Public Information Notice: IMF Concludes 2003 Article IV Consultation with Swaziland

May 25, 2004

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On February 9, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Swaziland.1


Swaziland faces a serious socioeconomic situation. Although it is classified as a lower-middle-income country, income distribution is highly skewed and two-thirds of the population is estimated to live on less than US$1 a day. A growing fiscal deficit threatens macroeconomic stability and external viability, and concerns over governance, particularly the rule of law, are threatening to undermine social harmony and investor and donor sentiment. Meanwhile, the humanitarian situation remains difficult, with persistent high rates of HIV/AIDS, unemployment, poverty, and localized food shortages.

Economic growth in Swaziland has weakened since the early 1990s, in part reflecting an erosion of the country's advantage as an investment location following South Africa's emergence from apartheid. After falling to 1½ -2 percent in 2000-01, growth is estimated to have picked up to 3½ percent in 2002 owing to a combination of mainly temporary factors. The completion of the Maguga dam and some road and housing projects boosted construction, sugarcane production recovered and had knock-on effects on manufacturing output, particularly food processing, and clothing production was supported by Swaziland's participation in the U.S. Africa Growth and Opportunity Act (AGOA). Economic activity appears to have slowed in 2003 with the waning of the one-off effects that supported growth last year and a weaker investment environment.

The central government fiscal deficit (including grants) widened to 4½ percent of GDP in 2002/03 (April-March). The increase was the result of both higher expenditure, particularly on public wages and transportation, and lower revenue as a share of GDP, in part reflecting a drop in Southern African Customs Union receipts. Developments thus far in 2003/04 suggest that the deficit could widen substantially to 6½ percent of GDP for the fiscal year, largely due to an increase in public sector wages, spending on a commonwealth partnership summit, and the government's participation in some of the so-called Millennium Projects such as a new airport.

After depreciating substantially in 2001 and the first half of 2002, the lilangeni has appreciated subsequently reflecting the strengthening of the South African rand (to which it is pegged). In November 2003, the nominal and real effective values of the lilangeni were around 4 percent and 8 percent stronger, respectively, than a year previously. The external current account deficit narrowed to 4 percent of GDP in 2002 as a decline in foreign income and transfers was more than offset by a reduction in the goods and services deficit. External debt rose to 32 percent of GDP, and the ratio of external debt service payments to exports to 1½ percent. Net official international reserves fell from 2¼ months of imports in 2002 to under 2 months of imports in November 2003, largely due to a drawdown in government foreign reserve holdings to finance the budget deficit.

The scope for the Central Bank of Swaziland to pursue an independent monetary policy is limited by the peg of the lilangeni to the rand and Swaziland's membership in the Common Monetary Area. The CBS reduced short-term interest rates by 550 basis points during June-December 2003, in step with monetary easing by the South African Reserve Bank.

Inflationary pressures have eased since late 2002 in line with inflation trends in South Africa. Falling oil and food prices and the appreciation of the lilangeni have contributed to a decline in consumer price inflation from a peak of nearly 13 percent (12-month basis) in October 2002 to 4.6 percent in December 2003.

Executive Board Assessment

Executive Directors expressed concern about the serious humanitarian situation facing Swaziland, in particular the high incidence of poverty, unemployment, and HIV/AIDS. Although recently the Swazi economy has continued to grow, buoyed by temporary factors, and inflation has declined, Directors considered that its performance remains below past achievements, the widening fiscal deficit threatens macroeconomic stability, and weaknesses in governance are undermining social harmony and investor and donor support.

Directors noted that economic reforms that would remove the impediments to higher sustainable economic growth and bring about a broad-based improvement in living standards are becoming increasingly urgent. Accordingly, they strongly urged the authorities to renew their political commitment to such reforms. Directors saw the restoration of fiscal discipline as essential for maintaining macroeconomic stability, external viability, and debt sustainability. They also underlined the importance of reorienting spending toward social sectors and avoiding frivolous expenditures; implementing structural reforms, including public enterprise restructuring; and developing strategies for improving humanitarian conditions.

Directors viewed a strengthening of governance as being crucial for ensuring the effective implementation of fiscal and monetary policies and structural reforms, and for attracting donor and investor support. They emphasized, in particular, the importance of strengthening the rule of law and improving fiscal transparency and accountability in order to ensure that the announced fiscal objectives are in fact achieved.

