The current high Southern African Customs Unions revenues should be used to implement fiscal measures to secure fiscal sustainability and support economic growth. The government should formulate a financial sector strategy that addresses Swaziland’s twin challenges of enhancing financial development and ensuring financial stability. Compounding the threat to exports of sugar and textiles is the looming issue of remaining competitive in a quickly changing global environment. The statistics on export and import, gross domestic product, assets and liabilities, and other such data have also been provided.

Abstract

The current high Southern African Customs Unions revenues should be used to implement fiscal measures to secure fiscal sustainability and support economic growth. The government should formulate a financial sector strategy that addresses Swaziland’s twin challenges of enhancing financial development and ensuring financial stability. Compounding the threat to exports of sugar and textiles is the looming issue of remaining competitive in a quickly changing global environment. The statistics on export and import, gross domestic product, assets and liabilities, and other such data have also been provided.

Swaziland: Basic Data

article image
Sources: Swazi authorities; and IMF staff projections.

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

Data for 2007 pertain to the latest available actual information-September 2007.

Includes government holdings abroad.

The fiscal year runs from April 1 to March 31.

The official GDP numbers from 1994 to 2006 were significantly revised.

I. Swaziland: Fiscal Policy and Sustainability1

A. Introduction

1. In the late 1990s in Swaziland public finances deteriorated, although it had recorded sizable surpluses for much of the 1980s. The combination of expansionary public spending and declining revenues caused budget deficits. The considerable spending did not facilitate growth and did not benefit the poor. More recently, however, with augmented revenues from the Southern African Customs Unions (SACU),2 the fiscal situation has reversed even though spending has continued to grow. In the next few years, SACU revenues are likely to remain high because the South African economy is expected to perform well. Spending is also expected to increase substantially in line with the authorities’ medium-term budget policy statement, 2008/09–2010/11, although domestic revenues will remain stagnant. Unfortunately, since most of the increase will be on current expenditures related to wages, transfers, and subsidies, growth is not likely to increase substantially.

2. The threat of falling SACU revenues in the medium term and the continued high spending pose risks for fiscal sustainability. This paper therefore proposes an alternative indicator to assess fiscal performance. The indicator would be a non-SACU fiscal balance that could provide policy makers with a less volatile tool by focusing on generating domestic revenues compatible with fiscal sustainability. A fiscal stance based more on domestic taxes and less on trade-related sources could provide enough resources to promote growth and prioritize social spending on health and education.

3. With credible political commitment, fiscal sustainability could be achieved with a combination of expenditure-reducing and revenue-enhancing measures. The measures would be complemented by firming up management of public finances and adhering to the medium-term fiscal framework. The measures could generate resources both to increase public investment and trigger more private sector participation.

4. In what follows, Section B reviews fiscal performance for 1996–2007. It also highlights the effects of fiscal spending on investment and growth. Section C describes the medium-term outlook for fiscal policy and growth. Section D discusses the non-SACU fiscal balance. Section E deals with the need to achieve fiscal sustainability to boost growth, by introducing revenue-enhancing and expenditure-cutting measures. Section F highlights the importance of effective public expenditure management to fiscal credibility, and Section G draws conclusion.

B. Fiscal Performance 1997–2006

5. In the late 1990s Swaziland started registering fiscal deficits owing mainly to growing expenditures, both recurrent and capital. The overall deficit including grants increased from 1.1 percent of GDP in 1996/97 to more than 4.5 percent of GDP in 2004/05. The deficits were financed primarily by drawing down international reserves, issuing domestic debt, and to a lesser degree borrowing from abroad. However, in spite of the increasing spending, economic growth slowed from an annual average of 3.6 percent in the 1990s to just over 2 percent since 2000.

uA01fig01

Swaziland: Real GDP Growth and Total Public Expenditures

(In percent of GDP)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

Expenditures

6. Total expenditures increased from 24 percent of GDP in 1996/97 to more than 31 percent in 2006/07. A major reason was the wage bill, which increased from about 10 percent of GDP to 14 percent. Wage expenditures have grown by about 10 percent in real terms since 2004. Transfers and subsidies also rose to support: (i) the operations of some state-owned enterprises (SOE), including the Central Transport Administration; (ii) subsidies to health clinics; (iii) grants for tertiary education; and (iv) transportation and official travel.

