Kingdom of Eswatini: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for the Kingdom of Eswatini
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International Monetary Fund. African Dept.
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Publication Date:
11 Feb 2020
eISBN:
9781513529769
ISBN:
9781513529769
Language:
English
Keywords:
ISCR; CR; government; deficit; SACU revenue; banking sector; government arrears; clearance strategy; intervention regime; government assets; private sector growth; Government debt management; Fiscal consolidation; International reserves; Africa; Global; Southern Africa; budget financing; control arrear accumulation; headline inflation; money creation
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2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Kingdom of Eswatini

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Kingdom of Eswatini

The Pitfalls of Unsustainable Fiscal Expansion

1. Among Southern African economies, Eswatini stands out for its close links to South Africa that have helped support economic progress, while anchoring policy-making.1 In the early 2000s, annual per capita GDP growth averaged 2.9 percent, boosted by South Africa’s strong performance following the end of apartheid. The peg with the South African rand anchored the policy framework and helped contain inflation, while financial integration and access to South African markets, and good road infrastructure supported the emergence of a somewhat diversified economy.

2. Economic links to South Africa have, however, exposed Eswatini to external shocks, amid structural bottlenecks constraining growth and deep social challenges (Figure 1). In 2010, the global crisis-induced recession in South Africa prompted a sharp reduction in Southern African Customs Union (SACU) revenue and triggered a fiscal liquidity crisis in Eswatini and a decline in international reserves. The government implemented significant fiscal adjustment, and with SACU revenue bouncing back, fiscal and external balances improved. However, since then, SACU revenues have been on a declining trend and growth has been below the pre-crisis period held back by decelerating private investment and stagnant competitiveness, reflecting structural impediments to business and widespread governance and regulatory issues (Figure 2). Socio-economic developmental challenges have remained deeply entrenched: about 40 percent of the population live in extreme poverty; unemployment is elevated, particularly among the youth; and, the HIV prevalence rate is one of the highest in the world.

Figure 1.
Figure 1.

Eswatini: Macroeconomic Volatility and Elevated Poverty and Inequality

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini authorities, World Bank World Development Indicators, and staff calculations.
Figure 2.
Figure 2.

Eswatini: Weak Governance and Regulatory Frameworks Hindering Investment and Growth

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini authorities, Worldwide Governance Indicators (WGI), The Global Competitiveness Report (GCR), Transparency International (TI), and staff estimations.Notes: WGI cover six dimensions of governance. The Corruption Perception Index from TI is a composite indicator measuring corruption. GCR indicators assess economic competitiveness. All these indicators have wide country coverage but rely on surveys of perceptions.
uA01fig01

Weak Governance and Institutions

(Scores, 2018)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: Worldwide Governance Indicator, D. Kaufmann (Natural Resource Governance Institute and Brookings Institution) and A. Kraay (World Bank) 2017 and IMF staff calculations.Notes: Shaded areas show the distribution of SACU countries excluding Eswatini (Botswana. Lesotho. Namibia, and South Africa) Scores are rescaled to 0–100 range; higher scores indicate better performance.

3. Expansionary budget policies and declining SACU revenue have recently resulted in rapidly growing public debt and declining international reserves. Since 2013, public spending has increased by about 7 percent of GDP as public wage costs, transfers to extrabudgetary entities, and capital outlays increased. With SACU revenue on a declining trend, a substantial fiscal deficit has emerged, resulting in public debt almost doubling over 2015–17 (from a low level), and government accumulating domestic arrears (about 4 percent of GDP in early 2018).2 With SACU revenue declining, the current account surplus narrowed and international reserves fell to about three months of imports (Table 1).

Table 1.

Eswatini: Selected Economic Indicators, 2015–24

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

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

12-month time deposit rate.

The series reflect the adoption of the BPM6 methodology and recent data revisions.

Public debt includes domestic arrears. Fiscal year runs from April 1 to March 31.

4. In 2018 and early 2019, growth temporarily recovered, as drought impacts lessened, but external buffers thinned further and vulnerabilities deepened. (Figure 3)

  • Real GDP in 2018 grew by 2.4 percent, the fastest rate in recent years, supported by high public spending and a temporary pick up in agricultural production, as the impact of the past years’ drought dissipated. The strong growth performance continued in the first two quarters of 2019, as public spending remained large, and manufacturing activities picked up; although growth started to decelerate in the third quarter.

  • Strong domestic demand, combined with high fuel prices and low SACU revenue, narrowed the current account surplus to 2 percent of GDP in 2018 (7 percent in 2017). International reserves declined to 2.6 months of projected imports (about 185 percent of reserve money), despite increased portfolio inflows by non-bank financial institutions (NBFI). The external position was moderately weaker than implied by macroeconomic fundamentals and desirable policies, with international reserve buffers thinning (Annex I).3 In 2019, international reserves declined further to 2 months of projected imports (about 130 percent of reserve money), despite the Central Bank of Eswatini (CBE) expanding its program of foreign currency purchases from banks.4

Figure 3.
Figure 3.

Eswatini: Unsustainable Fiscal Expansion Undermining Macroeconomic Stability

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini authorities and staff calculations.

5. Expansionary budget policies continued in 2018/19, and the fiscal position weakened further. Despite policies to contain the wage bill and reduce other non-wage spending, the FY18/19 fiscal deficit widened to 11.2 percent of GDP (7 percent in FY17/18) as SACU revenue declined (about 2½ percent of GDP) and, with weak public financial management systems, efforts to contain non-wage spending led to unreported spending commitments (Tables 2–3). Gross financing needs increased to 23½ percent of GDP. With banks’ limited appetite to expand sovereign exposures, the government drew on its bank deposits, which reached an all-time low, used additional central bank’s advances (2.6 percent of GDP), and increasingly tapped the domestic bond market dominated by the government-owned pension fund.5 Notwithstanding these actions, domestic arrears rose to about 6¾ percent of GDP by year-end, and public debt (including domestic arrears) reached 33½ percent of GDP, almost doubling from three years earlier.

Table 2.

Eswatini: Fiscal Operations of the Central Government, 2015/16–24/251

(Emalangeni millions)

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

The fiscal year runs from April 1 to March 31.

Gross public debt includes domestic arrears.

Table 3.

Eswatini: Fiscal Operations of the Central Government, 2015/16–24/251

(Percent of GDP)

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

The fiscal year runs from April 1 to March 31.

Gross public debt includes domestic arrears.

uA01fig02

Widening Fiscal Deficit

(Percent of fiscal year GDP)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Authorities and IMF staff calculations.

6. The weakening macroeconomic environment and rising government’s arrears have adversely affected credit and the banking sector. Credit growth to the private sector decelerated to 3.5 percent in 2018 (7.5 percent in 2017).6 With liquidity easing and relatively low loans-to-deposit ratios, the deceleration was mostly driven by weak demand from highly-leveraged households. Credit to households, particularly consumption credit, declined, though corporate credit remained buoyant (Figure 4). The difficult economic juncture affected banks’ asset quality, and NPLs rose to 9⅓ percent of total loans by end-2018. Despite the government’s high financing needs, banks’ direct exposures to government securities remained stable (around 12 percent of total assets), but NBFIs, particularly the government pension fund, substantially increased their exposures.

Figure 4.
Figure 4.

Eswatini: A Resilient Banking Sector Amid a Weak Economy

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini authorities, FinStats 2019, Global Findex database, and staff calculations.
uA01fig03

NBFIs Increasing Holdings of Government Debt

(Percent of total assets)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Authorities’ data.

7. Headline inflation declined and, in the context of the currency peg, the central bank lowered its policy rate. Average headline inflation declined to 4.8 percent in 2018 (6.2 percent in 2017) as core inflation lowered and food price inflation turned negative. In 2019, average inflation fell to around 3 percent, reflecting the weakening economy and the government’s decision to freeze electricity and water tariffs. In July 2019, the CBE followed the South African Reserve Bank (SARB) and lowered the policy rate, citing low inflation and persistent fiscal challenges.

8. Since taking office in late 2018, the new government has taken some actions to control rising fiscal deficits and has developed plans to boost growth. In line with staff’s past advice, the authorities began policies to contain the wage bill and restructure some loss-making public entities (Annex X). To support growth, the government has developed a national development plan and a roadmap of priority actions to support private investment. In the short term, it is facilitating the setting-up of selected foreign investment projects.

Outlook and Risks

9. Absent additional policy actions to contain the fiscal deficit, the economic outlook is unsustainable. The fiscal deficit is projected at around 8 percent of GDP this year and is expected to remain large thereafter, deepening government’s liquidity problems and weighing heavily on the outlook. Growth is projected to decline to around 1.2 percent in 2019 as agricultural activity stabilizes. Plans to pay off some arrears will temporarily boost growth in 2020, but over the medium-term growth would remain subdued as policy uncertainty rises and government’s domestic arrears continue accumulating7. Even if additional budget financing were available to avoid arrears, the outlook would remain unsustainable. Public debt would exceed 60 percent of GDP by the end of projection period, with government’s gross financing needs averaging about 22 percent of GDP. Absent additional external financing, international reserves would rapidly deplete, undermining the CBE’s capacity to support the currency peg and eventually leading to some form of abrupt adjustment (Table 4).

Table 4.

Eswatini: Balance of Payments, 2015–24

(Emalangeni millions, unless otherwise indicated)

article image
Sources: Swazi authorities; and Fund staff estimates and projections. Data reflects BPM6 classification.

Capital account minus financial account balance.

Positive sign indicates outflows.

In 2018 and 2019, gross international reserves exclude unmatured forward contracts.

Staff Medium-Term Projections (Baseline)1

(Percent of GDP, unless otherwise specified)

article image
Sources: Staff estimates.

Fiscal year data (April 1 – March 31).

10. Downside risks weigh on an already fragile outlook. The main risk arises from further fiscal slippages that could undermine confidence in the government’s ability to control public finances and the central bank to effectively support the peg. Doubts about the sustainability of the peg could result in accelerating inflation, currency mismatches in the private sector’s balance sheets, capital outflows and low growth. External shocks could exacerbate these vulnerabilities. If growth in South Africa remains sluggish, SACU revenues would decline, widening the fiscal deficit and accelerating the depletion of international reserves. Rising protectionist pressures and weaker global growth, including in South Africa, could negatively affect exports and GDP growth, and reduce SACU revenue, prompting a deterioration in both external and fiscal accounts. Moreover, increases in risk premia, driven by deteriorating market sentiments, could trigger rising interest rates in South Africa and, in the context of the peg, increase government’s financing costs and exacerbate funding difficulties (Annex II). Furthermore, Eswatini is exposed to climate events, like droughts, that could adversely affect growth and fiscal accounts.

11. Macro-financial feedback loops could intensify the effect of shocks and policy inaction. External shocks and tightening financial conditions in South Africa, or globally, could tighten domestic funding conditions for both the government and the private sector. With credit decelerating and government arrears rising, the financial position of the private sector would deteriorate further, undermining banks’ asset quality, reducing financial intermediation, and adversely affecting growth, with the risk that deteriorating expectations could create negative feedback loops.

Authorities’ Views

12. The authorities broadly agreed with staff’s outlook and risk assessment but see more upside to medium-term growth and stressed that some fiscal adjustment efforts are underway. They noted that a number of measures to contain FY19/20 budget overruns are being implemented, and that some tax measures (e.g., excises on alcohol, tobacco, fuel) have been introduced that will be fully effective in FY20/21. To restore sustainability and mitigate vulnerabilities, starting with the FY21/22 budget, they intend to develop a medium-term fiscal framework and implement a fiscal adjustment strategy to stabilize public debt. Finally, they expect that the implementation of the recently developed Recovery Roadmap and the 2019 National Development Plan would help increase private investment, reduce vulnerabilities, and deliver stronger growth over time. They concurred that external shocks would pose additional pressure on the already fragile outlook.

Policy Discussions

Discussions focused on: (i) designing a fiscal adjustment strategy to restore fiscal sustainability and strengthen external buffers, while supporting long-term development prospects; (ii) implementing reforms to boost private investment and competitiveness to reignite long-term growth, and (iii) advancing financial sector reforms to better manage macro-financial and AML/CFT risks.

A. Restoring Fiscal Sustainability and Supporting Long-term Growth

13. The authorities envisage a small reduction in the fiscal deficit next year, but have yet to develop a medium-term strategy to restore fiscal sustainability. They estimate the FY19/20 fiscal deficit to be around 6⅓ percent of GDP, and have approved budget spending ceilings that would contain the FY20/21 fiscal deficit to 5¾-6 percent of GDP. They intend to leverage a temporary increase in SACU revenue (2 percent of GDP) to finance an increase in capital spending and some wage increases, as well as meet rising interest costs, while continuing to contain new hiring and increases in non-wage expenses. Beyond the FY20/21 budget, the authorities are working on a medium-term fiscal and financing strategy to stabilize public debt.

14. Staff estimate that, without additional actions, the fiscal deficit over the next years would remain large and public debt would rise to unsustainable levels. Following the authorities’ recent actions, staff expect the FY19/20 fiscal deficit to be substantially lower than in the past but still large at about 8 percent of GDP because of revenue shortfalls and spending overruns in non-wage recurrent outlays. With limited financing, domestic arrears would increase to about 8¾ percent of GDP. Under the baseline scenario, which includes the authorities’ FY20/21 budget plans and no additional measure, the fiscal deficit would remain large, public debt would exceed 60 percent of GDP over the projection period, gross financing needs would average around 22 percent of GDP, deepening financing pressures and prompting further arrears accumulation (Tables 2–3). In addition, this outlook is subject to significant risks, particularly contingent liabilities from public entities as the financial situation of some entities is deteriorating (Annex III).

uA01fig04

Public Debt Under Alternative Scenarios

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Authorities and IMF staff calculations.

15. Immediate measures to reduce next year fiscal deficit and a credible medium-term consolidation plan, consistent with available financing, are needed to restore sustainability. Under staff’s macroeconomic projections, about 6 percent of GDP in measures is needed over the next three years, starting with FY20/21, to restore fiscal sustainability and bring public debt on a gradually declining path. While the goal is ambitious, the proposed adjustment is smaller than what was delivered in the aftermath of the 2010 fiscal crisis.8 With the limited financing options currently available, there is no fiscal space to smooth the adjustment over time and some front-loading of consolidation efforts is needed, which puts a premium on the ability to deliver reforms quickly. In the near-term, the fiscal adjustment would, however, have temporary adverse effects on growth.

uA01fig05

Changes in Primary Spending

(Percent of fiscal year GDP)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Authorities and IMF staff calculations.

Staff Medium-Term Projections (Adjustment Scenario)1

(Percent of GDP, unless otherwise specified)

article image
Sources: Staff estimates.

Fiscal year data (April 1 – March 31).

16. The adjustment should be based on policies that can deliver sustained fiscal consolidation and enhance the long-term growth prospects of the economy. Policy measures should include a combination of both spending and revenue measures, while protecting social and core capital spending.

  • With wages and transfers to extrabudgetary entities exceeding 60 percent of public spending, staff discussed a menu of near-term spending rationalization measures, including: (i) continuing policies limiting new hires and containing salary indexation over the next three years, extending these policies to all public entities and enterprises, while containing allowances and costs for special committees and appointments; (ii) rationalizing government administrative expenditures (e.g., travel costs, transfers to support traditional institutional frameworks); and (iii) prioritizing capital outlays to deliver budget savings and improve their impact on growth. Over time, additional savings could be achieved through: (iv) strengthening the efficiency of health and education spending, including through sectoral spending reviews (Figure 5), and (v) reforming public entities to improve their operational efficiency and reduce government transfers (see below). Staff also discussed design options to limit the short-term adverse effects on growth of some policies.

  • On the revenue side, measures should aim at creating a level-playing field for private investors and expanding domestic tax bases. Options include to: review the scope of existing discretionary tax reliefs; strictly limit the new special economic zone regime to new investment; broaden the corporate income tax base (e.g., thin capitalization, loss carry forward rules, special capital allowances) and the VAT base (e.g., electricity exemption, zero-rated fuel and other items), eliminate tax loopholes, and introduce a simplified tax regime for small taxpayers to facilitate compliance and revenue administration.

