Swaziland: Recent Economic Developments

This paper reviews economic developments in Swaziland during 1990–96. During 1990–95, the shares of exports and imports of goods and services in GDP averaged 81 percent and 92 percent, respectively. The overall trend in economic growth continued in 1995/96. Real GDP expansion was limited to 2.5 percent, fueled by the manufacturing and services sectors. Although there was no new major investment, several established firms expanded or modernized their operations. In particular, this led to significant improvement in the performance of the wood pulp and sugar industries.

Abstract

This paper reviews economic developments in Swaziland during 1990–96. During 1990–95, the shares of exports and imports of goods and services in GDP averaged 81 percent and 92 percent, respectively. The overall trend in economic growth continued in 1995/96. Real GDP expansion was limited to 2.5 percent, fueled by the manufacturing and services sectors. Although there was no new major investment, several established firms expanded or modernized their operations. In particular, this led to significant improvement in the performance of the wood pulp and sugar industries.

VII. The Impact of the Uruguay Round on Swaziland 47

A. Introduction

108. The outcome of the Uruguay Round (UR) of multilateral trade liberalization, through further lowering of tariffs and other nontariff barriers, is likely to have a significant impact on Swaziland’s balance of payments and customs revenues. Swaziland, in collaboration with South Africa and the other SACU member countries, is committed to lowering its most-favored-nation (MFN) tariffs in a more comprehensive and rigorous manner than other developing countries. This is because under the SACU, Swaziland’s tariff structure is virtually the same as that of South Africa, which the World Trade Organization (WTO) regards as an industrial country and thus requires to implement trade liberalization faster.

109. SACU’s MFN tariff cuts are likely to increase Swaziland’s imports of industrial products from countries other than SACU member countries. Currently, the SACU agreement provides South Africa and other SACU member countries duty-free access to Swaziland, while products from non-SACU member countries are subject to MFN tariffs. 48 Therefore, tariff cuts on products from non-SACU member countries would shift part of Swaziland’s import demand to these countries from SACU member countries, particularly South Africa.

110. After the completion of SACU’s MFN tariff cuts, Swaziland is unlikely to maintain the same high level of exports to South Africa as it currently does. Once tariffs on products from non-SACU member countries are lowered, Swaziland’s products would face tougher competition from non-SACU members.

111. Swaziland’s exports to the EU market are also likely to decline compared with the current level of its exports. Swaziland as a signatory member of the Lomé Convention has been granted duty-free access to the EU market for most of its export products. The UR agreement, however, requires the EU to implement MFN tariff cuts on products from countries other than those that have received preferential tariff treatments (including those of the Lomé Convention), thus eroding EU’s existing preferences toward Swaziland.

112. Moreover, worldwide trade reform under the UR agreement is projected to increase world food prices—primarily through subsidy cuts. This would compress world demand for certain food products, which in turn would lower Swaziland’s exports (for example, cream, milk, and meat), as well as its imports (for example, wheat and flour).49 On the other hand, a decline in subsidies, which the UR agreement required of industrial countries, would lower the supply of these countries and hence would increase exports of developing countries.

113. When the UR agreement is fully implemented, Swaziland’s total trade balance is estimated to rise by E 105 million, or 3 percentage points of the GDP level recorded in 1993. Furthermore, assuming that the current SACU revenue-sharing formula will be adjusted in line with the SACU tariff cuts schedule, the change in Swaziland’s trade balance is expected to lower its customs revenues by E 168 million, or 4.5 percentage points of the 1993 GDP.

114. This study assumes that trade reform will take place all at once and discusses the first-round impact of the UR agreement by applying a partial-equilibrium approach. Therefore, it fails to consider the fact that a more extensive and faster trade reform usually brings in efficiency gains in the long run through a better resource allocation. In addition, the study is unable to consider that a drop in import prices would benefit not only Swaziland’s consumers, but also producers through the availability of cheaper imported inputs, which would increase their profitability and hence encourage investment. Furthermore, the study uses the price elasticities of demand estimated for industrial countries, which could be quite different from those of developing countries, such as Swaziland. The quantitative assessment also assumes that the amounts of Swaziland’s exports and imports are determined by demand. Nevertheless, these considerations require a dynamic and general-equilibrium approach, as well as the availability of input-output tables, both of which are beyond the scope of this study. In this context, the results of this study might be regarded as a pessimistic scenario.

