A mission of the International Monetary Fund (IMF) led by Joannes Mongardini visited the Kingdom of Swaziland during October 24-November 7, 2012, to conduct the 2012 Article IV Consultation discussions with the Swaziland authorities.1
The mission met with the Deputy Prime Minister, Hon. Themba Masuku; Minister of Finance, Hon. Majozi Sithole; Minister of Agriculture and Cooperatives, Hon. Clement Dlamini; the Governor of the Central Bank of Swaziland, Martin Dlamini; and other senior officials. Furthermore, it held fruitful discussions with development partners, parliamentarians, and representatives of the private sector and trade unions.
At the end of the mission, Mongardini issued the following statement:
The Swaziland economy continues to suffer the lagged impact from the fiscal crisis of the past two fiscal years, which followed a significant decline in revenues from the Southern African Customs Union (SACU). The government budget that ended March 31, 2012, registered an overall fiscal deficit of 1.7 billion emalangeni (6.0 percent of gross domestic productGDP) and domestic government arrears of 1.6 billion emalangeni (5.1 percent of GDP). Faced with unpaid government receivables, many small- and medium-sized enterprises have been forced to cut down their operations. At the same time, credit to the private sector is declining in real terms. As a result, IMF staff projects real GDP to contract by 1.5 percent in 2012. Inflation remains moderate at an annual rate of 8.7 percent in September 2012, following higher domestic food prices and the introduction of the Value Added Tax (VAT) earlier this year. The external current account deficit narrowed by $47 million in 2011 to $341 million (8.6 percent of GDP), reflecting lower economic activity. Gross official reserves of the Central Bank of Swaziland stood at 6.4 billion emalangeni on October 26, 2012, equivalent to 3.5 months of prospective import covera significant improvement from 2.4 months of import cover recorded in October 2011.
The current fiscal year 2012/13 continues to be challenging for the government. There was a notable increase in government revenue as a result of the windfall SACU revenue and higher domestic collections, partly due to the introduction of VAT in April 2012. Despite this positive development, it will be difficult for the government to repay all remaining arrears unless domestic borrowing can be increased. Additional expenditure pressures are also rising, particularly on security spending. As a result, the budget surplus of 1 percent of GDP targeted for this fiscal year is unlikely to be met without additional expenditure cuts. The mission recommends a front-loaded fiscal adjustment to restore fiscal sustainability, including an upfront reduction in the wage bill of 300 million emalangeni, additional cuts in non-priority recurrent expenditures, and the implementation of the Enhanced Voluntary Early Retirement Scheme. These cuts will require sacrifices by all segments of Swazi society, but the basic needs of the most vulnerable should be protected as far as possible.
Similarly, the 2013/14 budget will need to aim for a balanced budget, given the lack of financing. The limited scope for additional revenue measures will limit the expenditure envelope to about 11 billion emalangeni, implying additional cuts in non-priority spending. Within this envelope, the mission urges the authorities to protect pro-poor spending. Capital projects should be prioritized and funded based on maximizing their impact on economic growth and poverty alleviation. Moreover, the swift passage of the draft Public Finance Management Billdeveloped with technical assistance from the IMFshould strengthen fiscal transparency and ensure that all expenditures are channeled through appropriate budgetary procedures.
The financial sector in Swaziland shows early signs of vulnerability. While banks in Swaziland still remain adequately capitalized and hold excess liquidity positions, there are possible risks to non-bank financial institutions. To address these vulnerabilities, the mission agrees with the government and the central bank that the recently-established Financial Sector Regulatory Authority should become fully operational as soon as possible. In addition, new regulatory frameworks for the supervision of Savings and Credit Cooperatives and asset management companies should be swiftly enacted.
Growth in Swaziland has been weaker over the last ten years than in other SACU countries. This is associated with high unemployment, widespread poverty, rising inequalities, and the highest HIV/AIDS prevalence rate in the world. A poor business climate and the lack of competitiveness are key obstacles to attaining higher sustainable growth and creating jobs. To address these challenges, the mission recommends restarting the privatization process, launching an international tender for a second GSM license, and improving access to modern financing by an appropriate land tenure reform.
The mission would like to thank the authorities for the frank and constructive discussions. Based on these discussions, the IMF Executive Board is scheduled to conclude the Article IV Consultation in late January 2013.