Introduction

The sugar sector is central to the economy of Swaziland accounting for 59% of agricultural output, 35% of agricultural wage employment and about 18% to the country output (GDP).  Swaziland is a low-cost producer of sugar and can sustainably produce sugar for a long time. Swaziland has also enjoyed preferential market access (at higher prices) for its sugar in the developed parts of the world, making sugar such a viable enterprise. With Swaziland facing high levels of poverty and unemployment, the sector can make a meaningful vehicle to fighting these problems. Smallscale cane farming is now practiced by many households, particularly those in the poverty stricken areas of the lowveld. Sugar presents a good opportunity for them to get employment, raise incomes and move out of poverty.

The currency appreciation since 2002 presented the first major challenge to the industry in recent years. Industry revenues decreased due to the fall in foreign exchange earnings. This currency appreciation affected returns mainly from the preferential markets (mainly that of the EU, where 30% of local sugar is sold).

Against the backdrop of a currency appreciation, the industry is now faced with an array of challenges, and is in a period of uncertainty, as the situation on its major export market, the EU, changes dramatically. The EU is reforming its internal sugar market, with a resultant drop in the EU price (and the price we were getting) and less guarantees on the preferential market access. This could see sugar revenues reduce substantially. This could further take away the viability of the sector whose strength was not only the low cost of production but also the sales to preferential markets (at higher prices).

This would adversely affect all sectors of the sugar industry and have serious repercussions throughout sectors of the Swazi economy with which the industry has links.

The Swaziland Sugar Association is running a series of articles with the aim of informing the public about these events and providing an opportunity for a lively debate on the challenges and the mapping of a way forward. The articles will look at the size and structure of the Swazi sugar industry, its role in the national economy, the current problems faced by the industry and what can be done to mitigate the problems and address the most urgent needs. Given the importance of the sugar sector in Swaziland, it is important that all Swazis have an understanding of the challenges that lie ahead and what needs to be done to ensure a profitable and sustainable future for the industry.

The Structure of the Sugar Industry
The modern sugar industry in Swaziland can be traced back to irrigation projects initiated in the mid 1950s in the Big Bend area of the lowveld.  This was rapidly followed by the establishment of a mill at Mhlume, in the northern part of Swaziland and the opening of a third mill at Simunye.  While sugar production in Swaziland has traditionally been based on estates, 1962 saw the establishment of the first smallholder sugar producers at Vuvulane through the assistance of the Commonwealth Development Corporation.  Other small scale sugar growing schemes have since been developed, with a considerable expansion since the mid 1990s. This was in view of the major contribution which smallholder sugar production can make to rural development and the fight against poverty ad unemployment. This has been facilitated through the establishment of special sucrose quotas and the provision of technical and financial assistance by the industry players and the support of such schemes by the Government.

Currently, the sugar industry in Swaziland consists of four components: miller-cum- planters and estates (77% production); large growers (17%); medium sized growers (5%) and small growers (1%).  The interests of different industry players are reconciled within the framework of the Swaziland Sugar Association, which through its Council (consisting of Millers and Growers) regulates the industry. 

While accounting for a smaller volume of total production, the largest number of growers falls under the category of medium and small growers. This sector is currently undergoing a process of rapid expansion through the implementation of two major irrigation schemes: the Swaziland Komati Downstream Development Project and the Lower Usuthu Smallholder Irrigation Project. At the conceptualisation f these projects it was projected that smallholder sugar farming would expand to around 250,000 tonnes of sucrose by 2014.  Recent developments could however close of these opportunities for expansion.

The Swazi Nation, through the smallholder farmers, the Swaziland Government and Tibiyo TakaNgwane (where the latter two hold shares in the milling companies, in trust for the Nation), has a major stake in the sustainability and growth of the industry. Challenges do not only face the present industry players, but more so the viability of new entrants into the sector whose capital establishment costs are high, in the face of dropping prices and returns.
 
What Role Does Sugar Play
Sugar is pivotal to the development of Swaziland and the modern sugar sector in Swaziland needs to be seen in the context of the challenges currently facing the country.  It is estimated that around 30% of the workforce is unemployed, while some 42% of the adult population is estimated to be HIV positive.  In terms of average incomes, Swaziland enjoys a GDP per capita of US$ 1,290. Income distribution is however highly concentrated and the human development index ranking shows a lowly 125, reflecting the high levels of rural poverty faced in Swaziland.

