Revenue diversification key as SACU revenue is expected to decline

With the expected decline in the South African Customs Union (SACU) revenue for the 2025/26 financial year, government has to put more effort on revenue diversification, particularly through nontax revenue sources such as water royalties, to support sustainable spending and economic growth.

The deterioration in SACU receipts places significant pressure on government finances, necessitating prudent budget management. SACU revenue is known to be highly pro-cyclical, resulting in large fluctuations in revenue during economic booms and slumps.

For the fiscal year 2025/26, total revenue is projected at M29,815.4 million, representing 67.1% of GDP. Tax revenue is expected to rise, while SACU receipts are anticipated to remain volatile. Water royalties are forecast to significantly contribute to revenue, increasing from 7.2% of GDP in 2024/25 to 11.1% in 2025/26.

These projections highlight the importance of revenue diversification, particularly through nontax revenue sources such as water royalties, to support sustainable government spending and economic growth.

Expenditure, on the other hand is expected to remain at 70.0% of GDP, with both recurrent and capital spending forecast to decline as a percentage of GDP over the medium term, due to anticipation of lower SACU receipts.

Conversely, investment spending is projected to increase, driven by both government and donor funding. This projected decline in government spending as a proportion of GDP may require prudent budgeting and expenditure prioritisation to ensure sustainable fiscal policy and continued economic growth.

While Lesotho successfully secured a one-year extension of AGOA and a moderation of tariffs to around 15 percent, tariffs remain elevated by historical standards, and global trade tensions continue to weigh heavily on long-term investment planning.

“Heightened uncertainty in global trade and financial markets underscores the importance of preserving fiscal buffers, safeguarding external stability, and remaining vigilant to spillovers through trade, SACU revenues and regional fiscal conditions,” Minister of Finance Dr, Retselisitsoe Matlanyane had emphasized when announcing the 2026/27 budget speech presentation.

Matlanyane added that the country’s external position has weakened due to declining textile and diamond exports. While the balance of payments remains supported by LHWP-II capital inflows, the current account deficit is expected to widen in 2026, before improving as construction imports normalise.

“Foreign reserves are projected to remain adequate at around six months import cover, though sensitive to SACU volatility, diamond prices and fiscal execution risks,” Matlanyane added.

Heavy reliance on SACU transfers, poses a major macro-fiscal vulnerability, especially given South Africa’s economic performance and regional trade dynamics.

This story is also published in the latest issue of Maseru Metro.