The Kingdom of Eswatini:Request for Purchase Under the Rapid Financing Instrument—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:
30 Jul 2020
eISBN:
9781513551869
ISBN:
9781513551869
Language:
English
Keywords:
ISCR; CR; financing; IMF emergency financial support; emergency financing request; authority; COVID-19 Pandemic; IMF support; financing gap; private sector financing pressure; RFI purchase; clearance strategy; Fiscal consolidation; Fiscal accounting and reporting; Africa; financing needs; financial support; CBE bill program; financing pressure; gradual adjustment; financing strategy
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Request for Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for the Kingdom of Eswatini

Abstract

Request for Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for the Kingdom of Eswatini

Context

1. Prior to the COVID-19 pandemic, Eswatini’s economy faced severe economic and social challenges, and the government had begun fiscal consolidation efforts. Years of expansionary budget spending policies and declining Southern African Customs Union (SACU) revenues had widened the fiscal deficit, resulting in rising public debt, and accumulation of domestic arrears. The current account surplus had narrowed and international reserves declined. Despite expansionary policies, decelerating private investment and declining external competitiveness resulted in subdued growth. Weak governance, vulnerabilities to state capture and other forms of corruption, and a difficult business environment compound to reduce Eswatini’s attractiveness as an investment destination. With low growth, the country’s socio-economic challenges have remained entrenched with 40 percent of the population estimated to be living in poverty, and high inequality and unemployment1 In FY19/20, the authorities had taken measures of about 21/3 percent of GDP as a first step towards addressing the underlying fiscal and external imbalances.

2. The pandemic is hitting Eswatini hard, exacerbating its vulnerabilities and creating immediate financing needs. The first COVID-19 cases were detected in early March and cases have been rising quickly. The country’s proximity to South Africa—the most impacted country in sub-Saharan Africa—raises further concerns that the virus could propagate rapidly given Eswatini’s high HIV/AIDS prevalence and an already pressured health care system. The government has declared a national emergency and imposed a partial lockdown since mid-March, which includes travel bans and closure of non-essential activities. These measures, combined with lower external demand, are having a pronounced effect on the economy, with declining GDP, deteriorating external balances, and a larger fiscal deficit.

3. To cushion the impact of the pandemic, the authorities have requested emergency financial assistance through the Rapid Financing Instrument (RFI). The authorities’ immediate priority is to contain the impact on public health and limit social, economic, and financial dislocation. To finance these efforts, they are seeking emergency financial assistance to help address the immediate needs. Moreover, Fund engagement is expected to catalyze additional assistance from Eswatini’s development partners, including the World Bank and the African Development Bank.

Impact of COVID-19, Outlook and Risks

A. Macroeconomic Developments Before the COVID-19 Pandemic

4. Ahead of the COVID-19 pandemic, the economy was decelerating amid persistent fiscal and external imbalances. GDP growth is expected to have slowed to about 1 percent in 2019 as agriculture activity stabilized after a post-drought rebound, and the government implemented wage and employment containment policies. Headline inflation averaged 2.6 percent in 2019, reflecting the weakening economy and a freeze of electricity and water tariffs. Despite some success in containing the wage bill, the fiscal deficit remained elevated, translating into further domestic arrears and public debt build-up. On the positive side, a temporary surge in manufacturing exports and weak domestic demand contributed to improve the external current account. However, increased portfolio investment and currency and deposits outflows offset improvements in the current account and, by end-2019 international reserves remained below 3 months of imports. While the banking sector remained broadly sound, with the weak economy, private sector credit growth slowed down and banks’ asset quality deteriorated.

B. Economic Impact of COVID-19

5. The authorities’ immediate response to contain the social and economic impact of the crisis has been multi-pronged (Box 1). To reduce the spread of the virus, the authorities have implemented a partial lockdown across the country and authorized additional health spending to improve the capacity of the health care system. To contain the impact on vulnerable households, they ramped up food assistance programs, increased social protection transfers, and accelerated the delivery of water and sanitation facilities to the most vulnerable with a cost of about 11/2 percent of GDP.2 They have also implemented policies to mitigate the effects on firms’ cash flow, through temporary tax payment deferrals. Meanwhile, in the context of the currency peg, the CBE has progressively reduced the policy rate by 250 basis points, in line with the South Africa Reserve Bank (SARB), and increased liquidity provision.

Policy Stringency Index

(Index, higher indicates more stringent)

Citation: IMF Staff Country Reports 2020, 229; 10.5089/9781513551869.002.A001

Note: The Stringency Index measures government responses to COVID-19, specifically containment and closure policies including school closures and restrictions in movement. The index should not be interpreted as scoring the appropriateness or effectiveness of a country’s response. A higher index value does not mean a better or worse response. SACU (excl. Eswatini) = Botswana, Lesotho, Namibia, and South Africa. Selected EMs = Brazil, China, India, Indonesia, Mexico, Russia, and Turkey. Selected AEs = Germany, Japan, United Kingdom, and United States. June-20 is as of June 11, 2020 Source: Oxford COVID-19 Government Response Tracker.

Eswatini: COVID-19 Fiscal Response Package

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Source: Eswatini authorities and IMF staff calculations.

Authorities’ Response to the COVID-19 Pandemic

The government’s immediate response has focused on containing the spread of the disease and ramping up the capacity of the health system. In mid-March, the government declared a national state of emergency and implemented a partial lockdown. The latter included: suspension of all international passenger flights, establishment of isolation facilities, quarantine of at-risk persons, cancellation of national events, restrictions on social gatherings and movement across cities, closure of schools and universities and social distancing. The authorities have also increased collaboration with development partners to accelerate the procurement of medicine, equipment, and mobilize financing. Actions have been coordinated by an inter-ministerial committee and have been communicated in daily press briefings. The National Disaster Management Agency (NDMA), an extra-budgetary entity, will execute crisis-related spending under a revamped monitoring and reporting framework.

Moreover, the authorities have taken fiscal, monetary, and financial measures to contain the economic impact of the pandemic and support jobs and businesses.

Fiscal measures

  • Additional spending of E100 million (0.14 percent of GDP) in FY19/20 to improve crisis preparedness.

  • In FY20/21, additional E1 billion (1½ percent of GDP) spending on drugs, health equipment and other health spending, and improved access to food, water, and sanitation to vulnerable households.

  • Increases in electricity and water tariffs have been postponed.

  • Tax relief to businesses, granting the possibility of filing of provisional loss returns with no tax payment; extending by 3 months the deadline to file tax return (for the first three quarters of the fiscal year); and stepping up payment arrangements for taxpayers facing cash flow problems.

  • About E90 million (0.13 percent of GDP) in tax refunds have been budgeted for SMEs that are tax compliant, retain employees, and continue to pay them during the pandemic.