115. This chapter is structured as follows: Section B provides an overview of Swaziland’s trade structures, while Section C analyzes the impact of the UR agreement on Swaziland’s imports based on the examination of SACU commitments to tariff cuts. Section D assesses the impact of the UR agreement on Swaziland’s exports, Section E examines the impact of the UR agreement on Swaziland’s customs revenues, and Section F concludes the chapter.

B. Trade Structure

116. Data on Swaziland’s exports are from 1993, the most recent year for which data classified by country and commodity were available (Appendix III, Table 41).50 Swaziland’s exports consist primarily of three items: nonalcoholic beverages dominated by edible concentrates (23 percent of total exports), sugar (19 percent), and coke and wood pulp (12 percent). Other major exports include other machinery and equipment, dominated by refrigerators (7 percent), canned fruit (3 percent), paper products (3 percent), textiles and yarns (3 percent), and apparel and clothing (3 percent).

117. South Africa is the principal market for Swaziland’s exports, accounting for 60 percent of total exports. In 1993, Swaziland exported about 84 percent of sugar-related products, such as edible concentrates, and 42 percent of wood and pulp to South Africa. Some of Swaziland’s exports—cotton seeds, cotton yarns, foodstuff for animals, machinery, pasta, vinegar, paper products, and rubber manufactures—are exported exclusively to South Africa. In 1993, Swaziland’s exports to the EU accounted for about 6 percent of Swaziland’s total exports, mainly citrus fruit and canned fruit, meat products, sugar, and wood and pulp. In the same year, Mozambique was the third largest buyer of Swaziland’s products, accounting for about 5 percent of total exports. The main products exported included cereals, eggs, live animals, sugar, and vegetables. The United States, which accounted for 2 percent of total exports, was the fourth largest export market for Swaziland’s products, particularly wood pulp and waste paper.

118. Swaziland’s main import products are machinery and transport equipment, which accounted for about 27 percent of total imports in 1993 (Appendix III, Table 42). Other major imports are paper and paper board, and iron and steel, cement, and fabricated construction materials, which together accounted for 18 percent of total imports in 1993. Swaziland is also a large importer of agricultural processed products (mainly pasta), and tomato ketchup. About 90 percent of Swaziland’s total imports in 1993 were from South Africa, 7.7 percent from the EU, and 1 percent from Japan.

C. Impact of the UR Agreement on Swaziland’s Imports

119. Swaziland’s trade reform under the UR agreement consists of both tariff bindings for all agricultural and most industrial products, as well as tariff cuts. Before the agreement, a number of countries, including SACU members, used tariffs on agricultural products without setting the upper limit (unbounded tariffs) and could raise their tariffs freely. In addition, these countries used a number of nontariff barriers and state-owned trading firms to control international agricultural trade. Under the agreement, WTO member countries have to: (i) convert all nontariff barriers to tariffs (tariffication); (ii) cut existing bound tariffs and new tariffs created through the tariffication; (iii) bind all unbounded tariffs; and (iv) maintain a minimum access commitment (for more detailed discussions on WTO provisions, see IMF, 1994).

120. Although the tariffication of nontariff barriers, mainly imposed on agricultural trade, would reinforce transparency in the trade system, initial tariffs—determined prior to the implementation of the trade reform—were usually set at very high levels. This was because the base period used for the tariffication procedure, the average of 1986-88, was when world agricultural prices were very low. Thus, the gap between world prices and highly protected domestic prices was large, thereby leading to high levels of ad valorem tariff equivalents. Other factors contributing to the high initial tariffs stemmed from the fact that some WTO member countries chose products that belonged to the same category and, simultaneously, incurred high domestic prices during the base period, while other countries merely declared new base and bound tariffs without any reference to previous levels of protection (Hathaway and Ingco 1995).