Figure 5.
Figure 5.

Eswatini: Public Spending Inefficiencies

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: IMF WEO, FAD Government Wage Bill and Employment Dataset, and World Bank ASPIRE.

Possible Adjustment Measures, FY20/21–22/23

(Percent of GDP)

article image
Sources: Authorities and staff estimates.

17. It will be important to accompany fiscal adjustment with measures to mitigate the effects on low-income households and to strengthen the distributive capacity of fiscal policy. Despite widespread poverty and high inequality, fiscal policy has only had a limited impact on addressing these challenges (Annex IV). While stronger growth and more equal access to economic opportunities are critical to address these challenges, there is room to adopt well-targeted budget policies and enhance some public programs to strengthen the impact of fiscal policy on poverty and reduce the adverse effect of the needed fiscal adjustment on the most vulnerable. The most effective policy options include: (i) increasing the old age grants, and possibly applying means-testing, and (ii) considering cash transfers targeted towards households with children. Improving the progressivity of the personal income tax would yield some revenue, with some limited improvements on overall inequality. The fiscal cost of these reforms would be limited (Annex IV). 9

uA01fig06

Elevated Poverty

(Percent of population)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: World Development Indicators.

18. Rationalizing extra-budgetary entities and public enterprises (PE) is key to the success of the fiscal consolidation efforts and to support long-term growth potential. Public entities and PEs provide essential services and operate in sectors that are key to the development of the country. However, they offer costly production inputs (e.g., electricity, telecommunications) and, with a few exceptions, represent a significant burden for the budget (about 5.4 percent of GDP) and a source of fiscal risks for the government.10 Aware of these challenges, the authorities are taking measures to improve the financial performance of a large medical referral scheme and some entities (e.g., University of Eswatini). In addition, they are developing plans to consolidate extra-budgetary entities and reviewing the governance structure of the sector. However, deep reforms are needed to enhance the sector efficiency and governance, while contributing to fiscal adjustment. In the short-term, reforms should focus on: (i) fast-tracking turnaround plans for key loss-making entities (e.g., Central Transport Administration, Eswatini Airways, medical referral scheme); (ii) enforcing limits on fast-rising wage costs for all entities and PE; (iii) reviewing entities’ mandates, rationalizing functions and eliminating unnecessary entities; and (iv) establishing a stronger accountability framework (e.g., board and management appointment procedures, business plans, performance contracts, revenue raising powers). Over time, it is important to establish an overarching governance structure to separate regulatory, policy, and financial monitoring responsibilities for the sector and drive future reform efforts.

19. Implementing fiscal adjustment measures requires accelerating reforms to strengthen public financial management (PFM) and procurement systems. The recent hurdles in containing public spending and arrears accumulation highlight widespread shortcomings in PFM. The authorities have recently introduced an invoice tracking system that has helped identify unpaid bills, however, deep reforms are needed.

  • In the near term, accelerating the implementation of the new PFM law is critical to formulate credible budgets, establish a medium-term fiscal framework, and tighten budget execution processes (including through a single treasury account).11 In this context, centralizing all budgetary functions within the Ministry of Finance would help manage tight budgets and control arrear accumulation.

  • Fast tracking the adoption of the 2011 Public Procurement Act regulations and developing a cost-effective and transparent procurement system, including by revamping the tender board’s technical capacity, would deliver needed savings and enhance transparency. Procurement rules should focus on delivering value-for-money and not pursue developmental objectives (e.g., supporting local producers) that reduce opportunities for savings and create risks of mismanagement.

  • Reviewing the rationale and prioritizing existing investment projects, establishing rigorous selection and appraisal processes for future projects, and centralizing the investment portfolio oversight with the Ministry of Planning would contribute to deliver fiscal adjustment and improve the growth impact of public investment (Annex V).12

Under the current circumstances, there is a premium to deliver short-term savings; however, it is important to develop over time a fiscal framework to deal with the volatility of SACU revenue and contain debt levels, possibly through fiscal rules.

20. A transparent strategy to clear existing arrears would support the normalization of the fiscal situation and ease pressure on the private sector. Such a strategy would firstly require to have in place adequate controls to limit the accumulation of new arrears. Moreover, it would entail to perform a comprehensive stock taking exercise and thorough verification of existing claims, define transparent repayment plans and, importantly for fiscal planning, to liquidate arrears through the standard budget process (Annex VI).

21. Over time, fiscal adjustment would restore macroeconomic stability and enhance the long-term growth prospects of the economy. The adjustment would compress domestic demand and help re-build international reserves buffers, thus contributing to restore macroeconomic stability. In addition, fiscal adjustment measures would help reduce the cost of key production inputs such as electricity and telecommunication, better align wage dynamics to productivity trends, and lead to more efficient and growth-enhancing public investment.

22. As the government consolidates, the central bank should refrain from providing further budget financing and keep the policy rate broadly in line with the SARB’s rate. The peg with the South African rand has provided an effective nominal anchor for monetary policy and allowed some space for the CBE to tailor the policy rate to the cyclical position of the domestic economy. However, the peg and a stable inflation differential with South Africa have entailed some loss of price competitiveness relative to South Africa, its main trade partner (Annex VII). Going forward, the CBE should maintain the policy rate broadly in line with the SARB’s rate, with a small positive spread to reflect differential risks and economic uncertainty due to possibly slow fiscal adjustment. To support the peg, the CBE should refrain from providing further budget financing. In addition, the CBE should control base money creation and domestic liquidity, particularly if the financing of government’s needs prompts additional foreign borrowing and large repatriations of assets held abroad by NBFI’s (Table 5).

Table 5.

Eswatini: Monetary Accounts, 2015–241

(Emalangeni millions, unless otherwise indicated)

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

End of period.

Excludes rands in circulation.

Authorities’ Views

23. The authorities underscored their commitment to take measures to stabilize public debt and avoid the accumulation of domestic arrears. They agreed that the fiscal outlook is unsustainable and a cumulative adjustment of about 6 percent of GDP is needed over the next few years to stabilize public debt and avoid domestic arrears. They noted that some initial steps have been taken, including freezing new hires, increasing some excise tax rates, and restructuring the medical referral fund. To provide relief to government’s suppliers, they have also secured external financing from the African Import-Export Bank to clear part of the domestic arrears stock in 2020. Finally, they agreed on the need to develop medium-term fiscal plans to stabilize public debt dynamics and avoid further arrears accumulation, a process that has already started.

24. The authorities intend to pursue a more gradual consolidation strategy than suggested by staff to account for capacity constraints and concerns with the adverse effects of adjustment on growth. For FY20/21, they plan to continue current policies to contain new hires and restrain increases in non-wage expenses. However, they noted the need to provide some wage increases after years of no inflation adjustment, to increase capital outlays to complete ongoing projects, and observed that the restructuring of PEs will need to be implemented gradually. Accordingly, they plan to start fiscal adjustment with the FY21/22 budget and spread adjustment measures over the following four or five years. To support these plans, they intend to adopt a medium-term fiscal framework starting with the FY21/22 budget. To protect the poor, they have increased the old age grant and are considering introducing programs to target poor children. On procurement, the authorities reiterated the importance of using procurement rules to support local suppliers, but concurred with the need to improve the effectiveness of the tender system and will seek technical assistance in this respect.

B. Implementing Supply-Side and Governance Reforms to Reignite Growth

25. Structural impediments to business and weak governance are hampering competitiveness and private investment, hindering growth and employment prospects. Since the early 2000s, both the contribution of exports to growth and goods exports have declined as the country’s competitiveness has decreased (Figure 6). Deteriorating competitiveness reflects relatively high labor costs, elevated cost of key production inputs (e.g., electricity, telecommunications), and a number of non-tariff barriers in the region (e.g., customs costs, rules of origin) that increase the cost of accessing some of Eswatini’s main export markets (e.g. South Africa). At the same time, private investment has sharply decelerated, the contribution of capital to growth has been negligible and productivity growth negative. As a reflection, the country’s indicators of ease of business, regulatory environment, and governance have been low, held back, among others, by inefficient government bureaucracy, limited control of corruption, weaknesses in contract enforcement, and shortages of skilled labor force (Figure 7).

Figure 6.
Figure 6.

Eswatini: Weakening Export Competitiveness

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: CBE, MoF, World Bank Doing Business, IFS, ILO, and IMF staff calculations.
Figure 7.
Figure 7.

Eswatini: Supply-Side and Governance Constraints Limiting Private Investment

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini authorities, Penn World Tables, World Bank Doing Business, Worldwide Governance Indicators (WGI), Global Competitiveness Indicators (GCI), and staff calculations.Notes: WGI and GCI are perception-based measures with wide country coverage. Doing Business indicators are based on a survey of experts using hard data. Country coverage is wide but refers to businesses in largest cities.
uA01fig07

Low Capital Contribution and Declining Productivity Growth

(Percent)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Authorities, Penn World Table, World Development Indicators, and IMF staff calculations.

26. Aware of these challenges, the authorities have made supporting private investment and boosting growth the central tenets of their development strategy. The 2019 National Development Plan focuses on improving governance, facilitating private investment, and enhancing human capital. In addition, the authorities have developed a Strategic Roadmap of priority and high-impact actions in these areas.

27. Supply-side and governance reforms, together with fiscal consolidation, would boost competitiveness and private investment, and support long-term growth and employment. A credible fiscal consolidation would help create a stable macroeconomic environment and remove some of the impediments to private investment. In addition, reforms are needed to (Annexes VII-VIII):

  • Strengthen governance, and improve business conditions. Reducing vulnerabilities to state-capture and corruption (e.g., strengthening the anti-corruption framework and the public procurement system), and improving regulatory transparency (e.g., ad hoc preferential tax treatments, investment procedures) would simplify the investment environment and facilitate the entry of new investors. Streamlining business regulations (e.g., starting businesses, licensing requirements, including trading licenses, lowering regulatory compliance costs and other fees), and strengthening investors protection (e.g., contracts enforcement, property and investors’ rights, including for land, creation of commercial courts, legal labor disputes) would facilitate private investment and boost growth, while increasing the capacity of the economy to create new employment.13

  • Address weaknesses in product market regulations. Removing the causes underlying the high costs of key production inputs (e.g., electricity, communications), including by restructuring PEs operating in these sectors, reviewing regulations hampering competition in domestic markets (e.g., access to electricity and telecommunications networks, preferential treatments in public procurement) 14 would reduce production costs and boost competitiveness.

  • Contain wage dynamics in the public sector and in the economy. Containing public sector wage growth and facilitating the adoption of more flexible wage policies in the private sector would help reduce the disconnect between wage dynamics and productivity trends and improve competitiveness.

  • Invest in human capital and reduce skill mismatches in the labor market. Ameliorating the shortage of skills and improving human capital are key to supporting long-term growth, boosting employment, and reducing poverty. In the short-term, this requires facilitating the issuance of work permits for skilled foreign workers. Over time, it is important to improve education attainments and access to education, especially for secondary and higher education and vocational training, which remain below peer countries.

28. The potential gains from supply-side and governance reforms could be significant. Growth could increase by 1⅓-2 percentage points per year if, for example, reforms help close part of the gap with middle-income countries in key product market, governance, and labor market indicators. In this respect, improving the quality of the regulatory environment for product markets appears to have the largest growth payoff.15

Authorities’ Views

29. The authorities consider supply-side reforms to facilitate private investment and fiscal adjustment policies as critical to preserve economic stability and boost long-term growth. They believe that a number of policies can have immediate impact on the country’s growth performance. Specifically, they are facilitating the setting-up of selected large foreign investment projects and have recently established special economic zones with new investment incentives. As part of their Strategic Roadmap, they also intend to create a one-stop shop for business registrations, simplify license requirements, gradually reduce corporate taxation, and establish commercial courts to speed the resolution of commercial disputes.

C. Managing Macro-Financial and Financial Stability Risks

30. Rising macroeconomic imbalances and the deteriorating economic environment are affecting the financial sector, although the impact is so far contained. The banking sector (assets about 30 percent of GDP) remains on average well capitalized and profitable, with good liquidity buffers. However, banks’ asset quality has weakened (Table 6). Over the last two years, NPLs have increased, and provisioning coverage has declined, with significant disparities across banks in terms of both capitalization and asset quality (Figure 4). The performance of the large NBFI sector, comprising a large state-owned pension fund and insurance companies (gross assets about 110 percent of GDP), remained positive. However, with government’s financing needs rising, the financial sector’s exposure to central government securities has increased, reaching in 2019 about 12 percent of GDP (about 70 percent of public domestic debt, excluding arrears).

Table 6.

Eswatini: Financial Sector Indicators, 2011–2018

(Percent, unless otherwise indicated)

article image
Sources: Central Bank of Swaziland; and IMF staff estimates. Note. Starting in 2012, statistics exclude Building Society. Last available year for branches of foreign banks is 2014. Data for 2018Q1 are preliminary.
uA01fig08

Banks’ Non-Performing Loans

(Percent of total loans)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Note: Shadow area indicates minimun and maximum NPLs ratio across banks.Sources: Central Bank of Eswatini; and IMF staff calculations.

31. The weakening economic environment could compound with existing structural vulnerabilities in the financial sector to amplify macro-financial and financial stability risks. With the economy expected to weaken further, NPLs are likely to remain on a rising path and continue weighing on banks’ profitability and capitalization. Tight interconnections within the financial sector could further amplify risks that need to be monitored and managed, including (Figure 8):

  • Banking sector concentration risks. Banks’ highly concentrated loan books and extensive reliance on wholesale deposits point to significant counterparty and asset-class concentration risks, and exposures to liquidity shocks. Stress tests suggest that while the banking sector is on average resilient to a doubling in NPLs, some banks could face difficulties in complying with capital requirements.16 Liquidity risks are also significant. While banks can on average meet significant deposit outflows, the capacity varies markedly across banks depending on their holdings of liquid assets and exposures to large depositors.

  • Sovereign-financial sector nexus. Over the past few years, the financial sector’s exposures to the sovereign have risen substantially. At end-2018, government-issued securities accounted for about 8 percent of NBFIs’ gross assets (6.4 percent in 2017) and 12 percent of banks’ assets, the largest exposures among SACU countries.

  • Interconnections among financial institutions and cross-border linkages. NBFIs are large and closely linked to banks and foreign markets, posing concerns about financial stability shocks. NBFIs account for 10 percent of banks’ deposits (3 percent of GDP) and hold foreign assets of about 40 percent of GDP. Even small portfolio adjustments by institutional investors and other NBFIs (e.g., reflecting concerns with domestic credit risk or spillovers from investments overseas) could trigger significant liquidity pressures on banks. These interconnections create potentially large contagion risk channels that need to be monitored. However, the Financial Services Regulatory Authority (FSRA) has yet to develop adequate regulatory and supervisory tools for the NBFI sector, against a legal framework that needs to be overhauled, and incomplete macroprudential and crisis management frameworks.

  • Household indebtedness. Compared to other middle-income countries, household leverage in Eswatini is elevated. Combined with banks’ large exposure to households (about 45 percent of bank loans), this raises concerns about banks’ resilience to households’ vulnerabilities, especially with the prospects of depressed real income growth.

Figure 8.
Figure 8.

Eswatini: Persistent Macro Financial Vulnerabilities

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Central Bank of Eswatini, FSRA, and IMF staff estimates
uA01fig09

Deposit-taking Institutions’ Exposure to Public Sector, 2018

(Percent of total assets)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: IMF, International Financial Statistics; and IMF staff calculations.