Monetary and financial measures

  • The policy rate has been reduced by 250 basis points to 4 percent; the liquidity requirement reduced (from 25 to 20 percent for commercial banks; from 22 to 18 percent for development banks); and reserve requirements lowered (from 6 to 5 percent of deposits).

  • The CBE has encouraged banks to restructure loans and use payment holidays for affected clients. It has encouraged banks with excess capital to utilize these buffers to lend, while discouraging dividend payments, which will now require CBE approval.

  • The mobile money transaction limits have been raised, and both banks and mobile network operators have been encouraged to use electronic payments.

  • To enhance monitoring, the CBE has required banks to report daily on liquidity and deposits, and report quarterly stress test results.

  • The CBE has permitted banks to suspend provisioning rules and maintain same risk weights on COVID-19 affected loans for six months, while advising that credit risk for loans receiving payment holidays should not automatically be increased.

Jobs and businesses

  • The government has suspended social contribution payments and wage negotiations in the private sector to preserve jobs. Several private enterprises have reduced wages.

  • Consideration is being given to providing short-lived cash transfers to SMEs, laid off workers, and covering a portion of salary for vulnerable businesses.

6. Containment measures and weak external demand will trigger a deep economic recession in 2020 and have created urgent balance of payments needs and affected the budget.

  • The economy is expected to contract by 3.5 percent in 2020, 6 percentage points below the pre-pandemic baseline. The lockdown in place since mid-March will negatively affect domestic demand, particularly manufacturing, construction, and trade sectors. Moreover, weak global demand, disruptions in supply chains, and border closures will adversely affect traditionally resilient sectors such as sugar processing and textiles and beverages, which account for 80 percent of the country’s goods exports, further depressing economic activity. A longer lockdown, or slower than expected recovery in external demand, would generate an even deeper recession. Possible delays in arrears clearance planned for the year would further weigh on growth. Inflation is expected to increase to 4.1 percent in 2020 as temporary inflation pressures from the depreciation of the exchange rate and rent increases are only partially offset by falling oil prices and economic slack.

  • The COVID-19 pandemic has weakened the external position and created additional balance of payments (BOP) needs of about 8½ percent of GDP (US$369 million) compared to the pre-COVID baseline (February 2020).3 The current account surplus is projected to narrow by about 2¾ percent of GDP (US$ 135 million) compared to the pre-COVID projections as lower exports of goods and services, depressed returns on investments abroad, and low remittances are only partly offset by a fall in imports due to sluggish domestic demand and lower oil prices. The financial account will deteriorate (about 6 percent of GDP, US$234 million) largely due to a temporary halt in foreign investments inflows, increased portfolio outflows, and a decline in government’s external financing for capital projects.4 The financing gap for 2020 would be about US$163 million. With international reserve coverage having already fallen in 2019,5 even accounting for additional funding envisaged from Eswatini’s development partners, reserves in 2020 are expected to remain slightly below the lower bound of the IMF’s reserve adequacy metric; although at around 170 percent of reserve money, they would still exceed the operational floor monitored by the CBE in the context of the currency peg.

  • The FY20/21 budget financing needs are projected to increase by about 4.4 percent of GDP (US$168 million) compared to the pre-COVID baseline (February 2020). Some spending reductions, particularly in wages, government’s operations and capital outlays, will make room for the additional expenditures related to the pandemic (about 1½ percent of GDP) to keep overall spending within the original budget ceiling. However, the fiscal deficit is expected to widen by 3 percent of GDP on the back of a sharp decline in domestic non-SACU revenue and lower GDP. The higher deficit, combined with lower external project financing, will substantially increase the budget financing gap in 2020 to about US$207 million, and gross financing needs will rise to about 25.8 percent of GDP.

Revisions to 2020 Real GDP Growth Projections

(Contribution to growth)

Citation: IMF Staff Country Reports 2020, 229; 10.5089/9781513551869.002.A001

Source: IMF staff calculations.Note: Blue bars show the revisions in contribution to GDP growth of each sector.

Eswatini. Balance of Payments: COVID-19 Impact

(In millions of US dollars)

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Source: Fund staff estimates.

Capital account minus financial account balance.

Positive numbers for FDI, portfolio investment, financial derivatives, and other investment indicate net outflows.

Negative numbers indicate a financing gap.

Eswatini. Fiscal Accounts: COVID-19 Impact FY20/21

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Source: Fund staff estimates.

7. The impact of the pandemic on the financial sector will roll out over time and is likely to accentuate existing macro-financial vulnerabilities. The banking sector entered this crisis with substantial capital buffers and ample liquidity. However, NPLs were rising, reflecting government’s domestic arrears and economic slack, and significant disparities existed across banks in terms of asset quality and capitalization. Moreover, banks’ funding largely relies on wholesale deposits, and lending is heavily concentrated on highly-leveraged salaried workers and on sectors such as construction, tourism, and manufacturing, that are hit hard by the pandemic. As the recession puts pressure on both firms’ and households’ balance sheets, banks’ asset quality will likely worsen, leading to substantial credit losses and prompting banks to deleverage, creating adverse feedback loops on growth. The large non-bank financial sector is closely intertwined with banks and the government and is a conduit of risks. NBFIs own a large share of banks’ deposits and hold over 50 percent of government’s domestic debt, and are exposed to potentially severe impact on returns from their domestic and Common Monetary Area (CMA) investments. While any impact on asset returns will likely be temporary, given the NBFIs’ relative size, any rebalancing in their portfolio could put further pressure on domestic banks and the government’s financing position.

C. Medium-Term Outlook and Risks

8. Beyond 2020, the economic outlook remains fragile and highly dependent on continued fiscal adjustment and the implementation of structural reforms. Assuming a gradual global recovery, including in South Africa, and the lifting of domestic containment measures in the second half of 2020, growth is expected to rebound to 1.4 percent in 2021. Growth will remain subdued in the following years as the authorities implement their fiscal consolidation plans (6½ percent of GDP over 2021–23), before stabilizing at around 2 percent over the medium term. Public debt remains sustainable, peaking at around 52½ percent of GDP in FY23/24, before starting to decline slowly. However, government’s annual gross financing needs would remain high averaging about 19.4 percent of GDP, leading to continued financing vulnerabilities. Moreover, the slowdown in South Africa will adversely affect future SACU revenue, particularly in FY22/23, thus generating additional budget and external financing pressures.6 On the positive side, fiscal adjustment will contain domestic demand and contribute to improve the current account balance to restore international reserve buffers. Medium-term growth prospects could improve above this baseline if successful implementation of structural reforms alleviate constraints to private investment and growth.7

Eswatini: Baseline Medium-Term Outlook and Government’s Policies

(Percent of GDP, unless otherwise specified)

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Sources: Staff estimates.

