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Chapter III: Swaziland’s External Vulnerabilities: The Fiscal Origin

Author(s):
Olivier Basdevant, and Borislava Mircheva
Published Date:
February 2013
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A. Swaziland’s Fiscal Position Remains Vulnerable and Inadequate to Reduce Poverty

The fiscal position has improved owing to the windfall transfer from SACU for fiscal year 2012/13 (Table 3)5 but fiscal imbalances are still present as expenditures remain high. Fiscal imbalances originate mostly from uncontrolled spending. The public wage bill, at about 15 percent of GDP, is one of the highest in sub-Saharan Africa (see Basdevant, Baba, and Mircheva, 2011, and Figure 3). While the deficit was partly reduced in 2011/12 to 6.0 percent of GDP, it was above the estimated sustainable levels at about 2 percent of GDP maximum. At the same time, progress has been made to strengthen public financial management (PFM). The new PFM bill has been drafted with technical assistance from the IMF and is expected to be submitted shortly to parliament. Once enacted, the new bill would increase the transparency of the budgetary process and ensure that all expenditures are channeled through the appropriate budgetary procedures.

Table 3.Swaziland: Central Government Finances, 2010/11–2012/13
2010/112010/112012/13
ActualBudgeted1ActualBudgeted2Projected
(percent of GDP, unless otherwise indicated)
Revenue and grants25.228.924.536.037.6
Primary expenditure38.033.629.233.936.1
Wage bill16.214.414.914.214.8
Goods and services6.65.05.05.76.0
Transfers6.98.06.58.18.4
Capital spending8.46.32.85.96.9
Primary balance–12.8–4.7–4.72.11.5
Interest payment0.61.11.31.31.0
Arrears (flow)2.7–0.22.8–4.82.1
Primary net lending / borrowing–10.1–4.9–1.9–2.73.6
Overall balance–13.4–5.8–6.00.80.5
Net lending / borrowing–10.7–6.0–3.2–4.12.6
Financing10.76.03.24.1–2.2
Net accumulation of financial assets5.21.71.7–1.0–1.1
of which: government deposits5.01.61.6–1.2–1.3
Net accumulation of financial liabilities5.54.21.45.1–1.1
Net domestic financing6.07.31.9–0.9–0.9
of which: budget support0.05.50.06.20.0
Net foreign financing–1.3–3.1–3.16.0–0.2
Memorandum items
Arrears (stock)2.72.45.40.07.1
Nominal GDP (Emalengeni billions)27.529.329.332.631.3
Source: Swaziland authorities and IMF staff estimates and projections.

Data on expenditure and revenue are based on the revised 2011/12 budget. Financing data are based on actual number, and inlude the budget support that underpined the approved budget (E 1.6 billion, 6½ percent of GDP).

Data on expenditure is based on the 2012/13 UFAR, adjusted for lower capital spending due to expected slower disbursements from donors. Financing is based on IMF staff projections, notably with respect to domestic financing, which is unlikely to be high in the absence of upfront fiscal measures.

Source: Swaziland authorities and IMF staff estimates and projections.

Data on expenditure and revenue are based on the revised 2011/12 budget. Financing data are based on actual number, and inlude the budget support that underpined the approved budget (E 1.6 billion, 6½ percent of GDP).

Data on expenditure is based on the 2012/13 UFAR, adjusted for lower capital spending due to expected slower disbursements from donors. Financing is based on IMF staff projections, notably with respect to domestic financing, which is unlikely to be high in the absence of upfront fiscal measures.

Figure 3.Origin and Implications of Swaziland’s Fiscal Risks

Source: Swaziland authorities, and IMF estimates.

The current composition of spending could be reoriented towards social priorities or poverty issues. The United Nations (2012) assessed a worsening of the situation of the poor as a result of the fiscal crisis, with lower access to key health care and education services, and higher school dropout rates. Indeed, social spending was much lower than budgeted by about E 1/2 billion in 2011/12. The affected transfers covered (i) transfers to the ministries of education and health, (ii) transfers to orphans and vulnerable children (OVC), (iii) scholarships, and (iv) transfers to hospitals and schools. In addition, several investment projects with poverty-alleviating components (e.g., school extensions) were stopped, while other investment projects (e.g., the Sikhuphe airport) were given priority.