uA01fig02

Swaziland: Current Expenditures 1997-2007

(In percent of GDP)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

7. Despite the continued fiscal expansion and extensive poverty—69 percent of the population lives on less than US$1 a day—expenditure on social sectors is low by regional standards. Expenditure on health is behind neighboring countries (Figure I.1), even though Swaziland has the highest prevalence rate of HIV/AIDS. Education outlays lag similarly. Since 2000 budgetary allocations have been kept at about 2.5 percent of GDP for health and 6.0 percent for education. Primary universal education is yet to be fully implemented; up to 23 percent of eligible children do not attend school. Even though spending on agriculture has been held at 4 percent of total expenditures and crop production has declined steadily. The result is that about 25 percent of the population require food assistance. The quality of spending also needs to improve so as to target the most vulnerable segments of the population. In spite of the growing recurrent expenditures, the quality of social services for poor households has not improved by much. Food security, which is largely supported by donors, has not necessarily been distributed in a timely and effective manner due to gaps in the distributional organization. 3

Figure I.1
Figure I.1

SACU Countries: Revenue and Expenditure Indicators, 2000-06

(In percent of GDP)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

Sources: IMF staff estimates and country authorities.
uA01fig03

Poverty Reducing Expenditure

(Percent of total expenditure)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

8. Capital expenditures have been low compared with neighboring countries and they have been only minimally effective supporting economic growth and poverty reduction. Low capital expenditure implies slower capital accumulation and hence little economic growth. (Figure I.1). In real terms capital spending increased on average by 1 percent annually for 2001/04–2006/07 even as current expenditures grew by 1.5 percent annually. The situation is complicated by low implementation capacity. On average only 82 percent of what the budget envisaged was actually spent. Capital expenditures are mostly associated with large programs, such as the Usuthu upstream development and the Millennium Development Project. 4 The latter was launched in 2000 to promote faster economic growth. However, not all its components attracted new international and domestic investments—nor were they progrowth.

uA01fig04

Swaziland: Current and Capital Expenditures 1997-2007

(In percent of GDP)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

9. The quality of capital expenditure needs improvement to ensure maximization of social rates of return. Capital expenditures have not been carefully planned, and budget submission by line ministries usually exceeds the capital expenditure ceiling, forcing projects to compete across sectors. However, project selection is not supported by adequate technical and feasibility appraisals, with the result that financing went to many non-progrowth and non-propoor projects. For instance in 2006/07 up to 50 percent of capital spending was directed toward renovation of public buildings.

uA01fig05

Swaziland: Capital Expenditure 1997-2007

(Emalangeni billion)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

Revenues

10. Total fiscal revenues increased from 35 percent of GDP in 1996/97 to more than 40 percent in 2006/07. 5 The increase was mainly driven by SACU revenues, which increased from 15 percent of GDP in 1997/98 to about 28 percent in 2006/07. Meanwhile, domestic efforts as reflected in tax revenues were almost flat at 12 percent of GDP. Moreover, nontax revenue declined from about 2 percent of GDP in 1998/1999 to less than 1 percent in 2006/07. The share of domestic taxes in GDP is low compared with neighboring countries, and domestic revenue efforts introduced in this period (removal of tax exemptions on rental income, a sales tax amendment to close loopholes, and enforcement of tax collections) did not contribute significantly to government coffers. Moreover, current collection practices are inadequate, and the general sales tax is yet to be replaced by a VAT.

uA01fig06

Swaziland: Fiscal Revenues (1997-2007)

(In percent of GDP)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

Budget outturn

11. Since 2005 and after the introduction of a new SACU revenue-sharing formula,6 Swaziland and the other members of SACU have benefited from windfalls. 7 For Swaziland, these accounted for additional revenues of between 5 and 8 percent of GDP.

