Kingdom of Swaziland: Selected Issues and Statistical Appendix

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.

III. Responding to the Challenges in the Global Trading Regimes for Swaziland’s Textiles and Sugar Sectors1

A. Introduction

1. Over the past six years, Swaziland’s export sector has performed well, relying increasingly on developments in the textile and sugar sectors. Beginning in 2000, the textile sector saw rapid growth and a major inflow of foreign direct investment with a consequent increase in employment levels. At the same time, sugar production rose steadily benefiting from heavy investments in irrigation systems and other infrastructure development. Only soft drink concentrate did better than these sectors in terms of foreign exchange earnings, but their combined contribution to the overall economy and employment levels far outstripped that of the soft drink concentrate.

2. Traditionally, Swaziland has received trade preferences from the United States, primarily for apparel exports under the African Growth and Opportunity Act (AGOA),2 and from the EU, for sugar exports. 3 Under these agreements, both apparel and sugar exports flourished. Between 2000 and 2005, apparel exports jumped more than 258 percent while sugar exports grew steadily by more than 50 percent over the same period.

3. However, exports of these commodities, which accounted for 31.2 percent of total exports in 2006 are seriously threatened by changes in the global trade regime and trade liberalization. These developments has seen the removal of trade preferences for textiles (Multi Fiber Agreement (MFA) in December 2004), and the phasing out of the preferential prices for sugar to the EU market. In July 2004, the EU announced a phased reduction, over four years, of prices for sugar imports by 36 percent.

4. Since the changes, exports of both textiles and sugar have been adversely affected. In 2006, textile exports fell by 9 percent over the 2005 level—the first time in five years, and that despite the extension of AGOA to 2015. Sugar exports also failed to register their usual strong growth as the industry began to grapple with the drop in the EU preferential prices.

5. A further challenge complicating these most recent developments is Swaziland’s membership in the Southern African Customs Union (SACU) and the Southern African Development Community (SADC), which largely determines that country’s external trade policy. In addition, Swaziland is seeking to reconcile its participation in the Common Market for Eastern and Southern Africa (COMESA) free trade area with its SACU membership. It is unclear for instance how a SACU-US free trade area currently under negotiation would impact apparel exports since other SACU-member countries also produce apparel. The same goes for efforts at attainment of a full SADC FTA by 2008.

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Swaziland: Textile and Sugar Exports as a Percent of Total Exports

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A003

Source: Central Bank of Swaziland and IMF staff estimates

6. The rest of the paper is organized as follows: the challenges currently facing the textile and sugar sectors are defined, followed by efforts currently underway to respond to those challenges, and concludes with a look at the way forward for that country.

B. Defining the Challenges

7. With two of Swaziland’s three main exports under threat, the country will have to find ways to address this challenge. Compounding the threat to exports of sugar and textiles is the looming issue of remaining competitive in a quickly changing global environment. The situation is made worse by issues of governance, the high cost of doing business, falling labor productivity and the impact of the HIV/AIDS epidemic.

The textile sector in Swaziland

8. Under the MFA, which came into force at the start of 1974, countries were allowed to negotiate bilateral treaties that permitted them to tailor quantitative restrictions on imports differentially according to their own particular requirements. The United States and European countries moved to impose quota restrictions on all countries in order to protect their own industries. A review of the MFA in 1986 removed provisions that could have provided the basis for a further tightening of existing quotas. Finally, in 1991, the Agreement on Textiles and Clothing (ATC) was negotiated as part of GATT’s Uruguay Round of trade negotiations, and a final version negotiated in 1995 allowed for the structured removal of global quotas on textiles and clothing.

9. Despite the introduction of the ATC, in the late 1990’s, sub-Saharan African countries including Swaziland were particularly favored for investments in textiles because of unfilled quotas under the MFA. As such, Swaziland attracted large investments in the textile sector, mainly from Asia and South Africa. The country’s position was also helped by the fact that its exchange rate was favorable with that of the US dollar; there was duty free access to the United States under the AGOA, and a relatively stable political environment. Manufacturers were able to import fabric from Asia under the third country fabric provision of AGOA to be used in the manufacturing of garments exported to the United States.

10. Consequently, between 1998 and 2005 textile exports from Swaziland jumped from US $15.2 million to US $181.0 million, and in 2006 represented 11 percent of total exports, most of it going to the US. Also, more than 30,000 workers found employment in newly opened factories-about one quarter of formal sector jobs.

11. The phasing out of the MFA quotas on January 1, 2005 under the ATC, combined with significant currency appreciation had a damaging impact on the textile sector of Swaziland. No longer constrained by quotas, several Asian companies left to return to their countries of origin. 4 The impact on employment was particularly severe as employment levels dropped by two-thirds to below 10,000, with a subsequent drop in exports.

