Introduction

Our Eswatini authorities thank Fund management and staff for their timely response to the request for emergency financing under the Rapid Financing Instrument (RFI). They consider assistance under the RFI as important in catalyzing additional resources from other development partners.

The Eswatini economy has been severely affected by the COVID-19 pandemic, exacerbating pre-existing economic challenges and hindering the authorities’ efforts to restore fiscal sustainability and support recovery from previous shocks. In addition, domestic measures to contain the pandemic, coupled with spillovers from South Africa and lower external demand, have led to a significant contraction in economic activity and emergence of financing gaps. Against this background, the authorities request purchase under the RFI in the amount of SDR 78.5 million, equivalent to 100 percent of quota, to help address urgent balance of payment needs created by the COVID-19 pandemic. They are also seeking additional financing from other development partners to close the residual financing gap.

To ensure the transparent and accountable use of COVID-related resources, the authorities will use a single account and create specific budget lines to facilitate tracking of all pandemic-related spending. In addition, they plan to publish bi-monthly reports on spending execution on the website of the National Disaster Management Agency (NDMA), as well as details of respective procurement contracts. Further, under the coordination of the Auditor General, they plan to conduct a financial and compliance audit of all crisis-mitigation spending and procurement processes using independent external audit companies, and to publish the audit results. At the same time, the Eswatini Public Procurement Regulatory Agency will separately conduct compliance and value-for-money audits of all procurement activities related to COVID-19 spending and publish the results on their website. Moreover, the Central Bank of Eswatini (CBE) is committed to undergo a safeguards assessment before Board approval of any subsequent arrangement.

Impact of the COVID-19 Pandemic

Since the first confirmed COVID-19 case registered on March 14, 2020, the number of cases has risen sharply to 1,894 as of July 21, 2020, partly reflecting a relatively strong testing capacity. As a result, the pandemic has exerted pressure on the already stretched health care system.

Reflecting the negative repercussions of the pandemic, GDP growth is projected to contract by 3.5 percent in 2020, which is about 6 percentage points lower than the pre-crisis growth projection. This largely reflects the growth constraining effects of domestic containment measures, disruptions in supply chains, and subdued external demand. At the same time, the current account surplus is expected to decline by about 2.8 percent of GDP relative to the pre-crisis level, also underpinned by depressed returns on investments abroad and decline in remittances. The drop in international oil prices and its impact on the import bill is, however, expected to partially moderate these adverse current account developments. Inflation pressures are expected to mount on the back of exchange rate depreciation and rent increases.

Consistent with the decline in economic activity, fiscal revenue is expected to fall short of the budget target by 2.6 percent of GDP in 2020, while spending on health care and transfers to vulnerable households and businesses will increase. As a result, the fiscal deficit is projected to widen to 8.7 percent of GDP in FY2020/21 compared to 5.5 percent of GDP in the pre-COVID scenario. This has created a budget financing gap of about 5.3 percent of GDP, to be covered by the RFI purchase and loans from the WB and AfDB.

Policy Responses to the Pandemic

In mid-March, the authorities declared a national state of emergency and swiftly took measures to contain the spread of the pandemic, including implementing a partial lockdown. Key response measures adopted include suspension of air travel, restrictions on gatherings and movement across cities, and closure of schools, universities, and non-essential businesses. In parallel, they enhanced collaboration with development partners to accelerate the procurement of medical supplies, while mobilizing the required financing. As a result, strong testing capacity has been established together with isolation facilities. Further, an inter-ministerial committee was constituted to coordinate government efforts and communicate pandemic-related developments in daily press briefings. At the same time, the National Disaster Management Agency (NDMA) was tasked with executing crisis-related spending under a robust monitoring and reporting framework.

To mitigate the impact of the pandemic on vulnerable households and businesses, the authorities instituted a package of fiscal, monetary, and financial sector measures. Key fiscal policy measures include scaling up of healthcare spending, expanding food assistance programs, improving access to water and sanitation for the vulnerable households, and increasing social protection transfers. To accommodate additional spending on the response package, a supplementary budget that reallocates budgetary resources within existing spending ceilings has been submitted to Parliament. In addition, the authorities have granted temporary tax relief to affected businesses conditional on retaining employees. The government has also postponed planned increases in electricity and water tariffs. They have also secured a loan from Afreximbank to partially repay past arrears and ease private sector financing pressures.

The CBE has implemented several accommodative monetary policy measures, including reducing the policy rate by 250 basis points to 4 percent to mitigate the impact of the pandemic on vulnerable businesses. In addition, the authorities have relaxed reserve requirements to help ease liquidity conditions in the financial system. Further, the CBE has encouraged banks to restructure loan repayments and provide payment holidays for affected clients. They have also raised limits on mobile money transactions to encourage the use of electronic payment and promote social distancing.

Post-crisis Measures

Starting in the FY2021/22, the authorities intend to implement their recently adopted fiscal consolidation plan. The plan entails a fiscal adjustment equivalent to 6.5 percent of GDP over a period of three years and aims to stabilize public debt while strengthening external resilience. The plan is centered around four pillars: increasing domestic revenue through rate increases and base broadening measures; reducing public wage spending; rationalizing transfers and expenditure of state-owned entities; and improving the targeting of social assistance programs. The authorities intend to contain reductions in capital spending and better prioritize growth-enhancing investments in line with the recommendations of the recent PIMA exercise.

To boost long-term growth and private investment, the authorities plan to accelerate implementation of their Medium-Term Recovery Strategy once the crisis abates. Meanwhile, they have continued to facilitate the setting up of large foreign investment projects and developing the recently established special economic zones. Concurrently, they continue to implement reforms to improve the business environment to further enhance the country’s investment appeal.

The CBE remains committed to supporting the exchange rate peg through prudent liquidity and international reserve management. To this end, they will stabilize excess liquidity stemming from external flows to finance public spending through the reactivation of weekly auctions of CBE bills, introducing a term discount window facility, and improving the terms on which banks can obtain liquidity. Moreover, the CBE stands ready to modify banks’ reserve requirements as needed to address excess liquidity and will continue to enhance its liquidity forecasting capacity going forward. To further strengthen financial sector’s oversight and preserve financial stability, the CBE has enhanced monitoring and reporting requirements on bank deposits and liquidity positions, suspended plans to relax the single exposure limits and is developing an early intervention regime. The central bank is also considering the extension of emergency liquidity assistance toolkit to non-bank financial institutions to further strengthen the crisis management framework.

Furthermore, the authorities are stepping up efforts to strengthen governance and intensify the fight against corruption. In this regard, they have increased funding to the Anti-corruption Commission to support the upgrading of its systems, building staff capacity, and expediting the resolution of pending cases. To further preserve fiscal sustainability, the authorities have made significant strides to stop accumulation of arrears. In this regard, they are determined to implement the arrears clearance strategy, that has been approved by Cabinet, to transparently liquidate past arrears through the standard budget process. In this respect, they have started phasing out special accounting treatment for some extra-budgetary entities. At the same time, regulations to fully implement the Public Financial Management (PFM) Act have been submitted to the Attorney General’s Office for final review prior to the Cabinet’s approval.

Conclusion

The authorities remain committed to restoring macroeconomic stability and supporting economic recovery in the medium term. To this end, they view continued Fund support as critical to help them advance reforms to ensure fiscal and debt sustainability while promoting sustainable and inclusive growth. They look forward to Executive Directors’ support on their request for emergency financing under the RFI to mitigate the pandemic shock.