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

Economic growth in Swaziland has weakened over the past decade. This 2005 Article IV Consultation highlights that real GDP growth decelerated to 2.1 percent in 2004 and an estimated 1.8 percent in 2005. A prolonged drought affected agricultural output, particularly maize, the main staple crop, and cotton. The authorities completed a “Poverty Reduction Strategy and Action Plan” in October 2004. The document spells out policies with the overall objective of halving the 1995 poverty rate by 2015. However, little progress has been made toward this and other Millennium Development Goals.


Economic growth in Swaziland has weakened over the past decade. This 2005 Article IV Consultation highlights that real GDP growth decelerated to 2.1 percent in 2004 and an estimated 1.8 percent in 2005. A prolonged drought affected agricultural output, particularly maize, the main staple crop, and cotton. The authorities completed a “Poverty Reduction Strategy and Action Plan” in October 2004. The document spells out policies with the overall objective of halving the 1995 poverty rate by 2015. However, little progress has been made toward this and other Millennium Development Goals.

I. Introduction

1. Swaziland is a small, open economy, with close trade and financial ties with South Africa. It is a member of the South African Customs Union (SACU) and the Common Monetary Area (CMA).1 The Swazi lilangeni exchanges at parity with the rand, which is also legal tender in the country. There are no exchange controls between CMA countries. Trade among SACU countries is free of tariffs and duties.2 About half of fiscal revenues come from Swaziland’s share in the SACU joint customs and excise pool. South Africa absorbs about 60 percent of Swazi exports, and provides 80 percent of the country’s imported goods and services, including most electricity and all petroleum products. Remittances from migrant workers are an important source of income for Swaziland, amounting to about 5 percent of GDP in recent years.

2. Economic growth in Swaziland has weakened over the past decade. Since South Africa democratized in 1994, Swaziland has lost part of its attractiveness to foreign investors. As foreign direct investment inflows declined, real GDP growth fell from 3.6 percent in the 1990s to just over 2 percent since 2000. Swaziland’s economy is based mainly on agriculture and agro-processing. In recent years, the garment sector, benefiting from preferences under the US African Growth and Opportunity Act (AGOA), has emerged as one of the largest employers in the country. At its peak, in early 2004, it provided about one quarter of formal sector jobs.

3. Although Swaziland is a low middle-income country, poverty is widespread, aggravated by food shortages in parts of the country and a severe HIV/AIDS epidemic.3 A highly skewed income distribution, persistent drought, and an inefficient internal market for agricultural products have contributed to shortfalls in food production. The World Food Program estimates that about 20 percent of the population are in need of food aid during 2005/06. HIV prevalence is among the highest in the world.4 As a consequence, overall mortality has doubled since the 1990s, and life expectancy has dropped from 57 years around 1990 to 33 years.


The HIV/AIDS Epidemic Has Resulted in Dramatic Losses in Life Expectancy

Citation: IMF Staff Country Reports 2006, 106; 10.5089/9781451836103.002.A001

4. A constitution, which had been eight years in the making, was signed by the King in July 2005. The new constitution, expected to become effective in January 2006, represents an improvement to the legal framework. It stipulates various individual rights, including provisions to protect private property, and provides a clearer separation of the executive, legislative, and judicial powers. The rule-of-law crisis that had undermined investor confidence in 2004 has been largely resolved after the government retracted its earlier decision to reject a Court of Appeals ruling regarding a property dispute that triggered the resignation of the judges.

5. Fund advice in recent years has focused on policies to address the impediments to higher growth and broad-based improvements in living standards. The Fund has emphasized the need for fiscal consolidation in order to maintain macroeconomic stability and preserve the exchange rate peg, and for structural reforms, most notably in the financial sector and public enterprises. While in broad agreement with the advice, the authorities noted the implementation difficulties they are facing (e.g., downsizing the civil service when unemployment is already high and poverty is worsening). They also stated that Fund policy advice would be more effective if Swaziland’s implementation capacity could be further strengthened with external assistance and capacity building support.