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Textile and Apparel Exports to the U.S.A, 1998-2006

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A003

Source: U.S. Department of Commerce and IFS.

12. The continuing appreciation of the South African rand (to which Swaziland’s currency is pegged 1:1) against the US dollar poses another obstacle to the growth and expansion of the textile sector. Between 2000 and 2002 when most of the companies set up shop in that country, the exchange rate was hugely advantageous. Since then it has appreciated from a level in 2003 of R12 to $1 to its current level of about R7.2 to $1. Indeed, such a currency appreciation could not have come at a worse time even as the battle continues to save the textile sector following the expiration of the MFA.

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Exchange Rates, January 2001- November 2007

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A003

13. There are other challenges currently facing the apparel sector including high utility and transport costs, and strong and consistent wage demands. These factors all negatively impact the textile sector. Wages in the garment sector are already considered high compared to neighboring countries with the exception of South Africa. Beyond 2012, it is expected that there will be increased competition from other Asian countries including China, India, Bangladesh and Vietnam, countries known to produce textiles at lower costs than Swaziland. Additionally, the rising incidence of HIV/AIDS adversely impacts productivity. Discussions are ongoing on ways to better position the sector to deal with these mounting challenges.

Garment Sector Wages for Selected Countries, 2002

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Source: USITC (2004); Cadot and Nasir, USAID (2004).

Estimate based on a US$155 monthly wage reported in USAID and a 45hr work week.

Midrange of monthly wages as reported in USITC (US$80-100) and a 50hr week.

Data for 2001 computed in Cadot and Nasir (2001).

Midrange between US$0.68-0.88 as reported in USITC.

The sugar sector in Swaziland

14. Swaziland has invested heavily in the sugar sector. Sugar cane is harvested both on Swazi Nation Land (SNL) and Title Deed Land (TDL). SNL accounts for 60 percent of land area and one fourth of agricultural production and is held in trust by the king and allocated by tribal chiefs according to traditional arrangements. The land is rain-fed and is mainly used for subsistence farming. On the other hand, TDL, which accounts for most of the commercial sugar production, is held by freehold tenure, has exclusive access rights, and is well irrigated. The Maguga dam project was completed in 2006/07, which allowed for the irrigation of over 6,000 hectares of sugar and benefited well over 30,000 households. The Lower Usuthu Smallholder Irrigation Project (LUSIP) is expected to become operational in September 2008, further impacting sugar production.

Swaziland: Sugar Cultivation Production and Exports

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Source: Central Bank of Swaziland and IMF staff estimates

15. Sugar production has greatly benefited Swaziland. With access to the EU and regional sugar markets, export earnings increased by over 50 percent in just five years. Infrastructural works including the two large irrigation projects have provided a much needed boon to the economy and allowed several thousand farmers to actively engage in sugar production. Vibrant communities have arisen around the sugar plantations with the Swaziland Sugar Association providing social and health services to households. Sugar also contributes as much as 8 percent on average to GDP.

16. Traditionally, the sugar regime in the EU have accounted for three-fourths of Swaziland’s sugar exports (excluding SACU exports), with the exception of 2006/07 when it fell to about 60 percent. Under the African, Caribbean, and Pacific (ACP) Trade Protocol agreement, the EU purchases and imports specific quantities of cane sugar that originates in the ACP states at guaranteed prices that are well above market prices. Under this arrangement, Swaziland benefited greatly from selling its sugar to the EU at above the world market price. However, in July 2004, the EU announced a phased reduction in the price paid for sugar imports and in September 2007 formally denounced the agreement. After the 5.1 percent reduction in 2007/08, the price will fall a further 12.0 percent in 2008/09, and a final price cut of 19 percent will be effected in 2009/10.

Changes in prices for ACP Sugar Protocol

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17. Already, Swaziland is feeling the effect of the price cut under the ACP Trade Protocol Agreement. During 2007, several small (subsistence) farmers faced with falling yields due to a drought and escalating costs were unable to meet their loan obligations as the price fell. A few lending agencies also refused to extend further credit to these farmers. In 2006/07 sugar production dropped by 4.5 percent and overall sugar exports dipped by just under 1 percent. With the anticipated 12 percent drop in EU prices in 2008/09 it is expected that export earnings will decline further and that there will be a continuing adverse impact on employment, the economy and on agriculture production in Swaziland. The EU’s granting of monitored duty free-quota free access under its new global trading regime is sure to increase competition on that market amongst sugar suppliers. A situation, which will only intensify after the granting of full duty free-quota free access beyond 2015.