Impact of Swaziland’s commitments on primary products

121. According to the UR agreement, the main purpose of agricultural trade reform is to establish tariff-based protection rather than to make substantial tariff cuts. Under the agreement, all nontariff barriers must be converted to tariffs first by measuring ad valorem tariff equivalents during the base period (UR base tariffs), followed by a minimum tariff reduction of 15 percent tariff on all tariff lines; and, for industrial countries, with average tariff cuts of 36 percent over the six-year period beginning in 1995. Following the WTO guidelines, the SACU declared base tariffs in its efforts to shift from nontariff barriers to tariffs. However, these declared tariffs—particularly for coarse grains, sugar, and wheat—were well above the levels of nontariff barriers estimated during the base period of 1986-88 (Table 4). Thus, SACU agricultural trade reform would create few changes in import prices in Swaziland. Similar results are expected in the cases of the EU and the United States.

Table 4.

Comparison of Estimated Ad Valorem Tariff Equivalents and Uruguay Round Base tariffs

(In percent)

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Source: Hathaway and Ingco, 1995, p. 12, Table 2b.

122. On the issue of cutting existing and newly levied final bound tariffs (UR bound tariffs), SACU tariffs on agricultural products are scheduled to remain broadly unchanged during 1994-2000 according to the UR agreement. Before the UR agreement, SACU protection instruments consisted of nontariff barriers, specific duties, and unbound ad valorem tariffs. By the end of the UR agreement (the year 2000), no tariff cuts are expected to take place with respect to Swaziland’s main agricultural import commodities. This is because actual tariff rates to be scheduled until 2000 are expected to be set below the UR base and bound tariff rates (Table 5).51 Flour, malt, gluten Sugar and sugar confectioner Juice, jams, jellies from fruits Ice cream, sauces, soups Beverages

Table 5.

Profitability in the South African Market, 1985-94

(Index 1985=100)

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Sources: Data provided by the Industrial Development Corporation of South Africa; and staff estimates.

Impact of changes in world prices of primary products

123. Goldin and van der Mensbrugghe (1995) estimated the percentage change in world agricultural prices as a result of the UR agreement. They used the 1989-93 average level of protection as UR base tariffs. Furthermore, they assumed that tariff cuts would be implemented according to each country’s commitments to the UR agreement, in addition to a 36 percent cut in subsidies in cases of OECD countries and a 24 percent cut in cases of non- OECD countries. They listed the products that will be affected by world-wide trade reform. Some of these products included Swaziland’s main import commodities and their percentage changes in world prices are as follows: coarse grains (3.3 percent), dairy products (2.5 percent), oils (4.6 percent), rice (1.3 percent), and wheat (6.6 percent).

124. The implication of the worldwide trade reform for Swaziland’s agricultural imports was assessed, based on world food price increases estimated by Goldin and van der Mensbrugghe and price elasticities of import demand estimated by Stern and others (1976). Owing to the lack of data, industrial countries’ price elasticities of import demand were used as a proxy for those of Swaziland. Following the approach adopted by Shields and others (1996), this chapter assumes that there is an infinitely elastic supply of imports and a downward-sloping demand for imports. It is also assumed that income will not change and that an increase in the world price for a commodity exported to Swaziland will lower its demand for this commodity in proportion to the change in the world price. The percentage change in imports for a commodity is estimated by the percentage change in its world price, plus the percentage change in its import volume.52 The results show that an increase in world food prices is expected to have a negligible impact on Swaziland’s agricultural imports- including wheat and its related products, which account for 25 percent of total food imports (Table 6).

Table 6.

Profitability in the South African Market, 1985-94

(Index 1985=100)

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Source: Staff estimates.