Fiscal year data (April 1 – March 31).

9. The outlook is subject to significant uncertainty and downside risks. A deeper and prolonged duration of the pandemic could further deteriorate the outlook and create additional external and budget financing pressures. Even under current assumptions, the outlook critically depends on the government’s ability to deliver on its medium-term fiscal adjustment plans. If adjustment plans are not fully implemented, domestic arrears and public debt would rise further, and financing pressures would exacerbate, adversely affecting growth and undermining macroeconomic stability. Moreover, international reserves would be further pressured, potentially undermining confidence in the peg. External shocks could exacerbate these vulnerabilities. Lower external demand, particularly a prolonged recession in South Africa, would negatively affect the economic recovery and reduce SACU revenue, weakening the fiscal and external positions. On the upside, lower oil prices for longer could support the economic recovery by reducing energy costs and the import bill, and progress with structural reforms could trigger stronger medium-term growth outcomes.8

Policy Discussions

Discussions focused on: (i) supporting the government’s immediate priorities to limit the impact of the pandemic, while protecting the most vulnerable, and preserving economic stability and the peg; (ii) ensuring medium-term fiscal sustainability and strengthening external buffers through continued fiscal consolidation; and (iii) implementing governance and structural reforms to enhance fiscal transparency and bolster inclusive and sustainable growth. The authorities remain committed to deliver on their medium-term fiscal consolidation agenda to stabilize public debt, and to implement their strategy to strengthen fiscal transparency and support inclusive and strong growth.

A. Managing the Pandemic and Protecting Social and Macroeconomic Stability

10. With limited fiscal space, the authorities intend to contain the adverse effect of the pandemic on this year’s fiscal deficit by reprioritizing spending. Cabinet has approved a supplementary budget that preserves the original overall budget spending ceiling and creates fiscal space to cover pandemic-related spending, through containment of wage and operating expenditure and lower capital outlays.9 However, with automatic stabilizers on the revenue side operating fully (revenue loss about 2½ percent of GDP), and the lower GDP, they expect the FY20/21 fiscal deficit to reach 8.7 percent of GDP (4.7 percent of GDP in the original budget).

11. Beyond the short-term, they have developed fiscal consolidation plans to stabilize public debt over time, and plan structural reforms to bolster inclusive growth and good governance.

  • Over the next three years, the authorities intend to implement fiscal consolidation measures of about 6½ percent of GDP starting in FY21/22. The consolidation plan, recently approved by cabinet, aims to restore debt sustainability, while protecting the most vulnerable through a combination of spending and revenue measures. The plan will be implemented in the context of the future annual budget cycles and is centered around four pillars: reducing public wage spending, through gradual employment reduction and below inflation salary adjustments; rationalizing transfers and expenditure of state-owned entities; reducing operational expenditures and improving the targeting of the main social assistance programs; and, increasing domestic revenue through rate increases of some major taxes and base broadening measures, while suspending plans to introduce reforms that would reduce corporate income revenue. They intend to contain reductions in capital spending and better prioritize investment toward high growth impact projects.10

  • The authorities are committed to continue strengthening public financial management (PFM), as well as governance, transparency and accountability standards. To enhance transparency and accountability of all COVID-19-related spending, they are using specific budget lines for such spending, and will publish on the website of the National Disaster Management Agency (NDMA) bi-monthly reports on spending execution. They will also publish procurement contracts for pandemic-related spending, including amount, awarded legal persons and beneficial owners, and ex-post validation of delivery. In addition, they will undertake and publish the result of independent ex-post audits of such spending and procurement processes (Letter of Intent, paragraph 8). Moreover, Cabinet has approved a strategy to liquidate past arrears through the standard budget process, and the authorities have taken actions to control the main sources of arrears and avoid new ones, including by phasing out special accounting treatments for some extra-budgetary entities that have been responsible for significant spending overruns in the past (so called trading accounts). Finally, to strengthen the PFM framework, they have finalized regulations to implement the new PFM law that are expected to be approved by Cabinet in July 2020. The implementation of the new law is a first step toward strengthening the budget process, helping formulate credible budgets and tightening budget execution processes. Moreover, expediting the adoption of a new information management system, adopting comprehensive commitment controls and a single treasury account, and enhancing public procurement will be critical to support the full implementation of the regulations and improve public financial management.

  • The authorities will continue to push through their Recovery Strategy to support private investment and boost long-term growth. They continue to facilitate the setting up of large foreign investment projects and developing the recently established special economic zones. They also intend to accelerate reform implementation to improve Eswatini’s poor doing business ranking (e.g., setting up a one-stop shop for businesses, simplifying license requirements).

Eswatini. Authorities’ Fiscal Consolidation Plans (Preliminary)

(Percent of GDP, cumulative)

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12. While the fiscal deficit will widen this year, public debt is expected to moderately decline over the medium term, although financing needs would remain large, posing funding risks.

  • Staff projects the FY20/21 fiscal deficit to reach 8.7 percent of GDP (5½ percent of GDP in the pre-COVID scenario), creating a budget financing gap for the year of about 5.3 percent of GDP (about US$207 million). The gap is expected to be covered by the RFI purchase (US$107 million), and loans of about US$100 million from the World Bank and the AfDB.

  • A successful implementation of the authorities’ fiscal adjustment plans will first stabilize the public debt ratio at a sustainable level and then place it on a moderately declining path over the medium-term. In the near-term, it would, however, have temporary adverse effects on growth. This outlook is subject to risks, particularly contingent liabilities from public entities as the financial situation of some entities has been deteriorating in recent years. Moreover, the expected decline in SACU revenue in FY22/23, coupled with the gradual pace of adjustment envisaged by the authorities, will translate into large financing needs in the next years, which will test the absorption capacity of the domestic market and require identifying additional financing sources. Aware of the challenges, the authorities are seeking technical and financial support from the World Bank, the AfDB, and other development partners.

Eswatini: Central Government Financing Needs and Sources

(Millions of Emalangeni)

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13. Staff recommend preparing contingency fiscal plans in case the shock worsens and strengthening the medium-term financing strategy. Given Eswatini’s limited fiscal space, it is important to identify possible spending, including low-priority public investment projects, to be curtailed in case the need for additional crisis-mitigating spending in health and programs to support the vulnerable arises. Moreover, the authorities should use the October 2020 mid-year budget review to re-assess budget spending execution and prioritization, as well as financing prospects for the current fiscal year and, if needed, further curtail non-essential spending to avoid the accumulation of domestic arrears. With large medium-term financing needs, a clear financing strategy to support the authorities’ gradual adjustment path, potentially including multi-year financial support from International Financial Institutions, or a more front-loaded adjustment, would be needed to address projected financing needs.