12. In 2006/07 there was thus a large surplus after several years of deficits. The overall fiscal surplus (including grants) reached 10.2 of GDP because of augmented SACU revenues reflecting the performance of the South African economy. Moreover, in transforming fiscal performance buoyant SACU revenues have masked the inadequacy of domestic revenue generation. At the same time, spending fell short of budgeted amounts, because the early retirement voluntary scheme for public servants was not initiated and payments to the government pension fund were lower. The surplus allowed an accumulation of international reserves to an estimated 3.4 months of imports.

uA01fig07

Swaziland: Overall Fiscal Balance (1997-2007)

(In percent of GDP)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

C. Medium-Term Outlook for Fiscal Policy and Growth

Fiscal policy and growth

13. The IMF in 2003 identified as sources of growth in Swaziland capital accumulation, employment, and total factor productivity. 8 These factors contributed to rapid growth in the 1980s and early 1990s. In particular, capital formation increased significantly from foreign investment as businesses relocated to Swaziland to avoid South African trade sanctions. However, in the late 1990s political changes in South Africa, the emergence of HIV/AIDS, and sluggish and unproductive Swazi public capital investment took a toll on growth by undermining capital accumulation and employment.

uA01fig08

Swaziland: Growth and Investment

(In percent of GDP)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

14. Swaziland’s economic growth has been low compared with the region and with other lower- and middle- income countries. Two factors appear to be at work: a slowdown in foreign investments and lower domestic investment as expectations about the economic outlook eroded and reform policies deteriorated. The Poverty Reduction Strategy and Action Plan (PRSAP) estimates that to meet some of the Millennium Development Goals (MDGs) by 2015, Swaziland needs an annual average growth of 5 percent. That is highly unlikely given the current environment.

15. Swaziland has one of the lowest investment growth rates in the region (Figure I.1). This might hinder prospects for overcoming challenges like containing the HIV/AIDS epidemic and meeting the MDGs. Total investment for 1997–2001 was slightly above the sub-Saharan average, but since 2003 it has fallen below the average. While other countries in the region benefited from net foreign inflows, Swaziland has experienced a substantial decline in foreign direct investment since the late 1990s. Total gross capital formation has also headed downward even as neighboring countries have maintained the level of investment in GDP terms. During the high economic growth of the 1980s and 1990s its capital expenditures were on average about 23 percent of GDP. In the last five years they have declined to about 18 percent of GDP, and GDP growth has been about 2 percent.

uA01fig09

Total Gross Capital Formation

(In percent of GDP)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

uA01fig10

Foreign Direct Investment

(In percent of GDP)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

16. Sound public finances are a prerequisite for growth, but the foundational economic and policy conditions have not improved sufficiently. Because progress in reforming the economy and strengthening macroeconomic policies has been sluggish, investment dynamics have not improved and growth has decelerated. Elsewhere, rising investments and productivity have underpinned growth, a probable result of efficiency gains from structural reforms, improvements in the business climate, and better economic policies. To facilitate growth fiscal policy must be more effective to safeguard macroeconomic stability while providing for high-quality public investment, particularly on propoor spending.

17. The authorities should use fiscal policy to boost growth. Because growth has remained elusive, it is necessary to reorient public spending from nonpriority areas toward higher-yield capital expenditures and areas like health and education that could help restore growth. 9 High-quality public investment can crowd in private sector initiatives, especially in infrastructure. 10 The productivity gains required to reach the growth target suggest the need for significant progress in privatizing public enterprises, removing impediments to private activity, reinforcing the domestic financial sector, and improving infrastructure. Spending more on education and health could also boost factor productivity. This could be done by reassigning expenditures from e.g., subsidies to inefficient SOEs, to priority tasks, such as training unskilled workers.

Fiscal outlook 2007/08–2011/12

18. SACU revenues are expected to remain high at least until 2010. However, Swaziland has not used these resources to steer the economy toward long-term fiscal sustainability. The country needs to restore fiscal discipline and achieve fiscal consolidation to safeguard macroeconomic stability and provide fiscal space to engender growth and reduce poverty.

