Kingdom of Swaziland: Staff Report for the 2014 Article IV Consultation
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International Monetary Fund. African Dept.
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Publication Date:
23 Jul 2014
eISBN:
9781498344593
ISBN:
9781498344593
Language:
English
Keywords:
ISCR; CR; SACU revenue; Swaziland; GDP; broad money; stabilization fund; economic growth; revenue rule; International reserves
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KEY ISSUESSetting: Swaziland has gradually recovered from the fiscal crisis of 2010-11, buoyed by the improved revenues from the Southern African Customs Union (SACU). Growth modestly recovered, and international reserves rebounded. Swaziland’s challenges, however, remain significant, in view of its high vulnerability to exogenous shocks and its sluggish growth performance, while facing significant social and development challenges with high unemployment and the prevalence of HIV/AIDS. Swaziland now stands at a critical juncture to strengthen its resilience to exogenous shocks, address its weak growth performance, and meet critical social and development needs.Outlook and risks: Under the status-quo policies, the outlook is for continued sluggish growth and increasing fiscal and external imbalances, reflecting low private investment, elevated government spending, and prospective decline in SACU revenues. Risks are associated with the high volatility of the SACU revenues, possible negative spillovers from South Africa (including higher policy rate and lower growth), and uncertain prospects for preferential trade agreements with the U.S. and EU.Strengthening Resilience to Shocks: Over the medium term, international reserves should be targeted at five to seven months of imports, and public debt be kept below 30 percent of GDP. This calls for a prudent fiscal policy stance, with fiscal deficit below 2 percent of GDP.Raising growth: It is essential to enhance the efficiency of the public sector and promote private sector-led growth through structural reforms including improving business climate and accelerating land reforms.Maintaining financial stability: Financial soundness indicators are generally strong. The strong growth of the nonbank financial sector in recent years calls for strengthening of supervision and regulation for the sector.Past advice: There is broad agreement between the Fund and the authorities on macroeconomic policy and structural reform priorities. With the authorities’ fiscal consolidation efforts and the improved SACU revenues, fiscal and external sustainability is being restored, consistent with staff’s advice. However, progress on structural reforms—including re-launching the privatization process, improving access to modernfinance and improving the business climate—has been modest.

Abstract

KEY ISSUESSetting: Swaziland has gradually recovered from the fiscal crisis of 2010-11, buoyed by the improved revenues from the Southern African Customs Union (SACU). Growth modestly recovered, and international reserves rebounded. Swaziland’s challenges, however, remain significant, in view of its high vulnerability to exogenous shocks and its sluggish growth performance, while facing significant social and development challenges with high unemployment and the prevalence of HIV/AIDS. Swaziland now stands at a critical juncture to strengthen its resilience to exogenous shocks, address its weak growth performance, and meet critical social and development needs.Outlook and risks: Under the status-quo policies, the outlook is for continued sluggish growth and increasing fiscal and external imbalances, reflecting low private investment, elevated government spending, and prospective decline in SACU revenues. Risks are associated with the high volatility of the SACU revenues, possible negative spillovers from South Africa (including higher policy rate and lower growth), and uncertain prospects for preferential trade agreements with the U.S. and EU.Strengthening Resilience to Shocks: Over the medium term, international reserves should be targeted at five to seven months of imports, and public debt be kept below 30 percent of GDP. This calls for a prudent fiscal policy stance, with fiscal deficit below 2 percent of GDP.Raising growth: It is essential to enhance the efficiency of the public sector and promote private sector-led growth through structural reforms including improving business climate and accelerating land reforms.Maintaining financial stability: Financial soundness indicators are generally strong. The strong growth of the nonbank financial sector in recent years calls for strengthening of supervision and regulation for the sector.Past advice: There is broad agreement between the Fund and the authorities on macroeconomic policy and structural reform priorities. With the authorities’ fiscal consolidation efforts and the improved SACU revenues, fiscal and external sustainability is being restored, consistent with staff’s advice. However, progress on structural reforms—including re-launching the privatization process, improving access to modernfinance and improving the business climate—has been modest.

Recent Developments, Outlook, and Risks

A. Recent Economic Developments

1. Swaziland’s economic performance has improved since the fiscal crisis of 2010–11, underpinned by the recovery of revenues from the Southern African Customs Union (SACU). Driven mainly by communication, manufacturing, and construction (as a result of large capital spending), real GDP growth in 2013 is estimated at 2¾ percent, recovering from −½ percent in 2011. Several indicators suggest the return of business confidence; commercial bank credit to the private sector is growing strongly, and the risk premium on T-bills continues to decline (Figure 1). Meanwhile, inflation has slightly risen, reaching 5.3 percent in April 2014, owing to increases in food and some administered prices (e.g., electricity and fuel).

Figure 1.
Figure 1.

Improving Economic and Financial Conditions since the 2010–11 Fiscal Crisis

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities and IMF staff estimates.
A01ufig01

Fiscal Revenues by Type

(Percent of GDP)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities and IMF staff estimates.

2. Improved SACU revenue since 2012/13 reduced the pressure on fiscal and external balances. The SACU revenue recovered from about 9 percent of GDP in 2010/11-2011/12 to over 18–20 percent of GDP since 2012/13.

  • With the recovery of SACU revenue, fiscal balances improved significantly in recent years. A surplus of 4½ percent of GDP was recorded in 2012/13. In 2013/14, though spending pressure increased owing to the adjustment of wages and a revival of capital expenditures (after two years of stagnation), a small surplus (¼percent of GDP) was recorded, partly aided by enhanced domestic revenue collection efforts (e.g., enhanced efficiency in VAT collection, and strengthened auditing and compliance).

  • The external current account turned from a deficit of 8¼ percent of GDP in 2011 to a surplus of 3¾ percent in 2012 and is estimated to have reached a surplus of 6 percent in 2013. This outcome was driven mainly by an increase in the SACU revenue and robust growth in exports (e.g., coal and iron ore). International reserves have reached 3¾ months of imports by March 2014, recovering from the low level of 2 months at end-March 2012.

3. Staff analysis suggests that Swaziland’s real effective exchange rate is moderately overvalued.1 The lilangeni has depreciated in real effective terms in line with the South African rand since 2011. While different estimation approaches give mixed results, the overall assessment points to a moderate overvaluation (Appendix 1).2

4. According to the financial sector soundness indicators, commercial banks are generally sound and liquid, and their asset quality has recently improved (Table 9), while financial system risks remain in nonbank financial institutions (NBFI). The banking sector appears well capitalized, with the capital adequacy ratio of the banks reaching 24 percent of risk-weighted assets. The asset quality of banks has improved with the nonperforming loan ratio falling to 6¾ percent at end–2013 from 8¾ percent at end-2012. The NBFIs—including pension funds, insurance companies, collective investment schemes, and savings and credit cooperatives (SACCOs)—account for about two-third of the financial sector (in terms of asset). Given that supervisory surveillance has not yet been fully extended to these institutions, some risks remain in the institutions.3

A01ufig02

Financial Sector Assets by Industry (2012)

(Percent of the total financial sector assets)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities and IMF staff estimates.

B. Development and Social Challenges

5. Swaziland continues to face serious development challenges, including high unemployment, poverty, and the prevalence of HIV/AIDS (Figure 2). Unemployment (particularly for youth) stays high.4 The high prevalence of HIV/AIDS (at about 26 percent for adults aged 15–49) has significantly lowered life expectancy (UNAIDS, 2012). Although there has been some progress in poverty reduction, an estimated 63 percent of the population still lives below the national poverty line in 2010 (down from 69 percent in 2001). This level is generally higher than other countries at the same income level (Figure 2), suggesting that there is room to enhance the inclusiveness of growth.

Figure 2.
Figure 2.

Swaziland: Social Developments

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Source: The World Bank.

6. Protracted weak growth performance contributed to the lack of progress in social developments. Though growth rebounded after the crisis, Swaziland has long suffered from sluggish growth performance, with average real GDP growth over 2004–13 at about two percent per year. This modest growth—less than half of the level of its neighboring countries (Botswana, Lesotho, and Namibia)—is also associated with high unemployment and limited progress in social developments (with widespread poverty and high inequality).

7. The new government has indicated its intention to address significant social and development challenges. Following parliamentary elections in September 2013, a new administration was formed. The prime minister was reappointed, and the minister of finance and the central bank governor switched their posts.5 The new minister of finance stated in his 2014/15 budget speech that the government would focus on invigorating economic growth, creating employment opportunities, and accelerating public sector reforms.

C. Outlook and Risks

8. Based on status-quo policies (baseline scenario), sluggish growth performance is expected to continue, while Swaziland would remain vulnerable to exogenous shocks. In the near term, growth is expected to remain low (at about 2 percent per annum), reflecting low private sector investment. Furthermore, the prospective decline in the SACU revenue and increases in public sector wages—as envisaged under the government’s medium-term fiscal framework—would translate into large fiscal deficits and external imbalances.6 With potential crowding out of the credit to the private sector (owing to large financing needs of the government), growth would gradually decline to below 2 percent over the medium term. Capital inflows would remain low, international reserves would fall to 3 months of imports, and the debt-to-GDP ratio would steadily increase to 30 percent. Should SACU revenues fall significantly (as in 2010–11), its impact on the economy could be even larger (compared with the previous crisis), given that Swaziland would be less resilient to the shocks owing to reduced policy space.

