## Extra-Budgetary Public Entities and Funds in Swaziland (cr17274) ## Source details **Canonical URL:** [Extra-Budgetary Public Entities and Funds in Swaziland (cr17274)](https://www.imf.org/-/media/files/publications/cr/2017/cr17274.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17274.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17274.pdf.json) --- ### Context and Vulnerabilities - Small middle-income economy exposed to external shocks with significant structural challenges. - Dependence on SACU revenue and a few products (soft drink concentrates, caramel color, sugar, textile about 70 percent of total exports). - Recent expansionary fiscal policy depleted buffers and raised public debt rapidly. - End-year international reserve coverage declined to below 3 months of projected imports; reserve coverage fell to 2.6 months of imports (May 2017). - Widespread poverty, high HIV prevalence, and high unemployment that is little responsive to growth. ### Key indicators and factual developments - Real GDP: stagnated at 1.1 percent in 2015; projected 0.6 percent in 2017 (staff projections). - SACU revenue decline in 2016: about 4¼ percent of GDP. - Current account surplus: reduced to ¾ percent of GDP in 2016 (from 10.8 percent of GDP in 2015). - Domestic arrears: about 5⅓ percent of GDP at end March 2017 (identified pending bills exceeding 30 days above 4 percent of GDP). - Public debt jumped to 25⅓ percent of GDP (from 18.7 percent). - Banks’ holdings of government securities: about 11 percent of banks’ assets. - Nonperforming loans: exceeded 10 percent of total loans (end-March 2017). - Headline inflation: averaged 5 percent in 2015; reached 8.7 percent in December 2016. - Central Bank policy rate: raised to 7.25 percent in January 2017. ### Outlook and main projections (baseline, no policy action) — selected series and exact values - Real GDP Growth (annual change): 2015 1.1; 2016 0.0; 2017 0.6; 2018–19 -0.5 to -0.8. - Credit to the Private Sector (annual change): 4.2; 11.6; 11.0; 4.9; 3.5. - Fiscal Balance (percent of GDP): -4.6; -10.5; -11.2; -12.4; -13.8. - Primary Fiscal Balance (percent of GDP): -3.4; -9.0; -8.7; -9.3; -10.0. - Gross Financing Needs (percent of GDP): 14.5; 21.7; 22.1; 24.2; 25.8. - Public Debt, gross (percent of GDP): 18.7; 25.3; 34.0; 41.5; 45.3; 58.0 (includes note "o/w Stock of Arrears...5.3 10.0 18.5 29.4"). - Current Account Balance (percent of GDP): 10.8; 0.7; -2.6; -3.8; -4.5. - Gross International Reserves (months of imports): 3.4; 2.8; 2.2; 1.2; 0.2. - Gross International Reserves (percent of reserve money): 391.6; 268.0; 205.3; 115.3; 21.7. ### Outlook risks (no policy action) - FY17/18 fiscal deficit projected large; domestic arrears to accumulate. - Real GDP: 0.6 percent in 2017 and turn negative thereafter as domestic arrears rise. - Public debt could reach 58 percent of GDP by FY19/20 and rise further. - Gross financing needs could average over 23 percent of GDP per year. - Downside risks: tightening in budget financing, deterioration in banks’ asset quality, lower SACU revenue, tightened global monetary conditions. - Extreme scenario: rollover difficulties could lead to severe financial-sector deterioration, banks deleveraging, deep recession, and pressure on the currency peg. ### Authorities’ stance - Broad agreement with medium-term outlook and staff risk assessment; more optimistic on near-term growth as drought fades. - Intend to consider options to contain the FY17/18 fiscal deficit within budget projections and to reduce the fiscal deficit starting in FY18/19. - Plan to contain wage bill dynamics, prioritize capital spending, and reform public entities; limited room for full three-year adjustment ahead of 2018 elections. - CBS concurs policy rate should be maintained in line with the SARB’s rate, possibly with a positive spread, and ruled out budget financing above legal limits. --- ### Policy focus: Ensuring fiscal sustainability and macroeconomic stability - Key challenge: preserve macroeconomic stability against low SACU revenue while reducing poverty and inequality. - Policy discussions focused on: - (i) fiscal adjustment to align fiscal deficit with available financing, contain public debt dynamics, and preserve external buffers; - (ii) managing fiscal–financial sector linkages and NBFI risks; - (iii) structural reforms to generate growth and jobs. ### Fiscal assessment and required adjustment - Staff assessment under current policies: - FY17/18 fiscal deficit would reach about 11 percent of GDP and rise over the projection period. - Public debt would rise above 90 percent of GDP over the projection period under current policies (staff projection). - Fiscal outlook subject to significant risks, particularly from contingent liabilities in non-central government public entities. - Required fiscal adjustment: - Under staff macroeconomic assumptions, 11–12 percent of GDP in measures (depending on pace of adjustment) is needed over FY17/18–FY19/20 to stabilize the public debt ratio at a sustainable level. - In absence of additional financing, adjustment would exceed 6 percent of GDP in the current fiscal year, and reach 10 percent in FY18/19. - A gradual but sustained adjustment over three years, starting in the current fiscal year, would deliver sustainable debt dynamics but likely imply a temporary increase in arrears in FY17/18. - Financing and technical assumptions: - Government use of part of its bank deposits mainly in FY17/18 (about 1.6 percent of GDP). - Planned increase in domestic asset requirements for NBFIs generating capital inflows (about 6–6.5 percent of GDP) over FY18/19–19/20 largely invested in government paper. - Financing assumes gradual repayment of domestic arrears and start of repayments to the central bank in FY19/20. ### Composition of adjustment — recommended measures - Spending-side measures (suggested): - Contain government wage bill by constraining inflation adjustments, limiting new hires and allowances. - Prioritize capital outlays to improve investment efficiency. - Reduce transfers to extra-budgetary entities and rationalize their functions. - Curb non-essential purchases. - Revenue-side measures (suggested): - Focus increases on consumption taxes (e.g., VAT base, fuel levy, excises) and property taxation. - Reduce tax incentives and exemptions. - Improve progressivity of personal income tax. - Strengthen collection of tax arrears and revenues. - Staff noted about ¼ of the adjustment could come from increasing domestic revenue. - Aggregate possible fiscal measures (FY17/18–FY19/20) — budget savings (Percent of GDP): - Total: Up to 14 - Revenue measures: Up to 5.0 - Widen the VAT tax base: 0.8 - Increase domestic levies, including on SACU excises (e.g., fuel, luxury good, alcohol, tabacco): 0.5 - Reduce tax incentives/exemptions: 2.0-2.5 - Remodule PIT rates: 0.4 - Improve VAT productivity: 0.7 - Expenditure measures: Up to 9.0 - Limit public salary increases, new hires, and statutory posts: 2.5-3.5 - Reprioritize capital budget: 2.5-3.0 - Reduce transfers to public entities (restructure the sector): 1.5 - Rationalize non-essential purchases and travel expenditures: 1.0 ### Macroeconomic benefits and short-term trade-offs - Benefits of adjustment: - Maintain external position broadly in line with fundamentals. - Contribute to more adequate international reserves. - Contain risks to the financial sector from deterioration in government creditworthiness. - Near-term costs: - Adjustment would lower growth, negatively affecting banks’ asset quality and profitability and increasing government–financial sector linkage risks. --- ### Public financial management and extra-budgetary entities - PFM near-term priorities: - Strengthen commitment controls and cash management, adopt a single treasury account. - Centralize budgetary functions within the ministry of finance. - Develop an arrear clearance strategy. - Accelerate adoption of regulations to enact the 2011 Public Procurement Act. - Improve public investment management and strengthen top-down budget formulation. - Extra-budgetary public entities and funds — findings: - 67 PEs (5 financial entities) and several extra-budgetary funds. - PEs perform social, development, regulatory and commercial functions; about 12 commercial PEs operate in key services and network industries. - PEs employ about a fifth of central government’s civil servants (May 2017). - In FY16/17, transfers amounted to 6.9 percent of GDP (2.9 percent of GDP to PEs, 3.9 percent of GDP to other funds); six PEs and funds account for about 45 percent of total transfers. - Central government’s loan guarantees to non-financial PEs exceed 2 percent of GDP; PEs gross debt about 10 percent of GDP; several entities accumulating large tax and payment arrears. - Reform priorities for PEs: - (i) review scope and mandate of all entities and funds; - (ii) enforce stronger governance framework (creation, board appointments, business plans, performance agreements, borrowing powers); - (iii) establish clear demarcation between social, regulatory and commercial activities. --- ### Financial sector: size, linkages, vulnerabilities, and recommendations - System size and exposures: - Banking system assets: about 34 percent of GDP. - NBFIs gross assets: about 119 percent of GDP; sector dominated by pension and asset management companies. - Banks and NBFIs together hold about 95 percent of government-issued securities. - Government securities amount to about 80 percent of banks’ capital. - Stress-test and vulnerability findings: - Domestic arrears as of March 2017 equivalent to about 20 percent of banks’ loans to the domestic private sector. - Stress tests: banking sector on average robust to substantial increases in NPL, but some banks could face difficulties complying with capital requirements and would need to deleverage. - Banking vulnerabilities: extensive reliance on wholesale deposits, concentrated loan books, liquidity risks due to concentration in non-marketable government securities, exposure concentration in SACCOs and building societies, relatively high household indebtedness. - NBFI vulnerabilities: some systemically large NBFIs provide about a tenth of banks’ deposits and hold 40 percent of government-issued securities; some large NBFIs have large external exposures (above 25 percent of GDP in 2016); legal framework fragmented. - Financial sector recommendations: - Improve banking supervision and regulation: eliminate legislative gaps, strengthen risk-based supervision, apply progressive regulatory actions, consider changes to mitigate concentration risks. - Enhance supervision of NBFIs: establish consistent legal framework; FSRA to scale up supervisory role for systemic NBFIs and lending entities. - CBS to lead macro-prudential assessment and to accelerate creation of financial regulatory architecture, providing powers and instruments for macro-financial risk assessment. - Strengthen crisis preparedness: develop crisis management and contingency planning; expand CBS liquidity facilities; operationalize Financial Stability Panel; amend Financial Institution Act to introduce bank resolution framework. - Address data gaps: FSRA to improve data collection and publish financial indicators; fill data gaps in real estate, household and corporate sectors and inter-institution linkages. --- ### Structural constraints, social policy, and recommendations - Binding structural constraints: - Low private investment, negative capital formation, large skill mismatches, wage dynamics exceeding productivity, weaknesses in institutional and business environments, land tenure constraints. - Two priority areas to improve long-term growth and employment elasticity: - Skill mismatches and human capital development: improve access and quality of secondary and higher education; strengthen vocational training; reduce HIV prevalence. - Wage dynamics and business conditions: contain public wages, increase market flexibility in wage determination; simplify business regulations and strengthen institutional environment. - Social assistance and poverty: - Direct cash transfers: about 0.6 percent of GDP in 2016. - 2009/10: 63 percent below the poverty line; about 30 percent in extreme poverty; Gini coefficient 51.5 in 2009/10. - 2015 social spending about 12 percent of GDP (36 percent of total public spending); direct cash transfers about 0.6 percent of GDP. - Cash transfers reduce extreme poverty by only 1 percentage point; main cash transfer and pensions lower inequality by 4 percent of Gini; in-kind education and health reduce inequality by additional 9½ percent. - Cash transfers are progressive: bottom half of income distribution receives nearly four-fifths of benefits; limited impact due to low benefits and delayed payments. - Policy implication: scale up existing cash transfer programs and introduce means-testing to better reach extreme poor, freeing resources to increase transfer sizes and impact. - Staff supports recent increases in cash assistance and suggests further scaling up and better targeting. --- ### External sector assessment and reserve adequacy - Reserves trends: - Reserves declined from US$767 million (3.7 months of imports and about 19 percent of GDP) at end-2013 to US$564 million at end-2016 (below 3 months of imports or 13.9 percent of GDP). - Reserve coverage in 2016 partly boosted by swaps operations. - IMF composite metric (ARA): reserves at 136.7 percent of the composite metric (2016 data) placed gross international reserves below the upper bound of the IMF’s reserve adequacy metric (100–150 percent corresponds to 2.2 and 3.4 months of imports, or 10.9 and 16.3 percent of GDP). - Modified metric accounting for SACU volatility: - Tailored metric: 30% of STD + 20% of OPL + 10% of M2 + 10% of X + 80% of SACU revenue. - Maintaining 100 percent coverage of this modified metric would require international reserve coverage of 4.9 months of imports, or about 20 percent of GDP in 2017. - Projections under staff’s adjustment scenario: - International reserves expected to decline in 2017 then gradually increase with fiscal adjustment. - By 2022, international reserves projected to reach 4.8 months of imports (17.7 percent of GDP). ### External position (selected figures) - Current account: surplus reduced to ¾ percent of GDP in 2016 (10.8 percent in 2015); balance projected to turn negative in 2017. - NIIP: 41.7 percent of GDP in 2016 (39 percent of GDP in 2015). - REER: depreciated by about 12 percent between end-2010 and end-2016; standing at 5.0 percent above historical average over January 1995‒May 2017. --- ### Debt sustainability, scenarios, and stress tests - Key conclusion: fiscal adjustment is critical to ensure debt sustainability and resilience. - Sensitivity to primary balance shocks: debt levels and gross financing needs highly sensitive to primary balance. - Scenario outcomes (selected): - Combined macroeconomic and contingent liability shock and SACU revenue fall by 5 percent in 2018–19: public debt would reach about 40–50 percent of GDP by FY22/23, depending on shock. - Tailored contingent liability including extra-budgetary entities: public debt increases to above 50 percent of GDP and stabilizes around 52 percent; gross financing needs peak at 34 percent of GDP in FY18/19, decline to 16 percent by FY22/23. - External debt: - Baseline external debt in 2016: 13.3 percent of GDP (increase of about 0.2 percent of GDP from 2015). - Projected external debt stabilizing level: around 21 percent of GDP. - Projected gross external financing needs: around 3.4 percent of GDP over the medium term. - Stress-test parameters: - SACU revenue shock: fall by 5 percent in 2018–19. - One-time real depreciation shock used: 30 percent. --- ### Wage bill containment (Annex IV) — facts and measures - FY16/17 public wage costs: 13.8 percent of GDP (11.3 percent in FY12/13) and amounted to 99 percent of domestic revenue (45 percent of domestic primary spending). - FY16/17 salary review resulted in about 2 percent of GDP additional wage expenses. - Under current policies, wage-to-GDP expected to exceed 17–18 percent of GDP (about 49 percent of domestic primary spending) by FY21/22. - Drivers of increase: - Wage bill increased by 2½ percent of GDP over last four years. - Compensation per employee grew about 11 percent per year nominally, contributing about 85 percent of nominal increase. - Public employment increased about 3.6 percent per year. - Short-term policy measures to control wage bill: - Maintain salary increases below inflation and suspend “notch” increases. - Temporary hiring rules (retirement/hiring ratios). - Reduce temporary and contractual positions outside social sectors. - Curtail allowances for statutory posts, Parliament, Foreign Service, Judiciary and high rank officials. - Medium-term measures: - Link pay to performance, align job requirements with compensation. - Strengthen human resource management to remove ghost workers. - Improve wage bill controls (biometric technologies). - Conduct organizational and functional reviews to identify overlaps and savings. - Exempt critical sectors (education, health) from short-term restrictions and allow reallocation of critical staff. --- ### IMF technical assistance and data issues - IMF TA provided in a five-year program focusing on tax administration integration, self-assessment, filing and payment compliance, management of tax arrears, risk models and audit selection. - New Revenue Mobilization Trust Fund to continue TA from 2017. - FAD, MCM, STA provided TA across PFM, revenue administration, banking supervision, financial stability, monetary and financial statistics, balance of payments, and national accounts. - Data adequacy: Category B — broadly adequate for surveillance but shortcomings remain (demand-side discrepancies, lag in GDP series, fiscal statistics gaps for extra-budgetary funds, balance of payments large errors and omissions). - CSO rebased GDP to base year 2011 and disseminated rebased data in December 2016; quarterly GDP estimates under development. --- ### Staff appraisal — summary recommendations - Fiscal consolidation: cumulative 11–12 percent of GDP in measures needed, starting in current fiscal year, spread over three years and supported by additional financing. - Composition: mix of revenue and expenditure measures—contain public wage bill, prioritize capital outlays, reduce transfers to extra-budgetary entities, boost consumption taxes, reduce tax incentives and exemptions. - Monetary/external: fiscal adjustment will preserve external balance; CBS should maintain policy rate at a positive spread with SARB’s rate and refrain from additional budget financing. - Financial sector: amend CBS Act to bolster independence and supervisory framework; accelerate financial regulatory framework and empower FSRA; strengthen crisis preparedness and data collection. - Structural reforms: improve higher education access and quality, contain public wages, simplify business regulation, strengthen institutional environment; scale up and better target cash transfers to reduce extreme poverty. *Source: IMF staff report excerpt on Swaziland macroeconomic outlook, fiscal risks, and policy recommendations (cr17274).* ### 1. Extra-Budgetary Public Entities and Funds in Swaziland _______________________________________ 12 ### 1. Extra-Budgetary Public Entities and Funds in Swaziland ### Context: High vulnerability and limited buffers - Swaziland is a small middle-income economy exposed to external shocks with significant structural challenges. - After a sharp decline in SACU revenue in 2010, revenue bounced back and buffers were rebuilt, but growth remains low relative to pre-crisis and other middle-income countries. - Current account and exports remain heavily dependent on SACU revenue and a few products (soft drink concentrates, caramel color, sugar, textile about 70 percent of total exports). - Recent expansionary fiscal policy has depleted buffers, leaving international reserve coverage below adequate levels and prompting a rapid increase in public debt. - End-year international reserve coverage declined to below 3 months of projected imports; more recently reserve coverage fell further to 2.6 months of imports (May 2017). - Despite middle-income status, Swaziland faces widespread poverty, high HIV prevalence, and unemployment that is high and little responsive to growth. Key factual developments and indicators (as reported) - Real GDP: stagnated at 1.1 percent in 2015; projected 0.6 percent in 2017 (staff projections). - SACU revenue decline in 2016: about 4¼ percent of GDP. - Current account surplus reduced to ¾ percent of GDP in 2016 (from 10.8 percent of GDP in 2015). - Domestic arrears: about 5⅓ percent of GDP at end March 2017 (identified pending bills exceeding 