32. Progress is needed to enhance the ability to manage vulnerabilities and rising risks, while continuing strengthening the legislative framework of the sector (Annex IX). Specifically, improvements are needed in:

  • Banking sector oversight. The CBE is progressively implementing Basel II standards and enhancing risk-based supervision. However, at the current economic junction, the CBE should intensify supervision by: requiring the most exposed banks to develop credible action plans to address high NPLs; continuing to ensure proper assets classification, collateral valuation, and provisioning; operationalizing an early intervention regime, including mandatory corrective actions; and by accelerating plans to improve capital quality of selected banks. To help manage concentration risks, it is important to suspend plans to relax single borrower concentration regulations. Moreover, increasing capital regulatory requirements and introducing the option of jointly syndicating large loan exposures could be considered.

  • NBFI oversight framework, regulation and supervision. The oversight framework of NBFIs needs a significant overhaul. The finalization of legislative changes currently under preparation, including amendments to the FSRA Act and laws regulating specific sectors, should be prioritized (Annex IX). While completing legislative reforms, the FSRA should continue efforts to scale up its supervisory role and moving beyond simply monitoring regulatory requirements, particularly for systemically large NBFIs and lending entities (e.g., building societies, SACCOs). In this respect, large non-bank deposit-taking institutions (e.g., building societies) should be subject to a regulatory framework similar to that applied to banks.

  • Macroprudential policy framework and toolkit. Despite the large and interconnected financial system and its specific vulnerabilities, no explicit macroprudential framework exists in Eswatini. The Financial Stability Bill (FSB), still under preparation, assigns an explicit macroprudential mandate to the CBE and creates a financial stability framework and its approval should be prioritized. Meantime, the authorities should strengthen the coordination between the CBE, FSRA and the Ministry of Finance, including through the creation of a planned Macroprudential Forum. In this context, and to help curb risks from highly leveraged households, consideration should be given to introducing debt-to-income (DTI) and debt-service-to-income (DSTI) ratio requirements.17

  • Crisis management and financial safety net. Developing an effective crisis preparedness and management framework is critical to the stability of the financial system. Draft amendments to the Financial Institutions Act and the draft CBE legislation, if appropriately rectified, would strengthen the legal framework underpinning the financial safety net and enhance the independence of the CBE. In advance of the envisaged upgrade of the legal framework, the authorities should start: requiring banks to submit recovery and resolution plans; operationalizing emergency lending assistance; and, strengthening cooperation with the SARB on recovery and resolution planning for South African bank subsidiaries. Over time, a deposit insurance scheme that meets international standards should also be developed.

  • Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT).

The implementing regulations of the 2011 Money Laundering and Financing of Terrorism Prevention Act have not been enacted yet. However, the authorities are performing a national risk assessment that will inform a review of AML/CFT requirements and the risk-based supervision activities of the CBE, the FSRA and the Financial Intelligence Unit. Additional work is needed to develop a beneficial ownership framework, set up a central register for beneficial ownership information, and enhance the identification of domestic politically exposed persons.

Authorities’ Views

33. The authorities agreed that financial stability risks are rising, but noted that banks have large capital buffers, providing a strong assurance of stability. Nonetheless, they are intensifying bank supervision, requiring some banks to develop plans to address high NPLs. They also intend to introduce mandatory corrective actions to strengthen the early intervention regime. However, they are considering relaxing single borrower limits for specific sectors to support growth. The authorities remain committed to introduce a macroprudential policy framework, but they do not plan to introduce DTI and DSTI limits at this stage. They also noted that a bank resolution framework and provisions for emergency liquidity assistance are part of the amendments to the Financial Institutions Act and the CBE legislation. On AML/CFT regulations, the authorities noted that an assessment of AML/CFT standards will be conducted in 2020. Finally, they recognized the importance of enacting key legislative proposals to overhaul the oversight framework of the financial sector, particularly for NBFIs, and intend to finalize the drafting of key bills in the coming months.

Other Issues

34. Improving fiscal management capacity and the ability to effectively oversee the financial sector will be important to underpin the authorities’ policy efforts going forward. In consultation with the authorities, a medium-term strategy has been developed to closely integrate the Fund’s capacity development activities with Eswatini’s surveillance priorities. The strategy focuses on: improving PFM and fiscal data quality, developing medium-term macro-fiscal and budget frameworks, and supporting several legislative changes to strengthen the financial sector oversight (Annex XI).

35. Statistical data are broadly adequate for surveillance purposes, but further improvements in fiscal and national accounts data are warranted. Amongst others, the registration of budget spending commitments should be enhanced to avoid further unidentified spending items to arise, coverage of fiscal accounts should be expanded to cover all central government entities and the general government. In addition, more timely and consistent annual and quarterly GDP statistics should be produced, and the compilation of external sector statistics improved to reduce the still large errors and omissions (Informational Appendix).

Staff Appraisal

36. The Eswatini economy is on an unsustainable path, with subdued growth and deep developmental challenges. Years of fiscal expansion and declining SACU revenue have resulted in wide fiscal deficits and rapidly rising public debt. Domestic arrears have accumulated and international reserves have fallen below adequate levels. Despite expansionary policies, decelerating private investment and declining external competitiveness have resulted in subdued growth that has been unable to lift people out of poverty and reduce unemployment.

37. The new government has taken some measures, but additional actions are needed to bring the economy back to a sustainable path. Steps have been recently taken to control personnel expenses and slow arrears accumulation, which would result in a reduction in the FY19/20 fiscal deficit. However, going forward the fiscal deficit is projected to remain large and growth to be negative in per capita terms. Public debt would exceed 60 percent of GDP over the next few years, government’s liquidity problems would deepen, and international reserves would deplete. Downside risks dominate this fragile outlook and stem from potential fiscal slippages that may undermine the CBE’s capacity to support the currency peg; lower demand for key exports; and, further declines in SACU revenue. Extensive macro-financial linkages could amplify the negative effects of these shocks. Eswatini’s key policy challenges are to reduce the fiscal deficit to restore fiscal sustainability and external buffers, and reignite the country’s long-term growth prospects to reduce poverty and unemployment.

38. A credible medium-term fiscal adjustment plan, starting with policies to reduce next year’s fiscal deficit, is needed. About 6 percent of GDP in measures over the next three years, starting in FY20/21, would bring public debt on a gradually declining path and restore international reserve buffers. While the proposed adjustment is ambitious, it is smaller than what was delivered in the aftermath of the 2010 fiscal crisis. With limited financing, some frontloading of consolidation efforts is, however, needed, putting a premium on delivering reforms quickly and designing policies to reduce the adverse effects of fiscal adjustment on growth and the most vulnerable.

39. Policies should combine spending reductions and revenue increases that can deliver sustained adjustment and enhance long-term growth prospects, while protecting the poor. Policies should include: continuing current policies limiting new hiring and salary indexation and applying these policies to all public entities; rationalizing government’s administrative expenditures and transfers to public entities and enterprises, while reforming the sector; prioritizing capital outlays; and strengthening the efficiency of health and education spending. Additional adjustment would come from limiting discretionary and special tax reliefs and from widening the corporate income and consumption tax bases. Over time, these policies would help better align wage dynamics to productivity trends, and create a level-playing field for investors, with positive effects on private investment and competitiveness. Increasing old age grants, and introducing cash transfers to children would strengthen the distributive impact of fiscal policy and help protect the poor from the proposed adjustment. In this context, the CBE should maintain the policy rate broadly in line with SARB’s rate and refrain from providing further budget financing.

40. Fiscal reforms are critical to the success of fiscal consolidation plans. Developing a medium-term fiscal framework, strengthening budget formulation and expenditures controls, reforming extrabudgetary public entities and enterprises, and adopting transparent selection and appraisal systems for capital spending are critical steps to deliver fiscal adjustment. To support fiscal transparency, it is also important to revamp public procurement processes and set up a transparent arrear clearance strategy.

41. Pressing ahead with supply-side and governance reforms would facilitate private investment and strengthen competitiveness, boosting growth prospects and employment. Leveraging fiscal adjustment policies, supply-side and governance reforms should aim to: reduce vulnerability to state-capture and other forms of corruption (e.g., strengthening public procurement); streamline business regulations and regulatory requirements; reduce high electricity and telecommunications costs; better align wage growth to productivity trends; and avoid regulations hampering domestic competition (e.g., ad hoc tax incentives, preferential public procurement rules). Over time, it is important to improve education attainments and access to secondary and higher education to address shortages of well-educated and skilled workers.

42. The financial sector remains sound although risks are rising, thus progress is needed to enhance the capacity to manage vulnerabilities and strengthen the sector oversight. Despite an increase in NPLs, the banking sector remains well capitalized and profitable. However, with the weakening macroeconomic environment, bank supervision should be intensified, including by addressing high NPLs, operationalizing an early intervention regime, and suspending plans to relax single borrower concentration regulations. With a large non-bank financial industry, completion of the legislative changes underway to improve the oversight, regulatory and supervisory frameworks of the sector ought to be accelerated. While setting up a macroprudential framework, the coordination between the CBE, FSRA and the ministry of finance should be strengthened. Moreover, to help manage risk buildup from highly leveraged households, the introduction of DTI and DSTI limits could also be considered. Finally, efforts to develop the crisis preparedness and management capacity and strengthen the AML/CFT framework should be stepped up.

43. It is proposed that the next Article IV consultation with Eswatini takes place on the standard 12-month cycle.

Annex I. External Sector Assessment

In 2018, the external position of Eswatini was moderately weaker than implied by macroeconomic fundamentals and desirable policies. The current account surplus narrowed on the back of declining SACU receipts and a shrinking trade balance. Despite a net inflow in the financial account, particularly portfolio investments, international reserves declined, reflecting the deterioration in the current account. After a temporary improvement in 2019, the current account balance is expected to return close to the 2018 level. Since 2013, international reserves have been declining and in 2018 they were below the lower bound of the IMF’s reserve adequacy metric.

A. External Sector Assessment

Net International Investment Position

1. In 2018, the Net International Investment Position (NIIP) remained positive but declined somewhat. Eswatini remained a net creditor to the world, with an NIIP of 17.9 percent of GDP in 2018 (26.6 percent of GDP in 2017). Albeit the positive value, the NIIP has been deteriorating over the last four years on the back of declining international reserves, portfolio assets and other investment. Most of the external assets are in the form of portfolio investment and other investment assets (together accounting for 77 percent of assets abroad) mainly owned by the non-bank financial and corporate sectors.

uA01fig10

International Investment Position

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Authorities and IMF staff calculations.

2. Despite ample assets abroad, in the absence of fiscal adjustment, the NIIP is expected to continue declining. Under staff’s baseline scenario, the current account surplus is projected to be limited compared to capital outflows, hence prompting the NIIP to deteriorate further, including reserve assets.

Current Account

3. The current account surplus narrowed in 2018 and reached the lowest level since 2011. In the last five years, Eswatini has experienced large current account (CA) surpluses (10 percent of GDP on average) on the back of substantial, although declining, Southern African Customs Union (SACU)’s receipts and trade surpluses.1 In 2018, the CA deteriorated to 2 percent of GDP as the trade surplus narrowed, largely because of high fuel prices, and SACU revenues declined by 2 percentage points of GDP. The primary income balance has remained broadly in line with past trends, reflecting the accumulation of dividends abroad by some large non-financial corporations.

uA01fig11

Current Account Balance

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Authorities and IMF staff calculations.
uA01fig12

Terms of Trade

(2000 = 100)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

4. In 2018, the external position was moderately weaker than implied by macroeconomic fundamentals and desirable policies. Using the revised EBA-lite CA methodology, the current account gap is estimated at about 0.7 percent of GDP and the real exchange rate gap at -2.4 percent. The 2018 cyclically adjusted CA (3.8 percent of GDP) was broadly in line with the model’s CA norm, estimated at 3.1 percent of GDP.2 While small, the current account gap is composed of a large policy gap of -9.4 percent of GDP, reflecting a loose fiscal policy, and a large residual. The residual may reflect productivity differentials (measured by output per worker) with the rest of the world and data issues that result in large errors and omissions. The presence of large and consistently negative errors and omissions points to the possibility of a weaker current account balance than reported. In addition, considering the inadequacy of international reserves (see below), the external position in 2018 was assessed as moderately weaker than implied by macroeconomic fundamentals and desirable policies.3 Preliminary and still incomplete data indicate that the overall position in 2019 is likely to remain moderately weaker than implied by macroeconomic fundamentals and desirable policies as, despite the current account position is estimated to temporarily improve, international reserves have declined further. Staff’s proposed fiscal adjustment, together with structural reforms to improve external competitiveness, would contribute to improve the current account and bring the external position broadly in line with macroeconomic fundamentals, and build adequate international reserves buffers.

Table A1.1.

Eswatini: Current Account and Real Exchange rate Assessment Results

article image
Source: IMF staff estimates.

For CA regression, 2018 cyclically adjusted CA value. For REER regression, 2018 REER value in log.

For CA regression, this is the multilaterally consistent adjusted CA norm. For REER regression, REER norm in log.

Negative numbers indicate undervaluation. Elasticity of current account to real exchange rate gap is -0.30.

Real Effective Exchange Rate

5. Background. The lilangeni is pegged at par to the South African rand, and the nominal exchange rate depreciation has followed the rand. The REER has remained broadly constant since the 80s despite a nominal depreciation, largely reflecting rising price differentials with trading partners. However, there are signs of weakening competitiveness (Annex VII) since both the bilateral REER vis-à-vis South Africa as well as the REER deflated by unit labor costs have been appreciating since the 2000s.

uA01fig13

Nominal and Real Effective Exchange Rate

(Index)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: International Financial Statistics.

6. Assessment. The REER approach suggests an undervaluation of 23.6 percent. This is driven mainly by demographic factors (e.g. life expectancy, dependency ratio), which would suggest that Eswatini’s lower life expectancy should translate into low savings and a more appreciated exchange rate. However, this implication contrasts with Eswatini’s high savings (15–25 percent of GDP over the last five years). Given the uncertainty surrounding how well the REER model lends itself to examine the characteristics of Eswatini and the decline in external competitiveness, the CA methodology used above appears the preferable approach to assess the adequacy of the Eswatini external position.

uA01fig14

Real Effective Exchange Rate based on CPI and ULC

(Index)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Note: ULC-based REER was estimated using public wages as a proxy for overall wages in Eswatini due to data limitations. Wage growth during the salary years was adjusted downwards to account for one-off events.Sources: Authorities, OECD, IMF Information Notice System and staff calculations.

Capital and Financial Account

7. Differently from past trends, the financial account in 2018 was marked by large inflows, mostly in the form of portfolio investment. Following unusual FDI outflows in 2017, in 2018 FDI inflows returned to more normal levels, but portfolio investment registered significant inflows, largely driven by reversals of equity investments abroad by non-bank financial entities. This was likely driven by the expectation that the domestic asset requirements for institutional investors would increase, which prompted a temporary repatriation of assets. The reversal of flows of other investment was driven by lower accumulation of deposits abroad by corporates in light of stagnant exports over the year. Since most of the flow reversals observed in 2018 were linked to one-off events, the financial account is likely to return to the trends prevailing in past years. Over the last five years, Eswatini has experienced financial account outflows (about 3 percent of GDP on average) mainly driven by portfolio investments of the large non-bank financial sector (gross assets about 110 percent of GDP), including a fully-funded pension fund, and other investment reflecting significant savings by large exporters.

uA01fig15

Financial Account

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Authorities and IMF staff calculations.

B. International Reserve Adequacy

8. Eswatini’s international reserves have been on a steadily declining trend since 2013. In 2010, a sharp decline in SACU revenue prompted a drop in international reserves. In the following years, SACU revenue bounced back and helped restore healthy levels of international reserves well above the IMF metric, reaching about 4.5 months of import coverage. However, since 2013, international reserves have been on a declining trend. International reserves have dropped from a peak of US$767 million, equivalent to 4.5 month of prospective imports (about 18 percent of GDP) at end 2013 to US$430.1 million at end-2018, below 3 months of imports or 9.9 percent of GDP. This decline is mainly driven by a deteriorating trade balance and lower SACU revenue, in addition to large and negative errors and omissions that signal a lower current account balance than reported.

uA01fig16

International Reserves

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Authorities and IMF staff calculations.