19. The main source of fiscal revenues for Swaziland over the medium term will continue to be SACU revenues, which rely heavily on South Africa’s GDP and import level. There could be positive shocks resulting from South Africa’s hosting of the 2010 World Cup (WC), which could have spill-over revenue effects for Swaziland. Between 2007–2010 South Africa will spend an estimated R17.4 billion in preparation for the WC, building and renovating WC stadiums, upgrading airports, and transforming urban transport infrastructure. The more than 300,000 foreign visitors expected for the finals are expected to spend about R9.0 billion. 11 The intended infrastructure investment and the foreign demand seem to reinforce the prospects that the South African economy will grow briskly through 2010. Imports are also forecasted to surge, which would imply higher tariff collection for the customs pool and spillover effects on the fiscal revenues of the other SACU members.

20. SACU payments as a share of South Africa’s GDP were on average about 0.8 percent of GDP (2000–04). Estimates through 2010 are for an increase to about 1.2 percent of GDP. If that happens annual SACU payments to Swaziland would average about R27 billion. Including the World Cup effect, the SACU pool might thus increase by about R78 million a year (2007 to 2011). For Swaziland, whose share of the total pool averages about 20 percent, this could bring in an extra R16-20 million a year (0.09 percent of GDP). While the extra revenues would be small, the estimate confirms that SACU revenues for Swaziland would continue to be high through 2010/11, (Appendix I) after which they might be subject to declining pressures from factors like increasing trade liberalization. To consolidate the fiscal space and achieve a sustainable fiscal path, the authorities must therefore work to generate more domestic revenues and target spending prudently toward a sustainable fiscal path.

Fiscal outlook

21. Increasing SACU revenues have facilitated a brisk expansion in government spending that could undermine the stability of the economy in the medium term. A balanced budget is expected for 2007/08 despite anticipated record expenditures of 37.6 percent of GDP, with a further rise in the wage bill to 14.4 percent of GDP. Medium-term budget policy through 2010/11 is again largely expansionary. The authorities plan to increase spending on education, heath, and agriculture in order to reach some of the MDG’s. 12 If they do, however, without offsetting cuts total spending could rise to a record 39 percent of GDP starting in 2008/09, with the wage bill escalating to above 15 percent. Even allowing for some expected improvements in domestic revenue collections, the projected decline of SACU revenues would bring about a deficit of almost 7 percent of Swaziland GDP by 2012/13.

22. Nevertheless, the possible impact on growth of the increased spending will probably be limited. Most will be channeled to recurrent expenditures with a large share to the wage bill. 13 And over the last three decades private gross capital formation has consistently declined, compared to other countries in the region, considerably affecting growth prospects.

uA01fig11

Private Gross Capital Formation

(In percent of GDP)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

23. Fiscal policy can become more complicated as SACU revenues increase and the government scales up the spending associated with hiring workers, delivering services to the public, and maintaining new infrastructures. Swaziland must now decide what to do when SACU revenues dry up. If the government finds it difficult to reduce expenditures, especially on wages, the pressure for deficit financing could undermine macro-stability. This scenario underlines the importance of formulating a prudent and sustainable fiscal path for the country after SACU revenues fall to more normal levels.

D. The Non-SACU Fiscal Balance

24. To better assess the performance of fiscal policy by giving a sharper focus to the domestic revenue effort and a financeable expenditure path, a non-SACU fiscal balance would be a preferred indicator. 14 This measure will help to put in context the current fiscal surpluses that have engendered higher spending. The non-SACU indicator would be similar to that used by mineral–rich countries that experience sudden inflows to derive a sustainable fiscal stance. It would capture the extent to which the government uses SACU windfalls to finance an increase in expenditure or a reduction in taxation. The indicator would provide policy makers with a less volatile tool (one that eliminates factors that are not fully under their control, such as the performance of the South African economy), while focusing on generating domestic revenues to achieve a non-SACU deficit compatible with fiscal sustainability. Moreover, the indicator will facilitate measurement of the economic impact of the augmented SACU revenues, since the overall fiscal balance, though in surplus, does not truly portray the fiscal stance (e.g., while the overall fiscal balance indicates an average surplus of 3 percent of GDP between 2005/06 and 2007/08, the non-SACU fiscal deficit is an average of 20 percent of GDP).