30 days above 4 percent of GDP). - Public debt jumped to 25⅓ percent of GDP (from 18.7 percent). - Banks’ holdings of government securities reached about 11 percent of banks’ assets. - Nonperforming loans exceeded 10 percent of total loans (end-March 2017). - Headline inflation: averaged 5 percent in 2015; reached 8.7 percent in December 2016. - Central Bank policy rate: raised to 7.25 percent in January 2017. ### Outlook and risks - Baseline (no policy action) staff projections: - Real GDP Growth: 2015 1.1; 2016 0.0; 2017 0.6; 2018–19 -0.5 to -0.8 (table excerpt: "20152016 2017 20182019 Real GDP Growth (annual change)1.10.00.6-0.5-0.8"). - Credit to the Private Sector (annual change): 4.2; 11.6; 11.0; 4.9; 3.5 (same table formatting preserved). - Fiscal Balance: -4.6; -10.5; -11.2; -12.4; -13.8. - Primary Fiscal Balance: -3.4; -9.0; -8.7; -9.3; -10.0. - Gross Financing Needs: 14.5; 21.7; 22.1; 24.2; 25.8. - Public Debt, gross: 18.7; 25.3; 34.0; 41.5; 45.3; 58.0 (table shows progression; includes note "o/w Stock of Arrears...5.3 10.0 18.5 29.4"). - Current Account Balance: 10.8; 0.7; -2.6; -3.8; -4.5. - Gross International Reserves (months of imports): 3.4; 2.8; 2.2; 1.2; 0.2. - Gross International Reserves (percent of reserve money): 391.6; 268.0; 205.3; 115.3; 21.7. - Without policy actions, FY17/18 fiscal deficit projected to be large, domestic arrears to accumulate, real GDP expected to grow 0.6 percent in 2017 and turn negative thereafter as domestic arrears rise. - Public debt would increase to 58 percent of GDP by FY19/20 and rise further over projection period under no-action scenario. - Gross financing needs could average over 23 percent of GDP per year, putting pressure on domestic markets and causing further accumulation of domestic arrears. - Main risks tilted to the downside: - Tightening in budget financing as investor confidence declines. - Deterioration in banks’ asset quality as domestic arrears accumulate. - External risks: lower demand for key exports due to protectionism; lower SACU revenue if South Africa growth fails to pick up; tightened global monetary conditions from rising US policy rates. - Extreme scenario: difficulties rolling over public debt could lead to severe financial-sector deterioration, banks deleveraging, deep recession, and pressure on currency peg. ### Authorities’ views - Authorities broadly agreed with medium-term outlook and staff risk assessment but are more optimistic on near-term growth. - They expect GDP growth to pick up in 2017 as drought fades, agricultural and agro-processing recover, and fiscal policy expands. - They concur risks from government financing shortfalls and accumulation of domestic arrears weigh heavily on the outlook. - Authorities intend to consider options to contain the FY17/18 fiscal deficit within budget projections and to reduce the fiscal deficit starting in FY18/19. ### Policy discussions — overall focus - Key challenge: preserve macroeconomic stability against low SACU revenue while reducing poverty and income inequality. - With expansionary fiscal policy contributing to an unsustainable outlook and external and financial vulnerabilities, discussions focused on: - (i) fiscal adjustment to align the fiscal deficit with available financing, contain public debt dynamics, and preserve external buffers; - (ii) managing risks from fiscal and financial sector linkages and the large non-bank financial sector (NBFIs); - (iii) advancing structural reforms to generate growth and jobs to reduce poverty and inequality. ### A. Ensuring fiscal sustainability and macroeconomic stability - 2017 budget envisages continuation of large fiscal deficit: - Authorities’ budget expects high revenue buoyancy from increased SACU receipts and some policy measures, contained non-wage recurrent expenditures, offsetting increases in wage and capital spending to yield a deficit of 8.2 percent of GDP, financed primarily through domestic sources. - Extent and quality of measures underpinning spending reductions remain unclear; revenue measures pending approval; wage pressures rising. - Staff assessment under current policies: - FY17/18 fiscal deficit would reach about 11 percent of GDP and rise over the projection period (staff estimates). - Public debt would rise above 90 percent of GDP over the projection period under current policies (staff projection). - Fiscal outlook subject to significant risks, particularly from contingent liabilities in non-central government public entities. - Need for fiscal adjustment: - Under staff macroeconomic assumptions, 11–12 percent of GDP in measures (depending on pace of adjustment) is needed over FY17/18–FY19/20 to stabilize the public debt ratio at a sustainable level (Annex III). - The size of adjustment is close to the correction planned and partly undertaken during the 2010 fiscal crisis; implementation requires broad political consensus. - In absence of additional financing, adjustment would exceed 6 percent of GDP in the current fiscal year, and reach 10 percent in FY18/19. - Authorities are exploring options to increase budget financing, intend to use government’s bank deposits and adopt new regulations increasing domestic asset requirements for NBFIs. - Additional financing would allow spreading the adjustment over time, making correction more feasible and reducing negative growth impact. - A gradual but sustained adjustment spread over three years, starting in the current fiscal year, would deliver sustainable debt dynamics with debt remaining below stress thresholds and slowly declining toward end of projection period; however it would most likely imply a temporary increase in the stock of arrears in FY17/18 as financing for the year remains limited. - Macroeconomic benefits of adjustment: - Would help maintain the external position broadly in line with medium-term fundamentals and desirable policies and contribute to more adequate levels of international reserves. - Would contain risks to the financial sector from deterioration in government creditworthiness. - In the near term, adjustment would lower growth, negatively affecting banks’ asset quality and profitability and increasing risks from tighter government–financial sector linkages. - Composition of adjustment and policy recommendations: - Adjustment should address sources of recent fiscal deterioration while supporting long-term growth. - Suggested spending-side measures: - Contain bloated government wage bill by constraining inflation adjustments, limiting new hires and allowances (Annex IV). - Prioritize capital outlays to improve investment efficiency. - Reduce transfers to extra-budgetary entities and rationalize their functions. - Curb non-essential purchases. - Over time, these measures likely to align wage dynamics with productivity trends, improve investment efficiency and the impact of public investment on growth. - Suggested revenue-side measures (Annex V): - Focus increases on consumption taxes (e.g., VAT base, fuel levy, excises) and property taxation. - Reduce tax incentives and exemptions (e.g., under income taxes). - Improve progressivity of personal income tax. - Renew efforts to strengthen collection of tax arrears and revenues. - Staff noted revenue measures should minimize negative impact on growth and that about ¼ of the adjustment could come from increasing domestic revenue. - Financing and technical assumptions referenced by staff: - Budget financing assumptions include government use of part of its bank deposits mainly in FY17/18 (about 1.6 percent of GDP) and planned increase in domestic asset requirements for NBFIs generating capital inflows (about 6–6.5 percent of GDP) over FY18/19–19/20 largely invested in government paper, in absence of viable alternatives. - Financing assumes government gradually repays domestic arrears over time and starts repayments to the central bank in FY19/20. *Source: IMF staff report excerpt on Swaziland macroeconomic outlook, fiscal risks, and policy recommendations.* ### 15. The credibility of fiscal adjustment relies on implementing structural reforms in public ### 15. The credibility of fiscal adjustment relies on implementing structural reforms in public financial management and rationalizing the extra-budgetary public entities ### Public financial management (PFM): findings and near-term priorities - Strengthen commitment controls and cash management practices, including adopting a single treasury account. - Centralize all budgetary functions within the ministry of finance (wages, capital budget; MoF) to manage a tight budget and contain arrears accumulation. - With large domestic arrears, develop an arrear clearance strategy to support orderly fiscal adjustment. - Accelerate adoption of regulations to enact the 2011 Public Procurement Act and improve procurement processes to reduce waste and free up resources for adjustment. - Improve public investment management (project appraisal, implementation) to support project re-prioritization and more efficient, growth-enhancing public spending. - As the authorities implement the recently approved PFM Act, strengthen the top-down budget formulation process and budget calendar ahead of next fiscal year to support design of credible budget and adjustment plans. ### Extra-budgetary public entities and funds: findings and reform priorities - There are 67 PEs (5 financial entities), and several extra-budgetary funds. - PEs perform social, development, regulatory and commercial functions; about 12 commercial PEs operate in key services and network industries (electricity, water, telecommunications, transport). - PEs employ a work force of about a fifth of central government’s civil servants (May 2017). - In FY16/17, transfers amounted to 6.9 percent of GDP (2.9 percent of GDP to PEs, 3.9 percent of GDP to other funds), with six PEs and funds accounting for about 45 percent of total transfers. - Preliminary evidence: central government’s loan guarantees to non-financial PEs exceed 2 percent of GDP; their gross debt is about 10 percent of GDP; several entities have been accumulating large tax and payment arrears. - Reform focuses: - (i) review the scope and mandate of all entities and funds; - (ii) enforce a stronger governance framework (creation of new entities, board appointments, business plans, performance agreements, borrowing powers); - (iii) establish clear demarcation between social, regulatory and