Recent Economic Developments

2. Swaziland’s economic performance has been positive in several areas, but overall achievements are behind the gains made in most lower middle-income countries. A modest rebound in growth of 2.8 percent in 2006 has been difficult to sustain because of several external constraints, including unfavorable weather conditions and limited export outlets for sugar and textiles. Inflation rate, estimated to have increased to an annual average rate of 8.3 percent in 2007, reflecting rising food and oil prices, has been curtailed by the Central Bank of Swaziland (CBS) through increase in its discount rate and issuance of securities to reduce excess liquidity and lessen demand pressures on the general price level. Credit to government declined, while lending to the private sector slowed only moderately as interest rates rose in line with developments in South Africa, with the spread between lending and deposit rates increasing. Banking soundness indicators have been positive, while banks are generally well capitalized, liquid and profitable, with low nonperforming loans. Savings and Credit Cooperative (SCCO) sector had not been effectively supervised, but the monetary authority is strengthening supervision. Increased SACU revenues contributed to a record fiscal surplus in 2006/07; external accounts improved, while official international reserves rose to a level that could cover three months of imports.

3. Swaziland has been facing difficulties attracting foreign direct investments most of which has gone to more competitive destinations within the region. These adverse factors and insufficient economic growth have aggravated the unemployment situation and poverty. The classification of Swaziland as a middle-income country adds yet another dimension that has contributed to depriving the country of concessional resources to fight HIV/AIDS and reduce poverty.

4. The challenges not withstanding, the authorities have embarked on reforms outlined in their Poverty Reduction Strategy and Action Program (PRSAP) aimed at enhancing robust economic growth to levels comparable to those experienced by other countries in the region. They are fully aware that the process of reform implementation requires resoluteness on their part. To this end, they are committed to seeing the reforms through with a view to alleviating poverty, sustaining the fight against HIV/AIDS pandemic, creating employment, tackling the food security problem, ensuring sound public expenditure management and diversification of revenue sources. The current high levels of SACU revenue also provide a window of opportunity to accelerate overdue reforms and address impediments to higher growth.

Fiscal Developments

5. The authorities recognize the importance of pursuing a prudent fiscal policy, supported by structural reforms, as the main instrument to restoring macroeconomic stability and engendering sustained economic growth. Increased fiscal outlays in 2007/2008 have been made to address the problems of HIV/AIDS pandemic, worsening social indicators, and deepening poverty. In order to get value for expenditures incurred, the budget process has reestablished expenditure controls and fiscal sustainability through the introduction of a computerized commitment system, improvement of the procurement system and support of the reform of public enterprises. High SACU revenues also provide a window of opportunity to undertake much needed fiscal reforms.

6. The authorities plan to focus on reducing the fiscal deficit excluding SACU revenues, and on assessment of likely revenues flows over the medium term. This approach would help the adjustment needed to ensure fiscal sustainability and smoothen expenditure over the longer term. The Revenue Authority Bill is expected to facilitate improvements in revenue collection. The authorities also intend to improve revenue administration and introduce the VAT to sustain revenue yields in view of anticipated decline in SACU revenues.

7. The authorities are committed to implementing civil service reforms, including reduction in the wage bill, starting with voluntary retirement program, elimination of arrears, and reduction of overall recurrent expenditure. They however, are aware of strains involved in implementation of the proposed civil service reform, such as the dilemma of right sizing the civil service in a relatively weak economic environment, with high unemployment. The authorities had initially offered a voluntary separation package to civil servants who were over 55 years of age, but the response had been very disappointing. Of particular concern is how to develop the appropriate safety nets to mitigate the adverse effects of the envisaged civil service rightsizing. Adequate social safety nets, to accommodate the vulnerable groups, are to be provided for in carrying out the reform.

