Abstract
The Swazi economy has continued to register sluggish economic activity even as rising Southern African Customs Union revenue contributed to a large fiscal surplus and accumulation of international reserves. The unchecked growth of insufficiently regulated saving and credit cooperatives poses risks to the financial system. Fiscal policy should safeguard priority spending and fiscal sustainability. Executive Directors commend the government’s effort in rebuilding international reserves. Further efforts are needed to improve the quality and timeliness of data to better facilitate policy formulation and monitoring.
On February 6, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Kingdom of Swaziland.1
Background
The Swazi economy remains stagnant. Real GDP growth has averaged just over 2 percent in the past six years. Per capita GDP growth is lagging behind other members of the Southern African Customs Union (SACU), and low and lower-middle income countries. The slow pace of economic reforms has worsened the investment climate, and the erosion of preferential treatment for Swaziland’s exports of textile and sugar, combined with declining competitiveness and weak institutional capacity have further contributed to the weakened output performance. Years of persistently low growth have led to stubbornly high poverty, inequality and unemployment, and Swaziland has a high prevalence of HIV/AIDS.
High SACU revenue contributed to a record fiscal surplus and accumulation of international reserves to 3.4 months of imports. Despite stronger import growth, the external current account deficit narrowed in 2007, owing to stronger demand for Swaziland’s major export, soft drink concentrate, the extension of the African Growth and Opportunity Act (AGOA), which benefited exports of textiles, and higher SACU transfers. Inflation has risen sharply since 2006 reflecting rising food and oil prices.
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Broad money has expanded sharply during the past two years, mainly reflecting the rise in net foreign assets of the banking system. While credit to the government has declined, due to the surpluses arising from SACU receipts, growth in lending to the private sector slowed only moderately from 22 percent in 2006 to 19 percent in 2007.
The outlook is subject to several risks arising out of the uncertainty surrounding SACU revenues, the external environment and emerging financial sector vulnerabilities.
Executive Board Assessment
Executive Directors expressed concern that Swaziland’s economic growth continues to lag behind that of most other lower middle income countries. Directors recognized that the HIV/AIDS epidemic, the erosion of trade preferences, and recurrent droughts, have adversely affected economic performance. Against this challenging background, Directors encouraged the authorities to use the window of opportunity provided by the current high levels of revenues from the SACU to accelerate reforms aimed at securing macroeconomic stability and addressing impediments to higher growth and poverty reduction.
Directors emphasized the need to ensure fiscal sustainability and safeguard priority spending given the expected decline in SACU revenues after 2010. They recommended that in setting fiscal policy, the authorities focus on a measure of the fiscal deficit that excludes SACU revenues, as this would help to highlight the scale of the needed adjustment and smooth expenditure over the longer term.
Directors considered that the burden of the fiscal adjustment would have to fall primarily on spending, and in this context, expressed concern about the sharp increase in expenditures in 2007/08. Directors stressed the importance of civil service reform and reorienting spending to priority areas. They also noted that privatization of enterprises that are currently a burden on the budget could provide additional fiscal space for much-needed social programs, while improving the environment for private sector development. Directors welcomed the ongoing effort to improve expenditure monitoring and strengthen the Medium-Term Expenditure Framework, which would enhance budget planning and transparency, and protect pro-growth and pro-poor spending. They encouraged the authorities to implement the recommendations of the World Bank’s public expenditure review. Directors recommended that expenditure savings be complemented, over time, by improvements in revenue administration and the implementation of a package of revenue measures, including the introduction of a Value Added Tax (VAT).
Directors agreed that Swaziland’s monetary and exchange rate regime has served the country well. The fixed rate of the lilangeni to the South African rand under the Common Monetary Area is underpinned by close economic integration with South Africa. To safeguard Swaziland’s net external position and the currency peg, Directors stressed the need to supplement the medium-term policy for fiscal sustainability with structural reforms to improve the business environment and strengthen competitiveness.
Directors commended the authorities’ effort in rebuilding international reserves to support confidence in the peg. Noting the recent buildup of government deposits in banks outside Swaziland, they advised the transfer of all government foreign currency deposits to the Central Bank of Swaziland.
Directors welcomed the progress made in strengthening commercial bank supervision, while encouraging continued efforts to ensure timely compliance by all banks with prudential regulations. Directors noted the importance of strengthening supervision of the savings and credit cooperative sector, which has been growing rapidly. Timely passage of pending legislation aimed at improving supervision of the financial system would be important in this connection.
Directors commended the authorities for the steps taken to develop a framework for insurance and pension funds. At the same time, they advised the authorities to exercise caution in enforcing the domestic investment requirement, as it could expose investors to the risk of low or negative returns due to the limited number of domestic investment opportunities.
