The Kingdom of Swaziland
Statistical Appendix
Author: International Monetary Fund
Publication Date:
13 Mar 2006
eISBN:
9781451836110
Language:
English
Keywords:
ISCR; CR; Swaziland; investment climate; garment export; export; holding; fiscal revenue; Swaziland's export; CMA member; Swaziland's exchange rate arrangement; CMA's objective
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In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Basic Data

Swaziland: Basic Data

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Sources: Swazi authorities.

In U.S. dollars.

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

The fiscal year runs from April 1 to March 31.

Excluding net errors and omissions.

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.

Swaziland’s External Competitiveness in the Context of the Common Monetary Area1

A. Introduction

1. Swaziland is a small, open, land-locked economy within the Common Monetary Area (CMA) and the South African Customs Union (SACU).2 There are no exchange controls among CMA countries, while trade among SACU countries is free of tariffs and quotas. The SACU joint customs and excise pool provides about half of Swaziland’s fiscal revenues. Swaziland’s main exports are sugar and sugar-based products, wood pulp and garments. South Africa absorbs about 60 percent of Swazi exports, and provides about 80 percent of the country’s imports. Although Swaziland is a low middle-income country, poverty is widespread, aggravated by food shortages in some parts of the country and a severe HIV/AIDS epidemic.

2. Except for 2002, when the garment sector grew rapidly, economic growth has decelerated since the mid-1990s while the external current account has deteriorated. At the same time, foreign direct investment (FDI) declined from an annual average of 7.1 percent of GDP in 1985–93 to 4.7 percent of GDP in 1994–2002 and, after turning negative in 2003, amounted to 2.5 percent of GDP in 2004. External factors, such as South Africa’s democratization since 1994, as well as domestic factors, e.g., governance issues, have contributed to the slowdown. Taken together, these developments suggest a weakening of Swaziland’s external competitiveness. After describing some key features of the CMA and their policy implications for Swaziland (Section B), this chapter, to the extent that data availability allows, discusses (in Section C) some aspects of Swaziland’s external competitiveness focusing on (i) trade preferences; (ii) exchange rate developments; (iii) wage costs and productivity; and (iv) nonwage costs and the investment climate. Section D concludes the chapter.

B. Objectives and Key Features of the CMA3

3. The CMA was established in April 1986, succeeding the Rand Monetary Area (RMA) that was created in December 1974. The CMA’s objectives are to confer the advantages of a common monetary area on its members, provide for the sustained economic development of the CMA as a whole, encourage the advancement of the less-developed members, and afford to all parties equitable benefits arising from the maintenance and development of the CMA.

4. Article 2 of the CMA agreement gives each of the three small member countries (Lesotho, Namibia, and Swaziland) the right to issue national currencies. The local currencies (in Swaziland, the lilangeni) issued by the three members are legal tender in their respective countries only. The South African rand, however, is legal tender throughout the CMA.4 Like the currencies of the other small CMA members, the lilangeni is pegged to the rand at par.

5. Under the terms of the CMA Agreement (Article 3), no restrictions can be imposed on the transfer of funds, whether for current or capital transactions, to or from any member country.

6. Article 5 of the CMA Agreement requires the smaller countries’ exchange control regulations to be similar, in all material aspects, to those in effect in South Africa.

Policy Implications of Swaziland’s Membership in the CMA

7. The peg of the lilangeni to the rand, the parallel circulation of the lilangeni and the rand, currency convertibility, and regional capital mobility imply that Swaziland (like the other small CMA countries) does not have independent control of its money supply. The demand for emalangeni depends in large part on the public’s confidence in the exchange rate parity given the extensive financial linkages between Swaziland and South Africa.5 Swaziland’s monetary base basically expands (or contracts) in line with central bank purchases (or sales) of foreign exchange. Given the small size of its economy relative to that of South Africa and their extensive financial links, interest rate movements in Swaziland largely mirror those in South Africa.

8. Swaziland’s exchange rate arrangement under the CMA has certain characteristics of a currency board, with the Central Bank of Swaziland (CBS) converting at the fixed rate emalangeni into rand and vice versa. However, a currency board is typically prohibited by law from acquiring domestic assets, so all the currency it issues is automatically and fully backed by foreign reserves.6 There is no such legal restriction for Swaziland under the CMA. Thus, following draw downs of government deposits in recent years to help finance fiscal deficits, the CBS has been recording an increase in its net domestic assets and, given the demand for emalangeni, diminishing levels of its net international reserves.7 As of end-September 2005, Swaziland’s international reserves covered only 1.1 months of imports.

