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The challenges of macroeconomic stabilization in the Southern African Customs Union

Sébastien Dessus's picture



The good governance of public financial resources is often more challenging during good times than during bad times. In the event of an unexpected negative shock – say a drought or a sudden decline in demand for the commodities produced in the country – it is generally rewarding, from a political perspective, for the government to launch ‘stimulus packages’ to keep the economic engine running.

Notably, this policy was adopted by most advanced economies in the aftermath of the financial crisis in 2008. In contrast, many countries find it problematic to restrain public spending during good times, as political pressures to ‘sustain the momentum’ or ‘meet immediate needs’ generally mount in these circumstances, and are difficult to resist politically. Often, lack of preparedness to positive shocks prompts governments to spend the windfall in current expenditures – wages and subsidies, which can easily be increased, as opposed to public investment projects which take years to prepare (appraisal, feasibility studies, etc.) and implement (multi-year budgeting, procurement, etc.).  Being unable to save for rainy days creates various problems: it reduces the availability of fiscal buffers needed to ‘stimulate’ the economy in bad times, and reduces the average portion of public finances available for long term investments in infrastructure, health or education. In turn, this undermines countries’ long-term development outlook.

These patterns are quite apparent among Southern African Customs Union (SACU) members: Botswana, Lesotho, Namibia, South Africa and Swaziland, which share a common external tariff policy, exchange freely their goods internally, de facto use the same currency, and distribute among themselves the pool of customs and excise taxes collected by the union. Having insufficiently saved during the commodity boom, SACU countries rapidly depleted their fiscal buffers (often taking the form of foreign reserves) after 2014. They are now confronted with severe fiscal challenges, all requiring restraining public spending in a period of modest growth, while being increasingly becoming vulnerable to negative external shocks, such as oil price increases, or a new wave of El-Nino climatic shocks. These developments are featured in the bi-annual World Bank Macro Poverty Outlook for the SACU region, which recorded downgrades of sovereign ratings in South Africa and Namibia, and a sharp reduction of foreign currency reserves in Swaziland and Lesotho, threatening their pegs to the Rand. This new publication aims to transparently and independently report every six months on recent economic and social developments and prospects in the SACU zone.

SACU members are increasingly cognizant of the need to establish stabilization mechanisms, at the union level. During the fifth summit of SACU heads of state and government in July 2017, a decision was taken to adopt a stabilization fund which would collect savings from members to be used during rainy days. While all SACU members are expected to strengthen fiscal discipline at the national level, this decision also recognizes the value addition of establishing a regional mechanism for stabilization, likely to be less prone to political pressures during good times.

The challenges of implementing an effective stabilization fund at the regional level are nonetheless significant. It indeed requires agreeing on (i) the ultimate objectives of the fund, without which disagreements on the risks that should be covered by the fund and on member’s access to the fund will likely rapidly appear; (ii) the governance and management structure of the fund, to be cost-effective, and independent from national political pressure while transparent and accountable to citizens; (iii) the policy to invest savings collected in the fund, depending on the risks to be covered, and the time when this fund shall become operational; (iv) the modus of replenishment of the fund, through a combination of member’s contributions and potential concessional borrowing or grants; (v) the possible differentiation of countries in their access to the fund, according to their risk exposure, and (vi) and the fair treatment of moral hazard issues, to avoid that some members overly rely on the fund to cover their insufficient fiscal stabilisation efforts at the national level.

These issues where discussed among SACU members in April 2018, at a session of the World Bank Spring Meetings during which was presented hands-on countries experiences in stabilization funds. It is our hope that SACU members will continue to use the World Bank’s knowledge, global experience, and convening power as a platform for peer-to-peer learning to identify evidenced-based, pragmatic solutions that would contribute to a better governance of public financial resources in establishing the stabilization fund.