The authorities have acknowledged most of these fiscal risks in their updated fiscal adjustment roadmap (UFAR). The UFAR provides accurate diagnostics of the issues and successes experienced since the approval of the original Fiscal Adjustment Roadmap in 2010. Specifically, the SRA has been successfully created and is moving towards modern-based revenue administration systems; and key tax policy measures have been taken, notably the introduction of the value added tax in April 2012. The UFAR also underscores persistent vulnerabilities related to a lack of expenditure controls, partly because of weaknesses in the PFM system and partly because of a lack of political and social consensus on reforms to be implemented.

While providing a broadly accurate diagnostic, the UFAR could be amended with additional and upfront expenditure cuts that could provide the basis to restore fiscal and external sustainability. On the expenditure side, measures of about E 1.4 billion over the medium-term would need to be implemented, with an emphasis on cutting the wage bill and other non-priority recurrent expenditures. Additionally, EVERS could be extended to all public sector employees, including security forces. Finally, the control of government expenditure should be brought under the sole responsibility of the Ministry of Finance. Table 4 below summarizes the assessment of the UFAR, based on adjusted assumptions on GDP and SACU transfers. It underscores how vulnerable it is: debt is unsustainable, and by 2015/16 would breach the threshold of 40 percent of GDP (see also section III.D for a detailed analysis). Vulnerable middle income countries like Swaziland are at risk of debt distress beyond this level.

Table 4.Overall Assessment of the Updated Fiscal Adjustment Roadmap (UFAR), 2011/12–2015/16
2011/122012/132013/142014/152015/16
(percent of GDP, unless otherwise indicated)1
Net lending / borrowing1–3.2–4.5–1.0–10.6–10.9
Interest payment1.31.01.01.01.5
Primary net lending / borrowing1–1.9–3.50.0–9.7–9.3
Revenue and grants224.537.636.827.228.3
Of which: SACU transfers29.822.621.211.312.1
Primary expenditure (commitment basis)29.236.136.836.937.6
Of which: wage bill14.914.813.613.112.9
Arrears2.8–5.00.00.00.0
Public debt18.324.524.834.644.0
Overall impact of measures (+ = improvement)–1.62.85.45.6
Revenue (+ = increase)0.20.61.50.3
Implementation of VAT (including administration improvements)0.20.40.10.1
Improvements in revenue administration0.00.20.20.2
Tax policy reform30.00.01.20.0
Expenditure (– = cut)41.8–2.2–4.0–5.3
Wage bill–0.2–1.2–0.4–0.2
EVERS cost (temporary impact)0.10.70.40.0
EVERS savings (permanent impact)0.0–0.8–0.80.0
Wage increases0.00.00.60.2
Other–0.3–1.00.00.0
Other recurrent spending–0.80.2–0.1–0.8
Domestically financed capital spending42.8–1.2–3.4–4.3
Memorandum items
Primary balance (commitment basis)–6.00.5–1.0–10.6–10.9
Nominal GDP (Emalengeni billions)29.331.333.535.637.5
Source: Swaziland authorities, and IMF staff estimates and projections.

Net lending corresponds to the fiscal balance on a cash basis.

Projections of GDP and fiscal revenue (including SACU transfers) are based on more prudent projections than those of the FAR.

Tax policy changes are not included in revenue projections, largely because measures have to be defined and quantified first.

The increase in spending in 2012/13 is largely related to spending going back to their normal value after the increase in SACU transfers.

Source: Swaziland authorities, and IMF staff estimates and projections.

Net lending corresponds to the fiscal balance on a cash basis.

Projections of GDP and fiscal revenue (including SACU transfers) are based on more prudent projections than those of the FAR.

Tax policy changes are not included in revenue projections, largely because measures have to be defined and quantified first.

The increase in spending in 2012/13 is largely related to spending going back to their normal value after the increase in SACU transfers.

In addition, targets could be set in the UFAR on poverty-alleviating spending, notably health and education, with the view of increasing their share in total spending throughout the medium term. The budget would also need to ensure an adequate allocation to grants for Orphaned and Vulnerable Children and the elderly. Investment project should be prioritized according to their expected impact on growth and poverty reduction. Last but not least, the UFAR also does not provide an adequate framework to strengthen expenditure controls. For example, the adjustment for 2012/13 is projected to be moderate, as most measures are planned for the next fiscal year. In parallel, spending pressures are mounting, in the context of higher SACU transfers. Without greater control by the Ministry of Finance on commitments and budget execution, slippages remain very likely, as they did in the past.

