The Kingdom of Swaziland
2008 Article IV Consultation-Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director
Author: International Monetary Fund
Publication Date:
03 Nov 2008
eISBN:
9781451836165
Language:
English
Keywords:
ISCR; CR; government; Swazi authorities; current account; Swaziland; government priority; regime of the Common Monetary Authority; authorities' effort; broad money; banking soundness indicator; money market; HIV and AIDS; Government finance statistics; Africa; Southern Africa; Global; GDP deflator; nominal interest rate; debt ratio; fuel price surge; Inflation
Download PDF (794 KB)

1. High and sustained economic growth remains elusive. Real GDP growth is lower than the 5 percent government target for effectively reducing poverty. Growth prospects are clouded by low investments, slow pace of economic reforms, and deterioration of preferential treatment for Swaziland’s main exports, sugar and textiles. The recent global shocks—surges of commodity prices and inflation, slowdown of economic growth, and continuing financial rebalancing—further increases risks to the Swazi economy. Years of persistently low growth have pushed up poverty and unemployment, a situation worsened by the prevalence of HIV/AIDS, labor force absenteeism, and low productivity. Since 1997 the epidemic has also limited annual population growth to about 0.4 percent.1

Abstract

1. High and sustained economic growth remains elusive. Real GDP growth is lower than the 5 percent government target for effectively reducing poverty. Growth prospects are clouded by low investments, slow pace of economic reforms, and deterioration of preferential treatment for Swaziland’s main exports, sugar and textiles. The recent global shocks—surges of commodity prices and inflation, slowdown of economic growth, and continuing financial rebalancing—further increases risks to the Swazi economy. Years of persistently low growth have pushed up poverty and unemployment, a situation worsened by the prevalence of HIV/AIDS, labor force absenteeism, and low productivity. Since 1997 the epidemic has also limited annual population growth to about 0.4 percent.1

I. Background

1. High and sustained economic growth remains elusive. Real GDP growth is lower than the 5 percent government target for effectively reducing poverty. Growth prospects are clouded by low investments, slow pace of economic reforms, and deterioration of preferential treatment for Swaziland’s main exports, sugar and textiles. The recent global shocks—surges of commodity prices and inflation, slowdown of economic growth, and continuing financial rebalancing—further increases risks to the Swazi economy. Years of persistently low growth have pushed up poverty and unemployment, a situation worsened by the prevalence of HIV/AIDS, labor force absenteeism, and low productivity. Since 1997 the epidemic has also limited annual population growth to about 0.4 percent.1

uA01fig01

Real Per Capita GDP

(1995=100)

Citation: IMF Staff Country Reports 2008, 356; 10.5089/9781451836165.002.A001

Source: World Economic Outlook.

2. High and rising revenues from the Southern African Customs Union (SACU) have allowed Swaziland to expand public expenditure and accumulate international reserves. The authorities have increased fiscal savings during the last two years; international reserves now cover more than three months of imports of goods and services after years of less than adequate coverage. Yet despite escalated public expenditure, the country’s social challenges remain daunting.

uA01fig02

Poverty rate1

(Percent)

Citation: IMF Staff Country Reports 2008, 356; 10.5089/9781451836165.002.A001

1 The food poverty represents the fraction of people who cannot afford buying food in order to maintain a minimum daily intake of 2,100 calories.

3. The first parliamentary election under the new constitution took place on September 19 using the traditional tinkhundla system—a grass roots system of local government and chiefdoms (Swaziland is a constitutional monarchy). A new Cabinet is expected to be sworn in during October 2008.

II. Recent Economic Developments and Outlook

4. As Swaziland recovered from the 2006 drought, real GDP growth in 2007 rose to 3.5 percent, and inflation escalated. Growth was also driven by increases in output in services and manufacturing. Inflation reached 9.8 percent at the end of 2007 as food and fuel prices rose. By the end of July 2008, inflation was at 13.4 percent. The authorities have responded to the recent surges of food, fuel and transportation prices mainly through a delayed pass-through of price increases.2 In 2008 average inflation is expected to be about 13 percent based on second-round effects from double-digit wage settlements, and despite recent declines in global fuel prices. Interest rates generally have risen in line with those of South Africa but the authorities decided in June 2008 not to match a 50 basis point increase by the South African Reserve Bank (SARB).

uA01fig03

Inflation, July 2003–July 2008

(Annual percent change)

Citation: IMF Staff Country Reports 2008, 356; 10.5089/9781451836165.002.A001

Sources: National authorities and IMF staff estimates.
uA01fig04

Inflation July 2003–July 2008

(Annual percent change)

Citation: IMF Staff Country Reports 2008, 356; 10.5089/9781451836165.002.A001

Sources: National authorities and IMF staff estimates.

