## tarea2024030 ## Source details **Canonical URL:** [tarea2024030](https://www.imf.org/-/media/files/publications/tar/2024/english/tarea2024030.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tar/2024/english/tarea2024030.pdf.md) - [Structured JSON version](/-/media/files/publications/tar/2024/english/tarea2024030.pdf.json) --- ### Mission, scope, and methodology - At the request of the Central Bank of Eswatini (CBE), an IMF Financial Sector Stability Review (FSSR) was conducted virtually and in-person between April 26 and July 18, 2023; main mission visit: Mbabane, Kingdom of Eswatini, July 4 to 18, 2023. - Mission leadership and team: - Led by Ms. Anastassiya Marina (Monetary and Capital Markets Department, MCM). - Included Mr. Phousnith Khay (Statistics Department, STA), and Messrs. David Farelius, Vern McKinley, Ravi Mohan Periyakavil, Rodolfo Wehrhahn (MCM short-term experts). - Ms. Marina Moretti, Deputy Director (MCM) joined for closing meetings. - Scope of work: - Financial stability and systemic risk monitoring, macroprudential frameworks and tools. - Financial safety net and crisis management. - Supervision and regulation of deposit-taking financial institutions and insurance and retirement funds. - Financial sector statistics. - Diagnostic guided by international standards and good practices (BCBS Stress Testing Principles (2018); FSB Key Attributes; IADI Core Principles; Basel Core Principles; IAIS Insurance Core Principles; IOPS principles; IMF statistical manuals/guides). ### Executive summary — main findings and vulnerabilities - Structure and size: - Total assets of Eswatini’s financial system: about 150 percent of GDP. - Nonbank Financial Institutions (NBFIs) account for 78 percent of financial sector assets or 116 percent of GDP. - Source of risks: - NBFIs identified as the source of most financial stability risks and the priority area for oversight improvements. - Institutional and legislative status: - Oversight split: CBE supervises banks; FSRA (under MOF) oversees NBFIs. - Government announced plans to integrate oversight under the CBE; progress limited. - Work underway: establish a deposit insurance scheme (within the CBE) and strengthen resolution, early intervention, and ELA frameworks. - Amendments to financial sector laws and regulations prepared under previous TA appear stalled; expediting passage and presenting amendments/new bills as a single package is recommended. - Macrofinancial risks (near-term context): - Household indebtedness and sovereign–financial sector nexus warrant close monitoring. - Banks appear liquid and well-capitalized, but NPLs are rising and under-provisioned. - Deposit-taking NBFIs are weaker than banks on NPLs, provisions, and capital. - Government securities account for 10 percent of financial sector assets. - Government’s dominance in NBFIs could transmit fiscal shocks to the financial system. - Coordination recommendation: - As institutional arrangements evolve, CBE and FSRA should enhance and prioritize coordination on financial stability and focus on capturing and preemptively addressing risks. ### Key statistics and financial system structure - Overall and NBFI shares: - Total financial system assets: about 150 percent of GDP. - NBFIs: 78 percent of financial sector assets; 116 percent of GDP. - Retirement funds (largest NBFI segment): - Retirement funds account for 36 percent of financial system assets or 53 percent of GDP. - More than 80 percent of retirement fund assets are held by the two state-owned pension funds. - About 70 percent of the assets managed by CMIs belong to retirement funds. - At beginning of 2023 retirement fund assets: about 36 percent of total financial sector assets with over 50 percent exposure to equity. - Of total retirement fund assets, about one third invested in ordinary listed shares on the JSE. - Domestic local investments constitute about half of retirement fund assets: - About 40 percent of the local investment portfolio (or 20 percent of total assets) are fixed income instruments maturing after 12 months. - Of those local fixed income instruments, 86 percent are invested in government securities, parastatals, and NBFIs (including insurers and reinsurers). - Exposure to government by retirement funds: about 17 percent of total assets (at par with banks’ holdings). - Retirement fund membership average age: 42.9 years. - Financial markets and government securities (outstanding debt securities, percent of GDP): - Total outstanding debt securities: 2015: 7; 2016: 9; 2017: 12; 2018: 16; 2019: 18; 2020: 19; 2021: 21; 2022: 21; 2023Q2: 20. - Government portion: 2015: 6; 2016: 8; 2017: 10; 2018: 14; 2019: 16; 2020: 19; 2021: 19; 2022: 19; 2023Q2: 18. - Corporates portion: 2015: 1; 2016: 1; 2017: 2; 2018: 2; 2019: 2; 2020: 2; 2021: 2; 2022: 2; 2023Q2: 2. - Stock market capitalization (percent of GDP): 2015: 5; 2016: 6; 2017: 6; 2018: 6; 2019: 6; 2020: 6; 2021: 6; 2022: 6; 2023Q2: 5. - Banking sector structure: - Commercial banks licensed by CBE: 5. - Government owned: 1 (10% market share). - South African bank subsidiaries: 3 (market shares 35%, 30%, and 25%). - Farmers Bank (Pty) Ltd.: licensed 2018, revoked 2020, reinstated 2021; undergoing restructuring. - NBFIs and supporting entities licensed by FSRA: 511 total (breakdown by subsectors provided in source content). - Interlinkages: - Bank loans to NBFIs: about 1 percent of total bank loans. - NBFI deposits in banks: about 11 percent of bank deposits. - Retirement funds place less than 1 percent of assets in bank and building society deposits. - Insurers’ exposure as a percentage of total market equity: less than 5 percent except one case with double digits. - Liquidity and concentration: - Top 20 bank depositors account for about 45 percent of total bank deposits. - Government domestic debt exposure accounts for about 10 percent of total financial sector assets. - Monetary and inflation indicators: - CBE discount rate raised by cumulative 400 basis points to 7.75 percent in May 2023. - Inflation: 6.1 percent in April 2023; expected to stabilize around 5–6 percent. - Macro outlook: - Real GDP projected to grow by 3.2 percent in 2023. - Downside risks: South Africa’s economic challenges, El Nino effects on agriculture, high inflation dampening disposable income, high interest rates increasing NPL risk. ### Credit quality, household vulnerabilities, and sector stress - Household credit and NPLs: - Rising interest rates affect households disproportionately because loans at flexible rates dominate. - Bank NPLs: rising to pre-pandemic levels; average around 8 percent with provisions about 50 percent as of March 2023. - Swaziland Building Society (SBS) has relatively higher NPLs (mostly housing loans) and is of concern. - Anecdotal evidence: households may be using non-collateralized borrowing from NBFIs to meet higher bank interest payments. - Recommendation: expand analysis to include household lending data from all NBFIs and monitor household NPLs across the system, especially housing and non-collateralized loans. - Building societies and SACCOs: - Building societies: much higher NPLs and much lower provisions than banks; capital adequacy data require further verification. - SACCO institutional capital ratio almost doubled in three years from 5 percent in 2020; still short of 8 percent required by FSRA. - SACCO NPLs appear to be rising while provisions are getting lower; increasing trend in liquidation over last five years. - Historical liquidation: Temnotfo Credit and Savings Co-operative closed and liquidated in 2018; depositors suffered losses. ### Insurance and retirement funds — prudential and governance issues - Insurance sector: - Assets at end-2022: 5 percent of total financial sector assets. - Sector profitable with double digit ROE in 2022: Long-term insurers ROE 11 percent in 2021 rising to 24 percent in 2022. - No catastrophe insurance. - Selected insurance indicators (percent): - Short-Term Insurers 2022: Claims ratio 28; Gross claims ratio 24; Expense ratio 44; Investment income ratio 7; Investment income / average invested assets 5; Combined ratio 72; Operating ratio 65; Profitability ratio 31; Return on equity (ROE) 27; Return on assets (ROA) 13; Risk retention ratio 57; Reinsurance recoveries + reinsurance commissions ratio 28. - Long-Term Insurers 2022: Claims ratio 72; Gross claims ratio 71; Expense ratio 27; Investment income ratio 14; Investment income / average invested assets 3; ROE 24; ROA 3. - Long-Term Insurers 2021: Claims ratio 83; Gross claims ratio 87; Expense ratio 41; Investment income ratio 42; Investment income / average invested assets 8; ROE 11; ROA 4. - Retirement funds risks: - Delayed government contributions to defined-benefit plans have resulted in underfunding; Public Sector Pension Fund (PSPF) funding gap indicated at 20 percent in PSPF 2022 Annual Report. - To close gaps, retirement funds increased search-for-yield and investment risk; recent materialization: a beneficiary fund loss amounting to 80 percent of its assets (collapse of ESW collective investment scheme). - Beneficiary fund misconduct example: loss of around E 80 million; several funds operate underfunded (one case with 9 percent coverage ratio). ### Supervisory capacity, data, and statistical weaknesses - Implementation and remaining gaps: - Authorities have implemented many TA recommendations (Basel II, NBFI supervision) but critical pending items remain: bank governance reforms (government-owned bank), updated CBE risk management guidelines, conversion of largest building society into a bank pending. - Effective supervision of building societies and SACCOs remains work in progress; data quality and supervisory coverage insufficient. - Corporate governance, internal controls, risk management, and compliance in NBFIs need strengthening; oversight of asset managers/investment funds requires enhancement. - Supervisory data and FSIs: - CBE reports FSIs quarterly; migration to 2019 FSIs Guide began from 2020Q3; updated spreadsheets submitted and disseminated through 2023Q1. - Selected FSIs for Deposit Takers (Percent) — series by quarter: - Regulatory capital to risk-weighted assets: 23.6, 22.9, 18.4, 18.6 (2022Q2, 2022Q3, 2022Q4, 2023Q1) - Tier 1 capital to risk-weighted assets: 20.7, 20.0, 16.2, 16.3 - Nonperforming loans net of provisions to capital: 11.0, 12.5, 11.1, 12.4 - Common Equity Tier 1 capital to risk-weighted assets: 20.7, 20.0, 16.2, 16.3 - Tier 1 capital to assets: 12.5, 12.1, 12.6, 13.5 - Nonperforming loans to total gross loans: 6.5, 6.8, 6.7, 7.3 - Provisions to nonperforming loans: 55.4, 51.7, 54.6, 53.2 - Return on assets: 3.0, 2.9, 3.0, 3.0 - Return on equity: 15.6, 14.5, 15.3, 13.6 - Interest margin to gross income: 54.3, 55.0, 55.8, 58.9 - Noninterest expenses to gross income: 66.8, 66.6, 66.0, 63.5 - Liquid assets to total assets: 29.4, 24.4, 28.8, 26.4 - Liquid assets to short-term liabilities: 39.5, 36.0, 42.9, 42.1 - Net open position in foreign exchange to capital: 100.7, 149.3, 117.1, 98.9 - Large exposures to capital: 56.2, 55.8, 46.9, 45.3 - Personnel expenses to noninterest expenses: 45.1, 44.5, 44.3, 42.8 - Customer deposits to total (non-interbank) loans: 123.4, 122.9, 122.7, 109.0 - Foreign-currency-denominated liabilities to total liabilities: 9.5, 10.7, 5.8, 6.8 - Residential real estate loans to total gross loans: 18.75, 19.56, 19.30, 18.84 - Commercial real estate loans to total gross loans: 9.41, 9.67, 8.92, 9.26 - Monetary and Financial Statistics (MFS) gaps: - SRF 2SR currently covers only commercial banks; coverage should expand to include building society, MMFs, and SACCOs. - Accrued interest not incorporated in outstanding amounts per MFSMCG. - OFCs accounted for 61.2 percent of financial system assets (excluding CBE) and 73.7 percent of GDP as of end-2020; source data from FSRA inadequate for compiling MFS and FSIs for OFCs. - Balance Sheet Approach (BSA) and external statistics: - BSA matrix for end-2021 exists but GFS data not available for 2021; improvements in MFS, IIP, and GFS needed to complete matrix. - IIP reporting: CBE reports quarterly IIP to STA; latest disseminated data refer to 2021Q1; BOP/IIP disseminated on website with lag >4 months. - GFS shortcomings: reports only budgetary central government; missing data for 21 extra budgetary units, 22 local governments, and 17 public enterprises; PSD statistics understates true debt situation; COFOG not reported. ### Financial safety net, crisis management, resolution, and ELA - Financial Stability Panel (FSP) and crisis communication: - Launch FSP via multilateral MoU as interim measure without waiting for Financial Stability Bill; FSP to meet regularly (e.g., quarterly) with confidentiality preserved. - The CBE lacks a crisis communications plan; a crisis communications plan for the FSP is necessary. - Memorandum of Understanding (MoU) with SARB: - Update the CBE-SARB MoU (signed early 2010) to include recovery and resolution planning and crisis management. - Leveraging SARB directives on recovery plans at South African bank subsidiaries can help CBE develop independent recovery plan protocols. - Recovery and resolution planning: - Develop recovery and resolution plans for Eswatini Bank and Swaziland Building Society (SBS); CBE and MOF cooperation to develop templates before legal mandate is approved. - FSRA should request recovery plans from SBS and draft resolution plans for SBS (a conversion plan exists). - Require and enforce recovery plans for underfunded retirement funds; FSRA to request recovery plans from all RFs and prepare/enforce resolution plans starting with underfunded public RFs (PSPF funding gap 20 percent). - Emergency Liquidity Assistance (ELA): - Develop separate public