II. Recent Economic Developments

6. Real GDP growth slowed to 2.1 percent in 2004 and is expected to weaken further to 1.8 percent in 2005 (Table 1). A prolonged drought affected agricultural output, particularly maize, the main staple crop, and cotton.5 The real appreciation of the lilangeni since 2002 and high oil import prices hurt Swaziland’s main exports (sugar, wood pulp, and garments) and manufacturing activities. In addition, the removal of the textile quotas since January 2005 has led to factory closures and significant job losses in the garment sector,6 further worsening the unemployment rate (estimated at 30 percent). Compared to other small CMA countries that have faced similar or more severe exogenous shocks, Swaziland is lagging behind in adjustment and output recovery (Box 1).

Table 1.

Swaziland: Basic Economic and Financial Indicators, 2002-2009

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Sources: Swazi authorities; and staff projections.

IMF Information Notice System trade-weighted; end of period.

The fiscal year runs from April 1 to March 31.

Reflecting the effects of several factors including exchange rate movements.

Under review by the CSO; data on indirect taxes used for estimation of GDP may contain errors and are subject to downward revisions based on the review.


Real GDP growth

(In percent)

Citation: IMF Staff Country Reports 2006, 106; 10.5089/9781451836103.002.A001

Source: IMF staff estimates and projections.

7. The lilangeni, which is pegged at par to the South African rand, appreciated by 24 percent in real effective terms between January 2002 and December 2004. The strength of the rand, while adversely affecting exports, helped to offset the impact of rising world oil prices, contributing to lower inflation through end-2004. In part owing to the lowering of interest rates by the South African Reserve Bank (SARB), the lilangeni depreciated against the US dollar in 2005, partially offsetting the earlier real appreciation. Annual inflation edged up to over 6 percent at end-November 2005, reflecting exchange rate movements and the pass-through of high oil import prices.7


Real and Nominal Effective Exchange Rates, Jan 2001-Sep 2005

Citation: IMF Staff Country Reports 2006, 106; 10.5089/9781451836103.002.A001

Source: IMF, International Financial Statistics and staff estimates.

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

Under the CMA, all three small member countries—Lesotho, Namibia, and Swaziland—peg their currency to the South African rand at par. The rand is legal tender throughout the CMA, circulating side by side with national currencies in the three smaller countries. With the CMA providing a common framework for monetary and exchange rate policies, fiscal policy is the main tool for macroeconomic stabilization in the small CMA countries. During 2004/05-05/06, all three countries have received large one-off SACU revenues.

External shocks: During 2002-2004, the nominal appreciation of the rand against the US dollar was about 40 percent, resulting in a 13-25 percent real effective appreciation in the three countries. However, reflecting the different production and trade structures, terms of trade movements varied. While Lesotho and Namibia have suffered heavy losses since 2002, Swaziland’s terms of trade experienced little change, reflecting its more diversified export base and the fact that its main export, sugar, has enjoyed preferential prices in the EU market.

Policy Responses: In response to the severe shocks to its textile sector, Lesotho saved the SACU windfalls (see Footnote 7), ran a budget surplus, and prepaid high interest rate external debt. Namibia managed to sharply reduce its fiscal deficit by 3.5 percentage points of GDP in 2004/05, while targeting further fiscal tightening in 2005/06. In contrast, Swaziland’s fiscal deficit has been widening, driven by sharp increases in the wage bill and other spending, and financed by running down external reserves and an accumulation of domestic arrears.

Economic performance: Lesotho has maintained a relatively high level of reserves, and sharply reduced the public debt-to-GDP ratio. Namibia has managed to maintain a higher import cover of official reserves than Swaziland and a good growth performance. Swaziland’s official reserves have declined to the lowest level among CMA members. Real GDP growth has continued to weaken, further diverging from that in South Africa, the engine of growth in the region.


Terms of Trade

(2000 = 100)

Citation: IMF Staff Country Reports 2006, 106; 10.5089/9781451836103.002.A001


Fiscal Balance

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 106; 10.5089/9781451836103.002.A001


Official Reserves

(In months of imports)

Citation: IMF Staff Country Reports 2006, 106; 10.5089/9781451836103.002.A001


Government Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 106; 10.5089/9781451836103.002.A001

Source: Country authorities and Fund staff estimates and projections.1/ From 2003/04 - 2005/06 government debt includes domestic payment arrears.