B. Current Account Imbalance and Competitiveness: The Fiscal Connection

Fiscal imbalances directly affect the external current account. Swaziland faces a “twin deficit,” where the overall fiscal balance and the current account balance are largely synchronized (Figure 4). This synchronization comes predominantly from the dependence on SACU transfers. For example, although SACU transfers for 2012/13 and 2013/14 are high (about 22.5 percent of GDP), they are projected to decline over the medium term.6 A fiscal adjustment would therefore be appropriate to reduce domestic demand and thus the current account deficit (see Basdevant and others, (2011), on options to reduce the current account deficit through a fiscal adjustment).

Figure 4.Swaziland’s Twin Deficits (Percent of GDP)

Source: Swaziland authorities; and IMF staff estimates and projections.

Fiscal imbalances also affect the current account deficit through their negative impact on growth and competitiveness. Several channels are involved: (i) the size of the public sector, together with relatively high public sector wages, crowds out private sector investment and reduces external competitiveness; (ii) the accumulation of arrears led to an additional contraction of private sector activity; and (iii) perceived risks of a fiscal crisis have led banks to reduce their exposure to Swaziland in general, and not just vis-à-vis the public sector.

Reflecting fiscal imbalances, Swaziland’s real effective exchange rate (REER) would have to depreciate by between 28 and 38 percent,7 all other factors remaining constant, in order to maintain a sustainable current account deficit over the medium term.8 The estimation for the exchange rate assessment is done using 2011 as the base year.9 The three standard approaches used in the CGER methodology to assess Swaziland’s exchange rate are (i) the macroeconomic balance approach, (ii) the equilibrium REER approach, and (iii) the external sustainability approach. All of the estimates indicate a continued significant overvaluation, compared with the assessment of 19–33 percent in the 2011 Article IV consultation (IMF, 2012e), reflecting the lasting impact of the fiscal crisis in Swaziland and worsening world economic outlook (Figures 4 and 5).10

Figure 5.Swaziland’s Real Exchange Rate Assessment

  • The macroeconomic balance approach suggests that at end-2011 the REER would need to adjust by 29.7 percent in order to bring the projected current account balance (–8.6 percent of GDP) to the estimated current account norm (–0.9 percent of GDP).11 Considering that the elasticity of the current account balance with respect to the real exchange rate is estimated at –0.26, the real exchange rate would have to depreciate by about 30 percent to close the external current account gap.12
  • The equilibrium real effective exchange rate approach suggests that at end-2011 the REER would need to adjust by 28 percent. This approach estimates the equilibrium REER based on fundamentals such as the terms of trade, relative productivity, and relative government consumption over medium-run equilibrium. The relative government consumption has an elasticity of about one. Fiscal adjustment would therefore have a direct impact in addressing the overvaluation.
  • The external sustainability approach indicates that the real effective exchange rate needs to adjust by 36–38.2 percent in order to bring the current account balance in line with a level stabilizing net foreign assets (NFA) of the central bank over the medium term. The assessment is made to maintain the NFA position at its current level (14 percent of GDP at end-2011) and its 2006–11 average level (25.5 percent of GDP). To achieve this targeted level of NFA the current account balance should be 0.7 percent or 1.3 percent of GDP, respectively. Accordingly, the REER would need to depreciate by between 36 and 38.2 percent in the medium term in order to close the gap.

With this overvaluation, without appropriate policies and a stable macroeconomic framework, the exchange rate regime can be vulnerable to additional internal and external pressures. A nominal exchange rate adjustment would entail risks that would largely outweigh the benefits and the potential gains from a possible nominal exchange rate adjustment are expected to be limited. In addition, maintaining the peg to the rand would continue to contribute to macroeconomic stability and external sector development, as it did in the past. As illustrated by Asonuma, Debrun, and Masson (2012), Swaziland gains from the CMA membership an estimated 2 percent of GDP. Therefore, adjustment of the exchange rate would be best addressed at its source, that is, by implementing a fiscal adjustment.

If the recommended fiscal adjustment is implemented, the overvaluation would be reduced where the remaining necessary depreciation would be best addressed at the CMA level. With the proposed fiscal adjustment, the current account deficit would be reduced to a level that would leave, according to the macroeconomic balance approach, an overvaluation of 7.1 percent. Similarly, the equilibrium real effective exchange rate would remain overvalued by 10.1 percent, while the external sustainability approach suggests an overvaluation of 28.8–31.1 percent. The remaining overvaluation would then be best addressed in a regional context, that is, with a close cooperation between all CMA members. Implementing the appropriate set of policies would then allow for continual support of the current exchange rate regime.

