Front Matter

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© 2006 International Monetary Fund

March 2006

IMF Country Report No. 06/106

The Kingdom of Swaziland: 2005 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2005 Article IV consultation with The Kingdom of Swaziland, the following documents have been released and are included in this package:

  • the staff report for the 2005 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on November 9, 2005, with the officials of The Kingdom of Swaziland on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 23, 2006. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its February 8, 2006 discussion of the staff report that concluded the Article IV consultation.

  • a statement by the Executive Director for The Kingdom of Swaziland.

The document listed below has been or will be separately released.

  • Statistical Appendix

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to

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Staff Report for the 2005 Article IV Consultation

Prepared by the Staff Representatives for the 2005 Consultation with Swaziland

Approved by David Andrews and Juha Kähkönen

January 23, 2006

Consultation process

  • The 2005 Article IV consultation discussions were held in Mbabane during October 26-November 9, 2005. The staff team comprised Messrs. Wang (Head), Gons, and Haacker, and Ms. Masha (all AFR). Mr. Mamba (Advisor to the Executive Director) participated in the discussions. Staff worked closely with overlapping technical assistance missions from the Monetary and Financial Systems Department (MFD) and the World Bank.

  • Discussions were held with Prime Minister A.T. Dlamini, the Cabinet chaired by Deputy Prime Minister Shabangu, Finance Minister Sithole, Central Bank of Swaziland (CBS) Governor Dlamini, other officials, and representatives of the private sector and donor community. The mission conducted outreach activities (seminars) with parliamentarians, CBS and government officials, and donor representatives on fiscal consolidation and monetary and exchange rate policies under the Common Monetary Area (CMA).

  • The discussions focused on the key policy challenges facing Swaziland: (i) reversing the unsustainable fiscal trends that threaten to deplete official reserves and undermine the exchange rate parity under the CMA; (ii) restoring external competitiveness and creating the conditions for sustainable growth; and (iii) making progress in the fight against HIV/AIDS and poverty.

  • At the conclusion of the 2004 Article IV consultation on February 16, 2005, Directors underscored the importance of addressing the impediments to higher growth and broad-based improvements in living standards. They emphasized the need for fiscal and wage cost restraint in the face of adverse external developments. Directors identified improvements in governance, restoration of the rule-of-law, and implementation of wide-ranging structural reforms as essential conditions for restoring external competitiveness and stimulating growth.

Exchange system

  • Swaziland has accepted the obligations of Article VIII, Sections 2-4, of the Articles of Agreement, and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions.


  • Executive Summary

  • I. Introduction

  • II. Recent Economic Developments

  • III. Policy Discussions

    • A. Outlook, Future Challenges, and Strategy

    • B. Fiscal Policy

    • C. External Sector and Monetary Policies

    • D. Structural Reforms

    • E. Capacity Building and Technical Assistance Issues

  • IV. Staff Appraisal

  • Boxes

  • 1. External Shocks, Policy Responses, and Economic Performance In Small Countries of the Common Monetary Area

  • 2. Sugar Sector and Reform of the EU Price Regime

  • 3. Key Policy Measures to Restore Fiscal Sustainability

  • Figures

  • 1. Main Economic Indicators

  • 2. CMA Countries: Social Indicators, 2003

  • Tables

  • 1. Basic Economic and Financial Indicators, 2002-2009

  • 2. Summary of Central Government Operations, 2003/04-2009/10

  • 3. Monetary Survey, 2002-2005

  • 4. Commercial Banks’ Performance Ratios

  • 5. Balance of Payments, 2003-2009

  • 6. Indicators of External Vulnerability, 2000-2005

  • 7. Millennium Development Indicators, 1990-2003

  • Appendices

  • I. Relations with the Fund

  • II. Relations with the World Bank Group

  • III. Statistical Issues

  • IV. Social and Demographic Indicators

  • V. Debt Sustainability Analysis

  • VI. Medium-Term Scenarios

  • Appendix Tables

  • V.1. Public Sector Debt Sustainability Framework, 2000-2010

  • V.2. External Debt Sustainability Framework, 2000-2010

Executive Summary

Economic Background

Economic activity has weakened since 2002, reflecting the impact of the real appreciation of the exchange rate in 2002-04, the removal of textile quotas in January 2005, and a prolonged drought. Poverty is widespread, aggravated by food shortages in parts of the country and a severe HIV/AIDS epidemic.

Fiscal imbalances have widened in the last two fiscal years. The overall fiscal deficit rose to 4.3 percent of GDP in 2004/05, driven primarily by a sharp increase in civil service wages. Spending pressures have continued to rise unabated in 2005/06. The deficits have been financed in large part by drawing down government financial assets and accumulating domestic arrears. As a result, official reserves declined to 1.1 months of imports by end-September 2005.

Swaziland is susceptible to a range of potentially permanent shocks over the medium term: anticipated reductions in the preferential prices for sugar exports to the EU, the expected removal of the AGOA provision allowing the use of third-country fabrics in 2007, and the forecast decline in SACU tariff revenues as a result of trade liberalization.

Policy Discussions

The authorities agreed that the current fiscal stance is not sustainable. In addition to immediate measures to deal with the government’s cash flow problem for the remainder of 2005/06, the staff urged a sharp reduction of the deficit in the 2006/07 budget and over the medium term, in view of the lack of access to concessional external financing, little room for domestic borrowing, the need to settle large payment arrears and contingent liabilities, and the need for rebuilding reserves. The staff emphasized the need for providing fiscal space to support poverty reduction.

The staff stressed that key policy reforms needed to be implemented without delay to underpin the fiscal consolidation. The authorities agreed that rightsizing the civil service is crucial for restoring fiscal sustainability but noted difficulties in implementation when the economy is stagnant. They also agreed that reform of the public expenditure system would help strengthen fiscal discipline. The staff urged the authorities to speed up the establishment of a Revenue Authority and the introduction of a broad-based VAT.

The authorities agreed that under the current exchange rate arrangement, Swaziland would have to rely on fiscal adjustment and structural reforms to restore competitiveness. There was broad consensus during the discussions that maintaining the exchange rate peg under the CMA is of vital importance to the economy. To improve the investment climate, the staff stressed the importance of privatizing the large number of public enterprises and improving economic governance. The latter should include enacting the anti-corruption legislation and enforcing internal and financial audits of public entities.

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Public Information Notice (PIN) No. 06/19


February 24, 2006

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February 8, 2006

The Kingdom of Swaziland: 2005 Article IV Consultation-Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director
Author: International Monetary Fund