18. Questions however persist as to whether Swaziland’s sugar industry will be able to compete at world market prices. The reality of increased competition from lower cost producers like Brazil and Thailand, partially during the transition, and fully from October 2015 will pose a serious challenge to the continued viability of Swaziland’s sugar industry. While the country will enjoy unlimited access to the EU market beyond 2015, it does not mean that it will be able to export unlimited quantities. It therefore remains to be seen whether the sector can be competitive while receiving much lower prices than traditionally paid. A recent European Research Office note on the ACP sugar trade with the EU highlights that by 2015 the price offered for ACP/LDC sugar on the EU market could fall to €261.85 per ton, a further 22 percent drop in price from the anticipated 2009/10 level.

Declining competitiveness

19. Swaziland continues to face the daunting challenge of remaining competitive in a rapidly changing global environment. Linked to this competitiveness challenge is the ability to attract and sustain foreign direct investment. In particular, new investment flows into the ailing textile industry is sorely needed. Swaziland is however saddled by the high cost of doing business, and the continuing drop in worker productivity linked to the high incidence of HIV/AIDS. The recent depreciation of the rand has resulted in a moderate depreciation of the lilangeni in real effective terms. The inability to contain rising inflation (for example, by controlling wage and fiscal pressures), could very well further erode competitiveness vis-à-vis South Africa and other trading partners. 5 As such, competitiveness enhancing reforms to increase productivity, reduce the cost of doing business, and improve governance are needed to complement macro-policies. Indeed, the survival of the critical textile and sugar sectors rests on the country’s ability to adequately address this issue and reverse the downward trend in competitiveness.

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Cost of Doing Business

(Percent of countries scoring better than Swaziland)

Citation: IMF Staff Country Reports 2008, 086; 10.5089/9781451836141.002.A003

Source: World Bank’s Doing Business, 2008

C. Responding to the Challenges

Diversification and new opportunities

20. In the face of the mounting pressure on the textile sector, the focus have been on restoring exports, attracting new investments and seeking to promote organic cotton. Stringent efforts are currently underway by the Swazi authorities to revitalize what’s left of the ailing textile sector by attempting to attract new investment and increase the local production of organic cotton. There is a belief in Swaziland that organic cotton provides a niche market. An ongoing organic cotton project is focused on growing cotton on lands currently unsuited for sugar production. The plan is to cultivate up to 4,000 hectares in the South of the country. This would satisfy the AGOA requirement for sourcing materials from Africa, and would also complete a full vertical integration of that sector. 6 Further opportunities were provided to the sector when the US government agreed to extend duty free access under AGOA to 2015 instead of allowing access to expire as previously agreed in September 2007. Swaziland can however only benefit from sourcing fabric from third countries through 2012.

21. Greater efforts must be pursued in diversifying Swaziland’s economy. Already, the tourism sector holds out potential in helping drive foreign exchange earnings and in generating significant employment. However, for this potential to be realized, there is need for greater efforts at promoting the country overseas, improving the tourism infrastructure and committing more resources in that regard. Other opportunities such as crop diversification, the development of agribusinesses, and small business development should be pursued.

22. A recently initialed Economic Partnership Agreement (EPA) between SADC and the EU may provide continued market access following the denunciation of the ACP Trade Protocol agreement. The EPA agreement that was formally adopted by the EU in December, 2007 agreed for market access regulation that granted duty and quota free access to the EU market from 1 January 2008, with transition periods for sugar and rice. 7 For sugar a three phased transitional arrangement is envisaged:

  • Phase 1 (January 2008-October 2009): a continuation of the sugar protocol, with a substantial improvement of LDC market access for marketing year 2008/09; initial market access for ACP non-LDCs not party to the Sugar Protocol and additional market access for ACP non-LDCs party to the sugar protocol;

  • Phase 2 (October 2009-October 2015): duty free and quota free access subject to safeguard arrangements; and

  • Phase 3 (October 2015 onwards) full duty free and quota free access to the EU market will be granted.

Seeking alternative trading arrangements

23. Without a guaranteed and protected EU market access, efforts have shifted to expanding trade within regional markets. While these markets are not as lucrative as the EU market, Swaziland’s ability to compete effectively on cost could go a long way in mitigating the negative impact of the loss of EU preferences. Already, the SACU market accounts for nearly 50 percent of sugar exports with COMESA8 and the rest of the world market accounting for a further 25 percent, and there are opportunities for expansion. Currently, there is a concerted effort underway to further reduce production costs and to move Swaziland from the third least cost producer of sugar in the world to a more advantageous position. 9

24. Several ongoing negotiations for various trade deals with different trading blocks and countries also holds out the prospects for increasing sugar, textiles and other exports. Among these:

  • Negotiations have concluded on a SACU-EFTA (European Free Trade Association) free trade agreement,10 and await implementation after ratification by all parties-The agreement aims to achieve substantial liberalization of trade in both agricultural and nonagricultural goods, in conformity with the GATT. For Swaziland it is expected to increase market access into the European countries of Switzerland, Norway, Liechtenstein, and Iceland;