Adjustment of the exchange rate would be best addressed at its source, i.e. by implementing a fiscal adjustment as a nominal exchange rate adjustment would entail risks that would largely outweigh the benefits. The potential gains from a possible nominal exchange rate adjustment are expected to be limited. Swaziland’s main export goods, such as sugar cane, are sold at given international prices. Thus, a nominal exchange rate adjustment would create limited volume gains on the export side, while higher import prices could be significant. Beyond these price effects, domestic supply may not be in a position to benefit fully from a nominal exchange rate adjustment and price-competitiveness improvements, because of, at least, three main bottlenecks. First, the economy remains largely dominated by the public sector; and without restoring fiscal sustainability in Swaziland, the business community is not expected to increase investments. Second, the business climate remains weak, largely because of low access to financial services and a low quality of institutions (legal and judicial framework, access to utilities, trade facilitation).13 For example, imports of services from South Africa are severely constrained by work permit requirements, including for stays of just a few days. Third, Swaziland’s human capital faces considerable pressures, with the highest rate of HIV/AIDS prevalence in the world and access to education and health services that has been reduced during the current crisis. Finally, the net balance sheet position of the private sector vis-à-vis the rest of the world could worsen (Chapter III, Section C) as many enterprises have currency mismatches in their balance sheets. Even if a nominal exchange rate adjustment were to improve competitiveness, the risks of insolvency because of balance sheet imbalances could offset the gains.

The peg to the rand has served Swaziland well and is expected to continue to be the main anchor for macroeconomic stability. As illustrated by Asonuma, Debrun, and Masson (2012), Swaziland gains from the CMA membership with an estimated gain of 2 percent of GDP. This gain has been triggered largely by facilitating trade and financial flows with other CMA members, and also by the anchor and stability of the peg to a currency of a strong emerging economy. While the peg has also entailed costs in terms of foregone monetary policy response to specific shocks, the increased integration and stabilization largely outweigh the cost.

C. Fiscal Risks Affect External Financing and Reserve Position

A model-based approach (Box 3) indicates that Swaziland’s level of gross official reserves is broadly adequate to protect the country against external shocks. This approach considers balance of payment pressures that can stem from different sources such as external liabilities or potential capital flight. By reflecting the relevant level of risk of the different possible sources of balance of payment pressures, the model estimates that the minimum level of reserves needed to cover the risk of potential balance of payments outflows in Swaziland is 17 percent of GDP (about E 5.1 billion for 2012; Table 5). At end-October 2012, gross official reserves stood above this threshold at E 6.4 billion, equal to 21 percent of GDP.

Table 5.Optimal Level of Reserves
2012
Billions of emalangeniPercent of GDP
Traditional metrics
Three months of imports5.518
100% of STD1.55
20% of M21.96
Model-based metric5.117
Gross official reserves, end-Oct 20126.421
Source: IMF staff calculations.
Source: IMF staff calculations.

Based on traditional reserve adequacy metrics, Swaziland’s level of gross official reserve is also broadly adequate. The standard measures commonly used to assess reserve adequacy are the gross official reserves as a ratio of months of imports, the ratio of the stock of short-term external debt by remaining maturity to gross official reserves, the ratio of gross official reserves to the stock of reserve money, and to the stock of broad money. The ratio of reserves to GDP is also used as a measure in some cases but does not have a theoretical or empirical underpinning. Of these metrics, the most widely used rule of thumb is that a country with a fixed exchange rate should maintain reserves equal to at least three prospective months of imports of goods and services. Swaziland’s level of reserves was above this threshold as of end-October 2012 (Figure 6).

Figure 6.Actual and Adequate Level of Reserves

(Emalangeni billions)

Fiscal imbalances have had a strong impact on the financial account of the balance of payments. Throughout the crisis, the government relied on central bank financing (about E 850 million, 1 percent of GDP), as well as placements of government bills and bonds. The government has so far not been able to mobilize any external budget financing, thus relying on its own deposits at the central bank and domestic arrears. With the lilangeni pegged to the South African rand, the depletion of government deposits at the central bank as well as portfolio outflows led to a parallel depletion of gross official reserves. Overall, the lack of progress on fiscal adjustment contributed to aggravating pressures on the financial account, as external budget support could not be secured (IMF, 2011a).

