Lesotho Making Billions Selling Water to South Africa

Even though Lesotho has high debt levels and high unemployment, it is raking in billions by selling water to South Africa. South Africa gets water from the landlocked mountainous kingdom through a series of tunnels and dams given that Lesotho receives 60 percent more rain than its neighbor. This transfer is accomplished through a series of rivers which include the Malibamatso, Matsoku, Senqunyane and Senqu, while in in South Africa it involves the Vaal River. This water transfer is said to be Africa's largest water trade scheme.

There is a signed Treaty between the two governments which sets out the structures required to implement the water transfer Project on behalf of the two governments, through an implementing management structure known as the Lesotho Highlands Water Project will also generate hydro-electric power.

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July 2010 SACU Summit

SACU continues to enjoy its centenary and uniquely, this year we have seen 2 SACU Summits with a third anticipated by the end of October 2010. The first Summit was held in April 2010, whereby the Heads of State and Government adopted a new mission and vision for SACU.  They also agreed on the institutionalization of the meetings of the SACU Heads of State and Government.

The second summit was held on July 16th 2010, and the Meeting issued a Communique which mandates Ministers to address challenges that SACU needs to resolve. The Summit further reiterated that SACU should be converted into a vehicle for regional integration and also recognized the role that SACU can play in Southern Africa as a building block for deeper regional integration. 

Some of the challenges mentioned in the communique are mandated in the 2002 SACU Treaty (e.g. revenue sharing, common policies, institutions etc). Some were also highlighted in the 2009 WTO Trade Policy Review of SACU. Other challenges highlighted by the Summit include: financing options for cross border projects, increasing intra-SACU trade, new generation issues, reviewing the 2002 SACU Agreement and development of a roadmap for an Economic Community and Monetary Union. 

One observation is that a unified SADC EPA position is not expressly mentioned.

The Communique can be accessed here.

SACU Centenary: Champagne?

The Southern African Customs Union (SACU) is commemorating its centenary and the theme of the celebrations is “Implementing a Common Agenda towards Developmental Integration in Southern Africa”. As I reflect on the theme, I am reminded that the combined population of the SACU countries is around 55 million with South Africa accounting for some 87% of the total.  South Africa also accounts for over 90% of SACU's aggregate GDP and will continue to maintain its predominant position in the region.

The SACU agreement was formalized in June 1910 between the then Union of South Africa — Territories of Basutoland, Swaziland and the Bechuanaland Protectorate.  The Agreement was renegotiated into the 1969 SACU Agreement, signed by the sovereign states of Botswana, Lesotho, and Swaziland (BLS) and South Africa, on December 11, 1969.  The second SACU Agreement provided two major changes: the inclusion of excise duties in the revenue pool and a multiplier in the revenue sharing formula that enhanced BLS revenues annually by 42 percent.  

With the independence of Namibia in 1990 and the end of apartheid in South Africa in 1994, SACU members embarked on a third round of new negotiations in November 1994, which culminated in a new SACU agreement in 2002. Namibia therefore joined SACU following her independence in 1990 and is the newest Member to the regional community.

Over the decades, intra-SACU trade has intensified but the traditional importance of South Africa as a regional hub has remained broadly unaltered. More than 95% of commercial flows within the customs union involved South Africa as a destination or supplier.  Moreover, South Africa accounts for around half of total BLNS trade, whereas the intra-SACU component of South Africa's total trade is relatively minor, reflecting SA’s greater diversification in terms of export destinations and import sources.

The EC continues to absorb the largest share of overall SACU exports, followed by the United States.  However, similar to the trend in the rest of Africa, the U.S. market remains the single most important single country destination (outside SACU) for exports from Lesotho and Swaziland, mainly due to the preferences granted under the African Growth and Opportunity Act (AGOA).  Exports to China from SACU, although still relatively modest, registered the fastest growth during the period reviewed (2003-2009).  Imports into SACU originate largely from the EC, China, and the United States.  Since 2005, imports from China have exceeded those originating in the United States and SACU's imports consist mainly of machinery and transport equipment, fuels, and chemicals.

However despite the longevity of the agreement, the results of regional integration have been imbalanced and fall far short of a century of progressive progress.  For instance, according to the WTO Third Trade Policy Review of SACU of November 2009, deeper integration is necessary for more balanced development in the SACU region and even though SACU economies have  collectively expanded at an average annual rate of about 4% in real terms since 2003, there is variation in growth rates in each economy and a generally unsteady performance.  The mixed growth record may reflect severe infrastructure bottlenecks, fluctuations in mining output, volatile national currencies, polarisation as well as the global economic downturn in recent years.

According to World Bank Trade data, SACU countries over the period 2006-2009 generally shrunk in average annual growth rate of total trade i.e. exports, imports of goods (merchandise) and services at constant 2000 U.S. dollars. As shown in the chart, Lesotho (the smallest economy of the five) shows to be the only exception to this trend.  

As a customs union, SACU policy harmonization efforts aimed at achieving a more cohesive, integrated regional market with balanced export-led growth is vital.  Considering the centennial theme has been acknowledged by the SACU Heads of State, one can only say "a 100 years later, its about time". 

Deeper Regional Integration among SACU Member States

The Southern African Customs Union (SACU) will be transformed from a customs union into a body to deepen regional integration (See attached Communique by Heads of State) in southern Africa beyond the existing five member states and to "serve as building block of an ever closer community" among the peoples of Southern Africa.