  • SACU is negotiating with the US on a Trade and Investment Cooperation Agreement (TICA) with a view to implementation by early 2008. This is largely viewed as a prelude to a FTA agreement with the US;

  • SACU is negotiating a preferential Trade Agreement with the Latin American trading block MERCOSUR. 11 It is anticipated that the first phase of the agreement would entail a fixed preferential tariff agreement to allow some goods easy access to each other’s markets. The second phase would entail a full Free Trade Area;

  • India recently indicated an interest in signing an FTA with SACU, and studies into the impact of a trade arrangement with China are still continuing;

  • Negotiations are currently underway to broaden SACU to include other SADC members; and

  • Negotiations at the technical level continue on the SADC FTA by 2008 and Customs Union by 2010. It is not certain whether the target dates would be met.

Efforts at improving competitiveness

25. Reducing the high cost of doing business, land and labor productivity, attracting FDI, and creating an enabling environment for private sector-led growth are all critical in improving Swaziland’s competitiveness. Key elements should include skills-training combined with policies to alleviate the productivity-eroding impact of skill mismatches, labor market rigidities, and HIV/AIDS. To attract investment there should be a focus on: (i) simplifying business licensing requirements and procedures; (ii) improving transportation, energy, and telecommunication infrastructures; and (iii) increasing land productivity, partly by a land reform strategy.

26. Ongoing efforts by the authorities to help improve competitiveness will help in preparing the country for the challenges ahead. The parliamentary passage of an anticorruption bill and the establishment of a Business Economic Advisory Panel to help improve the country’s image are useful first steps. Also, The Swaziland Investor Roadmap 2005 prepared by the USAID and the World Bank’s Investment Climate Assessment Survey has highlighted the complications caused by government regulations and identified concrete steps to improving the investment climate. Implementation of the recommendations contained in both studies will go a long way in helping Swaziland survive in this changing environment.

D. Conclusion

27. Recent changes in the global trading regimes have forced Swaziland to reassess its external position. The continuing momentum by various trading blocks towards full trade liberalization means that this country can no longer rely on having protected access to foreign markets. As such, in this new environment, the emphasis is on tackling productivity issues, improving competitiveness, and working to secure mutually beneficial trading arrangements with various countries and trade blocks.

28. The success or failure of this strategy will have far reaching implications for the Swazi economy, employment and the fight against poverty reduction. Sugar cultivation has served the country well in attempting to tackle rural poverty. The survival of this sector is therefore critical in helping win the fight against poverty. Efforts at expanding cotton production within Swaziland are also key in helping against that fight. Ultimately, the country has too much to lose to not at lest work vigorously to mitigate the impact of a changing global environment.

Statistical Appendix Tables

Table 1.

Swaziland: Gross Domestic Product by Sector of Origin at 2000 Constant Prices, 2001-06

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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, 2001–06

(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, 2001–06

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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, 2001–06

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Sources: World Bank’s World Development Indicators; and staff estimates.

National authorities, World Bank and staff estimates

World Bank estimates.

Ministry of Enterprise and Employment.

Table 5.

Swaziland: Developments in Crop Production, 2001/02–2006/07 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.

Developments in Sugar Production, Processing, and Consumption, 2001/02–2006/07

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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, 2001–06

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Sources: Central Bank of Swaziland; and Geological Survey and Mines Department.
Table 8.

Swaziland: Electrical Power Generation and Demand, 2001–05

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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), Short Market Energy Market (STEM), EDM is a Mozambique National Utility.

Table 9.

Swaziland: Retail Price Indices of Urban Families, 2002–061

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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 10.

Swaziland: Minimum Wages for General Workers in Selected Industries, 2001–06 1

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Source: Department of Labor.

As of December of each year.

Table 11.

Swaziland: Paid Employment in the Private and Public Sectors by Industry, 2001–05 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 12.

Swaziland: Summary of Central Government Operations, 2002/03–2006/07 1

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Sources: Ministry of Finance; and Fund staff projections.

The fiscal year runs from April 1 to March 31.

Table 13.

Swaziland: Central Government Revenue and Grants, 2002/03–2006/07 1

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Source: Ministry of Finance.

Fiscal year runs from April 1 to March 31.

Table 14.

Swaziland: Functional Classification of Central Government Expenditure and Net Lending, 2002/03–2006/07 1

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Source: Ministry of Finance.

Fiscal year runs from April 1 to March 31.

NFPEs (nonfinancial public enterprises).

Table 15.

Swaziland: Economic Classification of Government Current Expenditure, 2002/03–2006/07 1

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Source: Ministry of Finance.

Fiscal year runs from April 1 to March 31.

Table 16.

Swaziland: Capital Expenditure by Sector, 2002/03–2006/07 1

(In millions of emalangeni)

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Source: Ministry of Finance.

Fiscal year runs from April 1 to March 31.