5 |
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|---|---|---|---|
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|||
| Spending policy (deposit accumulation) | γ | 0 (no saving) | 1 (full saving) |
| Efficiency of public spending | s | 0.4 | 0.4 |
| Efficiency of aid-financed public spending | A | 0.4 | 0.4 |
|
|
|||
| Degree of sterilization | g | 0 | 0 |
| Inflation targeting coefficient | ϕπ | 1.5 | 1.5 |
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The existing SACU revenue-sharing formula also amplifies the procyclical nature of the fiscal transfers and its volatility, as the receipts are heavily dependent on South Africa’s imports, which generate about 90 percent of the SACU revenue pool (Basdevant 2012).
Changes in effective duty rates and exchange rate volatility could also affect SACU revenue. For details see Mongardini et al. (2013), p. 43.
Payments from the SACU revenue pool for Botswana, Lesotho, Namibia, and Swaziland (BLNS) are projected in South Africa’s budget documents.
Over the long term, a decline in SACU revenue could also result from (1) a reduction in the common external tariff rates owing to trade liberalization, (2) a change in the revenue-sharing agreement, and (3) low import growth of the South African economy (Basdevant and others 2011).
The model was developed to formulate country-specific aid scaling-up scenarios as part of the United Nations Millennium Development Goals Africa Steering and Working Groups, and has been applied for several African countries.
For the detailed description of the model, see Berg and others 2010a, p. 7.
Naturally, SACU revenues are volatile in the real world. However, the objective of the exercise is not to downplay this important feature but to highlight that a fiscal rule could help to better manage the surge and collapse of SACU revenues commonly experienced by these countries. Moreover, the second model introduces the randomness element, which is crucial for the welfare analysis.
This model focuses on international reserves (rather than on public debt), in light of the short-term policy objective to secure sufficient international reserves under the Common Monetary Area (CMA) and the relatively large government deposits (the deposits reach about 27 percent of GDP for Lesotho and 9.5 percent for Swaziland in 2014). Neither country has access to international capital markets, although they could gain access over the long term.
Under the assumption of no domestic or international borrowing, the change in government deposits maps into “above-the-line” fiscal operations. In this setup, no change in government deposits means a BBR.
The equilibrium definition is available in Berg and others 2010a with modifications for the government deposit accumulation (Equation [(1]) and the international reserve accumulation (Equation [2]) as defined above.
For both countries, this level of international reserves is adequate, based on IMF staff’s estimates (IMF 2015, 2016).
See Appendixes 2 and 3 for the parameters in the baseline calibration.
The larger trade deficit in Lesotho also results from a “learning-by-doing” externality in the tradables sector that augments the productivity in the sector when production increases. As Lesotho relies more on the consumption of traded goods, this creates a temporary boom that widens the trade for a few periods until the externality vanishes.
Offering specific advice on the detailed design of fiscal rules is beyond the scope of this paper, in particular because the fiscal rules have to be tailored to specific objectives and economic characteristics of countries, the country’s institutional and legal framework, and its macroeconomic conditions.
Based on Im, Sosa-Padilla, and Torres 2015.
See Im, Sosa-Padilla, and Torres 2015 for a full description of the model.
The first model does not explore a CCR rule because of its focus on international reserves. At present, securing/maintaining adequate international reserves is a policy priority for both countries, and increasing the government’s reserve holdings by more than the cyclical increase in SACU revenues (during good times) would not be realistic in the short term.
The implementation of the structural balance rule is aided by two independent panels of experts to determine potential output and the long-term price of copper (IMF 2009, p. 41).
This appendix is based on Im 2015 and Centre for International Economics 2011.
The initial RSF established under the 1910 agreement was revised in 1969 and 2002. The 1969 revision included excise duties in the pool and provided for a multiplier that enhanced revenues by 42 percent annually. It also linked the customs revenues to not only extra-SACU imports but also intra-SACU imports. The 2002 revisions defined customs revenues in relation to intra-SACU imports, separated the excise pool into the excise and development components, and agreed on the administrative institutional structure of the RSF.
Strong legal basis ensured the compliance of fiscal rules in Hong Kong SAR. Hong Kong SAR has been maintaining a balanced budget rule since 2002. The authorities have maintained countercyclical fiscal policy and actual performance exceeded the budget in most years.
The legal basis for fiscal rules ranges from political commitment to coalition agreement, guidelines, statutory norms, national law, and the constitution. Often the special legislation, particularly in Organisation for Economic Co-operation and Development (OECD) countries, includes stringent procedural rules on accountability, transparency, and fiscal stability.