commercial activities to strengthen accountability and efficiency. ### Possible fiscal adjustment measures (FY17/18–FY19/20) — budget savings (Percent of GDP) - Total: Up to 14 - Revenue measures: Up to 5.0 - Widen the VAT tax base: 0.8 - Increase domestic levies, including on SACU excises (e.g., fuel, luxury good, alcohol, tabacco): 0.5 - Reduce tax incentives/exemptions: 2.0-2.5 - Remodule PIT rates: 0.4 - Improve VAT productivity: 0.7 - Expenditure measures: Up to 9.0 - Limit public salary increases, new hires, and statutory posts: 2.5-3.5 - Reprioritize capital budget: 2.5-3.0 - Reduce transfers to public entities (restructure the sector): 1.5 - Rationalize non-essential purchases and travel expenditures: 1.0 - Sources for measures: MOF, and IMF staff estimates ### Macro policy interactions and central bank role - As the government develops adjustment plans, the central bank (CBS) should intensify efforts to support the peg. - With high policy uncertainty, the CBS should maintain the policy rate at a positive spread with the SARB’s rate to reflect risk differentials. - To support the peg, the CBS should refrain from additional budget financing and consider measures to control domestic liquidity and base money creation if government financing expands. ### Authorities’ views on fiscal adjustment - Authorities recognize the recent expansionary fiscal policy has significantly deteriorated the macroeconomic outlook and threatens economic stability. - They expect possible revenue shortfalls and spending pressures are likely to widen the FY17/18 deficit above budget projections. - They agreed that a cumulative adjustment of about 11–12 percent of GDP is needed over time to bring the public debt ratio to a sustainable path and eventually below their policy-guiding target of 35 percent of GDP. - With the fiscal year almost half way, they intend to review options and adopt measures to contain this year deficit within the budget limit of 8.2 percent of GDP and are preparing a cabinet paper identifying possible measures for cabinet consideration. - They intend to contain wage bill dynamics, strengthen selection process to prioritize capital spending, and reform public entities, but noted limited room to build consensus for a fully-fledged three-year adjustment strategy ahead of 2018 parliamentary elections. - The CBS concurred policy rate should be maintained in line with the SARB’s rate, possibly with a positive spread, and ruled out any budget financing above current legal limits while agreeing to implement measures to manage domestic liquidity and contain inflationary pressures. ### Financial sector: size, linkages, and systemic risks - Banking system assets: about 34 percent of GDP. - NBFIs gross assets: about 119 percent of GDP; sector dominated by pension and asset management companies. - Banks and NBFIs together hold about 95 percent of government-issued securities. - Government securities amount to about 80 percent of banks’ capital. - Stress test nexus: domestic arrears as of March 2017 are equivalent to about 20 percent of banks’ loans to the domestic private sector; stress tests indicate the banking sector is on average robust to substantial increases in NPL, but some banks could face difficulties complying with capital requirements and would need to deleverage. - Banking vulnerabilities: - Extensive reliance on wholesale deposits and highly concentrated loan books. - Liquidity risks due to most liquidity concentrated in non-marketable government securities. - Exposure concentration and rising NPLs in SACCOs and building societies; household indebtedness relatively high compared to other African middle income countries. - NBFI vulnerabilities: - Some NBFIs are systemically large, provide about a tenth of banks’ deposits, and hold 40 percent of government-issued securities. - Some large NBFIs have large external exposures (above 25 percent of GDP in 2016). - Legal framework for NBFIs is fragmented; FSRA needs more regulatory and supervisory tools. ### Financial sector recommendations to manage risks - Improve banking supervision and regulation: - Eliminate gaps and inconsistencies in legislation supporting CBS supervisory functions. - Strengthen risk-based supervisory framework and apply a progressive ladder of regulatory actions (e.g., mandatory corrective actions). - Over time, consider regulatory changes to mitigate banks’ concentration risks (e.g., increase regulatory capital requirements, jointly syndicate large loan exposures). - Enhance supervision of NBFIs: - Establish a consistent legal framework covering different segments. - FSRA should scale up supervisory role beyond monitoring regulatory requirements, particularly for systemic NBFIs and lending entities (SACCOs, building societies, micro and development credit institutions). - Monitor and manage stability risks from macro-financial linkages: - CBS should take the lead in assessing financial stability risks and exercise a macro-prudential role for the entire sector. - Accelerate plans to create a financial regulatory architecture and provide the CBS with powers and instruments to assess macro-financial risks and exercise macro-prudential controls. - Strengthen crisis preparedness: - CBS, in coordination with FSRA and MoF, should develop crisis management and contingency planning abilities. - Strengthen CBS liquidity facilities by expanding emergency liquidity assistance and developing long-term liquidity lending. - Operationalize the recently created Financial Stability Panel to improve coordination between CBS, FSRA and MoF. - Amend the Financial Institution Act to introduce a bank resolution framework. - Address data gaps: - FSRA should improve data collection and eventually publish financial indicators and analyses of NBFIs. - Fill data gaps in real estate, household and corporate sectors and in linkages across financial institutions to monitor risks. ### Authorities’ views on financial sector actions - Authorities agreed with staff’s risk assessment and are taking steps to better monitor and manage financial sector risks. - They concurred that concentration risks and deterioration in asset quality signal rising risks and agreed household indebtedness is relatively high and requires close monitoring. - They affirmed intention to finalize amendments to the Central Bank Act to clarify the CBS mandate and independence and strengthen its supervisory framework. - They plan to finalize a new Financial Stability Bill by end-2017; together with amendments to the CBS and the Financial Institution Acts, the bill would shape a financial stability framework, provide the CBS a leading role in managing stability risks, and introduce a bank resolution framework. ### Structural constraints to growth, employment, and inequality - Growth has recovered since the 2010 fiscal crisis but remains below pre-crisis level, held back by negative capital formation and low private investment. - Unemployment is persistently high and little responsive to the recovery. - Structural factors constraining private investment and the elasticity of employment to growth include: - large skill mismatches in the labor market, particularly for higher education skills; - wage dynamics exceeding productivity trends; - weaknesses in institutional and business environments, including contract enforcement and difficulties in starting businesses. *Source: IMF staff assessment and authorities’ materials as presented in the supplied content.* ### 26. The authorities’ strategy of increasing public investment and providing incentives for ### cr17274 - 26. The authorities’ strategy of increasing public investment and providing incentives for ### Impact of public investment and incentives - Recent increase in public investment has supported demand but has failed to crowd in private investment. - Compared to other middle-income countries, health and education attainments are relatively poor. - Tax incentive and credit guarantee schemes have had limited impact on declining export diversification (IMF country report 15/353). - Land tenure and management systems constrain private investment. - Loss of AGOA eligibility in 2014 has reduced textile exports outside the CMA. - Authorities have announced initiatives to: alleviate shortage of serviced land to start new businesses; create special economic zones with investment incentives; complete legislative steps to regain access to AGOA. ### Structural reforms to support private investment and employment elasticity - Two priority areas identified to potentially improve long-term growth and employment dynamics: - Skill mismatches and human capital development - Reducing skill mismatches in the labor market, especially for higher education skills, and improving education attainments are highlighted as most promising to raise private investment and employment elasticity. - Requires improving access and quality of secondary and higher education. - Reducing HIV prevalence rates could further raise employment elasticity and contribute to more inclusive growth. - Wage dynamics and business conditions - Reducing the disconnect between wage and productivity dynamics (e.g., containing public wages, increasing market flexibility in wage determination) could significantly boost private investment. - Simplifying business regulations (e.g., starting businesses, land management) and strengthening the institutional environment (e.g., contract enforcement, judiciary independence) would improve employment elasticity and reduce unemployment. ### Social assistance, poverty, and inequality - Swaziland allocates a relatively small share of GDP to social spending compared to other sub-Saharan middle-income countries. - Direct cash transfers (i.e., old age, public assistance programs) were about 0.6 percent of GDP in 2016. - Box 2 key findings: - In 2009/10, 63 percent of the population was estimated to live below the poverty line, and about 30 percent was in extreme poverty. - Gini coefficient 51.5 in 2009/10 (latest year available). - In 2015, social spending in Swaziland was about 12 percent of GDP (36 percent of total public spending). - Direct cash transfers were about 0.6 percent of GDP in 2015. - Incidence analysis suggests cash transfers reduce extreme poverty by only 1 percentage point. - The main cash transfer program and pensions lower inequality by only 4 percent (of Gini coefficient). - Inequality is reduced