Staff Medium-Term Projections (Baseline Scenario)

(Percent of GDP, unless otherwise indicated)

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

9. The main near-term risks are associated with the uncertain external environment (developments in South Africa, in particular) and the high volatility of the SACU revenue (see the risk assessment matrix (RAM)). The Central Bank of Swaziland (CBS) would have to raise its discount rate if the South African Reserve Bank hikes its policy rate further (as expected by the market). If South Africa’s growth weakens and/or international capital flows to South Africa significantly decline, adverse outward spillovers from the country may rise—possibly channeled through lower SACU revenue and trade and financial flows. Furthermore, uncertain prospects for the fate of preferential trade agreements—the Economic Partnership Agreements (EPA) with the EU and the African Growth and Opportunities Act (AGOA) with the U.S.—would affect production and investment in the textile and sugar sectors.7,8

Staff Medium-Term Projections (Reform Scenario)

(Percent of GDP, unless otherwise indicated)

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

10. Enhanced reform efforts, combined with prudent fiscal policy, would improve Swaziland’s growth potential and strengthen its resilience to shocks. The reform scenario envisages structural reforms to stimulate private sector-led growth and a prudent fiscal policy (with the fiscal deficits of less than 2 percent of GDP over the medium-term) to secure fiscal and external sustainability. The impacts of enhanced revenue mobilization efforts are cautiously estimated under this scenario, which implies possible room for further adjustment by greater revenue mobilization (in case the risk of a SACU revenue fall should materialize). Current account balance would be stronger than the baseline scenario, and capital inflows would be higher. International reserves would exceed five months of imports over the medium term, and public debt would remain below 25 percent of GDP. Swaziland would be then better positioned to cope with another SACU revenue shock. Increased capital spending (e.g., to meet critical infrastructure needs), following through project appraisal and selection, would help to raise Swaziland’s growth potential. Furthermore, with enhanced efforts to improve business climate and financial intermediation, private investment is expected to increase, and GDP growth would reach 4 percent.

Policy Discussions

While Swaziland has been recovering from two years of fiscal crisis (2010–2011), it remains highly vulnerable to exogenous shocks. Furthermore, Swaziland continues to face serious development challenges, with weak growth performance, high unemployment and prevalence of HIV/AIDS. Swaziland now stands at a critical juncture to (i) strengthen its resilience to exogenous shocks, while meeting critical social and development needs, and (ii) address its sluggish growth performance and promote inclusive growth.

A. Strengthening Resilience to Exogenous Shocks

Building cushion to respond to shocks

11. The experience of the 2010–11 fiscal crisis underlines Swaziland’s high vulnerability to shocks because of its heavy reliance on the highly volatile SACU revenue. The significant fall in the SACU revenue (by 10 percent of GDP) during the crisis led to large fiscal and current account deficits. Since the authorities’ consolidation efforts (largely through reduced capital spending) could not fully accommodate the shock, they ran large fiscal deficits in 2010–11, with financing from the drawdown of government deposits and accumulation of debt, which eventually led to a decline in international reserves.

A01ufig03

SACU Revenues

(Percent of GDP, fiscal revenues, and imports)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities and IMF staff estimates.

12. Staff emphasized the need to strengthen the economy’s resilience to exogenous shocks, through securing a sufficient international reserve cushion and maintaining debt sustainability.

  • To respond to exogenous shocks (such as a significant fall in the SACU revenue), international reserves should be further increased to five to seven months of imports over the medium-term (Appendix 2). Though this reserve target may stand at the higher end of traditional reserves adequacy estimates, this level of reserves should be secured, in light of Swaziland’s high vulnerability to shocks, as reflected by the severity of the recent crisis experience.9

  • Public debt should be maintained below 30 percent of GDP, to create sufficient buffer to address future shocks. Though the public debt stood at a modest level (17.2 percent of GDP) at end–2013, gross financing needs stay high (Appendix 3). To ensure debt sustainability, a prudent fiscal policy, together with debt management strategies, should be implemented. The strategy should incorporate the debt from public enterprises and all relevant risks. Specifically, the projected increase in gross financing needs is a source of concern, as it could raise interest rate and rollover risks; with possible financing constraints due to the small size of Swaziland’s financial sector.

13. The authorities concurred with staff on the need to strengthen resilience to shocks, by building sufficient international reserves and maintaining modest debt distress. On international reserves, the authorities agreed with the proposed level of 5–7 months of imports, noting that it is in line with CBS’s internal target of 6 months as set under the Southern African Development Community (SADC)’s macroeconomic convergence criteria. On debt limit, they broadly agreed with staff’s assessment, while setting 35 percent of GDP as the absolute ceiling of public debt. Taking into account the potential rollover risks, they expressed their intention to take advantage of the current favorable domestic liquidity conditions to better manage the term structure of financing.

Maintaining a prudent fiscal stance, while meeting critical social and development needs

14. Given the desirability of maintaining the exchange rate peg (to maintain price stability and facilitate capital and current transactions with South Africa), Swaziland will have to rely on fiscal adjustment and structural reforms to accumulate international reserves. Following two consecutive years of the fiscal surplus, the 2014/15 fiscal framework envisages an overall deficit of 1 percent of GDP. Over the medium-term, however, the deficits are expected to increase to 5 percent of GDP, owing to the prospective decline in SACU revenue, the scheduled review of public sector wages, and planned increase in capital spending.10, 11 In light of already high public sector wages (the compensation of employees increased from 10 percent of GDP in 2000/01 to 14¼ percent in 2013/14), the minister alerted in his budget speech that “the level of government’s wage bill has reached unsustainable levels”.

Fiscal Balance

(Percent of GDP)

article image
Sources: Swazi authorities and IMF staff estimates.

Based on the status quo policy (no new fiscal adjustment measure is incorporated).

Commitment basis.

15. Staff pointed to the importance of maintaining a prudent fiscal target (to secure a sufficient buffer for shocks), while safeguarding critical social spending and growth-promoting capital expenditures.12 With the increasing spending pressures and a prospective decline in the SACU revenue over the medium term, Swaziland’s international reserves would stay significantly below the adequate level. A prudent fiscal policy stance is necessary going forward, with a fiscal deficit ceiling of 2 percent of GDP over the medium term, to help maintain adequate international reserves and ensure debt sustainability. To achieve the target, the following policy measures are called for:

  • Improving revenue administration. The Swaziland Revenue Authority (SRA) should continue to expand taxpayer’s registration, increase compliance and service delivery, enhance self-assessment, and strengthen VAT collections. Furthermore, the cost of tax exemptions should be reassessed to eliminate those whose benefits are not commensurate to the cost.

  • Rationalizing recurrent expenditures (focusing on spending on goods and services and compensation of employees). The authorities should identify possible savings in non-priority spending, while safeguarding critical social expenditures. Recent increases in compensation of employees, as well as the scheduled salary review, raise a concern as they could squeeze out critical social and capital expenditures (Box 1). To this end, the staff shared the minister’s concern about the level of government’s wage bill and argued that, to contain further increase, public sector wage bills should be kept constant in real terms (e.g., by containing salary increases and pursuing public sector reforms) and new hiring should be limited to critical areas (e.g., education and health).

A01ufig04

Compensation of Employees of Sub-Saharan African Countries

(Percent of GDP, average of 2011–2013)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Country authorities and IMF staff estimates.

  • Effectively implementing planned public sector reforms (including the payroll and skill audits). To contain the wage bills, the staff supported the government’s plan for public sector reforms (including payroll audits and the staff inspection function). These reforms should be implemented promptly and effectively, if needed, with technical assistance by Swaziland’s international partners.

  • Strengthening public financial management (PFM). The enactment and effective implementation of the PFM Bill are critical to strengthen PFM and macroeconomic analysis. Furthermore, in line with the authorities’ PFM action plan, key reform measures include (i) preparing a coherent medium-term fiscal and expenditure framework; (ii) improving cash management; and (iii) strengthening commitment control to prevent arrears.13 It is important to enhance fiscal reporting and transparency (posting the budget outturn on the website is a good step forward), while effectively addressing the issues identified in the auditor general’s reports.14 Reconciliation exercises should also be conducted on regular basis. Furthermore, in light of Swaziland’s weakness in public investment management (relative to other countries), thorough project selection and appraisal and programming are essential to ensure high efficiency of public investment.15 For this purpose, a high-level appraisal committee—equipped with sufficient capacities—may help to improve the quality of projects.

A01ufig05

Public Investment Management Index

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Dabla-Norris et. al. (2011) and the World Bank.Sample: 68 middle and low income countries.

16. The authorities generally agreed with maintaining a prudent fiscal policy stance, while reiterating the need to secure critical social and development spending. They affirmed their intention to maintain a prudent fiscal policy, noting that the fiscal deficit ceiling of 2 percent of GDP would be achievable, while safeguarding critical social and development spending. They therefore expected that fiscal outcome would turn out to be better than envisaged in the current medium-term fiscal framework. Nevertheless, they saw the upcoming review of public sector wages as a challenge. Such spending pressures are expected to be partially offset by the ongoing efforts for public sector reforms (in particular through payroll audits). As part of the effort to strengthen PFM, the authorities planned to implement the PFM action plan more rigorously, with assistance from Swaziland’s international partners.

Public Sector Wage Increases and Planned Public Sector Reforms

Swaziland’s public wage bill has steadily increased over the last three decades, reaching 14 percent of GDP in 2013/14. This level is exceptionally high among Sub-Saharan African countries. The wage bill accounts for about 40 percent of total expenditures, limiting fiscal policy flexibility. Thus, fiscal consolidation was often conducted by significantly reducing capital expenditures (as in 2010–11).

The increase in nominal wage bill is largely explained by the increase in the average per head wage (largely as a result of periodic salary reviews, cost of living adjustments, and notch increases) and the increasing number of government employees. For the last ten years, the total wage bill expanded by 176 percent, while the per head wage increased by 116 percent. The pace of increase in the per head wage far exceeded inflation, and even higher than nominal GDP per capita.

A01ufig06

Fiscal Spending by Type

(Percent of GDP)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities and IMF staff estimates.
A01ufig07

Total Wages and Wages Per Head

(2004/05=100)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities and IMF staff estimates.
A01ufig08

Wages Per Head and CPI

(2004/05=100)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities and IMF staff estimates.

The authorities plan to step up efforts for public sector reforms, including:

  • (i) Intensifying the staff inspection function

  • (ii) Monitoring and managing wage bills

  • (iii) Fully implementing payroll audit

  • (iv) Preparing strategic plans by every ministry

  • (v) Introducing performance management systems

17. In view of the high volatility and uncertainty of the SACU revenue, a fiscal framework to better manage this uncertainty is worth exploring. The authorities are exploring the option of implementing a revenue rule that would only incorporate into the budget their estimated steady state level of SACU revenue (17 percent of GDP, the historical average) with any additional SACU revenue saved in a stabilization fund (to be used when the revenue is lower than the average).