Reserve Adequacy

9. Eswatini’s international reserves are below adequate levels. They are below traditional adequacy metrics, e.g., imports coverage (2.6 months of imports in 2018) and below the lower bound of the IMF’s composite metric (ARA) to assess reserve adequacy for countries with market access. According to the ARA, which captures vulnerabilities from multiple sources, reserves in the range of 100–150 percent of the composite metric are in general considered adequate. Using 2018 data, this would correspond to international reserves between 2.9 and 4.3 months of projected imports (10.2 and 15.3 percent of GDP). In 2018, gross international reserves ($430.1 million) fell to about 90 percent of the lower bound of the IMF’s reserve adequacy metric. By end-2019, international reserves declined further to about 72½ percent of the metric and, in the absence of fiscal adjustment, they are expected to continue declining as the current account would remain weak and economic uncertainty weighs on capital flows4.

uA01fig17

Contributions to Reserve Adequacy Metric

(Millions of US dollars)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Note: Projections based on staff’s macroeconomic baselineSource: IMF staff calculations.
uA01fig18

Eswatini. Assessing Reserve Adequacy (ARA) Upper and Lower Bounds

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

10. The high dependence of the CA on structurally volatile SACU’s revenue would suggest for Eswatini a cautionary approach in assessing the adequacy of reserves. Reflecting the high volatility of SACU revenue and their role in the CA, potential reserve losses from volatile SACU revenue would call for higher reserve levels. For example, were 20 percent of SACU revenue a measure of plausible reduced inflow risk, the adequate reserve level would increase by around 80 percent to about 5 months of imports, or 18.2 percent of GDP in 2018. 5

Annex II. Risk Assessment Matrix1

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Annex III. Debt Sustainability Analysis

Since 2015, Eswatini’ s central government debt has doubled, although from low levels, due to elevated fiscal deficits, largely financed through domestic debt and accumulation of domestic arrears. Under the staff baseline, which includes the authorities’ budget plans for FY20/21 and no additional measures going forward, debt would continue to increase, but remain below the stress threshold. Gross financing needs would however be large and exceed the stress threshold, emphasizing short-term financing risks and the urgency for fiscal adjustment. These trends leave Eswatini’ public debt outlook exposed to significant rollover risks, as well as vulnerable to growth shocks and potential fiscal slippages, as well as macroeconomic and contingent liabilities shocks. The external debt profile indicates vulnerabilities to current account shocks.

A. Public Debt1

Background

1. Eswatini’s public debt has doubled since 2015 driven by large primary deficits (Figure A3.3). Between FY15/16 and FY18/19, the public debt to GDP ratio doubled from 17.7 to 33.4 percent of GDP, owing to a large and growing primary deficit averaging about 8 percent of GDP.2

Figure A3.1.
Figure A3.1.

Eswatini: Public DSA Risk Assessment

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.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 1 5% 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; 1 5 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/ EM BIG, an average over the last 3 months, 06-Aug-19 through 04-Nov-19.5/ 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 A3.2.
Figure A3.2.

Eswatini: Public DSA — Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: IMF Staff.1/ Plotted distribution includes all 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 A3.3.
Figure A3.3.

Eswatini: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(In percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: IMF staff.1/ Public sector is defined as general government.2/ Based on available data.3/ EMBIG.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+g-π)) 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.

2. With high and rising gross financing needs (GFN), the authorities have steadily increased their reliance on domestic financial markets. After reaching 14.8 percent of GDP in FY15/16, GFN further increased to 23.4 percent of GDP in FY18/19. With no access to external financial markets,3 the share of domestic debt rose from about 48 percent of total public debt in FY15/16 to about 70 percent in FY18/19, including central bank advances and domestic arrears.

3. The maturity and composition of public debt bear significant rollover and liquidity risks, as well as exchange rate vulnerabilities. At end-March 2019, short-term treasury bills and other short-term debt (i.e., central bank advances, domestic arrears) accounted for about 57 percent of government’s domestic debt, largely in the form of short-term treasury bills and pending invoices (80 percent of short-term domestic debt). As a result, 90 percent of government’s estimated gross financing needs going forward are related to short-term domestic liabilities, exposing the country to rollover risks. Moreover, absent fiscal adjustment, the fiscal financing gap would widen, and gross financing needs would rise further, pointing at significant liquidity risks. While public debt denominated in foreign currencies has recently declined relative to overall debt (because of fast rising domestic debt), it has reached about 10 percent of GDP (about one third of central government public debt), reducing debt sensitivity to exchange rate fluctuations.

Outlook and Risks

4. Under Staff’s baseline, which includes the government’s budget plans for FY20/21 and no additional measure, public debt would be rising and financing needs would be elevated (Figure A3.3).4 Under the baseline, the debt-to-GDP ratio would rise to 62 percent of GDP by the end of the projection period and GFN average around 22 percent of GDP and exceed the risk threshold level. In the absence of a deep domestic financial market, the increase in public debt would be driven largely by the continued accumulation of domestic arrears.5 The GFN could be significantly higher if the government clears the stock of domestic arrears and finance new arrears. For instance, in a scenario where arrears from FY20/21 and new arrears going forward were financed through one-year T-Bills and 2-year bonds, the GFN would markedly increase, exceeding 40 percent of GDP by FY24/25. In such a scenario, the GFN average would increase from 22 percent to 32 percent of GDP over the projection period, pointing at elevated financing and rollover risks.

uA01fig19

Additional GFN with Arrears Clearance

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Authorities and IMF staff calculations.

5. Alternative scenarios and stress tests highlight the critical importance of fiscal adjustment to ensure debt sustainability and resilience to shocks. At the current level of the primary balance and no further adjustment, even a relatively small shock would accelerate the build-up in public debt and increase the GFN (Figure A3.5). Stress analysis suggests that debt levels and GFN are particularly sensitive to GDP growth shocks (Figure A3.5).6 Combing GDP and primary balance shocks with macroeconomic shocks would bring public debt to reach nearly 90 percent of GDP and breach the debt level stress threshold.

Figure A3.4.
Figure A3.4.

Eswatini: Public DSA—Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: IMF staff.
Figure A3.5.
Figure A3.5.

Eswatini: Public DSA—Stress Tests

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: IMF staff.

B. External Debt7

6. Eswatini’s external debt and gross financing needs have been increasing recently, but remain low (Table A3.1). In 2018, the stock of external debt increased by about 1.4 percent of GDP to reach 17.2 percent of GDP and is expected to increase further in 2019. Public debt accounts for a cross-country early-warning exercise of EMs that have experienced episodes of debt distress. Debt distress events are defined as default to commercial or official creditors, restructuring and rescheduling events, or IMF financing. about 60 percent of total external debt8. Gross external financing needs increased to 3.5 percent of GDP in 2018.

Table A3.1.

Eswatini: External Debt Sustainability Framework, 2014–2024

(In percent of GDP, unless otherwise indicated)

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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.

7. Under the Staff’s baseline, external debt will gradually increase and then stabilize over the projection period with contained gross financing needs. The external debt ratio is projected to stabilize at around 24.1 percent of GDP as the current account surplus, above the debt stabilizing level, offsets exchange rate depreciation pressures. Gross external financing needs are expected to stabilize at around 4 percent of GDP over the medium term (Table A3.1).

8. Sensitivity tests suggest that Eswatini’ s external debt is particularly sensitive to current account shocks (Figure A3.6). A shock to the non-interest current account would place the external debt-to-GDP ratio on a sharp upward path, reaching 46 percent of GDP over the medium term. This result is driven by the high historical volatility of Eswatini’s current account balance, largely due to fluctuations in SACU transfers. However, higher interest rates or a slowdown in economic growth would, by themselves, have very limited effects on debt dynamics. A combined (interest rate, growth, current account) shock has, therefore, an impact on debt similar to the current account shock. A one-time real depreciation of 30 percent would raise the debt level, but it would not place debt on an upward path.

Figure A3.6.
Figure A3.6.

Eswatini: External Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ 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.21/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 2020.

Annex IV. Poverty and Inequality Trends in Eswatini: Harnessing Fiscal Policy 1

Over the past decade, poverty and inequality in Eswatini have fallen very little, and remain much higher than in peer countries. Poverty comes with limited access to basic housing services, health care, and education. Child poverty is also very high, and having a job in the private sector does not always guarantee exiting poverty, especially for low-educated workers. While creating more and better jobs will be critical to make inroads on these issues, there is room to enhance the redistributive and poverty-alleviating role of budget policies, including scaling up existing programs and targeting benefits towards children, and over time improving access to higher education.

1. Poverty and inequality in Eswatini have improved little in recent years and are widespread by international standards, amid limited distributional impact of budget policies.2 According the 2016/17 Household Income and Expenditure Survey, since the early 2000s, poor people’s income has grown fast, yet 38.6 percent of the population in Eswatini lives in extreme poverty measured by the $1.9 per day poverty line (42 percent in 2009), one of the highest poverty rate among middle-income countries.3 Widespread poverty combines with one of the highest income inequality in the world, with the Gini coefficient stable at around 50 percent. Against this background, Eswatini’s spending on the social safety net is low compared to other countries in the region and has limited impact. Cash transfers in Eswatini amount to less than 1 percent of GDP and reduce poverty by 1.2 percentage points only (from a poverty headcount of 39.8 percent to 38.6 percent) and the Gini coefficient by 1.5 points (from a Gini coefficient of 50.8 to 49.3). This annex used the recently published household income and expenditure survey to assess the main features of poverty and inequality in Eswatini, and how to strengthen the impact of fiscal policy.

uA01fig20

Poverty and Inequality

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: World Development Indicators.
uA01fig21

Consumption per Adult Equivalent, Monthly

(Annual growth from 2010 – 2016, by consumption deciles)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini Household Income and Expenditure Surveys 2010 and 2016, and staff calculations.
uA01fig22

Reduction in Poverty & Inequality Due to Social Assistance

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini Household Income and Expenditure Survey 2016/17, and CEQ calculations.

A. Being Poor in Eswatini: Poverty Dimensions

2. Poverty is particularly high amongst children, the elderly, and in rural areas. Using the national moderate poverty line (E975.3 per adult equivalent in 2017), 59 percent of the population is poor, and poverty is much higher amongst the elderly (74 percent) and children (69 percent). In rural areas, poverty is both more pervasive (70 percent) and intense, with the poverty gap index in rural areas at around 30 percent compared to 6 percent in urban areas.4

uA01fig23

Poverty Rates in Urban and Rural Areas

(Percent)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini Household Income and Expenditure Survey 2016/17, and staff calculations.

3. Relative poverty is widespread in urban areas too. Once differences in consumption patterns are accounted for, and relative poverty lines are used. poverty in urban areas is somewhat higher than in rural areas (28 percent and 18 percent respectively).5

4. Both the rural and urban poor and, more in general, people living in rural areas have lower access to services. Both poor rural and urban households have limited access to services such as sanitation and piped water. With the exception of electricity access, people living in rural areas, both poor and non-poor, have limited access to housing services, suggesting both lack of infrastructure in rural areas and low income are obstacles to access. Similar patterns hold for services such as education and health. Poor households, both in rural and urban areas, have less access to education and health care. For health care, members of households in the bottom decile are about twice as likely to report not getting care than members of households in the top decile. The cost of care is a major hindrance, as about 40 percent in the bottom decile reported high cost as the reason for not getting care.

uA01fig24

Access to Basic Housing Services

(Percent of population)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini Household Income and Expenditure Survey 2016/17, and staff calculations
uA01fig25

Access to Health Care by Consumption Decile

(Percent)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

5. While employment helps to escape poverty, many working people remain poor. Having a job reduces poverty by about 40 percentage points, but the poverty rate amongst the employed remains substantial at 38 percent6 Furthermore, the overall poverty rate amongst the employed hides substantial differences by type of employer: the poverty rate amongst civil servants is about 18 percent, while it is over 70 percent for the nearly 40 percent of household heads who report working for a private household. The working poor are mainly employed by private sector firms or private households, and are about half as likely as the non-poor to have a permanent contract.

uA01fig26

Poverty Rates by Employment Status

(Percent)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini Household Income and Expenditure Survey 2016/17, and staff calculations.

6. Education is strongly associated with lower poverty rates amongst workers. In both urban and rural areas, people with at least some secondary or higher education face poverty rates about 30 percent lower than people with primary education or less. While both groups report working for different types of employers at similar rates, those with primary education are somewhat more likely to work for private households, which is associated with higher poverty rates. More educated workers are likelier to have permanent contracts and have much lower rates of poverty for nearly all types of employers.

uA01fig27

Share of Working Poor by Level of Education

(Percent)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini Household Income and Expenditure Survey 2016/17, and staff calculations
uA01fig28

Poverty Rates for Employees of Private Sector Firms and Households, by Level of Education

(Percent)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

7. Children experience very high rates of poverty and limited access to education. Poverty amongst children is about 70 percent (compared to 59 percent for the entire population). Poor children tend to live in rural areas and in large families, and nearly all poor households contain children. Except for primary education, which is free, poorer children have much lower access to education than children from richer households. For example, children in the top decile are twice as likely to be enrolled in secondary school than children in the bottom decile. Given the strong correlation between education and poverty rates, lack of access for poor children is likely to transmit poverty across generations.

uA01fig29

Size and Composition of Households

(By consumption decile)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini Houshold Income and Expenditure Survey 2016/17, and staff calculations
uA01fig30

Net Primary and Secondary School Enrollment

(Percent by consumption decile)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

B. The Role of Fiscal Policy

8. Despite widespread poverty, Eswatini’s spending on social cash transfers is low relative to other SACU countries, and it has limited impact on poverty rates. In FY2016/17, Eswatini spent about 0.6 percent of GDP on cash transfers, much less than in Namibia (2 percent of GDP) and Lesotho (4.5 percent GDP). Two programs accounted for about 90 percent of these transfers: The old age grant (OAG) and the Orphans and Vulnerable Children (OVC) Education Grant. The old age grant is a near-universal program, which in FY 2016/17 gave E240 per month to citizens above the age of sixty.7 The OVC Education Grant contributes towards the cost of secondary education for eligible children. These transfers reduce poverty only by about one percentage point (with the old age grant having the biggest impact), and even their effects on the targeted groups are relatively small. For example, these transfers reduce elderly poverty rate and poverty gap by 2.8 percentage points (to 74 percent) and by 5.3 percentage points (to 33 percent) respectively. The existing programs give benefits to many non-poor households, and at the same time miss most of the poor households. For example, about one-third of the households receiving the old age grant are not poor. At the same time, about sixty percent of poor households do not benefit from the grant as they do not contain elderly members.

uA01fig31

Impact of Existing Transfers on Poverty

(Percent)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini Household Income and Expenditure Survey 2016/17, and CEQ calculations.
uA01fig32

Share of Households with Elderly Members

(Percent, by consumption decile)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini Household Income and Expenditure Survey 2016/17, and staff calculations.

9. Social spending, including education and health, is large and broadly progressive. In FY 2016/17, Eswatini spent over 13 percent of GDP on education, health, pensions and cash transfers. As measured by the Kakwani index, spending on education, health, pensions and transfers were progressive, with only tertiary education spending being regressive. However, the effectiveness of the spending is likely reduced by the large share taken up by the wage bill.

uA01fig33

Progressivity of Social Spending

(Kakwani index)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: CEQ calculations.

Social Spending in FY 2016/17

(Share of GDP)

article image
Sources: Authorities’ data.

10. The personal income tax provides some progressivity to the tax side, although less so than in neighboring South Africa. The top tax rate is 33 percent and applies to incomes above E200,000. Although South Africa imposes a lower rate of 26 percent for incomes of 200,000 Rands, it has several additional brackets and the maximum rate is 45 percent8 Marginal rates on income earners with taxable income above E500,000, who are responsible for about one-third of the revenue collected by the tax, are lower in Eswatini than in South Africa.

uA01fig34

Personal Income Tax Rates, Eswatini and South Africa

(Percent)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini Revenue Authority, and South Africa Revenue Service.

