## _afr1301

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---

### Introduction and headline context
- Population: 1.1 million people.
- Economy: Small, open, landlocked; heavily dependent on concentrates, sugar exports, and tourism.
- Trade linkages: More than 80 percent of imports originate from South Africa.
- Memberships and currency regime:
  - Member of the Southern African Customs Union (SACU).
  - Currency: the lilangeni, pegged at parity with the South African rand under the Common Monetary Area (CMA). The rand is also legal tender in Swaziland.
- Recent fiscal trajectory:
  - Deficits of 13.4 percent of GDP in 2011/12 and 6.0 percent of GDP in 2012/13.
  - Accumulated domestic payment arrears estimated at E 1.6 billion (5.4 percent of GDP) at end-March 2012.
  - Arrears largely affected pension funds and government suppliers (each account for about 40 percent of the total stock of arrears).
- Growth and macro results:
  - Real GDP growth is projected to contract by 1.5 percent in 2012, attributed to accumulated arrears, stagnant credit to the private sector, and weak confidence in fiscal and external sustainability.

### Fiscal and external developments and key statistics
- SACU transfers:
  - Increased from about 10 percent of GDP in 2011/12 to 22.5 percent of GDP in 2012/13.
  - Windfall revenue used to repay an advance taken by the central bank and to reduce arrears by E 250 million as of end-September 2012.
  - An additional E 720 million in arrears to the public pension fund were restructured into a three-year loan.
- Reserves and external position:
  - Gross official reserves: E 3.7 billion at end-March 2012; improved to E 6.0 billion (3.1 months of imports) at end-November 2012.
  - Higher SACU transfers helped reduce the current account deficit and increase central bank reserves.
- Policy actions taken:
  - Introduction of a value-added tax (VAT) in April 2012; complemented with continued improvements in revenue administration.
  - A new Public Financial Management (PFM) bill drafted with IMF technical assistance and expected to be presented to parliament in early 2013.
  - Financial Services Regulatory Authority (FSRA) became operational in late 2012, taking on supervision of non-bank financial institutions and working towards creation and implementation of a regulatory framework.

### Vulnerabilities, causal linkages, and CMA institutional framework
- Fiscal origin of external vulnerabilities:
  - Large recent fiscal imbalances weakened the external current account balance and the gross official reserve position of the central bank.
  - Weakening of fiscal and external positions negatively affected the private and financial sectors, creating additional external vulnerabilities.
- Restoring confidence requires:
  - Implementing an adequate fiscal adjustment.
  - Promoting private-sector-led growth.
- CMA features and implications:
  - Lesotho, Namibia, and Swaziland have linked their domestic currencies to the South African rand; LNS currencies are pegged 1-to-1 to the rand.
  - The rand is legal tender in all CMA member countries; LNS currencies are legal tender only in their own country.
  - CMA is not a full currency union: no common central bank, no common pool of reserves, and no regional surveillance of domestic policies.
  - Swaziland differs from other CMA members:
    - Option to adjust its exchange rate unilaterally under the bilateral agreement of 1992.
    - Agreement does not require Swaziland to cover its currency in circulation 1-to-1 with gross official reserves of the Central Bank of Swaziland (CBS).
    - Swaziland reintroduced the rand as legal tender in 2003.

### Overall external sector assessment and policy anchor
- Overall assessment: an unsustainable external position under current policies.
- Background and drivers:
  - Lack of fiscal adjustment has led to external vulnerabilities: a large current account deficit, portfolio outflows, and a weakening reserve position.
- Potential policy responses and numeric guidance:
  - The parity with the South African rand should remain the anchor of macroeconomic stability.
  - Restoring external sustainability would primarily be achieved with fiscal adjustment coupled with structural improvements in external competitiveness.
  - Policy options to reduce the real exchange rate overvaluation should be based on an overall fiscal adjustment of about 6 percent of GDP over the medium term.

### Current account, real exchange rate, and competitiveness
- Current account:
  - After a temporary rebound in 2012 and 2013 owing to windfall SACU transfers, the current account deficit is projected to remain unsustainably high at about 7 percent of GDP over the medium term, absent fiscal adjustment.
  - Current account developments are largely dominated by the fiscal sector.
- Real exchange rate:
  - Exchange rate remains overvalued in the range of 28–38 percent according to all methods used; the overvaluation largely is a result of fiscal imbalances.
  - An adjustment in the parity is not desirable; recommended approach is fiscal adjustment of about 6 percent of GDP over the medium term plus measures to increase export-led growth.
- REER adjustment estimates:
  - Macroeconomic balance approach: REER needs to adjust by 29.7 percent to bring projected current account balance (–8.6 percent of GDP) to estimated norm (–0.9 percent of GDP); elasticity of current account to REER estimated at –0.26 implies about 30 percent depreciation needed.
  - Equilibrium REER approach: REER needs to adjust by 28 percent based on fundamentals.
  - External sustainability approach: REER needs to adjust by 36–38.2 percent to align with NFA stabilization targets.
  - With the proposed fiscal adjustment:
    - Macroeconomic balance approach would show remaining overvaluation of 7.1 percent.
    - Equilibrium REER approach would show remaining overvaluation of 10.1 percent.
    - External sustainability approach would show remaining overvaluation of 28.8–31.1 percent.
- Gains from CMA membership: estimated at 2 percent of GDP.