9. Given the exchange rate peg and lack of monetary independence, Swaziland will have to rely on fiscal and structural policy measures to achieve its economic goals and preserve, or improve, its external competitiveness. The next section discusses some indicators of Swaziland’s external competitiveness.

C. Indicators of External Competitiveness

Trade preferences

10. The existence of several preferential trade arrangements represents a key factor in Swaziland’s external competitiveness.8 The Swazi economy benefits from preferential access to the European Union (EU) under the Cotonou agreement and, since 2000, to the United States (U.S.) under the African Growth and Opportunity Act (AGOA). However, both the EU and the U.S. have maintained quotas on sugar imports.

11. Sugar accounts for some 12 percent of Swaziland’s exports, about half of which is exported to other SACU countries. Sugar is exported to the EU under two preferential agreements: the Sugar Protocol (100,000–130,000 tons per year) and the Special Preference Sugar (SPS) (about 40,000 tons per year), at prices that are more than three times higher than those in unprotected sugar markets. Exports to the EU amount to about one quarter of total sugar exports (including to SACU countries) in volume terms, and 40 percent by value.

12. Swaziland historically has had a small garment sector that mainly catered to the South African market. The coming into force of AGOA’s apparel provisions in 2001 explains its recent rise, through foreign direct investment notably from the Far East. At its peak, in early 2004, the sector provided about one quarter of formal employment. The bulk of the garment sector’s output consists of quota-constrained basic items (e.g., trousers and T-shirts), sold to high-volume discount chains in the U.S.. Swaziland’s garment exports have particularly benefited from AGOA’s “third party fabric provision” granted to least-developed countries (LDC’s). Under this provision, Swaziland is allowed to import inputs from nonmembers of AGOA without repercussions for its quota-free access to the U.S. market. With relevant U.S. import tariffs at more than 15 percent,9 on average, and with foreign inputs accounting for at least 50 percent of total costs, value added in Swaziland is effectively protected at a rate of 30 percent or more.10 11

13. Since textile quotas under the Uruguay Round Agreement on Textiles and Clothing (ATC) were lifted at the beginning of 2005, exports by low-cost producers that are no longer quota-constrained, in particular China, have increased.12 Producers in Swaziland have reported steep declines in garment exports and unofficial estimates suggest that some 15,000 jobs (about half of the sector’s total) have been lost since early 2004.

14. Additional shocks affecting the garment sector are likely to occur:

  • The “third party fabric provision” under AGOA is scheduled to be phased out in the fall of 2007. Maintaining tariff-free access to the U.S. market would then require sourcing fiber inputs from AGOA sources—which are generally more expensive than the current inputs, most of which originate in Asia;

  • The safeguards imposed by the U.S. and the EU in 2005 on garment imports from China (renewable on an annual basis) are likely to expire by mid-2008. In the case of the U.S., these safeguards limit the annual growth of garment imports from China to 7.5 percent; and

  • Multilateral tariff reduction of nonagricultural products under the Doha round is likely to gradually erode the significance of tariff-free market access.

15. Another adverse shock is the imminent change in the EU Sugar Protocol in 2007, implying a reduction in sugar prices of 36 percent over a 4-year period. Also, SPS access may expire in 2006.

Exchange rate developments

16. Swaziland’s external competitiveness is strongly influenced by its currency peg to the South African rand. On the one hand, this arrangement has precluded any exchange rate movement against Swaziland’s main trading partner, South Africa. Conditioned by this regime, domestic price movements in Swaziland have been largely similar to those in South Africa.

17. On the other hand, between 2002 and 2004, the strength of the rand combined with the general depreciation of the U.S. dollar, led to a sizable appreciation of the lilangeni relative to the dollar, by 50 percent in nominal terms and 24 percent in real effective terms (Figure I.1).13 Developments in nominal and real effective exchange rates are widely used indicators of overall competitiveness. In the case of Swaziland, profit margins of many Swazi exporters, being price takers in international markets, are likely to have been squeezed by the lilangeni’s strong appreciation.14During 2005, the lilangeni weakened against the U.S. dollar by about 13 percent, partly offsetting the earlier appreciation.

Figure I.1.
Figure I.1.

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

Citation: IMF Staff Country Reports 2006, 109; 10.5089/9781451836110.002.A001

Source: IMF, International Financial Statistics and staff estimates.