14. It is also critical to enhance fiscal transparency and strengthen governance, overall transparency and accountability standards. As most of the pandemic expenses will be carried out through the National Disaster Management Agency (NDMA), an independent public entity outside the central government, staff strongly recommend to swiftly implement enhanced transparency and accountability standards to ensure against the risk of any misappropriation of emergency expenditures. As identified by the authorities, such standards would include the monitoring and publication of all COVID-19 related spending and procurement contracts as well as ex-post independent audits of crisis-mitigation spending and procurement processes (see Letter of Intent, paragraph 8). Moreover, it is important to liquidate past arrears in a transparent manner and through the safeguards of the standard budget process. Accelerating the adoption of the 2017 PFM law regulations is a first critical step to strengthen public financial management systems, together with the need to adopt a new information management system and comprehensive commitment controls, and enhance public procurement. Adopting reforms to strengthen institutions, promote good governance, transparency and accountability, and reducing vulnerabilities to state-capture and other forms of corruption (e.g., strengthening the anti-corruption framework and the public procurement system) will be critical for long-term sustainable and inclusive growth.11

B. Safeguarding the Peg and Financial Stability

15. The CBE has reacted appropriately to contain the macro-financial effects of the shock, while preserving financial stability and supporting the peg. In the context of the currency peg, following the South African Reserve bank (SARB), the CBE has adopted an accommodative monetary policy stance and gradually reduced the policy rate by 250 basis points since mid-March. To ensure liquidity in the system, it has reduced banks’ liquidity and reserve requirements, and is updating the toolkit to manage liquidity. In addition, the CBE has encouraged banks to use repayment holidays for borrowers affected by the pandemic, prudently restructure loan repayments, and has temporarily suspended provisioning and changes to the risk weighting for such loans in line with other central banks in the region, and strengthened information requirements (Box 1). The CBE has also suspended plans to relax the single exposure limits and is developing an early intervention framework.

16. Efforts should continue to maintain an orderly financial system, manage liquidity, and coordinate micro and macro-prudential policies. It will be vital for the CBE to continue ensuring that the banking system can access liquidity should needs arise, including through the creation of an emergency liquidity facility. At the same time, as the government takes up new external loans to finance its operations, it will be important to stabilize any excess liquidity in the banking system to avoid pressures on domestic markets and international reserves, including by swiftly operationalizing CBE bill auctions and the new liquidity management toolkit. The CBE bill program would only target excess liquidity, thus leaving enough liquidity to support normal demand for treasury securities. The CBE should also ensure that banks’ loan classification and provisioning standards are fully maintained, encourage the adoption of strict criteria for acceptable loan restructuring to be limited to viable firms and previously performing loans, step up supervisory oversight, and encourage banks to regularly conduct portfolio reviews and risk assessments. Oversight of the major NBFIs by the FSRA also needs to be stepped up and the update of the sector’s legal framework prioritized, through the passage of pending legislations. To improve the coordination between the CBE and the FSRA, the establishment of the planned Financial Stability Panel should be finalized.

Fund Support Under the Rapid Financing Instrument

17. The authorities are requesting a purchase under the RFI equivalent to 100 percent of quota (SDR78.5 million or around US$107.3 million). Eswatini meets the eligibility criteria for support under the RFI and staff consider the requested access appropriate. The COVID-19 pandemic has generated urgent BOP needs that, if unaddressed, would result in major economic disruptions. The external financing needs triggered by the pandemic are expected to resolve within the next 12 months without major changes to existing policy plans. The RFI purchase would cover part of the external financing needs. The remaining financing needs will be covered by loans, currently under discussion, from the World Bank and the African Development Bank. Despite these interventions and policies laid out in the attached letter from the authorities, international reserves in 2020 will remain below the lower bound of the IMF’s adequacy metric, though above the operational floor used by the CBE for maintaining the currency peg. Upon the authorities’ request, the RFI purchase will be disbursed as direct budget support.

18. The RFI purchase is assessed to have no material impact on Eswatini’s debt sustainability. The updated DSA using the revised baseline including the COVID-19 pandemic’s impact (Annex I) shows that implementation of the authorities’ fiscal consolidation agenda would put public debt on a declining path over the medium-term, although financing needs will remain large. The impact of Fund support on debt sustainability is not significant, while its impact on the nation’s humanitarian needs would be critical.

19. Eswatini’s capacity to repay the Fund is adequate (Table 6). Eswatini currently has no outstanding loans from the Fund. The RFI purchase would result in Fund exposure to Eswatini of 2.8 percent of GDP (24 percent of international reserves). Repayments to the Fund would represent a small share of total projected external debt service, peaking at around 4 percent of government revenue in 2024.

Table 1.

Eswatini: Selected Economic Indicators, 2017–25

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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.

Table 2.

Eswatini: Fiscal Operations of the Central Government, 2017/18–25/261

(Emalangeni millions)

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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, 2017/18–25/261

(Percent of GDP)

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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 4.

Eswatini: Balance of Payments, 2017–25

(US$ millions, unless otherwise indicated)

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Source: Swazi authorities; and Fund staff estimates and projections. Data reflects BPM6 classification.

Capital account minus financial account balance.

Positive sign indicates net outflows in the financial account and its components.

Negative numbers for overall balance indicate a balance of payment needs.

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

Table 5.

Eswatini: Monetary Accounts, 2017–251

(Emalangeni millions, unless otherwise indicated)

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

End of period.

Excludes rands in circulation.

Table 6.

Eswatini: Indicators of Capacity to Repay the Fund

(SDR millions, unless otherwise indicated)

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Source: IMF staff projections

20. In line with IMF safeguards policy, the authorities are committed to undergoing a safeguards assessment. This will be the first safeguards assessment for the CBE and will be completed before Board approval of any subsequent arrangement to which the safeguards policy applies. Moreover, the CBE has committed to provide Fund staff with the most recently completed external audit reports and to authorize the external auditors to hold discussions with staff. The authorities have also committed to enhance transparency and accountability on the planning, monitoring and reporting of all COVID-19 related public spending (see above).

21. A Memorandum of Understanding (MoU) has been finalized between the CBE and the Ministry of Finance regarding the servicing of financial obligations to the Fund. As the RFI financing will be used in its entirety as budget support, the MOU sets out the roles of the CBE and the Ministry of Finance in the timely servicing of financial obligations to the Fund.

Staff Appraisal

22. The COVID-19 pandemic is having a severe impact on Eswatini’s economy. A significant decline in exports and the adverse impact on domestic demand of virus containment measures would lead to a sharp recession in 2020. The pandemic has also created external financing needs of about 4.2 percent of GDP. Moreover, the fiscal situation, which was already difficult, will deteriorate further, as the need for additional spending to respond to the health and humanitarian crisis and tax revenue shortfalls create additional budget financing needs.