With the surge in SACU transfers in 2012/13, the level of reserves at the central bank has improved and since October 2012 has been broadly adequate. However, between quarterly SACU transfers, reserves are decreasing rapidly as the government meets its budgetary obligations. The factor underlying the weakness is structural, and would require addressing the vulnerability of the whole balance of payments through a significant fiscal adjustment. Therefore, the recommended level of reserves of 17 percent of GDP should be viewed as a minimum. Swaziland is exposed to terms-of-trade shocks because it is an oil importer and a sugar exporter. In addition, it has a fully open capital account with South Africa, and is thus exposed to capital outflows, while Swaziland does not have access to international capital markets.

The central bank would be well advised to aim for a level of reserves beyond the recommended 17 percent of GDP. Specifically, the central bank needs a larger base of reserve coverage to address potential liquidity pressures faced by commercial banks while protecting the parity with the rand (Chapter III. A.). Should portfolio outflows occur, the current level of reserves may not be sufficient for the central bank to be in a position to provide liquidity to commercial banks.

Box 3.Standard and Modern Approaches for Estimating Reserve Adequacy

Standard measures are based on a simple ratio of gross official reserves. They do not have a theoretical or empirical underpinning. Four measures are typically identified:

  • For a country with a fixed exchange rate, the level of reserves should be at least three months of prospective imports of goods and services.
  • Another metric is to ensure full coverage of short-term debt service by remaining maturity, namely reserves should be sufficient to cover the payment of debt service outflows over the next 12 months in full.
  • The ratio of gross official reserves to base or reserve money (typically M0) gives a measure of the backing of currency in circulation. This measure is most relevant in currency boards, where the law requires the central bank to maintain a high percentage of reserves (60–100 percent) to be freely available to be exchanged for domestic currency in circulation.
  • The reserve coverage of broad money (typically M2) is another popular measure. The metric is intended to capture the risk of capital flight, and a ratio of 20 percent is commonly used as the minimum threshold for countries with a fixed exchange rate regime.

Model-based approaches derive the adequate level from a cost/benefit analysis.1 The benefits of holding reserves (i.e., reducing the probability of a crisis and smoothing consumption) are assessed against the cost of holding reserves, in terms of foregone investment in the economy. The benefits are typically defined in two broad categories:

A new model-based approach has also been developed by the IMF (2011b) to derive the optimal reserve holdings. Since 2002, emerging market and low-income countries have outpaced the traditional reserve adequacy metrics. Subsequently, during shocks, these reserves have provided a useful cushion against economic crises, including the current global economic crisis.

This new model-based approach provides a framework for optimal reserves. For emerging market (EM) economies, a two-stage methodology is employed.

  • The first stage estimates different potential losses of foreign reserves. The potential outflows during periods of exchange market pressure are estimated, when the specific sources of loss identified are (i) potential loss of export earnings from a drop in external demand or a terms-of-trade shock; (ii) external liability shock to short-term debt and medium- and long-term debt and equity liabilities; and (iii) capital flight risk.
  • In the second stage, the reserve coverage a country should hold is estimated based on the metric obtained from the first stage.

For countries with a fixed exchange rate regime, it proposes to use the following risk weights, based on tail event outflows during exchange market pressure periods: 10 percent of export income, 30 percent of short-term debt, 15 percent of other portfolio liabilities, and 10 percent of broad money, which in this case is a proxy for liquid domestic assets.

1IMF, 2011b.

D. A Dynamic Perspective: Debt Sustainability Analysis (DSA)

Swaziland’s International Investment Position (IIP) is characterized by (i) a weakening reserve position, reflecting the projected loss of reserves over the medium term; (ii) an overall balanced position between direct and portfolio investment assets and liabilities; and (iii) a sustainable external debt position, underscored by a relatively stable position on other investments (Table 6).14 Overall the net IIP is projected to decline quite significantly over the medium term. A dynamic analysis of debt sustainability reflects these vulnerabilities, where the unsustainable public debt weighs heavily on reserves but less so on external debt. After discussing the baseline and the main sustainability risks, stress tests to the debt sustainability analysis (DSA) are analyzed, along with the role of government assets to counter the projected debt dynamics. These stress tests reinforce the vulnerability assessed under the baseline scenario.