### Capital account, reserves, and foreign assets/liabilities
- Capital and financial account:
  - Financial account vulnerable to portfolio outflows; government has not yet secured external budget support.
  - Portfolio outflows raise concerns about financial sector stability; immediate actions needed to restore confidence and secure external inflows.
- FX reserves:
  - Model-based minimum reserve level: 17 percent of GDP (about E 5.1 billion for 2012).
  - At end-October 2012, gross official reserves stood at E 6.4 billion, equal to 21 percent of GDP.
  - Traditional metric: reserves covered at least three prospective months of imports as of end-October 2012.
  - Central bank recommendation: aim for reserves beyond the recommended 17 percent of GDP to address potential liquidity pressures faced by commercial banks while protecting the parity with the rand.
- Foreign assets/liabilities:
  - Foreign assets and liabilities dominated by projected weakening of the reserve position and public debt dynamics; lack of access to external financing increases pressure on reserves.
  - Net International Investment Position does not pose an immediate risk but reinforces need to buttress reserves through growth-enhancing fiscal adjustment.

### Cross-country risk assessment (main risks and likelihoods)
- Main possible risks (summarized):
  - Growth slowdown in the US: Impact , Likelihood LowHigh.
  - Growth slowdown in the euro area: Impact , Likelihood MediumHigh.
  - Growth slowdown in emerging economies: Impact , Likelihood LowHigh.
  - Hike in oil prices: Impact , Likelihood LowMedium.
  - Financial deleveraging by South African banks: Impact , Likelihood LowHigh.
  - Portfolio outflows: Impact , Likelihood MediumHigh.
  - Unaddressed fiscal imbalances: Impact , Likelihood HighHigh.
- Notes on SACU transfers:
  - South Africa generates about 90 percent of the revenue of the SACU pool.
  - BLNS receipts are heavily dependent on South Africa GDP projections; revenue in year t is based on projections for year t, with an adjustment in year t +2, producing procyclical transfers.

### Modeling spillovers: GIMF framework and simulation findings
- Model configuration and calibration:
  - Global Integrated Monetary and Fiscal (GIMF) model in a three-country configuration: Swaziland, South Africa, and the rest of the world.
  - Share of households without access to credit estimated at 70 percent in Swaziland and South Africa, and 50 percent in the rest of the world.
  - Trade: South Africa provides almost all of Swaziland imports and absorbs about two-thirds of its exports; Swaziland is a net importer of South African goods.
  - South Africa is a major source of financing for Swaziland; three out of four Swaziland banks are South African.
- Simulation of global fiscal contraction:
  - Scenario: fiscal adjustment in the global economy of 1 percent of GDP for two years.
  - Finding: A one-half percent GDP decline in the global economy could translate into a slowdown of at least one-eighth of GDP in Swaziland.
  - Transmission channels: contraction of demand for Swaziland’s goods; indirect impact via South Africa.
  - Caveats: impact limited by accommodative monetary policy; Swaziland’s limited fiscal space constrains countercyclical response.
- Financial deleveraging in South Africa simulation:
  - Modeled as a persistent risk premium shock peaking at 1 percentage point higher than in steady state.
  - Transmission to Swaziland significant due to presence of South African banks; direct banking contagion and indirect lower financing for exports.
  - Simulations assume accommodative fiscal and monetary policy but limited fiscal space in Swaziland.

### Monetary and fiscal policy framework (model features)
- Monetary policy:
  - The lilangeni is pegged to the South African rand; the monetary rule follows maintenance of the peg.
  - Monetary policy in South Africa and the rest of the world follows an inflation targeting regime, approximated by a Taylor rule.
- Fiscal policy:
  - Instruments: government consumption and investment, lump sum transfers, taxes on labor, corporate profits and consumption, and tariffs.
  - Non-Ricardian features allow sizable impact of fiscal measures; larger share of liquidity-constrained households raises fiscal multipliers.

### Swaziland’s fiscal position: vulnerabilities and adjustment options
- Recent developments:
  - Fiscal position improved owing to the windfall transfer from SACU for fiscal year 2012/13 but expenditures remain high.
  - Public wage bill is about 15 percent of GDP.
  - The deficit was partly reduced in 2011/12 to 6.0 percent of GDP, but remained above estimated sustainable levels at about 2 percent of GDP maximum.
  - Social spending was much lower than budgeted by about E 1/2 billion in 2011/12, affecting transfers and projects.
- UFAR assessment and recommended measures:
  - Updated Fiscal Adjustment Roadmap (UFAR) provides diagnostics but could be amended with additional and upfront expenditure cuts.
  - Expenditure-side measures of about E 1.4 billion over the medium-term needed, with emphasis on cutting the wage bill and other non-priority recurrent expenditures.
  - EVERS could be extended to all public sector employees, including security forces; EVERS identified as having temporary costs and permanent savings in UFAR.
  - Government expenditure control should be centralized under the Ministry of Finance.
  - UFAR should set targets on poverty-alleviating spending and prioritize investment projects by expected impact on growth and poverty reduction.
- Fiscal sustainability risks:
  - Table 4 assessment underscores vulnerability: debt is unsustainable and by 2015/16 would breach the threshold of 40 percent of GDP.