instructions and confidential internal procedures for ELA. - Define solvency (and secondarily viability) on a forward-looking basis. - Internal procedures should address the CBE’s low availability of reserves and preconditions for ELA in resolution and exit strategies. - Failure resolution tools and DPF: - Deploy Purchase & Assumption (P&A) as primary resolution tool, bridge bank as alternative, asset management vehicle and bail-in in specialized circumstances (per amended FIA Sections 89–92). - Assign dedicated staff to resolution and Deposit Protection Fund (DPF) with a pop-up resolution function for crises; consider shared services for DPF. - DPF design recommendations: - Run financial projections over at least a 10-year period and test pessimistic/bank-failure scenarios. - Develop fully automated depositor compensation to reimburse protected depositors within seven business days consistent with DICP. - Do not include industry members on DPF governing board; consider an advisory board instead. - Agree emergency funding arrangements with MOF; CBE should not provide emergency funding as it is fiscal responsibility. ### Macroprudential policy, stress testing, and D-SIFI framework - Macroprudential institutional and operational recommendations: - Reinvigorate Macroprudential Technical Committee including FSRA and CBE Banking Supervision Department. - Stocktake data availability, especially for NBFIs; revise reporting templates as needed. - Develop a Risk Dashboard in the CBE FSU including NBFI indicators and contagion indicators with South Africa linkage. - Build criteria for Domestic Systemically Important Financial Institutions (D-SIFI) designation phased: start with banks then extend to NBFIs with FSRA involvement. - Implement macroprudential policy gradually: begin with borrower-based tools (e.g., LTV frameworks) targeting household indebtedness; consider broader capital instruments later. - Stress testing: - Overhaul and strengthen CBE stress testing framework and expand to include the NBFI sector. - Revamp solvency stress tests and strengthen top-down stress testing with macrofinancial scenarios and satellite models. - Require banks to conduct bottom-up stress tests in the SREP context; include nonbank sector in long-term overhaul and interconnectedness analysis. - Discuss stress-testing results with SARB to understand cross-border supervisory resilience treatment. ### Technical Assistance Roadmap (TARM) — priorities and TA needs - Immediate priority TA (ST <6 months): - Prepare amendments to existing acts and new bills as a single package for new Parliament. - Responsible: CBE-FSRA; Priority: H; Completion Timeframe: ST. - Strengthen supervisory capacity for market conduct in CMIs and Credit Institutions. - Responsible: FSRA; Priority: H; Completion Timeframe: ST and continuous. - Enhance NBFI offsite surveillance and forward-looking risk assessments; undertake stocktaking of NBFI data. - Responsible: CBE-FSRA; Priority: H; Completion Timeframe: ST/MT. - Finalize ELA procedures; run financial projections for DPF. - Responsible: CBE; Priority: H; Completion Timeframe: ST. - Priority TA by diagnostic area (selected): - Financial stability and stress testing: stocktaking of data, develop Risk Dashboard, overhaul stress-testing framework, develop D-SIFI criteria (TA needed; Responsible: CBE; Priority: H; Timeframe: MT-LT). - Financial safety net and crisis management: DPF projections, interagency crisis protocols, finalize ELA, update CBE–SARB MoU (TA needed; Responsible: CBE; Priority: H; Timeframe: ST–MT). - Regulation and supervision of banks and deposit-taking NBFIs: advance Basel requirements including Pillar 2 and liquidity, complete corporate governance reforms, strengthen deposit-taking NBFI supervision (TA needed; Responsible: CBE/FSRA; Priority: H; Timeframe: ST–MT). - Insurance and retirement funds: enforce IRF regulations, develop risk-based supervision with automated tools, introduce risk-based solvency regime for insurers (TA needed; Responsible: FSRA; Priority: H; Timeframe: MT). - Financial, external, and government statistics: improve source data for OFCs, compile MFS and FSIs for OFCs and deposit-takers, expand MFS coverage for Other Depository Corporations (TA needed; Responsible: CBE-FSRA; Priority: H; Timeframe: ST–MT). - Capacity building and institutional measures: - Review and augment staffing of CBE Financial Stability Unit (FSU); consider deputy head and eventual Financial Stability Department (Responsible: CBE; Priority: H; Timeframe: MT). - Resume Macroprudential Technical Committee meetings and launch Financial Stability Panel (Responsible: CBE-FSRA; Priority: H; Timeframe: ST). - Enhance FSRA IRF staffing: IRF department currently staffed by 10 with 5 vacancies; capacity allows for only 3–5 annual inspections. - Improve supervisory tools, move toward automated supervisory tools, RegTech/SupTech adoption, and strengthen data validation and reporting. ### Governance, legal, and regulatory reform priorities - Outstanding draft bills and amendments to expedite (selected list): - Amendments to the Central Bank of Eswatini Act (1974); Financial Stability Bill; Amendments to Financial Institutions Act (2005); Amendments to FSRA Act (2010); Amendments to Insurance Act (2005) and Retirement Funds Act (2005); Amendments to Building Societies Act (1962) and new Savings and Credit Cooperatives Bill; Amendments to Securities Act (2010). - Regulatory architecture and interim measures: - Integration of CBE and FSRA oversight responsibilities requires legal amendments; include these in single legislative package. - Interim coordination: enhance CBE-FSRA coordination, reinvigorate technical cooperation, establish joint project management for TARM implementation, and launch FSP via multilateral MoU without waiting for legislation. ### Priority actions checklist (selected from Table 1 and TARM) - Prepare legislative package consolidating amendments and new bills for post-2023 elections presentation to Cabinet and Parliament (Responsible: CBE-FSRA; Time Frame: ST). - Enhance NBFI offsite surveillance and forward-looking risk assessments; undertake stocktaking of NBFI data (Responsible: CBE-FSRA; Time Frame: ST–MT). - Run financial projections for DPF; finalize ELA procedures; update CBE–SARB MoU (Responsible: CBE; Time Frame: ST–MT). - Expedite conversion of a building society into a bank (Responsible: MOF; Time Frame: ST). - Advance Pillar 2 implementation, adopt calibrated Basel III liquidity requirements, and strengthen banks’ corporate governance (Responsible: CBE; Time Frame: MT). - Enact Insurance Act and Retirement Funds Act amendments and develop risk-based supervision and risk-based solvency regime for insurers (Responsible: MOF-FSRA; Time Frame: ST–MT). - Compile MFS and FSIs for OFCs and expand SRF 2SR coverage to deposit-taking NBFIs (Responsible: CBE-FSRA; Time Frame: ST–MT). *Source: IMF Financial Sector Stability Review (FSSR) mission materials and diagnostic report prepared for the Central Bank of Eswatini and Financial Services Regulatory Authority, July 2023.* ### PREFACE ________________________________________________________________7 ### PREFACE ### Mission and scope - At the request of the Central Bank of Eswatini (CBE), an IMF Financial Sector Stability Review (FSSR) was conducted virtually and in-person between April 26 and July 18, 2023. - Main mission visit: Mbabane, Kingdom of Eswatini, July 4 to 18, 2023. - Mission leadership and team: - Led by Ms. Anastassiya Marina (Monetary and Capital Markets Department, MCM). - Included Mr. Phousnith Khay (Statistics Department, STA), and Messrs. David Farelius, Vern McKinley, Ravi Mohan Periyakavil, Rodolfo Wehrhahn (all MCM short-term experts). - Ms. Marina Moretti, Deputy Director (MCM) joined the mission for the closing meetings. - Scope of work agreed during scoping visit April 26-28, 2023: - Financial stability and systemic risk monitoring, and macroprudential frameworks and tools. - Financial safety net and crisis management. - Supervision and regulation of deposit-taking financial institutions and insurance and retirement funds. - Financial sector statistics. - Stakeholder engagement: - Meetings with the Minister of Finance, CBE Governor and Deputy Governor, CEO and teams of the Financial Services Regulatory Authority (FSRA), and (virtually) supervisors of the South African Reserve Bank (SARB). - Consultations with senior executives from public and private sector financial institutions and companies. - Liaison with the World Bank pre- and post-missions. ### Acknowledgements - The FSSR diagnostic team thanks CBE and FSRA staff for collaboration, productive discussions, and hospitality. ### Diagnostic approach and standards - Diagnostic guided by international standards and good practices: - Basel Committee on Banking Supervision (BCBS) Stress Testing Principles (2018). - Financial Stability Board’s Key Attributes of Effective Resolution Regimes. - International Association of Deposit Insurers’ Core Principles for Effective Deposit Insurance Systems. - Basel Core Principles for Effective Banking Supervision. - Insurance Core Principles (IAIS) and Principles of Private Pension supervision (International Organization of Pension Supervisors). - IMF statistical manuals and guides for financial sector statistics assessment. ### Key facts on the financial system - Total assets of Eswatini’s financial system: about 150 percent of GDP. - Nonbank Financial Institutions (NBFIs): - Account for 78 percent of financial sector assets or 116 percent of GDP. - Their asset share has steadily increased over the past decade, while commercial banks’ assets have been flat as a share of GDP. - NBFIs identified as both: - The source of most financial stability risks and vulnerabilities. - The priority area for improvements in the oversight framework. --- ### EXECUTIVE SUMMARY ### Main findings and vulnerabilities - Oversight gaps and reform status: - Financial oversight currently split: CBE supervises banks; FSRA (under the Ministry of Finance, MOF) oversees NBFIs. - Government has announced plans to integrate financial sector oversight responsibilities under the CBE, but progress has been limited. - Work underway: establish a deposit insurance scheme (within the CBE) and strengthen other safety net components (resolution, early intervention, and emergency liquidity assistance frameworks). - CBE has taken steps to build financial stability and macroprudential policy and frameworks; uncertainty remains around completion. - Coordination recommendation: - As institutional arrangements evolve, CBE and FSRA should enhance and prioritize coordination on financial stability, focusing on capturing and preemptively addressing risks. - Near-term macrofinancial context and risks: - Against tightening global financial conditions and continued near-term economic recovery: - Household indebtedness and sovereign–financial sector nexus warrant close monitoring. - Banks appear liquid and well-capitalized, but NPLs are rising and under-provisioned. - Deposit-taking NBFIs are weaker than banks in NPLs, provisions, and capital. - Anecdotal evidence: household indebtedness is increasingly affecting repayment capacity. - Government securities account for 10 percent of financial sector assets. - Government’s dominance in NBFIs could transmit fiscal shocks to the financial system. - Legislative and regulatory urgency: - Amendments to financial sector laws and regulations prepared under previous TA appear stalled. - Expediting passage of amendments and new bills should be a priority for the next parliamentary session. - Mission advised presenting amendments and new bills as a single package to Cabinet and Parliament after handover of legislative and administrative powers post-2023 elections, expected early 2024. ### Supervisory capacity and remaining gaps - Progress made: - Supervisors have implemented many previous TA recommendations, especially Basel II implementation and supervision of NBFIs. - Further critical improvements needed: - Strengthen bank corporate governance and risk management. - Complete conversion of the largest building society into a bank. - Strengthen supervision of deposit-taking NBFIs and enhance data quality. - Strengthen NBFIs’ corporate governance, risk management, internal controls, and compliance functions. - Enhance NBFI statistics. ### Technical assistance (TA) roadmap and priority reforms - Diagnostic supports sequenced follow-up TA (Section III). - Key recommendations across five diagnostic areas (Table 1 summary): 1. Financial stability and systemic risk monitoring, and macroprudential frameworks and tools, including stress testing: - Undertake stocktaking of data availability, especially for NBFIs. - Develop a Risk Dashboard. - Overhaul stress-testing framework. - Develop D-SIFI designation criteria, starting with banks and extending to NBFIs. 2. Financial safety net and crisis management: - Run financial projections for the Deposit Protection Fund (DPF). - Develop protocols for an interagency crisis management panel. - Finalize emergency liquidity assistance (ELA) procedures. - Update CBE–SARB MoU with provisions for recovery and resolution planning and crisis management. 3. Regulation and supervision of banks and deposit-taking nonbanks: - Advance implementation of Basel requirements, including bank liquidity and Pillar 2. - Advance banks’ corporate governance reforms. - Strengthen regulation and supervision of deposit-taking NBFIs. 4. Regulation and supervision of insurance and retirement funds (IRFs): - Enhance enforcement of IRF regulations. - Develop a risk-based supervision framework with automated supervisory tools. - Introduce a risk-based solvency regime for insurers adequate to market conditions. 