  • In the staff’s view, a credible fiscal rule could help ensure fiscal and external sustainability and mitigate the adverse impacts of exogenous shocks on the economy. For the rule to be successful, however, it would be important to complete the groundwork before its introduction (Box 2). Specifically such a framework (i) would require strong PFM (e.g., fiscal monitoring, transparency, internal and external audit) and (ii) should be compatible with a sustainable macroeconomic framework. In terms of a stabilization fund, it would be important to (i) ensure its full transparency and accountability and (ii) implement strict regulation/rule for its use.

  • The authorities expressed their intention to carefully explore such a framework; initially by anchoring the fiscal policy with a medium-term international reserve target of 5–7 months of imports, while exploring a fiscal rule or a stabilization fund with enhancing efforts to strengthen PFM or complete the groundwork, assisted by the IMF technical assistance.

Groundwork for Successful Fiscal Rules

Following the fiscal crisis, the authorities are exploring different fiscal policy frameworks to better manage the high volatility of SACU revenue. Specifically, they envisage a revenue rule that would only incorporate into the budget their estimated steady state level of SACU revenue of 17 percent of GDP (the historical average) with any additional SACU revenue saved in a stabilization fund.

A fiscal rule is worth considering, in view of successful experiences in some resource-rich countries with similar challenges to manage highly volatile revenues.1 A credible fiscal rule could help to manage the high volatility of SACU revenue. The staff’s preliminary analysis suggests that, compared with the status quo, a fiscal rule which targets a non-SACU fiscal deficit of 17 percent (similar in spirit with the authorities’ plan), if implemented effectively, may work better to ensure fiscal and external sustainability and mitigate the adverse impacts of exogenous shocks on growth.2

If a non-SACU deficit target of 17 percent of GDP had been introduced in 2008/09, expenditures would have been more stable…

A01ufig09

Estimated Expenditures under the Fiscal Rule

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities and IMF staff estimates.

…leading to additional saving before the crisis and allowing higher spending during the crisis. Cumulative fiscal imbalances would be mitigated over the medium term.

A01ufig10

Estimated Fiscal Balances under the Fiscal Rule

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities and IMF staff estimates.

For a fiscal rule to work effectively, however, adequate PFM systems are prerequisites.3 Specifically it is important to have: (1) reliable data as well as a minimum technical forecasting capacity (to predict budgetary aggregates with sufficient accuracy); (2) comprehensive budget reporting systems (to produce in-year and timely end-year reports); (3) effective internal and external audit systems (to ensure that public resource utilization is fully accounted for); and (4) publication of fiscal data (to allow external monitoring of the rule). The stabilization fund—which may be seen as a convenient way to set aside surges in revenues—would also call for strong PFM. In particular it is important to (i) create the fund within the budget; (ii) ensure its full transparency and accountability, and (iii) implement strict regulation/rule for its use.

1 IMF, 2012, “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries”. 2 IMF and World Bank, “Options of Fiscal Rules to Manage High Volatility of SACU revenues”, forthcoming. 3 IMF, 2009, “Fiscal Rules—Anchoring Expectations for Sustainable Fiscal Finance,” www.imf.org/external/np/pp/eng/2009/121609.pdf.

B. Raising Growth Potential and Creating Jobs

18. The weak growth performance for the last decade has been associated with low private sector developments and the apparent low growth impact of fiscal spending. This weak growth performance, particularly with low private sector development, is also associated with high unemployment and limited progress in poverty reduction.

  • In the past decades, the government pursued expansionary fiscal policies, while trend growth has continually decelerated. The government increased spending from about 18 percent of GDP in 1980s to 32 percent in 2000s, though growth averaged about 8 percent in the early 1980s and thereafter it has continually decreased to about 2 percent for the last ten years. Furthermore, the increasing number of public enterprises (from 28 in 2007 to 45 in 2014) raises concerns on public sector efficiency and the lack of competitiveness.

  • Private sector development has been depressed, as shown by the slow pace of capital accumulation (Figure 4). While middle-income countries and sub-Saharan countries have gradually increased their fixed capital formation since 2000, Swaziland experienced a sharp decline in investment, reaching less than half the level (in terms of GDP) from the early 2000s. This is caused by a significant decline in private-sector investment, suggesting the stagnation of the sector over a long period. There have also been little new FDI inflows in recent years. There is a risk that Swaziland may be trapped in a “vicious cycle,” with sluggish growth prospects leading to low private investment (which adversely affects productivity growth and industrial diversification) and this further reducing the growth potential.

  • Financial intermediation has been contained. Though commercial banks’ credit to the private sector is recently growing, its level (relative to GDP) is still relatively low, compared with other countries in the region. The nonbanking sector (mainly pension and insurance sectors) has grown significantly in recent years. To facilitate financial intermediation and promote private sector development and inclusive growth, the CBS has recently embarked on the preparation of the Financial Sector Strategy, with technical assistances from the IMF and the World Bank. To effectively implement the Strategy, a comprehensive Financial Sector Development Implementation Plan, with a prioritized time-bound sequence of actions, will be prepared.

Figure 3.
Figure 3.

Recent Macroeconomic Performance and Outlook

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Country authorities and IMF staff estimates.
Figure 3.
Figure 3.

Recent Macroeconomic Performance and Outlook (concluded)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Country authorities and IMF staff estimates.
Figure 4.
Figure 4.

GDP Growth and Private Sector Investment

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: the World Bank, country authorities and IMF staff estimates.
A01ufig11

Commercial Bank Credit to Private sector (Percent of GDP)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Country authorities and IMF staff estimates.

19. The authorities expressed concerns about the weak growth performance, although their previous efforts, through several strategies, have thus far not been fruitful. The Economic Recovery Strategy (ERS), for example, rightly identified several structural weaknesses (including unfavorable business environment and low efficiency in public expenditure) as constraints to growth and laid out a set of measures to address them. Nevertheless, growth has remained well below the ERS’s target of “at least 5 percent”. Notwithstanding some progress under these strategies, the implementation of reform has been generally slow. The new minister of finance stated in his 2014/15 budget speech that the government would focus on invigorating economic growth, creating employment opportunities, and accelerating public sector reforms.

20. Staff highlighted the needs to address sluggish growth performance, through effective implementation of structural policy measures. To raise potential growth (and then to enhance employment and reduce poverty and inequality), it is essential to improve the efficiency of the public sector and promote private sector-led, inclusive growth, through wide-ranging structural reforms.16 Improvement in Swaziland’s competitiveness, through these reforms, is also called for, given an appreciated real exchange rate.

  • Improve the efficiency of public spending (Appendix 4). To raise the growth impact of public spending, it is essential to strengthen PFM and public investment management (e.g., project appraisal and evaluation), introduce program-based budgeting (with implementing a program classification as a first step), and allocate higher weight to capital expenditures. Improved efficiency of public spending could also lead to creating fiscal space for critical social spending and investment to promote inclusive growth. Expenditures for such fiscal space, following careful assessments (e.g., MTEF-driven spending reviews, project appraisals), should focus on the areas to help achieve the government’s objectives of promoting growth and creating jobs. Furthermore, in light of the recent pace of increase in public enterprises, staff also pointed to the need to review the status of public enterprises and revisit the Privatization Road Map.17

  • Promote private sector developments (Appendix 5). Staff suggests the authorities’ to (i) accelerate the improvement of the business climate (e.g., on starting a business and enforcing contracts), (ii) accelerate planned land management reforms (e.g., to finalize and implement the draft Land Policy), and (iii) strengthen anti-corruption efforts, including by mobilizing the anti-money laundering framework. Effective implementation of a set of comprehensive structural measures is called for to break the vicious circle of sluggish growth and low private investment. Private sector-led growth, with these structural reforms, would benefit broad segments of the population, helping to reduce inequality and enhance employment.

  • Enhance financial intermediation with proper regulatory oversight. To facilitate private sector development, the staff also argued for further enhancement of financial intermediation (particularly for the access to credit by small and medium enterprises), while ensuring financial sector stability. To this end, the staff also advised the Financial Services Regulatory Authority (FSRA) to further step up its efforts to strengthen the supervision and regulation for nonbank financial institutions (including the implementations of legal frameworks for the regulations for insurance companies and capital market institutions).18 Despite the relatively small size of the SACCOs (with the total asset accounting for 1½ percent of the total financial sector assets), strengthening supervision and regulation of the sector is important to ensure confidence in the financial sector. Furthermore, as some of the pension funds and insurance companies are granting loans, close monitoring of their risks associated with such activities (e.g., credit risk) is also warranted.

21. The authorities, recognizing these challenges, generally agreed with the staff’s suggestions. Acknowledging the importance of efficient and effective public spending, they plan to (i) further develop internal audit to eliminate wastage and corruption and (ii) to introduce performance budgeting. To ensure progress in improving business climate, the government has relaunched the Investor Roadmap in 2012. In terms of privatization, the authorities explained that the increase in public enterprises reflects the needs to establish regulatory authorities for some industries, while agreeing to revisit the privatization policy and the rationalization of current public enterprises. On financial intermediation, the authorities acknowledged that there was room to enhance the access to credit, particularly for small and medium enterprises. To this end, they expected their current efforts (to formulate a financial sector strategy, with technical assistance from the IMF and the World Bank) to help enhance financial sector developments and access to credit. The authorities, however, expressed difficulty in undertaking land reforms pending wider consultations, largely due to the complexity of the land management issues. In terms of nonbank financial institutions (specifically SACCOs), the authorities acknowledged the needs to strengthen supervisory oversight, and the newly-established FSRA plans to expand the coverage of its supervisory assessments for all financial sectors, while building capacity for off-site and on-site supervision and implementing regulatory frameworks for all nonbank financial institutions.

C. Other Surveillance Issues

22. Data provision is broadly adequate for surveillance with some data shortcomings in national account and fiscal sector statistics. Staff welcomed the authorities’ recent efforts to update the economic survey as a basis for the national account statistics, which will be rebased and updated in late 2014. On fiscal data, weak cash management is associated with the lack of proper fiscal monitoring, which resulted in relatively large unidentified financing (2¾ percent of GDP in 2013/14). To this end, it is critical to conduct reconciliation exercises on a regular basis and strengthen cash management.