25. The adoption of a medium-term fiscal framework based on a non-SACU fiscal balance will help policy makers focus on a sustainable fiscal stance. Budgetary projections based on a non-SACU deficit would minimize the downside risks to SACU revenues over the medium term and ensure fiscal sustainability, by allocations for saving during the years of above-trend SACU revenues and then, using savings to smooth spending when that falls.

26. A sustainable non-SACU fiscal deficit could be based on a median of SACU revenues for 1996/97–2004/05, before the recent surges. This “normal” SACU revenue is about 14 percent of GDP. Sustainability was implied by the relatively low debt/GDP ratio for the period that did not create an unbearable burden to the economy, and a sufficient level of international reserves to support the peg.

27. On this basis, estimates of a non-SACU sustainable fiscal deficit would be about 16 percent of GDP. Any SACU revenues above 14 percent of GDP could be used for progrowth capital investments, propoor priority expenditure, and building international reserves while better projects to boost growth are being identified. Targeting the non-SACU revenues will also give the authorities the space they need to implement domestic revenue-enhancing measures. Otherwise, if policies are unchanged, the non-SACU deficit will continue to deteriorate, leading to a deficit of 26 percent of GDP by 2012/13, accelerating debt levels, crowding out the private sector, and speedily depleting international reserves.

uA01fig12

SACU Revenues and Fiscal Balance Including Grants

(Percent of GDP)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

Sources: National authorities and IMF staff estimates and projections.

E. Fiscal Sustainability

28. Fiscal sustainability is usually linked to sound economic fundamentals. Fiscal sustainability can be restored by implementing measures to boost domestic revenues and reduce expenditures, targeting a non-SACU fiscal deficit of about 16 percent of GDP over the medium term. This should put public finance on a path conducive to growth. Revenues higher than the target may be used to boost progrowth capital expenditures and recurrent expenditures that are compatible with the PRSAP.

29. Durable fiscal adjustment has been found to rely primarily on reducing expenditures. 15 Reducing capital and current spending equally, with emphasis on a durable lowering of the wage bill, worked best. There are also cases of durable fiscal adjustments based on revenue enhancement, particularly for countries with low initial revenue-to-GDP ratios where the pace of adjustment was more gradual. This allowed for sustained implementation over time of tax policy and administrative reforms.

30. Large fiscal adjustments generally had a positive macroeconomic impact, and more gradual implementation seems to have brought more favorable economic outcomes. Large adjustments—over 5 percent of GDP—have occurred relatively often over the past 30 years, including in Swaziland in 1974, 1979, and 1987. This time Swaziland would need to introduce measures to reduce expenditures by about 6 percent of GDP over five years.

Revenue reform

31. To offset the projected decline in SACU revenues, the authorities should take prompt action to generate more domestic revenue. At about 12 percent of GDP tax collection is low compared with other countries. The authorities should introduce measures to strengthen tax collection, establish large-taxpayer units, broaden the tax base, introduce the VAT, and establish a Revenue Authority. The impact of these measures would probably be small in 2008/09 (0.2 percent of GDP) but could increase to more than 2.0 percent of GDP by 2012/13 (Appendix II).

32. If Swaziland were to adopt a VAT rate similar to that in South Africa (at 14 percent), that could yield the equivalent of about 6.8 percent of GDP (the current yield in South Africa). This would be about 3 percent of GDP higher than the revenues currently generated by sales taxes (3.5 of GDP on average). Thus, introducing a VAT could partially offset the revenue decline when SACU income decreases over the medium term.