The decision was taken yesterday by the heads of state and government of the five member countries: Botswana, Namibia, Lesotho, Swaziland and South Africa.  A joint communiqué to declare that a new vision and mission had been defined for SACU was signed by President Hifikepunye Pohamba and the visiting heads of state King Mswati III of Swaziland, President Jacob Zuma of South Africa, Botswana President Ian Khama and Prime Minister Pakalitha Mosisili of Lesotho.

They held a closed-door meeting yesterday morning and then proceeded to the site where the new SACU headquarters will be built, in order to sign the communiqué during a ceremony that also marked the start of the centenary celebrations of the world's oldest customs union.  Although the communiqué stopped short of declaring that SACU might become the envisaged larger customs body for the 15-member state Southern African Development Community (SADC), this might well be so, a well-placed source told The Namibian.

In December last year, the SACU Council of Ministers decided in Windhoek to work towards "a defined roadmap for moving towards and economic community and monetary union" and further decided to "position SACU at the centre of the SADC economic integration agenda," according to a statement released afterwards.  "This underscores the aim to make SACU the nucleus for the envisaged SADC Customs Union," the source added.  President Hifikepunye Pohamba said yesterday that all five SACU states had underscored unity and vowed to hold a common position when it would come to trade negotiations with external trading partners.

"Our negotiations with third parties over the years have brought to the fore the need to develop common positions. This is particularly true of the ongoing talks for an Economic Partnership Agreement (EPA) with the European Union.  This situation, if not arrested, has the potential to undo all the gains realised in our deepening economic integration, both in SACU and SADC," Pohamba stated. According to South African President Jacob Zuma, the founding of SACU in 1910 was based on colonialism by the then Union of South Africa.

"Today, as we mark one hundred years of SACU, we must look at how to strengthen the arrangement, how to eliminate all vestiges of colonial systems of domination and dependency, and how to operate within a changing geopolitical environment," Zuma said. The combined trade contribution of developing countries now stood at 37 per cent and was rising rapidly towards 50 per cent, he said. "We must therefore engage with this international reality to enhance our collective development objectives. "We feel strongly that SACU's external strategy could include serious exploration of South-South cooperation, since this has excellent prospects for advancing our economic development," he said, hinting at Brazil and India, among others.

The vaguely drafted communiqué stated that the heads of state agreed that SACU had to be transformed into "a vehicle for regional economic integration capable of protecting equitable development."

Tasks that have not yet been completed are the establishing of a SACU Tariff Board, the SACU [trade] tribunal, a common negotiating mechanism and strengthening the Secretariat.  A common industrial and agricultural policy must still be drawn up and four of the five member states must still set up their own SACU national offices. Yesterday's meeting was preceded by three days of talks by the Council of Ministers. Another meeting of the SACU Heads of State will be held in July in South Africa.

By Brigitte Weidlich 23 April 2010 WINDHOEK

Intra- SADC Trade Flows are Predominantly with South Africa

Regional Trade Agreements (RTAs) are influenced by the share of trade with partner countries as well as the composition of trade and production linkages.  Intra-regional trade in the SADC region is influenced by both the 2008 SADC Trade Protocol and bilateral trade agreements, which Member States negotiated prior to entry into force of the Trade Protocol. It should be noted that  the SADC Trade Protocol provides for the continuation of existing bilateral arrangements as long as they do not contradict the Protocol.

Despite the several bilateral agreements among SADC Members and the SADC FTA, a high proportion of intra-SADC trade is bilateral trade flows with South Africa.  South Africa is the largest importer and exporter in SADC as shown in the figure above (World Bank Data).  

Furthermore the bulk of trade flows is among the 5 Members of the Southern African Customs Union (SACU) and hence trade flows between 15 SADC Members outside of SACU is very low (less than 10% of total trade) with possible exception for Zambia.  The predominant role of South Africa is in part a reflection of its role as a logistical hub for the region’s trade with the rest of the world.  This may explain why the highest trade dependence is displayed by countries that are logistically connected to South Africa, possibly landlocked and are able to take advantage of her larger market, infrastructure and connectedness with world markets. 

Despite this high percentage of SADC trade with South Africa, overall the SADC region trades predominantly with the rest of world as shown in a previous post here.  This trend applies for both  exports and imports and implies that Africa's future trade expansion may lie in the fastest growing export market which is East Asia and in particular China.

Extra-SADC Trade are Flows Predominantly with the Rest of the World

The Members of the Southern African Development Community (SADC) formed a Free Trade Area (FTA) according to the SADC Protocol on Trade in 2008 in order to stimulate trade amongst the 15 Members. However a significant portion of the SADC Region's import/export trade is with the rest of the world and not among the 15 Members of this regional economic community. Since the coming into force of the SADC FTA, trade flows have in deed increased however these trade flows have been with trade partners in other parts of the globe and not among the SADC Members.  

As shown in the charts, even though the European Union continues to be the largest trade partner for the SADC region, East Asia has consistently been the fastest growing trade partner for the SADC region.  East Asia in 2005 was the second largest source of imports for the SADC region at 12,075US$ and with an increase of 140% from 2000. This trend is only likely to increase given that East Asia has a competitive advantage in manufactured products.

SADC export trade was also conducted largely with the EU (24,376US$) in 2005 and East Asia (6,573US$) the same year. However in 2000, SADC exports were predominantly destined for the EU (14,484US$) and NAFTA (3,746US$).  Between 2000 and 2005, SADC exports to the EU increased by over 55% while exports to the NAFTA increased by about 75% and increased by about 163% to East Asia. Data obtained from the SADC..