2. Impact
on Government Revenue and Operations
The
most direct impact of the EU sugar reform on Government will relate to income
earned on sales into the EU market on two accounts. First, the Government
charges a tax (called the sugar levy) on export to the EU under the Sugar
Protocol. Secondly, the reduction of industry earnings from the EU market,
which presently represent a third of total industry revenues, will leave less
taxable income from which Government can earn revenue. Other indirect revenue
losses will be in the form of losses in personal income tax (including the
taxation of benefits), and general sales tax as the buying power of people will
be reduced through retrenchments and other mechanisms.
The
most glaring and easily quantifiable area of loss is the sugar levy which is a
tax applicable to sales of sugar under the EU Sugar Protocol. Government is
expected to lose about €9 million per
annum in revenues from the levy. The sugar levy was designed to secure part of
the economic rent to be derived from the existence of the preferential access
to the EU market for use in the provision of wider social services in
Swaziland. With the implementation of EU sugar sector reforms, at current
prices and exchange rates, a higher premium for Swazi sugar in the EU market
will be disappearing particularly in relation to the domestic (SACU) market.
The justification for the levy will thus disappear.
The revenue losses from other sources of the sector
are not readily quantifiable but are significant. For this to be happening in a
period of serious strain on public finances and a huge pressure of
expenditures, given the HIV/AIDS pandemics, high unemployment and poverty, the
significance of such revenue losses will be huge. This is against a backdrop of
limited ability for the Government to utilise fiscal, monetary and trade policy
to intervene in cases of such developments. The Government is therefore
constrained in its response to this reduction in revenue. Government operations
will suffer, unless an equal injection is obtained from the EC and other
sources, in the form of budget support. This
is particularly relevant as the sugar industry seeks to withdraw from the
financing of a range of social services, and the financial burden falling on
the Government is set to increase substantially.
3. Impact on the Social
Sector
The
social welfare services that are provided by the sugar estates/companies will
no longer be available to the employees that will face retrenchment, including
their families. Furthermore, even for those employees that will remain in
employment, the companies will cut the level of social services provided and
subsidised. This will have the effect of reducing social welfare standards, for
employees and their communities. The ability of the economy to absorb and
assist those who will be retrenched is limited. Access of ex-employees to
social services provided by the companies is forfeited on their departure. This
places them at the hands of the state, which is already overstretched given the
many challenges relating to high unemployment and poverty levels, and other
social challenges exacerbated by the high prevalence of HIV/AIDS. The EU
reforms are therefore having some profound impacts on the society.
The
sugar sector plays a multifaceted role in the economy. Besides creating
employment, providing social services, bringing foreign exchange, and boosting
economic growth, the linkages with other sectors of the economy make it more
important. The effect of any decline in the performance of the industry is
therefore macroeconomic in nature. Manufacturing, which has for many years been
the main driver of economic growth in the country, will suffer as a result of
the decline in the performance of the sugar industry.
A
weakening performance of the sugar sector results in higher unemployment, poor
industrial performance, reduction in foreign reserves and the weakening of the
balance of payments position, amongst many other macroeconomic imbalances to
result from these EU reforms. With sugar exports to the EU accounting for 21%
of total Swazi exports to the EU, a 36%
decline in Swazi sugar sales to the EU will result in approximately a 7%
decline in the total value of Swazi exports to the EU (all other factors
constant)
The
reduction of the employment level in the sugar industry is translating directly
into an increase in the national poverty
indicators. The income losses sustained by former sugar employees, by passing
either into unemployment or self-employment under the industry’s scheme of
out-sourcing of services, are exacerbated by the fact that about 7 dependents
must be assumed for each retrenched worker. This situation is compounded by the
increased costs which retrenched workers face in accessing health, education
and housing, as a result of their loss of status as employees (with
non-employees facing higher charges, fees and rents than employees). This
undermines the welfare of future generations, as those directly affected now
will not be able to maintain their lifestyle and to pass it on to their
children.
The financial sector in Swaziland is heavily exposed to the
sugar sector. Any decline in present and future performance of the sugar sector
directly challenges the viability of the financial institutions as well, as the
financing model used was based on higher prices. For example, 14 Farmers’
Associations, farming a total of 2,341 ha, have borrowed E109 million, mainly
from the commercial Swazibank, and have an average debt load of over E43,000
per ha of cane. Interest alone is presently requiring annual payments per ha of
over E7,000. There is need to stabilise the financial situation of the sector
so that financial institutions are not exposed to further risks of collapse.