C. Strengthening the Impact of Fiscal Policy on Poverty and Inequality

11. Scaling up the old age grant and, over time, improving its targeting, are likely the most effective ways of increasing the poverty impact of the existing transfer system.9 In FY 2017/18, the old age grant was increased from E240/month to E400/month, which raised the cost of the program by about 0.2 percent of GDP and is estimated to have reduced overall poverty rate to 58.1 percent (from 58.9 percent) and the elderly poverty rate to 71.7 percent (from 74.3 percent). Further increasing the old age grant to E600/month could reduce overall poverty to 57.1 percent, and the elderly poverty rate to 68.6 percent, at the additional cost of about 0.3 percent of GDP (raising total spending on cash transfers to 1.1 percent of GDP). Targeting the old age transfers to poor pensioners would improve its impact and reduce poverty to 56 percent, but doing so will require developing new administrative capacity and may take time.

12. A cash grant to households with children would cover most of the poor households and better address the issue of childhood poverty and possibly education access. Simulations suggest that, for example, rather than increasing the old age grant, replacing it with a universal cash grant to households with children (E200/month per child) would cover more poor households, and reduce childhood poverty rates, while yielding similar overall poverty rates and the same fiscal cost as the old age grant. Under the new grant, even though the OAG is eliminated, the impact on elderly poverty would be mitigated, since many elderly poor live with children and would indirectly benefit from the child grant. Targeting the child grant would amplify its benefits. In this respect, targeting poor households with children may be easier to implement as the authorities have recently performed a pilot study using proxy means testing to target poor children.10

13. A mixed system, combining targeted old age and child cash grant could substantially reduce poverty and inequality, but targeting will be necessary to control costs. A targeted mixed system that gives E400/month to the elderly and E200/month to children, living below 110 percent of the poverty line, would leave both groups substantially better off. This program is estimated to reduce overall poverty to 55.9 percent, childhood poverty to 64.5 percent, and elderly poverty to 70.9 percent. Although the cost of such a system would be about 1.4 percent of GDP, Eswatini would still be spending significantly less than its neighbors.

Table A4.1.

Eswatini: Fiscal Cost, and Impact on Poverty and Inequality of Policy Reforms

article image
Sources: Authorities’ data, and CEQ simulations.

14. There is room to increasing the progressivity of the personal income tax to yield additional revenue, while marginally reducing inequality. The personal income tax could be made more progressive by raising the rate on incomes above E200,000 from the current rate of 33 percent. As an example, raising the marginal rate for incomes between E200,000 – E400,000 to 38 percent, and raising the marginal rate for incomes above E400,000 to 43 percent could raise about 0.4 percent of GDP in additional revenue while slightly reducing the Gini coefficient (by about 0.1 point).

15. In the long term, improving access to secondary education will be critical to reducing poverty. Eswatini has achieved near-universal primary school enrollment through offering free access. However, while the government spend about 7 percent of GDP on education (FY 2016/17), its net secondary school enrollment rate is only 51 percent, placing the country at the 20th percentile of middle-income countries, below the SACU average of 56 percent and substantially lower than the middle-income median of 72 percent. Furthermore, the much lower enrollment rates for children from poorer households is likely to transmit poverty across generations. In the medium term, facilitating access to secondary education would help close the gap between Eswatini and its peers.

uA01fig35

Net Secondary School Enrollment

(Comparison with SACU and Middle Income Countries)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Note: Latest available data for each country.Sources: Eswatini Household Income and Expenditure Survey 2016/17, World Development Indicators.

Annex V. Strengthening Public Investment1,2

1. Eswatini has one of the highest levels of per capita public capital relative to peer countries, although access to some key service remain low. This reflects sizable public investment over the years. The 2019 National Development Plan has an ambitious agenda to further scale-up public investment. Nevertheless, Eswatini performs modestly relative to its neighbors in terms of access and the perceived quality of infrastructure in key sectors such as electricity and water. Only 65 percent of the population has access to electricity, with only 42 percent of poor households having access to power. Moreover, Eswatini has one of the highest prices for electricity in the SACU. Access to water averages 42 percent nationally, with only 22 percent of poor households having access. Moreover, overall service delivery is weak, particularly in sectors such as healthcare and education.

uA01fig36

2017 Public Capital Stock per Capita, Thousands

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: IMF staff calculations.
uA01fig37

Access to Electricity and Water

(Percent of population)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Eswatini Household Income and Expenditure Survey 2016/17, and IMF staff calculations.

2. The quality of public investment management (PIM) suffers from various weaknesses across the investment cycle. On the IMF’s overall indicator of public investment efficiency, Eswatini’s estimated efficiency gap is 35 percent, broadly in line with the SSA average but slightly worse than the rest of SACU. Weakness across the spectrum of the public investment process contribute to the relatively low efficiency:

  • Weak governance undermines investment planning and selection. There is an absence of rigorous formal appraisal of projects prior to their inclusion in the budget. This also applies to some of the largest projects being implemented and creates uncertainty about their viability. Moreover, there are no explicit and transparent criteria for project prioritization, including some of the costliest projects currently ongoing.

  • Financial and technical constraints hinder resource allocation. Public spending has been consistently under-executed, reflecting both technical capacity challenges and fiscal constraints. The absence of multi-year budgets creates cash constraints, frequently disrupting project implementation. Various stalled projects saddle the budget and no resources have been identified to enable their completion. The diversion of resources across projects also slows down project implementation.

  • Poor project management leads to implementation hurdles. No single entity is tasked with responsibility for overseeing the entire portfolio of projects, with project management and supervision fragmented across different line ministries. Procurement, contracting, and contract management arrangements appear not to offer adequate protection from project scope revisions and project cost escalations. Projects suffer from steep but unexplained escalation in their total cost, resource unavailability, and lack of clarity on the optimal path with which to proceed.

3. With no fiscal space and low investment efficiency, emphasis needs to be placed on improving efficiency of investment to secure value for money and better service delivery. Comprehensive institutional reforms are thus needed with a view to:

  • Strengthen project appraisal and selection. There is a need to develop dedicated PIM regulation, on project appraisal, prioritization and selection, and roles and responsibilities of key stakeholders. PPP projects should await the implementation of a PPP framework, while implementation capacities need to be strengthened. A unit must be established within the Ministry of Economic Planning and Development (MEPD) for administering the PIM regulations and guidelines, overseeing implementation, performing the screening function, and overseeing the projects portfolio.

  • Improve public procurement and contracting, and project oversight. Government procurement and contract arrangements need to be reviewed to offer greater protection from, and to disincentivize, project cost adjustment and ensure timely completion of projects. The role of the Ministry of Economic Planning and Development (MEPD) as an implementer of projects should be discontinued with the Public Works and Transport (MPWT) and other ministries, departments, or agencies carrying implementation duties.

  • Improve budget financing framework and review resource allocation to current projects. Address weaknesses in the budget framework by credibly allocating resource to capital projects over time would allow the budget to credibly allocate resources to priority capital spending. A comprehensive review and reprioritization of the current investment portfolio is needed to identify projects for postponement or cancellation, to allow more resources to be assigned to priority projects that can be efficiently implemented, and completed.

Annex VI. Designing an Effective and Transparent Arrears Clearance Strategy1

1. Since 2016, Eswatini central government has been experiencing a significant build-up in unpaid invoices and the accumulation of domestic arrears that should be cleared. The central government’s stock of arrears had mothballed to around 7 percent of GDP in March 2019. Arrears accumulation reflected the combined effects of expansionary budget policies which were not fully financed, and weaknesses in the budgetary process and expenditure controls, which contributed to widening financing shortfalls. With budget financing issues deepening over time, the arrears problem has extended beyond the central government, including public entities and enterprises and local governments (with a stock of arrears estimated at 2 percent of GDP), including arrears across government entities. As part of the government’s fiscal adjustment plans to restore fiscal sustainability, a transparent strategy to clear existing arrears should be developed.

2. A pre-condition to embark on an arrear clearance strategy is to put in place actions that control and prevent the accumulation of new arrears. Avoiding the accumulation of new arrears is essential to prevent that the clearance becomes a rolling over process. In Eswatini, this requires improving both the budget formulation and execution processes, as well as addressing arrears accumulation outside the central government (i.e., public entities and enterprises). On budget formulation, annual budgets should provide realistic spending estimates, cover special funds and trading accounts, and be fully financed. Introducing the need for the ministry of finance to authorize the signature of high value contracts can also strengthen the budget. On budget execution, commitment controls within the standard spending execution have to be strengthened, eliminating expenditures processed outside the standard PFM channels, and individual and institution sanctions for violators should be enforced. Accounting and institutional oversight needs to be enhanced to ensure rules are observed. Finally, tighter controls on budget execution of extrabudgetary entities and public enterprises and effective penalties for violations need to be set up to prevent arrears outside the central government.

3. Based on cross-country experience, once arrear accumulation is under control, an effective arrears clearance strategy needs to follow a sequence of steps and principles:

  • Comprehensive stock-taking. The first step of a clearance strategy is taking stock of the existing unpaid invoices and commitments and define the size of the problem to be addressed. Line ministries should be held responsible for the completeness of arrears data for both the ministry and its subordinate extrabudgetary public entities and enterprises. The stock-taking process should be timebound with cut-off dates for reporting, and sanctions for non-reporting or incomplete reporting should be announced and enforced. Status of limitation for claims not reported on time could be introduced as needed. The recently introduced Invoice Tracking System (ITS) can help identify unpaid bills from Ministries, Departments, and Agencies (MDAs), if the ITS is comprehensively populated. A process to identify arrears from public enterprises, other public entities, special funds, trading accounts (e.g. CTA), and local authorities needs to be separately defined.

  • Claim verification. Claims should be verified and legally endorsed to contain risks of fraud and duplication of payments. In Eswatini, central government’s unpaid bills pending before the Treasury Department (processed through the Treasury Accounting System) have an established verification process. However, in case of uncertainty, external audits of ministries generating significant arrears could be undertaken to verify the completeness of reported liabilities. A verification process needs to be established for entities outside the central government, such as trading accounts, local authorities, and claims not processed via the treasury department.

  • Transparent repayment plans with clear prioritization. The repayment process needs to be transparent, with a clear prioritization in the order of payments to guarantee stakeholders that the clearance process is robust and fair and without undue interferences. Various prioritization criteria for repayment could be adopted, including: age profile, risks of penalties or possible legal actions, socio-economic risks, and disruption of critical ongoing projects.

  • Liquidation through the budget. Financing the clearance of arrears should be part of the standard budget process and arrears should be paid out of budget financing. Securitization options to pay existing arrears should be considered carefully as they create interest costs and increase financing needs in the future as securities mature, complicating debt management.

4. Finally, Cabinet approval of any strategy is a key step to ensure the comprehensiveness, transparency, and credibility of the arrear’s clearance process.

Annex VII. Trade, Export Competitiveness and Growth1

Over the last two decades, export performance in Eswatini has been deteriorating, and diversification of the export base and trading partners has narrowed. These trends reflect declining competitiveness. Underpinning the decline in external competitiveness are a rising price differential with South Africa, fast-rising and higher wage costs than peers, particularly for skilled workers, high inputs costs in network industries (i.e., electricity, telecommunications), weaknesses in business conditions and high border costs for exports to Eswatini’s main trade partners.

1. Growth in Eswatini is closely associated with exports performance, and the recent ratification of the AfCFTA is an occasion to assess the country’s competitiveness and its support to growth. Exports are usually among the major drivers of growth in small and open economies and Eswatini has been no exception. Since the early nineties, changes in GDP growth in Eswatini have been largely accompanied by changes in export growth.2 In recent years, the growth rate of exports has halved compared to the early 2000s (10 percent between 2000–2006) and has been associated with weaker GDP growth which has also halved over the same period (3.8 percent between 2000–2006). The recently ratified African Free Trade Area (AfCFTA) is a major step towards trade integration in the continent and may offer to the country an opportunity to strengthen exports and reignite growth. Specifically, the AfCFTA envisages eliminating tariffs on traded goods, liberalizing trade services, and addressing non-tariff barriers. In this respect, it may support a return for Eswatini to the higher GDP growth rates experienced in the past.

uA01fig38

Exports and GDP growth

(Percent)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: Central Statistics Office and IMF staff calculations.

A. Declining External Competitiveness

2. Over the last two decades, exports performance in Eswatini have been declining, reflecting negatively on GDP growth. Exports of goods and services have halved from about 78 percent of GDP in the early 2000s, a time when global trade was booming and commodity prices were high, to 40 percent of GDP in 2018. As a result, unlike peer middle income countries, Eswatini’s trade volumes have not kept up with global trends, resulting in a loss of share in global markets. Exports of services have similarly experienced a loss of market share and a trend decline, representing 1.5 percent of GDP in 2018 (about 10 percent of GDP in the early 2000s). The contribution of exports to growth is much lower from an average 3.2 percent during the 1990s and 2000s to 0.35 percent contribution during 2010–2017.

uA01fig39

Contribution to Real GDP

(Percent)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: Central Statistics Office and IMF staff calculations.
uA01fig40

Global Market Share in Goods Exports

(Percent of total world exports)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: World Economic Outlook and IMF staff calculations.

3. Eswatini’s export base has also narrowed and become less diversified, increasingly dominated by exports from a few traditional sectors. Up to 2008, exports were relatively diversified and of good quality and Eswatini was among the more diversified product exporters in Sub-Saharan Africa (measured by a Theil diversification index) and the quality level (measured by the unit value of exports) was higher than the average of African countries (see SM/15/354 report for details). In recent years, export diversification has, however, declined. Exports have increasingly been dominated by few items and there has been little increase in new products. Today, about 90 percent of exports are concentrated in four manufactured goods from traditional sectors: soft drink concentrate, sugar, textiles, and wood manufacturing. In particular, soft-drink concentrate accounts for half of goods exports in 2018 (compared to 33 percent in 2000).

uA01fig41

Structure of Exports, 2018

(Percent of exports of goods)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Central Bank of Eswatini and IMF staff estimations.

4. As a reflection, Eswatini’s exports positioning in the product space carry limited opportunities for product development and diversification.3 Eswatini’s exports (represented by the colored sections in the graph) are mainly positioned at the periphery of the product space (agricultural, textile, and soft-drink concentrate), indicating that, based on the connectedness between existing products and related products requiring similar know-how, there are limited opportunities for further product development leveraging current know-how. Further diversification based on know-how would require positioning in the dense middle as this offers opportunities to export other products with similar production processes.

uA01fig42

Eswatini in the Product Space, 2017

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Note: The colored sections represent Eswatini’s exports and their positioning in the product space. Non-colored nodes represent globally traded goods and their interconnectedness with related products requiring similar know-how. Product nodes are sized by world trade.Source: “The Atlas of Economic Complexity” by Harvard University.

5. Export concentration, compounded with a concentration in trading partners, suggests that the country has been unable to take advantage of its various trade agreements. Despite numerous trade agreements, including the Southern Africa Customs Union (SACU), the Southern African Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA), and with the European Union (EPA) and the United States (AGOA), among other regional bodies, about half of total trade is conducted with South Africa. Major commodities, such as sugar, textiles, and soft-drink concentrate are destined to South Africa. This increases the trade sector’s dependence on its neighbor’s performance. Other trade agreements such as the African Growth and Opportunities Act (AGOA), which gives Eswatini preferential access to US markets are not being exploited beyond textiles4.

uA01fig43

Selected Exports of Goods by Destination, 2018

(Percent of each goods exports)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: Central Bank of Eswatini and IMF staff calculations.
uA01fig44

Eswatini’s Trading Partners

(Percent)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: IMF Information Notice System.

