This 2019 Article IV Consultation with the Kingdom of Eswatini highlights that the financial system remains sound, although vulnerabilities are rising. Hence, bank supervision should be intensified, the early intervention regime strengthened, and plans to relax single borrower concentration regulations suspended. The paper explains that the authorities have recently taken some policy actions toward stabilizing the economy. However, reflecting expansionary spending policies and declining Southern African Customs Union revenue, public debt is still rising, domestic arrears have accumulated, and international reserves have fallen below adequate levels. Supply side and governance reforms are needed to support private investment and strengthen competitiveness. Reforms should reduce vulnerabilities to state-capture and other forms of corruption, streamline business regulations and regulatory requirements, reduce high electricity and telecommunications costs, contain wage growth, and address shortages of skilled workers. A credible medium-term fiscal adjustment plan, starting with measures to reduce next year’s fiscal deficit, is needed to bring the economy on a sustainable path. Policies should combine expenditure reductions and revenue increases that enhance long-term growth prospects. Expanding and better targeting cash transfers would help protect the poor.
KEY ISSUES Setting: Swaziland has gradually recovered from the fiscal crisis of 2010-11, buoyed by the improved revenues from the Southern African Customs Union (SACU). Growth modestly recovered, and international reserves rebounded. Swaziland’s challenges, however, remain significant, in view of its high vulnerability to exogenous shocks and its sluggish growth performance, while facing significant social and development challenges with high unemployment and the prevalence of HIV/AIDS. Swaziland now stands at a critical juncture to strengthen its resilience to exogenous shocks, address its weak growth performance, and meet critical social and development needs. Outlook and risks: Under the status-quo policies, the outlook is for continued sluggish growth and increasing fiscal and external imbalances, reflecting low private investment, elevated government spending, and prospective decline in SACU revenues. Risks are associated with the high volatility of the SACU revenues, possible negative spillovers from South Africa (including higher policy rate and lower growth), and uncertain prospects for preferential trade agreements with the U.S. and EU. Strengthening Resilience to Shocks: Over the medium term, international reserves should be targeted at five to seven months of imports, and public debt be kept below 30 percent of GDP. This calls for a prudent fiscal policy stance, with fiscal deficit below 2 percent of GDP. Raising growth: It is essential to enhance the efficiency of the public sector and promote private sector-led growth through structural reforms including improving business climate and accelerating land reforms. Maintaining financial stability: Financial soundness indicators are generally strong. The strong growth of the nonbank financial sector in recent years calls for strengthening of supervision and regulation for the sector. Past advice: There is broad agreement between the Fund and the authorities on macroeconomic policy and structural reform priorities. With the authorities’ fiscal consolidation efforts and the improved SACU revenues, fiscal and external sustainability is being restored, consistent with staff’s advice. However, progress on structural reforms—including re-launching the privatization process, improving access to modern finance and improving the business climate—has been modest.
The fiscal crisis in the Kingdom of Swaziland emanating from a decline in revenue from the Southern African Customs Union and one of the largest public wage bills in sub-Saharan Africa has reached a critical stage. Faced with revenue shortfalls associated with slowing economic activity, uncontrolled public spending, and lack of financing, the authorities continued to deplete central bank reserves and accumulate domestic arrears. The authorities have been able to finance only a minimal amount of expenditure, including wages, utilities, and essential transfers.
The Swaziland economy continues to suffer from the global economic crisis and an overvalued real exchange rate. The fiscal crisis is starting to affect external stability. Notwithstanding the fiscal crisis, banks continue to remain well capitalized and profitable. The 2011–12 budget promises to make significant progress in fiscal adjustment while safeguarding priority expenditures. The government is taking ambitious measures to cut the wage bill in FY2011–12. Improvements in revenue administration by the Swaziland Revenue Authority (SRA) will strengthen revenue collections.
The Swaziland economy continues to underperform, reflecting the impact of the global economic crisis. The impact of the crisis has been felt mostly in revenue transfers of the Southern African Customs Union (SACU) to Swaziland. Executive Directors welcomed Fiscal Adjustment Roadmap (FAR), which focused on restoring fiscal sustainability, improving competitiveness, and strengthening financial supervision. They noted that key challenges are restoring fiscal sustainability, addressing HIV/AIDS, reducing poverty, and creating employment. Directors emphasized the need for fiscal adjustment and budgetary reforms. Directors noted that the banking system remains in good health.
This Selected Issues paper and Statistical Appendix for the Kingdom of Swaziland assesses the interaction of nonbank financial institutions (NBFIs) within the financial system and the real economy. Understanding the type of flows will help in designing policies to better manage capital flows and allow higher interest rate; and more attractive domestic investment opportunities could reduce outflows. The current global financial crisis provides useful lessons on the importance of an efficient regulatory and supervisory framework. However, regulation should be in line with economic structures and the stage of economic development.
The current high Southern African Customs Unions revenues should be used to implement fiscal measures to secure fiscal sustainability and support economic growth. The government should formulate a financial sector strategy that addresses Swaziland’s twin challenges of enhancing financial development and ensuring financial stability. Compounding the threat to exports of sugar and textiles is the looming issue of remaining competitive in a quickly changing global environment. The statistics on export and import, gross domestic product, assets and liabilities, and other such data have also been provided.
This 2006 Article IV Consultation highlights that Swaziland’s economic performance has remained weak with growth averaging only 2 percent since 2000, owing to a substantial real appreciation of the lilangeni during 2002–04, erosion of trade preferences, recurrent drought, and stagnant investment. Over that same period, rising government expenditures, especially on the wage bill, undermined fiscal sustainability and reduced foreign reserves to critically low levels. Poverty has escalated in the face of high and rising unemployment, food shortages, and the world’s highest HIV/AIDS infection rate.
Economic growth in Swaziland has weakened over the past decade. This 2005 Article IV Consultation highlights that real GDP growth decelerated to 2.1 percent in 2004 and an estimated 1.8 percent in 2005. A prolonged drought affected agricultural output, particularly maize, the main staple crop, and cotton. The authorities completed a “Poverty Reduction Strategy and Action Plan” in October 2004. The document spells out policies with the overall objective of halving the 1995 poverty rate by 2015. However, little progress has been made toward this and other Millennium Development Goals.
This 2002 Article IV Consultation highlights that real GDP growth for Swaziland fell from 7¾ percent annually during the 1980s to 3¾ percent during the 1990s. In 2001, growth declined further to 1.8 percent, reflecting a fall in export demand associated with the economic slowdown in South Africa, foreign disinvestment in some industries, and poor weather. Economic activity appears to have weakened further in 2002, with manufacturing output showing the effects of additional closures by foreign firms and agricultural output being affected by the drought in the region.