Staff Appraisal

23. Swaziland’s economy has been recovering from the fiscal crisis of 2010–11. Improved SACU revenue has relieved the pressure on fiscal and external balances, and economic growth is gradually recovering. The buildup in international reserves (to 3¾ months by end-March 2014) suggests that the likelihood of an immediate crisis has receded. Swaziland’s economic outlook, however, remains subject to downside risks (mainly associated with the uncertain prospects for South African economy and the high volatility of the SACU revenue). Close monitoring on the regional and global economic developments is warranted.

24. Swaziland’s medium-term challenges remain significant. The recent fiscal crisis points to the need to strengthen Swaziland’s resilience to shocks, while the economy has suffered from weak growth performance, which has adversely affected social developments. Swaziland’s key economic policy challenges are therefore to strengthen its resilience to exogenous shocks and achieve high, inclusive growth, while meeting critical social and development needs. Building on the progress since the fiscal crisis, Swaziland now stands at a critical juncture to decisively address these challenges.

25. To strengthen Swaziland’s resilience to shocks, it is essential to build sufficient international reserve buffer and maintain modest debt distress. In light of these objectives and the need to safeguard the exchange rate peg, a prudent fiscal policy stance (with a fiscal deficit below 2 percent of GDP) should be maintained over the medium-term, while protecting critical social and development expenditures. Such a prudent fiscal policy stance would help build a sufficient international reserve buffer (five to seven months of imports) and maintain modest debt distress, and provide Swaziland with better protection for possible shocks. The prospects for achieving the prudent fiscal policy target over the medium term, however, appear challenging, in light of the prospective decline in the SACU revenue and the scheduled salary review for public officials. It is therefore important to (i) improve revenue administration, (ii) rationalize recurrent expenditure (while safeguarding critical social and development expenditures), (iii) effectively implement public sector reforms, and (iv) enhance efforts to strengthen PFM.

26. To address a long-standing problem of weak growth performance, a set of comprehensive structural reforms should be implemented effectively. The weak growth performance has been largely associated with a low multiplier of fiscal spending and low private sector development (depressed private investment in particular). The authorities should improve the efficiency of spending, through strengthening PFM and public investment management, and allocating higher weight to growth-promoting capital expenditures. Furthermore, it is also essential to promote private sector-led, inclusive growth. In particular, enhanced steps should be taken to further improve business climate, facilitate financial intermediation, and pursue land management reforms. Should fiscal deficits increase substantially—as envisaged under the medium term fiscal framework, the government’s large financing needs would likely crowd out private sector credit, further squeezing private sector developments. Maintaining soundness of the financial sector—with further efforts to strengthen the supervision and regulation for nonbank financial institutions—is also critical for private sector-led growth. In most cases, the authorities have rightly acknowledged the areas of reforms. Staff encouraged the new government to step up efforts to implement reforms, seeking technical assistance from Swaziland’s international partners, as needed. The CBS’s initiative to embark on a financial sector strategy is encouraging.

27. While Swaziland continues to maintain one exchange restriction related to advanced payments for certain imports (subject to Fund approval under Article VIII), the authorities have not requested and staff does not recommend the approval of this restriction.

28. Staff recommends that the next Article IV consultation with Swaziland take place on the standard 12–month cycle.

Table 1.

Swaziland: Risk Assessment Matrix1

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The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

Table 2.

Swaziland: Selected Economic and Financial Indicators, 2012–19

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Sources: Swazi authorities; and Fund staff estimates and projections.

IMF Information Notice System trade-weighted; end of period. A negative sign indicates depreciation.

Percent of beginning of period M2, unless otherwise indicated.

12-month time deposits rate.

Fiscal year data (fiscal years run from April 1 to March 31).

Table 3.

Swaziland: Fiscal Operations of the Central Government, 2010/11–19/20 1

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Sources: Swazi authorities; and Fund staff estimates and projections.

The fiscal year runs from April 1 to March 31.

Staff estimates based on the baseline scenario.

Table 4.

Swaziland: Fiscal Operations of the Central Government, 2010/11–19/20 1

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Sources: Swazi authorities; and Fund staff estimates and projections.

The fiscal year runs from April 1 to March 31.

Staff estimates based on the baseline scenario.

Table 5.

Swaziland: Monetary Accounts, 2011–19 1

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Sources: Swazi authorities; and Fund staff estimates and projections.

End of period.

Excludes rand in circulation.

Including valuation changes.

Table 6.

Swaziland: Balance of Payments, 2011–19

(U.S. dollar millions; unless otherwise indicated)

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Sources: Swazi authorities; and Fund staff estimates and projections.
Table 7.

Swaziland: Millennium Development Goals, 1995–2013 or Latest

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Source: World Bank; and Swailand authorities.
Table 8.

Swaziland: Financial Sector Indicators, 2009–13 1

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Sources: Central Bank of Swaziland; and IMF staff estimates.

In line with the recommendation by recent IMF TA, from 2012, the statistics exclude the Building Society as it is not a bank.

Appendix I. Exchange Rate Assessment1

1. Staff analysis suggests that Swaziland’s real effective exchange rate (REER) is moderately overvalued.2 The estimated results are mixed using different approaches, but overall points to moderate overvaluation. Since the lilangeni is pegged to South African rand, monetary policy plays a passive role in Swaziland, following closely the policy rate in South Africa. This points to the need of structural reforms to improve Swaziland’s competitiveness. It should also be noted that large uncertainties surround the analysis, as it involves many assumptions and projections.

2. Swaziland’s real effective exchange rate has been on a declining trend since its peak at end-2010. The depreciation has followed the deprecation of South African rand. The REER has depreciated 14 percent over the past three years (9 percent over the past year) and currently stands at 2 percent below its long-term average over 1995–2013. The fact that the REER is below historical average and yet may still be overvalued suggests that Swaziland’s equilibrium real exchange rate, as determined by fundamentals, may have declined over the past 20 years. It should also be noted that since its inflation is relatively higher, Swaziland has been losing competiveness with regard to South Africa.

A01app01ufig01

Real effective exchange rate

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Country authorities and IMF staff estimates.

3. Staff assessed the REER based on the IMF’s Consultative Group on Exchange Rate Issues (CGER) methodology. The CGER methodology includes three different approaches that links equilibrium exchange rate to a set of fundamentals (Lee et al., 2008). The analysis uses coefficients from Vitek (2014), which extended the original CGER sample to include many developing countries.

Macroeconomic balance (MB) approach

MB approach (explaining current account)

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****, ***, **, and * indicates significance at the 1%, 5%, 10%, and 20% levels. Source: IMF staff estimates.

4. The MB approach first estimates Swaziland’s equilibrium current account as -3.8 percent of GDP. The current account is modeled on Swaziland’s economic conditions, mostly relative to its trading partners. Specifically, it is computed as a function of the levels of these variables projected to prevail in the medium term (2019). One exception is the net foreign asset (NFA) position, for which the latest data are for 2010, from the (updated) External Wealth of Nation database (Lane and Milesi-Ferretti, 2007). The NFA to GDP ratio stood at -3.9 percent in 2010, which is used in the calculation.

5. This approach suggests an overvaluation of Swaziland’s REER by 7.4 percent. The exchange rate misalignment is the REER adjustment needed to close the gap between the equilibrium current account and the “underlying” current account. The medium-term (2019) projection of the current account (-2.8 percent of GDP) is taken to be the underlying current account, i.e., the level that would emerge at a zero output gap both for Swaziland and its trading partners. Using Swaziland’s specific elasticity (0.28) and also controlling for multi-lateral consistency (a common correction factor to the estimated exchange rate adjustments since there can only be n–1 independent exchange rates among n currencies), this suggests an overvaluation of Swaziland’s REER by 7.4 percent.

Equilibrium real exchange rate (ERER) approach

6. The ERER approach, however, suggests some undervaluation. The ERER approach models equilibrium real exchange rate as a function of (projected) medium-term values of fundamentals. The equilibrium REER is then compared with the latest real exchange rate data (February 2014), which suggests an undervaluation of 8.3 percent. It should however be noted that since Swaziland’s REER has fallen markedly in recent years, the REER regression-based models are likely to (mistakenly) point to undervaluation, unless they can link the full downward trend of the REER to deteriorating fundamentals. We therefore give more weight to the MB approach.

ERER approach (explaining real exchange rate)

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****, ***, and **indicates significance at the 1%, 5%, and 10% levels. Source: IMF staff estimates.

External sustainability (ES) approach

7. Under the ES approach, the equilibrium current account is the level that would stabilize the ratio of the net foreign asset position to GDP at its 2010 level (the latest observation). The current account norm, based on medium-term projection for nominal GDP growth, is -0.3 percent of GDP. Comparing this to the projected 2019 current account suggests an overvaluation of the REER at about 11 percent.

References

  • Lane, Philip R. and Gian Maria Milesi-Ferretti, 2007, “The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970–2004”, Journal of International Economics 73, November, 223–250.

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  • Lee, J., G. M. Milesi-Ferretti, J. Ostry, A. Prati, and L. Ricci, 2008. “Exchange Rate Assessment: CGER Methodologies.” IMF Occasional Paper 261.

    • Search Google Scholar
    • Export Citation

  • Vitek, Francis, 2014, Exchange Rate Assessment Tools for Advance, Emerging, and Developing Economies.

Appendix II. Adequate International Reserves 1

1. Swaziland’s international reserve level has grown rapidly over the past two years with the recovery of the SACU revenue. Reserve coverage dropped to 2.3 months of imports at end–2011, following a sharp decline of SACU receipts over 2010–11. Gross official reserves stood at US$732 million at end-March 2014, or 3.8 months of imports.

2. Swaziland’s international reserves are adequate based on traditional reserve metrics. The current level of reserves is significantly above traditional metrics based on imports, short-term debt and broad money. The traditional metrics, based on simple rules of thumb, certainly have relevance and the attraction of simplicity, but are by their nature arbitrary, and focus only on a particular aspect of vulnerability, and could give disparate results (IMF 2011a).

