Press Release No. 11/60

Press Release No. 11/60
March 1, 2011

A mission of the International Monetary Fund (IMF), led by Joannes Mongardini, visited Swaziland during February 16-March 2, 2011. The mission held discussions on a possible Staff -Monitored Program for Swaziland. The mission met with the Prime Minister, His Excellency Dr. Barnabas Sibusiso Dlamini; the Minister of Finance, Hon. Majozi Sithole; the Minister of Economic Planning and Development, H.R.H. Prince Hlangusemphi; the Governor of the Central Bank, Mr. Martin Dlamini; and other senior officials. The mission briefed the full government in a cabinet session on March 1, 2011. It also held fruitful discussions with donors, representatives of the private sector, and labor unions.

At the end of the mission, Mr. Mongardini issued the following statement:

“The Kingdom of Swaziland continues to face substantial fiscal challenges. The central government deficit is expected to reach 13 percent of gross domestic product (GDP) in fiscal year 2010/11 (April-March), compared with 7.1 percent of GDP in 2009/10. The widening of the fiscal deficit is mainly driven by a large shortfall in revenue transfers (down 11 percent of GDP compared with the previous year) from the Southern Africa Customs Union (SACU), a 4.5 percent unbudgeted wage increase granted to civil servants and politicians in April 2010, and the supplementary budget passed in November 2010 (emalangeni 350 million – about US$50 million) to finance expenditure overruns for a new airport project. The large fiscal deficit is being financed by drawing down government deposits at the central bank, significant domestic borrowing, and an accumulation of significant domestic payment arrears. Correspondingly, the external current account deficit is estimated at 18 percent of GDP in 2010, which has reduced the gross international reserves of the Central Bank of Swaziland to E4.5 billion or 2.9 months of import cover. Real GDP growth in 2010 is estimated at 2 percent, while inflation increased to 4.5 percent.

“The mission concurred with the authorities’ views that the government will face a tight fiscal situation in 2011/12. Against this background, the draft 2011/12 budget envisages a fiscal deficit target of 7.5 percent of GDP. This significant fiscal adjustment will be achieved through tax increases as well as expenditure cuts. Priority spending on education and health will, however, be protected, and the draft budget includes higher expenditures to honor the government’s commitment to universal free primary education. The mission welcomed the draft FY2011/12 budget, as it is consistent with the government’s Fiscal Adjustment Roadmap adopted in October 2010 to address the current fiscal crisis. However, while commending the authorities for their resolve to mobilize higher domestic tax revenues, the IMF mission noted that the projected increase in government revenues is quite optimistic as it relies heavily on a sharp improvement in taxpayer compliance in FY2011/12. The new Swaziland Revenue Authority has just been created and will need time to deliver the expected gains. The mission also encouraged the authorities to hold discussions with trade unions and reach an understanding on ways to address the problem of the wage bill (the largest as a share of GDP in Sub-Saharan Africa).

“The large fiscal adjustment in 2011 and the continued structural impediments to growth are projected to dampen real GDP growth to about 0.5 percent in 2011. The consumer price inflation is projected to rise to about 8 percent in 2011, reflecting higher domestic taxes and levies on various products, as well as the increase of food and fuel prices on the international markets. Mirroring the sharp fiscal adjustment, the current account would improve significantly.

“The mission welcomes the government’s plan to resume its privatization program, starting with Swazi Bank and the awarding of a new mobile phone license as it was announced in the budget speech. It underscored that the conduct of these two operations through a competitive process would also be essential to attract foreign direct investment and improve the business climate. The mission also recommended the sale of minority shares in other enterprises, so as to provide additional financing for the budget, improve the business climate and competitiveness in the private sector. The mission also commends the authorities for the establishment of the Swaziland Revenue Authority in January 2011 and progress being made toward strengthening the regulation and supervision of non-bank financial institutions, in particular the passage of appropriate laws and the creation of the Financial Services Regulatory Authority (FSRA). It encourages the authorities to make this institution operational as soon as possible.

“IMF staff continues to assist the authorities in implementing their Fiscal Adjustment Roadmap through policy advice and technical assistance. To this end, the mission reached broad understandings with the Swaziland authorities on a set of policies that could form the basis for a possible Staff-Monitored Program covering the period January-June 2011. Once a number of prior actions are implemented, these understandings will be submitted to the IMF Managing Director for his approval.

“The mission would like to thank the authorities for their excellent cooperation and the frank and constructive discussions.”