Wage costs

18. Given the openness of Swaziland’s economy, its external competitiveness is closely related to its wage level. In addition, the country’s fixed exchange rate highlights the importance of domestic cost control for maintaining competitiveness. Available data on minimum wages in manufacturing show an increase of 17.5 percent during 2002–04 (Figure I.2). However, reflecting the appreciation of the lilangeni, the nominal wage expressed in US dollars increased by 58 percent during the period.

Figure I.2.
Figure I.2.

Monthly Minimum Wage in Manufacturing and Processing

Citation: IMF Staff Country Reports 2006, 109; 10.5089/9781451836110.002.A001

Source: Department of Labor.

19. Available data, for the garment sector only, indicate that in 2002 Swazi nominal wages were around the level of those in Asian countries, except China, which has a much higher rate. In addition, although lower than in South Africa, Swazi nominal wages were at the same level as those in Lesotho but exceeded those of Kenya and Madagascar.

Figure I.3.
Figure I.3.

Garment Sector Wages for Selected Countries, 2002

(In U.S. dollars per hour)

Citation: IMF Staff Country Reports 2006, 109; 10.5089/9781451836110.002.A001

Source: USITC (2004); Cadot and Nasir (2001), USAID (2004).1/ Estimated.2/ Data for 2001 computed in Cadot and Nasir (2001).3/ Midrange between US$ 0.68-US$ 088 as reported in USITC.

20. Although no systematic studies have been conducted on labor productivity in Swaziland, anecdotal evidence suggests that, except for the sugar sector, productivity is relatively low.15 Deteriorating social indicators, including increased absenteeism partly due to the HIV/AIDS pandemic, have aggravated the problem.

21. In the agricultural sector, data on yields present a mixed picture. Sugar cane, one of the two main crops, is mainly grown on privately owned, well-irrigated, Title Deed Land (TDL) and output per hectare has increased by some 9 percent since 1998/99 (the Swazi sugar industry is generally considered as efficient and competitive). However, maize, the other main crop, is primarily cultivated on rain-fed communal Swazi Nation Land (accounting for 60 percent of Swazi territory), where output per hectare has almost halved since 1998/99 under the influence of drought, soil erosion, lack of investment and credit, and, increasingly, the effects of the HIV/AIDS pandemic. Productivity declines have affected other food staples as well and since acreage was not increased, absolute declines in food production have occurred, leading to upward pressures on prices.

Figure I.4
Figure I.4

Sugarcane and Maize Yield, (In metric tons per hectare)

Citation: IMF Staff Country Reports 2006, 109; 10.5089/9781451836110.002.A001

Source: Central Statictical Office and Swaziland Sugar Association.1/ Title Deed Land (TDL).2/ Swazi Nation Land (SNL).

Investment climate

22. Swaziland’s investment climate has been negatively affected by perceptions about poor governance, corruption, high costs of utilities and transportation, and a relatively burdensome regulatory environment. These factors have tended to outweigh the benefits of relatively little government intervention and a low crime rate.

23. Governance issues have had a major impact on the business climate. A rule-oflaw crisis in 2002/03 concerning a property dispute that had negatively affected investors’ perceptions has been resolved, contributing to some restoration of confidence. Although a new Constitution, which clarifies various individual rights including provisions to protect private property and provides a clearer separation of the executive, legislature, and the judiciary, became effective in February 2006, uncertainty remains about its implementation. Finally, the lack of important legislation, such as an Investment Code16 and a Companies Act creates uncertainty.

24. Among CMA countries, Swaziland ranks lowest on Transparency International’s Corruption Perception Index (Table I. 1) and, on various occasions, high-ranking government officials, including the Prime Minister, have identified corruption as a major policy challenge.

Table I.1.

Corruption Perception Index

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Source: Transparency International and Passau University.

The 2004 report covered a total of 146 countries.

The 2005 report covered a total of 155 countries.

25. Utilities and transportation constitute significant bottlenecks for the Swazi business community. According to a survey conducted by the Southern Africa Global Competitiveness Hub (2004), the cost of utilities is relatively high. Power outages (as well as power surges) occur frequently, and many companies reportedly have back up generators. Telecommunications are expensive and internet service needs to be improved. All utilities are provided by public enterprises that charge relatively high tariffs. Likewise, a survey by USAID (2004) concluded that despite a relatively well-developed road system and proximity to major seaports such as Durban and Maputo, transportation is costly and unreliable.17

26. Administrative procedures are complicated and suffer from a lack of transparency and coordination among government agencies.18 For new businesses, the Swaziland Investment Promotion Agency (SIPA), officially a one-stop shop, is often confronted with intervening actions of other government agencies. Approval procedures are time-consuming and lack transparency. Sometimes, rules and regulations are contradictory.19 In addition, existing businesses are faced with time-consuming customs procedures, and arbitrary health and sanitary inspections. The perception is widespread that available incentives are granted to nonresidents only and do not apply to local entrepreneurs.