A01app02ufig01

Gross official reserve and SACU receipts

(In millions Emalangeni)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities and IMF staff estimates.

3. The current international reserves also exceed the level based on the standard IMF metric. This metric is a weighted average of four indicators, and seems to predict exchange market pressure and other crisis events better than traditional metrics (IMF 2011a, 2011b). Specifically, the metric for countries with fixed exchange rate regime is computed as:

30% of STD+ 15% of OPL + 10% of M2 + 10% of X,

Reserve Adequacy

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Source: IMF staff estimates.

One third of long-term private external debt is assumed to be due next year.

4. Where STD stands for short-term debt by remaining maturity; OPL stands for longer-term debt and equity liabilities; M2 is broad money; and X stands for exports of goods and services. Equity liabilities data are from the (updated) External Wealth of Nation database (Lane and Milesi -Ferretti, 2007), where the latest observation is for 2010 (US$68 million). The suggested reserve coverage is 100 to 150 percent of the metric, and Swaziland’s current coverage reaches 184 percent. This metric, however, does not take into account Swaziland specific risks.

5. Swaziland’s own experience suggests that these levels of reserve are not adequate for it to withstand a severe external shock as experienced during 2010–11. Before the crisis, international reserves stood at 4 months of imports, or 24 percent of GDP at end–2009. Yet, the government experienced the fiscal crisis, with marked reduction in spending during 2010–11 (when the SACU revenue declined substantially), and reserve coverage dropped to 2.3 months of imports at end–2011.

6. To incorporate Swaziland-specific risks (regarding the uncertainty associated with the SACU revenue), modified metrics are explored. The variables used in the standard IMF metric are selected based on past episodes of exchange market pressure in emerging markets, where the coefficient assigned to each variable is based on the size of changes for these indicators during those episodes. For Swaziland, the largest shock, the crisis of 2010–11, came as a sharp decline in the SACU revenue. In particular, accumulated decline of SACU revenue during 2010–11 amounted to 94 percent of the SACU revenue before the crisis. In terms of GDP, the SACU revenue declined from 19½ percent in 2009 to 9–10 percent in 2010–11. Using the same concept for the construction of the standard IMF metric, we therefore explore the following two modified metrics which would be more suitable for Swaziland:

  • The coefficient of 94 percent for the SACU revenue is used, in light of the changes in the SACU revenue from the pre-crisis level (2009).2

    30% of STD+ 15% of OPL + 10% of M2 + 10% of X + 94% of SACU revenue.

  • A more conservative coefficient of 80 percent for the SACU revenue is used

    30% of STD+ 15% of OPL + 10% of M2 + 10% of X + 80% of SACU revenue.

7. Maintaining a 100 percent coverage of these metrics would call for international reserves at 33 percent of GDP (5½ months of imports) and 30 percent of GDP (5 months of imports), respectively. Maintaining a 150 percent coverage would call for international reserves at more than 45 percent of GDP (7½ months of imports).

8. Reserve adequacy is further analyzed using a cost-benefit analysis approach. Dabla-Norris et al. (2011) develop a cost-benefit approach to quantify the optimal level of reserves in low-income countries, focusing on the role of reserves in preventing and mitigating absorption drops triggered by large external shocks. Specifically, countries are assumed to maximize the net benefit of holding reserves (NBR):

maxRNBR = −q * P(R,W) *C(R,Z)–r*R,

Where P and C represent, respectively, the conditional probability of a crisis given a large shock event and the utility cost of a crisis—where a crisis is defined by a sharp drop in absorption. Both of these variables depend on reserves R and other control variables (W and Z). The parameters q refers to the unconditional probability of a large shock event, which is set to be 0.4 based on the sample average. Large shock events are identified if the annual percentage change of the relevant variable falls below the 10th percentile in the left-tail of the country-specific distribution. In particular, shock episodes include one or more of the following six shocks: external demand, terms-of-trade, FDI, aid flows, remittances, and large natural disasters. Finally, r represents the opportunity cost of holding reserves.

9. Relevant values for Swaziland are derived from historical distributions. Higher fiscal balance is found to be associated with smaller probability of crisis. We used the estimated fiscal balance for 2013/14. Higher World Bank’s CPIA index, a broad indicator of the quality of a country’s present policy and institutional framework, is also associated with lower crisis probability. The CPIA index is not available for Swaziland, so we used the value for Lesotho instead. Changes in external demand, terms of trade, FDI and aid to GDP ratio all affect the absorption loss when there is a crisis. For these variables, we used the 10th percentile figure over the past 20 years. The external demand is compiled as the weighted average of real GDP growth of South Africa, the Euro area, and the U.S. using 2005 export share as the weights.

10. The optimal level of reserves critically depends on the opportunity cost of holding reserves. The cost is typically defined as the difference between the return on short-term foreign currency assets and the return on more profitable alternative investment opportunities. A common proxy is the interest rate differential between the domestic and U.S. government treasury bills. Currently the real interest rate for the 3-month U.S. T-bill is about -1 percent, and the real T-bill in Swaziland is about 1.3 percent, which implies a cost of holding reserves at about 2.3 percent. This corresponds to an optimal level of reserves equivalent to 7.3 months of imports. If one uses real GDP growth rate as the lost return, then the opportunity cost of holding reserves would be 3.8 percent (using the estimated 2013 growth rate). This corresponds to an optimal level of reserves equivalent to 4.2 months of imports.

A01app02ufig02

Optimal Level of Reserves

(Months of imports)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Source: IMF staff estimates.
A01app02ufig03

Optimal level of reserves

(Months of imports)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Source: IMF staff’s estimates.

11. The optimal level of reserves also depends on the fiscal balance, among other factors. Countries with weaker fiscal balance would have to maintain higher reserve buffer. At a fiscal deficit of 5 percent as in the status quo scenario, Swaziland would need to maintain a reserve level equivalent to 5-8½ months of import coverage, depending on the cost of holding reserves.

12. In conclusion, Swaziland needs to further increase its reserve coverage from the current level to secure sufficient buffer for exogenous shocks. While there are uncertainties to the exact optimal level of reserves, the analyses using various methodologies suggest that Swaziland should increase its international reserve coverage to 30%-40% of GDP (equivalent to 5-7 months of imports).

References

  • Dabla-Norris, Era, Jun Il Kim, and Kazuko Shirono, 2011, “Optimal Precautionary Reserves for Low-Income Countries: A Cost-Benefit Analysis,” IMF working paper 11/249.

    • Search Google Scholar
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  • International Monetary Fund, 2011a, Assessing Reserve Adequacy.

  • International Monetary Fund, 2011b, Assessing Reserve Adequacy—Supplementary Information.

  • International Monetary Fund, 2013, Assessing Reserve Adequacy—Further Considerations.

  • Lane, Philip R. and Gian Maria Milesi-Ferretti, 2007, “The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970–2004”, Journal of International Economics 73, November, 223–250.

    • Search Google Scholar
    • Export Citation

Appendix III. Debt Sustainability Analysis

Though Swaziland’s public debt is low, large gross financing needs raise concerns. The debt sustainability analysis (DSA) indicates that, under the baseline scenario, most of the public debt indicators remain below their relevant indicative thresholds over the medium term, although high gross financing needs raises concerns for rollover risks and possible crowding-out of private sector credit. Should the SACU revenue fall significantly (as experienced in 2010–11), the debt level would rise sharply, leaving little scope for absorbing shocks.

Recent Developments

1. Swaziland’s public debt remains low, although it has gradually and continuously risen for the past few years. The debt increased in nominal terms from 13 percent of GDP in 2009 to nearly 18 percent of GDP in 2013, owing to a large increase in primary deficit (particularly during the fiscal crisis in 2010–2011). Meanwhile, gross financing needs remain high, at about 10 percent of GDP, owing to an increasing reliance on short-term public debt. While improved SACU revenue after the fiscal crisis has relieved pressure on the fiscal front, a fiscal surplus was recorded for 2012 and 2013.

2. The central government has steadily increased their reliance on domestic debt for its borrowing needs. In terms of the composition of public debt, the proportion of debt denominated in domestic currency increased over time, reducing exposure to exchange rate risk. The share of domestic debt rose from 11 percent of total public debt in 2009 to about 50 percent in 2013. By the end of 2013, treasury bonds account for around 65 percent of the government’s domestic debt. Treasury bills make up the balance of domestic debt, with the 91-days accounting for 41 percent of total treasury bills.

3. The country’s external public debt—primarily in the form of project loans from bilateral and multilateral sources as well as private creditors—is relatively high (51 percent of the total debt), albeit on a declining trend. While its importance—relative to domestic public debt—has declined, the composition of external public debt has been quite stable over the past few years. Financing from multilateral organizations has accounted for nearly 60 percent of external public debt, while bilateral project loans and loans from private creditors have made up 30 and 10 percent of external public debt, respectively.

Medium Term Public DSA

4. A heat map suggests that, while the public debt level is not subject to imminent risks, the country faces risks relating to its gross financing needs and debt profile (Figure 1). Under the baseline scenario, the gross financing needs would increase continuously and reach 15 percent of GDP benchmark by 2018. All standard macro-fiscal shocks would push the gross financing needs even higher. In particular, the standard primary balance shock and the combined macro-fiscal shock would raise the gross financing needs above the benchmark by 2016. The large share of debt held by non-residents—albeit on a downward trend—also highlights vulnerabilities in the debt profile.

Baseline Scenario

5. The baseline macroeconomic scenario for the DSA is based on the status-quo policies, consistent with the macroeconomic framework underlying the 2014 Article IV Staff Report. Specifically, growth is expected to remain sluggish (at about 2 percent per annum), reflecting low private sector investment. With a prospective decline in the SACU revenue (to a historical average of 17 percent of GDP), the fiscal revenues would slightly decline by 2015 and remain stable around 32 percent of GDP until 2019. Fiscal expenditures would increase by around 3 percentage points of GDP over the same period, taking into account spending pressure arising from the prospective review of wage bills and increasing interest payments. As a result, fiscal deficit is expected to increase by around 5 percentage points of GDP between 2013 and 2019. The realism of this scenario for DSA purposes is assessed in Figure 2. While the forecast errors for Swaziland for real GDP growth and inflation (deflator) have been mostly in line with other countries, those for the primary balance have been relatively larger—mostly reflecting the high uncertainty associated with prospective SACU revenue.