5. Financial, external, and government sector statistics: - Improve source data for other financial corporations (OFCs). - Compile monetary and financial statistics (MFS) and financial soundness indicators (FSIs) for OFCs and deposit-takers. - Expand MFS coverage for Other Depository Corporations to include deposit-taking NBFIs. - Improve international investment position statistics and government finance statistics. ### Other recommended continuity areas (outside FSSR process) - Continue work on: - Capacity building of the CBE Board. - Emergency liquidity assistance (ELA). - Liquidity forecasting and management. - Banks’ governance reforms and bank licensing framework. - Financial Market Infrastructures (FMIs), payments, remittances, Central Bank Digital Currency (CBDC). - Financial sector development, including capital markets, financial inclusion, gender, and climate. - Upskilling supervisors on international standards and emerging risks (cyber, crypto, climate) via: - Short-term secondments to regional supervisors. - Supervisory training at AFS and Africa Training Institute (ATI). - Self-study through BIS Financial Stability Institute Connect tutorials. ### Table 1: Eswatini FSSR — Key Recommendations (Selected highlights) - Time frames: ST – short-term, <6 months; MT – medium-term, <18 months; LT – long-term, <30 months. - Immediate legislative reforms, institutional coordination, and oversight capacity building: - After finalization of regulatory architecture changes, prepare amendments and new bills as a single package for incoming Government and Parliament (¶24, Tables 6 and 7). - Responsible: CBE-FSRA; Time Frame: ST. - Coordinate on financial stability and financial sector oversight, including TARM project management (¶25,27, Table 7). - Responsible: CBE-FSRA; Time Frame: ST. - Build supervisory capacity in oversight and enforcement of market conduct in capital market intermediaries and credit institutions (¶15, Box 2, Table 7). - Responsible: FSRA; Time Frame: ST. - Enhance NBFI offsite surveillance and forward-looking risk assessments (¶27-29, 62-63, Table 8). - Responsible: CBE-FSRA; Time Frame: ST. - Financial stability, macroprudential policy frameworks, and systemic risk monitoring: - Review and augment staffing of the CBE Financial Stability Unit (FSU) (¶28). - Responsible: CBE; Time Frame: ST. - Undertake thorough stocktaking of data availability, especially in NBFIs (¶29). - Responsible: CBE-FSRA; Time Frame: ST. - Develop criteria for D-SIFI designation (¶30). - Responsible: CBE; Time Frame: MT. - Develop a Risk Dashboard and overhaul the stress-testing framework (¶29,31). - Responsible: CBE; Time Frame: MT-LT. - Financial Safety Net and Crisis Management: - Run financial projections and scenarios for the Deposit Protection Fund (DPF) (¶45). - Responsible: CBE; Time Frame: ST. - Develop protocols for an interagency crisis management panel (¶32,34). - Responsible: CBE; Time Frame: MT. - Finalize procedures for emergency liquidity assistance (¶38,39). - Responsible: CBE; Time Frame: ST. - Update the CBE–SARB MoU with recovery and resolution planning and crisis management provisions (¶5a,35). - Responsible: CBE; Time Frame: MT. - Supervision and regulation of deposit-taking financial institutions: - Expedite pending conversion of a building society into a bank (¶23,65). - Responsible: MOF; Time Frame: ST. - Advance implementation of Pillar 2 in bank supervision (¶23,52). - Responsible: CBE; Time Frame: MT. - Advance banks’ corporate governance reforms (¶23,26,58). - Responsible: CBE; Time Frame: ST. - Strengthen regulation and supervision of deposit-taking NBFIs (¶23,61-62,64,66). - Responsible: FSRA; Time Frame: ST. - Implement bank liquidity requirements of Basel III in a proportional manner (¶13,53). - Responsible: CBE; Time Frame: MT. - Supervision and regulation of insurance and retirement funds: - Initiate without delay supervisory intervention of the beneficiary fund that left orphans without funds; find a financial solution to cover significant losses (¶15,75, Box 2). - Responsible: MOF-FSRA; Time Frame: ST. - Enhance enforcement of IRF regulatory compliance (¶67,75-77). - Responsible: MOF-FSRA; Time Frame: MT. - Develop IRF risk-based supervision framework with automated supervisory tools (¶68-69). - Responsible: FSRA; Time Frame: MT. - Introduce a risk-based solvency regime adequate to market conditions for insurers (¶70). - Responsible: FSRA; Time Frame: MT. - Financial, External, and Government Sector Statistics: - Improve source data for OFCs and compile MFS and FSIs for OFCs based on relevant IMF Manual/Guides (Annex I, ¶8-11). - Responsible: CBE-FSRA; Time Frame: ST. - Compile additional FSIs for deposit takers based on the 2019 FSIs Guide (Annex I, ¶4). - Responsible: CBE-FSRA; Time Frame: MT. - Expand MFS coverage of other depository corporations to include deposit-taking NBFIs (Annex I, ¶6). - Responsible: CBE; Time Frame: MT. - Improve international investment position and government finance statistics to enhance BSA matrix completeness (Annex I, ¶17-18). - Responsible: CBE-MOF; Time Frame: MT. --- ### I. INTRODUCTION — A. Scope of Work (summary) - Report prepared as part of the main FSSR mission conducted remotely and in-person during July 4-18, 2023; scoping discussions held April 26-28, 2023. - Main mission produced a broad diagnostic of key financial system segments and proposed a Technical Assistance Roadmap (TARM) to address capacity and vulnerability gaps. - Diagnostic topics: financial stability and systemic risk monitoring, macroprudential tools, financial safety net and crisis management, supervision and regulation of deposit-taking institutions, insurance and retirement funds, and financial sector statistics. --- ### I. INTRODUCTION — B. Overview of the Financial System (summary) - Eswatini’s financial sector: - Total assets: about 150 percent of GDP. - NBFIs: 78 percent of financial sector assets; 116 percent of GDP. - Over the past decade: NBFI asset share increased; commercial banks’ assets remained flat as a share of GDP. *Source: IMF Financial Sector Stability Review (FSSR) mission materials and diagnostic report prepared for the Central Bank of Eswatini and Financial Services Regulatory Authority, July 2023.* ### 4. The largest NBFI segment is retirement funds, which is dominated by the state and ### 4. The largest NBFI segment is retirement funds, which is dominated by the state and closely interlinked with capital markets intermediaries (CMIs) ### NBFI structure and retirement funds - Retirement funds account for 36 percent of financial system assets or 53 percent of GDP. - The segment is dominated by the state—more than 80 percent of retirement fund assets are held by the two state-owned pension funds. - About 70 percent of the assets managed by CMIs belong to retirement funds. - At the beginning of 2023, retirement fund assets amounted to about 36 percent of the total financial sector assets with over 50 percent exposure to equity. - Of total retirement fund assets, about one third is invested in ordinary listed shares on the JSE. - Domestic local investments by retirement funds constitute about half of retirement fund assets: - About 40 percent of the local investment portfolio (or 20 percent of total assets) are fixed income instruments maturing after 12 months. - Of those local fixed income instruments, 86 percent are invested in government securities, parastatals, and in NBFIs, including insurers and reinsurers. - Exposure to government by the dominant nonbank segment (retirement funds) is at par with banks’ holdings of government securities, i.e., about 17 percent of total assets. - Retirement fund membership demographic: average age 42.9 years. ### Financial institutions, licensing, and supervision - Commercial banks, licensed by the CBE: 5. - Government owned: 1 (10% market share). - South African bank subsidiaries: 3 (market shares 35%, 30%, and 25%). - Farmers Bank (Pty) Ltd. noted as licensed but undergoing restructuring (licensed in 2018, revoked 2020, reinstated 2021). - NBFIs and supporting entities, licensed by the FSRA: 511 total. - Credit and Savings Institutions: SACCOs 62 (90% by 10 SACCOs); Building Societies 2 (93.7% and 6.3%); Other nonbank credit institutions 135 (80% by 2 CIs); Debt counsellors 1. - Insurance: Short-term insurers 6 (60% by top insurer); Long-term insurers 7 (58% by 2 insurers); Composite insurers 1; Reinsurance firms 2; Insurance brokers 34; Micro-insurers 2; Medical Schemes 3; Corporate agents 35; Individual agents 107. - Retirement Funds: Local retirement funds: 84% by 4 statutory funds; Standalone funds 40 (8% by 12 funds); Umbrella funds 14 (6% by 6 funds); Beneficiary funds 3; Foreign retirement funds 20; Fund administrators 8. - Capital Markets Intermediaries (CMIs): Investment advisors 12 (43% by top advisor); Collective investment scheme managers 5 (88% by 2 managers); Securities brokers 1; Trustees 3; Exempt dealers 1. - Financial Markets Infrastructures (FMIs): 6 (including RTGS (SWIPSS) 1; SAECH 1; Central Securities Depository 1; Credit Bureaus 2; Stock Exchange 1). - Supervisory arrangements: - Three South African bank subsidiaries must meet SARB supervisory and regulatory requirements. - The CBE has an MoU with SARB and participates in supervisory colleges convened by SARB every two years. - The SARB MoU does not require the subsidiaries of the three South African banks to develop recovery and resolution plans. - FSRA—situated under the MOF—oversees NBFIs. ### Financial markets and government securities - Financial markets are shallow and dominated by government securities. - Outstanding debt securities (in percent of GDP): 2015: 7; 2016: 9; 2017: 12; 2018: 16; 2019: 18; 2020: 19; 2021: 21; 2022: 21; 2023Q2: 20. - Government portion of outstanding debt securities (in percent of GDP): 2015: 6; 2016: 8; 2017: 10; 2018: 14; 2019: 16; 2020: 19; 2021: 19; 2022: 19; 2023Q2: 18. - Corporates portion of outstanding debt securities (in percent of GDP): 2015: 1; 2016: 1; 2017: 2; 2018: 2; 2019: 2; 2020: 2; 2021: 2; 2022: 2; 2023Q2: 2. - Stock market capitalization (in percent of GDP): 2015: 5; 2016: 6; 2017: 6; 2018: 6; 2019: 6; 2020: 6; 2021: 6; 2022: 6; 2023Q2: 5. - About 8 percent of NBFI assets, and 17 percent of bank assets, are held in government securities. - Overall, government domestic debt is mainly on balance sheets of banks and nonbanks; exposure accounts for about 10 percent of total financial sector assets. ### Macrofinancial outlook and risks - Near-term outlook: Real GDP projected to grow by 3.2 percent in 2023; inflation to stabilize at around 5–6 percent. - Downside risks: - Ongoing economic challenges in South Africa. - Prospective impact of El Nino on agricultural output, food prices, and food security. - Dampening effects of high inflation on disposable income. - High interest rate environment impacting new investments, corporate balance sheets (via higher debt service), and potentially higher NPLs in financial institutions. - Systemic risks from dependence on South Africa: - Revenue transfers from SACU are essential for fiscal income. - Peg of the Eswatini lilangeni to the South African rand increases vulnerability to rand exchange rate fluctuations. - Presence of three large South African commercial banks increases dependence on South Africa. - Power generation difficulties, load shedding, volatile commodity prices, and challenging external environment have contributed to South Africa’s weaker growth performance, posing spillover risks to Eswatini. ### Monetary policy and interest rates - Following SARB tightening, the CBE raised its discount rate by a cumulative 400 basis points, reaching 7.75 percent in May 2023. - Inflation uptick: 6.1 percent in April 2023, driven mainly by housing and utilities prices. ### Household vulnerabilities and credit quality - Rising interest rates affect households disproportionately because loans at flexible interest rates dominate. - Potential consequences: reduced consumption, depressed GDP growth, loan defaults, weakening lenders, higher NPLs. - Current indicators: - Four commercial banks do not yet show a decline in household credit quality. - Swaziland Building Society (SBS) has relatively higher NPLs (mostly housing loans) and is of concern. - Anecdotal evidence indicates households may be using non-collateralized borrowing from NBFIs (micro-credit and micro-finance companies) to meet increased bank interest payments. - Recommendation in text: expand analysis to include household lending data from all NBFIs and closer monitoring of household NPLs across the financial system, especially housing and non-collateralized loans. ### Bank and building society health - Banks: - Appear liquid and well-capitalized following improvements in CBE supervisory approach and regulatory framework. - Bank NPLs appear to be rising to pre-pandemic levels and average around 8 percent with provisions about 50 percent as of March 2023. - Building societies: - Have much higher NPLs and much lower provisions than banks. - Capital adequacy data for building societies requires further verification. ### Deposit concentration and liquidity risks - Top 20 bank depositors account for about 45 percent of total bank deposits, signaling potentially heightened liquidity risks. - Identified gaps in liquidity risk analysis and oversight in the diagnostic. ### SACCOs and sector stress - SACCO institutional capital ratio almost doubled in the last three years from a relatively low basis of 5 percent in 2020; still short of the 8 per cent required by the FSRA. - SACCO NPLs appear to be rising from a low level while provisions are getting lower. - Increasing trend