5. In 2007/08 high SACU transfers contributed to the second consecutive budget surplus (6.4 percent of GDP), an improved current account, and an accumulation of international reserves. The recent depreciation of the nominal exchange rate along with the South African rand, to which it is pegged, is possibly having a positive impact on the export sector. External debt in 2007 declined to 16.7 percent of GDP, and international reserves reached the equivalent of 3.5 months of imports.

uA01fig05

Current Account and Reserves

Citation: IMF Staff Country Reports 2008, 356; 10.5089/9781451836165.002.A001

Sources: National authorities and IMF staff estimates.
uA01fig06

Fiscal Developments

(Percent of GDP, unless otherwise stated)

Citation: IMF Staff Country Reports 2008, 356; 10.5089/9781451836165.002.A001

Sources: National authorities and IMF staff estimates.

6. Since the last consultation the authorities have consolidated international reserves at the central bank (CBS) and enhanced supervision of the financial sector, but have done little to tighten expenditures and reform the civil service. The 2008/09 budget forecasts increased expenditure by 7 percent of GDP to 40.3 percent and the wage bill to rise to 16.7 percent of GDP. Under the 2007 Revenue Authority (RA) Act, the authorities have established the RA and are recruiting staff. With insurance sector liberalization, four new companies started up in 2008. The authorities have begun the process of privatizing the government owned Swazi Bank and of supervising saving and credit cooperatives (SCCOs.)

7. With current policies, medium-term prospects are not encouraging and subject to substantial risks that could undermine macroeconomic stability. Growth could be further hampered by uncertainties about the viability and timing of investment projects, low competitiveness scores, an investment climate that keeps the cost of doing business high, and the prevalence of HIV/AIDS. Staff therefore expects a growth slowdown to less than 3 percent annually, although the authorities, anticipating investment projects, expect growth rates of at least 3 percent. The current account deficit is expected to widen as tariff protection in the SACU market is eliminated, and preferential prices for sugar in the EU market are reduced.3 Furthermore, recent global financial market developments may have an adverse impact on the country’s financial sector should South African banks, which dominate the sector, suffer significant losses. The outlook is further clouded by a fiscal stance that is overly dependent on SACU revenue, high inflation, and a vulnerable financial sector.

III. Policy Discussions

Summary of the 2007 Consultation Discussions

Directors expressed concern about the slow pace of economic growth that lags behind most of other lower middle income countries, emphasized the need to ensure fiscal sustainability and safeguard priority spending to address urgent social needs (HIV/AIDS and unemployment). The Fund encouraged the authorities to use the buoyant SACU revenues to accelerate fiscal and structural reforms aimed at securing macroeconomic stability and addressing impediments to higher growth and poverty reduction. It commended the authorities’ efforts in rebuilding international reserves, strengthening banking supervision, and the passage of key financial legislation. Finally, directors recommended the timely implementation of the Poverty Reduction Strategy and Action Program and in line with the medium-term fiscal expenditure framework.

A. Fiscal Sustainability and Reforms

8. Swaziland’s fiscal stance is highly dependent on SACU revenues but these are not likely to be sustained, based on: (i) a call by South Africa to revisit the revenue-sharing formula; (ii) a slowdown in South Africa’s economic growth; (iii) a reduction in common external tariff rates due to trade liberalization; and (iv) possible transformation of the Southern African Development Community (SADC) into a customs union, which would imply lower shares for SACU members.

9. In anticipation of SACU revenue declines in the long term, fiscal policy is not tight enough to make room for the savings needed to smooth expenditure and prevent abrupt fiscal adjustment that could undermine macroeconomic stability. Furthermore, a tighter fiscal policy in the near term is also advisable from a cyclical perspective given the current high inflation that is anticipated to remain in 2009. Hence, the fiscal expansion of the 2008/09 budget and its medium-term fiscal outlook should be corrected, with adjustments equivalent to 4 percent of GDP over the medium term to secure savings (see below).

uA01fig07

SACU Revenues and Fiscal Balance Including Grants 1990/91–2013/14

(Percent of GDP)

Citation: IMF Staff Country Reports 2008, 356; 10.5089/9781451836165.002.A001

Sources: National authorities and IMF staff estimates and projections.
uA01fig08

Swaziland and Sub-Saharan Africa: Central Government Wages; Swaziland 2007/08, other countries latest available data

(Percent of GDP)

Citation: IMF Staff Country Reports 2008, 356; 10.5089/9781451836165.002.A001

10. To help put in context recent fiscal surpluses owing to temporary surges of SACU revenue, the non-SACU fiscal balance is used to estimate the deficit and level of adjustment needed for fiscal sustainability.4 Based on “normal” SACU revenue of 13 percent of GDP (the average for 1996/97–2004/05), staff targeted a sustainable non-SACU deficit of 16.8 percent of GDP. However, the authorities project a non-SACU deficit of 26.8 percent of GDP in the 2008/09 budget. Staff estimates that without reform, the fiscal imbalance would worsen, with non-SACU deficits of about 22 percent over the medium term.