Directors stressed that a firmly implemented and front-loaded fiscal adjustment is needed to ensure that the 2003/04 fiscal deficit target and the medium-term goal of eliminating the primary deficit are achieved. They cautioned that a continued drawdown of the government's foreign reserve holdings to finance the deficit is undesirable as it would weaken external viability. Directors urged the authorities to accord the highest priority to controlling expenditure, which has been the main source of the fiscal deterioration. This will involve limiting public sector wage increases and transfers to public enterprises; reorienting spending toward critical social sectors, such as health and education; and improving public expenditure management. They also called on the authorities to abide by their original intention to devolve most of the Millennium Projects to the private sector.

Directors advised the authorities to take further steps to broaden the tax base in order to help to reduce the budget deficit, improve efficiency, and compensate for an envisaged decline in trade taxes from the Southern African Customs Union over the medium term. They supported consideration of a value-added tax after careful preparation and public education with some analysis of its social impact, and saw room for measures to strengthen tax administration and collect sizable tax arrears.

Directors considered that Swaziland's membership in the Common Monetary Area (CMA), which pegs the exchange rate of the lilangeni to the South African rand, continues to serve the economy well by bringing with it greater financial discipline in light of the close economic integration with South Africa. They stressed that a strengthening of public finances, implementation of a prudent monetary policy stance aimed at securing an adequate level of international reserves, and continued structural reforms will be essential elements of policy to secure the credibility of the exchange rate peg. Directors endorsed further efforts to deepen financial integration within the CMA and reduce the inflation differential with South Africa.

Directors observed that the banking system in Swaziland is well developed. They noted that the commercial banks are well capitalized, have a relatively low level of nonperforming loans, and have taken a sound approach to risk management and provisioning. Directors welcomed the Central Bank of Swaziland's plans to improve supervision of the Swaziland Development and Savings Bank, whose future commercial viability is a matter of concern, and suggested that the authorities consider its eventual restructuring or privatization. They also endorsed recent legislation to strengthen lending rules, and to combat money laundering and the financing of terrorism.

Directors encouraged the authorities to initiate measures to put the financial condition of the Swaziland Public Service Pensions Fund on a sustainable path to avoid this becoming a significant contingent liability of the government. They also supported civil service reform to enhance the efficiency of the public sector, while restraining the overall wage bill.

Directors urged the authorities to move forward with reform of the land tenure system in ways that would help raise agricultural productivity, strengthen food security, and alleviate poverty. They recommended early enactment of measures that would provide greater security of land tenure and institute long-term leases for agricultural land.

Directors encouraged the authorities to work toward integration into regional free trade initiatives and to take full advantage of United States and European Union trade preferences.

Directors welcomed the recent success of the National Emergency Response Committee on HIV/AIDS in coordinating a national anti-HIV/AIDS strategy. Nevertheless, they regretted that social needs related to HIV/AIDS remain largely unmet. Directors accordingly called on the government to sharpen its focus on improving social services, including through a reorientation of public expenditure, in order to alleviate hardships related to the illness and attract stronger donor support. It was suggested that development of a comprehensive poverty alleviation strategy would be helpful in this regard.

Directors encouraged the authorities to address the shortcomings in economic statistics, particularly in the national income, balance of payments, and government accounts, and to improve the timeliness of data reporting to the Fund. In this context, Directors welcomed the authorities' participation in the Fund's General Data Dissemination System (GDDS) since early 2003, and considered that the ongoing GDDS assessment and technical assistance should form a sound basis for strengthening the economic data needed to enhance the effectiveness of policymaking.

Swaziland: Selected Economic and Financial Indicators, 1999-2002







Domestic economy


(Annual percent change)


Real GDP





Consumer price inflation (period average)






External economy


(In millions of U.S. dollars, unless otherwise indicated)


Exports, f.o.b.





Imports, f.o.b.





Current account balance 2/





(in percent of GDP)





Capital and financial account balance





Net official international reserves





(in months of imports of goods and nonfactor services)





Debt service (in percent of exports of goods and nonfactor services)





Change in real effective exchange rate (in percent) 3/






Financial variables


(In percent of GDP, unless otherwise indicated)


Total government revenue and grants 4/





Total government expenditure and net lending 4/





Overall government balance 4/





Change in broad money (in percent)





Interest rates (in percent) 5/






Sources: Swazi authorities; and IMF Staff estimates.


1/ Unless otherwise indicated.

2/ Including transfers.

3/ Trade-weighted; end of period.

4/ Fiscal years (April 1-March 31).

5/ For 12-month time deposits.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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