in liquidation of SACCOs in the last five years reconfirms deteriorating sector health. - Historical liquidations: Temnotfo Credit and Savings Co-operative was closed and liquidated in 2018 after being determined deeply insolvent; depositors suffered losses. One additional SACCO entered compulsory liquidation more recently and another requested voluntary liquidation. ### Risks in retirement funds from underfunding and external exposures - Delayed government contributions to defined-benefit pension plans have resulted in underfunded retirement funds. - To close funding gaps, retirement funds have engaged in a search for yield and taken more investment risk. - Such strategies can be detrimental to a retirement fund in a mature or closed state with cash outflows higher than income; recent materialization: a significant loss by a beneficiary fund. - Collapse of the ESW collective investment scheme (former Ecsponent Limited) resulted in losses for a beneficiary fund amounting to 80 percent of its assets. ### Insurance sector - Insurance sector is small and profitable. - Assets at end-2022 amounted to 5 percent of total financial sector assets. - Solvency requirement: insurers must hold more assets than liabilities—thus all insurers have positive equity. - Sector profitability: double digit returns on equity in 2022. - Long-term insurers ROE: 11 percent in 2021 rising to 24 percent in 2022. - No catastrophe insurance. - Selected insurance indicators (percent): - Short-Term Insurers 2022: Claims ratio 28; Gross claims ratio 24; Expense ratio 44; Investment income ratio 7; Investment income / average invested assets 5; Combined ratio 72; Operating ratio 65; Profitability ratio 31; Return on equity (ROE) 27; Return on assets (ROA) 13; Risk retention ratio 57; Reinsurance recoveries + reinsurance commissions ratio 28. - Long-Term Insurers 2022: Claims ratio 72; Gross claims ratio 71; Expense ratio 27; Investment income ratio 14; Investment income / average invested assets 3; Return on equity (ROE) 24; Return on assets (ROA) 3. - Long-Term Insurers 2021: Claims ratio 83; Gross claims ratio 87; Expense ratio 41; Investment income ratio 42; Investment income / average invested assets 8; Return on equity (ROE) 11; Return on assets (ROA) 4. ### Interlinkages between banks and NBFIs; contagion and monitoring needs - Interlinkages appear weak: - Bank loans to NBFIs are about 1 percent of total bank loans. - NBFI deposits in banks account for about 11 percent of bank deposits. - Retirement funds place less than 1 percent of assets in bank (and building society) deposits. - Insurers’ exposure as a percentage of total market equity is less than 5 percent, with one exception where exposure is double digits and should be monitored. - Recommendation in text: further analysis of interlinkages between banks and NBFIs, including contagion channels, should be conducted regularly. ### Digital financial innovation and fintech risks - Rapid growth in mobile payments provided by two mobile operators and two fintech companies; focus on retail payments. - Mobile operators and fintechs required to deposit money held in customers’ mobile wallets in trust accounts with commercial banks (below 5 percent of total bank deposits) and are not authorized to extend credit. - Micro credit firms use digital platforms offered by mobile operators for lending. - Mobile operators and fintechs have served the unbanked and underbanked and fostered financial inclusion. - The fintech sector is growing rapidly; attendant risks, including operational risks, require close monitoring. *Source: tarea2024030 — IMF PDF chapter/section content.* ### 22. The Eswatini authorities have received considerable technical support from the IMF ### 22. The Eswatini authorities have received considerable technical support from the IMF ### IMF and other TA delivered (focus and timeline) - Focus of IMF MCM TA in the last five years: strengthening bank and NBFI supervision and regulation, central bank governance, liquidity management, and financial market infrastructures (Table 5). - World Bank assistance: payment and remittance systems, credit information sharing, and financial inclusion. - Selected IMF MCM TA entries (2018–2023) as reported: - FY23-24: AFS/ CO (tbc) FY24 Liquidity Forecasting and Management – follow up (Planned) - FY23-24: AFS/ CO (tbc) FY24 Emergency Liquidity Assistance (ELA) (Planned) - FY23-24: AFS/ FR (tbc) FY24 Banks’ Governance Regulatory Reform - Drafting (Planned) - TA July 4-18, 2023 Main FSSR mission (Completed) - TA Apr 26-28, 2023 Scoping FSSR mission (Completed) - AFS/ PI Apr 24-28, 2023 Oversight of payment service providers (Completed) - CO Oct – Nov 2022 CBE Strategic Planning Apr 2023 – March 2028 (Completed) - FC November 2022 Establishing a Deposit Insurance Scheme (Completed) - AFS/ FR October 2022 Banks’ Governance Regulatory Reform - Framework assessment and reform planning (Completed) - FY22: AFS/ PI 09/01-08/21 Finalization of PFMI Review Report (Completed) - FY22: CO/ LEG/ AFR 07/13-16/21 Central Bank of Eswatini Board Workshop (Completed) - FY22: AFS/ CO 05/10-09/03/21 Liquidity Monitoring and Forecasting (Completed) - FY19-21: TA 2/8-9/2021 NBFIs Supervision - Insurance and Retirement Funds (Completed) - CO 2/6-16/2021 Liquidity Forecasting Framework (Completed) - AFS/ PI 1/14-25/2021 Feedback on revised FMI Assessments (Completed) - FR 12/30/2020 WAH - NBFIs Supervision Capital Markets (Completed) - AFS/ FR 12/7-18/2020 Bank Licensing Framework (CBE) (Completed) - FR 2018 to 2020 NBFIs Supervision Capital Markets, Insurance and Retirement Funds, Credit and Savings Institutions (Completed) - Source for TA activities: IMF database of TA activities. ### Implementation status and remaining gaps - Progress: - CBE and FSRA have implemented many TA recommendations, including strengthening Basel II implementation and supervision of NBFIs. - Critical pending items: - Bank governance reforms, notably for the government-owned bank. - Updating the CBE risk management guidelines. - Planned conversion of the largest building society into a bank is pending with no clarity on timelines or a precise action plan. - Effective supervision of building societies and SACCOs remains work in progress, including onsite and offsite monitoring and supervisory data quality and availability. - Corporate governance, internal controls, risk management, and compliance in the NBFI sector need further strengthening; oversight of asset managers and investment funds needs enhancement—evidenced by recent failures in SACCOs, regulatory breaches by building societies, and fraud by asset managers. - Notes on implementation assessment (Figure 9): - For FMIs, FinTech, Payments and CMIs the implementation status is self-assessed by the authorities. - For other topics, implementation status is self-assessed and verified by the FSSR diagnostic mission. - Implementation status of Banks’ Governance Regulatory Reforms and Establishing a Deposit Insurance Scheme is largely explained by the relatively recent TA delivery – October and November 2022, respectively. ### Outstanding legislative reforms (priority actions) - Little progress has been made on passage of legal reforms that were designed with MCM TA support; expediting passage should be a priority for the next parliamentary session. - Authorities should consider presenting amendments and new bills as a single package to Cabinet and Parliament after the 2023 elections and assess any need for updating of texts prepared over a year ago. - Outstanding draft bills and amendments (as listed): 1. Amendments to the Central Bank of Eswatini Act (1974) - Main objective: To modernize the central bank’s functions - Additional consideration: Consult IMF MCM and Legal Departments on any missing elements. 2. Financial Stability Bill - Main objective: To establish the financial stability framework—macroprudential policy and crisis management, resolution, safety net - Additional consideration: Consult IMF MCM and Legal Departments on any missing elements. 3. Amendments to the Financial Institutions Act (2005) - Main objective: To strengthen legal, regulatory, supervisory, and resolution frameworks in line with Basel Core Principles and FSB Key Attributes - Additional considerations: Draft FIA amendments propose mitigating lacunae in bank oversight and must be enacted quickly; consider consulting IMF Legal Department (LEG). 4. Amendments to the Financial Services Regulatory Authority Act (2010) - Main objective: To strengthen legal, regulatory, and supervisory frameworks for nonbank financial institutions in line with international standards; enable FSRA to become a signatory of the IOSCO multilateral MoU - Additional considerations: Include provisions for reporting obligation of court-appointed administrators to the FSRA; powers to supervise holding companies and outsourced activity; a cooling off period for senior management leaving FSRA; legally stronger powers for Ombudsman. 5. Amendments to the Insurance Act (2005) and corresponding regulations - Main objective: Enhance safety and soundness of insurance firms and promote access to insurance products - Additional consideration: Include powers for FSRA to supervise holding companies and outsourced activities. 6. Amendments to the Retirement Funds Act (2005) and corresponding regulations - Main objective: Strengthen legal, regulatory, and supervisory frameworks for retirement funds - Additional consideration: Grant FSRA power to supervise holding companies and outsourced activities. 7. Amendments to the Building Societies Act (1962) and corresponding regulations - Main objectives: Facilitate building societies to obtain banking license; strengthen legal, regulatory, and supervisory frameworks for building societies - Additional consideration: The Building Societies Act is archaic; urgent need to enact the new act and regulations drafted under the FIRST Technical Assistance on the NBSI Supervision. 8. Savings and Credit Cooperatives Bill and corresponding regulations - Main objective: Establish legal, regulatory, and supervisory frameworks as there is no sectoral law - Additional consideration: MOF had initiated drafting but it has not reached a logical conclusion; urgent need to engage an expert consultant to redraft the bill and regulations. 9. Amendments to the Securities Act (2010) and corresponding regulations - Main objective: Upgrade legal, regulatory, and supervisory frameworks for securities markets - Additional consideration: Consult IMF Monetary and Capital Markets Department on any missing elements. ### Regulatory architecture, coordination, and interim measures - Integration plans: - Expected changes in regulatory architecture—integration of CBE and FSRA oversight responsibilities—will require legal amendments that should ideally be included in the legislative package. - Integration appears to be progressing in line with the government’s SOE reform plan, though timelines and final organizational structure lack clarity. - IMF staff stand ready to assist. - Interim coordination measures recommended: - CBE and FSRA should enhance coordination on financial stability by: - Reinvigorating technical cooperation (e.g., resume quarterly Macroprudential Technical Committee meetings paused during the pandemic). - Establishing a joint project management for implementation of the TA Roadmap (TARM) proposed by the FSSR diagnostic. - Working jointly on technical matters and considering a joint legislative package for Cabinet and Parliament in 2024. - Operational interim step: Launch a Financial Stability Panel (FSP) based on a multilateral MoU, not awaiting passage of the Financial Stability Bill; meetings should occur regularly (e.g., quarterly) and confidentiality must be preserved. ### Diagnostic review — main recommendations (selected) - Six priority areas to continue working with IMF and partners, identified by the FSSR diagnostic: (i) capacity building of the CBE Board under the CBE Strategy reset started in August 2022; (ii) ELA operationalization; (iii) CBE liquidity forecasting and management; (iv) banks’ governance regulatory reform; (v) Financial Market Infrastructures (FMIs), payments, remittances, CBDC; (vi) financial sector development, including capital markets, financial inclusion, gender, and climate. - Current support mapping: - Four areas supported by MCM HQ and AFRITAC Central Bank Operations (CO) and Financial Sector Regulation and Supervision (FR) resident advisors. - Area (v) supported by AFRITAC Payments, Currencies, and Infrastructures (PI) resident advisor and the World Bank’s Eswatini Financial Sector TA program 2023-24 on National Payments System (NPS) and Credit Reporting Systems. - Area (vi) could be covered under the WB FSAP Development Module and WB Eswatini Climate Change Development Report; the FSAP Development Module has been requested by the authorities from the WB and the Climate Change report is in the WB’s plan for FY24. ### Macroprudential policy framework and systemic risk monitoring (diagnostic recommendations) - Institutional arrangements: - Press ahead with enhanced cooperation between CBE and FSRA irrespective of oversight integration timing. - Reinvigorate the Macroprudential Technical Committee including FSRA and CBE Banking Supervision Department for technical deliberations. - Give FSRA a more defined role in Financial Stability Report (FSR) production—e.g., FSRA Research Department to produce the NBFI section using FSRA Quarterly Statistical Bulletin data. - Preparing for expanded macroprudential mandate: - Adoption of the Financial Stability Bill is important to establish a comprehensive macroprudential framework. - Consider organizational changes: CBE could create a new