by an additional 9½ percent if in-kind spending on education and health is considered. - Cash transfers are generally progressive: the bottom half of the income distribution receives nearly four-fifths of the benefits. - Low benefits and delayed payments are the main causes of the limited impact of cash transfer programs. - Policy implication: Scaling up existing cash transfer programs and introducing means-testing to better reach people in extreme poverty (mainly subsistence farmers in rural areas) could free resources to increase transfer sizes and improve impact. - Fiscal expenditure assessment tools suggest Swaziland’s level and efficiency of education and health spending are relatively low compared to peers. ### Authorities’ views - Authorities reaffirm commitment to policies that support long-term growth and reduce extreme poverty and income inequality. - Measures underway: - Strengthening technical vocational programs to facilitate acquisition of market-relevant skills. - Establishing a higher education council to improve performance of higher education institutions. - Expectation that public investment, particularly in infrastructure, and creation of special economic zones will support private investment and job creation. - In early 2017 authorities started increasing cash transfers to elderly and disadvantaged people. ### Staff appraisal and policy recommendations - Recent macroeconomic context and risks: - Since 2011, macroeconomic stability preserved, but economic conditions have recently deteriorated. - A prolonged drought and a sharp decline in SACU revenue have severely hit the economy. - Expansionary fiscal policy has worsened fiscal and external imbalances: public debt is rising fast, domestic arrears are accumulating, the current account has deteriorated, and international reserves coverage is below adequate levels. - Linkages between domestic financial institutions and the government have tightened, raising macro-financial concerns. - Real GDP expected to grow little in 2017 and turn negative thereafter absent corrective policies. - Downside risks include further tightening in budget financing, deteriorating banks’ asset quality, and lower SACU revenue and demand for key exports. - Fiscal consolidation: - Staff assesses a cumulative 11–12 percent of GDP in measures is needed, starting in the current fiscal year, to bring public debt on a declining path and restore external buffers. - Adjustment should be spread over three years, require additional budget financing, and be based on a combination of revenue and expenditure measures that can support long-term growth. - Suggested measures: containing the public wage bill, prioritizing capital outlays, reducing transfers to extra-budgetary entities, boosting consumption tax revenues, and reducing tax incentives and exemptions. - Fiscal structural reforms needed to improve budget formulation and expenditure controls, and governance of extra-budgetary entities. - Monetary and external considerations: - Fiscal adjustment will help preserve external balance and facilitate monetary policy management under the peg to the South African rand. - CBS should maintain the policy rate at a positive spread with the SARB’s rate and refrain from additional budget financing. - Financial sector and regulatory recommendations: - Monitor and manage risks from banks’ vulnerabilities, government-financial sector links, and large non-bank financial institutions. - Amend the CBS Act to bolster central bank mandate and independence and strengthen supervisory framework. - Accelerate plans to create a financial regulatory framework for the sector and provide the CBS with powers and tools to assess financial stability risks and exert macro-prudential controls. - Enhance the ability of the FSRA to deploy adequate regulatory and supervisory tools. - Role of structural reforms and social assistance: - Selected structural reforms—reducing skill mismatches (e.g., improving access and quality of higher education), aligning wage and productivity dynamics (e.g., containing public sector wages, increasing market flexibility in wage determination), simplifying business regulation and improving institutional environment (e.g., starting businesses, protecting property rights, judicial independence)—could boost private investment and deliver stronger, more inclusive growth. - Staff supports recent increases in cash assistance programs and suggests further scaling up and better targeting could help reduce extreme poverty. *Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17274.pdf* ### 36. It is proposed that the next article IV consultation with Swaziland be held on the ### Swaziland: Article IV Consultation — Key Findings and Data Snapshot ### Institutional note - It is proposed that the next article IV consultation with Swaziland be held on the standard 12-month cycle. ### Growth, inflation, and monetary policy Findings - Real GDP per capita has improved less than in other SACU countries over past decades (Figure 1). - GDP at constant prices (annual percent change): - 2013: 4.8 - 2014: 3.6 - 2015: 1.1 - 2016: 0.0 - 2017 (Est.): 0.3 - 2018 (Prel.): -0.9 - 2019 (Proj.): 0.1 - 2020 (Proj.): 1.3 - 2021 (Proj.): 1.9 - 2022 (Proj.): 2.2 - Inflation (consumer prices, average) series: - 2013: 5.6 - 2014: 5.7 - 2015: 5.0 - 2016: 8.0 - 2017 (Est.): 7.0 - 2018 (Prel.): 5.4 - 2019 (Proj.): 5.4 - 2020 (Proj.): 5.5 - 2021 (Proj.): 5.5 - 2022 (Proj.): 5.5 - CBS policy action: the Central Bank of Swaziland increased its policy rate, which is now above the South African Reserve Bank’s rate (Figure 2). (Charted policy-rate relationship shown; no specific policy-rate numeric series cited in text.) ### External sector, buffers, and reserves Findings - Structural trade deficit in goods and services and low SACU revenue have recently deteriorated the current account balance (Figure 3). - Real effective exchange rate: REER depreciation occurred in 2016 (Figure 3). - Non-FDI financial flows have remained negative since the 2011 fiscal crisis, contributing to declining international reserves (Figure 3). - Gross international reserves (months of imports): - 2013: 3.7 - 2014: 3.7 - 2015: 3.4 - 2016: 2.9 - 2017 (Est.): 2.7 - 2018 (Prel.): 3.2 - 2019 (Proj.): 4.1 - 2020 (Proj.): 4.5 - 2021 (Proj.): 4.6 - 2022 (Proj.): 4.8 - Gross international reserves (months of imports) memorandum: 3.7, 3.7, 3.4, 2.9, 2.7, 3.2, 4.1, 4.5, 4.6, 4.8 (Table 4/memo). ### Fiscal imbalances and public debt Findings - Fiscal deficits have widened as expenditures rose and SACU receipts declined (Figure 4). - Government domestic arrears: estimated amount of domestic arrears equals 4.6 percent of GDP as of March 2017 (Figure 4 note). - Central government fiscal operations (percent of GDP unless otherwise indicated): - Total revenue series (percent of GDP): 2013/14: 29.6; 2014/15: 31.1; 2015/16: 28.4; 2016/17: 24.6; 2017/18 (Proj.): 26.9; 2018/19 (Proj.): 26.9; 2019/20 (Proj.): 27.2; 2020/21 (Proj.): 27.5; 2021/22 (Proj.): 27.6; 2022/23 (Proj.): 27.8 (Table 3). - Total expenditure series (percent of GDP): 2013/14: 28.8; 2014/15: 32.2; 2015/16: 33.0; 2016/17: 35.1; 2017/18 (Proj.): 38.1; 2018/19 (Proj.): 39.0; 2019/20 (Proj.): 40.1; 2020/21 (Proj.): 40.5; 2021/22 (Proj.): 41.0; 2022/23 (Proj.): 41.2 (Table 3). - Gross public debt (percent of GDP): 2013/14: 15.3; 2014/15: 14.3; 2015/16: 18.7; 2016/17: 25.3; 2017/18 (Proj.): 31.3; 2018/19 (Proj.): 35.4; 2019/20 (Proj.): 36.3; 2020/21 (Proj.): 34.5; 2021/22 (Proj.): 34.1; 2022/23 (Proj.): 33.8 (Table 3). - Fiscal financing stress: - Government’s gross financing needs have reached unsustainable levels (Figure 4; Gross Financing Needs series charted in Figure 4, Table 2). - Domestic financial institutions’ holdings of government securities and Central Bank exposure have risen (Figure 4). Selected fiscal figures (levels, Emalangeni millions, Table 2) - Total revenue: - 2013/14: 12,910 - 2014/15: 14,773 - 2015/16: 14,621 - 2016/17 (Prel.): 13,883 - 2017/18 (Proj.): 15,978 - 2018/19 (Proj.): 16,607 - 2019/20 (Proj.): 17,652 - 2020/21 (Proj.): 18,956 - 2021/22 (Proj.): 20,347 - 2022/23 (Proj.): 21,843 - Total expenditure: - 2013/14: 12,582 - 2014/15: 15,304 - 2015/16: 16,999 - 2016/17 (Prel.): 19,835 - 2017/18 (Proj.): 22,663 - 2018/19 (Proj.): 24,130 - 2019/20 (Proj.): 26,042 - 2020/21 (Proj.): 27,914 - 2021/22 (Proj.): 30,221 - 2022/23 (Proj.): 32,422 - Stock of arrears (mem.): 2013/14: 2,990; 2014/15: 4,210; 2015/16: 3,264; 2016/17: 1,378; 2017/18 onward: 0 (Table 2 mem.). ### Financial sector and macrofinancial risks Findings - Banking sector capitalization and asset quality: - Regulatory capital to risk-weighted assets (percent): 2011: 20.6; 2012: 21.1; 2013: 22.2; 2014: 24.9; 2015: 22.5; 2016Q1: 22.8; 2016Q2: 19.8; 2016Q3: 21.6; 2016Q4: 22.2; 2017Q1: 23.5 (Table 6). - Nonperforming loans to total gross loans: 2011: 3.5; 2012: 10.7; 2013: 6.8; 2014: 6.9; 2015: 6.6; 2016Q1: 8.0; 2016Q2: 4.5; 2016Q3: 12.0; 2016Q4: 9.6; 2017Q1: 10.4 (Table 6). - Liquidity buffers have declined; excess liquidity above regulatory requirements charted as percent of GDP shows falling series (Figure 5). - Credit trends: - Credit to the private sector (12-month percent change) shows a declining trend (Figure 5). - Bank lending composition: negative corporate lending growth while mortgages to individuals remain buoyant (Figure 5). - Macrofinancial linkages and concentration risks: - Banks’ funding is highly dependent on wholesale deposits, including from non-bank financial institutions (Figure 6). - Loan-book concentration: large exposures to the sugar industry and individual mortgages; composition of corporate loans (December 2016) includes 26% sugar, 24% households (mortgages and others combined), other sectors smaller shares (Figure 6). - Domestic financial institutions’ exposures to government have increased (Figure 6). - NBFIs, through asset managers, hold large foreign exposures and account for a sizable share of banks’ deposits (Figure 6). - Household indebtedness and bank exposure metrics are rising; links between investment funds and bank liabilities charted in 2016 (millions of Emalangeni). Selected financial system indicators (Table 6) - Return on assets: - 2011: 3.5 - 2012: 3.5 - 2013: 3.1 - 2014: 4.0 - 2015: 4.7 - 2016Q1: 4.3 - 2016Q2: 5.7 - 2016Q3: 4.2 - 2016Q4: 4.0 - 2017Q1: 2.9 - Customer deposits (selected years): 2011: 7,481; 2012: 8,119; 