On January 31, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Kingdom of Eswatini.
Following the severe fiscal deterioration in 2010, Eswatini experienced a period of macroeconomic stability. Fiscal consolidation, a temporary rebound in Southern African Customs Union (SACU) revenue, and credibility in the peg with the South African rand contributed to improve fiscal and external balances and rebuild buffers. However, declining private investment and weakening external competitiveness have kept growth below the pre-2010 period and are hindering the long-term growth prospects of the economy. With subdued growth, socio-economic challenges have remained entrenched reflected by widespread poverty, high income inequality, and elevated unemployment.
Macroeconomic conditions have recently deteriorated. After a period of subdued growth, real GDP growth picked up somewhat in 2018, as the drought impact faded, and public spending remained elevated. However, over the last three years, expansionary budget policies and low SACU revenue have widened the fiscal deficit to an annual average of 9 percent of GDP. Public debt has risen rapidly, and financing constraints have led to the accumulation of domestic arrears. The current account surplus has narrowed and international reserves have fallen. With a weakening economic environment, credit to the private sector has lately decelerated, and banks’ asset quality has deteriorated. The authorities have recently implemented some actions to contain the rise in the fiscal deficit, which remains large.
Economic indicators are expected to remain weak. GDP growth is projected to temporarily pick up in 2020, as the government plans to repay some arrears, but growth would be subdued afterwards as fiscal imbalances persist and the private sector remains hamstrung. The fiscal deficit is expected to remain large and budget financing risks to be elevated. The large deficit would raise public debt above 60 percent of GDP over the medium-term and contribute to further reduce international reserves.
Downside risks weigh on this fragile outlook. Risks emanate from possible further fiscal slippages that could undermine confidence in the government’s ability to control public finances and in the peg. Other risks arise from further decline in SACU revenue, weak demand for key exports, and rising interest rates. With a highly interconnected financial sector, macro-financial feedback loops could amplify the adverse effects of shocks.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.