Statement by Ismaila Usman, Executive Director for Swaziland

This 2002 Article IV Consultation highlights that real GDP growth for Swaziland fell from 7¾ percent annually during the 1980s to 3¾ percent during the 1990s. In 2001, growth declined further to 1.8 percent, reflecting a fall in export demand associated with the economic slowdown in South Africa, foreign disinvestment in some industries, and poor weather. Economic activity appears to have weakened further in 2002, with manufacturing output showing the effects of additional closures by foreign firms and agricultural output being affected by the drought in the region.

Abstract

This 2002 Article IV Consultation highlights that real GDP growth for Swaziland fell from 7¾ percent annually during the 1980s to 3¾ percent during the 1990s. In 2001, growth declined further to 1.8 percent, reflecting a fall in export demand associated with the economic slowdown in South Africa, foreign disinvestment in some industries, and poor weather. Economic activity appears to have weakened further in 2002, with manufacturing output showing the effects of additional closures by foreign firms and agricultural output being affected by the drought in the region.

Introduction

1. My Swaziland authorities would like to convey their appreciation to the staff for their constructive views, recommendations and advice during the last Article IV Consultation staff mission. They are broadly in agreement with the report which is candid and gives a fair and balanced view of the recent economic developments in the country highlighting also the numerous challenges.

2. Recent performance indicate a slump in economic growth which stood at 1.75 percent in 2001 compared to 2.0 percent the year before. Inflation pressure continued to mount and reached an annualized 12.9 percent by October 2002. Economic growth has been falling over the years, largely as a result of a continued low inflows of foreign direct investments and increased competition from neighboring states. The country also suffered from the closure and downsizing of some of its major manufacturing entities, such as the fridge manufacturing firm which employed a sizeable number of the work force in the manufacturing sector. A 10 percent decline in agricultural performance as a result of the poor weather conditions resulting in successive poor harvests also contributed to the poor performance. The same trend continued in 2002 as a result of the weak performance of the agricultural sector due largely to the continued drought conditions.

3. Unemployment remained at unacceptably high levels estimated at 31 percent of the labour force in 2001 despite the significant number of jobs that have been created mainly in the textile sector since 2001, amounting to 6 percent of total employment. The authorities are however, committed to help ameliorate the situation through the attraction of more textile manufacturing concerns that seek to take advantage of the United States’ Africa Growth and Opportunities Act (AGOA).

4. The international reserve position fell marginally to two months of imports as the external sector recorded fewer inflows of foreign direct investments into the country. The country’s competitiveness was also undermined by the steady surge in the country’s inflation rate. The depreciation of the local currency vis-à-vis its major trading partners in the latter half of 2001 to mid-2002, subsequently improved the country’s export competitive edge. Exports to most industrial countries surged as a result of this development accounting for 55 percent of total exports in 2001 from 40 percent in 1999.

Humanitarian Situation

5. The HIV/AIDS pandemic has continued to ravage the economy, with indications of an increase in infection rates which stand amongst the highest in the world. To address this concern my authorities established the National Emergency Response Committee on HIV/AIDS (NERCHA) in December 2001. NERCHA seeks to coordinate the fight against AIDS and effectively utilize the limited public resources to fight the pandemic.

6. Although the full economic impact of the HIV/AIDS pandemic is yet to be assessed, the spate of factory closures and departure of foreign investors largely due to the high incidence of the disease, underscores the seriousness of the humanitarian situation which is compounded by the food shortage as a result of the prolonged drought. The authorities have allocated extra budgetary resources towards the food crisis and donor assistance has also been sought to deal with the issue. The HIV/AIDS crisis is affecting one out of every three people in the working age group of the population. The pandemic is not only threatening the country’s most productive human resource base but stands to undermine longer-term economic growth prospects of the country. Taking into consideration that nearly one third of the population is unemployed and two-thirds of the population is living under US$1 per day, the country needs adequate foreign assistance to deal with the crisis.

7. My authorities are concerned by the classification which denies the country access to concessional multilateral financing under the PRGF and IDA. The classification fails to address the income inequality that currently exists in the country. They therefore urge the IMF and World Bank to re-examine the rationality of the eligibility criterion with a view to granting the country waiver to enable it to access concessional resources to effectively address the pandemic.

