By Tanele Magongo, Mangaliso Mohammed, and Thula Sizwe Dlamini

To introduce or not to introduce value added tax (VAT) on electricity? This is the question that confronts our government and the nation as a whole, given the current state of government revenue.

Swaziland remains highly dependent on revenue from the Southern African Customs Union (SACU) to finance government activities. Not surprising, SACU has become a key determinant of the Swazi economy as it represents more than half of government revenue.

Yet the prospects of a sustained stream of revenue from the world’s oldest customs union remain bleak. South Africa could decide that the R48 billion it pays annually to the customs union is a fiscal drain to their economy and a hindrance to real economic development.

If such a situation were to materialise, it could leave Swaziland and the other SACU members that share 55% of the revenue pool dry.

To be clear, SACU is not really the problem here: the issue is that having one source of income just doesn’t cut it. The government of Swaziland needs much more robust and diverse streams of income in order to be able to sufficiently fund the different national development programmes. One of these proposed revenue generating measures is the introduction of VAT on electricity.

VAT is a tax instrument on consumption of final goods and services used by countries all over the world to increase the total amount of money collected by government. Essentially, this means that in order to increase government’s cash flow, a unit price of electricity in Swaziland would be increased by 15%. Recall that government also proposed to increase VAT from 14% to 15% as of 1st April 2018.

Perhaps putting numbers on the issue might help shed some light on why our government would be tempted to tax electricity. Without factoring in inflation, in 2012 the government introduced VAT and made a whopping E1.74 billion rising to E2.4 billion in 2016. Figures from the Swaziland Electricity Company (SEC) Annual Report (2016) indicate that in 2016 a total of 1084.1 gigawatt hours of electricity were sold, generating E1.586 billion in revenue for SEC. If government were to tax this at a standard rate of 15%, it would make approximately E237.9 million and increase total revenue in 2016/17 by 1.73%.

Well, clearly, there could be revenue generated in the short term which could improve our budgetary conditions. Countries such as Portugal did experience significant improvements in both their economic and budgetary conditions after introducing VAT on electricity in 2011. The Saudi Arabian government just recently introduced a 5% VAT on electricity earlier this year and anticipates that it will improve the country’s fiscal sustainability position going forward.

It gets much more complicated and interesting though: in 2016, SEC imported 86.6% of the electricity it sold in Swaziland, on which it paid VAT in South Africa at a standard rate of 14%. Currently, electricity is a tax exempt commodity in Swaziland, that is, the government does not tax its sale and SEC cannot claim the VAT they pay in South Africa like other importers do with other commodities.

So what does this mean? It means that if electricity would become zero-rated (the government does not tax its retail sale, but allows the importer to claim the VAT it paid to buy the commodity) then SEC would be able to reclaim the VAT, to the loss of the Swaziland Revenue Authority (SRA), which collects money for government.

Put the logistics about who claims what, how, and which money eventually gets to government coffers aside for a moment. The more pertinent question is: what does this increment mean to the ordinary Swazi and to the economy at large? In other words, what will be the impact on the households and business, and what will be the impact on the cost of producing goods and services? How many jobs will be affected and what will be the impact on the cost of living in Swaziland?

The concerns arising can be grouped into three sets of impacts. On the economic front, we should be concerned about overall economic performance when the price of electricity, a key input for production, goes up. On the equity front, the VAT policy on electricity could have regressive distributional effects on households in Swaziland, making affordability an even acute problem of our time. On the environmental front, the fear is that more expensive electricity would drive more households to use alternative forms of energy that are less friendly to the environment.

With all of these possible outcomes, the question still remains: who will bear the brunt of this price hike and in the grand scheme of things, is a 15% hike in electricity worth an additional E200 million to the government’s coffers?

These may indeed be difficult questions to answer but before we even attempt to do so, it is important to note that there is no doubt that electricity is an important input in the welfare of consumers in any economy, as well as a key ingredient for the production of goods and services in any economy. Energy also plays a huge role in supporting much more convenient lifestyles – a key goal for the National Development Strategy (NDS). It provides flexible hours for working and studying, and reduces adverse health impacts that would otherwise plague the country if households were using wood fuel for cooking instead of cleaner and health-friendly stoves.

And so, with 63% of the population in Swaziland living under the poverty line, this policy measure is bound to come with some unintended consequences. In fact, the government’s effort to ensure that every household is connected to the electricity grid might fail to yield the intended benefits. In their study titled ‘The Effect of an Increase in the VAT on Electricity in Portugal’, Pereira and Pereira (2017) argue that introducing a goods and services tax, in our case VAT on electricity, will make poor people worse-off.

Swaziland’s Sustainable Energy for All Country Action Plan indicates that, already, the country is experiencing a rural energy crisis where demand for household energy has outstripped supply and as such, this has contributed to environmental degradation and rural poverty in the country. So such a measure could possibly end in a sad story for the environment, on people’s health, and on the economy as a whole.

Let us not forget industry, which contributes massively to Swaziland’s Gross Domestic Product (GDP). According to SEC publications, the industrial sector uses the most electricity (about 363 gigawatt hours in 2016) in Swaziland after the domestic sector. Hence, they are essentially one of the biggest source of revenue for our electricity provider. But with the new proposed tax amendments, things could play out differently. In the same publication by Pereira and Pereira, the authors postulate that introducing a tax on electricity could drive away investments. For Swaziland, this could mean that if electricity costs end up driving away industries, which in fact are the backbone of the electricity sector, government could possibly see a reduction in overall revenue gained from VAT.

So why then introduce this tax on electricity anyway?

It is clear that the possible impacts of introducing VAT on electricity are not clear cut and dry. Will we have a significant increase in our budgetary conditions or will we experience a decreased consumption in electricity which could essentially mean little to no improvement or even a negative impact on government revenue? What will happen to our environment? Our businesses? Who stands to benefit and who stands to lose? Are the benefits anticipated worth the possible costs? What level of VAT is appropriate for electricity given the business climate in Swaziland?

All these questions need answers which lie in a thorough academic study that will evaluate the economy wide potential effects of introducing VAT on electricity in Swaziland. Before we find ourselves in a deep dark hole that we cannot come out of, let us investigate this issue thoroughly!  Fortunately, the Swaziland Energy Regulatory Authority (SERA) and the Swaziland Economic Policy Analysis and Research Centre (SEPARC) are already engaging in such a study.

About the authors: Tanele Magongo is an Energy Policy Analyst, Mangaliso Mohammed is a Research Economist, and Thula Sizwe Dlamini is a Research Economist and Executive Director at SEPARC. They can be reached at and They write in their personal capacity.