Recent Economic Developments

2. Swaziland’s economic performance has been positive in several areas since the recovery from the 2006 drought, but overall performance has remained below the levels attained in other lower middle-income countries. The modest rebound in GDP growth of 3.5 percent in 2007 has been difficult to sustain because of several external shocks, including the rise of food and fuel prices, and the restrictions on export outlets for sugar and textiles following the end of the Multi-Fibre Agreement. Inflation, estimated to have increased to an annual average of 8.3 percent in 2007 because of rising food and oil prices, has accelerated. However, the budget recorded a second consecutive surplus (6.4 percent of GDP) and international reserves rose to the equivalent of 3.5 months of imports in 2007 on the strength of higher SACU receipts. The Central Bank of Swaziland (CBS) has tightened its monetary policy stance by increasing its discount rate and the issuance of securities. Although the banking sector has been adequately supervised, supervision of the savings and credit cooperative sector has had to be enhanced by the monetary authority. Further, the authorities have begun the process of privatizing the government owned commercial bank. They are also working towards deepening the financial sector and strengthening its institutional and legal structure to enhance resource allocation and provide a safeguard for its operation.

3. Swaziland has been facing uncertainties and difficulties in attracting foreign direct investments. Low competitiveness scores, an investment climate that keeps the cost of doing business high, the prevalence of HIV/AIDS and other social challenges remain daunting for the authorities. These adverse factors, together with the current surges in food and fuel prices, have aggravated the unemployment situation and poverty. The classification of Swaziland as a lower middle-income country has added another dimension that has contributed to denying the country concessional resources to fight HIV/AIDS and reduce poverty.

4. These challenges notwithstanding, the authorities have embarked on a number of economic and structural reforms aimed at enhancing economic growth to levels comparable to those achieved by other countries in the region. They are fully aware that the process of reform implementation requires them to be resolute.

Fiscal Developments

5. The authorities recognize the importance of pursuing a prudent fiscal policy as the main instrument to restoring macroeconomic stability and engendering satisfactory economic growth. Increased pro-poor fiscal outlays in 2008/2009 have been made to address the problems of the HIV/AIDS pandemic, worsening social indicators, and deepening poverty. The authorities have, however, taken steps to reduce other expenditures in 2008/09, with further adjustments to come in 2009/2010. In order to better manage public expenditures, the government is highlighting improvement of the procurement system, reform of Public Finance Management Act, and support for the reform of public enterprises. They also plan to assess expenditure and budget allocation based on social rate of return and government priorities in social services consistent with the Poverty Reduction Strategy and Action Program (PRSAP).

6. The authorities plan to focus on reducing the fiscal deficit, excluding SACU revenues, and increasing domestic revenues over the medium term. This approach would help the adjustment needed to ensure fiscal sustainability and smooth expenditure over the medium term. Operationalizing the Revenue Authority Act will introduce the requisite institutional framework and facilitate improvements in revenue collection. In addition, the authorities intend to strengthen revenue administration with the introduction of VAT.

7. The authorities are committed to implement civil service reforms, including reduction in the wage bill and implementation of performance contracts. They, however, are aware of the difficulties involved, including the predicament of right-sizing the civil service in a relatively weak economic environment and high unemployment. Of particular challenge is developing the appropriate safety nets to mitigate the adverse effects of the envisaged civil service right-sizing.

8. The authorities intend to continue with reorienting expenditure toward priority sectors in order to enhance economic growth and reduce widespread poverty. In this regard, further efforts are needed to ensure that the framework for macroeconomic stability is consistent with the PRSAP. They recognize the increasing challenges, especially in the medium to long term, of meeting the health and education needs of its youthful population. In an effort to revitalize the health sector, they have embarked on a comprehensive review to begin a process of zero-based budgeting for the sector.

Response to the Food and Fuel Price Increases

9. The authorities are committed to dealing with the high food and fuel prices, focusing on fiscal viability, minimization of market distortions, and effective delivery of essential services and support to the most vulnerable groups. They plan to discourage general subsidies and undue delay in passing through of price increases. The National Disaster Management Agency will be working on improving coordination among all stakeholders.

Monetary and Exchange Rate Developments and Financial Sector Reform

10. The Swazi authorities consider the regime of the Common Monetary Authority (CMA), including the peg to the rand, as having served the country well and remaining appropriate. Going forward, the authorities plan to maintain a tight monetary stance in order to address the second round effects of food and fuel price increases. They are also committed to strengthening the financial sector. In this regard, the central bank is pressing for a timely compliance of all banks with prudential regulations, further improvement of the supervision of Savings and Credit Cooperatives (SCCOs), comprehensive address of pyramid schemes through better coordination among domestic and regional financial regulators, improved internal processes for dealing with fraudulent operations, and laws prohibiting pyramid operations. Also, the authorities are seeking an early passage of the Financial Services and Regulatory Authority Bill. In addition, the authorities are further reviewing its legal structure and modernizing its operations with Fund support in a number of areas, including strengthening reserve management, dealing with anti-money laundering and strengthening banking supervision.

11. Banking soundness indicators are positive with well-capitalized, liquid, profitable and low nonperforming loans. However, the government-owned Swazi Bank continues to have relatively high nonperforming loans and faces difficulties meeting compliance requirements. A few major SCCOs also face severe financial difficulties. Notable progress has been made in establishing a framework for regulation and supervision of banks as well as insurance and pension funds. New regulations have been introduced 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 authorities continue to foster cooperation and monetary integration at the regional level, and remain fully committed to the ideals of the CMA as a means to anchor inflation and promote economic growth. They recognize the need to strengthen their obligation to the exchange rate peg through steady accumulation of international reserves. The central bank, supported by the government, has continued to focus on promoting financial sector soundness and exchange rate stability by increasing the country’s international reserve position.

Structural Issues

12. The authorities acknowledge the need and are committed to significantly improve the investment climate and enhance competitiveness through the acceleration of structural reforms and reduction of the cost of doing business. Other measures receiving attention include strengthening the anti-corruption commission; reducing labor market rigidities; simplifying business licensing requirements and procedures; and carrying out land reform that would help increase agricultural productivity. In addition, 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 augur well for future investment inflows.

13. The authorities are keenly aware that the process of transforming the economy will depend 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. Foreign investors would bolster this effort as an indigenous entrepreneurial class of small and medium sized entrepreneurs (SMEs) is developed. The government, together with its SACU partners, will continue to pursue an aggressive bilateral trade negotiations agenda to achieve this goal.

Conclusion

14. The Swazi authorities face difficult challenges and have embarked on a strong reform agenda 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 could undermine the achievement of the MDGs. The continued classification of the country as lower middle-income, based only on GDP per capita and ignoring the poor social indicators facing the majority of the population, has hampered the authorities’ efforts to secure 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. Therefore, we believe that there is need to review the methodology used to classify countries and address appropriately the serious concerns that have been expressed by Swaziland and other countries.