Table 6.International Investment Position, 2010–17(Percent of GDP)
(Percent of GDP)
20102011201220132014201520162017
Assets67.970.565.866.564.558.757.258.8
Direct investment abroad0.71.01.01.01.00.90.90.9
Portfolio investment36.942.741.843.543.944.745.646.5
Financial derivatives0.00.00.00.00.00.00.00.0
Other investment13.612.18.98.69.17.78.29.7
Reserve assets16.614.714.113.410.65.42.51.7
Liabilities46.155.353.154.253.853.954.254.4
Direct investment in Swaziland25.231.730.932.032.332.833.333.9
Portfolio investment0.20.20.20.20.20.20.20.2
Financial derivatives0.00.00.00.00.00.00.00.0
Other investment20.723.421.922.021.421.020.720.4
Net international investment position21.815.212.712.310.84.83.04.4
Source: Swaziland authorities; and IMF staff estimates.
Source: Swaziland authorities; and IMF staff estimates.

The baseline scenario is defined as a continuation of the authorities’ current policies, with unadjusted fiscal spending and an associated large accumulation of domestic borrowing (or arrears) to finance the deficit (Table 7). Public debt would then exceed 40 percent of GDP by 2015 and exceed 60 percent of GDP by 2017 (Figure 7). A debt level of 40 percent of GDP is the approximate threshold above which emerging markets have experienced debt crises (Manasse, Roubini, and Schimmelpfennig, 2003). In parallel, external debt would remain sustainable (Table 8, and Figure 8). This is due only to the lack of access to external financing without a fiscal adjustment. In contrast, fiscal deficits could only be financed by either a further accumulation of domestic arrears or by issuing debt, which would then be subscribed domestically. This would imply not only an unsustainable debt position (including arrears) but would also lead to crowding out the private sector, which would then have to either finance the government or bear the cost of arrears accumulation. In both cases, growth prospects would remain weak (Table 7). Overall, the DSA emphasizes the need for implementing front-loaded fiscal adjustment. Reducing the wage bill, and adjusting real wages downward, is essential to improving competitiveness and reducing Swaziland’s exposure to external risk. An objective of keeping debt below the threshold of 40 percent of GDP over the medium term remains appropriate.

Table 7.Swaziland: Public Debt Sustainability, 2007–17
(Percent of GDP, unless otherwise indicated)
ActualProjectionsDebt-stabilizing primary balance9
20072008200920102011201220132014201520162017
Baseline: Public sector debt118.116.913.616.018.023.124.932.542.151.861.8–0.1
Of which: foreign-currency denominated15.915.312.011.011.611.19.68.37.36.96.5
Change in public sector debt0.9–1.3–3.32.42.05.01.97.69.59.710.1
Identified debt-creating flows–2.7–0.44.511.26.4–3.9–1.18.78.59.29.7
Primary deficit–2.2–2.04.413.16.4–3.8–0.59.28.89.49.9
Revenue and grants38.341.136.825.624.938.337.127.628.728.728.6
Primary (noninterest) expenditure36.139.141.238.731.334.536.636.837.538.138.6
Automatic debt dynamics2–0.51.60.1–1.90.0–0.1–0.6–0.5–0.3–0.2–0.3
Contribution from interest rate/growth differential3–1.1–1.0–0.2–0.40.1–0.1–0.6–0.5–0.3–0.2–0.3
Of which: contribution from real interest rate–0.6–0.50.0–0.10.2–0.3–0.6–0.5–0.2–0.1–0.1
Of which: contribution from real GDP growth–0.4–0.5–0.2–0.20.00.30.0–0.1–0.1–0.1–0.2
Contribution from exchange rate depreciation40.62.60.3–1.5–0.1
Other identified debt-creating flows0.00.00.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes53.6–0.9–7.8–8.8–4.48.82.9–1.11.00.50.4
Public sector debt-to-revenue ratio147.341.136.962.572.360.267.2117.8146.7180.6216.0
Gross financing need6–2.21.25.111.37.20.4–0.17.510.010.911.8
(US$ billions)–65.632.9150.9417.1287.216.6–4.6292.4397.0439.5486.2
Scenario with key variables at their historical averages723.126.525.827.227.928.6–0.8
Scenario with no policy change (constant primary balance) in 2012-201723.141.246.358.071.488.43.5
Key macroeconomic and fiscal assumptions underlying baseline
Real GDP growth (percent)2.83.11.21.90.3–1.50.00.30.30.30.3
Average nominal interest rate on public debt (percent)87.96.75.35.17.56.34.54.24.64.94.8
Average real interest rate (nominal rate minus change in GDP deflator, percent)–3.9–2.7–0.1–1.11.1–2.0–2.7–2.0–0.5–0.1–0.2
Nominal appreciation (increase in US dollar value of local currency, percent)–4.1–14.5–2.215.21.0
Inflation rate (GDP deflator, percent)11.89.45.46.16.48.37.26.25.15.05.0
Growth of real primary spending (deflated by GDP deflator, percent)14.411.56.5–4.1–18.98.46.30.82.02.01.6
Primary deficit–2.2–2.04.413.16.4–3.8–0.89.28.89.49.9