23. The authorities have taken swift actions to mitigate the impact of the pandemic and are committed to medium-term fiscal consolidation to preserve debt sustainability. Following the first infection cases, the government increased funding for health spending, scaled up assistance programs to protect the most affected segments of the population, and introduced revenue measures to support firms. To safeguard public finances and fairness, these measures are temporary and targeted. To address the pandemic shock, the CBE has adopted an accommodative monetary policy and taken steps to ensure adequate domestic liquidity. Beyond this immediate response, cabinet has approved a medium-term fiscal consolidation plan. Steadfast implementation of this multi-year consolidation plan will be critical to deliver substantial fiscal adjustment and ensure debt sustainability. The authorities remain also committed to advancing the structural reform agenda spelt out in their Recovery Strategy to boost competitiveness and accelerate private investment.

24. Staff urge the authorities to prepare contingency plans to address possible deepening of the pandemic shock, strengthen the financing strategy, and further enhance governance. Given Eswatini’s limited fiscal space, the cost of a more protracted shock will need to be financed through budget spending reallocations or additional emergency financing. With significant financing relief, staff welcome the authorities’ commitment to swiftly implement enhanced transparency and accountability standards for pandemic relief spending, and encourage the authorities to accelerate public financial management reforms, including public procurement. Going forward, despite the ambitious fiscal adjustment plans to preserve debt sustainability, financing needs remain large and the authorities need to develop a financing strategy that can support their gradual adjustment path or stand ready for a more front-loaded adjustment to cope with financing constraints.

25. Going forward, the CBE should strengthen liquidity management operations and continue implementing prudential rules to support the soundness of the banking system. The central bank should swiftly implement plans to enhance the liquidity management framework and tools, step up banks’ monitoring and supervisory oversight of the banking system, particularly for NPLs, and ensure that loan classification, provisioning standards, and capital buffers are maintained.

26. Against this background, staff support the authorities’ request for a purchase under the Rapid Financing Instrument in the amount of SDR 78.5 million (100 percent of quota). Staff support is based on the severity of the impact of the pandemic on the economy, the urgent balance of payments needs arising from the pandemic, and the authorities’ existing and prospective policies and commitments to address this external shock and preserve macroeconomic stability. The RFI would support the authorities’ immediate efforts to save lives and livelihoods and, together with financing from other international institutions, contribute to cover external and budget financing needs. While the risks to the outlook are substantial and budget financing needs elevated, Eswatini’s public debt is sustainable, the capacity to repay the Fund is adequate, and the authorities remain committed to maintain close engagement with the Fund.

Figure 1.
Figure 1.

Eswatini: Macroeconomic Effects of the COVID-19 Pandemic

Citation: IMF Staff Country Reports 2020, 229; 10.5089/9781513551869.002.A001

Sources: Eswatini authorities and staff estimates.
Table 7.

Eswatini: Financial Sector Indicators, 2011–June 2019

(Percent, unless otherwise indicated)

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

2019 Q2 data subject to revisions.

Annex I. Debt Sustainability Analysis1

Over the last four years, Eswatini’s central government debt has more than doubled driven by elevated fiscal deficits, largely financed through domestic debt and accumulation of domestic arrears. To rectify this trend, the authorities begun implementing consolidation measures in FY19/20 and have recently approved fiscal consolidation plans of about 6½ percent of GDP to be implement over the next three years. Under the staff baseline, which includes the authorities’ consolidation plans, public debt would remain below the stress threshold, peaking at around 53 percent of GDP in FY23/24, before starting to decline. Gross financing needs (GFN) would, however, be large and exceed the stress threshold, emphasizing short-term financing and rollover risks and the urgency for strong fiscal adjustment complemented by an adequate medium-term financing strategy. The DSA shock scenarios point to additional vulnerabilities arising from growth shocks and potential fiscal slippages. The external debt profile indicates vulnerabilities to current account shocks.

Public Debt2

Background

1. Eswatini’s public debt has doubled since 2015 driven by large primary deficits. Between FY15/16 and FY19/20, the public debt to GDP ratio rose from 17.7 to 38 percent of GDP, owing to a large and growing primary deficit averaging about 8 percent of GDP.3

2. With high and rising gross financing needs (GFN), the authorities have steadily increased their reliance on domestic financial markets. With external financing limited to project loans,4 the share of domestic debt rose from about 48 percent of total public debt in FY15/16 to about 68 percent in FY19/20, including central bank advances and domestic arrears. After reaching 14.8 percent of GDP in FY15/16, GFN further increased to 20.5 percent of GDP in FY19/20.

3. The maturity and composition of public debt bear significant rollover and liquidity risks, as well as exchange rate vulnerabilities. At end-March 2020, short-term treasury bills and other short-term debt (i.e., central bank advances, domestic arrears) accounted for about 58 percent of the government’s domestic debt, over 80 percent of which is in the form of short-term treasury bills and pending invoices. The increase in short-term domestic liabilities raises the GFN going forward and exposes the country to short-term rollover risks. Even with fiscal adjustment, GFN would remain above the risk threshold, pointing to significant medium-term financing risks. Public debt denominated in foreign currency has also increased, reaching about 12.3 percent of GDP (about one third of central government public debt). Given the recent depreciation in the domestic currency and increasing recourse to external loans, foreign exchange risks are heightened.

Outlook and Risks

4. Under staff’s baseline, which includes the government’s fiscal adjustment plans, public debt would peak around 52½ percent of GDP before declining gradually, but financing needs would remain elevated.5 The baseline incorporates 6½ percent of GDP in consolidation measures to reflect the authorities’ commitment to reduce the fiscal deficit and stabilize public debt dynamics (see main text and the authorities’ Letter of Intent). Under this baseline, the debt-to-GDP ratio would peak at in FY23/24 before starting to decline (Figure A3) and annual GFN would average around 19.4 percent of GDP.6 Absent of deep enough domestic financial markets and additional external financing, a financing gap during the first two years of adjustment would translate in new domestic arrears. Moreover, if remaining past arrears are cleared with new borrowing, GFN could be significantly higher although this would extend the maturity profile of public debt. These factors point to the need to develop an adequate medium-term financing strategy.

Figure A1.
Figure A1.

Eswatini: Public DSA Risk Assessment

Citation: IMF Staff Country Reports 2020, 229; 10.5089/9781513551869.002.A001

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.4/ EM BIG, an average over the last 3 months, 19-Feb-20 through 19-May-20.5/ 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 A2.
Figure A2.

Eswatini: Public DSA—Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2020, 229; 10.5089/9781513551869.002.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.
Figure A3.

