Public Information Notice: IMF Executive Board Concludes 2005 Article& IV Consultation with Swaziland

February 24, 2006

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Public Information Notice (PIN) No. 06/19
February 24, 2006

On February 8, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the 2005 Article IV consultation with Swaziland.1


Economic growth in Swaziland has weakened over the past decade. More recently, 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 real effective appreciation of the exchange rate of 24 percent in 2002-04 and high oil import prices hurt Swaziland's main exports (sugar, wood pulp, and garments) and manufacturing activities. In addition, the removal of textile quotas in industrialized countries in January 2005 has led to factory closures and significant job losses in the garment sector, further worsening the unemployment rate (estimated at 30 percent).

The fiscal deficit has increased in the last two fiscal years. In 2004/05, despite a large one-time windfall in South African Customs Union revenues and efforts to increase domestic revenue by removing some tax exemptions, the wage bill and other current expenditures were sharply increased, resulting in a deficit (including grants) of 4.3 percent of GDP, significantly higher than the original budget of 2.8 percent of GDP. Spending pressures have continued to rise in 2005/06, because of the full-year effect of the civil service wage increase granted in 2004, and further wage increases through a supplementary budget in the third quarter of the fiscal year, further widening the budget deficit. The deficits have been financed by external and domestic borrowing, drawing down of government financial assets, including the Capital Investment Fund (CIF), and an accumulation of domestic arrears. As the budgeted obligations exceed inflows of revenues and available financing, the government is facing a serious cash flow problem.

Monetary developments have reflected those in South Africa. In line with interest rate reductions in South Africa, the Central Bank of Swaziland reduced its discount rate to 7 percent in April 2005. Market yields on treasury bills have moved downward and interest rate spreads relative to South Africa have remained small, as new issues of treasury bills have been contained to avoid incurring higher short-term borrowing costs, notwithstanding the government's large financing needs. Available data indicate that the banking system, which is dominated by South African banks, remains strong.

In the face of shocks to exports and strong pressure to finance the fiscal deficit, gross international reserves (which include the Capital Investment Fund) declined from 1.9 month of imports at end-2003 to 1.1 months of at end-September 2005, the lowest level among members of the Common Monetary Area (CMA). In the meantime, public debt (excluding outstanding domestic payment arrears), which is mostly on nonconcessional terms, has increased to 22 percent of GDP.

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 (MDGs). There are indications that the share of the population living below the national poverty line (less than US$1/day) has been increasing in the last several years. According to the Ministry of Health, the infection rate among women attending ante-natal clinics increased from 39 percent in 2002 to 43 percent in 2004. The latest data show, however, that preventive measures may begin to have effect as HIV/AID infection rate for the 15-19 age group has declined by 3 percentage points to 29 percent for the first time.

Executive Board Assessment

Executive Directors noted that Swaziland's economic performance had deteriorated over the past two years. Output growth had slowed as a result of a substantial real appreciation of the lilangeni that undermined external competitiveness, the elimination of textile quotas by industrial countries, and a persistent drought. In addition, the fiscal deficit had widened and had been increasingly financed through accumulation of domestic payment arrears, while foreign reserves had declined to a critically low level. At the same time, the very high HIV/AIDS prevalence rate was exacting a heavy toll on society, food shortages persisted in parts of the country, and poverty remained widespread.

Directors considered that the key policy challenges facing the Swazi authorities were to restore fiscal sustainability and external competitiveness so that progress could be made in reducing poverty. They noted that these challenges were complicated by the prospects of a further loss of trade preferences and declining revenues from the South African Customs Union. In light of the pressing challenges, Directors urged the authorities to embark promptly on an adjustment strategy centered on fiscal consolidation and structural reforms and noted that the key elements of such a strategy had already been discussed within the country and with development partners. Directors underscored that further delays would make the eventual correction more costly and widen the growth gap between Swaziland and South Africa and other countries in the region.