Not only does the sugar sector make a major contribution to the economy but it also makes a major direct and indirect contribution to the provision of health care, education, housing, public utilities and social services in sugar producing areas.
The role of the sugar industry to other national developments can also be seen through its contribution to government revenues, both directly through the sugar levy and through corporate and income taxes levied on the industry. The annual payments to Government amount to over E100 million per year (sufficient to run many health and education facilities a year).
In this context, the challenges facing the Swazi sugar sector will have a direct bearing on government tax receipts, with the most obvious area of loss being under the “sugar levy”. The levy (see box below for details) payments alone amount to about E28 million per year. With corporate earnings falling dramatically, so will the tax revenue from corporate taxation. These challenges will inevitably force some companies to restructure and in the process shed some workforce. The revenue from personal income taxation will fall accordingly. Furthermore, the possible inability to continue producing sugar at sufficient levels might threaten the operation of locally based manufacturing enterprises who are adding value to the product. This could result in a direct reduction of corporate tax and related taxes (including value added tax).

This loss of government revenue will come at a time when demands on the government to take over the running of education, health and public utility provision in sugar growing areas is increasing. This is also coming at a time when the role of Government in public service provision is under great challenge due to newly created social safety instruments and the challenges of unemployment, HIV/AIDS and poverty. This is likely to have a very direct impact on the provision of health, education and public utility services in sugar growing areas, with services (and quality) likely to deteriorate in the medium to long term, unless alternative  models for the sustainable management and financing of these services can be established.

The Changing Significance of the EU Market
The roots of the current challenges lie in the history of Swaziland’s trade relationship with the EU.  For many years, although the EU took about 30% of Swazi sugar exports, with EU sugar prices at about 3 to 4 times the world market prices, earnings on sales to the EU were the major source of industry revenues. With the reforms, this is bound to change.  In the last ten years, sugar sales on the SACU market have risen considerably (from 125,659 tonnes in 1992/93 to 331,920 tonnes in 2003/04). The SACU market is a world price related market. Therefore, as the industry expands (with additional production expected to come on stream from the Maguga and LUSIP projects), more and more Swazi sugar has had to be sold at world market related prices. Selling at these prices is not sustainable in the longterm unless the financing of smallholders is restructured, along other restructuring activities.
 
The first declines on revenues to the EU market were felt during the period of the appreciation of the Emalangeni (the value of the Euro against the South African rand began to fall dramatically).  Between 2002 and 2005, for every Euro earned on sales of sugar in the EU, 37% less Emalangeni was received.  This contributed to a 21% decline in the sucrose price paid to farmers between 2002 and 2005.  This has created serious problems in the sugar industry. The reduction of the EU price, as a result of the reforms, is only going to make matters worse. 
 
These developments will make the SACU market (which pays a premium to the world price, but still below the EU price) more and more important to Swaziland. By the end of the EU reform process (where prices would have been cut by 36% in the EU), sugar prices on the SACU market will be higher those on the EU market. The SACU market is therefore becoming of significant and strategic importance to Swaziland. Protecting this market (which is shared mainly with South Africa) and nurturing regional and domestic demand is of particular importance. A particularly important area relates to the industrial use of sugar, which is declining in South Africa, as trade liberalization removes tariff protection from sugar containing food products.  This is adversely affecting investment in sugar based food processing and this is an issue that needs to be addressed in developing future trade relations with the EU. This is the reason Swaziland has such a vested interest in the trade negotiations between the EU and South Africa, regarding the Trade and Development Cooperation Agreement (which is presently under review). Under this agreement, sugar containing products will be exported to South Africa free of duty from 2012. This will be in direct competition with local and regional sugar manufacturing plants who have been buying Swazi sugar.
 
The recent dramatic increase in world market prices (a doubling in 12 months) while providing some relief to the hard pressed Swazi sugar industry, can in no way balance the impending losses on sales to the EU market. Even after the reform of the EU sugar sector, EU prices will still be above the current high world market price.  Ironically, the only way to balance EU price reductions is to re-direct sugar currently exported at world market prices to the EU market (since prices are higher in the EU than on the world market).  

The Priority Options
Indeed, securing expanded duty free access to the EU market for Swazi sugar exports is the highest priority issue for Swaziland in developing its trade relations with the EU.  If unlimited access to the EU sugar market could be obtained, this could balance income losses arising from the EU price reductions. By some measure, the expanded access would absorb some of the sugar (which is increasingly) sold to the world market which is lowly priced. This option would have to b pushed against the realities which are at the moment negating the possibility of success on such. In the long term, however, it offers the best possible solution to the current challenges facing the Swazi sugar sector.  
 
In the short term, priority needs to be given to the rapid mobilisation of EU aid to help with priority restructuring measures. This aid needs to be made available with urgency, especially if it is to respond to the plight of smallholder sugar farmers who are being pushed into a state of bankruptcy. The EU needs to move on its part to make available this aid and make clear its commitment to assisting countries adjust to this changing environment. The investments necessary to adjust to the reforms, which are due to begin in 2006, ought to have been already made if the adjustment is to be meaningful and timely.