8. Fiscal imbalances have widened in the last two fiscal years (Table 2 and Figure 1). In 2004/05, despite a large one-time windfall in SACU revenues8 (4.2 percent of GDP) and efforts to increase domestic revenue by removing some tax exemptions,9 the deficit (including grants) rose to 4.3 percent of GDP, significantly higher than the originally budgeted deficit of 2.8 percent of GDP, as the wage bill and other current expenditures were sharply increased through three supplementary budgets. Spending pressures have continued to rise unabated in 2005/06, as the wage increase granted in 2004 became fully effective and was extended to all branches of the civil service, increasing the total wage bill to 15 percent of GDP. Moreover, a supplementary budget was adopted in the third quarter of the fiscal year to authorize wage increases for parliamentarians and other politicians, further widening the budget deficit.

Table 2.

Swaziland: Summary of Central Government Operations, 2003/04-2009/10 1/

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Sources: Ministry of Finance; and Fund staff projections.

Without corrective policy measures. The fiscal year runs from April 1 to March 31.

Including domestic payment arrears estimated at 2 percent of GDP for 2004/05. For 2005/06 onwards, including financing gaps.

Figure 1.
Figure 1.

Swaziland: Main Economic Indicators

Citation: IMF Staff Country Reports 2006, 106; 10.5089/9781451836103.002.A001

Sources: Central Bank of Swaziland; and South African Reserve Bankl1/ Fiscal year beginning April 1.2/ End of period 2000-2004, through September, 2005.

9. The deficits have been financed by external and domestic borrowing, drawing down of government financial assets, including the Capital Investment Fund (CIF), and an accumulation of domestic arrears. The latter increased from an estimated 0.8 percent of GDP at end-2003/04 to over 2 percent of GDP at end-2004/05. With usable deposits (excluding deposits earmarked for specific projects) virtually exhausted by end-September 2005, the government is facing a serious cash flow problem. Funding for budgeted poverty reduction programs has been adversely affected.

10. Monetary developments have reflected those in South Africa. In line with interest rate reductions in South Africa, the CBS reduced its discount rate to 7 percent in April 2005. Market yields on treasury bills have moved downward and interest rate spreads relative to South Africa have remained small, as new issues of treasury bills essentially have been contained to roll over falling due maturities in order to avoid higher borrowing costs on short-term debt, notwithstanding the government’s large financing needs. Available data suggest that financial soundness indicators of the banking system remain strong (Table 4).10

Table 3.

Swaziland: Monetary Survey, 2001-2005 1/

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Sources: Central Bank of Swaziland (CBS); and Fund staff estimates.

End-of-year data.

Counterpart of government external assets in rand and in CIF.

Excludes rand in circulation.

For September 2005, change from December 2004.

Table 4.

Swaziland: Commercial Banks’ Performance Ratios, Dec. 2003 - Sept. 2005

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Source: Central Bank of Swaziland.

Excluding the Swaziland Development and Savings Bank, which is owned by the government and offers both development finance and commercial banking services after its recapitalization and relaunch by the government in 2001.

11. In the face of shocks to exports and strong pressure to finance the fiscal deficit, gross international reserves (which include the CIF) declined from 1.9 months of imports at end-2003 to 1.1 months at end-September 2005, the lowest level among CMA members (Table 5). Other reserve adequacy indicators such as the ratio to short-term debt or to the monetary base have also deteriorated. In the meantime, public debt, which is mostly on nonconcessional terms, has increased to 22 percent of GDP, including domestic debt excluding outstanding domestic payment arrears.11

Table 5.

Swaziland: Balance of Payments, 2003-2009 1/

(In millions of U.S. dollars, unless otherwise specified)

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Sources: Central Bank of Swaziland; and staff projections.

Without corrective policy measures.

SACU: Southern African Customs Union.