Directors stressed the urgency of sharply reducing the budget deficit during the remainder of this fiscal year and emphasized that the 2006/07 budget would constitute a critical step towards placing public finances on a sustainable path. Looking ahead, they called on the authorities to aim for a balanced budget in the next few years given the absence of concessional external financing, the existence of large payment arrears and contingent liabilities, the limited scope for domestic financing, and low economic growth.

To achieve the fiscal adjustment, Directors emphasized the need for expenditure controls and reforms in the civil service, public investment, and fiscal revenue areas. They noted that weak expenditure controls, including at the line ministry levels, had contributed to the rising fiscal deficits and payment arrears. In this context, Directors welcomed the authorities' intention to reform the public expenditure management system and encouraged the authorities to seek technical assistance in this important area. Directors urged the authorities to follow through with measures to rightsize the civil service and rationalize the government structure, in line with their civil service reform program. Directors also considered that expenditure needed to be re-oriented to productive investment and pro-poor programs, while strong efforts were needed to increase domestic revenue, including through the establishment of a Revenue Authority and the introduction of a broad-based VAT.

Directors underscored that, with the lilangeni pegged to the South African rand under the Common Monetary Area arrangement, the authorities would need to rely primarily on structural reforms to support fiscal consolidation and restore external competitiveness. They urged the authorities to press ahead with measures to increase labor productivity, reduce domestic costs for the export sector, and improve the investment climate. In this regard, the authorities' recent initiatives to support workers' training and enhance their skills were encouraging.

To improve the investment climate, Directors emphasized the need to restructure and privatize the large number of public enterprises, as well as reforms to strengthen governance. The privatization of key utilities could enhance private sector development, and help improve the competitiveness of the Swazi economy through lower costs of key services, including those provided to the government. Directors encouraged the authorities to enact anti-corruption legislation as soon as possible and institute periodic internal and financial audits for all entities benefiting from the consolidated government budget.

Directors welcomed the recent steps by the Central Bank of Swaziland to strengthen its operations—including reserve management—and to further develop Swaziland's financial system, but noted that efforts to strengthen the official foreign reserve position would depend critically on a prudent fiscal policy stance. Directors also encouraged the authorities to enact legislation to strengthen the supervision of financial institutions.

Directors welcomed the authorities' efforts to strengthen the provision of economic data to enable timely economic policy decision making and monitoring. They noted in particular the authorities' commitment to improve the national accounts and balance of payments statistics.

Swaziland: Selected Economic and Financial Indicators, 2001-05

  2001 2002 2003 2004 2005



Domestic economy

(Annual percentage change)

Real GDP

1.6 2.9 2.4 2.1 1.8

Consumer price inflation (period average)

7.5 11.7 7.4 3.4 4.8

External economy

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

Exports, f.o.b.

1,043 1,032 1,485 1,878 1,889

Imports, f.o.b.

-1,125 -941 -1,442 -1,910 -1,994

Current account balance 1/

-57 58 36 40 -44

(In percent of GDP)

-4.5 4.8 1.9 1.6 -1.6

Gross official international reserves

267 260 265 262 232

(In months of imports of goods and nonfactor services)

2.4 2.7 1.9 1.3 1.1

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

1.3 1.4 1.1 1.1 1.2

Financial variables

(In percent of GDP, unless otherwise indicated)

Total government revenue and grants 2/

27.6 26.3 26.3 29.3 30.7

Total government expenditure and net lending 2/

30.6 30.8 29.0 33.6 35.0

Overall government balance (incl. grants) 2/

-3.1 -4.5 -2.7 -4.3 -4.3

Change in broad money (in percent)

10.7 13.1 14.1 10.4 10.5

Interest rates (in percent) 3/

6.3 9.5 4.2 4.1 3.5







Sources: Swazi authorities; and IMF staff estimates.

1/ Including transfers.

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

3/ 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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