OLEBOGENG RAMATLHODI | Illicit trade, affordability and South Africa’s shrinking fiscal room

South Africa’s illicit trade challenge is no longer just a law-enforcement issue. It is increasingly linked to affordability, informality and the narrowing fiscal space available to the government.

For years, the public debate around illicit trade has followed a familiar script: smugglers, counterfeit goods, lost tax revenue, damaged local industries and the need for stronger enforcement. That account remains true, but it now misses a deeper shift. Illicit trade is becoming more embedded in parts of the economy where formal goods are harder to afford, the informal sector remains a livelihood mechanism for millions, and the state is under pressure to protect households while still collecting enough revenue to keep the fiscal framework credible.

From criminal market to consumer system

South Africa’s illicit trade footprint spans cigarettes, alcohol, clothing and textiles, leather and footwear, precious metals, scrap metal, second-hand vehicles and fuel. The South African Revenue Service (Sars) has repeatedly warned that these activities undermine customs duties, VAT and excise revenue, weaken local industry and threaten jobs.

The less explored point is that illicit trade does not expand only because criminal networks are effective. It can also expand where parts of the consumer market are under strain. Where legal goods carry taxes, compliance costs and distribution costs, and households are under pressure, a shadow market can start to function like a parallel consumer system. In that system, illicit goods may be purchased because they are cheaper, available and socially normalised in stressed communities.

This does not excuse illicit trade; it explains its resilience. South Africa’s informal economy remains a major source of livelihoods and economic participation, and that matters because illicit goods often circulate through the same localised channels that already serve consumers excluded from the formal economy. The operational distinction between “informal” and “illicit” may be clear in law, but on the ground the two can, in some instances, become entangled through survivalist trading, weak enforcement and highly price-sensitive demand.

The affordability trap

This creates an affordability trap. As legal goods become more expensive, demand shifts towards untaxed or undertaxed substitutes. As that demand grows, compliant firms lose market share, tax receipts come under pressure and the formal economy becomes less competitive. The state then faces a double loss: it misses revenue on the illicit product itself and also loses the wider taxable activity that would have accompanied formal production, wholesale, retail and payroll in the legal economy.

That framing is especially useful now because the cost-of-living story is intensifying again. The South African Reserve Bank’s March 2026 statement said headline inflation was expected to rise to average 4% in the second quarter of 2026, with fuel inflation above 18% following the oil price shock.

The Bank’s April 2026 Monetary Policy Review added that the temporary R3 a litre fuel-levy relief would moderate the inflationary impact somewhat, implying that without relief the near-term price shock would be worse.

In other words, affordability pressures are unlikely to ease meaningfully in the short to medium term. Even where headline inflation had shown temporary moderation earlier in the year, the fuel shock introduces second-round effects and risks through transport, food distribution and other administered or energy-sensitive costs.

That matters for illicit trade because rising prices widen the gap between formal taxed goods and cheaper illegal substitutes, which can solidify consumer migration into the shadow market.

Why the budget now matters more

This is where illicit trade becomes a fiscal sustainability story. Finance minister Enoch Godongwana’s 2026 budget placed illicit trade squarely in the narrative, warning that it robs the fiscus of billions of rands and threatens the economy, jobs and consumers.

That framing is significant because it treats illicit trade not as a peripheral enforcement matter but as a structural leakage problem in the revenue system. The fiscal implications are substantial. Recent reporting has pointed to multibillion-rand annual losses from tobacco, alcohol and the broader illicit economy.

Sars has long linked illicit trade to missed customs-revenue targets and warned that it threatens the state’s ability to fund public programmes. That concern becomes more acute when the government is simultaneously trying to cushion households from external shocks.

The National Treasury and the department of mineral & petroleum resources introduced a temporary R3 a litre reduction in the general fuel levy from April 1 2026, later extending this relief to June. The Treasury said the extension would be funded through higher-than-expected tax revenue and spending undershoots and estimated the forgone revenue at R17.2bn for April to June 2026.

The message is clear: the state is choosing to forgo some near-term revenue to ease pressure on households, but it can only do so because it believes the broader fiscal framework can absorb the shock.

That makes revenue leakages from illicit trade even more consequential. A fiscus that is already forgoing levy income has less fiscal flexibility to absorb losses in customs, excise and VAT caused by illicit markets.

Inflation, rates and the policy squeeze

The inflation and interest rate outlook strengthens this argument. The Reserve Bank has turned more cautious as fuel price risks have risen. In March 2026 it held the repo rate unchanged and warned that the inflation outlook had deteriorated because of the oil price shock, as noted above.

The market-implied expectations have shifted from anticipated rate cuts to interest rate hikes, with the recent 25 basis point increase under heightened inflationary pressures and risks.

That makes the policy environment less supportive for household relief than many had expected at the start of the year, when the broad expectation had been that inflation would converge toward the new 3% target in 2026 and create space for monetary policy easing.

For consumers, this means affordability may remain under pressure from two sides at once: higher prices and sticky or higher borrowing costs. For the state, it means the social and political case for temporary relief measures becomes stronger just as fiscal room becomes more contested.

For compliant businesses, it means the pricing gap against illicit competitors may widen further in the short to medium term. This is the central tension that conventional illicit trade commentary often misses.

South Africa is not only fighting smugglers and tax evaders; it is also confronting the economic conditions in which shadow markets flourish. When inflation rises, rates stay high or increase, and household purchasing power weakens, illicit trade can become more entrenched because it offers the appearance of affordability even while it corrodes the tax base over time.

The real policy question is therefore not simply whether enforcement should be tougher. It should. Sars has signalled a stronger effort to disrupt the illicit economy and indicated a stronger focus on corruption, noncompliance and criminal syndicates. But stronger enforcement alone may not fully solve a problem rooted in affordability stress, entrenched informality and narrow fiscal margins.

A more durable response would need to combine enforcement with sharper revenue protection, cleaner borders, better prosecution, and a broader recognition that the illicit economy is feeding off economic strain. This is happening at precisely the moment when the Treasury is trying to preserve fiscal credibility and the Reserve Bank is signalling that monetary policy relief may not be forthcoming soon.

Illicit trade should be viewed in the context of broader macroeconomic pressures — particularly rising near-term inflation and potentially elevated lending rates.

It can act both as a symptom of economic strain and, in some cases, a contributor to declining revenue performance. If inflation remains elevated and the Reserve Bank is constrained from easing — or is forced to tighten further — household affordability pressures will intensify.

In that environment, the shift towards illicit markets is likely to accelerate, further undermining tax collections and weakening fiscal outcomes. Addressing illicit trade is therefore not only a compliance issue but also an important factor in protecting already constrained fiscal space.

• Ramatlhodi is partner and Africa Indirect tax leader, Deloitte Africa