Public Information Notice: IMF Concludes Article IV Consultation with Swaziland

March 8, 1999

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.

On January 11, 1999, the Executive Board concluded the Article IV consultation with Swaziland1.


Real GDP growth decelerated to slow from 3.7 percent in 1997 to about 2 percent in 1998, owing to a deterioration in the external economic environment (particularly in South Africa and Asia) and attendant higher domestic interest rates. Consumer price inflation, while trending downward from an annual average rate of about 14 percent in 1994 to 7 percent in 1997, picked up to average about 8½ percent in 1998, owing to higher imported inflation from South Africa in the wake of the large depreciation of the rand to which the lilangeni is pegged.

The overall budget balance improved from a deficit of 1 percent of GDP in 1996/97 to a surplus of 3.5 percent in 1997/98 on account of increases in indirect taxes, strengthened tax collections, higher Southern African Customs Union (SACU) transfers, and a large, albeit one-off, reduction in transfers to the parastatals. The fiscal deficit for 1998/99, which was projected at 2.8 percent of GDP in the budget, is expected to turn into a surplus of 1.6 percent of GDP owing mainly to lower-than-projected capital spending.

Interest rate differentials relative to South Africa widened in 1998 in the wake of pressures on the rand. From May through September 1998, interest rates rose by only about 3 percentage points compared with the nearly 7 percentage point increase in South Africa. This differential led to a capital outflow to South Africa (about US$20 million in the first half of 1998), which moderated the increase in net foreign assets of the Central Bank of Swaziland and helped absorb the excess liquidity in the banking system. Toward the end of the year, however, the interest rate gap narrowed to about 1 percent, easing the pressure for the exodus of capital. Reflecting weakening demand, annual broad money growth moderated from 19 percent at end-1997 to 13 percent in 1998, while private sector credit remained virtually stagnant during the period.

Aided by lower oil prices and a real effective depreciation of the lilangeni of about 3 percent, the strengthening of the overall balance of payments continued in 1998. Consistent with the compression of domestic demand and an improvement in the terms of trade, the external current account moved into a surplus estimated at 1.1 percent of GDP as compared to a current account deficit of 3.7 percent in 1997. Official reserve cover increased from 2.6 months of imports of goods and nonfactor services in 1997 to 3.5 months in November 1998.

Executive Board Assessment

Executive Directors commended the authorities for the macroeconomic stability attained over the last few years. However, they expressed concern about the recent decline in economic growth and increase in macroeconomic strains. Directors noted that, while these developments were related in part to recent adverse external developments in South Africa and Asia, the authorities were likely to be faced on a permanent basis with a more challenging external economic environment than previously.

Against this background, meeting the central policy challenges of delivering higher standards of living, alleviating poverty, and maintaining macroeconomic stability, would require resolute action by the authorities to create a favorable investment climate that could place the economy on a faster growth path. In this context, Directors attached particular importance to the need for a strengthening of public finances and a deepening of structural reforms, especially in the parastatal sector.

Directors emphasized the need for strengthening and rationalizing the public finances to offset the effects of the new revenue-sharing arrangements under the Southern African Customs Union arrangements, and the likely free trade agreements within the Southern African Development Community and between South Africa and the European Union. On the revenue side, they urged the authorities to implement the draft income tax bill—possibly phasing-in some of the provisions—and to widen the base of the sales tax, increase tax rates, and strengthen tax administration. On the expenditure side, Directors agreed that wage structures within the civil service needed to be improved, but stressed that it was also important to reduce the number of civil service employees. They urged the authorities to expedite the work of the Public Sector Management Program. Directors believed that substantial redirection of government expenditures was essential to accommodate increased expenditures on capital projects and social services, rendered imperative by Swaziland’s demographic profile and growing health concerns.

Noting the climate of investor uncertainty engendered by the state of the parastatal sector, Directors underscored the need for an expedited privatization and restructuring program to revitalize investment, arrest the drain on public finances, improve the quality of infrastructure, and importantly, to signal the government’s commitment to transparency and good governance. They expressed serious concern about the weaknesses in the banking system. They considered early action to deal with the insolvent Swaziland Development and Savings Bank as essential to preserve confidence in government policy, and urged the authorities to enlist the support of the World Bank in the restructuring process. Directors also emphasized the need to strengthen bank supervision to address weaknesses in the privately owned banks. Additionally, Directors supported Swaziland’s membership in the Common Monetary Area and the exchange rate peg to the South African rand, which had helped to secure broad financial stability and safeguard against losses in competitiveness. They welcomed the recent narrowing of the interest rate differentials with South Africa, and stressed the need for the authorities to continue to eliminate impediments to capital integration within the Common Monetary Area.

Directors recommended improvements in the quality of economic statistics, particularly those relating to the national accounts—including investment—and public finances, so as to improve policy formulation and facilitate effective surveillance.

Swaziland: Selected Economic Indicators1

1994 1995 1996 1997 1998

Domestic Economy
GDP at constant prices 3.4 3.0 3.6 3.7 2.0
Consumer prices (annual average) 13.8 12.3 6.4 7.2 8.5
External Economy
Exports, f.o.b. (in millions of U.S. dollars) 791 868 896 961 914
Imports, f.o.b. (in millions of U.S. dollars) 832 1,010 1,077 1,173 1,049
Nominal effective exchange rate2 (annual percent change) -1.1 -0.8 -3.4 0.4 -2.23
Real effective exchange rate2 (annual percent change) 3.3 2.8 -5.7 2.3 -3.53
Current account balance (in percent of GDP)
Including grants 3.2 2.3 -2.5 -3.7 1.1
Excluding grants -11.5 -8.6 -14.1 -15.1 -12.7
Overall balance of payments (in millions of U.S. dollars) -13 29 15 25 35
Gross official reserves (in millions of U.S. dollars) 238 273 278 286 350
(in months of imports of goods and nonfactor services) 2.8 2.7 2.9 2.6 3.5
External debt (in percent of GDP) 21.1 19.8 21.9 18.5 ...
Debt service ratio (in percent of exports of goods and nonfactor services) 3.9 3.1 3.8 3.3 ...
Financial Variables
Central government fiscal deficit (in percent of GDP)4 -5.5 -0.3 -1.0 3.5 1.6
Money and quasi money (annual growth in percent) 10.9 3.9 16.3 19.4 12.93
Interest rate (12-month time deposits in percent) 8.3 11.9 13.4 11.8 14.13

Sources: Swaziland authorities; and IMF staff estimates and projections.

1Data on a calendar-year basis, unless otherwise indicated.
2Trade-weighted and period average, based on IMF’s Information Notice System.
3November data.
4Fiscal year basis, including grants.

1Under 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 directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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