FSU deputy head; over time transform FSU into a Financial Stability Department with dedicated divisions. - FSRA should build resources proportionate to expected macroprudential role, e.g., enhance NBFI offsite surveillance and forward-looking risk assessments. - Systemic risk monitoring: - Undertake a thorough stocktaking of data availability, especially on NBFIs, and revise reporting templates as needed. - Develop a Risk Dashboard in the CBE FSU including relevant NBFI indicators and contagion-risk indicators considering interconnectedness with South Africa. - Recognize that building the Risk Dashboard is a long-term engagement requiring longer time series. - Operationalizing macroprudential policies: - Develop criteria to guide D-SIFI designation (use draft bill guidance). - Involve FSRA in identifying Domestic Systemically Important Financial Institutions (D-SIFIs) in nonbank segments. - Implement macroprudential policy gradually, starting with borrower-based tools targeting household indebtedness (e.g., codify Loan-to-Value (LTV)-based frameworks); consider broad-based capital instruments later. - Stress testing: - Overhaul and strengthen CBE stress testing framework and expand to include NBFI sector. - Revamp solvency stress tests and capture NBFIs. - Strengthen top-down stress testing by elaborating macrofinancial scenarios and developing satellite models; include nonbanks given their large share and interconnectedness. ### Financial safety net and crisis management (diagnostic recommendations) - Institutional arrangements: - Launch an FSP via multilateral MoU as an interim measure until codification in law; MoU should address interagency coordination protocols. - FSP should meet regularly at prescribed minimum frequencies (e.g., quarterly). - Preserve confidentiality throughout crisis coordination. - Structural separation: - Adopt measures to structurally separate safety net and crisis management functions: CBE currently provides ELA, supervises banks, acts de facto as resolution authority, and will manage the proposed deposit protection fund. - FSU houses resolution authority and deposit protection functions but without dedicated staff; CBE advised to implement organization plans with structural separation in mind. *Source: IMF staff mission findings and IMF database of TA activities.* ### 34. Make the FSP the primary platform for crisis communication messaging. The CBE ### tarea2024030 - 34. Make the FSP the primary platform for crisis communication messaging. The CBE ### Crisis communication and Financial Stability Platform (FSP) - The CBE has a Strategy and Communications Department responsible for bank-wide communication, but it does not presently have a crisis plan. - A crisis communications plan for the recommended FSP is a necessary element of promoting financial stability through a transparent presentation of the state of the financial system and of the government responses in process or contemplated. - Reference frameworks and prior work cited: Adrian, Morsink, and Schumacher, 2020; Bank of Canada Working Paper 2013-41. ### Memorandum of Understanding (MoU) with SARB - Update the CBE-SARB MoU to include recovery and resolution planning and crisis management. - The existing MoU was signed in early 2010 and predates many recent best practices for resolution and crisis management. - Leverage progress from SARB directives on recovery plans at the three South African bank subsidiaries in Eswatini to allow CBE to develop an independent recovery plan protocol. - The MoU could address cooperation and simulations for instability of an Eswatini-based subsidiary of a South African banking group or the home banking group itself. ### Recovery and resolution planning — Banks and deposit-taking NBFIs - Develop recovery and resolution plans for Eswatini Bank and Swaziland Building Society (SBS). - Eswatini Bank is a logical starting point given government ownership and control, and cross-border banks’ more advanced state in formalizing plans. - CBE and MOF cooperation can develop templates before the mandate for these plans is approved under law. - For deposit-taking NBFIs, the FSRA should: - Request recovery plans from SBS based on existing powers. - Draft resolution plans for SBS, noting an existing plan for its conversion into a bank. ### Recovery and resolution planning — Retirement Funds (RFs) - Require and enforce recovery plans for underfunded RFs. - Public RFs are underfunded and operating outside regulatory requirements. - The FSRA Defined Benefit Retirement Fund Funding Guideline 2/2020 requires strict supervisory measures when a retirement fund is underfunded. - The Public Sector Pension Fund (PSPF), the largest RF, has remained underfunded for several years. - The PSPF’s latest Annual Report (2022) indicates a funding gap of 20 percent. - Given RF asset valuation does not follow IFRS 9, there is uncertainty about assets’ value and the actual funding gap. - FSRA is advised to request recovery plans from all RFs and prepare and enforce resolution plans for RFs, starting with underfunded public RFs. ### Emergency Liquidity Assistance (ELA) - Develop supporting documentation for ELA consisting of separate public instructions and confidential, internal procedures. - Public instructions should address objectives, conditions, and parameters of ELA. - Solvency (and secondarily viability) should be defined on a forward-looking basis. - Internal ELA guidelines should complement public instructions and describe task allocation, internal processes, organizational considerations, and technical indicators (e.g., priority order for selection of ELA collateral). - The CBE has faced a low availability of reserves to respond in an emergency; internal procedures should address this. - Address the option for providing ELA in resolution as part of any procedures in a revised framework under the amended CBE Act. - Procedures should detail preconditions under which lending can be pursued in resolution and an exit strategy from the emergency liquidity extension. ### Failure resolution — Banks - Deploy Purchase & Assumption (P&A) as the primary resolution tool, complemented by bridge bank as an alternative, once the amended Financial Institutions Act (FIA) is adopted. - Operationalize transfer of assets and liabilities resolution tool (FIA Section 89). - Use bridge bank (FIA Section 90) only if no buyer is willing to participate in a full/partial sale and liquidation could pose financial stability risks. - Apply an asset management vehicle (FIA Section 91) and bail-in (FIA Section 92) in specialized circumstances. - Assign dedicated staff to resolution and Deposit Protection Fund (DPF) and have a pop-up resolution function to increase staffing during a crisis. - Start-up of a resolution function and a DPF requires commitment of resources for infrastructure and technical capacity. - Committed staff should initiate work on resolution plans and resolution procedures. - Consider shared services contracts with the formation of the DPF. - Note: There are no plans for the DPF to harmonize or merge operations with other jurisdictions in the Common Monetary Area, but there is overlap in member institutions. - Develop a resolution manual once the new resolution regime is in place. - The manual should set out policies and procedures, decision points, contingency procedures, and incorporate policies adopted by decision-making bodies of the CBE. ### Failure resolution — Insurers and Retirement Funds - Enhance liquidation regulation of retirement funds and insurers to accompany the process and protect consumers per supervision objectives. - The appointment of a curator under the FSRA Act and/or a judicial manager under the Retirement Funds Act provides FSRA control, but curator rules and powers have yet to be issued. - Issue rules and powers for appointed curators to ensure technical aspects and consumer protection requirements are followed. - Members of a retirement fund under judicial winding up should be treated as preferred creditors rather than deferred ones. - Enact the draft amendment to the Insurance Act to allow the FSRA Act to provide for appointment of a curator and/or liquidator for insurers. - Develop and enact adequate regulation to close or dissolve participating retirement funds operating under an umbrella fund. - Closing participating funds should be dealt with under umbrella fund regulation, require cost-efficient approaches, and ensure consumer protection compliance. - For participating funds under an insurance policy, follow a similar process as the cancellation of an insurance policy. ### Deposit Protection Fund (DPF) - Run financial projections and scenarios, utilizing stratified depositor data, and explore options to build seed capital. - Undertake projections over at least a 10-year period during which the target level fund would be built. - Consider sources of funding for building the fund, including from the MOF and potentially donors. - Run alternative, pessimistic scenarios, including a bank failure scenario to test DPF resiliency. - Develop a system of depositor compensation that is a fully automated process which can compensate protected depositors within seven business days consistent with the Deposit Insurance Core Principles (DICP). - There is no current mandate for timeliness under the amended FIA for reimbursement. - Consider various payment methods and technologies. - Do not include members of the industry in the DPF governing board due to conflicts of interest and confidentiality considerations. - Under the amended FIA the DPF Board of seven members is to include two representatives from member institutions appointed by the Bankers’ Association. - Best practice recommends against industry participation on the governing board; an advisory board of industry representatives is an alternative. - Agree emergency funding arrangements for the DPF through the MOF. - Back-up funding should be operationalized between the CBE and the MOF. - The MOF has not indicated willingness to provide a borrowing facility to the DPF. - The CBE should not provide emergency funding, as funding of the DPF is a fiscal responsibility and lending would draw resources away from CBE core operations. ### Financial Crisis Management - Formalize all crisis management-related procedures into a Financial Crisis Management Binder (FCMB). - Develop a census of existing crisis management documents, determine gaps, and develop lacking procedures. ### Supervision and regulation of deposit-taking financial institutions — Banks - Complete outstanding legislative and regulatory reforms to facilitate benchmarking of the Eswatini banking system to international standards and good practices; implement via a roadmap on a project mode basis. - Conduct a comprehensive self-assessment against the Basel Core Principles for Effective Banking Supervision (BCP). - The March 2003 self-assessment did not involve a granular assessment of each principle. - Complete expeditiously the implementation of Pillars 2 and 3 of Basel II. - Ensure comprehensive coverage of risks under Pillar 2 and harmonize Risk Appetite statements with banks’ business strategies. - Prescribing additional capital for Pillar 2 risks after SREP requires approval from the Finance Minister; amendments to the FIA are required. - Enhance Pillar 3 disclosures, especially risk dashboards and qualitative disclosures. - Formulate and implement a roadmap for select elements of Basel III, especially liquidity requirements, in a calibrated manner. - Priorities include: (i) develop bank contingency funding plans; (ii) undertake a quantitative impact assessment (QIS) of introducing the Liquidity Coverage Ratio; (iii) implement longer-term plans to diversify bank funding sources. - Devote more attention to IFRS implementation, especially IFRS 7, 9, and 13. - Implementation depends on IT systems, data, and expert knowledge of statistical modelling. - Enhance CBE supervisors’ skills for validation of Expected Credit Loss (ECL) models under IFRS 9 and analysis of IFRS 7 and IFRS 13 disclosures. - Finalize the early intervention framework and undertake prompt corrective actions to enable supervisors to identify banking sector challenges and mitigate risk build-up. - Revise business continuity and disaster recovery planning requirements with greater prescription, ensuring staff know precise roles during disruptions to meet BCBS principles on operational resilience. - Revamp risk management guidelines (issued 2009) to incorporate emerging risks such as cyber risk and climate risk. - Continue implementing governance reforms for banks: - Revise 2017 Corporate Governance guidelines based on BCBS Corporate Governance Principles for banks (2015). - Enhance the role of Chief Risk Officer in banks. - Strengthen the 2021 Fitness and Probity Guidelines and respective disclosure. - Formulate a policy framework on related party transactions covering identification, approval, reporting and disclosure, compliant with BCP 20 and International Accounting Standard 24. - Introduce legal and regulatory reforms to strengthen AML/CFT compliance and effectiveness in response to the 2022 Mutual Evaluation by the Eastern and Southern Africa Anti-Money Laundering Group. ### Deposit-taking NBFIs — Cross-sector recommendations - Strengthen regulation and supervision of deposit-taking NBFIs irrespective of integration progress and legislative reforms. - FSRA should introduce sectoral regulations for building societies and SACCOs based on existing powers and prior TA recommendations, not waiting for passage of draft bills or outcomes of oversight integration. - Enhance quality of data submission and develop analytical tools for offsite surveillance and forward-looking risk assessments. - Current data integrity and validity are compromised and should be assured. - Analytical tools will support forward-looking risk assessments and profiling of supervised entities. *Source: tarea2024030 (IMF PDF chapter/section).