Directors welcomed the authorities’ poverty reduction strategy and action program (PRSAP), and their accelerated efforts to address the HIV/AIDS epidemic and food security situation. They stressed that effective implementation would require greater efforts to ensure that the PRSAP is consistent with a medium-term expenditure framework that supports macroeconomic stability, and perseverance with growth-enhancing and employment-creating reforms. Directors noted that, to address the challenges ahead, Swaziland would need international support, which should be grounded on decisive action on policy reform by the authorities.
Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
Swaziland: Selected Economic and Financial Indicators, 2002–07
Including transfers.
Fiscal years (April 1-March 31).
For 12-month time deposits.
Swaziland: Selected Economic and Financial Indicators, 2002–07
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 Est | ||
|---|---|---|---|---|---|---|---|
| Domestic economy | |||||||
| Real GDP | 2.2 | 3.8 | 2.6 | 2.4 | 2.8 | 2.3 | |
| Consumer price inflation (period average) | 11.7 | 7.4 | 3.4 | 4.8 | 5.3 | 8.3 | |
| External economy | (In millions of U.S. dollars, unless otherwise indicated) | ||||||
| Exports, f.o.b. | 1,032 | 1,387 | 1,809 | 1,612 | 1,492 | 1,630 | |
| Imports, f.o.b. | -941 | -1,283 | -1,718 | -1,733 | -1,633 | -1,930 | |
| Current account balance 1 | 58 | 124 | 52 | -81 | -81 | -20 | |
| (In percent of GDP) | 4.8 | 6.8 | 2.2 | -3.1 | -2.9 | -0.7 | |
| Gross official international reserves | 260 | 265 | 262 | 231 | 364 | 637 | |
| (In months of imports of goods and nonfactor services) | 2.7 | 2.1 | 1.5 | 1.3 | 2.2 | 3.4 | |
| Debt service (in percent of exports of goods and nonfactor services) | 1.4 | 1.1 | 1.0 | 1.1 | 1.2 | 1.2 | |
| Financial variables | (In percent of GDP, unless otherwise indicated) | ||||||
| Total government revenue and grants 2 | 26.7 | 27.6 | 30.9 | 32.0 | 41.5 | 37.5 | |
| Total government expenditure and net lending 2 | 31.3 | 30.4 | 35.5 | 33.5 | 31.3 | 37.6 | |
| Overall government balance (incl. grants) 2 | -4.6 | -2.9 | -4.6 | -1.5 | 10.2 | 0.0 | |
| Change in broad money (in percent) | 13.1 | 14.1 | 10.4 | 5.9 | 25.1 | 26.8 | |
| Interest rates (in percent) 3 | 9.5 | 4.2 | 4.1 | 3.5 | 8.5 | 9.8 | |
Including transfers.
Fiscal years (April 1-March 31).
For 12-month time deposits.
Swaziland: Selected Economic and Financial Indicators, 2002–07
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 Est | ||
|---|---|---|---|---|---|---|---|
| Domestic economy | |||||||
| Real GDP | 2.2 | 3.8 | 2.6 | 2.4 | 2.8 | 2.3 | |
| Consumer price inflation (period average) | 11.7 | 7.4 | 3.4 | 4.8 | 5.3 | 8.3 | |
| External economy | (In millions of U.S. dollars, unless otherwise indicated) | ||||||
| Exports, f.o.b. | 1,032 | 1,387 | 1,809 | 1,612 | 1,492 | 1,630 | |
| Imports, f.o.b. | -941 | -1,283 | -1,718 | -1,733 | -1,633 | -1,930 | |
| Current account balance 1 | 58 | 124 | 52 | -81 | -81 | -20 | |
| (In percent of GDP) | 4.8 | 6.8 | 2.2 | -3.1 | -2.9 | -0.7 | |
| Gross official international reserves | 260 | 265 | 262 | 231 | 364 | 637 | |
| (In months of imports of goods and nonfactor services) | 2.7 | 2.1 | 1.5 | 1.3 | 2.2 | 3.4 | |
| Debt service (in percent of exports of goods and nonfactor services) | 1.4 | 1.1 | 1.0 | 1.1 | 1.2 | 1.2 | |
| Financial variables | (In percent of GDP, unless otherwise indicated) | ||||||
| Total government revenue and grants 2 | 26.7 | 27.6 | 30.9 | 32.0 | 41.5 | 37.5 | |
| Total government expenditure and net lending 2 | 31.3 | 30.4 | 35.5 | 33.5 | 31.3 | 37.6 | |
| Overall government balance (incl. grants) 2 | -4.6 | -2.9 | -4.6 | -1.5 | 10.2 | 0.0 | |
| Change in broad money (in percent) | 13.1 | 14.1 | 10.4 | 5.9 | 25.1 | 26.8 | |
| Interest rates (in percent) 3 | 9.5 | 4.2 | 4.1 | 3.5 | 8.5 | 9.8 | |
Including transfers.
Fiscal years (April 1-March 31).
For 12-month time deposits.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.