27. Land tenure issues are being handled by various ministries, which is time consuming. In addition, there are no established procedures for the purchase of Government Title Deed Land. Single women are allowed to hold property title, but married women may only do so with their husband’s consent.

28. Swaziland’s standard corporate tax rate (30 percent) is in line with neighboring countries. The Minister of Finance may, with Cabinet approval, designate an enterprise as a Development Enterprise and grant tax concessions, implying a reduction of the corporate tax rate to 10 percent (the lowest among SACU members) for ten years and exemption from withholding tax on dividends, also for ten years. However, the requirement that new businesses pay provisional corporate income tax six months after commencing operations constitutes a heavy financial burden. In addition, in the absence of a tax tribunal, tax disputes are handled, with long delays, by the judicial courts.

D. Conclusion

29. Available evidence indicates that Swaziland’s external competitiveness has deteriorated in recent years due to erosion of trade preferences, exchange rate appreciation, relatively low labor productivity, partly because of HIV/AIDS, and a poor investment climate. In 2005, real GDP growth slowed to less than 2 percent and gross international reserves declined to 1.1 months of imports at end-September 2005.20 Given Swaziland’s participation in the CMA, i.e., it has no control over the exchange rate and does not have an independent monetary policy, effective implementation of prudent fiscal policies and bold structural reform measures would go a long way to improve Swaziland’s external competitiveness.

References

  • Cadott, Olivier, and John Nassir, 2001, “Incentives and Obstacles to Growth: Lessons from Manufacturing Case Studies in Madagascar”, World Bank, RPED Discussion Paper No.117.

    • Search Google Scholar
    • Export Citation

  • Humpage, Owen F. and Jean M. McIntire, 1995 “An Introduction to Currency Boards,” Federal Reserve Bank of Cleveland Economic Review (31), p.2–11.

    • Search Google Scholar
    • Export Citation

  • Masson, Paul R., and Catherine Patillo, 2005, The Monetary Geography of Africa, (Washington D.C., Brookings Institutions Press).

  • Southern Africa Global Competitiveness Hub, 2005, “The Swaziland Investor Road Map.”

  • United States Agency for International Development (USAID), 2004, “the Elimination of Quotas Under the World Trade Organization Agreement on Textile and Clothing: The Impact on Swaziland,” (Botswana: USAID/Regional Center for Southern Africa).

    • Search Google Scholar
    • Export Citation

  • United States International Trade Commission (USITC), 2004, Textiles and Apparel: “Assessment of the Competitiveness of Certain Foreign Suppliers to the U.S. Market,” USTIC Publication No. 3671 (Washington, DC).

    • Search Google Scholar
    • Export Citation

Appendix: CMA features

30. The CMA’s broad objectives are to confer the advantages of a common monetary area on its members, provide for the sustained economic development of the CMA as a whole, encourage the advancement of the less developed members, and afford to all parties equitable benefits arising from the maintenance and development of the CMA (Article 2).

31. Article 2 of the CMA agreement gives the three small member countries (Lesotho, Namibia, and Swaziland) the right to issue national currencies, and their bilateral agreements with South Africa define the areas in which their currencies are legal tender. The local currencies (in Swaziland, the lilangeni) issued by the three members are legal tender in their respective countries only. The South African rand, however, is legal tender throughout the CMA.

32. Under the terms of the CMA Agreement (Article 3), no restrictions can be imposed on the transfer of funds, whether for current or capital transactions, to or from any member country. The only exceptions result from the member countries’ investment or liquidity requirements prescribed for financial institutions. The small member countries tend to view the investment and liquidity requirements as a measure of savings mobilization for development purposes. The regulations requiring the investment of funds by financial institutions in domestic securities or credits to local businesses or individuals are, in effect, minimum local asset requirements. These regulations are meant to address the concerns of the three small, less developed, CMA members that funds generated in their territories and deposited with local financial institutions tended to flow to the more developed capital markets of South Africa. Swaziland’s minimum local assets to total deposits ratio, which has been reduced in recent years, is 13 percent at present.

33. The CMA Agreement provides for the three small member countries to have access to the South African capital and money markets, but only through prescribed investments or approved securities that can be held by financial institutions in South Africa.

The CMA Agreement (Article 5) requires the smaller countries’ exchange control regulations to be—in all material aspects—similar to those in effect in South Africa.