2013: 9,448; 2014: 10,050; 2015: 11,649 (Table 6 deposits series). ### Employment, poverty, and structural constraints Findings - Poverty and inequality: - Poverty headcount ratio at national poverty line (selected years charted in Figure 1): poverty remains widespread, especially in rural areas. - Income inequality remains high — one of the highest in the world (Figure 1; Gini coefficient charts). - Unemployment: - Unemployment is persistently high, particularly for youth (Figure 1 and Figure 7). - Unemployment rate (World Bank modeled ILO estimates, charted): Swaziland shows high unemployment relative to lower-middle income countries (Figure 7). - Unemployment is little correlated with GDP growth; employment growth rates are little responsive to growth (Figure 7). - Structural impediments: - Low secondary and tertiary enrollment relative to other middle income countries (Figure 8). - High skill mismatches in the labor market; charts link skill mismatch index to lower investment and higher unemployment (Figure 8). - Weaknesses in business conditions and disconnection between wage and productivity cited as constraints to investment and employment (Figure 8). Selected social and labor indicators (Table 7) - Unemployment, total (% of total labor force): 1995: 21.7; 2000: 22.9; 2005: 25.5; 2008: 28.2; 2009: 27.9; 2010: 27.8; 2011: 27.5; 2012: 27.3; 2013: 27.0; 2014: 26.7; 2015: 25.8; 2016: 25.3. - Employment to population ratio, 15+, total (%): 1995: 38.6; 2000: 37.8; 2005: 36.5; 2008: 35.5; 2009: 35.7; 2010: 36.0; 2011: 36.4; 2012: 36.8; 2013: 37.2; 2014: 37.7; 2015: 38.5; 2016: 39.0. - Prevalence of HIV, total (% of population ages 15-49): 1995: 15.7; 2000: 24.8; 2005: 25.7; 2008: 26.4; 2009: 26.7; 2010: 27.2; 2011: 27.6; 2012: 28.0; 2013: 28.4; 2014: 28.7; 2015: 28.8. ### Balance of payments and financing Findings - Current account balance (US$ millions): - 2013: 233.0 - 2014: 143.8 - 2015: 425.4 - 2016: 25.7 - 2017 (Est.): -44.5 - 2018 (Proj.): 9.7 - 2019 (Proj.): 67.8 - 2020 (Proj.): 70.9 - 2021 (Proj.): 46.8 - 2022 (Proj.): 54.9 (Table 4). - Trade components (US$ millions, Table 4): - Exports, f.o.b.: 2013: 1,895.7; 2014: 1,903.9; 2015: 1,731.1; 2016: 1,603.4; 2017 (Est.): 1,670.9; 2018 (Prel.): 1,670.3; 2019 (Proj.): 1,688.2; 2020 (Proj.): 1,691.8; 2021 (Proj.): 1,718.9; 2022 (Proj.): 1,767.3. - Imports, f.o.b.: 2013: -1,693.6; 2014: -1,691.2; 2015: -1,391.0; 2016: -1,406.4; 2017 (Est.): -1,512.7; 2018 (Prel.): -1,435.1; 2019 (Proj.): -1,395.1; 2020 (Proj.): -1,397.3; 2021 (Proj.): -1,446.9; 2022 (Proj.): -1,490.4. - Financial account developments: - Foreign direct investment (US$ millions): 2013: 29.1; 2014: 25.8; 2015: 42.4; 2016: 28.7; 2017 (Est.): 27.7; 2018 (Prel.): 27.6; 2019 (Proj.): 27.8; 2020 (Proj.): 28.4; 2021 (Proj.): 29.2; 2022 (Proj.): 30.0 (Table 4). - Overall balance (US$ millions): - 2013: 187.4 - 2014: -11.3 - 2015: -14.4 - 2016: -16.7 - 2017 (Est.): -82.8 - 2018 (Prel.): 71.9 - 2019 (Proj.): 180.7 - 2020 (Proj.): 91.8 - 2021 (Proj.): 45.1 - 2022 (Proj.): 61.9 (Table 4). ### Key cross-cutting observations - Poverty and inequality remain high while unemployment—particularly youth unemployment—remains persistent despite modest per capita income improvements relative to SACU peers (Figures 1, 7, 8). - External buffers declined to among the lowest levels in the Common Monetary Area but are projected to recover gradually (Figure 3; Table 4 gross international reserves series). - Fiscal pressures have increased gross public debt and generated arrears and unsustainable gross financing needs; domestic arrears amounted to 4.6 percent of GDP as of March 2017 (Figure 4; Table 2 notes). - Financial sector is broadly well capitalized but faces rising asset-quality deterioration, liquidity pressures, sectoral concentration (notably sugar and mortgages), growing government exposure, and sizable links with NBFIs (Figures 5–6; Table 6). *Source: IMF staff compilation of Swaziland Article IV consultation materials, figures, and tables contained in the provided document.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overview - In 2015, the external position of Swaziland was moderately weaker than suggested by fundamentals. - In 2016, the current account (CA) balance deteriorated significantly as the trade balance declined and official transfers (mainly SACU receipts) lowered by a 39 percent compared to the previous year. - Financial account outflows, particularly portfolio investment, slowed significantly in 2016 and helped contain the negative impact of the deteriorated CA on international reserves. - Level of international reserves declined below three months of projected imports (end-December 2016). - Staff recommends fiscal consolidation; staff recommends fiscal adjustment of 11–12 percent of GDP which, together with stabilized SACU revenues, would help maintain the external position broadly consistent with fundamentals. ### International Reserve Adequacy - Recent trends: - Reserves declined from a peak of US$767 million (equivalent to 3.7 month or prospective import coverage and about 19 percent of GDP) at end-2013 to US$564 million at end-2016 (below 3 months of imports or 13.9 percent of GDP). - Reserve coverage in 2016 was in part boosted by swaps operations. - Reserves are expected to decline further in absence of fiscal adjustment and a compression of domestic demand. - IMF composite metric (ARA) assessment: - Traditional adequacy metrics suggest reserves are adequate in terms of import and broad money coverage, but may underestimate external vulnerabilities. - The IMF metric considers four sources of risk: (i) low export earnings from a terms of trade shock; (ii) low rollover rates of short-term debt at remaining maturity (short term debt plus debt service); (iii) non-resident capital outflows on portfolio investments plus medium and long-term debt; and (iv) resident capital flight proxied by broad money. Relative risk weights are based on observed outflows during past exchange market pressures. - Using 2016 data, reserves at 136.7 percent of the composite metric placed gross international reserves below the upper bound of the IMF’s reserve adequacy metric (100–150 percent of the composite metric corresponds to 2.2 and 3.4 months of imports, or 10.9 and 16.3 percent of GDP). - Modified metric to account for SACU volatility: - Tailored revised metric for Swaziland: 30% of STD+ 20% of OPL + 10% of M2 + 10% of X + 80% of SACU revenue, where STD denotes short-term debt, OPL other liabilities, M2 broad money, and X exports; a conservative 80 percent weight is applied to a SACU revenue shock. - Maintaining 100 percent coverage of this modified metric would require international reserve coverage of 4.9 months of imports, or about 20 percent of GDP in 2017. - Projections and policy implications: - Under staff’s adjustment scenario, international reserves are expected to decline in 2017 and, as fiscal adjustment is implemented, to gradually increase. - By 2022, international reserves are projected to reach 4.8 months of imports (17.7 percent of GDP), i.e., above the upper bound of the IMF metric and in line with the metric adjusted for SACU volatility. - Going forward, adequate policies (notably fiscal adjustment and stabilized SACU revenues) should help ensure safer and adequate reserve levels. ### External Position - Recent trends: - CA and NIIP in 2016: - CA surplus reduced to ¾ percent of GDP in 2016 (10.8 percent in 2015); balance projected to turn negative in 2017. - NIIP reached 41.7 percent of GDP in 2016 (39 percent of GDP in 2015), reflecting positive valuation effects and increased short-term trade credit assets. - Most external assets are portfolio equity and debt instruments (about 77 percent of gross external assets), mainly owned by the CBS and non-bank private sector. - REER developments: - REER depreciated by about 12 percent between end-2010 and end-2016. - REER started appreciating somewhat in late 2016 and currently stands at 5.0 percent above its historical average over January 1995‒May 2017. - Methodology: - Assessment uses the three approaches under the IMF’s EBA-Lite methodology: - Current account (CA) regression model (norms consistent with fundamentals and desirable policies; provides normative evaluations of the CA). - Real effective exchange rate (REER) regression model (estimates REER norm). - External sustainability (ES) approach (model-free; computes medium-term CA norm that stabilizes the net foreign asset position at a benchmark level). - Assessment based on latest available data (preliminary 2016). - Assessment results: - CA approach: - Using 2016 preliminary data, the model finds Swaziland’s CA was broadly in line with the CA norm. - Model estimated CA gap is 0.7 percent of GDP, composed of policy gap (-5.0 percent) and regression residual (5.8 percent). - The CA model explicitly accounts for proposed fiscal adjustment under staff’s baseline, which explains 80 percent of the identified policy gap. - Large residual partly reflects volatile SACU revenues. - ES approach: - Given Swaziland’s large positive NIIP, external sustainability is not a major concern even after possible increases in domestic asset requirements for NBFIs that would imply capital inflows and a reduction in the NIIP. - Relatively low international reserves (close to the lower bound of the ARA metric) imply the sustainability analysis should account for other distortions influencing CA and REER gaps. - REER approach: - Suggests an exchange rate undervaluation of about 8.9 percent. - Summary numerical assessment (as reported): - CA gap: 0.7–1.5 percent of GDP. - Real exchange rate gap: -2.4–8.9 percent (positive numbers indicate overvaluation). - Elasticity of current account to real exchange rate gap is -0.30. ### Policy Implications and Recommendations - Staff recommends fiscal consolidation and a substantial fiscal adjustment (11–12 percent of GDP) as part of the policy action scenario. - Fiscal consolidation together with stabilized SACU revenues would help maintain the external position broadly consistent with fundamentals. - Ensuring adequate reserve accumulation under the adjusted metric requires implementing the recommended fiscal measures and stabilizing SACU transfers. *Source: Annex I. External Sector Assessment, IMF staff assessments and projections as presented in the provided content.