### Reserve adequacy, external financing, and balance of payments pressures (Box 2 & Box 3)
- Reserve adequacy:
  - Model-based minimum: 17 percent of GDP (about E 5.1 billion for 2012).
  - Gross official reserves: E 3.6 billion at end-2011; E 6.4 billion at end-October 2012 (21 percent of GDP); E 6.0 billion (3.1 months of imports) at end-November 2012.
  - Traditional rule: at least three prospective months of imports; reserves were above this threshold as of end-October 2012.
- External financing and reserve dynamics:
  - Fiscal imbalances strongly impacted the financial account; government relied on central bank financing (about E 850 million, 1 percent of GDP), placements of government bills and bonds, government deposits at the central bank, and domestic arrears.
  - Government has not mobilized external budget financing; depletion of government deposits and portfolio outflows led to parallel depletion of gross official reserves.
  - Surge in SACU transfers in 2012/13 improved reserves but reserves decrease rapidly between quarterly SACU transfers as the government meets obligations.
  - Recommended reserve floor of 17–19 percent of GDP; central bank should aim beyond 17 percent to provide liquidity to commercial banks if needed.
- Standard and model-based reserve metrics (Box 3):
  - Standard measures: three months of imports; coverage of short-term debt service; reserves-to-base money; reserves-to-broad money (20 percent threshold).
  - IMF (2011b) two-stage model-based approach: estimate potential losses (exports, external liabilities, capital flight) and derive reserve coverage using risk weights for fixed exchange rate regimes: 10 percent of export income, 30 percent of short-term debt, 15 percent of other portfolio liabilities, 10 percent of broad money.

### Financial sector performance, vulnerabilities, and policy recommendations
- Financial sector performance and short-term trends:
  - Capital adequacy: 11.5 to 35.7 percent (end-September 2012), well above the minimum statutory requirement of 8 percent.
  - Profitability (2006–2011): banks profitable with return on assets and return on equity above international standards.
  - Profitability deterioration (first nine months of 2012): return on assets and return on equity have decreased while the ratio of nonperforming loans to total loans has remained somewhat flat.
  - Liquidity position: liquid assets cover about 25 percent of liquid liabilities.
- Stress tests and scenarios:
  - Credit risk assumption: 9 percent of all current loans will migrate to nonperforming loans (NPLs).
  - Deposit outflow resilience: financial system could withstand a shock of up to E2 billion in deposit outflows.
  - Larger outflows: balance sheets of banks would shrink by more than half; reserves of the central bank could be depleted and external stability jeopardized.
- Systemic vulnerabilities and safety-net gaps:
  - Central bank may not be in a position to exercise lender-of-last-resort role fully owing to limited resources and need to preserve the parity against the rand.
  - No crisis resolution mechanism or deposit insurance in place; legislation needed for government to provide resources to the central bank and to introduce a limited deposit insurance scheme.
- Nonbank financial institutions:
  - SACCOs: 67 institutions serving about 37,000 members (out of a total population of 1.2 million) and holding about 2 percent of the assets of the whole financial system (December 2011).
  - Capital market institutions: four collective investment schemes (CIS) and two licensed stock brokerage firms, managing about 14 percent of all assets in the financial system, equal to about 16 percent of GDP; one CIS controls about 70 percent of total funds under management.
  - Regulatory gaps: FSRA operationalized; SACCO regulatory framework in development; CIS yet to be properly regulated and supervised.
  - Estimated cost of limited SACCO deposit insurance: Covering 80 percent of deposits in the SACCOs would cost about E 0.6 billion (2 percent of GDP).
- Balance Sheet Approach (BSA) findings:
  - Main transmission channel of vulnerabilities: financial sector’s credit exposure to the private non-financial sector.
  - Central bank gross official reserves: E 3.6 billion at end-2011.
  - Private sector deposits in domestic banking system: E 4.4 billion.
  - Private sector foreign assets: E 16.2 billion.
  - Government liabilities at end-2011: E 6.8 billion (23.6 percent of GDP); external public debt E 3.4 billion, 11.6 percent of GDP.
  - Government liquid financial assets deposited at the central bank: E 1.9 billion, 6.6 percent of GDP (cannot be used without creating pressures on gross official reserves).
  - Net positions at end-2011: private sector net positions E -5.1 billion (exposed to rest of world) and E -1.7 (exposed to government).
- Policy recommendations for financial sector:
  - Strengthen crisis management framework: enact legislation to enable government support to the central bank; introduce limited deposit insurance.
  - Improve regulation and supervision of nonbank institutions: operationalize FSRA oversight; complete SACCO regulation; regulate CIS.
  - Bolster central bank reserves relative to private sector deposits.
  - Reduce concentration and fiscal risks by stabilizing the fiscal sector and restoring confidence.