Impact of Swaziland’s commitments on industrial goods

125. Under the UR agreement, industrial countries are committed to lowering import- weighted average bound tariffs on all industrial products by 40 percent and increasing tariff bindings to cover 98 percent of imports over the five-year period beginning in 1995.53 Similarly, the SACU is committed to lowering its MFN tariffs on a number of industrial products from non-SACU countries, mainly the EU. These tariff cuts are expected to expand Swaziland’s imports from the EU, particularly for those of cotton, clothing, glass and glass products, inorganic chemicals, newspaper and printed materials, organic chemicals, paper and paper products, pharmaceuticals, photographic materials, plastics, and toiletries and perfumes. Moreover, the MFN cuts are expected to expand Swaziland’s imports from Japan and the United States, particularly for electrical machinery, nonelectrical machinery, and vehicles other than railroad equipment.

126. While SACU’s actual tariffs in 1994 were already lower than UR base tariffs for a number of products (for example, pharmaceuticals and photographic materials), substantial tariff cuts are scheduled between 1995 and 2004 for most industrial products (Table 7). However, despite substantial cuts in tariffs, UR bound tariffs for textiles and clothing are scheduled to remain at high levels. This is because these products are regarded as “sensitive” under the UR agreement, and are therefore allowed to have lower-than-average tariff cuts and a longer implementation period than other industrial products (up to ten years vis-à-vis five years).

Table 7.

SACU Tariffs for Selected Industrial Products

(In percent; simple average)

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Sources: Data provided by the Industrial Development Corporation; and staff estimates.

The terminal year is 2004 for textiles, clothing, and vehicles.

Clothing I refers to knitted or crocheted and Clothing II refers to not knitted or crocheted.

127. The quantitative assessment of the impact of SACU’s tariff cuts on Swaziland’s imports is based on the assumption that the supply of products shipped to Swaziland is perfectly elastic. It is also assumed that industrial products are differentiated, and thus demand for each product depends on its own price and the prices of close substitutes produced by other countries. Based on these assumptions, SACU tariff cuts would result in a decline in the value of imports from South Africa and an increase in the value of imports from the EU. Assuming that income will not change, the decline in Swaziland’s import demand for South African products depends on how much SACU tariffs on the EU’s products will drop and on Swaziland’s cross-price elasticity of import demand for South African products with respect to a change in the import price of EU products. In addition, Swaziland will increase its demand for the EU’s products by the percentage change in tariffs, given Swaziland’s own-price elasticity of import demand. Finally, since tariff cuts will lower the price of EU products and keep the price of South African products constant, the percentage change of import prices, which is estimated by [Δt/(1+t)], needs to be considered only for EU products.54

128. The result shows that a drop in SACU tariffs will raise Swaziland’s imports of industrial goods from countries other than South Africa—mainly from the EU—by 2 percent, or E 7 million (Appendix III, Table 43). In addition, the decline in SACU tariffs will reduce Swaziland’s imports from South Africa by 7 percent, or E 128 million, because the import prices of non-South African products will be lower than before, thereby raising the relative prices of South African products to non-South African products. In sum, Swaziland’s imports of industrial products will decline by 6 percent, to E 121 million.

D. Impact of the UR Agreement on Swaziland’s Exports

129. SACU tariff cuts against non-SACU members will lower the import prices of products from these countries in the South African market. This will result in an increase in South Africa’s imports from non-SACU member countries and a decline in its imports from SACU member countries, such as Swaziland. A similar substitution effect is expected to take place with respect to Swaziland’s exports to the EU market, as the erosion of preferential tariffs granted by the EU to Swaziland under the Lomé Convention will raise the relative price of Swazi exports vis-à-vis exports of other countries.

130. The average rate of the EU’s tariffs on Swaziland’s products is 0.5 percent, which is 5 percent lower than the average level faced by other exporters of the same goods (Yeats, 1994). Among 149 tariff line items registered for Swazi exports to the EU, 138 line items face a zero tariff rate under the generalized system of preferences (GSP) and the MFN arrangement (118 and 20, respectively). Yeats estimated that Swaziland’s exports to the EU would drop by 2.6 percent as a result of the MFN tariff cuts.

131. The simple average rate of SACU’s MFN tariffs was 20 percent in 1994 and this rate is scheduled to decline to 11 percent by 2004. This drop is expected to lower South Africa’s demand for products from Swaziland at. a faster pace than that of demand from the EU market, because of the larger tariff cuts scheduled in the SACU than in the EU.