11. To achieve sustainable fiscal balances, staff proposed a phased implementation of revenue and expenditure reforms while providing for more spending on high-priority sectors. Measures to immediately improve tax administration and introduce the VAT in the next few years should increase revenue by about 2 percent of GDP by 2013/14.5 Civil service reform could bring the wage bill back to 12 percent of GDP, about the level in 2004/05—though the sub-Saharan African average is 7.3 percent to GDP. Expenditure reform should therefore combine consolidation, reorientation, and quality improvements to reduce spending by about 2 percent of GDP and allow fiscal space to facilitate economic growth and reduce poverty. On civil service reform, the performance management system, developed with the Botswana National Productivity Board, needs to be implemented promptly; it should involve redeployment toward prioritized sectors such as health care while promoting increased productivity, transparency, and accountability.6 Though they concurred with the staff analysis, the authorities admitted that social pressures and a cumbersome bureaucracy had delayed implementation.

Swaziland: Medium Term Fiscal Scenario Without and With Measures 1/

(Percent of GDP)

article image

The fiscal year runs from April 1 to March 31.

The buoyant SACU revenues through 2013/14 are consistent with the forecast of the South African staff team.

12. Improvement in public expenditure management and assurance that spending is of high quality is crucial to successful fiscal adjustment. Poor coordination of budget execution across government agencies has resulted in under-spending for some, arrears for others, and frequent supplementary budgets. To better manage public expenditure, the authorities highlighted continuing improvement of the procurement system and reform of the Public Finance Management Act. Staff underscored the need to assess expenditure and budget allocation on the basis of the social rate of return and government priorities in health, education, and agriculture, consistent with the Poverty Reduction Strategy and Action Program (PRSAP).

13. Staff proposed an alternative scenario based on fiscal and structural reforms, preferably starting in 2008/09, that could generate GDP growth of about 4 percent over the medium term. With reforms, the saving-investment balance should improve and foreign investment and donor financing be attracted, thus helping to raise GDP growth. Improved fiscal surpluses will help sustain reserves at more than 3.5 months of imports of goods and services7 while reducing the debt-to-GDP ratio to about 8 percent by 2012. While agreeing with staff on the risk to SACU revenues and the need for fiscal adjustments, the authorities identified political constraints and enormous social needs as formidable challenges to fiscal consolidation. Nonetheless, the authorities plan to save this year’s unbudgeted SACU windfall.8

Swaziland: Medium-Term Scenario, 2008–2013

(Percent of GDP, unless noted otherwise)

article image

Fiscal year runs from April 1 to March 31.

Assuming that fiscal policy and structural reforms including reducing the cost of doing business; improving the quality of public institutions; addressing the lack of transparency and poor administrative coordination; increasing labor market flexibility; simplifying business licensing; and improving infrastructure) will result in fiscal and current account surpluses.

B. External Stability and Exchange Rate Policy

14. Sufficient international reserves are critical to safeguard external stability and confidence in the currency peg with South Africa, which has served the country well. Staff supported the authorities’ policy to have reserves of at least three months of import cover. The authorities believe that this level is appropriate in relation to the domestic monetary base (reflecting the free circulation of the rand) and external debt, while preserving confidence in the peg and serving as a cushion against adverse external shocks.

15. Debt sustainability analysis (DSA) shows that Swaziland has very low debt Tables 7 and 8). Since 2002 despite the most recent depreciation, total public sector debt has declined, reflecting in part limited new borrowing and an exchange rate appreciation between 2003 and 2006. As a lower-medium-income country, Swaziland has limited access to concessionary loans; any large increases in external debt would carry high interest costs.

Table 1.

Swaziland: Basic Economic and Financial Indicators, 2005–2013

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

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

In percent of beginning-of-period broad money.

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 in 2007, and recently in 2008.

Table 2.

Swaziland: Summary of Central Government Operations, 2006/07–2013/14 1

article image
Sources: Ministry of Finance; and Fund staff projections.

Without corrective policy measures. The fiscal year runs from April 1 to March 31.

Includes requested supplementary budget

Disbursements less amortizations.

Table 3.

Swaziland: Monetary Survey, 2004–2008 1

(Millions of emalangeni)

article image
Sources: Central Bank of Swaziland (CBS); and Fund staff estimates.

End-of-year data. (For 2008, as of end-June)

Counterpart of government deposits held abroad.

Excludes rand in circulation.

4/ For 2008, change from June 2007.
Table 4.

Swaziland: Commercial Banks’ Performance Ratios, Dec. 2003–2008

article image
Source: Central Bank of Swaziland.

Excluding the Swaziland Development and Savings Bank, which is owned by the government and offers both development finance and commercial banking services since its recapitalization and relaunch by the government in 2001.

Table 5.

Swaziland: Balance of Payments, 2005–2013 1

(Millions of U.S. dollars, unless otherwise specified)

article image
Sources: Central Bank of Swaziland; and IMF staff projections.

Without corrective policy measures.

SACU: Southern African Customs Union. SACU transfers in the current account does not reflect the true level of SACU revenue because of the particular treatment of those transfers in the accounts where the authorities make an estimate based on the level of imports and adjust in ‘other investment’ to reflect the total SACU revenues.

Table 6.

Swaziland: Millennium Development Goals

article image
Source: World Development Indicators database, June 2008