Botswana, Lesotho, Namibia, and Swaziland face the serious challenge of adjusting not only to lower Southern Africa Customs Union transfers because of the global economic crisis, but also to a potential further decline over the medium term. This paper assesses options for the design of the needed fiscal consolidation. The choice among these options should be driven by (i) the impact on growth and (ii) the specificities of each country. Overall, a focus on government consumption cuts appears to minimize the negative impact on growth, and would be appropriate given the relatively large size of the public sector in each country.
Botswana, Lesotho, Namibia, and Swaziland (BLNS) face significant risks of a permanent loss of revenue from the Southern Africa Customs Union (SACU). They already experience a sharp loss in 2010/11–11/12, in the context of the global crisis. However BLNS could also face a further decline over the medium term, related to at least three structural factors:
(i) a change in the SACU revenue-sharing formula currently under discussion (Box 1)
(ii) a reduction in the common external tariff rates as a result of trade liberalization, and
(iii) the creation of the Southern African Development Community (SADC) customs union.
Quantifying with precision these risks is a daunting task, but under the preliminary parameters under discussion on the revenue sharing formula, and the impact on trade liberalization, the baseline estimate of the fall in SACU transfers ranges, for BLNS, from 5 percent of GDP to 15 percent (Table 1).
From these parameters it is possible to define options for a fiscal adjustment, which is the purpose of this paper. Although the specific magnitude of each shock is yet unknown, the results are nevertheless qualitatively robust to this magnitude. Thus, the policy recommendations would remain broadly the same, even if the size of the needed fiscal adjustment were to be smaller.
* Abstract and introduction to: The Design of Fiscal Adjustment Strategies in Botswana, Lesotho, Namibia, and Swaziland, prepared by Olivier Basdevant, Dalmacio Benicio, Borislava Mircheva, Joannes Mongardini, Geneviève Verdier, Susan Yang, and Luis-Felipe Zanna; IMF Working Paper African and Research Departments, November 2011.
* The 38 page report can be accessed here.