132. On agricultural exports, however, few changes are expected with respect to the SACU’s MFN tariffs, because actual tariff rates to be scheduled until 2000 are expected to be set below the UR base and bound tariff rates. As South Africa’s domestic prices of imports from non-SACU countries are expected to remain broadly unchanged, there will be no erosion of preference from the perspective of Swaziland and thus, no adverse impact is expected for Swaziland’s exports to the South African market. Similar results are expected in the cases of Swaziland’s agricultural exports to non-SACU member countries, such as the EU and the United States.

Impact of the EU’s commitments on primary products

133. Although progress is hardly expected on its agricultural trade reform, the EU’s MFN tariff cuts would affect a limited number of Swaziland’s primary exports, mainly beverages. Agricultural commodities (e.g., fruit, vegetables, and meat) are expected to remain unaffected by the EU’s MFN tariff cuts, provided that the prices of other countries’ products—after tariff cuts—will remain higher than those of Swaziland, which still maintains duty-free access to the EU market (Table 8).55

Table 8.

European Union Tariffs for Selected Agricultural Products

(In percent; simple average)

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Source: Staff estimates.

MFN rates are higher than GSP rates. The precise MFN and GSP rates are not reported in this table because diverse rates are applied to finely classified commodities within each category.

Impact of changes in world prices of primary products

134. Assuming that each supplier faces an infinitely elastic supply curve, an increase in world food prices for certain products is expected to lower demand for these products by the EU and South Africa, some of which include Swaziland’s export commodities. The quantitative assessment of this effect is based on the same approach described in the previous section. As a result of a rise in world food prices (particularly meat, milk and cream, and cereals and related products), Swaziland’s exports are estimated to decline by E 1 million.

Impact of industrial countries’ commitments on industrial products

135. South Africa’s tariff cuts will reduce its domestic prices of imported products from non-SACU members, thereby raising its demand for such products. As a result, South Africa’s imports from Swaziland are likely to decline for a few products, such as cotton yarn and paper (Table 9). Applying the same approach described in the previous section, Swaziland’s exports to South Africa are estimated to drop by 3 percent, or E 15 million (Appendix III, Table 44).

Table 9.

South African Tariffs for Selected Industrial Products

(In percent; simple average)

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Source: Staff estimates.

136. The tariff cuts implemented by the EU are likely to create preference erosion with regard to Swaziland’s industrial exports. Based on the estimates of the preference erosion effect caused by the EU’s tariff cuts (Yeats, 1994), Swaziland’s exports to the EU are estimated to decline by 2.6 percent (E 2.8 million). By contrast, Swaziland’s exports to the United States are estimated to grow by 2.7 percent (E 1.2 million), as most of Swaziland’s export products to the latter country are subject to MFN rates.

E. Impact of the Uruguay Round Agreement on Swaziland’s Trade Balance and on SACU Revenue

137. Overall, the UR agreement is estimated to lower Swaziland’s total imports by E 123 million, as compared with the 1993 level of imports, and its total exports by E 18 million. Thus, Swaziland’s trade balance is expected to decline by E 105 million or, 3 percent of GDP when the UR agreement is fully implemented (Table 10).

Table 10.

Total Impact of the Uruguay Round Agreement on Swaziland’s Balance of Payments

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138. On SACU tariff receipts, it is assumed that the tariff rate applied under the current revenue-sharing formula will decline in line with the SACU’s tariff cuts schedule. The changes in Swaziland’s customs receipts depend on the percentage change in the SACU’s tariff rates, including both compensatory and stabilization factors, and the percentage change in imports.56 It is estimated that SACU receipts will drop by E 168 million, or 4.5 percentage of GDP by the time the UR agreement is fully implemented.

F. Conclusion

139. This chapter has attempted to provide a quantitative assessment of the impact of the UR agreement on Swaziland’s balance of payments and customs revenues. As regards the impact of the UR agreement, Swaziland’s agricultural trade will be affected primarily by the changes in world food prices—through subsidy cuts across countries—rather than by the changes in tariff cuts. It is estimated that a hike in world food prices will reduce Swaziland’s exports by E 1 million and its imports by E 1.6 million, as compared with the level of 1993. Consequently, net exports of these products are expected to increase only by E 650,000.

