Well-planned, permanent expenditure cuts were highlighted by the International Monetary Fund (IMF) as the most effective fiscal adjustment for Botswana, Lesotho, Namibia and Swaziland, or the BLNS countries, in light of the global financial crisis which shrank the shared Southern African Customs Union (Sacu) revenue pool.

In a newly released report by the IMF African Department called ‘In the wake of the global economic crisis: adjusting to lower revenue of the Sacu in Botswana, Lesotho, Namibia and Swaziland’, the IMF noted that fiscal adjustment within the BLNS to date, has been uneven.

The IMF estimated a large revenue shortfall for the smaller economies of Sacu, while the impact on South Africa was expected to be small, at about 0,3% of gross domestic product (GDP), while the Sacu revenue shortfall in Lesotho and Swaziland would be 23,3% and 15,9% of GDP, respectively, over the next three years.

The report further indicated that in Botswana, adjustment - as presented in the 2010/11 fiscal budget - was based on significant spending restraint, including a substantial cut in development spending, as recent projects approached completion. The Botswana government was also implementing a civil service salary freeze, while the value added tax rate has also been increased from 10% to 12%.

In Lesotho, in the context of an extended credit facility arrangement with the IMF, the authorities have increased administrative fees, charges, and fines; and on the expenditure side they have contained the growth of the wage bill, goods and services and transfers.

In Namibia, the fiscal adjustment to the lower Sacu revenue was expected to start with the 2011/12 budget, mainly on the expenditure side.

The Swaziland authorities have recently developed a fiscal adjustment roadmap that sets out a plan to improve tax administration, introduce comprehensive civil service reform, and improve the quality of spending to realise further savings.

The IMF suggested that an appropriate mix of fiscal adjustment and financing should ease the adjustment process over the medium-term without endangering debt sustainability, growth, or poverty reduction.

The IMF explained that the global economic crisis had a large impact on Sacu imports, and the dollar value of Sacu imports declined at a yearly rate of 28,1% in 2009, which reflected the contraction of economic activity in the region.

“Notwithstanding an incipient recovery in the region in 2010, imports are not expected to return to the 2008 peak until 2012 and will grow broadly in line with world real GDP growth thereafter,” said the IMF.

The organisation also highlighted that there were significant downside risks of a larger decline in Sacu revenue to the BLNS countries than currently estimated.

These potential risks include: a possible change in the Sacu revenue-sharing formula, which may reduce transfers to smaller Sacu members; a further slowdown in the global economy and South Africa’s economic growth; a reduction in the common external tariff rates because of trade liberalisation; and the creation of a Southern African Development Community customs union, which may comprehensively change the current revenue-sharing arrangement and adversely affect all Sacu members.

“These downside risks highlight the need for cautious Sacu revenue projections in the future and for building up fiscal buffers to offset future shocks,” emphasised the IMF.