Introduction

On behalf of my authorities, I thank staff for the candid deliberations during the 2011 Article IV Consultations in Mbabane. My authorities welcome the frank assessment of the current and medium term policy challenges facing Swaziland and broadly agree with the thrust of the staff appraisal.

The second round effects of the global economic crisis negatively impacted SACU receipts that depend largely on trade, and accounting for more than 40 percent of total government revenues. The reduction in SACU receipts by more than 50 percent coupled with a slowing economic growth have exerted tremendous pressure on government revenues and compromised the ability of the country to provide social services and alleviate poverty. Additionally, the authorities continue to face and respond to many underlying challenges including, inter alia, the country’s high wage bill, poverty levels and lackluster economic growth. In this regard, my authorities acknowledge the urgent need for fiscal consolidation and structural reforms to unleash the country’s growth potential.

Recent Economic developments and outlook

Economic activity improved slightly in 2010 registering real GDP growth of 2.0 percent boosted by positive performance in the primary and tertiary sectors. However, growth is expected to decelerate slightly in 2011. Prospects for growth remain challenging in the medium term, clouded by the persistent fiscal crisis. It is anticipated that the government’s continued cash flow problems will compromise economic activity especially in sectors that are linked to government such as construction and tertiary sectors. These sectors are expected to remain subdued as government has significantly cut spending on goods, services and capital projects. On the other hand, the recovery in manufacturing output which accounts for about 40 percent of GDP will cushion, to some extent, the contraction in government activity. Inflation ticked up in 2011 but remained in single digits supported mainly by a stronger currency. It is projected that inflation will urge up slightly but remain in single digits due to pressures emanating from rising prices for food, fuel and utilities.

Fiscal policy developments and reforms

The fiscal situation in Swaziland continues to worsen despite efforts by the government to cut spending, mainly due to the drying up of both external and domestic financing. The authorities in November 2011, submitted to parliament, a supplementary budget which proposed to further cut spending in goods and services by E100 million (0.4 percent of GDP) and capital spending by E460 million (1.5 percent of GDP). As an additional measure, the authorities continue to enforce the issuance of the release warrants where expenditures are approved directly by the Minister of Finance only if there are funds available. To better understand the nature and composition of the arrears, my authorities, carried out an audit and are developing a strategy and mechanism to reduce the arrears in the next fiscal year. They also made an effort to minimize the impact on the private sector. As a result, private sector arrears are estimated to account for just a quarter of total arrears with the bulk of the arrears owed to parastatals and the public pension fund.

My authorities recognize that good fiscal policy hinges on a credible budget and strong public finance management systems. They note that the current budget process and spending controls are weak but deeper reforms cannot be achieved in the short term. To that end, they intend to revive the efforts to improve the medium term fiscal and expenditure frameworks and are preparing to include a broad set of PFM reforms in the forthcoming public finance management bill. These efforts are being supported by a new high-level PFM reform committee that spans 22 departments and 12 Ministries to ensure proper ownership, improved coordination and sequencing.

As an immediate measure, for the 2012/13 budget the authorities required line ministries to present medium term budgetary requirements anchored on policies and projects as opposed to the previous one year expansion of resource allocation and input mix. This will assist in identifying priority areas and implications of the projects on future resource requirements and is in line with Fund TA recommendations on Strengthening Expenditure Management. The authorities also plan to maintain the 2011/12 budget level and use the additional SACU revenues to clear arrears. The Government has also requested a ROSC Accounting & Auditing from the World Bank, with a target of issuing the report by June 30, 2012.

To broaden the tax base and enhance revenues, my authorities submitted to parliament the Sales Tax Amendment Bill which has subsequently been passed. The amended bill has widened the tax coverage to include institutions, businesses, economic agents, goods and services previously excluded. They will also be introducing VAT in April 2012.

Further, the authorities with the assistance of the ADB have developed a fiscal adjustment road map (FAR) which aims at addressing both the fiscal and structural challenges. Through implementation of the FAR, the authorities plan to reduce the civil service by 7000 workers by 2015 and this will put the wage bill on a more sustainable path. However, given the political sensitivities surrounding the civil service reform, the authorities have adopted a more cautious approach which seeks to foster a buy in from key stakeholders. They are also preparing to implement a voluntary retirement scheme. To facilitate these processes, my authorities have requested assistance from the World Bank for a civil service audit which will provide a basis for retrenchments.

Monetary policy and financial sector developments

As a member of the Common Monetary Area, Swaziland’s monetary policy stance is influenced predominantly by developments in South Africa. During 2011, the monetary policy stance remained broadly accommodative with the discount rate left unchanged at 5.5 percent for the better part of 2011 which augured well for economic activity. Credit extended to the private sector rose by 2.8 percent in November 2011, mainly driven by increased lending to other non-financial corporations’ (industry) and household sectors. Credit extended to industry increased by 3.2 percent, while credit extended to households and nonprofit institutions serving households rose by 3.3 percent.

Swaziland’s financial system remains stable amid the ongoing government’s cash flow problem due to continued prudent supervision and oversight of the banking system. In July 2011, the central bank introduced a minimum liquid asset requirement in order to anchor financial sector soundness by ensuring that the banks hold appropriate levels of liquidity and cash reserves especially in light of the prevailing fiscal situation. Nonperforming loans have not increased significantly to indicate that the financial system is at risk. However, the central bank remains fully aware of the emerging risks for the banking sector and through its supervision department, continues to monitor developments in the banking system. In addition, a cash flow committee comprising the central bank and ministry of finance has been tasked to monitor government’s cash flow position closely.

Exchange rate policy developments

The Swaziland authorities remain committed to the fixed exchange rate regime. They have undertaken to protect the 1 to 1 peg with the South African rand and remain mindful that a divergence from the peg has significant downside risks and would be detrimental for the economy. Despite the precarious cash flow situation, my authorities have refrained from making significant draw downs on government deposits with the central bank. At the end of November 2011, the country’s gross official reserves stood at E4.4 billion, reflecting a 2.8 percent increase from the previous month. The moderate rise in reserves was due to revaluation gains from the depreciation of the rand against major trading currencies over the month. At this level, the reserves were enough to cover 2.5 months of imports of goods and services, higher than the 2.4 months cover recorded in October 2011. The government continues to seek other options to finance the fiscal deficit with the aim of minimizing draw downs on reserves and protecting the peg. The unavailability of external support renders these efforts extremely difficult.

Conclusion

My authorities value Fund advice and are committed to continued engagement. They are aware of the urgent need to implement the much needed reforms in order to anchor macroeconomic stability.