140. Swaziland’s (SACU’s) tariff cuts on industrial products are expected to lower Swaziland’s industrial imports. The tariff cuts against non-SACU member countries will increase Swaziland’s imports from these countries—primarily the EU—and reduce imports from SACU members, mainly South Africa. This chapter has estimated that the net effect of SACU tariff cuts on Swaziland’s total industrial imports will be a decline of E 121 million.

141. On Swaziland’s exports, South Africa’s (SACU’s) tariff cuts on industrial products against non-SACU members will lower Swaziland’s exports to South Africa by E 15 million, compared with the 1993 level. Taking into account the impact of the tariff cuts by the EU and the United States, it is estimated that Swaziland’s total industrial exports will decline by E 17 million.

142. In sum, the total impact of the UR agreement on Swaziland’s trade balance would be an increase of E 105 million in net exports, or 3 percentage points of GDP, as recorded in 1993. Furthermore, Swaziland’s customs revenues are expected to drop by E 168 million, or 4.5 percentage points of the 1993 GDP.

References

  • Swaziland, Central Statistical Office, 1993, Annual Statistical Bulletin (Mbabane).

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47

Prepared by Sayuri Shirai.

48

For detailed discussions on the status of South Africa (SACU’s) trade reform, see SM/96/109, Chapter III.

49

However, the amount of change in demand for food products depends on the degree of the price elasticities of demand, which are usually low.

50

Although the detailed data on exports and imports after 1993 were unavailable, the available information suggests that the trade structure appears unchanged so far

51

The UR agreement failed to include the removal of state-owned trading agencies, which had frequently operated as monopoly entities in a number of countries. Therefore, even if import tariff cuts are implemented, these agencies may not pass the lower prices on to consumers.

52

The percentage change in import volume in Swaziland, Msw1? is expressed as equation (1).

ΔM1sw/ΔM1sw=e11[ΔPW/PW],(1)

where e11 and Pw denote the own-price elasticity of import demand, defined as the percentage change in Swaziland’s import demand for a commodity with respect to a 1 percentage point change in the price of the commodity, and the world price for the commodity, respectively. Using the estimate by Sterns and others, en is approximated with -1.13.

53

IMF, 1994, pp. 1-2.

54

The percentage change in Swaziland’s imports of South African products, Msw2, is assessed by the percentage change in import volume, which is derived by multiplying the cross-price elasticity of demand, e23, and the percentage change in import price, which is estimated by [δt/(l+t)], as shown in equation (2). On the percentage change in Swaziland’s imports of the EU’s products, Msw3, the percentage change in import volume is derived by the product of the own-price elasticity of demand, e33, and [Δt/(1+t)] (as shown in equation (3), and the percentage change in import price is derived by [Δt/(1+t)].

ΔM2sw/ΔM2sw=e23[Δt/(1+t)(2)
ΔM3sw/ΔM3sw=e33[Δt/(1+t)(3)

Following the approach adopted by Shields and others (1996), it is assumed that e23 is substituted by the multiplication of e33 and the ratio of Swaziland’s imports from the EU to the sum of its imports from the EU and its domestic production.

55

The rates shown in the table exclude specific duties. Since specific duties are scheduled to be lowered for some agricultural goods, these rates underestimate the true level of protection. The table also indicates the EU’s tariffs that are applied preferentially to the member states of the Lomé Convention, including Swaziland. Swaziland’s exports of sugar are assumed to remain unchanged, owing to the uncertainties surrounding the EU’s future quota arrangement and prices.

56

The change in SACU receipts at period t=l is derived by the product of the change in tariff rates, At, and total imports at period t=0, plus the product of the change in imports, AM, and tariff rates, t, at period t=0, as shown in equation (4).

ΔSACURevenue=1=ΔtMt=0+tt=0ΔM(4)