### Balance Sheet Approach (Box 6): adjustment composition and timing
- Overall adjustment and composition:
  - Proposed fiscal adjustment: about 6 percent of GDP.
  - Revenue improvement: about 1.8 percent of GDP (largely from VAT implementation and tax administration improvements).
  - Critical expenditure adjustment: about 4 percent of GDP, requiring new measures, notably on the wage bill.
  - Upfront cut in wage bill: about E 300 million annual basis to be implemented in 2012/13.
- EVERS (Revised Early Retirement Scheme) detailed figures and financing:
  - Average final salary of EVERS candidates: 120 thousand Ω
  - Average time of service: 20 year D
  - Monthly payment, under the rule of 50, with 20 years of service: 48 thousand W = Ω*(D/50)
  - Lump sum payment by the pension fund: 240 thousand Σ = ¼ W * D
  - Revised EVERS saving goal: 1 600 million S
  - Number of takers needed: 5,000 people M = S/ω
  - Budget cost of EVERS, per candidate: 120 thousand L = ½ Σ
  - Budget cost of EVERS, total: 600 million K = L * M
  - Financing: 600 million
    - Existing allocation: 210 million
    - Allocation 2013/14: 300 million
    - Allocation 2014/15: 90 million
  - Notes: revised EVERS assumes halving the lump sum amount topped up by government; savings generated at separation; half of takers leave in 2013/14 and half in 2014/15; lump sum paid over 18 months.
- Macroeconomic timing and growth effects:
  - Fiscal adjustment will contract demand and have a negative impact on growth in the short term; negative impact expected to last about two years.
  - Recovery and positive “crowding-in” effects from private sector development expected over the medium term.
  - Short-term positive impact may come from clearing arrears and liberalizing state-dominated markets.
- Reserve and financing implications:
  - Current account balance would improve with fiscal adjustment; medium-term improvement could reach about 1.5 percent of GDP.
  - Projected decline in SACU transfers of about 7–8 percent of GDP increases need for external financing.
  - Recommended floor for gross official reserves: about 17–19 percent of GDP.
  - External financing in the short term expected largely from budget support and exceptional financing; private foreign investment expected to restore other net inflows over time.
- Broader policy recommendations and social considerations:
  - Achieving sustainability requires broad reform package addressing fiscal imbalances, poverty and inequality, business climate, market liberalization, and privatization.
  - Political and social consensus is critical; transparency and accountability essential to demonstrate how fiscal space is used to reduce poverty.
  - Fiscal adjustment should share sacrifices fairly and increase the share of social spending to protect the most vulnerable.
  - Strengthen institutions: enhance financial sector surveillance, the budget process, and consider fiscal rules.

### Key takeaways and policy implications (synthesized)
- Preserve the parity with the South African rand as the anchor of macroeconomic stability.
- Implement a fiscal adjustment of about 6 percent of GDP over the medium term, with revenue measures (about 1.8 percent of GDP) and expenditure measures (about 4 percent of GDP) focused on wage bill and non-priority spending.
- Combine fiscal adjustment with measures to strengthen export-led growth and create a favorable environment for higher private sector-led growth.
- Restore confidence to prevent portfolio outflows and implement a strategy to secure external inflows (private investment and external budget support).
- Maintain and aim to strengthen reserves (recommended minimum about 17 percent of GDP, with central bank advised to aim higher) to preserve liquidity and the parity.
- Strengthen financial safety nets: legislation to enable central bank intervention, limited deposit insurance, operationalize FSRA, and regulate SACCOs and CIS.
- Ensure fiscal adjustment is designed to protect poverty-alleviating spending and include transparent prioritization and cost-benefit analysis for public investment projects.

*Source: IMF country chapter—_afr1301 (Introduction, Box 1, Box 2, Box 3, Box 6, financial sector and conclusions material contained in the supplied content).*

### 1. Swaziland—Economic conditions.  2. Finance—Swaziland.

### 1. Swaziland—Economic conditions.  2. Finance—Swaziland.

### Introduction and headline context
- Population: 1.1 million people.
- Economy: Small, open, landlocked; heavily dependent on concentrates, sugar exports, and tourism.
- Trade linkages: More than 80 percent of imports originate from South Africa.
- Memberships and currency regime:
  - Member of the Southern African Customs Union (SACU).
  - Currency: the lilangeni, pegged at parity with the South African rand under the Common Monetary Area (CMA). The rand is also legal tender in Swaziland.
- Recent fiscal trajectory:
  - Deficits of 13.4 percent of GDP in 2011/12 and 6.0 percent of GDP in 2012/13.
  - Accumulated domestic payment arrears estimated at E 1.6 billion (5.4 percent of GDP) at end-March 2012.
  - Arrears largely affected pension funds and government suppliers (each account for about 40 percent of the total stock of arrears).
- Growth and macro results:
  - Real GDP growth is projected to contract by 1.5 percent in 2012, attributed to accumulated arrears, stagnant credit to the private sector, and weak confidence in fiscal and external sustainability.