International Reserves

(In millions of Rands)

Citation: IMF Staff Country Reports 2006, 106; 10.5089/9781451836103.002.A001

12. The authorities issued a “Poverty Reduction Strategy and Action Plan” in October 2004. The document spells out policies with the overall objective of halving the poverty rate from the level in 1995 by 2015. However, little progress has been made toward this and other Millennium Development Goals (MDGs). There are indications that the share of the population living below the national poverty line has been increasing in the last several years. According to the Ministry of Health, the HIV infection rate among women attending antenatal clinics increased from 39 percent in 2002 to 43 percent in 2004. While there have been modest improvements in the area of education, Swaziland’s key social indicators compare unfavorable with those of other countries in the region (Table 7 and Figure 2).

Table 6.

Swaziland: Indicators of External Vulnerability, 2000-2005

(In percent of GDP, unless otherwise indicated)

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National government debt.

End of period.

Backward-looking with actual CPI.

Customs-based data, in current U.S. dollar prices.

Table 7:

Swaziland: Millennium Development Indicators, 1990 - 2003

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Source: World Bank, World Development Indicators Database, 2005.
Figure 2.
Figure 2.

CMA Countries: Social Indicators, 2003

Citation: IMF Staff Country Reports 2006, 106; 10.5089/9781451836103.002.A001

Source: World Bank, World Development Indicators 2005; United Nations Population Division.

III. Policy Discussions

A. Outlook, Future Challenges, and Strategy

13. The government’s cash flow problems loom large in Swaziland’s near-term economic outlook. Domestic payment arrears adversely affect the private sector’s working capital and, ultimately, tax compliance. Uncertainty regarding the government’s ability to meet its obligations as budgeted may also have a dampening effect on services and construction activities, which were boosted by increased government expenditures in the last two years. The near-term outlook is also weakened by delayed and likely inadequate rainfalls, the ban on beef exports to the EU,12 the real effective appreciation of the lilangeni, and the erosion of trade preferences for garment exports. Prolonged high oil import prices are also putting pressure on the productive sectors, prices, and the balance of payments. The authorities projected a further slowdown in economic growth and a worsening of the external current account in 2006.

14. Over the medium term, Swaziland is susceptible to a range of potentially permanent shocks: anticipated reductions in the preferential prices for sugar exports to the EU by 36 percent over the next four years (Box 2); the eventual elimination of the new restraints on textile imports in the United States and the EU; the expected removal in 2007 of the AGOA provision allowing the use of third-country fabrics; and the forecast decline in SACU tariff revenues as a result of trade liberalization.13 The HIV/AIDS epidemic is exacting a heavy toll on society, and the high infection rate contributes to higher mortality rates, a loss of productivity and real income, and mounting fiscal pressures.

15. The authorities agreed that a strategy to achieve more rapid economic growth and broad-based improvements in living standards needs to address three key challenges: (i) reversing the unsustainable fiscal trends which threaten to deplete official reserves, undermine the exchange rate parity under the CMA, and compromise the government’s ability to address development priorities; (ii) restoring external competitiveness; and (iii) addressing the high prevalence of poverty and HIV/AIDS. The staff emphasized that fiscal consolidation would help maintain macroeconomic stability and provide the fiscal space to support poverty reduction.

16. To illustrate the policy choices the authorities are facing, the staff developed two alternative medium-term scenarios (Appendix VI). The first one (baseline scenario) assumes that policy implementation continues to be lacking. The fiscal imbalances would worsen further and domestic payment arrears increasingly plague the enterprise sector. Without structural reforms to address the loss of external competitiveness, economic activities will remain depressed. Under such a scenario, official reserves are eventually depleted and the viability of the exchange rate parity arrangement is threatened. In addition to fiscal pressures, a major, unanticipated deterioration of the terms of trade or a sudden loss of the public’s confidence in the exchange rate parity could hasten the breakdown of the exchange rate peg.

Sugar Sector and Reform of the EU Price Regime

Swaziland’s sugar industry consists of commercial and a large number of small-holder sugar cane farms, sugar processing subsectors, and related trade and service businesses. Sugar also constitutes the basis for the production of soft drink concentrates and other beverages, the largest exports of Swaziland, as well as ethanol and other derivative products. While the sector per se accounts for about 15-20 percent of GDP and exports, it indirectly affects a much larger part of the national economy.