* ### 6. Alternative scenarios and stress test analysis highlight the critical importance of fiscal ### 6. Alternative scenarios and stress test analysis highlight the critical importance of fiscal ### Fiscal sustainability, scenarios, and stress-test findings - Key conclusion: fiscal adjustment is critical to ensure debt sustainability and resilience to shocks. - Even a relatively small primary deficit in line with the historical data would imply a constantly increasing public debt and high gross financing needs. - Sensitivity of debt dynamics: - Debt levels and gross financing needs are particularly sensitive to primary balance shocks. - Under the combined macroeconomic and contingent liability shock as well as a customized shock to SACU revenues (i.e. a fall by 5 percent in 2018–19), public debt would reach about 40–50 percent of GDP by FY22/23, depending on the type of shock, and gross financing needs would remain above 10 percent of GDP by FY22/13). - Extra-budgetary entities: - Preliminary evidence suggests their gross debt could be about 10 percent of GDP, possibly including claims by the central government and other public entities. - Staff tested debt dynamics including debt of extra-budgetary entities, alike to a tailored contingent liability shock: under this shock, public debt would increase to above 50 percent of GDP and stabilize at around 52 percent over the projection period; gross financing would be high, peaking at 34 percent of GDP in FY18/19, before declining to 16 percent by FY22/23. - Additional risk: large annual changes in short-term public debt in the past widely exceeded the relevant benchmark (Figure A3.1). ### External debt: levels, projections, and sensitivity analysis - Current position: - Swaziland’s external debt and gross financing needs remain low. - Following an increase in 2015 mainly due to the depreciation of the South African rand, in 2016 the stock of external debt increased little (about 0.2 percent of GDP to 13.3 percent of GDP). - Most of the external debt is public debt. - Baseline projections and requirements: - Under the DSA baseline, external debt is forecasted to rise and stabilize over the projection period. - The external debt ratio is projected to gradually increase and stabilize at around 21 percent of GDP. - Gross external financing needs are expected to stabilize at around 3.4 percent of GDP over the medium term. - Fiscal adjustment under the baseline is critical to maintain an adequate current account surplus. - Sensitivity and stress-test results: - External debt is particularly sensitive to current account shocks. - A shock to the non-interest current account would place the external debt-to-GDP ratio on an upward path, driven by high historical volatility of Swaziland’s current account balance largely owing to fluctuations in SACU transfers. - Higher interest rates or a slowdown in economic growth alone would have very limited effects on external debt dynamics. - A combined (interest rate, growth, current account) shock has an impact on debt similar to the current account shock. - A one-time real depreciation of 30 percent would raise the debt level, but would not place debt on an upward path. ### Stress-test scenarios and selected baseline figures (as presented) - SACU revenue shock: fall by 5 percent in 2018–19 used as a customized scenario. - Combined macroeconomic and contingent liability shock: leads to public debt about 40–50 percent of GDP by FY22/23 depending on shock type. - Tailored contingent liability (including extra-budgetary entities): public debt stabilizes around 52 percent of GDP; gross financing needs peak at 34 percent of GDP in FY18/19 and decline to 16 percent by FY22/23. - Baseline external debt level in 2016: 13.3 percent of GDP (increase of about 0.2 percent of GDP from 2015). - Projected external debt stabilizing level: around 21 percent of GDP. - Projected gross external financing needs: around 3.4 percent of GDP over the medium term. - One-time real depreciation shock magnitude used in tests: 30 percent. *Source: IMF staff analysis in the Swaziland Public Sector Debt Sustainability Analysis (DSA) chapter.* ### Annex IV. Containing the Wage Bill in Swaziland ### Annex IV. Containing the Wage Bill in Swaziland ### Public wage bill: levels and recent trajectory - In FY16/17, public wage costs for central government employees peaked to 13.8 percent of GDP (11.3 percent in FY12/13) and amounted to 99 percent of domestic revenue (45 percent of domestic primary spending). - Except for Lesotho, Swaziland (with Namibia) has the largest public wage bill (in terms of GDP) among SACU countries and small middle income economies in the region. - The FY16/17 salary review reformed pay structure and resulted in about 2 percent of GDP in additional wage expenses. - Under current policies, Swaziland’s public wage-to-GDP ratio is expected to increase further and exceed 17–18 percent of GDP (about 49 percent of domestic primary spending) by FY21/22, largely above domestic revenue collection. ### Drivers of the wage bill increase - Over the last four years, the wage bill has increased by 2½ percent of GDP. - Compensation per employee grew on average by about 11 percent per year in nominal terms, well above inflation dynamics, and contributed about 85 percent of the overall nominal increase in the wage bill. - Public employment increased on average by about 3.6 percent per year over the same period, outpacing population growth and contributing to the remaining part of the nominal wage bill increase. - Higher public employment mainly reflected strong occupational dynamics in education, defense and security (about 60 percent of central government employment). ### Economic and distributional implications - Containing the public wage bill is critical for fiscal adjustment and could strengthen long-term economic performance and employment, without affecting poverty. - Empirical evidence for low and middle income countries suggests that wage increases above productivity gains are associated to higher unemployment rates (IMF, 2013). - Staff analysis finds that public sector wage dynamics in Swaziland do not reflect changes in labor productivity and contribute to persistently high unemployment. - Empirical evidence for small-middle income countries shows that creating public jobs does not necessarily reduce unemployment and, in some cases, may increase it by creating pressures on the labor market (e.g., higher reservation wages) (IMF 2013). - Incidence analysis finds that the majority of civil servants belongs to the highest income quintiles of the market income distribution and that controlling public wage dynamics would have limited impact on poverty. ### Policy measures to reduce and manage the wage bill - Reducing the wage bill and controlling its dynamics requires a combination of short and medium-term measures: - Short-term measures (aimed at controlling wage bill dynamics and aligning deficits with limited budget financing): - Maintain salary increases below inflation trends and suspend “notch” increases for workers not yet at the highest point-value of their pay grade. - Introduce temporary hiring rules to reduce public employment (e.g., retirement/hiring ratios). - Reduce temporary and contractual positions outside social sectors. - In Swaziland’s case, correcting the wage increases granted with the 2016 salary review (e.g., by limiting the cost-of-living adjustment for some years) could deliver substantial savings. - Curtail allowances for statutory posts, Parliament, the Foreign Service, the Judiciary and high rank officials to contribute to fairness of the adjustment. - Note: Short-term measures are effective but often not sustainable and can distort wage and employment structures (IMF, 2016). - Medium-term measures (aimed at durable wage bill management and efficiency): - Link pay to performance, and align job requirements with compensation while ensuring some relation between public and private sector compensation for workers with comparable skills. - Strengthen human resource management by removing ghost workers. - Improve wage bill controls (e.g., through biometric technologies, enhanced controls for the hiring of low-skilled workers). - Conduct comprehensive organizational and functional reviews of ministries, departments, and agencies to identify overlap or duplication and generate tangible savings. - To avoid loss of critical skills and incentives for critical workers (e.g., doctors, engineers) to leave public employment, focus short-term restrictions on non-essential personnel, exempt critical sectors (e.g., education, health), and allow reallocation of employees across sectors. *Source: Annex IV, "Containing the Wage Bill in Swaziland", IMF staff.* ### 4. The IMF has provided technical assistance (TA) to support the recent revenue ### 4. The IMF has provided technical assistance (TA) to support the recent revenue ### IMF technical assistance on revenue administration - IMF advice and TA were provided in the context of a five-year program. - Advice focused on: - administrative integration of domestic taxes, - self-assessment, filing and payment compliance, - management of tax arrears, - development of risk models and audit case selection. - Starting in 2017, further support is planned under the new Revenue Mobilization Trust Fund. - The new TA program will: - continue the work already commenced on compliance, - reassess the operational structure, particularly that of the LTU, to better support a segmented approach to managing taxpayers. ### Financing and trust funds - The Swaziland technical assistance program was financed by the Tax Policy and Administration Topical Trust Fund (TPA-TTF), a multi-donor fund that supports tax administration technical assistance projects spanning three to five years. - The Revenue Mobilization Trust Fund is the successor the TPA-TTF funds in supporting technical assistance projects. ### IMF TA activities, 2012–present (selected) - Fiscal Affairs Department (FAD) activities included: - PFM Act and Regulations (January 2012; May 2012; August 2012; October 2012; January 2014; September 2015; October 2015) - MTFF/Budget/Expenditure Management (March 2013; May 2013; July 2013; August 2013; December 2013; January 2014; August 2015) - Cash management and accounting (November 2015; June 2014; December 2014; February 2015; April 2015; October 2015; April 2017) - Chart of accounts (July 