B. Factors Hindering Export Competitiveness

Appreciating Real Effective Exchange Rates (REER)

6. Despite the nominal exchange rate has been depreciating over the last two decades, the country has been losing price competitiveness vis-a-vis its trade partners. The standard CPI-based REER has remained broadly constant over the last two decades, signaling that the nominal depreciation of the exchange rate has not translated in competitiveness gains because of a rising price differential in Eswatini compared to its trading partners. Given the large share of trade with South Africa, an important indicator of price competitiveness for Eswatini is the bilateral REER with South Africa. Unlike the general REER, the REER with respect to South Africa has been appreciating by 22 percent since the 2000s, reflecting an adverse inflation differential (since there is no exchange rate effect). Price competitiveness has been declining compared to other trade partners too because of a differential in wage growth. Indeed, Eswatini’s REER deflated using unit-labor costs has been appreciating by 33 percent since 2002.5

uA01fig45

Real Effective Exchange Rate based on CPI and ULC

(Index)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Note: ULC-based REER was estimated using public wages as a proxy for overall wages in Eswatini due to data limitations. Wage growth during the salary years was adjusted downwards to account for one-off events.Sources: Authorities, OECD, IMF Information Notice System and staff calculations.
uA01fig46

Nominal and Real Effective Exchange Rate

(Index)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: IMF Information Notice System.

Higher Labor Costs

7. Labor costs for skilled workers have been rising fast and their wages are now higher than in peer countries, together with a widening wage-productivity gap (Figure A7.1). According to the 2016 Labor Force Survey, over the period 2013–16, nominal salaries increased well above the inflation rate, rising on average 11 percent each year across all occupations. Following the fast increases in public sector wages, which almost doubled in three years, nominal wages increased significantly in several industries including trade (19 percent), manufacturing (8 percent), and agriculture (9 percent). Fast-growing salaries have resulted in Eswatini having relatively higher wages compared to other African and lower-middle income countries (LMICs) for high skilled (e.g. professionals, managers, and technicians) and mid-skilled labor (e.g. sale workers and clerical workers). In this context, the gap between wage and productivity dynamics has widened and contributed to erode further Eswatini’s competitiveness edge.

Figure A7.1.
Figure A7.1.

Eswatini: Wages by Occupation and Industry, and Skills Mismatch

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

8. Apart from fast rising public sector wages, the high wage premium for skilled workers reflects, among others, skills mismatches in the labor market. Eswatini has very high skill mismatches in the labor market.6 These mismatches contribute to the high unemployment rates for the lower skilled workers (e.g. elementary occupations, crafts, skilled agriculture, and plant operators), who also have more competitive wages compared to LMICs. 7 However, the relatively lower supply of skilled workers contributes to higher wage costs for skilled workers, particularly for high skilled occupations in the public sector, followed by professionals, education sector and financial sector workers. Thus, shortages of skills in the labor market and recent increases in public sector wages may explain pressures on overall wages and contributes to rising unit labor costs.

Costly Production Inputs: Electricity and Telecommunications

9. The cost of electricity in Eswatini is among the highest in the SADC region, hindering firms’ profitability and competitiveness. In Eswatini, electricity tariffs are cost-reflective and in recent years they have been rising fast. Electricity tariffs are now among the highest in the SADC at 16.2 US cents per kWh (Table A7.1). Underpinning the high electricity costs are high generation costs, contributing to 60 percent of total tariffs (ESERA cost of supply study, 2018) coupled with a monopoly market structure that prevents competitive price setting. Electricity supply is mainly covered by imports (about 70 percent), mostly from South Africa and Mozambique. The state-owned enterprise Eswatini Electricity Company (EEC) owns the monopoly on the transmission and distribution of electricity and has a dominant position in the local electricity production. Cognizant of these challenges, the authorities have started to deregulate the generation segment of the electricity sector, and the construction of an independent power producers (IPP) solar generation plant has recently started.

Table A7.1.

Eswatini: Cost of Local Inputs and Trade

article image
Source: World Bank Doing Business Indicators, International Telecommunication Union.
uA01fig47

Electricity Tariffs, 2019 (US cents per kWh)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: World Bank Doing Business indicators.
uA01fig48

Fixed Broadband Costs, 2016 (USD)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: International Telecommunication Union.

10. Relatively high telecommunications costs also contribute to hamper the country’s competitiveness. Following efforts by the regulator (ESCCOM) to reduce prices in the ICT sector and the licensing of a new mobile operator, mobile phone per minute tariffs have recently declined, but they are still 50 percent higher than in neighboring South Africa. Similarly, internet data charges are the second highest in SSA (ESCCOM report, 2016), while internet service provision stands at only 32 percent of the population.8 Moreover, the number of households’ fixed broadband connections is very low, and data costs are among the highest in the SADC (Table A7.1 and figure).9

11. High communications costs reflect a still weak market regulatory framework. While there are no regulations restricting access to the market, by national mandate, the EPTC, which owns the network infrastructure, sets the price for its use to both internet service providers and mobile operators. In addition, Eswatini has no immediate access to an international gateway and internet service providers must purchase capacity in neighbor countries, which partly contributes to high costs. Cognizant of these challenges, the authorities are considering liberalizing the sector by unbundling the EPTC into three separate and independent entities, separating the management of the network and encouraging competition in the fixed and mobile markets. However, progress on these plans has so far been slow and the regulator’s efforts to address the issues regarding accessing infrastructure need to be accelerated and its powers strengthened to ensure the cost and ease of sharing the facilities do not discourage competition and pose barriers of entry.

Non-tariff Trade Costs and Business Environment

12. Eswatini has good quality road infrastructure and freight imbalances do not seem to be an issue. In a landlocked country like Eswatini, transport infrastructure is key to improve trade integration. The country has overall good quality road infrastructure, which is the preferred mode of transportation for regional trade. In addition, given Eswatini’s large trade with South Africa (both imports and exports), the country seems to have more efficient trucking use compared to other SACU countries. Typically, transporters in peer SACU countries may need to charge the client for the full return trip to cover the empty return leg of the trip, given the large imbalances in trade with South Africa. However, limited data availability on transport costs in Eswatini prevent analyzing whether transport costs could be improved.

uA01fig49

Freight Imbalances, 2015

(Import trucks for each export truck)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: "Trade facilitation for global and regional value chains in SACU", World Bank 2015.

13. Eswatini ranks well in trading across borders, but customs compliance costs across the border and lack of harmonization in procedures are not negligible. While border cost to export (measured by documentary and border compliance costs) are lower than other SACU countries, South Africa’s higher border costs weigh on the total cost exporters face when trading goods with its neighbor. In addition, the cost to export per container in Eswatini is higher than the SACU median and middle-income countries and remains high in global terms. Border clearance time is efficient and time to export is lower than peers, but lack of harmonization in standard procedures, particularly between the SACU and the SADC, represents a concern for firms10.

uA01fig50

Export Related Costs

(Indexed, Eswatini=100)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Note: 1/Border tosl intrude costs on documentary as well as border compliance.Source: WorW Ban It WDI.

14. The business environment has become increasingly costlier to navigate, and governance weaknesses have risen. Excessive regulation and levies, weaknesses in government effectiveness, a slow process to start a business, and weaknesses and delays in enforcing contracts are harming Eswatini firms and the country competitiveness. In 2019, Eswatini ranked 117 of 190 countries in the World Bank Doing Business indicators with weaker performance in getting electricity, enforcement of contracts, starting a business and registering property. Regulatory challenges related to excessive regulation and fees are the biggest challenge reported by companies in surveys. These are challenges affecting the country’s competitiveness for new and existing businesses. In addition, the country’s governance indicators have been structurally low and worse than peer SACU countries hindered by limited control of corruption, which contributes to the cost of doing business. Cognizant of these weaknesses, authorities have placed strengthening governance and improving the business climate as key priorities in the Strategic Roadmap.

uA01fig51

Worldwide Governance Indicators, 2017

(Scores, higher is better)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: Worldwide Governance Indicators, D. Kaufmann and A Kraay.
uA01fig52

Doing Business indicators in Eswatini, 2019

(Scores)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: World Bank Doing Business Indicators.

C. Conclusions and Policy Recommendations

15. Several indicators point to eroding competitiveness. Exports as a percent of GDP have halved during the last two decades, and the export base and trading partners have become more concentrated. In addition, appreciating exchanges rate vis-à-vis South Africa and as measured by ULC have made Eswatini’s exports less competitive. Relatively higher labor costs and production costs, and a costly business environment hinder competitiveness.

16. Boosting export competitiveness and the role that exports may play in the Eswatini development require reforms focused on:

  • Reducing the cost of electricity and communications services. Addressing the causes underlying high electricity and communications costs, including by promoting private sector participation, access to infrastructure, and private sector investment in new technologies would contribute to reduce the cost of key production inputs, secure better electricity supply and higher speed on internet service, with positive effects on the country’s competitiveness.

  • Improving the availability of skilled workers and containing public and private sector wage dynamics. Alleviating shortages of skills in the short-term, by easing restrictions on work permits, and over time, by strengthening high education outcomes and training, would contribute to release pressure in the labor market for skilled workers. Containing growth in public sector wages and facilitating the adoption of more flexible wage policies in the private sector would contribute to more competitive labor costs dynamics and reduce the disconnect between wages and productivity and improve competitiveness.

  • Taking advantage of regional trade integration and harmonizing documents and border procedures. The authorities should work on leveraging the new AfCFTA area, and take advantage of Eswatini’s vast trading agreements and preferential access to the EU and the US, to diversify exports destinations and widen products export bases.

  • Strengthening governance and improving the business environment. Reforms to reduce vulnerabilities to corruption (e.g. strengthening the anti-corruption framework) and streamlining business regulations (e.g. ease of starting businesses, lowering compliance costs, and trading license requirements) would contribute to improve business conditions and lower costs of doing business in the country.

Annex VIII. Supply-Side and Governance Reforms to Reignite Growth1

Over the past decade, Eswatini has experienced weak growth hindered by a steady decline in private investment and declining productivity growth. Factors underlying the decline in private investment are governance weaknesses, inefficiencies in the regulatory framework for product markets, and weaknesses in the labor market, and a challenging business environment. Structural reforms that aim to relax these constraints could contribute to reignite growth by about 1⅓-2 percent.

1. Over the past decade, growth in Eswatini has been subdued due to decelerating private investment and declining productivity growth. During 2000–2007, GDP growth averaged about 4 percent supported by strong growth in the region. Since the global financial crisis and Eswatini’s 2010 fiscal crisis, growth in Eswatini has averaged about 2.5 percent, despite significant fiscal stimulus since 2015. The deceleration in growth reflects longstanding adverse trends in the growth engines of the economy. Investment has been on a declining trend, with private investment decelerating from about 17 percent of GDP in the early 2000s to 4 percent in 2018. Hence, capital-to-output ratios have been declining and the contribution of capital formation to growth has been negligible. Moreover, the deceleration in investment has been compounded by declining total factor productivity (TFP) contribution to growth, from about 2.3 percentage points in the early 2000s to 0.3 percent after the global crisis. With no fiscal space to support domestic demand, decelerating private investment and TFP will continue to hold back Eswatini’s growth potential. Reviving private investment is therefore central to reignite growth and address widespread poverty and elevated unemployment in the country. This annex identifies the key factors holding back private investment and examines supply-side reforms that can reverse the trend.

uA01fig53

Growth Accounting Decomposition

(percent)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: IMF staff estimates.
uA01fig54

Declining Capita I-to-Output ratio

(In units)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Penn World Table and IMF staff calculations.
uA01fig55

Declining Gross Fixed Capital Formation

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Central Statistics Office, Penn World Tables, and IMF staff estimates.

A. What Explains Eswatini’s Decelerating Private Investment?

2. Empirical evidence suggests that structural factors underpinning labor markets, the business environment, governance, and market regulations matter for private investment. Staff’s econometric analysis shows that for middle-income countries the gap between wage dynamics and productivity trends, skills mismatches in the labor market, flexibility of wages, and protection of property rights are associated with firms’ investment decisions.2 Extending the existing analysis to include indicators of governance and product markets regulation suggests that also these factors are relevant for private investment (Table A8.1).3 Specifically,

  • In specification (1) of our extended model, regulatory quality is the most important factor for investment among the Worldwide Governance Indicators (WGI).

  • Results in specifications (2)-(4) highlight the importance of efficient product markets as measured by the regulatory environment, reduced government’s presence in the economy and government spending efficiency. 4

  • Specification (5) confirms the importance of efficiency in labor markets in combination with the above factors. All cyclical factors have the expected sign, with growth and capital inflows having positive effects on investment and real lending rates have the opposite effect.

Table A8.1.

Eswatini: Factors Associated with Private Investment Across Middle-Income Countries, 2005–2017

article image
Note: * denotes significance at the 10% level, ** at the 5% level, and *** at the 1% level.

Index reflects perceptions of the quality of public services and the degree of independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.

Regulatory quality captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.

Countries with lower levels of government spending, lower marginal tax rates, and less state ownership of assets earn the highest score in this area.

GCI indicator addressing the question: "In your country, how efficient is the government in spending public revenue? (1 = extremely inefficient; 7 = extremely efficient)"

Moreover, recent analyses suggest that governance and regulatory indicators matter for TFP (IMF, 2019a)5. Additionally, reforms aiming to deregulate product markets, ease job protection legislation, and improve governance have considerable effects on investment and, with varying degrees, on productivity (IMF, 2019b)6. Eswatini exhibits significant weaknesses in most of these areas.

Governance Weaknesses

3. Eswatini lags SACU and middle-income countries (MICs) in most governance indicators, and the perception of corruption has been deteriorating overtime. Among the WGI, control of corruption—which captures the “perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as weii as capture of the state by elites and private interests”—has been declining. Similarly, regulatory quality has also been deteriorating. On the other hand, there have been improvements in government effectiveness and the rule of law, albeit from a low base and the overall scores continue to remain weak.

uA01fig56

Weak Governance and Institutions, SACU Countries

(Scores, 20l7)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: Worldwide Governance Indicators, D. KauFmann (Natural Resource Governance Institute and Brookings Institution) and A. Kraay (World Bank) 2017 and IMF staff calculations.Note: Shaded areas show the distribution of SACU countries (Botswana, Lesotho, Namibia, and South Africa), Scores are rescaled to 0–100 range.
uA01fig57

Governance Indicators

(Scale: -2.5 to 2.5, higher scores better)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: Worldwide Governance Indicators, D. Kaufmann and A. Kraay.

4. Reflecting these weaknesses, firms report corruption as the main obstacle for doing business in Eswatini. In the 2016 World Bank Enterprise Survey, 17.8 percent of businesses highlighted corruption as the main obstacle for doing business—compared to 5.2 percent in 2006 and 7.7 percent for Sub-Saharan Africa (SSA). Survey data suggest that instances and scope of bribery are relatively low in Eswatini, with the exception of government contracts (Box A8.1). However, about half (48.4 percent) of surveyed firms cited that gifts were expected to be offered to secure government contracts, and 17 percent of firms declared that gifts were expected “to get things done”. Overall, the 2017 National Corruption Perception Survey by the Ministry of Justice and Constitutional Affairs, found that 93 percent of respondents—unchanged from the 2010 survey—perceived corruption to be a major issue in Eswatini. The survey further illustrated an increase in tolerance for corruption compared to 2010, signaling this longstanding issue remains.

uA01fig58

Top Obstacles for Doing Business

(Percent of firms)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: World Bank Enterprise Survey 2016.

5. Corruption is a tax on capital and corruption perception indicators are associated with lower private investment. Payments of gifts and bribes to secure contracts, permits, or licenses, raises the cost of doing businesses, and lowers the returns on investment. Small middle-income countries in the region, with better perception of corruption have achieved higher levels of investment, including high-performers like Botswana and Cabo Verde.