6. The DSA under the baseline scenario indicates that the debt level would stay modest over the medium term, although the fast pace of debt accumulation and the projected increase in gross financing needs raise concerns (Figure 3 and 4). Under the baseline scenario, the expected increase in fiscal deficits would lead to fast accumulation of public debt. The primary deficit averages about 2 percent of GDP during 2014–2019. Gross public debt would reach 30 percent of GDP by 2019. As it is expected to be financed mainly domestically by short- and medium-term treasury bills/bond, gross financing needs are projected to grow continuously, from 10 percent of GDP in 2013 to about 16 percent of GDP in 2019.

7. The alternative scenarios indicate that a prudent fiscal policy stance, if maintained over the medium term, would help to avoid a continuous increase in public debt and a high level of public gross financing needs. Assuming a constant primary balance from 2014 onwards, public gross financing needs would be brought down to around 8 percent of GDP by 2019, and gross public debt would be around 17 percent of GDP. A similar result would be achieved under the historical scenario where the real GDP growth, the primary balance, and the real interest rate are set at their historical averages.

Macro-Fiscal and Additional Stress Tests

8. While public debt dynamics are resilient to several stress tests, high gross financing needs point to emerging risks associated with the maturity structure and crowding out of the private sector credit. The results of the standardized macro-fiscal stress tests do not fundamentally alter the broad outlook for public debt previously discussed.1 Under all standardized sensitivity cases, the public debt-to-GDP ratio nearly reaches 35 percent by the end of the projection period. Nonetheless, the macro-fiscal shocks (especially the primary balance shock) result in a more rapid increase in gross financing needs to around 17 to 19 percent of GDP by end–2019. The rapid increase in gross financing needs could potentially crowd out the private sector credit, as well as posing risks related to the maturity structure and debt roll-over.

9. The customized stress test, which simulates a SACU revenue shock, leads a relatively large increase in both public debt and gross financing needs. Given the heavy reliance on customs and excise revenues from SACU, the macroeconomic outlook is subject to downside risks related to external environment.2 The customized shock, whereby SACU revenue temporarily falls to 9 percent of GDP in 2017–2018, would increase risks significantly.3 Gross public debt would be estimated at 49 percent of GDP at end–2019. Moreover, the gross financing needs would exceed the benchmark of 15 percent of GDP by 2016, and reach 25 percent of GDP by 2019.

10. Under the reform scenario, public debt and gross financing needs are projected to be sustainable over the medium term. To strengthen the country’s resilience to exogenous shocks, the reform scenario assumes a prudent fiscal policy, together with structural reform to stimulate growth (see main text). Such a fiscal policy stance—largely achieved through reduction in government recurrent expenditures—would also create fiscal space for critical social and development spending. As a result of these reforms, the primary deficit averages about 0.2 percent of GDP during 2014–2019. Public debt would be stabilized around 20 percent of GDP over the projection period, and gross financing needs would stay at a lower level, about 10 percent of GDP on average.

Medium Term External DSA

11. Swaziland’s gross external debt has remained low and recently declined slightly from nearly 19 percent of GDP in 2009 to around 17 percent of GDP in 2013. Public external debt accounted for around 52 percent of gross external debt in 2013. Under the baseline assumptions, gross external debt is projected to only slightly increase to about 13 percent of GDP in 2019.

12. Stress tests, while pointing no imminent concerns for external debt trajectory, indicates vulnerability to shocks to the non-interest current account and large exchange rate depreciations. Standardized sensitivity analysis suggests that Swaziland’s external debt is resilient to interest rate and growth shocks, but a 30 percent real depreciation would raise the external debt-to-GDP ratio to around 20 percent in 2019. A current account deficit that is 3 percentage points of GDP (one-half standard deviations) larger than projected in the baseline would likely put the country on an unsustainable path, as the external debt-to-GDP ratio would increase to 30 percent by 2019. Thus, moderating the non-interest part of the external current account balance is important for external debt sustainability.

Conclusion

13. Overall, the DSA indicates that, though the debt level is not posed to imminent risks, high gross financing needs and projected pace of debt accumulation raise concerns. Both public debt and external debt are on sustainable trajectories under the baseline scenario, and the results of stress tests indicate that debt dynamics are generally resilient to several shocks over the medium term. Nonetheless, should the expected pace of debt accumulation continue over the longer period, Swaziland could soon face higher debt distress. In addition, the analysis found that the public debt outlook is particularly vulnerable to a shock of SACU revenue. Furthermore, increasing gross financing needs projections—with excessive reliance on short- and medium-term financing—raise concerns for risks associated with distorted maturity structure, debt roll-over, and crowding-out of private sector credit.

14. Addressing these concerns is important for macroeconomic stability over the medium term. As presented in the analysis under the reform scenario, it is important to maintain a prudent fiscal policy stance over the medium term, which would moderate the pace of debt accumulation. Given that the economy has been recovering from the fiscal crisis with the return of confidence, the authorities should take this opportunity to seek diversification of financing sources.

Figure 1:
Figure 1:

Swaziland Public DSA Risk Assessment

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are:200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.4/ Long-term bond spread over German bonds, an average over the last 3 months, 03-Feb-14 through 04-May-14.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.
Figure 2:
Figure 2:

Swaziland Public DSA - Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Source: IMF Staff.1/ Plotted distribution includes surveillance countries, percentile rank refers to all countries.2/ Projections made in the spring WEO vintage of the preceding year.3/ Not applicable for Swaziland, as it meets neither the positive output gap criterion nor the private credit growth criterion.4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.
Figure 3:
Figure 3:

Swaziland Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario

(in percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Source: IMF staff.1/ Public sector is defined as general government.2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
Figure 4:
Figure 4:

Swaziland Public DSA - Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Source: IMF staff.
Figure 5.
Figure 5.

Swaziland Public DSA - Stress Tests

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Source: IMF staff.
Table 1.

Swaziland External Debt Sustainability Framework, 2009-2019

(In percent of GDP, unless otherwise indicated)

article image

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Table 2:

Swaziland External Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)

article image
Sources: International Monetary Fund, Country desk data, and staff estimates.

Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

One-time real depreciation of 30 percent occurs in 2015.

Appendix IV. Fiscal Multiplier in Swaziland1

For the past two decades potential growth has continually decelerated in Swaziland. Although the government has significantly expanded its outlays, they seem to have had a low impact on growth. The estimations suggest the fiscal multiplier in Swaziland is about 0.1. To increase the growth impact of public spending, the authorities could favor capital as opposed to current expenditures and improve public financial management.

A. Introduction

1. For the past three decades the government pursued expansionary fiscal policies, while trend growth has continually decelerated. In the early 80’s growth averaged about 8 percent and thereafter it has continually decreased. Potential growth is currently estimated to be around 2 percent. At the same time the government pursued expansionary fiscal policies, as it increased its spending by about 20 percentage points of GDP in the past two decades.

Figure 1.
Figure 1.

Growth and Expenditures

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities, IMF staff estimates

2. Against this backdrop of increasing expenditures and decelerating growth, it appears that public spending in Swaziland has a low growth impact. This note estimates the effect of discretionary fiscal policy shocks on output (the so-called fiscal multiplier) and discusses some policy options to increase the output effect of public spending.

B. Literature Review

3. The fiscal multiplier is typically estimated using one of three competing methodologies. General equilibrium models (DSGE) as in Christiano et. al. (2011), structural vector autoregressions (SVAR) as in Blanchard and Perotti (2002), or with the so-called narrative approach (event analysis) as in Romer and Romer (2010).

4. There is no consensus on how to estimate the fiscal multiplier, as each of the above techniques has its own merits and pitfalls. The main drawback from the DSGEs is that the fiscal multiplier is ultimately determined by the assumptions and the calibration of the model. The narrative approach, intends to capture the effects of specific unexpected policy changes, however it typically suffers from endogeneity issues. SVARs are specifically designed to control for the automatic responses of endogenous variables, but require identification assumptions to recover the structural shocks.

5. Empirical estimates of the fiscal multiplier tend to vary with country characteristics. Ilzetzki et. al. (2013) show that the multiplier tends to be larger in industrial than in emerging economies; under predetermined exchange rate regimes and zero with flexible exchange rates; smaller in economies that are more open to trade; and might even be negative in highly indebted countries. Moreover as shown by Auerbach and Gorodnichenko (2012), the multiplier also varies for a given country, depending on the state of the economy (larger during downturns).

C. Estimation of Fiscal Multiplier in Swaziland

6. This section presents some estimates of the multiplier for Swaziland, using a traditional SVAR approach. It should be noted, however, that given the severe data limitations, the exercise can only be conducted with annual data which casts some doubt on the identified structural fiscal shocks. Thus, the estimates should be interpreted with care.

7. The estimation includes two endogenous variables (real GDP and real government primary expenditures) and one exogenous variable (South Africa’s real GDP) to control for the external environment. The estimation sample is from 1980 to 2013 and uses three lags (with less lags the errors have some residual autocorrelation, and with higher lags the results are similar). As explained above, since government spending affects GDP but output developments might also affect economic spending, the structural shocks are recovered with the standard assumption that real GDP shocks do not have a contemporaneous effect on fiscal policy.

Figure 2.
Figure 2.

Response to an Exogenous Unit Shock to Total Expenditures

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities, IMF staff estimates.

8. The expenditure multiplier in Swaziland is close to 0.1. The response to an exogenous shock to total expenditures (normalized to unity) is presented in Figure 2. As explained in Battini et. al. (2014), the effect vanishes after some periods (left panel), and has an inverted U shape with the maximum impact occurring in the second period (right panel). More precisely, after three periods the ratio of the accumulated response of output to the accumulated increase in spending (the fiscal multiplier) is around 0.1.