8. The authorities consider that in order to enhance sustainable economic growth, greater efforts are needed to ensure that the PRSAP is costed within a MTEF in a manner that ensures macroeconomic stability. They recognize the increasing challenges, especially in the medium to long term, of meeting the health needs of its youthful population. In an effort to revitalize the health sector, they have embarked on a comprehensive review of the health sector budget to incorporate new challenges and begin a process of zero-based budgeting. This effort is being supported by the World Health Organization (WHO), and includes developing a strategic plan for the entire health sector, undertaking a service mapping exercise for the sector, and strengthening the legislative framework and health management systems. The authorities seek further international support to implement this ambitious health sector reform program and to effectively deal with the emergence of new diseases.

Monetary and Exchange Rate Developments

9. The monetary authority remains committed to strengthening and maintaining a healthy financial sector. In this regard, the Central Bank of Swaziland is pressing for more timely compliance of all banks with prudential regulations, improvement of the supervision of Savings and Credit Cooperatives (SCCOs), and securing of passage of the Financial Services and Regulatory Authority Bill. In addition, the authority is reviewing its legal structure and modernizing its operations with Fund support in a number of areas, including improving reserve management, dealing with anti-money laundering and strengthening banking supervision.

10. Banking soundness indicators are positive, while banks are well capitalized, liquid and profitable, with low nonperforming loans. However, the government-owned Swazi Bank continues to have high nonperforming loans and faces difficulties meeting compliance requirements. A few major SCCOs also face severe financial difficulties. Nevertheless, notable progress has been made in establishing a framework for regulation and supervision of banks and insurance and pension funds. The authority has introduced new regulations that require all insurance and pension funds to increase their holdings of domestic assets from 10 to 30 percent of total assets in the next three years. The authority continues to foster cooperation and monetary integration at the regional level and remains fully committed to the ideals of the Common Monetary Area as a means to anchor price stability and promote economic growth in the country. It recognizes the need to strengthen its obligation to the exchange rate peg through steady accumulation of international reserves. The Central Bank of Swaziland, supported by the government, has continued to focus on further promoting financial sector soundness and exchange rate stability by increasing the country’s international reserve position.

Structural Issues

11. The authorities acknowledge the need to significantly improve the investment climate and enhance competitiveness, through acceleration of structural reforms and reduction of the cost of doing business. Other measures receiving attention include operationalizing the anticorruption commission; reducing labor market rigidities; simplifying business licensing requirements and procedures; and carrying out land reform that would help increase agricultural productivity. Recent changes in the global trading regime for textiles and sugar have undermined smaller and less competitive economies like Swaziland by reducing their market share and contributing to higher unemployment. Nevertheless, the authorities believe that the continued harmonious industrial climate, the country’s good infrastructure, and proximity to markets, and a relatively well-educated labor force, augurs well for future investment inflows. They are committed to improving the business environment further.

12. The process of transforming the economy will be anchored on implementing a number of structural reforms, perseverance with sound macroeconomic management, improvement of competitiveness and development and implementation of a new set of investment incentives that are budget neutral. This effort will be bolstered by the attraction of foreign investors, while developing an indigenous entrepreneurial class of Small and Medium Sized Entrepreneurs (SMEs). The government is committed to supporting this effort through clearing of domestic arrears and expediting payments to private sector suppliers of goods and services. The government together with its SACU counterparts, continues to pursue an aggressive bilateral trade negotiations agenda to achieve this goal.

Conclusion

13. The Swazi authorities face difficult challenges and have embarked on a strong reform effort to revive economic growth. They count on the international community and their cooperating partners to assist them in dealing with the multiplicity of problems that seek to undermine the country’s achievement of its MDGs. The continued classification of the country as a middle-income country based only on GDP per capita and ignoring the poor social indicators facing the majority of the population, has continued to undermine the authority’s efforts to source concessional resources to finance social reforms. The country has all the social indicators of a poor developing country, with more than two thirds of the Population living below the poverty line. HIV/AIDS continues to ravage the country and this, together with the worsening incidence of poverty, is causing untold harm to the future economic growth prospects of the country.