### Fiscal and external developments and key statistics
- SACU transfers:
  - Increased from about 10 percent of GDP in 2011/12 to 22.5 percent of GDP in 2012/13.
  - The windfall revenue was used to repay an advance taken by the central bank and to reduce arrears by E 250 million as of end-September 2012.
  - An additional E 720 million in arrears to the public pension fund were restructured into a three-year loan.
- Reserves and external position:
  - Gross official reserves: E 3.7 billion at end-March 2012; improved to E 6.0 billion (3.1 months of imports) at end-November 2012.
  - Higher SACU transfers helped reduce the current account deficit and increase central bank reserves.
- Policy actions taken:
  - Introduction of a value-added tax (VAT) in April 2012; complemented with continued improvements in revenue administration.
  - A new Public Financial Management (PFM) bill drafted with IMF technical assistance and expected to be presented to parliament in early 2013.
  - Financial Services Regulatory Authority (FSRA) became operational in late 2012, taking on supervision of non-bank financial institutions and working towards creation and implementation of a regulatory framework.

### Vulnerabilities and causal linkages (as presented)
- Fiscal origin of external vulnerabilities:
  - Large recent fiscal imbalances weakened the external current account balance and the gross official reserve position of the central bank.
  - Weakening of fiscal and external positions negatively affected the private and financial sectors, creating additional external vulnerabilities.
- Restoring confidence requires:
  - Implementing an adequate fiscal adjustment.
  - Promoting private-sector-led growth.

### Institutional framework: Common Monetary Area (Box 1 summary)
- CMA features:
  - Lesotho, Namibia, and Swaziland have linked their domestic currencies to the South African rand; LNS currencies are pegged 1-to-1 to the rand.
  - The South African Reserve Bank (SARB) uses an inflation-targeting system and lets the rand float freely against other major currencies.
  - The rand is legal tender in all CMA member countries; LNS currencies are legal tender only in their own country.
  - The CMA is not a full currency union: no common central bank, no common pool of reserves, and no regional surveillance of domestic policies.

### Key takeaways from the Introduction chapter
- Swaziland experienced two difficult fiscal years that led to large deficits, arrears, and reserve drawdowns.
- The surge in SACU transfers in 2012/13 substantially improved fiscal space and external reserves, but external position remains vulnerable.
- Recent reforms (VAT introduction, PFM bill drafting, FSRA operationalization) are positive steps but further fiscal adjustment and policies to foster private-sector-led growth are needed to restore sustainability and confidence.

*Source: IMF country chapter—Introduction and summary material on Swaziland economic conditions and finance.*

### Box 1. (concluded)

### Box 1. (concluded)

### CMA arrangements and currency dynamics
- Smaller countries under the CMA share certain characteristics of a currency board—domestic currency issues are required to be fully backed by foreign reserves (except for Swaziland, where it is not a requirement).
- Unlike a typical currency board:
  - there is no legal restriction prohibiting the central bank of a small member country from acquiring domestic assets.
  - the small member countries have not made an irrevocable commitment to keep a given exchange rate level against the South African rand.
  - member countries are not required to provide mutual support if the exchange rate peg comes under pressure.
  - there is no formal mechanism for fiscal transfers to cushion the impact of asymmetric shocks.
- The SARB will, on request, make the required foreign exchange available to other members of the CMA.
- For LNS, the local currency and the rand are perfect substitutes, with no rand-conversion cost and no restrictions on transfers of funds, whether for current or capital transactions.
- All four members of the CMA also belong to the Southern African Customs Union (SACU). As a consequence, capital and goods are highly mobile across the CMA region.
- Swaziland differs from other CMA members:
  - Swaziland has the option to adjust its exchange rate unilaterally under the bilateral agreement of 1992.
  - The Swaziland agreement does not require Swaziland to cover its currency in circulation 1-to-1 with the equivalent amount of gross official reserves of the Central Bank of Swaziland (CBS).
  - Swaziland reintroduced the rand as legal tender in 2003.

### Overall external sector assessment and policy anchor
- Overall assessment: an unsustainable external position under current policies.
- Background: the lack of fiscal adjustment has led to external vulnerabilities: a large current account deficit, portfolio outflows, and a weakening reserve position.
- Potential policy responses:
  - The parity with the South African rand should remain the anchor of macroeconomic stability.
  - Restoring external sustainability would primarily be achieved with fiscal adjustment coupled with structural improvements in external competitiveness.
  - Structural improvements would be achieved with continued progress on creating a favorable environment for higher private sector-led growth.
- Policy-specific numeric guidance:
  - Policy options to reduce the real exchange rate overvaluation should be based on an overall fiscal adjustment of about 6 percent of GDP over the medium term.