D. Factors Contributing to a Low Fiscal Multiplier in Swaziland

9. The composition of expenditures plays an important role in determining the effects of fiscal stimulus. The response to normalized shocks to current expenditures and public investment are presented in Figure 3 and Figure 4. Both shocks last about three periods, but the multipliers are 0.05 and 0.5, respectively. These estimates are broadly consistent with the work of Ilzetzki et. al. (2013). They find that in emerging markets spending multipliers range from 0.1 to 0.3, explained by a government consumption multiplier of zero and a public investment multiplier of 0.6. Moreover, as can be observed in Figure 5, the increase in government expenditures in the past three decades in Swaziland has also been accompanied by a decline in the share of public investment (which would tend to lower the size of the multiplier).

Figure 3.
Figure 3.

Response to an Exogenous Unit Shock to Current Expenditures

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities, IMF staff estimates.
Figure 4.
Figure 4.

Response to an Exogenous Unit Shock to Public Investment

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities, IMF staff estimates.
Figure 5.
Figure 5.

Share of public investment to total expenditures

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Swazi authorities, IMF staff estimates.

10. The efficiency of public spending is correlated with the quality of public investment management (PIM). Arizala (2014) estimates fiscal multipliers using a panel SVAR for a sample of 40 emerging and advanced economies, and finds that the quality of public investment management (PIM), as measured by the Public Investment Management Index of Dabla-Norris et. al. (2011), is positively correlated with the size of the spending multiplier) as presented in Figure 6. The PIM index is based on the public expenditure and financial accountability assessments (PEFA) from the World Bank. Table 1 presents the components of the PIM Index for SADC countries. Swaziland is among the lowest in the region, and moreover performs poorly in all sub-categories, which reflects a poor institutional environment underpinning public spending.

Figure 6.
Figure 6.

PIM Efficiency Index and Spending Multiplier

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: Dabla-Norris et al. (2012) and Arizala (2014).
Table 1.

Components of PIM Index for SADC Countries

article image
Source: Dabla-Norris et al. (2012)

11. Other factors may have also contributed to the low multiplier in Swaziland. As explained in Battini et. al. (2014), more open economies tend to have lower multipliers and Swaziland is in the 80th percentiles of the world distribution of openness to trade (with exports and imports around 50 and 70 percent of GDP). Such a high degree of openness results from the customs union with South Africa, which has an economy that is one hundred times larger than that of Swaziland. As a result, the industrial base in Swaziland is small and relatively underdeveloped.

E. Conclusions

12. The growth effect of public spending is low in Swaziland and several factors may explain this result. First, although expenditures have risen significantly during the last two decades, an increasing share has been allocated for recurrent rather than capital spending. Secondly, a relatively weak public investment management has lowered the efficiency of spending. Finally, Swaziland’s high propensity to import and its limited industrial base has resulted in a foreign demand leakage of fiscal spending. Thus, to improve the fiscal multiplier, it would be helpful to allocate higher weight to capital expenditures; improve the quality of PFM; and enhance the industrial base to reduce the dependency on imports.

Reference

  • Arizala, Francisco. (2014). “Fiscal Multipliers and Macroeconomic Fundamentals.” Forthcoming IMF Working Paper.

  • Auerbach, Alan and Yuriy Gorodnichenko, (2012). “Measuring the Output Responses to Fiscal Policy,” American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1–27, May.

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  • Battini, Nicoletta; Luc Eyraud, and Anke Weber, (2014). “Guesstimating Fiscal Multipliers,” Forthcoming IMF Working Paper.

  • Blanchard, Olivier and Roberto Perotti, (2002). “An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output,” The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329–1368, November.

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  • Dabla-Norris, Era; Jim Brumby, Annette Kyobe, Zac Mills, and Chris Papageorgiou, (2012). “Investing in public investment: an index of public investment efficiency,” Journal of Economic Growth, Springer, vol. 17(3), pages 235–266, September.

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    • Export Citation

  • Christiano, Lawrence; Martin Eichenbaum, and Sergio Rebelo, (2011). “When Is the Government Spending Multiplier Large?” Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78–121.

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    • Export Citation

  • Ethan, Ilzetzki; Enrique Mendoza, and Carlos Végh, (2013). “How big (small?) are fiscal multipliers?,” Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239–254.

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    • Export Citation

  • Romer, Christina and David H. Romer, (2010). “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks,” American Economic Review, American Economic Association, vol. 100(3), pages 763–801, June.

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  • Woodford, Michael, (2011). “Simple Analytics of the Government Expenditure Multiplier,” American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 1–35, January.

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    • Export Citation

Appendix V. Causes of Low Private Sector Investment2

1. Swaziland faces critical challenges to improve its growth performance. The slowdown in economic growth—observed in the past decades—has been apparently associated with its inability to maintain private investment crucial for sustainable economic development (Figure 1). A couple of structural factors—some of which are also discussed in the World Bank’s resent paper on growth in Swaziland (World Bank, 2014)—are identified behind these private sector developments.

Figure 1.
Figure 1.

Average Private Fixed Capital Formation and GDP Growth: 1990s and 2000s

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: IMF WEO, staff calculations.Sample: Non-oil exporting middle income contries in North and Sub-Saharan Africa.

2. First, relatively weak business environments in Swaziland have undermined private sector development, as recognized in the Economic Recovery Strategy (ERS) and the Investor Road Map (IRM). According to the World Bank’s 2014 Doing Business Indicators, Swaziland is ranked 123rd out of 189th countries on the ease of doing business. Although some indicators show relatively good performance (e.g. dealing with construction permit and paying taxes), Swaziland ranks 172th and 176th on the ease of starting business and contract enforcement, respectively.3 Though efforts have been made to formulate strategies (e.g., the Investor Road Map and the Economic Recovery Strategy) to enhance private sector development, their implementation has been limited.4

Table 1.

World Bank’s Doing Business Indicators (2014)

article image
Source: World Bank’s Doing Business (2014).

  • Starting a business in Swaziland is more difficult, relative to the average of Sub-Saharan African countries. The number of procedures to legally start and operate a company in Swaziland has remained relatively high, and there has been no improvement in the costs of starting a business, while Sub-Saharan African countries, on average, have made progress. Meanwhile, contract enforcement in Swaziland—an indicator for the protection of investor rights—is quite slow (it takes about 952 days to enforce contracts) and costly (56.1 percent of the claim).

Figure 2a.
Figure 2a.

What does it take to start a business?

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Source: World Bank Doing Business (2014).
Figure 2b.
Figure 2b.

How efficient is the process of contract enforcement?

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Source: World Bank Doing Business (2014).

  • Furthermore, the World Economic Forum’s 2014 Global Competitiveness Indicators suggest that the major constraints to doing business in Swaziland are inefficient government bureaucracy, corruption, and access to financing. Particularly, relatively low domestic credit to private sector and the decline in access to finance suggest a potential room to improve credit, and thus, private sector activities.

Figure 3a.
Figure 3a.

Domestic Credit to the Private Sector

(Percent of GDP)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Source: World Bank.
Figure 3b.
Figure 3b.

Access to Credit

(Borrowers from commercial banks per 1,000 adults)

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Source: World Bank.

3. Second, macroeconomic uncertainties and prolonged weak growth performance may have also adversely affected investor confidence. The recent fiscal crisis has proven Swaziland’s vulnerability to exogenous shocks which has likely increased investors’ perceived macroeconomic risks. Furthermore, with prolonged weak growth performance, the expected returns from investment are likely undermined. Swaziland seems to be trapped in a “vicious cycle,” with sluggish growth prospects leading to low private investment, which in turn lowers the growth potential.

4. Third, high HIV/AIDS prevalence and slow progress on human development also appears to hold back investment and economic growth, while the recent improvement in medical treatment may mitigate some of the adverse effects of HIV/AIDS. The impact of the HIV/AIDS epidemic (prevalence rate is estimated at around 26.5 percent of adults ages 15–49 for 2012 (UNAIDS, 2013)) has resulted in high mitigation costs, absenteeism, and loss of human capital, which has adversely affected labor productivity and lowered the returns to investment (Simtowe et al., 2011; and Asiedu et al., 2012). This together with the low levels of human capital—as measured by the quality of education and training and labor market efficiency—may be possible factors behind skills mismatch, and high unemployment (IMF, 2013). Skills mismatch and structural unemployment could, in turn, restrict investment in new sectors with high growth potential. Going forward, however, as the HIV/AIDS prevalence rate has stabilized, and medical treatment options have recently improved, economic costs associated with HIV/AIDS are likely to be lowered, mitigating the adverse impacts on growth and private sector investments.

Figure 4a.
Figure 4a.

HIV Prevalence Rate and GDP Growth: 2000s

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Sources: IMF WEO, World Bank, and staff calculations.
Figure 4b.
Figure 4b.

Ranks on Quality of Human Capital and Labor Market

Citation: IMF Staff Country Reports 2014, 223; 10.5089/9781498344593.002.A001

Source: World Economic Forum (2014).

5. Fourth, some rigidities in land markets may have adversely affected private sector developments. Based on discussions with the Swaziland Investment Promotion Authority and investors, the World Bank (2014) identified tremendous demand from private sector investors for land. However, some features seem to prevent greater investment in the sector and a more efficient use of land. These include: (i) lack clarity and documentation of Swazi Nation Land (SNL) smallholders, which may limit some room to negotiate a more effective use of the land and may lower the incentives to invest in productivity-enhancing technology; (ii) limited access to credit, fragmentation and coordination problems for SNL smallholders, and (iii) unclear legal framework governing commercial investors’ access to land. Creating a clear, transparent legal and regulatory framework for commercial investors and supporting new initiatives in SNL can lead to higher and more sustained levels of investment in the sector. Therefore, improvements in land governance and management can help attract investment into agriculture and reinvigorate growth in the sector and the overall economy. The Draft Land Policy (2009)—an initial step towards providing a practical framework to deal with these issues, though further consensus is required—has been prepared but not approved by the Parliament. This, in addition, has led to private investors’ perceived uncertainty in land policies and markets.