Difficult Business Environment

6. The business environment in Eswatini has become more difficult to navigate. In 2019, Eswatini ranked 117th out of 190 economies in the World Bank Doing Business Indicators, with the ranking dropping in recent years. The main weaknesses relate to getting electricity, enforcing contracts, protecting minority investors and starting a business. In particular, enforcing contracts, defined as “the time and cost for resolving a commercial dispute through a local first-instance court, and the quality of the judicial process index”, takes longer and is costlier than in other SACU and Sub-Saharan African countries (956 days compared to 655 days in SSA). Reflecting these costs, the indicator of property rights protection has been declining, signaling shortcomings in how effectively and reliably the legal system enforces property and contract rights, despite the constitutional protection of property and the absence of expropriation events7.

uA01fig59

Doing Business Scores, 2019

(0 – 100 best)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: World Bank Doing Business Indicators.
uA01fig60

Property Rights Index

(Scale: 1–7, higher scores better)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: WEF Global Competitiveness Indicators.Note: Eswatini’s index for 2016–17 is not available.

7. Weaknesses in the regulatory environment are a major obstacle to private investment. According to the 2019 National Development Plan, the single largest challenge firms face in doing business is the regulatory framework. Regulatory quality, as measured by the WGI, reflects “perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development”. The regulatory quality has been deteriorating and is lower than other SACU, EMs, and MICs. Similarly, the regulatory burden indicator, as defined by the Fraser Institute, reflecting “the risk that normal business operations become more costly due to the regulatory environment, including regulatory compliance and bureaucratic inefficiency and/or opacity”, has been deteriorating and remains below peers. These trends may reflect, among others, increased red tape and inefficient bureaucracy, which are in part linked to higher perception of corruption.

uA01fig61

Regulatory Quality, 2018

(Scores, higher is better)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Note: Scores are rescal ed to 0–100 range.Source: Worldwide Governance Indicators, D. Kaufmann and A. Kraay.
uA01fig62

Regulatory Burden

(Scores, 0 – 10 best)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: Fraser Institute Economic Freedom of the World.

8. Lack of clarity on rules and procedures, particularly ‘Employing’ and ‘Reporting’ procedures, are among the top constraints for investors. Recent evidence suggests that results from the Swaziland Investor Roadmap (2005) about lack of transparency on investment procedures are still valid.8 Lack of general information, forms, and legislation; poor policy and administrative coordination among government agencies; and lack of transparency on investment incentives were among the main findings. Specifically, the most problematic procedures for ‘Employing’ are the approval timeframe for work permits, and ‘Reporting’ weaknesses include annual trading licenses required to all firms and each activity they operate in, the mining license policy and process, and lack of transparency in the decision of applications for tax breaks offered under the Development Approval Orders (DAO). While ‘Locating’ and ‘Operating’ procedures were identified as less binding, among the ‘Locating’ procedures, access to land remains challenging. Overall, the ease of navigating the system depends very much on the door through which investors came to the country and the availability of a local partner.

Ineffective Regulations in Key Product Markets

9. While market dominance is prevalent, the effectiveness of the regulatory framework of key product markets is limited, constraining private investment and growth. The small market in Eswatini naturally reduces the number of prospective players, resulting in market concentration and the dominance of few firms, including public enterprises. The Global Competitiveness Indicators, capturing the extent of market dominance and effectiveness of anti-monopoly policy at ensuring fair competition, have deteriorated consistently since 2010. In this context, some large public enterprises operate in key sectors of the economy, often providing inputs that are costly, in turn undermining the competitiveness of domestic firms and hindering their ability to compete in the regional market. Specifically, the cost of electricity and communications provided by public enterprises are among the highest in the SADC region. Moreover, the strong presence of subvented public enterprises in sectors such as agriculture distorts the playing field and likely crowds out the private investment in the sector.

uA01fig63

Extent of Market Dominance, 2010–2017

(index, 1–7 best)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: WEF Global Competitiveness Indices.Note: Estwani's index for 2016–17 is not available.
uA01fig64

Effectiveness of Anti-Monopoly Policy, 2010–2017

(index, 1–7 best)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Source: WEF Global Competitiveness Indices.Note: Estwani's index for 2016–17 is not available.

The Governance-Investment Nexus

There are various channels through which a weak governance framework can contribute to a worsening of the business environment, making it more difficult and costlier for investors to operate. In Eswatini, three channels appear to be at work, and sometimes they overlap and can be difficult to disentangle:

  • Perception of corruption comes across as the main obstacle to investment in firm surveys in Eswatini and this perception has worsened over time. Corruption can take various forms, such as petty bribery, exchange of favors using public positions or even broader capture of the organs of the state. Corruption is most likely in public procurement, which is rather weak in Eswatini. Anecdotical evidence suggests that some firms in Eswatini have stopped participating in public procurement processes out of corruption and late payment concerns.

  • An unlevel playing field can deter investors. Eswatini is characterized by strong insider-outsider dynamics, where insiders have preferential access to investment opportunities. In a regulatory framework difficult to navigate, outsiders can find it difficult to access investment opportunities, including serviced land, ad hoc tax breaks, licensing requirements. Such a state of affairs reinforces the dominance of a few players and inhibits competition.

  • An unbalanced public spending composition and rising inefficiencies in public investment translate in limited improvements in the infrastructure. Government spending has been skewed towards largely non-productive recurrent spending. Additionally, government capital spending, while increasing in recent years, suffers from both planning and governance weaknesses. Recent capital spending has been allocated towards low-impact projects, which over time would contribute little to close infrastructure gaps (e.g., in energy), and may deepen infrastructure weaknesses, thus inflating the cost of doing business.

Several policies, with synergies, could be used to promote better governance and support private investment. Such policies include:

  • Greater adherence to existing laws and regulations. The anti-corruption framework (prevention and enforcement) needs to be technically capacitated to deal with the backlog of cases currently under investigation and reverse the perceived culture of impunity. The AML/CFT framework must be bolstered to allow for stronger assessment relating to customer due diligence, beneficial ownership, asset declarations, and politically exposed persons. The proposed setting-up of the commercial court to deal with corruption cases needs to be expedited. All the entities involved in fighting corruption must be independent. Adherence to high standards also involves the public sector. It is important to enforce strict adherence to the Public Procurement Act (PPA) and ensure procurement complies with all regulations and requirements at all stages.

  • Levelling the playing field and reducing opportunities for corruption. Given the strong insider-outsider dynamics, the role of the Investment Promotion Agency must be strengthened so that it can operate as a proper one-stop-shop for investors. The role must extend from that of promotion to one where the agency is able to credibly address entry and regulatory barriers that outsiders face. Such measures must include efforts to accelerate access to land and utilities. Moreover, regulatory constraints that prevent new players from coming in, including due to domestic shareholding requirements, must be alleviated to increase competition.

  • Strengthening centralized procurement to promote cost savings and transparency, while tackling conflicts of interest and abuse. In this respect, it is important to adopt the 2011 procurement Act regulations, revamping the tender’s board technical capacity, and better capacitate the Public Procurement and Regulatory Agency to deliver on its mandate. Integrating SOE and local government procurement with that of the central government would allow for greater economies of scale and oversight. Improving the transparency of the procurement process is also critical. Several steps can be taken in this respect, including: creating a database of eligible suppliers (based on compliance and previous record criteria), publishing all tenders online to allow for equal opportunities and competition, including for SMEs, making public the winning bids as well as prices. Moreover, enforcement is of paramount importance. In this respect, payments in cases of non-compliant procurement payments should be delayed pending proper investigation, irregular contracts should be voided and prosecuted, and centralized procurement could be used to gather information—such as state employees, tax payer IDs and status, and the ultimate owners of companies—that can support law enforcement agencies in ethical violation and corruption investigations.

  • Improving public investment management. This includes cost-benefit analysis and budgeting to ensure they have economic merit and are prioritized in line with available financing. Strong safeguards must be put in place to stop projects that are initiated outside of the budget process. MOF authorization must be required for the signature of high value contracts to strengthen budget execution.

B. Potential Dividends from Structural and Governance Reforms

10. Structural reforms can have significant positive effect on growth. Following Prati et al (2011)9, the impact of structural reforms on GDP per capita growth was estimated using panel data regressions over a sample of MICs during 1998–2017 (the availability of structural indicators varies across indicators and countries). The following growth equation was estimated:

ln GDPi,t – ln GDPi,t-1 = α0 + α1 ln GDPi,t-1 + α2Reformi,t + μi + δt + εi,t

Where GDP is real GDP per capita in country i and period t, and Reform reflects a group of structural reform indicators. Four different specifications were run (Table A8.2), with a set of country and year fixed effects and covering a set of labor market, product market, and governance indicators. In most of these indicators Eswatini ranks below the median of the sample. To estimate the gains in GDP from improving each set of indicators, we assume that Eswatini’s indicators in each reform group increase gradually to the MIC median. Subsequently, we estimate the path for GDP per capita assuming reforms are undertaken and have the above estimated gains. Next, we obtain the dividends from reforms in overall growth rate terms by comparing the baseline real GDP path (after adding population growth) with the reform path over a 5-year horizon and we take the average growth rate.

Table A8.2.

Eswatini: Impact of Structural Reforms on GDP per Capita Growth in MICs, 1998–2017

article image

11. Structural reforms to bring Eswatini’s labor and product markets, and governance indicators to the level of other MICs can substantially increase growth. Reducing distortions in product markets and reforms to improve labor markets and governance would lift annual growth by 1.5 and 1.3 percent, respectively. Undertaking a comprehensive set of reforms across product markets, labor markets, and governance reforms, and accounting for overlapping effects, could be associated with an increase in GDP growth above the baseline of about 2 percent over a 5-year period. These findings are consistent with recent estimates of the impact of structural reforms in EMs. A recent study (IMF, 2019b) for a broad sample of EMs and developing economies finds that deregulation in product markets would lead to an increase in output of about 1 percent three years after the reform. The same study finds that improvements in governance would increase output by 2 percent after six years.

uA01fig65

Real GDP Growth Gains and Distance to the Frontier

(Eswatini)

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Sources: IMF Staff estimatesNote: The chart shows the distance from the frontier and the estimated increase in annual growth rate of real GDP if the gap is closed in five years The frontier is the median value for each indicator in a sample of MIC countries

C. Supply-side and Governance Reforms

12. Several reforms can help reduce bottlenecks to investment by improving governance, and labor and product market functioning, thus reigniting growth and employment:

  • Strengthening governance and government effectiveness. Reducing vulnerabilities to corruption, for example, by strengthening the anti-corruption framework, reforming the government procurement process, and improving public investment management would contribute to strengthen the governance framework.

  • Streamlining regulations to improve the investment climate and business conditions. Enhancing the transparency of procedures, availability of information, forms, and legislation online, greater clarity on the qualification for investment incentives, strengthening the role of the investment promotion agency to credibly address entry and regulatory barriers investors may face, and easing procedures to start and operate a business would make the business and regulatory environment easier to navigate and contribute to attract investment. In addition, accelerating the setting up of the commercial court, appointment of commercial judges, and adoption of electronic case management would enable the expediting of pending cases and improve contract enforcement.

  • Improving the functioning of key network industries and competition. Inefficient functioning of network industries, such as electricity and communications, inflate the cost structure of the economy and undermine competitiveness. Improving the regulatory framework in these sectors would help reduce costs and create a playing field to allow market entry by new investors.

  • Investing in human capital and addressing shortages of skills. Closing the skills-gap in the labor market by better aligning higher education and vocational training to industry needs, improving education attainments and access to education, especially for secondary and tertiary education, and reducing timeframe for work permits would have positive spillovers to growth and employment.

  • Aligning wage and productivity dynamics. Establishing a well-structured salary policy in the public sector and facilitating the adoption of a more flexible wage policy in the private sector would help better align wage growth with productivity.

Annex IX. Strengthening the Financial Stability Architecture1

1. Eswatini has a large financial sector with some structural vulnerabilities that are sources of macro-financial and stability risks.

  • The financial sector is dominated by non-bank financial institutions (gross assets about 110 percent of GDP), including a large government retirement funds (assets about 35 percent of GDP), with a relatively small banking sector (assets about 30 percent of GDP). (Figure A9.1; Table A9.1)

  • The sector is highly concentrated and characterized by considerable structural vulnerabilities: banks extensively rely on wholesale deposits as a funding tool and their loan books are highly concentrated; financial institutions are closely interconnected and have large foreign exposures, with NBFIs providing a sizable share of banks’ deposits while holding about half of their assets abroad (about 40 percent of GDP), exposing the system to external shocks; households are highly leveraged compared to neighboring and other middle-income countries; and the sovereign-financial linkages have been strengthening, exposing the sector to the government’s weak fiscal position (Table A9.2).

  • Despite structural vulnerabilities, the sector oversight framework has several weaknesses. A macroprudential and crisis management frameworks need yet to be fully developed, the independence and operational capacity of the central bank ought to be strengthened, and the legislative framework underpinning the regulatory and supervisory ability of the CBE and the FSRA should be updated and completed.

Table A9.1.

Eswatini: Financial System Structure1

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Assets managers’ assets not included in financial institutions’ total assets (see memo item).

Sources: Eswatini authorities; and IMF staff estimates.
Table A9.2.

Eswatini: Financial Soundness Indicators

article image

Reporting financial year, starting from April of the year to March of the subsequent year.

Sources: Eswatini authorities, IMF, Financial Soundness Indicators database; and IMF staff estimates.

2. In light of the financial sector vulnerabilities, there is a strong case for strengthening the financial stability architecture and the authorities have embarked on extensive legislative reforms. The planned legal reforms include: enacting the CBE bill (currently, there is a Central Bank Order), amending the Financial Services Regulatory Authority (FSRA) Act, and introducing the Financial Stability bill (Table A9.3), together with upgrading sectoral laws (e.g., Financial Institutions, Insurance, Retirement Funds, Securities, Building Societies, and consumer Credit Acts). These legal reforms would establish the legal underpinnings to develop effective macroprudential and crisis management frameworks (e.g., Financial Stability Bill), bolster the financial safety net, including by strengthening the bank resolution regime and the liquidity provision framework (e.g., CBE bill, amendments to the Financial institutions Act), and upgrade the legal frameworks for NBFIs (which are outdated or non-existent) (Table A9.3). These legislative reforms should be completed as a priority. In addition, the creation of a deposit insurance scheme would strengthen the financial safety net, and in the context of a macroprudential framework, macroprudential tools to prevent systemic risks should be developed.

Table A9.3.

Eswatini: Status of Financial Sector Legislative Reforms

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Figure A9.1.
Figure A9.1.

Eswatini: A large and Developed Financial Sector

Citation: IMF Staff Country Reports 2020, 041; 10.5089/9781513529769.002.A001

Annex X. Implementation of Past IMF Advice

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Annex XI. Capacity Development Strategy: Summary1

CD Strategy

Eswatini’s key policy challenges are to: (i) deliver substantial fiscal adjustment to restore macroeconomic stability, amid declining SACU revenue; (ii) reignite long-term growth prospects to reduce poverty and unemployment; and, (iii) manage macro-financial risks and vulnerabilities.

Eswatini’s medium-term capacity development (CD) strategy, developed in coordination with the authorities, aims at supporting the authorities’ fiscal adjustment efforts, strengthen their capacity to manage macro-financial risks, and improve macroeconomic data quality to better support surveillance activities. In this context, the most urgent capacity development needs are to: establish a credible annual and medium-term budget framework; strengthen budget execution and commitment controls; mobilize domestic revenue; strengthen financial sector supervision and regulation; and improve quality and timeliness of macroeconomic statistics. These strategic priorities do not constitute a significant departure from the previous capacity development strategy note.

Key Overall CD Priorities Going Forward

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Main Risks and Mitigation

Eswatini is a high intensity technical assistance (TA) recipient, and past implementation of Fund TA has been mixed. The authorities have implemented: policies to contain the wage bill (after a TA on expenditure rationalization), a new system for invoice tracking (supported by a resident advisor); improved tax administration functions (supported by intense TA), and advanced in the drafting of key financial sector legislation (with TA support). However, they have strived to develop credible and comprehensive budget and reliable medium-term budget plans, implement effective cash management systems, effectively control spending commitments, largely due to insufficient implementation capacity, staffing constraints, and, in some cases, lack of political support. To mitigate capacity issues, recent experience in revenue administration, PFM, and national accounts compilation shows that better progress can be achieved by hands-on training, presence of a resident advisor and/or close and continuous TA engagement.