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

(In percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2020, 229; 10.5089/9781513551869.002.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+gπ)) times previous period debt ratio, with r – interest rate; π – growth rate of GDP deflator; g – real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π (1 +g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1 +r).8/ Includes asset changes and interest revenues (if any).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.

5. Alternative scenarios and stress tests highlight the importance of fiscal adjustment to ensure debt sustainability and resilience to shocks. Even temporary delays in implementing the government’s adjustment plans would result in public debt approaching or exceeding the debt risk threshold and exacerbate financing needs. With full implementation of the adjustment plans, stress test analysis suggests that debt levels and GFN are particularly sensitive to GDP growth shocks. In the case of a combined GDP growth, primary balance and macroeconomic shock, public debt would exceed 90 percent of GDP. The recent recourse to external financing increases exchange rate risks, particularly in the context of the peg to the rand, which has recently been subject to significant depreciation and volatility due to the deteriorated economic conditions in South Africa. Mitigating factors include a large share of medium-term debt held by a large domestic non-bank financial sector, including a fully funded pension fund.

6. The debt sustainability analysis critically depends on the authorities’ ability to deliver fiscal adjustment. In the extreme case of no fiscal adjustment, the public debt-to-GDP ratio would breach the DSA risk threshold in the last year of the projection period. The annual fiscal deficit would exceed 10 percent of GDP and GFN would average 24½ percent of GDP—5 percent of GDP above the baseline scenario, thus posing significant financing and sustainability risks. Arrears would increase further, hamstringing the private sector and weighing on growth and financial stability.

External Debt7

7. Eswatini’s external debt and gross financing needs have been relatively flat and remain low (Table A1). In 2019, the stock of external debt increased by about 1 percent of GDP to reach 18.3 percent of GDP. About two thirds of external debt is owned by public entities. Half of public external debt in 2019 was with multilateral creditors, one third was with private creditors and the remaining was official bilateral debt. 8 External debt is expected to increase further in 2020 by 9.8 percent of GDP as the government taps external financing to fund immediate external needs arising from the COVID-19 pandemic and to start repaying domestic arrears. Gross external financing needs declined to 1.7 percent of GDP in 2019 owing to a temporary recovery in the current account surplus and are expected to temporarily increase in 2020.

Table A1.

Eswatini: External Debt Sustainability Framework, 2015–2025

(In percent of GDP, unless otherwise indicated)

article image

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

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

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

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

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

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

8. Under the DSA baseline, after an initial increase, external debt will moderately decline over the projection period with contained gross financing needs. The external debt ratio is projected to peak at 29.9 percent in 2021 and decline over the projection period to 25.5 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 1.2 percent of GDP over the medium term (Table A1).

9. Sensitivity tests suggest that Eswatini’s external debt is particularly sensitive to current account and currency depreciation shocks (Figure A6). A shock to the non-interest current account would place the external debt-to-GDP ratio on a sharp upward path, reaching 43 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 A4.
Figure A4.

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

Citation: IMF Staff Country Reports 2020, 229; 10.5089/9781513551869.002.A001

Source: IMF staff.
Figure A5.
Figure A5.

Eswatini: Public DSA—Stress Tests

Citation: IMF Staff Country Reports 2020, 229; 10.5089/9781513551869.002.A001

Source: IMF staff.
Figure A6.
Figure A6.

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

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2020, 229; 10.5089/9781513551869.002.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.2/ 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.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.4/ One-time real depreciation of 30 percent occurs in 2021.

Appendix I. Letter of Intent

Mbabane, July 20, 2020

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Ms. Georgieva,

1. The Government of the Kingdom of Eswatini hereby requests financial support from the IMF under the Rapid Financing Instrument (RFI) in the amount of SDR 78.5 million (100 percent of quota) to mitigate the urgent balance of payments needs arising from the adverse impact of the COVID-19 pandemic on the economy. The government also requests that, upon approval by the IMF’s Executive Board, and following parliamentary approval of the loan, the full amount of the RFI purchase be made available as direct budget support to the Ministry of Finance’s account at the Central Bank of Eswatini (CBE). This purchase is critical to help the government to address the impact of the pandemic on the economy.

2. The COVID-19 pandemic is having a severe impact on Eswatini. The virus is spreading rapidly, and Eswatini’s relatively high HIV/AIDS prevalence and an already pressured health care system exacerbate risks that the pandemic could propagate even faster. To contain the pandemic, the government has swiftly put in place an array of containment measures. It has declared a national emergency and imposed a partial lockdown across the country, including travel bans, closure of schools and universities, and a suspension of all non-essential activities. These measures, combined with a sharp decline in external demand for Eswatini’s key exports and spillovers from South Africa, are causing a dramatic fall in economic activity. Our preliminary assessment suggests a contraction in real GDP of 3.5 percent this year, 6 percentage points lower relative to our estimate from just a few months ago. Given the uncertainty as to the depths and duration of this crisis, this estimate comes with significant risks.

3. To support the economy and preserve financial stability, the CBE has adopted a more accommodative policy stance and supported liquidity provision. In the context of the peg, the CBE has followed the South African Reserve Bank and reduced the policy rate by 250 bps since mid-March and reduced banks’ liquidity and reserve requirements.

4. Despite the policy response, our external position is under stress and urgent BOP needs have emerged. The current account surplus is projected to decline to about 1 percent of GDP compared to 4.2 percent of GDP in 2019, as a reduction in the country’s key exports (beverages, sugar, and textile), and lower remittances and returns from investment abroad would only be partially offset by a slowdown in imports. SACU receipts still support a positive current account, but the financial account is posited to deteriorate largely because of a decline in FDI, temporary higher portfolio outflows, as investors search for safer investments, and lower external financing for government’s capital projects. Despite a depreciation of the currency, we expect external financing needs of US$163 million for this year that, if not financed, will lead to a further decline in already low international reserves.

5. The COVID-19 pandemic is also severely affecting the budget. The economic recession is affecting domestic revenue, which are expected to fall short of the budget target by 2.6 percent of GDP. Moreover, to mitigate the impact of the pandemic, the government has put in place a response package at the cost of about 1.5 percent of GDP. The package includes additional health spending, ramped up food assistance programs, increased social protection transfers, and improved access to water and sanitation facilities for the vulnerable. Given the limited fiscal space, Cabinet has approved a supplementary budget for FY20/21 to accommodate the additional pandemic-related spending within the existing overall budget ceiling by curtailing spending authorization for capital outlays, selected operating expenses, including transfers to public entities, and limiting hiring plans. Despite this prudent approach, given the reduction in GDP, the fiscal deficit is projected to widen to about 8½ percent of GDP, compared to 4.7 percent targeted in the 2020 budget and gross financing needs are projected to approach 25.8 percent of GDP. While part of the budget financing needs will be covered in the domestic market, we estimate an additional US$207 million (5.3 percent of GDP) is required to close the fiscal financing gap for the year. We expect the immediate budgetary impact of the pandemic to subside towards the end of the year.

