IMF Executive Board Concludes 2010 Article IV Consultation with Swaziland

Public Information Notice (PIN) No. 11/6
January 13, 2011

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 10, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Swaziland.1


The Swaziland economy continues to underperform, reflecting both the impact of the global economic crisis and key obstacles to growth. While real GDP growth is expected to have inched up to 2 percent in 2010, the rebound is moderate and has mostly been driven by public consumption. Swaziland also continues to underperform other Southern African Customs Union members, reflecting an overvalued exchange rate, continued structural impediments to growth, and the heavy toll of HIV/AIDS on economic activity. The economic outlook shows only moderate growth averaging 2 percent over the medium term. Inflation has slowed in recent months (4.5 percent in October 2010) and is projected to remain moderate over the medium term.

The impact of the crisis has been felt the most in the revenue transfers of the SACU to Swaziland. SACU imports fell sharply in 2009 due to the contraction of economic activity in South Africa and the unwinding of infrastructure spending associated with the 2010 World Cup. As a result, transfers from the common revenue pool to Swaziland have fallen by 11 percent of GDP in Fiscal Year 2010/11 due to the highly procyclical SACU revenue-sharing formula.

The shortfall in SACU revenue and a high wage bill are engendering a fiscal crisis. Absent corrective measures, the deficit could widen to 16 percent of GDP in 2010/11, reflecting the decline in SACU revenue and a further wage increase granted in mid-2010. This has contributed to making the Swaziland wage bill one of the largest in Sub-Saharan Africa. The government also added to fiscal pressures by submitting a supplementary budget to parliament in November 2010 to clear capital expenditure arrears. The deficit has been financed through a drawdown of government deposits at the central bank and domestic arrears on all expenditure items, except wages and utilities.

The fiscal crisis is mirrored by a rapid deterioration of Swaziland’s external position. The current account deficit is expected to have widened to 20.5 percent of GDP in 2010, reflecting the decline in SACU transfers and unabated public consumption. Foreign direct investment and other financial flows remain anemic. As a result, gross official reserves declined steadily in 2009-10, as the government drew down its deposits at the central bank.

The government adopted a Fiscal Adjustment Roadmap (FAR) in October 2010 to correct the unsustainable fiscal position. On the revenue side, the FAR envisages increases in taxes and the introduction of the value added tax and a capital gains tax. On the expenditure side, the FAR includes a freeze on the wage bill for the next three years and cuts in expenditures on goods and services. It also envisages stricter controls and greater efficiencies in the delivery of goods and services, as well as Public Financial Management reforms to improve procurement, accounting, and auditing practices. In November 2010, the authorities increased the fuel levy, canceled a large amount of investment projects, and implemented measures to reduce the wage bill.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They noted that a sharp decline in revenue transfers from the Southern African Customs Union (SACU) and excessive growth in the public sector wage bill have set the stage for a fiscal crisis which threatens external stability and the soundness of the financial sector. The immediate policy challenges are to restore a sustainable fiscal position, regain competitiveness, and strengthen financial sector supervision. Directors welcomed the authorities’ plans on all these fronts, but emphasized the need for more ambitious and sustained efforts to revitalize Swaziland’s economic performance.

Directors called for additional measures in the 2011/12 budget to compensate for recent increases in non-priority spending and continued weakness in SACU revenue transfers. They stressed the importance of reining in the public sector wage bill while protecting needed social programs. Noting the large financing gap for the 2011/12 fiscal year, they encouraged the authorities to mobilize additional domestic financing, while seeking financial assistance from the international community.

Underscoring that fiscal consolidation needs to be sustained over the medium term, Directors welcomed the authorities’ intention to reduce the budget deficit to 2 percent of GDP by 2014/15. However, they considered that achieving this target requires bolder fiscal adjustment and budgetary reforms than envisaged in the current plan. Additional technical assistance is also necessary to build up implementation capacity, particularly at the ministry of finance.

Taking note of the staff’s assessment that the real effective exchange rate remains overvalued, Directors expressed concern about the erosion of competitiveness which depresses growth and inhibits private sector development. They called for stepped up efforts to improve the business environment, including by reviving the government’s privatization program, reducing the cost of doing business, and keeping labor costs in line with those in the region.

Directors noted that the banking system remains in good health but saw a need to strengthen the oversight of nonbank financial institutions which appear to have broadened their activities to non-core areas. More broadly, they encouraged the authorities to remain vigilant, given the risks posed to the financial sector by the fragile fiscal situation.

Swaziland: Selected Economic and Financial Indicators, 2006–10

  2006 2007 2008 2009 2010







Domestic economy 1

(percentage changes; unless otherwise indicated)

GDP at constant prices

2.9 3.5 2.4 1.2 2.0

Consumer price inflation (period average)

5.3 8.2 13.1 7.5 6.2

Consumer price inflation (end of period)

5.5 9.8 12.9 4.5 7.0

External sector

(US$ millions, unless otherwise indicated)

Exports, f.o.b.

1,570.4 1,572.8 1,731.5 1,772.5 1,821.1

Imports, f.o.b.

-1,580.3 -1,704.0 -1,976.6 -1,897.8 -1,938.6

Current account balance

-196.7 -139.5 -231.7 -425.9 -735.0

(percent of GDP)

-7.4 -4.7 -8.2 -14.4 -20.5

Gross international reserves

373.7 758.5 745.9 947.0 576.3

(months of imports)

2.0 3.9 4.0 5.0 2.6

Debt service (percent of exports)

7.7 9.3 13.1 7.5 3.6

Financial variables

(percent of GDP)

Total government revenue and grants 2

42.8 38.9 40.4 36.1 25.1

Total government expenditure and grants 2

32.3 32.4 40.6 43.3 39.1

Overall balance (excluding arrears)

10.4 6.5 -0.2 -7.1 -10.6

Overall balance (including arrears)

10.4 6.5 -0.2 -7.1 -14.0

Change in broad money (percent)

25.1 21.4 15.4 26.8 17.2

Interest rates (percent) 3

4.9 7.1 8.2 5.4 ...

Discount rate (percent)

9.0 11.0 11.0 6.5 5.5

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

1 The official GDP numbers from 1994 to 2006 were significantly revised in 2007, and recently in 2008.

2 Fiscal years (April 1st–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. An explanation of any qualifiers used in summings up can be found here:


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