* ### 63. Optimize the use of supervisory data to identify early emerging risks. The FSRA ### 63. Optimize the use of supervisory data to identify early emerging risks. The FSRA ### Supervisory data and early warning - The FSRA should work with the supervised entities to improve the quality of data used in regulatory reporting and strive to use new techniques and analytical skills for developing early warning indicators. - The use of RegTech is cited as an example that can significantly improve regulatory reporting. ### Building Societies - Building societies should be regulated and supervised more rigorously. - Prudential norms should be put in place. - The Building Societies Act and regulations should be adopted and implemented in a fast-track mode. - Expedite the pending conversion of a building society into a bank to increase clarity and ensure viability and contribution to financial inclusion efforts. ### Savings and Credit Cooperative Organizations (SACCOs) - SACCOs should be regulated and supervised more rigorously while considering their consolidation. - SACCO inspections should follow proportionate, risk-based procedures to better allocate staff resources and capture risks. - The adoption of the new SACCO law and regulations should be expedited. - Improve governance structure in the sector through a structured and systematic approach to building capacity of SACCO directors. - Given SACCOs serve largely underserved segments, consider consolidation rather than closing and liquidating weaker SACCOs to preserve financial inclusion and improve viability. ### Supervision and regulation of insurance and retirement funds — overarching actions - Enact the amendments to the Insurance Act and the Retirement Funds Act together with the corresponding amended regulations as a priority. (Final drafts were submitted for approval by the MOF in 2020; additional revision is required given market developments and regulatory architecture changes.) - Assess the adequate level of resources needed for effective supervision of insurance and retirement funds and build up the staffing of the FSRA IRF department. - The IRF department is responsible for 90 legal entities and 107 individual agents in the insurance sector and 85 legal entities active in the retirement fund sector. - The IRF department is currently staffed by 10 persons and has 5 vacancies. - These human resources allow for 3 to 5 annual inspections only, leaving a large number of licensed entities without an inspection for several years. - Current tools supporting supervision require manual data entry before any assessment of the findings can be done. - Enhance the use of the supervision manuals by providing capacity building and developing supportive supervision tools. - Develop supervisory tools that automatically guide the supervisor to areas of concern and the application of an adequate level of supervisory intensity. - At a minimum, develop and use a risk profiling tool and an early warning system. ### Insurance — prudential framework and sectoral gaps - Continue gradual implementation of Solvency 2 adapted to market capacity to enhance the prudential regulatory framework. - Work had been carried out over several years toward Solvency 2; since 2021 no further advancement due to consultations indicating the market is far from ready. - A gradual introduction of a risk-based capital regime that considers prevailing market conditions and capacity remains a priority. - Develop regulations for the operation of specialized insurance pools in accordance with international good practices to cover disaster risks, especially in agriculture. - Agriculture contributes 8 percent of GDP (2021). - Other economic activities accounting for 32 percent of GDP are closely related to agriculture. - Agriculture provides employment to 12 percent of the labor force with the agriculture-related industry employing an additional 23.5 percent (2020). - At the end of 2022, agriculture insurance is reported to have collected 500 USD in premium only. - Insurance against hydrometeorological hazards (seasonal flooding, drought, violent storms, forest fires) is non-existent in the market; insurance pools would help exhaust local capacity and attract international reinsurers. - Group-wide supervision needs to be developed following Insurance Core Principles. - Supervision is currently carried out at legal entity level; no group-wide supervision framework (as required by ICPs 23 and 25) is in place. - Risks that can go unnoticed include double gearing of capital, contagion risks, reputational risks, and ineffective intragroup reinsurance or coinsurance agreements. - For cross-border groups, communication exists with relevant supervisors, but no crisis arrangements are in place. ### Reinsurance supervision and regulatory actions - Enhance reinsurance supervision; a comprehensive reinsurance supervision framework is currently not part of the FSRA insurance supervisory framework. - In line with the 2021 Reinsurance Bill, issue a reinsurance guideline including the following requirements and actions: - Any reinsurer active in the country should be registered. Registration requirements could include an annual good standing letter from the home supervisor, and minimal credit rating. - The FSRA should enter into MoUs with the regulators where the critical reinsurers active in Eswatini are domiciled to be able to get supervisory confidential information on the reinsurer if needed. - Insurers should be required to request from the reinsurer examples of claims and the protection effect and, if pertinent, make them available for the FSRA to better assess the effectiveness and impact of complex contracts. - To avoid inappropriate use of reinsurance to reduce reserve requirements, a minimum risk transfer threshold should be required and, for relevant reserve relief volume, proof of the test calculation should be requested by the FSRA. ### Retirement funds — regulatory gaps and enforcement - Develop and enact the regulation of beneficiary funds. - Regulation of beneficiary funds is non-existent but three of these funds have been licensed. - These funds were allowed to submit annual reporting rather than the quarterly reporting requirement set out in the Act, creating regulatory ambiguity that was misused (see Box 2). - Regulation should consider appropriate levels of investment risk and liquidity of assets according to the function of beneficiary funds (e.g., providing income to underage orphans). - Timely appointment of a curator or judicial administrator in presence of critical misconduct. - Appointment of a curator or a judicial administrator in presence of critical misconduct in a beneficiary fund has not been undertaken in a timely manner. - Using powers vested in the FSRA and following its Intervention Policy of 2016, the appointment of a curator and/or a judicial administrator is legally permissible once misconduct or violation is uncovered to protect IRF members and restore proper behavior. - Enforce compliance of sponsors with timely and complete payment of committed contributions to retirement funds. - FSRA has difficulties enforcing sponsor compliance, leaving members with reduced retirement income and unearned investment returns. - Consider introducing interest charges on overdue contributions as well as name and shame measures as part of enforcement efforts. ### Boxed case findings and analytical inputs (selected) - Retirement Fund regulatory gaps and enforcement weaknesses affecting the public (Box 2): - A beneficiary fund violated regulatory requirements, leading to the loss of over 80 percent of the trusted funds, which were all placed in one investment management firm that vanished. - The remaining 20 percent of the original fund was invested in a high risk and illiquid related party instrument of the fund’s administrator. - The situation led to a loss of all the funds around E 80 million. - Investments guidelines for beneficiary funds, limits on related party investments, and reporting frequency are yet to be enacted as part of the amendments to the Retirement Funds Act. - Evidence of misconduct and imprudent behavior of the beneficiary fund administrator and trustees remains to be dealt with; the fund still operates accepting new business. - Existing regulation requires retirement funds to have 100 percent funding ratios; several defined-benefit funds continue operating underfunded — in one case with as low as a 9 percent coverage ratio — resulting in liquidity issues. - Source: Mission’s findings. - Drought recurrence and severity (Box 3): - A Standardized Precipitation Index (SPI) from six meteorological stations and Python software (Version 3.6) predicted drought recurrence. - Highveld: 42 precent of droughts were moderate, 32 percent were severe and 26 percent were extreme (SPI -2.34 to -2.82). - Middleveld: even proportion of drought categories (29–35 percent). - Lowveld: 62 percent moderate, 8 percent severe and 30 precent extreme droughts of which 70 precent occurred post 2000. - Moderate droughts recur every 4–5 years; extreme droughts expected every 13–21 years. - Consequences of severe recent droughts left 25 percent of the population vulnerable and acknowledged as food and water insecure. - Sources cited in text. ### Technical Assistance Roadmap (TARM) — planning and priorities - TARM was developed in cooperation with the authorities and in consultation with IMF departments to build capacity to address risks and vulnerabilities in the financial system. - TARM proposes a medium- to long-term TA program with prioritized actions for the next three years. - The TARM integrates: - Key Vulnerability/ Gap in Oversight. - Recommendation. - TA Activity: indication whether TA delivery is “needed” or “not needed”. - Responsible Agency. - Priority: high, medium, low. - Timeframe: short-term (ST), medium-term (MT), long-term (LT). - Prerequisites for TA activities. *Source: Mission’s findings.* ### 80. The priority TA—a subset of the TARM that can help the authorities bridge ### 80. The priority TA—a subset of the TARM that can help the authorities bridge identified capacity gaps in pursuing the key recommendations listed in Table 1—can be summarized as following: ### Immediate priority TA - Immediate priority TA to help implement: - (i) preparing amendments to the existing acts and new bills as a single package for the approval and adoption by the newly elected Parliament; - (ii) strengthening supervisory capacity in oversight and enforcement of market conduct in CMIs and CIs; - (iii) enhancing NBFI offsite surveillance and forward-looking assessments of risks. - Required characteristics: - Request the TA as the priority, not waiting for the diagnostic to complete its course. - Completion timeframe labels used throughout: ST – short-term, less than six months; MT – medium-term, with results around 18 months; LT – long-term, with results around 30 months. ### Priority TA by diagnostic area - (i) Financial stability, systemic risk, macroprudential frameworks and tools, including stress testing: - Undertake a stocktaking of data, especially in NBFIs. - Develop a Risk Dashboard. - Overhaul the stress-testing framework. - Develop D-SIFI designation criteria, starting with banks and extending to NBFIs. - (ii) Financial safety net and crisis management: - Run financial projections for the Deposit Protection Fund (DPF). - Develop protocols for an interagency crisis management panel. - Finalize emergency liquidity assistance procedures. - Update the CBE-SARB MoU with provisions for recovery and resolution planning and crisis management. - (iii) Regulation and supervision of banks and other deposit-taking credit and savings institutions: - Advance the implementation of Basel requirements, including those for bank liquidity and Pillar 2. - Advance banks’ corporate governance reforms. - Strengthen the regulation and supervision of deposit-taking NBFIs. - (iv) Regulation and supervision of insurance and retirement funds: - Enhance enforcement of IRF regulations. - Develop a risk-based supervision framework with automated supervisory tools. - Introduce a risk-based solvency regime for insurers. - (v) Financial, external, and government sector statistics: - Improve source data for OFCs. - Compile MFS and financial soundness indicators for OFCs and deposit-takers. - Expand the coverage of MFS for Other Depository Corporations to include deposit-taking NBFIs. - Improve the international investment position statistics and government finance statistics. ### Legislative reforms, institutional coordination, and oversight capacity building - Harmonize amendments to existing acts and new bills and prepare as a single package for presentation to the new Government and Parliament in the follow-up of the 2023 elections. - TA needed: Yes. - Responsible agency: CBE and FSRA. - Priority: H. - Completion Timeframe: ST. - Prerequisites: Finalize expected changes in the regulatory architecture in line with the announced integration of the oversight responsibilities of the CBE and FSRA; willingness to take forward the legal reforms expeditiously; complete harmonization of amendments as listed in Table 5 into a single package. - Improve coordination on financial stability and oversight issues: - Resume coordination under the existing CBE-FSRA MoU; establish a joint project management function for implementation of the TARM proposed by the FSSR diagnostic. - TA needed: Not needed. - Responsible agency: CBE and FSRA. - Priority: H. - Completion Timeframe: ST. - Prerequisite: Willingness to undertake the coordination in the required representation, frequency, and intensity. ### Capacity building for supervision and NBFI data & analytics - Build capacity of NBFI supervisors in oversight and enforcement of market conduct of Capital Market Intermediaries and Credit Institutions. - TA needed: Yes. - Responsible agency: CBE and FSRA. - Priority: H. - Completion Timeframe: ST and continuously thereafter. - Prerequisite: Request the TA as the priority. - Strengthen role, staffing, and capacity of bank and NBFI supervisors to develop regular monitoring. - TA needed: Yes. - Responsible agency: CBE and FSRA. - Priority: M. - Completion Timeframe: Continuously. - Prerequisite: Promote self-learning and training opportunities (IMF AFS, ATI, HQ-led training; SARB; World Bank). - Enhance capabilities in data analytics, RegTech, SupTech, crypto assets, cyber and climate risk management. - TA needed: Yes. - Responsible agency: CBE and FSRA. - Priority: L. - Completion Timeframe: Continuously. - Address NBFI data weaknesses and lack of forward-looking analysis: - Enhance validity and integrity of NBFI data submission. - Develop analytical tools for offsite surveillance. - Enhance FSRA and CBE powers to assess and require information quality improvements and management information systems upgrades. - TA needed: Yes. - Responsible agency: CBE and FSRA. - Priority: H. - Completion Timeframe: ST. - Prerequisite: Detailed analysis of contents and coverage of various returns by FSRA and CBE before TA. ### Financial stability, macroprudential policy frameworks, and systemic risk monitoring - Staffing and institutional adjustments: - Review and augment staffing of the FSU; consider a deputy head to focus the head on macroprudential functions. - TA needed: Not needed. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: MT. - Prerequisites: Willingness to increase resources; clarity on integrated oversight; adoption of the Financial Stability Bill. - Calibrate FSRA functions for macroprudential implementation as Financial Stability Bill is adopted. - TA needed: Yes. - Responsible agency: FSRA and CBE. - Priority: H. - Completion Timeframe: MT. - Prerequisites: Willingness and cooperation between CBE and FSRA; adoption of the Financial Stability Bill. - Resume macroprudential Technical Committee meetings between CBE and FSRA. - TA needed: Not needed. - Responsible agency: CBE and FSRA. - Priority: H. - Completion Timeframe: ST. - Undertake thorough stocktaking of data availability, focusing on non-banking area. - TA needed: Yes. - Responsible agency: CBE and FSRA. - Priority: H. - Completion Timeframe: MT. - Prerequisite: Cooperation between CBE and FSRA. - Develop a risk dashboard including indicators of interconnectedness. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: MT. - Prerequisite: Data gaps identified in stocktaking. - Revamp the Financial Stability Report (FSR); consider increasing periodicity to two reports per year. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: MT. - Develop criteria for D-SIFI designation in phased manner, starting with commercial banks then non-banking sector with FSRA cooperation. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: MT. - Prerequisites: Data gaps identified; adoption of the Financial Stability Bill. - Gradual implementation of macroprudential instruments, starting with household indebtedness measures then broader capital-based tools. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: MT. - Prerequisites: Stocktaking of data completed; adoption of the Financial Stability Bill. ### Stress testing - Overhaul macroprudential stress testing by introducing macrofinancial scenarios and satellite models. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: MT. - Prerequisites: Stocktaking of data needs completed; willingness of the CBE to assign more resources to stress testing. - Require banks to conduct bottom-up stress tests in SREP context to supplement macroprudential tests. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: MT. - Prerequisite: Willingness of CBE to assign resources in BSD. - Include non-banking sector in stress-testing overhaul and analyze interconnectedness in more detail. - TA needed: Yes. - Responsible agency: CBE and FSRA. - Priority: H. - Completion Timeframe: LT. - Prerequisites: Stress testing machinery for banks is built and used; stocktaking of data needs completed and relevant data collected; cooperation and resource dedication by CBE and FSRA. - Discuss stress-testing results with SARB to increase understanding of South African supervisory resilience treatment. - TA needed: Not needed. - Responsible agency: CBE. - Priority: M. - Completion Timeframe: LT. - Prerequisite: Revised stress testing framework implemented. ### Financial safety net and crisis management - Deposit Protection Fund (DPF): - Run financial projections and scenarios for the DPF and solicit seed capital contributions. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: ST. - Prerequisites: Begin to develop a 10-year projection model under base and pessimistic scenarios; initiate discussions with WB, KfW, MOF regarding seed funding; estimate bank premium percent and base. - Policy and legal analysis to finalize amended Financial Institutions Act (FIA). - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: ST. - Prerequisite: Forward final legal provisions in draft amended FIA to IMF Legal Department for updated desk review. - Conduct an IADI Deposit Insurance Core Principles assessment with follow-up TA as needed. - TA needed: Yes. - Responsible agency: CBE. - Priority: M. - Completion Timeframe: LT. - Prerequisite: Begin operationalizing the DPF sufficiently for a worthwhile review. - Guide Eswatini Bank and Swaziland Building Society in development of recovery and resolution plans. - TA needed: Yes. - Responsible agency: CBE (Eswatini Bank) and FSRA (SBS). - Priority: M. - Completion Timeframe: MT. - Prerequisite: Begin to compile information for plan content. - Finalize crisis management binder; develop interagency crisis management committee protocols. - TA needed: Yes. - Responsible agency: CBE. - Priority: M for binder (MT); H for interagency protocols (MT). - Prerequisites: Continued progress on underlying elements; draft MoU with proposed protocols (as in Financial Stability Bill). - Develop a resolution manual and amend the CBE-SARB MoU to prepare for cross-border resolution. - TA needed: Yes. - Responsible agency: CBE. - Priority: M for manual (LT); H for MoU amendment (MT). - Prerequisites: Further legal reform progress for manual; consider updates to MoU based on changes since 2010. ### Emergency liquidity assistance - Finalize procedures for emergency liquidity assistance, including in resolution. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: ST. - Prerequisite: Determine timing relative to passage of amended CBE Act. ### Supervision and regulation of deposit-taking institutions - Expedite pending conversion of a building society into a bank. - TA needed: Not needed. - Responsible agency: MOF. - Priority: H. - Completion Timeframe: ST. - Ensure full compliance with ESAAMLG 2022 Mutual Evaluation recommendations (UBO guidance, Virtual Service Providers framework, consolidated supervision for AML/CFT, treatment of domestic PEPs). - TA needed: Yes. - Responsible agency: CBE-FSRA. - Priority: H. - Completion Timeframe: ST. - Prerequisite: World Bank initiated TA in this area can be continued. - Undertake a comprehensive Basel Core Principles (BCP) assessment after BCBS revision of BCPs; CBE self-assessment recommended. - TA needed: Not needed. - Responsible agency: CBE. - Priority: M. - Completion Timeframe: MT. - Prerequisite: CBE supervisors’ self-assessment post-BCBS revision. - Revamp risk management guidelines and strengthen related-party exposures framework; strengthen corporate governance guidelines and Fitness and Probity Guidelines. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: ST. - Prerequisite: Share drafted amendments prior to TA. - Review banking licensing framework after amended FIA adoption. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: ST, following adoption of amended FIA. - Prerequisite: Adoption of amended FIA and prior TA recommendations adoption. - Review Pillar 2 implementation, SREP, and Pillar 3 disclosures. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: MT. - Prerequisite: Adoption of Financial Institutions Act amendments for prescription of additional capital under Pillar 2. - Implement liquidity requirements of Basel III calibrated to context, develop contingency funding plans, conduct QIS of LCR introduction, and encourage deposit diversification. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: MT. - Prerequisite: Collection of data by CBE supervisors. - Assess Expected Credit Loss (ECL) models under IFRS 9 developed by banks. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: ST. - Prerequisite: Submission of latest ECL Models by banks to the CBE. - Assess quality of Business Continuity and Disaster Recovery plans of banks and issue guidance to strengthen operational resilience. - TA needed: Not needed. - Responsible agency: CBE. - Priority: M. - Completion Timeframe: MT. - Prerequisite: Obtain and analyze plans from all banks. ### NBFI regulation and supervision (Building Societies and SACCOs) - Review FSRA institutional setup and legal framework (FSRA Act; sectoral laws and regulations). - TA needed: Yes. - Responsible agency: FSRA. - Priority: H. - Completion Timeframe: ST. - Prerequisite: Understand coverage of various draft bills pending at different stages. - Support governance improvements, data validity and integrity, develop offsite analytical tools, and enhance FSRA powers to require information corrections and MIS improvements. - TA needed: Yes. - Responsible agency: FSRA. - Priority: H. - Completion Timeframe: ST. - Prerequisite: Detailed analysis of returns by FSRA before TA. ### Insurance and retirement funds supervision - Assess IRF department staffing needs and implement restructuring and risk-based supervision framework. - TA needed: Not needed for staffing assessment; implement restructuring. - Responsible agency: FSRA Board. - Priority: H. - Completion Timeframe: ST. - Develop risk-based supervision approach with supervisory tools and risk profiling. - TA needed: Yes. - Responsible agency: FSRA. - Priority: H. - Completion Timeframe: MT. - Prerequisite: Become familiar with existing supervision manual. - Strengthen enforcement framework (timely appointment of judicial administrators/curators) contingent on Insurance Act amendment. - TA needed: Not needed. - Responsible agency: MOF/FSRA. - Priority: H. - Completion Timeframe: ST. - Prerequisite: Enact draft amendment to Insurance Act to allow FSRA Act to provide for appointment powers. - Develop macroprudential surveillance framework for insurers and pension funds. - TA needed: Yes. - Responsible agency: FSRA. - Priority: M. - Completion Timeframe: MT. - Prerequisite: Work with CBE stability unit to complement their work. - Issue rules and powers for curator of an ailing insurer or retirement fund once Insurance Act amendment enacted. - TA needed: Not needed. - Responsible agency: MOF/FSRA. - Priority: H. - Completion Timeframe: ST. - Prerequisite: Enact draft Insurance Act amendment; understand technical details of recovery and resolution for insurers and retirement funds. - Develop supervision and inspection manuals and SOPs for market conduct supervision and inspection. - TA needed: Yes. - Responsible agency: FSRA. - Priority: H. - Completion Timeframe: MT. - Prerequisite: Understand regulatory framework on market conduct. - Implement group-wide supervision of insurance groups, introduce risk-based capital regime, enhance reinsurance supervision, develop medical insurance regulations, and create regulations for insurance pools as needed. - TA needed: Yes for group-wide supervision, risk-based capital, reinsurance supervision, medical insurance regulation, insurance pool regulation. - Responsible agency: FSRA. - Priorities: H for group-wide and capital regimes (MT); M for reinsurance, medical insurance, pools (ST to MT depending). - Prerequisites: Insurance Act and related regulations enacted/understood; use existing draft frameworks where available; stakeholder engagement for medical insurance; assess needs for natural hazards/man-made disasters for pools. ### Retirement funds specifics - Introduce interest charges on overdue contributions and enhance transparency (name and shame) for delinquent sponsors. - TA needed: Not needed. - Responsible agency: FSRA. - Priority: H. - Completion Timeframe: ST. - Prerequisite: Assess effect of enhanced transparency. - Enact Ombudsman legislation. - TA needed: Not needed. - Responsible agency: MOF. - Priority: M. - Completion Timeframe: ST. - Prerequisite: Willingness to pass legislation. - Develop regulation of beneficiary funds and regulation for umbrella fund closure/dissolution procedures. - TA needed: Not needed. - Responsible agency: MOF/FSRA. - Priority: H. - Completion Timeframe: ST. - Prerequisites: Understand function of beneficiary funds; assess capacity of umbrella funds to close/dissolve participating funds while protecting consumers. ### Financial, external, and government sector statistics - Financial sector statistics: - Compile MFS for OFCs using SRF 4SR based on the MFSMCG. - TA needed: Yes. - Responsible agency: CBE and FSRA. - Priority: H. - Completion Timeframe: ST. - Prerequisite: Adequate source data for OFCs with breakdown by financial instrument and counterpart sector. - Compile FSIs for OFCs based on the 2019 FSIs Compilation Guide. - TA needed: Yes. - Responsible agency: CBE and FSRA. - Priority: H. - Completion Timeframe: ST. - Prerequisite: Adequate source data for OFCs with breakdown by instrument, counterpart sector, and income/expenses as set in 2019 FSIs Guide. - Compile additional FSIs for deposit takers (DTs) per 2019 FSIs Guide. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: MT. - Prerequisite: Additional source data for DTs. - Expand MFS coverage for Other Depository Corporations (SRF 2SR) to include building societies and SACCOs. - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: MT. - Prerequisite: Adequate source data for building societies and SACCOs with breakdown by instrument and counterpart sector with monthly frequency. - External sector statistics: - Improve IIP statistics as recommended by External Sector Statistics TA Mission (February 10–21, 2020). - TA needed: Yes. - Responsible agency: CBE. - Priority: H. - Completion Timeframe: MT. - Prerequisite: Obtain financial statements of direct investment enterprises, incorporate insurance services related stocks data, develop new estimation techniques for trade credit and currency and deposits for other sectors, and develop consistent integrated data compilation framework. - Government sector statistics: - Improve GFS as recommended by Government Finance Statistics and Public Sector Debt Statistics TA Mission (July 6–12, 2022). - TA needed: Yes. - Responsible agency: MOF. - Priority: H. - Completion Timeframe: MT. - Prerequisite: Adequate data on local governments and public entities to expand GFS coverage, improve data frequency and timeliness, and adequate reporting of expenditure classification by functions of government (COFOG). *Source: Eswatini FSSR TA Roadmap and accompanying recommendations in the referenced content unit.* ### ANNEX I. ASSESSMENT OF ESWATINI’S FINANCIAL, EXTERNAL, AND GOVERNMENT ### ANNEX I. ASSESSMENT OF ESWATINI’S FINANCIAL, EXTERNAL, AND GOVERNMENT SECTOR STATISTICS ### A. Financial Soundness Indicators (FSIs) - Status and coverage - The Central Bank of Eswatini (CBE) reports FSIs data to the IMF’s Statistics Department (STA) quarterly. - Previously reported data were based on the 2006 FSIs Guide (13 core and 6 additional FSIs for deposit-takers (DTs) and two additional FSIs for real estate markets). - A large data gap existed with the latest disseminated data referring to 2020Q2 while the CBE migrated to the 2019 FSIs Guide. - The CBE migrated to the 2019 FSIs Guide and mapped source data for DTs starting with 2020Q3; updated compilation spreadsheets were submitted to STA and disseminated through 2023Q1. - FSIs for DTs are compiled on a domestic location (DL) basis; group consolidation is not applicable because no Eswatini bank has subsidiaries or foreign branches that materially affect FSIs. - The updated FSIs include a new FSI compiled based on Basel III (Common Equity Tier 1 capital to risk-weighted assets). - Areas for improvement (current compilation of FSIs for DTs) - Compile new FSIs for DTs based on the 2019 FSIs Guide. - Clarify definition and calculation of underlying series (examples: nonperforming loans, liquid assets, short-term liabilities), including Basel III–based series. - Strengthen source data checking and validation procedures to improve data quality. - Explore inclusion of other DTs (such as building society) in FSIs compilation. - Update FSIs metadata to reflect accounting and regulatory frameworks and any deviations from the 2019 FSIs Guide. - Compile FSIs for OFCs to complete sectoral coverage of financial corporations. - Selected FSIs for Deposit Takers (Table A1; Percent) - Regulatory capital to risk-weighted assets: 23.6, 22.9, 18.4, 18.6 (2022Q2, 2022Q3, 2022Q4, 2023Q1) - Tier 1 capital to risk-weighted assets: 20.7, 20.0, 16.2, 16.3 - Nonperforming loans net of provisions to capital: 11.0, 12.5, 11.1, 12.4 - Common Equity Tier 1 capital to risk-weighted assets: 20.7, 20.0, 16.2, 16.3 - Tier 1 capital to assets: 12.5, 12.1, 12.6, 13.5 - Nonperforming loans to total gross loans: 6.5, 6.8, 6.7, 7.3 - Provisions to nonperforming loans: 55.4, 51.7, 54.6, 53.2 - Return on assets: 3.0, 2.9, 3.0, 3.0 - Return on equity: 15.6, 14.5, 15.3, 13.6 - Interest margin to gross income: 54.3, 55.0, 55.8, 58.9 - Noninterest expenses to gross income: 66.8, 66.6, 66.0, 63.5 - Liquid assets to total assets: 29.4, 24.4, 28.8, 26.4 - Liquid assets to short-term liabilities: 39.5, 36.0, 42.9, 42.1 - Net open position in foreign exchange to capital: 100.7, 149.3, 117.1, 98.9 - Large exposures to capital: 56.2, 55.8, 46.9, 45.3 - Personnel expenses to noninterest expenses: 45.1, 44.5, 44.3, 42.8 - Customer deposits to total (non-interbank) loans: 123.4, 122.9, 122.7, 109.0 - Foreign-currency-denominated liabilities to total liabilities: 9.5, 10.7, 5.8, 6.8 - Residential real estate loans to total gross loans: 18.75, 19.56, 19.30, 18.84 - Commercial real estate loans to total gross loans: 9.41, 9.67, 8.92, 9.26 - Gross asset position in financial derivatives to capital and Trading income to total income: reported in the old form based on the 2006 FSIs Guide and not available in the updated series (denoted "..."). ### B. Monetary and Financial Statistics (MFS) - Current reporting and methodology - The CBE reports monthly monetary statistics using standardized report forms (SRFs) 1SR (central bank) and 2SR (other depository corporations, ODCs) for dissemination in International Financial Statistics (IFS). - SRFs are broadly in line with the Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG) in classification of financial instruments, valuation, and sectoring. - SRF 2SR institutional coverage is incomplete: it currently covers only commercial banks. - Accrued interest is not incorporated in outstanding amounts of financial assets or liabilities per MFSMCG. - Coverage expansion needs - SRF 2SR coverage should be expanded to include building society, money market funds (MMFs), and deposit-taking savings and credit cooperatives (SACCOs). - As of end-2020, SACCOs and the building society combined accounted for 16.4 percent of ODCs’ total assets (nearly 8 percent of GDP). - Prior TA missions found source data for these additional ODCs lacked required breakdowns, frequency, and timeliness; reporting delays reduced completeness. - Compiling MFS for OFCs is a high priority. - MFS compilation improvements recommended - Expand SRF 2SR coverage to additional ODCs (building society, MMFs, SACCOs). - Incorporate accrued interest into outstanding amounts in line with MFSMCG. - Strengthen reporting timeliness, data frequency, and completeness. - Improve data validation procedures and compilation practices. ### C. Statistics for Other Financial Corporations (OFCs) - Importance and current gaps - OFCs accounted for 61.2 percent of the financial system assets (excluding the CBE) and 73.7 percent of GDP as of end-2020 (2021 TA FSIs mission findings). - OFCs include non-bank financial institutions (NBFIs): insurance companies, pension funds, investment companies, savings cooperatives, and credit institutions regulated by FSRA. - CBE receives some data from FSRA but they were not adequate for compiling MFS and FSIs for OFCs. - Source data and reporting shortcomings - FSRA statistical returns provide most required details but need additional breakdowns by type of asset/liability and counterpart sector for MFS and FSIs classification. - Examples of missing breakdowns in insurance and retirement funds statements: - “deposits” (assets) by type (transferable deposit and other deposits) - “money market and debt” by type of assets (such as loans and debt securities) - some “invested assets” by counterpart sector - Retirement funds' statistical returns do not capture financial liabilities. - Data sharing from FSRA to CBE should be clarified and improved. - Data requirements and compilation templates - MFS for OFCs to be compiled using SRF 4SR based on MFSMCG, requiring detailed statement of financial positions with breakdowns by financial instrument, counterpart sector, and currency. - FSIs for OFCs to be compiled using the new FSIs templates based on the 2019 FSIs Guide, covering whole OFCs sector and major subsectors (insurance corporations—life and non-life separately where applicable, pension funds, MMFs). - Required data include detailed statements of financial positions, income statements, and supplemental breakdowns consistent with MFSMCG and 2019 FSIs Guide. ### D. Balance Sheet Approach (BSA) - Data inputs and current BSA availability - Main data sources for BSA matrix: SRFs (MFS), external sector (IIP), and government financial balance sheet (GFS). - MFS are most important for BSA as they capture financial intermediation and counterpart sector detail, enabling from-whom-to-whom tables for stocks. - A BSA matrix for Eswatini for end-2021 combining MFS and IIP data is provided in Table A.2. - Eswatini’s GFS data are not available for 2021. - Improvements needed to increase completeness and analytical usefulness - Once CBE reports OFCs data using SRF 4SR and improves ODCs data quality, matrix completeness will improve substantially. - Improvements needed across MFS, IIP, and GFS data (detailed below). ### E. International Investment Positions (IIP) and External Sector Statistics (ESS) - Current status - CBE reports quarterly IIP data to STA for dissemination on an annual basis (latest disseminated data refer to 2021Q1). - Data are compiled using BPM6 framework. - CBE also compiles and disseminates BOP and IIP on its website on a quarterly basis with a lag of more than 4 months after the end of the reference period. - Required enhancements - Improve estimation techniques for essential components (trade credits, currency holdings, deposits). - Incorporate new source data (for example, Tourism Revenue Authority). - Enhance the quarterly Foreign Capital Survey (QFCS) to obtain more detailed data on services. - Obtain financial statements of direct investment enterprises to fill gaps on earnings and dividends. - Address inconsistencies among ESS datasets (BOP/External Debt Statistics, IIP) and between reserve assets published in ESS and in MFS. - Improve frequency and timeliness of ESS datasets to better support policy analysis. ### F. Government Finance Statistics (GFS) and Public Sector Debt (PSD) - Current status and shortcomings - Implementation of GFSM2014 classification standards has improved through STA CD support since 2018, but shortcomings remain. - Authorities report annual GFS data covering only budgetary central government (BCG). - Data for 21 extra budgetary units (EBU), 22 local governments, and 17 public enterprises are not available—institutional coverage needs broadening. - Reporting irregularities exist, particularly for high-frequency data (monthly/quarterly) and timeliness. - PSD statistics produced by the authorities do not reflect the true debt situation. - Large statistical discrepancies exist between above-the-line and below-the-line in annual GFS data reported for IMF’s GFS Database. - Expenditure classification by functions of government (COFOG) is not reported. - Role in completing BSA matrix - Remaining data gaps in BSA after MFS, IIP, and GFS can be filled with data on nonfinancial corporations (NFCs) and households (HHs). - Collecting financial positions for NFCs and HHs is challenging—source data typically come from national accounts-related sources with issues in quality, coverage, periodicity, and timeliness. ### Annex II: Assessment of Technical Assistance (TA) Needs - General TA needs - Authorities would benefit from further TA in macroeconomic statistics: MFS, FSIs, ESS, and GFS. - CBE officials are encouraged to attend IMF training courses on macroeconomic statistics. - A. FSIs TA priorities - Support reviewing available source data (including building society) and incorporating them in the FSIs compilation framework for DTs. - Review definitions and calculations of key underlying series to ensure consistency with the 2019 FSIs Guide. - Update FSIs metadata. - Follow up on implementation of recommendations from the 2021 TA FSIs mission. - B. MFS TA priorities - Review and improve source data for deposit-taking SACCOs, MMFs, and building societies. - Map source data for these institutions to SRF 2SR to expand coverage. - Improve data validation procedures and address data frequency, timeliness, and incomplete coverage. - Identify areas for medium-term workplan to improve financial sector statistics and provide hands-on training for compilers. - Follow up on recommendations of 2021 TA FSIs mission and 2018 TA MFS mission. - C. OFCs TA priorities - Review and improve source data for OFCs. - Map source data to SRF 4SR to derive MFS for OFCs based on MFSMCG. - Map source data to new FSIs templates to derive FSIs for OFCs based on 2019 FSIs Guide. - Identify further source-data improvements and provide hands-on training on MFS and FSIs methodologies to improve staff capacity. - D. BSA TA priorities - Focus on improving MFS for ODCs and compiling MFS for OFCs. - For IIP/BOP, TA could assist in improving source data, updating estimation techniques, and addressing data inconsistencies; TA could also address pending issues from the February 2020 ESS TA mission. - For GFS, TA could assist with developing/improving source data for units outside BCG, incorporating them into GFS compilation, improving PSD statistics, and addressing outstanding issues identified by the July 2022 TA mission. *Source: ANNEX I. ASSESSMENT OF ESWATINI’S FINANCIAL, EXTERNAL, AND GOVERNMENT SECTOR STATISTICS (IMF). * --- _Source: https://www.imf.org/-/media/files/publications/tar/2024/english/tarea2024030.pdf_