6. The requested RFI purchase will finance part of the projected external financing needs arising from the COVID-19 shock in 2020. It will also play a catalytic role in securing additional support from our development partners. Beyond a commercial loan already secured to partially repay past domestic arrears, we expect additional financing from the World Bank and the African Development Bank to address the impact of the COVID-19 emergency and contribute to fully finance the FY20/21 budget and cover part of the financing needs for the following years as SACU revenues are expected to decline. We are also developing a contingency plan, should the need emerge, to further scale up pandemic-related government spending, to be financed through reductions in non-priority expenditures. Finally, if there is any remaining budget financing gap in FY20/21, in the context of the October 2020 Mid-year Budget Review, we will issue a supplementary budget to avoid the accumulation of new arrears.

7. Going beyond the current year, the government of the Kingdom of Eswatini remains fully committed to its Recovery Roadmap and to implement policies to preserve macroeconomic stability.

  • First and foremost, we have developed a detailed medium-term fiscal consolidation plan to stabilize public debt and bolster external buffers, while protecting the most vulnerable. Cabinet has approved a plan to adopt consolidation measures of 6½ percent of GDP over the next three years starting in FY21/22, which are part of the government’s Medium-Term Recovery Strategy. The current economic recession and the expected slow recovery will require us to implement the adjustment gradually, backloading some measures. Our fiscal adjustment strategy is centered around four pillars. We will contain public wage spending, continuing our policies of gradual employment reduction and lower-than inflation salary adjustments. We have commissioned an external review of the extra budgetary sector with the aim of rationalizing spending and transfers to key state-owned entities and merge entities with similar mandates over time. We will also continue to pursue new ways to reduce our operational expenditures, and intend to improve the targeting of our main social assistance programs. In addition, about 40 percent of our adjustment plan relies on boosting our domestic revenue by broadening tax bases, increasing some tax rates such as personal taxation and VAT, and continuing strengthening tax administration. To protect revenue collection, we also commit not to introduce measures that would reduce corporate income tax revenue. This strategy will allow us to broadly preserve capital spending and domestic capital accumulation, and caring more effectively for the most vulnerable members of the society.

  • We are committed to support the peg and enhance the banking system liquidity management. The CBE has issued a public notice to communicate its objective to stabilize excess liquidity in the banking system, including liquidity injected through the expected external flows to finance public spending, and its enhanced liquidity management instruments. It has advised the market that it is reactivating weekly auctions of CBE bills as the main tool to stabilize excess liquidity and stands ready to modify reserve requirements as needed. As part of the effort to modernize the liquidity management strategy, the CBE has also improved the terms on which banks can obtain liquidity by reducing the cost of its overnight lending facilities, and has introduced a term discount window facility and will continue to develop its liquidity forecasting capacity.

  • Preserving financial stability remains a key policy objective. The CBE has recently introduced temporary regulatory relief measures for COVID-19 affected loans, including payment holidays and forbearance measures. It has also enhanced reporting requirements on banks’ liquidity and deposits, introduced more frequent stress tests for key categories of risk in bank’s balance sheets, including for COVID-19 affected loans, and required banks to more frequently conduct portfolio reviews and risk assessments. To ensure risks in the banking sector are well managed, the CBE has suspended plans to increase single exposure limits, has taken steps to ensure that loan classification and provisioning standards are maintained. To further strengthen the regulatory framework, the CBE intends to introduce over the next months an early intervention regime. We are also improving the coordination between the CBE and the Financial Services Regulatory Authority (FSRA), by fast-tracking the establishment of the planned Financial Stability Panel. Moreover, to bolster our crisis management framework, we intend to eventually extend the emergency liquidity assistance toolkit to non-bank financial institutions.

8. The government will intensify reforms to strengthen governance, transparency and accountability, and reduce vulnerabilities to state-capture and other forms of corruptions. We have taken a multi-pronged approach.

  • First, we fully recognize the importance of ensuring that financial assistance and budget allocations to support COVID 19-related spending are used for intended purposes. To that end, we will: (i) use specific budget lines to facilitate the tracking and reporting of the release of funds of all crisis-mitigation spending, and (ii) publish on the National Disaster Management Agency (NDMA)’s website (www.ndma.org.sz) bi-monthly reports on funds released and expenditures incurred for health, social and other crisis-mitigation spending; (iii) regularly publish, on the Eswatini Public Procurement Regulatory Agency (ESPPRA)’s website (www.sppra.co.sz), signed public procurement contracts for crisis-mitigation spending, along with the names of awarded legal persons and their beneficiary owners, and ex-post validation of delivery; in addition, (iv) the Auditor General will undertake a financial and compliance audit of all crisis-mitigation spending and related procurement processes using independent external audit companies and will publish the results within six-months from the end of the 2020/21 fiscal year. Moreover, the Eswatini Public Procurement Regulatory Agency (ESPPRA) will undertake separate compliance and value-for money audits of all procurement activities related to COVID-19 spending, and publish the result on its website.

  • Second, we have set up a transparent strategy to start clearing domestic arrears. All claims will be subject to the standard internal budget spending verification process, including validation of delivery, and the process will be subject to an ex-post review by the Auditor General as part of the budget audit certification process. Cabinet has approved the clearance strategy, which includes Cabinet’s approval of any detailed liquidation schedule before payments occur. Moreover, before clearing any arrears, we will publish on the government’s website (www.gov.sz) the liquidation strategy and schedule, and all pending claims, both verified and not, with information on claiming legal entities.

  • Moreover, to strengthen our PFM framework, we have submitted regulations to fully implement the 2017 PFM law to the Attorney General’s Office for final review, and we expect these regulations to be approved by Cabinet in the second half of July 2020, before being presented to Parliament for approval. The full implementation of the law will overhaul PFM processes, strengthening budget credibility and medium-term fiscal planning, and tightening budget execution processes.

  • Finally, the government continues to support the strengthening of the Anti-Corruption Commission. Despite the fiscal constraints, the funding to the agency has increased in the last two years to support the upgrading of its systems, building staff capacity, and accelerate the solution of pending cases.

9. As the crisis abates, the government will scale up structural reform implementation to facilitate private investment and support more inclusive and stronger growth. Our objective is to create an enabling business environment focusing on the ease of doing business by leveraging the Recovery Strategy and the 2019 National Development Plan. We are facilitating the setting up of large foreign investment projects by providing factory shells, and will continue developing the recently created special economic zones. We also intend to accelerate reform implementation to improve Eswatini’s low doing business ranking, amongst others, by setting up a one-stop shop for businesses, and simplifying license requirements, and property registration. The regulatory framework is being reviewed and will be amended in line with international best practice, including to improve protection of minority investors, and taxpayers’ appeal rights.