34. Since the rand is legal tender in all CMA countries (but the currencies of the three small CMA members are not legal tender in South Africa), South Africa compensates them for forgone seigniorage. Compensation is based on a formula equal to the product of (i) two-thirds of the annual yield on the most recently issued long-term South African government stock; and (ii) the volume of rand estimated to be in circulation in the member country concerned. The ratio of two-thirds was established on the assumption that it approximated the yield of a portfolio of reserve assets comprising both long-term and short-term maturities, assuming that the average yield would be less than the full long-term yield.

35. To facilitate the implementation of the CMA Agreement, the member countries have established a commission in which each of them has one representative (along with some advisors, as needed). The commission holds regular consultations—at least once a year—with the aim of reconciling the interests of member countries on common issues pertaining to monetary and foreign exchange policies. It also convenes at other times at the request of a member country. Article 9 of the CMA Agreement provides for the establishment of a tribunal to arbitrate disputes that might arise between member countries regarding the interpretation or application of the agreement.

Table 1.

Swaziland: Gross Domestic Product by Sector of Origin at 2000 Constant Prices, 2000-2004

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Source: Central Statistical Office.

Swazi Nation Land (SNL).

Title Deed Land (TDL).

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.

Table 2.

Swaziland: Gross Domestic Product by Sector of Origin at Current Prices, 2000-2004

(In millions of emalangeni, unless otherwise indicated)

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Source: Central Statistical Office.

Swazi Nation Land (SNL).

Title Deed Land (TDL).

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.

Table 3.

Swaziland: Gross Domestic Product by Expenditure Category at Current Prices, 2000-2004

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Source: Central Statistical Office.

All Southern African Customs Union receipts are treated as indirect taxes (and therefore deducted from imports, c.i.f. to get imports, f.o.b.), accounting for the significant difference between the trade figures in the national income accounts reported in this table and those in the balance of payments.

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.

Table 4.

Swaziland: Population and Labor Force Estimates, 2000-2003

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Sources: Central Statistical Office; World Bank; United Nations; and staff estimates.

Estimate, United Nations and national authorities.

World Bank estimates.

Central Statistical Office data.

Table 5.

Swaziland: Developments in Crop Production, 2000/01-2004/05 1/

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Source: Central Statistical Office and Swaziland Sugar Association.

Variable crop years.

Swazi Nation Land (SNL).

Title Deed Land (TDL).

Table 6.

Swaziland: Developments in Sugar Production, Processing, and Consumption, 2000/01-2004/05

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Source: Swaziland Sugar Association.

Sugarcane is grown mainly on Title Deed Land.

Crop year beginning in April, unless otherwise indicated.

Calendar year. “Domestic” covers Swaziland, as well as the other members of the Southern African Customs Union.

Table 7.

Swaziland: Mineral Production and Exports, 2000-2004

(In thousands of metric tons)

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Sources: Central Statistical Office; and Geological Survey and Mines Department.

Asbestos mining stopped in 2001.

Table 8.

Swaziland: Index of Industrial Production, 2001-2003

(1985 = 100)

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Source: Central Statistical Office.
Table 9.

Swaziland: Electrical Power Generation and Demand, 2000-2004

(In millions of kilowatt-hours)

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Source: Swaziland Electricity Board.

The difference between production and sales is accounted for by transmission and distribution losses.

Excludes self-generated power of several industrial concerns.

South African Electricity Supply Commission (ESKOM).

Table 10.

Swaziland: Retail Price Indices of Urban Families, 2001-2005 1/

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Source: Central Statistical Office.

For 2005, latest available month.

End of period; derived independently from the two income indices on the basis of a different basket of goods and services.

End of period; families with incomes of E 2,399 per annum and below.

End of period; families with incomes between E 2,400 and E 8,760 per annum.

Table 11.

Swaziland: Minimum Wages for General Workers in Selected Industries, 2001-2003 1/

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Source: Department of Labor.

As of December of each year.

Table 12.

Swaziland: Paid Employment in the Private and Public Sectors by Industry, 2000-2003 1/

(In number of employees)

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Source: Ministry of Enterprise and Employment.

Paid employment (including part-time) as of June of each year.

Table 13.

Swaziland: Summary of Central Government Operations, 2000/01-2004/05 1/

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Sources: Ministry of Finance; and Fund staff projections.

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.

Table 14.

Swaziland: Central Government Revenue and Grants, 2000/01-2004/05 1/

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Source: Ministry of Finance.

Fiscal year runs from April 1 to March 31.