8. In this connection my authorities intend, in collaboration with the UNDP, to organize a donor conference in due course and they hope that they could count on the goodwill, understanding and support of the international community in this endeavor.

Fiscal Policy

9. My authorities are committed to improved fiscal discipline. They would develop a medium-term fiscal strategy in conjunction with an EU-sponsored fiscal restructuring project initiated in 2002 that aims at achieving macroeconomic stability and promoting economic growth. They are cognizant of the challenges posed by the HIV/AIDS threat and the need to reorient spending to increase social sector expenditures without worsening the medium-term budgetary position. Spending in health and education is to be increased whilst transfers to parastatals would be restrained and the size of the wage bill contained.

10. My authorities are currently embarking on a comprehensive tax reform exercise under the Fiscal Restructuring Project, targeting diversification and broadening the revenue base. They are also committed to a further broadening of the tax base to compensate for the declines in the Southern African Customs Union (SACU) receipts, which currently account for approximately 50 percent of government revenues. SACU receipts are expected to decline as a result of the countries’ WTO commitments and the South Africa-European Union Free Trade Area and the SADC trade arrangements. All remaining income tax exemptions will be abolished and the tax base will be broadened by amending the Sales Tax Act and incorporating previously uncovered commercial activities on the Swazi Nation Land. Tax collection will be improved and tax administration further strengthened. Tax officials will also receive training.

Monetary Policy

11. Swaziland belongs to a monetary union with Lesotho, Namibia and South Africa, where the currencies of these economies are pegged on a one-to-one basis with the South African rand. The rand circulates widely in Swaziland along with the local currency, the lilangeni. This has meant that it cannot exercise an independent monetary policy. Authorities agree with the recommendation of staff to maintain the peg and they believe that the gains outweigh the costs. This also serves to increase trade and foster further and deeper economic integration with its neighbour and biggest trading partner, South Africa. Monetary and exchange rate policies are therefore closely tied to those of South Africa and this informs the authorities commitment to continued increase in financial integration with members of the CMA.

Structural Reforms

12. Civil service reforms will continue and will help reduce the size and improve efficiency of the public service. The UNDP, working jointly with the authorities, are currently developing a comprehensive strategy to privatize and restructure public enterprises including the Central Transportation Authority (CTA). On the developments surrounding the Swaziland Public Service Pension Fund, the authorities accept recommendations of staff and would rectify the anomalies and initiate measures to increase its efficiency by increasing contributions and retirement age.

13. Reform of the Swaziland Development and Savings Bank is on-going, with the appointment of a new management team, recapitalization of the bank and provisioning for nonperforming loans. The Bank is now operating under new enhanced risk management procedures. My authorities support the need to delineate the commercial and development aspects of the bank to increase transparency and accountability of its financial operations whilst fulfilling its responsibility of improving the living standards of the people and contributing to the country’s poverty reduction efforts.

14. Swaziland’s trade policy is largely influenced by the Southern African Customs Union (SACU) which has been recently renegotiated. The new SACU will be a democratic institution which will also have Secretariat which will be responsible the day-to-day running of the affairs of the institution. Recognizing the small size, and relative openness of the Swazi economy and its susceptibility to external shocks the authorities will work closely with other regional economic integration groupings to promote an export sector-led economic growth.

15. My authorities remain committed to improve agricultural production on Swazi Nation Land through improved agricultural irrigation of land as shown by the recent implementation of the Lower Usuthu Smallholder Irrigation Project (LUSIP). The Land Policy Act is expected to further empower the smallholder rural farming communities to access credit to improve investment and productivity.

16. They agree with the staff recommendation to improve economic data to strengthen policy formulation and have already joined the GDDS project and would welcome technical assistance in this regard.

Other Reforms

17. A constitutional review process is currently underway with the formation of a Constitutional Review Commission (CRC). The commission is expected to complete its work soon and present its report and recommendations to the authorities and this is expected to bring into the country a new political dispensation once the commission’s recommendations are considered and adopted.

Conclusion

18. My authorities remain committed to pursuing prudent macroeconomic policy and creating an environment conducive to attracting foreign direct investment. They however remain concerned with the slow response of the multilateral institutions and the international community to help them to address the humanitarian crisis facing the country in particular the HIV/AIDS pandemic and the food shortage crisis aggravating the already pervading poverty situation.

Swaziland: 2002 Article IV Consultation-Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Swaziland
Author: International Monetary Fund