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r – π(1+g) – g + αε(1+r)]/(1+g+π+g π)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of US dollar).

The real interest rate contribution is derived from the denominator in footnote 2 as r – π (1+g) and the real growth contribution as –g.

The exchange rate contribution is derived from the numerator in footnote 2 as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium- and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r – π(1+g) – g + αε(1+r)]/(1+g+π+g π)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of US dollar).

The real interest rate contribution is derived from the denominator in footnote 2 as r – π (1+g) and the real growth contribution as –g.

The exchange rate contribution is derived from the numerator in footnote 2 as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium- and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Figure 7.Swaziland: Public Debt Sustainability: Bound Tests1

(Public debt, percent of GDP)

Sources: Country authorities; IMF staff estimates and projections.

1 Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

2 Permanent one-fourth standard deviation shocks applied to real interest rate, growth rate, and primary balance.

3 One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2012, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Table 8.Swaziland: External Debt Sustainability, 2007–17
(Percent of GDP, unless otherwise indicated)
ActualProjections
20072008200920102011201220132014201520162017Debt-stabilizing non-interest non-interest6
Baseline: External debt18.016.913.513.914.513.911.710.49.810.211.6–0.7
Change in external debt1.0–1.1–3.50.50.6–0.6–2.2–1.3–0.60.41.4
Identified external debt-creating flows (4+8+9)0.14.811.44.35.0–1.00.44.45.35.85.8
Current account deficit, excluding interest payments1.17.213.39.97.7–1.00.95.05.96.36.3
Deficit in balance of goods and services11.015.416.415.215.111.515.111.711.011.711.7
Exports74.663.263.155.954.850.746.846.845.443.242.7
Imports85.578.679.571.169.962.261.958.556.454.954.4
Net non-debt creating capital inflows (negative)–0.5–4.0–2.0–3.6–2.6–1.0–1.0–1.0–1.0–1.0–1.0
Automatic debt dynamics1–0.51.70.1–2.0–0.11.00.50.40.40.40.5
Contribution from nominal interest rate1.11.00.80.60.90.70.50.50.50.50.5
Contribution from real GDP growth–0.4–0.6–0.2–0.20.00.20.00.00.00.00.0
Contribution from price and exchange rate changes2–1.21.2–0.5–2.5–1.0
Residual, incl. change in gross foreign assets (2–3)30.8–5.9–14.8–3.8–4.40.4–2.3–5.6–5.9–5.4–4.4
External debt-to-exports ratio (in percent)24.226.821.324.926.527.425.022.221.623.627.2
Gross external financing need (billions of US dollars)40.10.20.40.40.40.00.10.30.30.30.4
(percent of GDP)3.38.414.211.19.71.02.56.87.88.38.5
Scenario with key variables at their historical averages513.912.18.04.41.80.2–2.3
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)2.83.11.21.90.3–1.50.00.30.30.30.3
GDP deflator in US dollars (change in percent)7.3–6.53.122.37.4–4.21.62.11.41.51.7
Nominal external interest rate (in percent)7.15.34.76.07.14.73.94.04.54.95.0
Growth of exports (US dollar terms, in percent)12.8–18.34.110.45.6–12.7–6.32.6–1.3–3.10.7
Growth of imports (US dollar terms, in percent)10.0–11.45.511.55.9–16.11.2–3.2–1.9–0.81.1
Current account balance, excluding interest payments–1.1–7.2–13.3–9.9–7.71.0–0.9–5.0–5.9–6.3–6.3
Net non-debt creating capital inflows0.54.02.03.62.61.01.01.01.01.01.0

Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [–r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [–r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 8.Swaziland: External Debt Sustainability: Bound Tests1

(External debt, percent of GDP)

Sources: Country authorities; IMF staff estimates and projections.