Expenditure reform

Wage policy and civil service reform

33. The continued escalation of the wage bill extracts resources from priority spending and uses almost all the domestic revenue collected. The high civil service wage bill is the result of both higher employment and wage growth. Although a civil service reform was approved in 2004/05 that would have eliminated 3,000 positions in three years, the number of government employees has increased from 25,000 to 30,000. Nominal wages have also increased at a rate equal to or above inflation rates. The wage bill is now among the highest in Africa.

uA01fig13

Swaziland and Sub-Saharan Africa: Central Government Wages, 2006

(Percent of GDP)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A001

34. Moreover, higher public wages may increase pressure on private wages. Since a large part of social sector employment (education and health) is in the public sector, when public sector wages rise, the pressure to raise wages elsewhere in the domestic economy (for example, manufacturing) may also rise; higher manufacturing wages could reduce export competitiveness. An excessive wage bill also makes the budget more rigid and more vulnerable to shocks. Studies on experience with large fiscal adjustment indicate numerous cases where unsustainable wage bills contribute to fiscal crisis.

35. There are short-term options for containing the wage bill and reducing the size of the civil service. Among them are combining attrition with a selective hiring freeze; better centralizing recruitment; regularly auditing the payroll system to maintain its integrity; and avoiding across-the-board salary increases. The pay scale should be decompressed gradually to facilitate recruitment and retention of skilled personnel. To improve budgetary transparency and decision making, in-kind benefits and allowances should gradually be merged into the pay scale.

Other expenditure adjustments

36. The 2004 privatization policy still needs to be translated into action. Meanwhile, improving oversight of SOEs to avoid excessive subsidies and transfers, needs to be given priority. 16 Over the medium term privatization of SOEs can significantly reduce spending while it can potentially reduce service costs and generate private sector activities. Other adjustments should include streamlining foreign travel and transportation costs, eliminating unproductive transfers, reducing subsidies to tertiary education, and to a lesser degree cutting back on goods and service. The World Bank’s study indicates that in 2004/5 official foreign travel accounted for more than the entire budget for primary education.

37. The authorities could reorient expenditures to those that best support private sector driven-growth and poverty reduction. The budget proposal should be aligned to the goals of the PRSAP. 17 Decisive actions to reduce wage bills, unproductive spending on goods and services, and on subsidies and transfers to SOEs would help to reduce current expenditures by about 2.4 percent of GDP in 2008/09 and 6.0 percent by 2012/13 (Appendix II).

38. The investment climate could be enhanced by reducing the role of the government in the economy. When the public sector is ill equipped to expand its delivery services, an alternative is to work with the private sector. Public-private partnerships could also be explored. But it is important to ensure that such arrangements are adequately monitored and that costs and benefits are carefully analyzed.

F. Fiscal Management and Fiscal Credibility

39. How effective public expenditure spending is depends on the quality of both policies and institutions. Efficient use of government resources is critical, supported by sound public financial management and good governance. Dealing with Swaziland’s remaining challenges in the public expenditure management (PEM) area will require political buy-in for reform at all levels of government to ensure efficient use of limited public resources.

Public expenditure management

40. If spending is to be productive in achieving growth and reducing poverty, PEM must be able to control and monitor its effectiveness. It is well known that weak policies and institutions, as well as risks of conflict and political instability weigh heavily on many countries with low growth.

41. The World Bank’s 2006 Public Expenditure Review (PER) found that PEM in Swaziland suffers from systemic weaknesses in most critical stages of the budget process. The PER stresses the need to improve budget preparation, budget execution, reporting and transparency, and coordination with donors. Other areas needing work are management of commitments and prevention of arrears, payroll controls, internal and external audits, and quality of reporting. Unfortunately, a major factor behind poor performance is limited capacity at all levels of government. Well-focused technical assistance could help deal with this issue. The budget exercise, for instance, is distorted by enactment of supplementary budgets to cover unbudgeted expenditures by line departments. Strict adherence to budgetary rules would prevent future arrears.

42. Improvements in the computerized commitment control system have somewhat strengthened PEM, but more comprehensive monitoring is needed. The system prevents budget overruns through a computerized commitments control system. However, not all spending categories (e.g., transfers) and budgetary units (regional administrations and local governments) are automated. Thus, some expenditure arrears still take place and need to be resolved. Furthermore, the ongoing improvement of procurement system, with the assistance of Crown Agents, also plays an important role in ensuring efficient use of budget. Better PEM is crucial for a successful fiscal adjustment.