The reform of the European Union (EU) Sugar Regime:

Currently, Swaziland exports sugar to the EU under two preferential agreements: the Sugar Protocol (100-130,000 tons per year) and the Special Preference Sugar (SPS, 40,000 tons per year). The anticipated reform would reduce the prices applicable to Swazi exports by 36 percent over four years. It also opens the possibility of a higher export volume from developing countries including Swaziland to the EU, as the reform cuts the quotas for EU producers by 2.8 million tons.

Swaziland: The Impact of the Reduction in the EU Sugar Price

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Source: Swaziland Sugar Association and EU

So called institutional price.

Assumes the continuation of SPS beyond 2006.

Possible impact on Swaziland: The loss of export earnings from the EU reform are estimated at €50 million over the 4-year period, but could be much more substantial and more imminent if the SPS access expires in 2006. In addition, tax revenue would be adversely affected; small-holder farmers and millers may face financial difficulties, aggravating rural poverty.

The authorities’ response: Key elements of the strategy are: to further reduce costs by providing training and financing for small-holder farmers; to seek higher access to the EU market for Swazi sugar; to address specific adverse consequences of the reform process, especially on small-holder growers and the environment; to move to higher value-added products and diversify export markets. Public investment in sugar-related projects would help. For instance, the Lower Usuthu Small-holder Irrigation Project could substantially increase annual net income of some 640 small-holder farms in the newly developed Komati and Usuthu river basins by reducing their vulnerability to drought.

Swaziland: Medium-Term Scenario, 2005-2009

(In percent of GDP, unless noted otherwise)

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Sources: Fund sources and staff simulation.

Assuming that strong policy reforms will help attract private investment, both domestic and foreign, particularly to tourism and related services and construction activities.

17. Fiscal consolidation and improvement in economic governance play a central role in the second, “reform policy,” scenario. Under the assumption of decisive actions to implement the civil service reform and improve public expenditure management, the bulk of the fiscal adjustment would initially come from the spending side. In subsequent years, measures to broaden the tax base and strengthen revenue collection would go into effect. The public savings-investment balance would reverse the recent deteriorating trend, contributing to improvements in the gross national savings-investment balance. Implementation of the necessary structural reforms will help improve the business climate, attract donor financing, and enable Swaziland to benefit from strong growth in South Africa. GDP growth could rise to 3-4 percent over the medium term, benefiting from higher investment, including foreign direct investment, and higher efficiency of public investment.14 Official reserves would be rebuilt gradually along with improvements in the balance of payments.

B. Fiscal Policy

18. The authorities agreed that the current fiscal policy stance is not sustainable and measures are urgently needed to ensure that the government meet its payment obligations on a timely basis for the remainder of 2005/06. The staff pointed out that resorting to short-term borrowing and deposit withdrawals provided some breathing space in the recent past, but it has become increasingly difficult to do so without incurring significantly higher borrowing costs or further reducing the country’s official international reserves. It is therefore imperative for the authorities to undertake immediate measures that would help contain expenditures and prepare the ground for a more fundamental adjustment in the context of the 2006/07 budget (Box 3). In this context, the staff emphasized the importance of starting to “rightsize” the civil service, noting that the Voluntary Retirement Program had been envisaged earlier and the associated costs have already been included in the 2005/06 budget. The authorities were receptive to the staff’s recommendations, particularly on prioritizing expenditures, including investment projects, and tightening control of non-wage current expenditure.