References

  • Asiedu E., Y. Lin, and Kalonda-Kayama I. (2012), The Impact of HIV/AIDS on Foreign Direct Investment: Evidence from Sub-Saharan Africa, Economics Department WP Series 201207, University of Kansas.

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  • International Monetary Fund (2013), Enhancing Inclusive Growth and Employment in Small Middle-Income Countries, IMF Selected Issues Papers, Country Report No. 13/292.

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    • Export Citation

  • Simtowe F., K. M. Islam, and Kinkingninhoun-Medagbe F. M. (2011), The Impact of HIV/AIDS on Labor Markets, Productivity, and Welfare in Southern Africa: A Critical Review and Analysis, African Journal of Agricultural Research, Vol. 6(10), pp. 2118–2131.

    • Search Google Scholar
    • Export Citation

  • World Bank (2014), Institutions, Governance, and Growth: Identifying Constraints to Growth in Swaziland, preliminary draft, The World Bank, DC.

    • Search Google Scholar
    • Export Citation
1

The analysis is based on the status quo scenario.

2

Swaziland continues to maintain an exchange restriction subject to Fund approval under Article VIII arising from a 50 percent limit on the provision for advance payments for the import of capital goods in excess of 10 million emalangeni.

3

The authorities are taking steps to strengthen the surveillance of NBFIs. Large SACCOs are being assessed, and the rest is expected to be also assessed soon. Based on technical assistance from the IMF, the authorities plan to strengthen the regulatory and supervisory frameworks for NBFIs as well as building capacity for both off-site and on-site supervision.

4

The overall unemployment rate stood at 28.5 percent in 2010, while the youth unemployment reached 52.4 percent. No newer figures are available, but indications are that unemployment stays high.

5

Swaziland is a monarchy, where the King holds the executive authority, which may be exercised either directly or through the Cabinet or a Minister. Parliamentary elections are held every five years, following which the King appoints cabinet members, 20 out of 30 senators, and 10 out of 65 members of the lower house.

6

The SACU revenues will remain high in 2014/15 (19 percent of GDP), but medium-term prospects are uncertain. The authorities expect that the revenue would stabilize around their historical average of 17 percent of GDP.

7

During Swaziland’s annual review for AGOA eligibility in December 2013, the U.S. Government determined that Swaziland failed to satisfy the AGOA eligibility requirements due to violations of worker rights. Though the deadline was extended to May 15, 2014 for the Swaziland Government to satisfy five conditions, Swaziland failed to satisfy these conditions. The authorities are currently making efforts to meet the conditions by end-year, with a view to renewing the AGOA eligibility. Should Swaziland lose its eligibility from 2015, although the trade and growth impacts would likely be moderate (the GDP share of textile industry is about 3 percent), it could have large employment and social impacts.

8

The EU and the Africa, the Caribbean, and the Pacific Group of States (ACP) are committed to signing EPAs between the EU and regional groups of ACP countries, rather than bilaterally. While the current interim EPA is set to expire in October 2014, Swaziland is currently negotiating the EPA as part of the Southern African Development Community (SADC) group. Swaziland largely benefits from the EPA for its sugar exports to the EU (accounting for about half of its sugar exports and 9 percent of the total exports). A loss of preferential access to the EU market could have large impact on Swaziland’s exports and the economy. Protracted slower growth in Europe would also adversely affect Swaziland’s sugar exports.

9

International reserves stood at 4 months of imports, or 24 percent of GDP at end–2009. Yet, the government had to cut spending markedly during 2010–11 when the SACU revenues declined substantially, and reserve coverage dropped to 2.3 months of imports at the end of 2011.

10

The last review of the public sector wages took place in 2004, through which the overall compensation of employees increased by 24 percent in 2005/06 from the previous year.

11

The 2014/15 capital budget covers the ongoing projects (including the completion of a new international airport and road construction) and some new projects (the construction of a hotel and convention centre), with a view to boosting the tourism industry.

12

Under the 2014/15 budget, the education sector received the highest allocation (17 percent) of the total budget, to provide universal primary education and advanced skills training.

13

To assist the rationalization process, a set of spending reviews (driven by a medium term expenditure framework)—with ranking key priority policies and service delivery outcomes and outputs, and identifying opportunities for prioritizing resource allocation and reducing manpower costs—should be undertaken.

14

The 2012/13 Auditor General’s report found that the consolidated financial statements did not present fairly the financial position of the government. The report specifically identified: i) the lack of working relations between the Internal Audit and Auditor General’s office, ii) failure to submit audited financial statements by 14 out of 39 public enterprises for the past two years, and iii) the lack of reconciliation between ministries and the Accountant General’s office.

15

All the domestically-financed capital projects are appraised by the Ministry of Economic Planning and Development, based on the planning officer’s manual.

16

To raise growth, the World Bank suggested the following policy measures in its recent report (“Institutions, Governance and Growth: Identifying Constraints to Growth in Swaziland”): (i) enhancing the business environment (e.g., by improving and standardizing time period and procedures for company registration and ameliorating investor protection); (ii) enhancing public sector efficiency (e.g., by controlling recurrent expenditures and the public wage bill, increasing the efficiency and performance of public enterprises, providing more predictable and transparent regulatory systems, and accelerating the pace of implementation of reforms); and (iii) implementing the land reform (e.g., by assessing the current land management framework and building consensus around a unifying vision of land governance—a first step already identified in the Draft Land Policy of 2009, alleviating coordination problems faced by smallholders and providing better enforcement and dispute resolution mechanisms for commercial investors).

17

Based on the Privatization Policy (approved by cabinet in 2006), the privatization roadmap was formulated in 2007, which, however, has not been fully implemented.

18

The FSRA Act came into force in June 2010. It is now operational with the appointment of key staffs and the issuance of a set of core regulations. Most of the Savings and Credit Cooperatives (SACCOs) have been licensed, and large SACCOs are being assessed, with corrective actions being taken, based on recommendations by the IMF TA. The assessments will eventually cover all SACCOs. The FSRA, however, still faces operational challenges, owing to its weak capacity and resource constraints.

1

Prepared by Yi Wu.

2

The analysis is based on the baseline scenario.

1

Prepared by Yi Wu.

2

The SACU revenue declined by 94 percent during the crisis (2010/11- 2011/12, accumulated) from the level of 2009/10.

1

The macro-fiscal stress tests include standard shocks to growth and interest rates, a primary balance shock (a deterioration in the primary balance by a half of its 10-year historical standard deviation), an exchange rate shock (equal to a maximum historical movement over the past 10 years and an estimated exchange rate pass-through of 0.25), and a combined shock.

2

Specifically, Swaziland is subject to outward spillovers from exogenous shocks to South Africa’s economic performance. In particular, constrained external demand from Europe and the pull back of capital flows could adversely affect South African economy, and thus, result in weaker SACU revenues and terms of trade.

3

This customized shock is based on the level of SACU revenues during the 2010–11 fiscal crisis, which was 9 percent of GDP.

1

Prepared by Jose Torres.

2

Prepared by La-Bhus Fah Jirasavetakul.

3

These indicators should be interpreted with caution due to a limited number of respondents, a limited geographical coverage, and standardized assumptions on business constraints and information availability.

4

The recent achievements in the business climate reforms include: the introduction of VAT in 2012 (replacing the general sales tax) and the amendments of the Trade Licensing Act and the Shop Trading Hours Act in 2011.

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Cover IMF Staff Country Reports
Kingdom of Swaziland: Staff Report for the 2014 Article IV Consultation
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2014: Issue 223
Publisher:
International Monetary Fund
ISBN:
9781498344593
ISSN:
1934-7685
Pages:
74
DOI:
https://doi.org/10.5089/9781498344593.002
Figure 1.

Improving Economic and Financial Conditions since the 2010–11 Fiscal Crisis

Fiscal Revenues by Type

(Percent of GDP)

Financial Sector Assets by Industry (2012)

(Percent of the total financial sector assets)
Figure 2.

Swaziland: Social Developments

SACU Revenues

(Percent of GDP, fiscal revenues, and imports)

Compensation of Employees of Sub-Saharan African Countries

(Percent of GDP, average of 2011–2013)

Public Investment Management Index

Fiscal Spending by Type

(Percent of GDP)

Total Wages and Wages Per Head

(2004/05=100)

Wages Per Head and CPI

(2004/05=100)

Estimated Expenditures under the Fiscal Rule

Estimated Fiscal Balances under the Fiscal Rule
Figure 3.

Recent Macroeconomic Performance and Outlook
Figure 3.

Recent Macroeconomic Performance and Outlook (concluded)
Figure 4.

GDP Growth and Private Sector Investment

Commercial Bank Credit to Private sector (Percent of GDP)

Real effective exchange rate

Gross official reserve and SACU receipts

(In millions Emalangeni)

Optimal Level of Reserves

(Months of imports)

Optimal level of reserves

(Months of imports)
Figure 1:

Swaziland Public DSA Risk Assessment
Figure 2:

Swaziland Public DSA - Realism of Baseline Assumptions
Figure 3:

Swaziland Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario

(in percent of GDP unless otherwise indicated)
Figure 4:

Swaziland Public DSA - Composition of Public Debt and Alternative Scenarios
Figure 5.

Swaziland Public DSA - Stress Tests
Figure 1.

Growth and Expenditures
Figure 2.

Response to an Exogenous Unit Shock to Total Expenditures
Figure 3.

Response to an Exogenous Unit Shock to Current Expenditures
Figure 4.

Response to an Exogenous Unit Shock to Public Investment
Figure 5.

Share of public investment to total expenditures
Figure 6.

PIM Efficiency Index and Spending Multiplier
Figure 1.

Average Private Fixed Capital Formation and GDP Growth: 1990s and 2000s
Figure 2a.

What does it take to start a business?
Figure 2b.

How efficient is the process of contract enforcement?
Figure 3a.

Domestic Credit to the Private Sector

(Percent of GDP)
Figure 3b.

Access to Credit

(Borrowers from commercial banks per 1,000 adults)
Figure 4a.

HIV Prevalence Rate and GDP Growth: 2000s
Figure 4b.

Ranks on Quality of Human Capital and Labor Market