10. As we request the RFI’s purchases to be made available as budget support, the Ministry of Finance and the Central Bank of Eswatini have signed a Memorandum of Understanding on their roles in the timely servicing of Eswatini’s financial obligations to the Fund.

11. The Kingdom of Eswatini does not have outstanding credit from the Fund and its capacity to repay the RFI purchase is adequate. Repayments will peak at 1.1 percent of GDP and 2.5 percent of exports of goods and services and will remain manageable. The government intends to meet its financial obligations to the IMF on a timely basis. Moreover, our external and public debt sustainability indicators will not change significantly because of the additional financing to cope with the current crisis.

12. In line with IMF safeguards policy, we commit to undergoing a safeguards assessment conducted by the Fund. To this end, we authorize IMF staff to hold discussions with external auditors and provide IMF staff access to the CBE’s most recently completed external audit reports. Moreover, we do not intend to introduce measures or policies that would exacerbate balance of payments difficulties. We do not intend to impose new or intensify existing exchange rate and trade restrictions.

13. We are determined to meet the challenge the COVID-19 pandemic has created and the support of the international community will be critical. We look forward to an early approval of financial assistance by the IMF—which will help our effort to bring Eswatini’s economy back on a strong path and sustain our fight against poverty. Beyond this much needed immediate financial assistance, we reaffirm our willingness to fully remain engaged with the IMF, to benefit from its policy advice, its technical assistance and, if needed, financial support.

14. In line with our commitment to transparency in government operations, we agree to the publication of this letter and all the documents submitted to the Executive Board in relation to this request.

Sincerely yours,

article image
2

The COVID-19 social assistance response utilizes an existing disaster relief program and its targeting mechanism. The program covers about 150,000 individuals (as of FY 2018/19). Beneficiaries are identified based on proxies for vulnerabilities, including income level and source, household size, and number of meals per day. The authorities have been engaging with development partners on enhancing the existing cash transfer programs (largely untargeted old-age grants), including piloting a program for poor children. In the 2019 Article IV consultation, staff concluded that existing cash transfer programs, while offering some relief, are not adequately targeted and offer only partial coverage of the poorest segments of the population (IMF Country Report 20/41).

3

The pre-COVID baseline is an updated version of the 2019 Article IV Staff Report baseline (February 2020).

4

The decline in government’s project financing reflects the FY20/21 budget strategy to bring to completion existing projects for which the external financing component has been exhausted.

5

For an assessment of reserve adequacy, see IMF Country Report 20/41. Using 2020 projections, the IMF’s metric would suggest that an adequate level of international reserves would be in the range of 3.3–5 months of imports.

6

Eswatini’s common external tariff revenues for the current year are likely to be lower than assigned before the crisis. Under the SACU revenue sharing formula, FY20/21 revenue distributed in excess of actual outturns will be clawed back in FY22/23.

7

For an analysis of the growth impact of structural reforms in Eswatini, see IMF Country Report 20/41.

8

Structural reforms that help to close part of the gap with middle-income countries in key product market, governance and labor market indicators could boost growth up to 1.3–2 percentage points annually (IMF Country Report 20/41).

9

The supplementary budget is expected to be presented to parliament in July.

10

The development of the authorities’ adjustment plans has benefited from Fund’s technical assistance on tax policy, in particular VAT (January 2017, July 2019); expenditure rationalization, particularly wage policies and transfers to selected entities (October 2018); and, a recent Public Investment Management Assessment, PIMA (July 2019).

11

For an analysis of key structural reforms to boost growth in Eswatini, see IMF Country Report 20/41.

1

The latest DSA was published in February 2020 (IMF Country Report No. 20/41). At that time, the authorities had not developed any fiscal adjustment plans. This DSA incorporates the fiscal adjustment strategy recently approved by Cabinet, targeting measures for about 6½ percent of GDP to be rolled out over the next three years.

2

Analysis based on fiscal year and on central government debt. General government debt data are not available.

3

As of March 2020, debt guaranteed by the central government amounted to 5½ percent of GDP.

4

A new E2bn commercial loan to pay off part of domestic arrears has recently been finalized and incorporated in the FY20/21 projections, which also include the RFI and prospective financing from the World Bank and the AfDB.

5

Gross financing needs exclude obligations arising from financing any fiscal financing gap.

6

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 are exceeded in the baseline. The benchmarks are based on 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.

7

Analysis based on calendar year.

8

Given delays and possible limitations in data collection, the stock of private external debt might be somewhat underestimated.

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Cover IMF Staff Country Reports
Kingdom of Eswatini: Request for Purchase Under the Rapid Financing Instrument-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 229
Publisher:
International Monetary Fund
ISBN:
9781513551869
ISSN:
1934-7685
Pages:
45
DOI:
https://doi.org/10.5089/9781513551869.002
  • View in gallery

    Policy Stringency Index

    (Index, higher indicates more stringent)

  • View in gallery

    Revisions to 2020 Real GDP Growth Projections

    (Contribution to growth)

  • Figure 1.
    View in gallery
    Figure 1.

    Eswatini: Macroeconomic Effects of the COVID-19 Pandemic

  • Figure A1.
    View in gallery
    Figure A1.

    Eswatini: Public DSA Risk Assessment

  • Figure A2.
    View in gallery
    Figure A2.

    Eswatini: Public DSA—Realism of Baseline Assumptions

  • <sup><xref ref-type="fig" rid="RA01fig04">Figure A3.</xref></sup>
    View in gallery
    Figure A3.

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

    (In percent of GDP unless otherwise indicated)

  • Figure A4.
    View in gallery
    Figure A4.

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

  • Figure A5.
    View in gallery
    Figure A5.

    Eswatini: Public DSA—Stress Tests

  • <sup><xref ref-type="fig" rid="RA01fig07">Figure A6.</xref></sup>
    View in gallery
    Figure A6.

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

    (External debt in percent of GDP)

Policy Stringency Index

(Index, higher indicates more stringent)

Revisions to 2020 Real GDP Growth Projections

(Contribution to growth)
Figure 1.

Eswatini: Macroeconomic Effects of the COVID-19 Pandemic
Figure A1.

Eswatini: Public DSA Risk Assessment
Figure A2.

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

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

(In percent of GDP unless otherwise indicated)
Figure A4.

Eswatini: Public DSA—Composition of Public Debt and Alternative Scenarios
Figure A5.

Eswatini: Public DSA—Stress Tests
Figure A6.

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

(External debt in percent of GDP)