1 Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2 Permanent one-fourth standard deviation shocks applied to real interest rate, growth rate, and current account balance.

3 One-time real depreciation of 30 percent occurs in 2012.

Stress tests on the DSA indicate that public debt is primarily vulnerable to shocks to the primary balance (Figure 6). Weakness in expenditure controls, as demonstrated by variability in the primary balance in the past and the current pattern of unadjusted expenditures, also constitutes a risk to public debt sustainability in the future. This weakness, combined with the threat of reduced SACU receipts over the medium term, poses considerable risks of debt distress. In contrast, public debt is fairly resilient to shocks on interest rates, growth, and contingent liabilities. Swaziland’s public debt is contracted under fixed interest rates which remain fairly low, with a spread of about 200 basis points compared with South African rates, explaining the resilience to interest rate shocks. Growth has been relatively stable, and shocks to growth have been historically small. While interest rates remain low, spreads against South African rates are rising, increasing exposure to interest rate risk.

Stress tests for external debt indicate a significant risk in terms of a shock to the current account balance. A shock of ¼ standard deviation of the current account balance would put external debt on a sharply increasing trajectory, and it would reach about 30 percent of GDP by 2017. Such a current account shock could arise as a consequence of the primary balance scenario examined in the public DSA and a large decline in SACU transfers. The associated loss in competitiveness and Swaziland’s weak export base would accelerate the deterioration in the current account balance, thereby compounding the vulnerability shown in the public DSA. Because fiscal policy is essential to maintaining a sustainable current account deficit, this dynamic emphasizes the importance of fiscal discipline to maintain external debt sustainability.

Government assets are not sufficient to counter the projected rapid increase in public debt. Government assets are not liquid, implying a significant maturity mismatch. The government has limited liquid financial assets, mostly deposits at the central bank (E 3.4 billion as of end-October 2012). These assets cannot be fully used for deficit financing, as they are also the counterpart of the gross official reserves of the central bank. In contrast, the government holds significant illiquid assets, from part or full ownership of companies in competitive sectors (banks, mobile telecommunication, sugar production, insurance). These illiquid assets cannot be sold in the short run to alleviate financing pressures on the budget. Fiscal adjustment remains therefore critical for maintaining debt sustainability.

Box 4.An Overview of Swaziland Debt

Swaziland’s fiscal stability depends on high Southern African Customs Union receipts to sustain a high spending-to-GDP ratio. The large fiscal deficits accumulated during fiscal year 2010/11 (13¾ percent of GDP) and 2011/12 (10½ percent of GDP) were triggered by the loss in SACU transfers. They revealed large fiscal imbalances, with recurrent spending, notably on the wage bill, being the main source of fiscal risks. Total public debt, including advances from the central bnak, rose from 12½ percent of GDP in 2009/10 to 17½ percent of GDP at end-2011/12 (excluding arrears) and 23¾ percent of GDP (including domestic arrears). All arrears are domestic and are the result of the drying up of market financing to cover the fiscal deficit. The composition of debt has also changed. Domestic debt was 1½ percent of GDP in 2009/10. After the crisis, it increased to 6 percent of GDP (10 percent including arrears) at end-2011/12, following the upward revision of the debt ceiling in November 2010.1

Public debt issuances are placed largely domestically to commercial banks and big institutional investors. Domestic debt was previously overwhelmingly short-dated, consisting primarily of 91-day treasury bills, until 2010 when the government began issuing long-term bonds. The Central Bank of Swaziland (CBS) introduced its own paper with 182 days maturity in January 2011, and a year later added 273-day treasury bills to complement the existing shorter-term 28-day and 56-day CBS bills and 91-day government treasury bills.

Swaziland’s external debt is primarily public, and corresponds to donor-financed investment projects. Private external debt is relatively low, about 3 percent of GDP, and stable. The external debt dynamic is therefore dominated by public debt. The external debt stock decreased slightly to about 9 percent of GDP at end-March 2012, remaining at a sustainable level. External debt has been contracted in a variety of currencies. The predominant currencies are the South African rand (about 40 percent), euro (20 percent), U.S. dollar (20 percent), and Japanese yen (10 percent). A number of other currencies also have smaller shares in the portfolio, including the Swiss franc, Danish krone, and Kuwaiti dinar.

1 The government amended the law defining the domestic debt ceiling to raise it to 25 percent of GDP, beginning November 15, 2010.

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