2012; December 2012; January 2013; February 2013; March 2013; August 2013; January 2014; August 2014) - Tax policy (April 2017) - Customs revenue administration (October 2012; June 2015) - Tax Administration (July 2012; October 2012; August 2013; December 2013; December 2014; November 2016) - Monetary and Capital Markets (MCM) and other departments provided TA on insurance supervision, central banking and bank supervision, national payment systems, bank resolution and institutional setup for crisis management and prevention, risk based supervision, capital market supervision, SACCOs supervision, supervision of non-banks, compliance with Basel, financial stability, public debt management, stress testing, and NPS development with missions across 2011–2017. - Statistical Department (STA) activities included: Monetary and Financial statistics (September 2013), Financial Soundness Indicators (March 2014), Balance of Payment statistics (February 2017), National Accounts Statistics (January 2012; August 2012; October 2012; December 2013; April 2014; July 2016; February 2017). ### Joint World Bank and IMF work plan (selected planned activities, next 12 months as of June 2017) - IMF planned activities included: - 2017 Article IV Consultation (June 2017) - TA: PFM (Commitment and cash management, PFM regulatory framework, MTEF, COA, IFMIS) - TA: Revenue administration (Long-term advisor; HQ mission July–August 2017; AFS follow-up missions September; December 2017) - TA: Tax Policy - TA: Regulatory and prudential framework - TA: Risk-based supervision (AFS) - TA: Basel II/Basel III compliance (AFS) - TA: Financial stability law - TA: National Payment Systems - TA: Balance of Payments (DFID EDDI2) (November 2017 (tentative); August 2017) - Notes: Dates are tentative. Years are calendar years. Some items dependent on finalization of the SADC law. ### Statistical issues and data adequacy - Overall assessment: Data provision has some shortcomings, but is broadly adequate for surveillance (Category B). - National accounts: - CSO rebased GDP series with base year 2011; rebased data were disseminated in December 2016 and was used for the 2017 Article IV consultation. - With IMF and donor TA, CSO integrating tax data into GDP compilation and developing quarterly GDP estimates. - Shortcomings remain: large statistical discrepancies for the demand-side of GDP series, delays in finalizing GDP series with about a year lag, and absence of an issuance calendar. - Price statistics: - CPI base year is December 2012. - Monthly consumer price data published with a one-month lag. - Household Income and Expenditure Survey planned to be finalized by end-2017. - Last Labor Force Survey conducted in 2013/14. - Government Finance Statistics: - Aggregate budgetary central government data by fiscal year reported annually with expenditures on an invoice-registered basis. - No fiscal statistics disseminated for extra budgetary funds and institutions, consolidated central government, and consolidated general government. - No data available to assess fiscal risks. - Monetary and Financial Statistics: - CBS reports monthly monetary statistics on standardized report forms for the CBS balance sheet and other depository corporations. - Credit and savings cooperatives remain outside the deposit corporations’ survey. - CBS reports FSIs to the Fund for commercial banks on a quarterly basis and, at times, require revisions. - Balance of Payments and IIP: - CBS reports BOP and IIP data quarterly with a lag of about six months according to BPM5 methodology. - With IMF TA, CBS migrating to BPM6; large errors and omission imply further actions needed to improve accuracy and reliability. - Participation in data standards: - Participant in the Enhanced General Data Dissemination System (e-GDDS) since January, 2017. - No data ROSC available. - Reporting to STA: - CBS reports monetary and financial statistics to STA regularly, although timeliness could be improved. - Balance of payments data are published in International Financial Statistics (IFS) and in the Balance of Payments Yearbook. ### Key economic developments and fiscal stance (authorities’ statement highlights) - Shocks and growth: - Recovery from the fiscal crisis of 2010 was followed by two shocks in 2015: a fall in SACU revenues and a devastating drought. - Economic growth slowed in 2016 due to the severe drought affecting agriculture and hydropower; authorities optimistic real GDP will pick up in 2017 as agriculture and agro-processing recover. - Inflation: - Inflation averaged 8.0 percent year-on-year in 2016, higher than the 5.0 percent recorded in 2015. - In the first and second quarters of 2017, inflation averaged 7 percent and 6.7 percent year-on-year, respectively. - Inflation is projected to moderate around 7 percent in 2017. - External sector: - Current account continued to post surpluses in 2016, supported by net surpluses in merchandise trade and current transfers, benefiting largely from inflows of SACU receipts. - Trade account turned negative in the second quarter of 2017 owing to increasing domestic demand with a high import component. - Public debt and fiscal developments: - Total public debt increased in 2016 reaching 25.3 percent of GDP against 18.7 percent in the previous year. - Overall public debt remained below the authorities' limit of 35 percent, despite increasing by 2.7 percent during the year to July 2017. - Authorities budgeted a lower deficit of 8.2 percent for FY2017/18 relative to the previous fiscal year, enabled by strong domestic revenue performance and expenditure cuts on goods and services. - Financing challenges led to deterioration of the fiscal position, accumulation of domestic arrears, and faster accumulation of public debt. - Fiscal measures and consolidation plans: - Authorities acknowledge the fiscal position is unsustainable and seek to contain the FY2017/18 deficit within budget. - Measures under consideration include: - a downward revision of planned spending for FY2017/18, - a zero percent increase in the cost of living adjustment, - subjecting all non-core spending in the Ministries of Health and Education (previously exempt) to the commitment control system, - suspending all domestically financed capital projects. - Commencing in FY2018/19, authorities are committed to implementing fiscal consolidation and are exploring financing sources to ease potential impact on growth. - Authorities have begun soliciting broad consensus with stakeholders to undertake wage reform measures (high wage bill is a key concern). - Cash and debt management: - A Cash Management Unit has been established at the Ministry of Finance to manage government cash flow and provide guidance on expenditure management; with Fund TA, the Unit is strengthening cash flow projections and analysis of revenue streams and expenditures. - A Debt Management Unit is fully functional and has commenced preparation of a debt management strategy. - Public enterprises: - Authorities plan a study to streamline and enhance performance and sustainability of Public Enterprises, including reducing the number of enterprises by merging those with similar mandates; plans to develop policy guidelines for the establishment and management of Public Enterprises. ### Monetary and financial sector policy priorities - Exchange rate regime: - Swaziland maintains a fixed exchange rate regime; the lilangeni is pegged at parity to the South African rand, which is also legal tender. - Authorities aim to maintain reserves above the benchmark of three (3) months. - Banking sector: - Financial sector is stable with the banking sector well capitalized and profitable. - Accumulation of domestic arrears by the Government is likely to affect banking sector asset quality; NPLs have been rising, especially in the construction sector. - Government and CBS developed an arrears’ clearance program; CBS closely monitoring banking sector developments and will limit deficit financing. - Regulatory reforms and supervision: - CBS targeting full implementation of Basel II by January 2018 and thereafter preparing for Basel III. - Amendments to the Central Bank Order and the Financial Institutions Act submitted to Parliament; drafting of regulations targeted for completion by end September 2017 and legislation passed into law by December 2017. - Financial Stability Bill being drafted with expectation of passage in 2018. - FSRA has expanded supervision of NBFIs since 2010 with Fund TA; SACCOs balance sheets have strengthened. - Financial Stability Unit established at CBS; improved coordination between CBS and FSRA; first Financial Stability Report to be published before 30 September 2017. - Ongoing efforts to review the stress testing framework. ### Structural reforms and social measures - Structural reform priorities: - Improve road and utilities infrastructure to encourage investment and growth. - Improve ease of doing business, establish special economic zones, review land policy, develop serviced land to alleviate shortage for investors. - Continue implementing structural reforms consistent with Vision 2022 development agenda. - Completed legislative processes to facilitate access into the AGOA market. - Implementing the World Trade Organization trade facilitation agreement. - Education and skills: - Strengthen Technical and Vocational Education and Training programs. - Swaziland Higher Education Council and the National Qualifications Department to regulate quality of programs and institutions. - Social protection: - Cash transfers to the elderly increased by 66 percent as part of the FY2017/18 budget. - Monthly grants for disabled people increased by 125 percent. - Extended provision of free education to orphaned and vulnerable children up to the first year after primary school. ### Authorities’ conclusion - Authorities recognize exceptional domestic and external challenges given vulnerability to external shocks and high dependency on SACU revenues. - Authorities reiterate commitment to fiscal consolidation in the near to medium term to restore fiscal sustainability, anchor macroeconomic stability and support inclusive growth. - Authorities value Fund advice and technical assistance and look forward to continued close collaboration with the Fund. *Staff Report for the 2017 Article IV Consultation — Informational Annex* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17274.pdf_