19. The staff urged a sharp reduction of the deficit in the 2006/07 budget. It argued that with virtually no access to international capital markets on acceptable terms, little room for domestic financing, substantial contingent liabilities, in particular from the seriously under-funded Swaziland Public Pension Fund (PSFP),15 and low economic growth, maintaining fiscal and debt sustainability will require a substantial reduction of the fiscal deficit, below the government’s earlier medium-term target of 2 percent of GDP.16 Indeed, under the current exchange rate arrangement, any fiscal deficits in excess of available external financing will carry the risk of worsening the international reserve position. This is because domestic money demand may not be adequate to accommodate increased government borrowing, and also because Swaziland’s import propensity is high. In view of the need to clear payment arrears and to rebuild the country’s international reserves, and in the absence of concessional external financing, the staff supported the Ministry of Finance’s intention to aim for a balanced budget in the next several years. For 2006/07, fiscal adjustment of at least 3 percentage points of GDP will have to be made to limit the deficit to available external financing and the adjustment will have to rely heavily on expenditure measures.17 The authorities agreed with the need for a sharp adjustment but noted that their efforts may encounter substantial resistance given the rigidity of many expenditure programs and the need to finance the implementation of the new constitution. Subsequent to the mission, in their Medium-Term Budget Policy Statement issued in December 2005, the authorities announced that they aim to cut down the fiscal deficit to 2 percent of GDP in the next two years and achieve a balanced budget in 2008/09.

Key Policy Measures to Restore Fiscal Sustainability

Based on discussions with various ministries and the CBS, the staff team made the following recommendations:

Immediate Measures: (i) prioritize budgeted expenditures, giving priority to wages and salaries, debt service, and utilities; (ii) start rightsizing the civil service by implementing the Voluntary Retirement Program aiming to retire about 1,300 public employees aged 55 and above, adopting a Cabinet decision to eliminate 1,000 vacant positions resulting from natural attrition, and continuing the policy of zero growth for budgetary positions; (iii) tighten control of foreign travel and use of government cars; (iv) halt funds for capital projects that have not yet started or are not directly productive and are not funded by donors, in line with a priority list prepared by the Ministry of Economic Planning and Development; (v) strengthen control of expenditure commitments by setting monthly spending ceilings for all line ministries and issuing expenditure warrants accordingly, based on availability of funds; (vi) refrain from approving new supplementary budgets and meet justifiable additional spending needs, for example, for scholarships, within the existing resource envelope; (vii) transfer all foreign assets of the CIF to the CBS balance sheet to strengthen reserve management.

Medium-term Measures: (i) aim for a balanced budget, in the absence of concessional external financing. Budgets over the medium term should aim to support rebuilding of official foreign reserves to cover at least three months of imports; (ii) establish the Revenue Authority and introduce a broad-based VAT; (iii) rightsize the civil service to a sustainable level and reduce the number of ministries from 17 to 14 or less, in line with an earlier study commissioned by the government. Introduce a performance-based pay system; (iv) privatize state-owned companies that can be privatized to increase efficiency and service delivery; (v) improve the public procurement system by requiring competitive bidding, undertake periodic internal audits and financial audits of all spending entities.

Possible Impact in 2006/07: Implementation of civil service reform and consolidation of ministries could help reduce wages and other expenditures by about 1 percent of GDP. Restructuring of public enterprises, including the Central Transport Administration by reducing its car fleet and other costs, could lower spending on goods and services and subsidies by nearly 1 percent of GDP. Rationalization of the public investment program could help reduce capital expenditures by up to 1.5 percent of GDP. These estimates are in line with the assessment of the World Bank staff team assisting expenditure management and control.

20. The authorities indicated their intention to strengthen revenue mobilization. They have planned since 2003 to combine the Department of Customs and Excise and the Income Tax Commission into a unified Revenue Authority and then to introduce a broad-based VAT. However, these reforms have been postponed, with the introduction of VAT slipping from 2006/07 to 2007/08. The staff urged the authorities to speed up the reforms and implement other measures as envisaged, including the removal of tax exemptions on rental income, a sales tax amendment to close loopholes, and the enforcement of tax collections from non-compliant entities.

21. On the expenditure side, the authorities agreed that containing the wage bill through implementation of the civil service reform is crucial for restoring fiscal sustainability. They explained, however, that the recent wage increases to levels competitive with those of the private sector were needed to retain qualified public sector workers and were meant to be implemented in conjunction with rightsizing the civil service. They acknowledged that rightsizing the civil service to a sustainable level (of about 20,000, from the current 28,000) will require persistent efforts and would be difficult to implement if the economy remains stagnant. The staff urged the authorities to press ahead with this important reform because further delay would only make the eventual correction more costly.