43. Better PEM is crucial for a successful fiscal adjustment. Weak controls on line ministry expenditures have caused budget overruns and accumulation of arrears. Containing the fiscal deficit will necessitate improved budget discipline and accountability, reform of the public procurement system, and firmer control of expenditure commitments, as the PER envisages. The authorities need to strengthen formulation, execution, and monitoring of the medium-term expenditure framework to enhance fiscal transparency.

Medium-term fiscal expenditure framework (MTEF)

44. The MTEF needs to be reinforced. Introduced in 2003/04 as part of the fiscal restructuring project financed by the European Union, it has guided the ministry of finance and line ministries in preparing a three-year budget outlook on which one-year budgets are based. Still needed, however, are a public expenditure tracking system aligning the annual budget with the PRSA and better project evaluation. The monitoring system should also cover delivery of services.

45. The improvements in the transparency, quality, and depth of the budgeting process for ministries and departments envisaged by the MTEF would allow for better prioritization of spending. The composition of current expenditure in Swaziland is less growth-enhancing than that in other SACU members. A review of the capital expenditure program is needed to focus on projects directly linked to more productive areas with a high social rate of return (e.g., irrigation programs). Project evaluation is critical for ensuring that public investment projects do not jeopardize debt sustainability; priority should be given to high-return, progrowth, and propoor projects where bottlenecks to be resolved by such projects have been clearly identified.

46. Well-functioning PEM systems and the MTEF help improve governance by ensuring that public resources are used transparently and efficiently. Greater transparency, tighter rules governing budget procedures and reporting, and preparation of medium-term expenditure plans would not only enhance the productivity and accountability of public policy, they could have a positive impact on business climate.

47. Empirical evidence shows that good governance is essential if spending is to be effective. The adverse impact of corruption and poor governance on economic and social outcomes is well recognized Corruption tends to be associated with poorly enforced property rights, weak rule of law, and few incentives for productive investment, all which damage economic growth.

G. Conclusions

48. Although Swaziland has been spending heavily, economic growth has been slow, large increases in recurrent expenditures seems not to have done much for the poor. Fiscal consolidation and improvements in the quality of spending are needed to better facilitate economic growth. Progress on poverty reduction, which still affects much of the population has been scanty because economic growth has been so low. The medium-term fiscal outlook, though expansionary, will not sufficiently promote growth because most of the increases are concentrated on recurrent expenditures. It is necessary to reorient spending toward priority areas like health and education.

49. The authorities should use the opportunity of the current high SACU revenues to implement fiscal measures to secure fiscal sustainability and support economic growth to at least 5 percent per year, as proposed by the PRSAP. Developing fiscal policy stance using the non-SACU balance should help policy makers to put in context a fiscal path that is under their control and provide an estimate of the magnitude of adjustments to secure fiscal sustainability. Hence, a combination of revenue and expenditure measures could be specified. Restarting the stalled civil service reform, overhauling the tax administration, introducing the VAT, privatizing public enterprises, and targeting a non-SACU fiscal balance will all help attain and preserve fiscal sustainability.

50. In the medium term, fiscal consolidation and structural reforms should help improve the business climate, promote private sector growth, and a stronger current account. To support fiscal consolidation the PEM and the MTEF must be strengthened to ensure that fiscal resources are used efficiently and for the purpose they were intended. Timely implementation of all measures might attract donor assistance and concessional financing to support social needs. Implementing structural reforms over the medium term could also improve the perception of the international community toward Swaziland, and lead to higher foreign investment and more efficient public investment. If they do not aim for fiscal consolidation, the authorities could miss an opportunity to have a good fiscal foundation for accomplishing everything that is currently needed.

Appendix I

Swaziland: SACU Revenues 1

article image
Sources: South Africa’s Treasury Review, Swaziland authorities, and staff estimates.

Data from the South Africa’s Treasury Review various issues

Data for fiscal years 2007/08 -2009/10 are from Swaziland’s budget estimates.