Authorities’ Views

The authorities consider IMF TA of great value and regularly seek the Fund’s advice to structure the reform strategy in areas such as PFM, revenue administration, expenditure management, financial sector supervision and regulation, and statistics.

The authorities have also suggested that our CD activities could achieve greater results by relying more on hands-on support, resident advisors, peer learning and comparisons with international best practices to complement written recommendations from TA reports.
1

Eswatini’s currency is pegged to the South African rand. With South Africa, Botswana, Lesotho and Namibia, Eswatini is a member of the Southern African Customs Union (SACU) and over the last decade has received annual customs revenues of about 12 percent of GDP. These revenues are critical to support the external balance and the currency peg and to finance the government budget (about 40–45 percent of tax revenue). Moreover, about 70 percent of exports and 70 percent of imports occur with South Africa. South African banks dominate the domestic banking system, and South African financial markets are the main destination of Eswatini’s large financial outflows.

2

In the absence of reliable estimates of the structural fiscal balance, changes in spending levels and in the fiscal balance net of SACU revenue are the most reliable measures of government’s fiscal policy stance.

3

Large and consistently negative errors and omissions in the balance of payments (about 6–8 percent of GDP) underpin the conclusion of an overvalued exchange rate.

4

In 2019, a regulation was introduced requiring authorized dealers to offer any foreign currency acquired from export proceeds to the CBE for purchase at market price. This measure is being assessed by the staff using the Institutional View on Liberalization and Management of Capital Flows as it might constitute a capital flow management measure.

5

In March 2019, the central bank’s total exposure to the government amounted to 4.7 percent of GDP. This is close to the maximum exposure to the government allowed under the Central Bank Order.

6

Given the volatility of credit, credit growth refers to 12-month averages.

7

The authorities have recently negotiated a R2 billion commercial loan, repayable within 5 years, to clear domestic arrears, and have requested creditors with claims on the government to come forward.

8

In 2010, the authorities developed a Fiscal Adjustment Roadmap that envisaged a reduction in fiscal deficit (about 11 percent of GDP in three years) by relying on both expenditure and revenue measures.

9

For instance, increasing the old age grant benefits by 50 percent is estimated to cost about 0.3 percent of GDP per year; replacing the old age grant with a universal E200/month child grant would carry a similar cost.

10

As of March 2019, central government’s loan guarantees amounted to about 4 percent of GDP. In June 2019, extra-budgetary public entities and enterprises’ overall liabilities were estimated to exceed 16 percent of GDP.

11

Implementing regulations for the new PFM law have been developed, with Fund technical assistance, and are waiting for submission to the Attorney General as part of the promulgation process.

12

Recommendations refer to a Public Investment Management Assessment (PIMA) recently completed as part of the Fund’s capacity development activities.

13

For an analysis of policies to increase employment and its elasticity to growth, see IMF Country Reports 17/274–275.

14

Procurement rule granting preferential regimes to specific supplier inhibit competition and increase collusion risks.

15

Estimates assume that reforms would close the gap with the middle-income countries median in key governance and structural indicators, and that gains occur over a period of 5 years. The analysis relies on third-party indicators, which should be interpreted with caution due to their perception-based nature, and uncertainty around point estimates and representativeness of survey samples.

16

Stress tests assume no use of future profits and a conservative provisioning coverage for existing and new NPLs. If NPLs are adequately provisioned, the banking sector can on average absorb NPLs up to about 27 percent of total loans (the increase in NPLs is similar to the amount of government’s domestic arrears expected by March 2020).

17

Moreover, macroprudential tools should be used to prevent the buildup of systemic risks. Therefore, differently from what envisaged under the current FSB draft, they should be considered before risks materialize.

1

The external sector statistics in Eswatini reflect adoption of BPM6 methodology in 2018 and subsequent data revisions. However, large and consistently negative errors and omissions suggest significant room to improve the reliability of external statistics.

2

The cyclically adjusted CA is larger than the actual CA because of a decline in the terms of trade during the year.

3

The large errors and omissions are likely to be in part due to data limitations in recording trade in services. External position assessment based on IMF, “The Revised EBA-lite Methodology”, Policy paper No. 19/026, July 2019.

4

International reserves have been adjusted to exclude FX forward purchase contracts between the Central Bank of Eswatini and commercial banks as these foreign assets would only be available to the central bank as international reserves upon reaching maturity.

5

The risk weight was chosen based on the 10th percentile of observed reduced SACU inflow over recent years.

1

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 under current policies). 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; ST and MT are meant to indicate that the risks could materialize within 1 year and 3 years, respectively). The RAM reflects staff’s views on the sources of risk and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

1

Analysis based on fiscal year and on central government debt, as general government debt data are not available.

2

As of March 2019, reported debt guaranteed by the central government amounted to 4 percent of GDP.

3

External public debt is primarily in the form of project loans.

4

Gross financing needs do not include obligations from financing of any fiscal operations financing gap.

5

The DSA framework uses risk thresholds of 70 percent of GDP for public debt and 15 percent of GDP for gross financing needs. Exceeding these benchmarks is reported with yellow color in the heat map if the benchmarks are passed in a stress scenario and a red color if they exceeded in the baseline. The benchmarks are based on

6

Primary balance is assumed to return to the FY18/19 level, about 10 percent of GDP.

7

Analysis based on calendar year.

8

However, given data limitations, there is uncertainty around the stock of private external debt.

1

Prepared by A. Habib and Z. Wang, in collaboration with M. Goldman and H. Renda from the Commitment to Equity Institute (http://commitmentoequity.org/).

2

Unless otherwise specified, the analysis utilizes the recently released 2016/17 Household Income and Expenditure Survey data, available from the Eswatini Central Statistical Office (CSO), Ministry of Economic Planning.

3

As in many developing countries, consumption expenditure is used as a measure of income and to calculate all poverty statistics to overcome shortcomings of income data.

4

Eswatini has seen little urbanization over the past two decades, as the share of the rural population has remained stable at three-quarters of the population. Poverty gap is defined as the average shortfall of income relative to the poverty line.

5

The relative rural and urban poverty lines are calculated as 60 percent of the median consumption per adult equivalent in the area.

6

Based on the 2016 Labor Force Survey, about 50 percent of the working age population are in the labor force, 67 percent of whom are employed.

7

In FY 2017/18, the old age grant was raised to E400/month.

8

The Emalangeni is pegged at parity to the South African Rand.

9

The OVC Education Grant is estimated to have a limited impact on current poverty rates. However, scaling up that program could help reduce the gap in secondary enrollment rates between children from poor and rich households, and reduce poverty in the long term.

10

Eswatini recently concluded a cash grant pilot for OVCs, but have yet to decide whether to introduce a permanent program.

1

Prepared by V. Thakoor.

2

The annex reflects findings from a recently conducted Public Investment Management Assessment (PIMA).

1

For details on how to design arrears clearance strategies, see IMF, Prevention and Management of Government Expenditure Arrears, 2014 (https://www.imf.org/external/pubs/ft/tnm/2014/tnm1403.pdf). For Eswatini, see recent IMF TA report, Chaponda et. al. (April 2017), Y. Koshima et. al. (September 2017), and F. Rahim et. al. (August 2018).

1

Prepared by P. Ganum.

2

Growth accelerations/decelerations are defined as structural breaks in the growth pattern.

3

The product space network analysis represents the relatedness of over 800 traded goods based on the connectedness between existing products and related products requiring similar know-how, and its shape helps define paths to diversify exports. For more details see “The Atlas of Economic Complexity” by Harvard University: http://atlas.cid.harvard.edu/

4

Although, Eswatini lost AGOA eligibility in 2014 leading to a replacement of the US market as a destination for textile products with South Africa.

5

Typically, REER deflated by labor costs is estimated using economy-wide measures of the unit labor cost (labor compensation and output). However, due to data limitations, public wages are used to proxy for overall wage level and have been adjusted downwards accounting for one-off increases during salary review years. In the context of a small economy like Eswatini, the government is a large employer and public employment constitutes about 46 of formal employment.

6

For more details on skills mismatches in Eswatini’s labor market see IMF Country Paper SM/17/221 “Investment, employment, and inclusive growth in Swaziland”.

7

The 2016 Labor Force Survey showed that about 90 percent of the unemployed have up to secondary education or a lower education level. While those that have completed tertiary education represent only 7.6 percent of the unemployed.

8

See 2018 Annual Report, Eswatini Communications Commission (ESCCOM).

9

For importance of the ICT sector in lower information and transaction costs for firms see “Digital Dividends”, World Bank 2016.

10

See “Trade Facilitation for Global and Regional Value Chains in SACU”, World Bank, 2015.

1

Prepared by P. Ganum and V. Thakoor.

2

See IMF country Report 17/219 “Investment, Employment, and Inclusive Growth in Swaziland” for further details.

3

The analysis relies on third-party indicators, which should be interpreted with caution due to their perception-based nature, and uncertainty around point estimates and the representativeness of survey samples.

4

Size of government (by Fraser Institute) gauges the degree to which a country relies on personal choice and markets rather than government budgets, whereby countries with lower government size receive higher scores in this area. It captures five components: government consumption spending as a share of total consumption, transfers and subsidies as a share of GDP, top marginal income and payroll tax rates, government enterprises and investment as a share of total investment, and a ratings variable capturing the state ownership of assets.

5

See IMF country Report 19/295 “Annex V. Unleashing Growth Through Supply-Side Reforms” and IMF (2015) “Structural Reforms and Macroeconomic Performance: Initial Considerations for the Fund”.

6

IMF (2019), World Economic Outlook, Chapter 3, “Reigniting Growth in Emerging Market and Low-Income Economies: What Role for Structural Reforms?”.

7

It is worth noticing that this indicator may be capturing the traditional country structure in which two-thirds of land surface is Swazi Nation Land, governed by different rules and procedures than Title Deed Land.

8

The “Swaziland Investor Roadmap” (2005) is an assessment of the administrative regime governing investment in Eswatini.

9

A. Prati, M. Onorato, and C. Papageorgiou, (2011), “Which Reforms Work and under What Institutional Environment: Evidence for a New Dataset on Structural Reforms”.

1

Prepared by P. Jeasakul.

1

Preliminary version reflecting a draft CD strategy.

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Cover IMF Staff Country Reports
Kingdom of Eswatini: 2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Kingdom of Eswatini
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2020: Issue 041
Publisher:
International Monetary Fund
ISBN:
9781513529769
ISSN:
1934-7685
Pages:
108
DOI:
https://doi.org/10.5089/9781513529769.002
Figure 1.

Eswatini: Macroeconomic Volatility and Elevated Poverty and Inequality
Figure 2.

Eswatini: Weak Governance and Regulatory Frameworks Hindering Investment and Growth

Weak Governance and Institutions

(Scores, 2018)
Figure 3.

Eswatini: Unsustainable Fiscal Expansion Undermining Macroeconomic Stability

Widening Fiscal Deficit

(Percent of fiscal year GDP)
Figure 4.

Eswatini: A Resilient Banking Sector Amid a Weak Economy

NBFIs Increasing Holdings of Government Debt

(Percent of total assets)

Public Debt Under Alternative Scenarios

(Percent of GDP)

Changes in Primary Spending

(Percent of fiscal year GDP)
Figure 5.

Eswatini: Public Spending Inefficiencies

Elevated Poverty

(Percent of population)
Figure 6.

Eswatini: Weakening Export Competitiveness
Figure 7.

Eswatini: Supply-Side and Governance Constraints Limiting Private Investment

Low Capital Contribution and Declining Productivity Growth

(Percent)

Banks’ Non-Performing Loans

(Percent of total loans)
Figure 8.

Eswatini: Persistent Macro Financial Vulnerabilities

Deposit-taking Institutions’ Exposure to Public Sector, 2018

(Percent of total assets)

International Investment Position

(Percent of GDP)

Current Account Balance

(Percent of GDP)

Terms of Trade

(2000 = 100)

Nominal and Real Effective Exchange Rate

(Index)

Real Effective Exchange Rate based on CPI and ULC

(Index)

Financial Account

(Percent of GDP)

International Reserves

Contributions to Reserve Adequacy Metric

(Millions of US dollars)

Eswatini. Assessing Reserve Adequacy (ARA) Upper and Lower Bounds
Figure A3.1.

Eswatini: Public DSA Risk Assessment
Figure A3.2.

Eswatini: Public DSA — Realism of Baseline Assumptions
Figure A3.3.

Eswatini: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(In percent of GDP unless otherwise indicated)

Additional GFN with Arrears Clearance

(Percent of GDP)
Figure A3.4.

Eswatini: Public DSA—Composition of Public Debt and Alternative Scenarios
Figure A3.5.

Eswatini: Public DSA—Stress Tests
Figure A3.6.

Eswatini: External Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)

Poverty and Inequality

Consumption per Adult Equivalent, Monthly

(Annual growth from 2010 – 2016, by consumption deciles)

Reduction in Poverty & Inequality Due to Social Assistance

Poverty Rates in Urban and Rural Areas

(Percent)

Access to Basic Housing Services

(Percent of population)

Access to Health Care by Consumption Decile

(Percent)

Poverty Rates by Employment Status

(Percent)

Share of Working Poor by Level of Education

(Percent)

Poverty Rates for Employees of Private Sector Firms and Households, by Level of Education

(Percent)

Size and Composition of Households

(By consumption decile)

Net Primary and Secondary School Enrollment

(Percent by consumption decile)

Impact of Existing Transfers on Poverty

(Percent)

Share of Households with Elderly Members

(Percent, by consumption decile)

Progressivity of Social Spending

(Kakwani index)

Personal Income Tax Rates, Eswatini and South Africa

(Percent)

Net Secondary School Enrollment

(Comparison with SACU and Middle Income Countries)

2017 Public Capital Stock per Capita, Thousands

Access to Electricity and Water

(Percent of population)

Exports and GDP growth

(Percent)

Contribution to Real GDP

(Percent)

Global Market Share in Goods Exports

(Percent of total world exports)

Structure of Exports, 2018

(Percent of exports of goods)

Eswatini in the Product Space, 2017

Selected Exports of Goods by Destination, 2018

(Percent of each goods exports)

Eswatini’s Trading Partners

(Percent)

Real Effective Exchange Rate based on CPI and ULC

(Index)

Nominal and Real Effective Exchange Rate

(Index)
Figure A7.1.

Eswatini: Wages by Occupation and Industry, and Skills Mismatch

Electricity Tariffs, 2019 (US cents per kWh)

Fixed Broadband Costs, 2016 (USD)

Freight Imbalances, 2015

(Import trucks for each export truck)

Export Related Costs

(Indexed, Eswatini=100)

Worldwide Governance Indicators, 2017

(Scores, higher is better)

Doing Business indicators in Eswatini, 2019

(Scores)

Growth Accounting Decomposition

(percent)

Declining Capita I-to-Output ratio

(In units)

Declining Gross Fixed Capital Formation

(Percent of GDP)

Weak Governance and Institutions, SACU Countries

(Scores, 20l7)

Governance Indicators

(Scale: -2.5 to 2.5, higher scores better)

Top Obstacles for Doing Business

(Percent of firms)

Doing Business Scores, 2019

(0 – 100 best)

Property Rights Index

(Scale: 1–7, higher scores better)

Regulatory Quality, 2018

(Scores, higher is better)

Regulatory Burden

(Scores, 0 – 10 best)

Extent of Market Dominance, 2010–2017

(index, 1–7 best)

Effectiveness of Anti-Monopoly Policy, 2010–2017

(index, 1–7 best)

Real GDP Growth Gains and Distance to the Frontier

(Eswatini)
Figure A9.1.

Eswatini: A large and Developed Financial Sector