The Shadow Economy: South Africa's R30 Billion Annual Loss to Illicit Trade

The consequential decisions made during the COVID-19 lockdown in South Africa have resulted in a staggering annual loss of R30 billion in tax revenue, according to alarming figures revealed in a study conducted by the Transnational Alliance to Combat Illicit Trade (TRACIT). As the country grappled with the pandemic, the government-imposed restrictions, including bans on the sales of cigarettes and alcohol, inadvertently fueled an underground market that now poses a significant challenge to the nation’s stability and economic resurgence.

TRACIT's Director-General, Jeffrey Hardy, underscored the issue stating, "The Covid-19 pandemic provided wide opportunities for illicit traders to adjust and expand their operations,” highlighting the need for South Africa to devise and enact robust policies and programs that effectively stymie illicit traders’ fortification in the post-pandemic market.

Law enforcement, diverted their focus to pandemic-related duties, leaving a void that criminal networks exploited to entrench themselves within the illicit markets of alcohol and tobacco—a problem that the Bhekisisa Centre for Health Journalism noted has been growing over the past two decades.

In particular, from an almost negligible 5% in the early 2000s, illicit tobacco trade has skyrocketed to 54% of the total market by 2020, research by a PhD candidate at the University of Cape Town, Nicole Vellios, revealed. This boom is markedly attributed to increased official prices and the dismantling of South African Revenue Service’s enforcement units, alongside the lockdown sales ban that acted as a catalyst for the illicit market’s exponential growth.

The ramifications are stark, with Tax Justice SA estimating a loss of more than R20 billion in tax revenue in the last year alone due to illegal tobacco, and illicit alcohol trade costing the country an additional R6 billion per annum. With illicit activities consuming substantial portions of both markets—22% in alcohol and more than half in tobacco—the efforts to regulate and formalize these sectors are experiencing severe setbacks.

Moreover, the escalation of the illicit alcohol market, as detailed in the TRACIT report, records that the South African fiscal loss in this area is the largest among seven African countries investigated in a Euromonitor study, with SARS losing R11 billion a year to the shadow economy.

Despite varied estimates regarding the total cost of the bans over the past five years, all data converge on a considerable and growing shortfall in expected tax revenue due to illicit trade, underscoring the urgency for intervention before the illicit markets’ entrenchment becomes irreversible.