Spending on infrastructure and estimated spending of foreign visitors

Estimates of Swaziland SACU revenues from data released by South Africa on October 2007

Estimates of Swaziland’s SACU revenues including additional World Cup effect.

Appendix II Key Measures to Restore Fiscal Sustainability

In anticipation of SACU revenue decline after 2010/11 that would threaten fiscal sustainability, the following measures should be implemented to consolidate the fiscal stance.

article image
Source: Staff estimates

References

  • Budget Review 2007, February 2007, Republic of South Africa, National Treasury.

  • Central Bank of Swaziland, Annual Report April 2006-March 2007.

  • Henriksson, Jens, “Ten Lessons about Budget Consolidation,” Bruegel Essay and Lectures Series, 2007.

  • International Monetary Fund, 2006, Sub-Saharan Africa, Regional Economic Outlook, May and September issues.

  • International Monetary Fund, 2007, Country Report No 07/278, Ghana: Selected Issues, June (Washington: IMF).

  • International Monetary Fund, 2003, Country Report No 3/22, Swaziland, Selected Issues, January (Washington: IMF).

  • Ministry of Finance of Swaziland, Budget Speech 2007.

  • The World Bank, Swaziland Public Expenditure Review, August 31, 2006, Report No. 35318-SW, (Washington: The World Bank).

  • Tsibouris, George C.; Horton, Mark A.; Flanagan, Mark J.; Maliszewski, Wojciech S., “Experience with Large Fiscal Adjustment”, IMF, Occasional Paper 246, 2006.

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Notes

1

Prepared by Alfredo Torrez.

2

As a SACU member Swaziland receives a share of the SACU revenue pool, which is comprised of tariffs and excise taxes collected in the region.

3

For instance, HIV/AIDS treatments could have been more effective combined with food assistance to the victims.

4

The Millennium Development project, initially assessed at E2.4 billion, by 2007 had already used E0.9 billion, and it has been estimated that over the next three years an additional E0.6 billion will be needed. It comprises the construction of an airport, sports center, stadium, theme park, trade fair complex, and factory shells. The budget will support completion of the first two projects only; the rest is to be completed with the participation of investors other than the government.

5

SACU revenues contribution to Swaziland’s total revenues increased from 40 percent in 1992/1993 to more than 65 percent in 2006/07.

6

The new formula has the following components: (i) customs, which comprises all customs duties collected by SACU; (ii) excise, which comprises all excise duties collected within SACU; and (iii) development, which has been set at 15 percent of total excise component. The new formula enhances the receipts of the smaller countries.

7

SACU windfall (or SACU revenue adjustment) is defined as much higher actual SACU payments than estimated, owing to a higher actual value for imports than the one used in forecasting SACU payments.

8

International Monetary Fund, 2003, Country Report No 3/22, Swaziland, Selected Issues, January.

9

Studies on the link between higher social or public investment spending and per capital growth found that an increase in capital outlays of 1 percent of GDP increases growth by 0.7 percent over a five-year period. IMF, Regional Economic Outlook, May 2007.

10

See, e.g., IMF, May 2006, Sub-Saharan Africa, Regional Economic Outlook.

11

This could prompt hotels in South Africa and the neighboring countries to plan expansion of their accommodation facilities, in particular in cities where some of the participating teams will be staying.

12

The draft Comprehensive Agricultural Strategy, if implemented properly, would help address the food security situation by boosting agriculture production (improving yields through irrigation programs). Most of the spending on food security is financed by donors.

13

Expenditures on health and education could be growth-enhancing, but much will depend on the quality of spending.

14

Defined as the overall fiscal balance less SACU revenues.

15

IMF, 2006, Experience with Large Fiscal Adjustments, Occasional Paper 246.

16

On average the government spends about 4 percent of GDP on transfers and subsidies. Since the financial situation of the SOEs depends on pricing, the government should allow pricing practices in accordance with a market mechanism that calls for a move to full cost recovery in a timely fashion.

17

The PRSP also proposes far-reaching reforms to restore macroeconomic stability and boost economic growth.

Kingdom of Swaziland: Selected Issues and Statistical Appendix
Author: International Monetary Fund