### Current account and real exchange rate
- Current account:
  - Background: After a temporary rebound in 2012 and 2013 owing to windfall SACU transfers, the current account deficit is projected to remain unsustainably high at about 7 percent of GDP over the medium term, absent fiscal adjustment.
  - Assessment: Current account developments are largely dominated by the fiscal sector. Priority could be given to reducing the current account deficit by combining a fiscal adjustment and measures to strengthen export-led growth.
- Real exchange rate:
  - Background: According to all methods used, the exchange rate remains overvalued in the range of 28–38 percent. The overvaluation largely is a result of fiscal imbalances.
  - Assessment: An adjustment in the parity would not be desirable because Swaziland benefits significantly from having its currency pegged at parity with the South African rand, which is also legal tender. Policy options to reduce the overvaluation should be based on an overall fiscal adjustment of about 6 percent of GDP over the medium term and measures to increase export-led growth.

### Capital account, reserves, and foreign assets/liabilities
- Capital and financial account:
  - Background: Swaziland’s financial account is vulnerable to portfolio outflows, while the government has not yet secured external budget support.
  - Assessment: Portfolio outflows raise concerns about financial sector stability. Immediate actions are needed to restore confidence while implementing a strategy to secure external inflows (private investment and external budget support).
- FX reserves:
  - Background: At present, the level of reserves is broadly adequate to cover the potential external vulnerabilities mentioned above.
  - Assessment: A fiscal adjustment strategy would need to be coupled with a strategy to maintain the level of reserves at an adequate level throughout the medium term.
- Foreign assets and liabilities:
  - Background: Swaziland’s foreign assets and liabilities are dominated by a projected weakening of the reserve position, and public debt dynamics that would weigh more on reserves than external debt, owing to the lack of access to external financing.
  - Assessment: While the net International Investment Position does not pose an immediate risk, it reinforces the need for buttressing reserves through a growth-enhancing fiscal adjustment.

### Cross-country risk assessment (key risks and likelihoods)
- Main possible risks (summarized from Table 2):
  - Growth slowdown in the US: Impact , Likelihood LowHigh. Sources: Lower exports to the US, spillovers from lower activity in South Africa. Possibly lower SACU transfers over the medium term.
  - Growth slowdown in the euro area: Impact , Likelihood MediumHigh. Sources: Lower exports to the euro area, spillovers from lower activity in South Africa. Possibly lower SACU transfers over the medium term.
  - Growth slowdown in emerging economies: Impact , Likelihood LowHigh. Sources: Lower exports to the emerging markets, spillovers from lower activity in South Africa. Possibly lower SACU transfers over the medium term.
  - Hike in oil prices: Impact , Likelihood LowMedium. Source: Risk of a growth slowdown.
  - Financial deleveraging by South African banks: Impact , Likelihood LowHigh. Source: South African banks could reduce their exposure to Swaziland further. Risk of a credit crunch and growth slowdown.
  - Portfolio outflows: Impact , Likelihood MediumHigh. Source: With large portfolio outflows, external sustainability could rapidly be jeopardized, because deposits would most likely be transferred to South Africa.
  - Unaddressed fiscal imbalances: Impact , Likelihood HighHigh. Source: Without a credible fiscal adjustment plan, Swaziland’s fiscal and external positions are unsustainable over the medium term. With a fiscal adjustment plan, Swaziland could restore both fiscal and external sustainability.
- Notes on SACU transfers:
  - South Africa generates about 90 percent of the revenue of the SACU pool.
  - The existing rules make BLNS receipts heavily dependent on South Africa GDP projections; revenue received in year t is based on projections for year t, with an adjustment in year t +2 to correct discrepancies, producing procyclical transfers.

### Modeling spillovers: GIMF framework and simulation findings
- Model and calibration:
  - Analysis uses the Global Integrated Monetary and Fiscal (GIMF) model in a three-country configuration: Swaziland, South Africa, and the rest of the world.
  - Key model features:
    - The share of households without access to credit is estimated at 70 percent in Swaziland and South Africa, and 50 percent in the rest of the world.
    - Trade data indicate Swaziland’s trade is largely dependent on South Africa, which provides almost all of Swaziland imports and absorbs about two-thirds of its exports. Swaziland is a net importer of South African goods. The rest of the world makes up about 98 percent of South African imports and exports.
    - South Africa is a major source of financing for Swaziland through investment (direct and portfolio), remittances, and domestic financing; three out of four Swaziland banks are South African.
  - Calibration sources: South Africa parameters from Canales-Kriljenko (2011), rest of world from Kumhof and others (2010), Swaziland parameters from Basdevant and others (2011).
  - Fiscal policy responses in simulations are based on maintaining a structural surplus consistent with stable ratios of government debt to GDP over the medium term.
- Impact of a fiscal contraction in the global economy:
  - Simulation: a fiscal adjustment in the global economy of 1 percent of GDP for two years (consistent with fiscal risks in advanced economies).
  - Finding: A one-half percent GDP decline in the global economy could translate into a slowdown of at least one-eighth of GDP in Swaziland.
  - Main transmission channels: (i) contraction of demand for Swaziland’s goods affecting exports; (ii) indirect impact on South Africa via lower growth and policy responses affecting demand for Swaziland’s goods.
  - Caveats:
    - Impact is projected to be relatively limited owing to accommodative monetary policy; multipliers could be stronger, potentially increasing pass-through.
    - Accommodative policies in South Africa and Swaziland would reduce the impact, but Swaziland’s capacity for countercyclical fiscal policy is constrained by limited fiscal space.
  - SACU transfers volatility: small shocks to South African GDP can have very significant impact on SACU transfers to smaller members; the two-year lag in adjustment has produced procyclical transfers that can exacerbate fiscal stress.
- Implications of financial deleveraging in South Africa:
  - Modeling approach: simulate a shock increasing the risk premium for financing firms to represent deleveraging.
  - Simulation result: the risk premium shock is modeled as a persistent shock peaking at 1 percentage point higher than in the steady state.
  - Transmission to Swaziland: significant implications due to strong presence of South African banks in Swaziland’s banking sector. Transmission channels are direct contagion (banking exposure) and indirect impact of lower financing on demand for Swaziland’s exports.
  - Policy context: simulations assume accommodative fiscal and monetary policy in both countries, but Swaziland’s assumed fiscal space remains limited.

