Swaziland Uses IMF Monitoring Program to Fight Fiscal Crisis
By Olivier Basdevant
IMF African Department
April 8, 2011
- Swaziland faces fiscal crisis caused by drop in customs revenue, large wage bill
- Staff-Monitored Program to help fiscal adjustment, safeguard pro-poor spending
- IMF staff urges improved public financial management, expenditure control
IMF Managing Director Dominique Strauss-Kahn approved a Staff-Monitored Program for Swaziland to help the southern African country enact tax reforms and at the same time protect social spending.
The program entails IMF staff scrutiny of the authorities’ policies, but does not include formal backing of the program or any financial support.
Swaziland is facing a serious fiscal crisis, with an overall budget deficit estimated around 13 percent of GDP for the 2010/11 fiscal year ending on March 31, 2011. The crisis came from structural imbalances in both government expenditures and revenues.
Although its situation is serious, Swaziland confronts a liquidity crisis and not a solvency crisis. The government is facing significant short-term liquidity constraints in financing its large fiscal deficit. However, the debt-to-GDP ratio is relatively low by international standards at around 20 percent of GDP.
The liquidity crisis could quickly turn into a solvency crisis if not addressed up front, as the fiscal adjustment will take time to lead to a more balanced fiscal position, which will imply a growing debt-to-GDP ratio over the coming years.
The Swazi authorities adopted a Fiscal Adjustment Roadmap in late 2010 to restore fiscal sustainability. The roadmap also includes short-term measures such as tax increases and a hiring and wage freeze.
The roadmap also carries measures to be implemented over the medium term, largely focused on strengthening Finance Ministry functions such as public financial management, expenditure policy, tax policy, and revenue administration. The package also proposes reducing the civil service by 20 percent through an enhanced voluntary early retirement scheme.
The Swazi authorities requested that the roadmap be scrutinized by an IMF Staff-Monitored Program. Following advice from IMF staff, an agreement between national authorities and IMF staff was made to monitor the implementation of the Government of Swaziland’s economic and financial program during a specified period. Approval of this agreement does not represent endorsement of the program by the IMF Executive Board or involve IMF financing.
IMF management approved the program on April 4, 2011 to encourage the needed fiscal adjustment while safeguarding Swaziland’s spending on education and health. The program also seeks to enhance administrative capacity, notably in the area of public financial management, expenditure controls, and revenue administration.
Swaziland’s large fiscal adjustment in 2011 and continued structural impediments to growth are projected to dampen real GDP expansion to about ½ percent this year. Consumer price inflation is projected to accelerate to about 8 percent in 2011 from 6¼ percent in 2010, reflecting higher domestic taxes and levies on various products, as well as the increase of food and fuel prices on international markets. Mirroring the sharp fiscal adjustment, the current account would improve significantly.
On the expenditure front, Swaziland has one of the largest wage bills in sub-Saharan Africa, at around 18 percent of GDP in FY2010/11. Moreover, weaknesses in the budget process have led to off-budget expenditures in the past, which were subsequently regularized by supplementary budgets.
For example, the 2010/11 budget has been negatively affected by a 4½ percent unbudgeted wage increase granted to civil servants and politicians in June 2010, and additional expenditure of around $50 million to finance expenditure overruns for a new airport project.
On the revenue side, Swaziland is heavily dependent on payments from the Southern African Customs Union, which accounted for 63 percent of total revenues in 2009/10. Following the global financial crisis, these revenue transfers fell by about two-thirds (11 percent of GDP) and are not expected to recover to pre-crisis levels.
One of the key priorities for Swaziland is to protect pro-poor spending while consolidating its public finances. Swaziland has the highest incidence of HIV/AIDS and tuberculosis in the world, a skewed income distribution, and pervasive poverty. In this context, it is essential to protect education and health to make progress towards the government’s stated goal of halving poverty by 2015.
Under the Staff-Monitored Program, IMF staff recommended additional upfront measures to strengthen the credibility of the fiscal roadmap and to assist the authorities to raise adequate financing for the budget. In particular, the size of the wage bill required nominal wage cuts for higher-paid civil servants, with smaller reductions applied to lower-paid civil servants.
Following these recommendations, the government committed to cut the salaries of cabinet ministers by 10 percent. Further cuts are being negotiated with parliamentarians and trade unions in order to achieve a 5 percent cut in the overall wage bill. These cuts will allow the government to continue to pay for pensions for the elderly, school programs for orphaned children, and medicines for people infected with HIV/AIDS.