### Policy implications and recommendations (derived from assessments)
- Preserve the parity with the South African rand as the anchor of macroeconomic stability.
- Implement a fiscal adjustment of about 6 percent of GDP over the medium term to address real exchange rate overvaluation and external sustainability.
- Combine fiscal adjustment with measures to strengthen export-led growth and create a favorable environment for higher private sector-led growth.
- Restore confidence to prevent portfolio outflows and implement a strategy to secure external inflows (private investment and external budget support).
- Couple fiscal adjustment with a strategy to maintain adequate reserve levels throughout the medium term.
- Reinforce resilience to external shocks by addressing intrinsic vulnerabilities (fiscal imbalances, dependence on SACU transfers) and preparing for potential external adverse shocks (global slowdown, deleveraging in South Africa, SACU transfers volatility).

*Box 1. (concluded) — Source content from the provided IMF chapter excerpt*

### Box 2. (Concluded)

### Box 2. (Concluded)

### Monetary policy and fiscal policy framework
- Monetary policy:
  - The lilangeni is pegged to the South African rand; the monetary rule follows the maintenance of the peg.
  - Monetary policy in South Africa and the rest of the world follows an inflation targeting regime, approximated by a Taylor rule.
- Fiscal policy:
  - Instruments: government consumption and investment, lump sum transfers, taxes on labor, corporate profits and consumption, and tariffs.
  - Non-Ricardian features allow for a sizable impact of spending- and revenue-based fiscal measures; a fiscal impulse typically stimulates economic activity in the short run and crowds-out private investment and net foreign assets in the long run.
  - The larger the proportion of liquidity-constrained households, the larger the fiscal multiplier from temporary changes to taxes and transfers.

### Swaziland’s fiscal position: vulnerabilities and adjustment options
- Recent developments and vulnerabilities:
  - The fiscal position improved owing to the windfall transfer from SACU for fiscal year 2012/13 but fiscal imbalances are still present as expenditures remain high.
  - The public wage bill is about 15 percent of GDP (one of the highest in sub-Saharan Africa).
  - The deficit was partly reduced in 2011/12 to 6.0 percent of GDP, but remained above estimated sustainable levels at about 2 percent of GDP maximum.
  - Social spending was much lower than budgeted by about E 1/2 billion in 2011/12, affecting transfers to ministries of education and health, transfers to orphans and vulnerable children (OVC), scholarships, and transfers to hospitals and schools; several poverty-alleviating investment projects were stopped while other projects (e.g., the Sikhuphe airport) were prioritized.
  - The new PFM bill has been drafted with IMF technical assistance and is expected to increase transparency and ensure that all expenditures are channeled through appropriate budgetary procedures.
- UFAR assessment and recommended measures:
  - The Updated Fiscal Adjustment Roadmap (UFAR) provides accurate diagnostics but could be amended with additional and upfront expenditure cuts to restore fiscal and external sustainability.
  - Expenditure-side measures of about E 1.4 billion over the medium-term would need to be implemented, with emphasis on cutting the wage bill and other non-priority recurrent expenditures.
  - EVERS could be extended to all public sector employees, including security forces; EVERS is identified as having temporary costs and permanent savings in the UFAR assessment.
  - Government expenditure control should be brought under the sole responsibility of the Ministry of Finance to limit slippages.
  - UFAR should set targets on poverty-alleviating spending (notably health and education) to increase their share in total spending and ensure adequate allocation to grants for Orphaned and Vulnerable Children and the elderly.
  - Investment projects should be prioritized according to expected impact on growth and poverty reduction.
- Fiscal sustainability risks:
  - Table 4 assessment underscores vulnerability: debt is unsustainable and by 2015/16 would breach the threshold of 40 percent of GDP.
  - Vulnerable middle income countries like Swaziland are at risk of debt distress beyond this level.

### Current account imbalance, competitiveness, and exchange rate assessment
- Twin deficits and SACU dependence:
  - Swaziland faces a “twin deficit,” where the overall fiscal balance and the current account balance are largely synchronized, predominantly due to dependence on SACU transfers.
  - SACU transfers for 2012/13 and 2013/14 are high (about 22.5 percent of GDP) but are projected to decline over the medium term.
- Impact of fiscal imbalances on competitiveness and growth:
  - Fiscal imbalances reduce competitiveness through: (i) large public sector size and relatively high public wages crowding out private investment; (ii) accumulation of arrears contracting private activity; (iii) perceived fiscal crisis risks leading banks to reduce exposure to Swaziland.
- REER overvaluation and required adjustments:
  - Swaziland’s real effective exchange rate (REER) would have to depreciate by between 28 and 38 percent, all other factors remaining constant, to maintain a sustainable current account deficit over the medium term.
  - Macroeconomic balance approach: REER needs to adjust by 29.7 percent to bring projected current account balance (–8.6 percent of GDP) to estimated norm (–0.9 percent of GDP); elasticity of current account to REER estimated at –0.26 implies about 30 percent depreciation needed.
  - Equilibrium REER approach: REER needs to adjust by 28 percent based on fundamentals (terms of trade, relative productivity, relative government consumption).
  - External sustainability approach: REER needs to adjust by 36–38.2 percent to bring the current account in line with NFA stabilization targets (maintaining NFA at current level 14 percent of GDP at end-2011 and 2006–11 average 25.5 percent of GDP would require current account balances of 0.7 percent or 1.3 percent of GDP, respectively).
- Role of fiscal adjustment versus nominal exchange rate adjustment:
  - A nominal exchange rate adjustment would entail risks that largely outweigh the benefits; potential gains are expected to be limited because key exports (e.g., sugar cane) are sold at given international prices and domestic supply, business climate, and human capital constraints limit responsiveness to price competitiveness improvements.
  - Implementing the recommended fiscal adjustment would reduce overvaluation; with the proposed fiscal adjustment:
    - Macroeconomic balance approach would show remaining overvaluation of 7.1 percent.
    - Equilibrium REER approach would show remaining overvaluation of 10.1 percent.
    - External sustainability approach would show remaining overvaluation of 28.8–31.1 percent.
  - Remaining necessary depreciation would be best addressed at the CMA level with cooperation among CMA members.
- Gains from CMA membership:
  - As illustrated by Asonuma, Debrun, and Masson (2012), Swaziland gains from the CMA membership an estimated 2 percent of GDP.

### Reserve adequacy, external financing, and balance of payments pressures
- Model-based reserve adequacy:
  - A model-based approach indicates Swaziland’s minimum level of reserves needed to cover potential balance of payments outflows is 17 percent of GDP (about E 5.1 billion for 2012).
  - At end-October 2012, gross official reserves stood at E 6.4 billion, equal to 21 percent of GDP.
- Traditional reserve metrics:
  - The standard rule of thumb for a fixed exchange rate is reserves equal to at least three prospective months of imports; Swaziland’s level of reserves was above this threshold as of end-October 2012.
- External financing and reserve dynamics:
  - Fiscal imbalances strongly impacted the financial account; during the crisis the government relied on central bank financing (about E 850 million, 1 percent of GDP), placements of government bills and bonds, government deposits at the central bank, and domestic arrears.
  - The government has not mobilized external budget financing; depletion of government deposits and portfolio outflows led to parallel depletion of gross official reserves.
  - With the surge in SACU transfers in 2012/13, reserves improved and since October 2012 have been broadly adequate, but between quarterly SACU transfers reserves decrease rapidly as the government meets budgetary obligations.
  - The structural underlying weakness requires addressing the vulnerability of the whole balance of payments through a significant fiscal adjustment; the recommended level of reserves of 17 percent of GDP should be viewed as a minimum.
  - Swaziland is exposed to terms-of-trade shocks (oil importer and sugar exporter), has a fully open capital account with South Africa (exposed to capital outflows), and does not have access to international capital markets.
- Central bank recommendation:
  - The central bank should aim for reserves beyond the recommended 17 percent of GDP to address potential liquidity pressures faced by commercial banks while protecting the parity with the rand; current reserves may not be sufficient to provide liquidity to commercial banks in the event of portfolio outflows.

*Source: IMF staff estimates and projections, and Swaziland authorities (content unit: Box 2. (Concluded))*

### Box 3. Standard and Modern Approaches for Estimating Reserve Adequacy

### Box 3. Standard and Modern Approaches for Estimating Reserve Adequacy

### Standard measures of reserve adequacy
- Standard measures are based on a simple ratio of gross official reserves. They do not have a theoretical or empirical underpinning.
- Four measures are typically identified:
  - For a country with a fixed exchange rate, the level of reserves should be at least three months of prospective imports of goods and services.
  - Ensure full coverage of short-term debt service by remaining maturity, namely reserves should be sufficient to cover the payment of debt service outflows over the next 12 months in full.
  - The ratio of gross official reserves to base or reserve money (typically M0) gives a measure of the backing of currency in circulation. This measure is most relevant in currency boards, where the law requires the central bank to maintain a high percentage of reserves (60–100 percent) to be freely available to be exchanged for domestic currency in circulation.
  - The reserve coverage of broad money (typically M2) is intended to capture the risk of capital flight, and a ratio of 20 percent is commonly used as the minimum threshold for countries with a fixed exchange rate regime.

### Model-based approaches and cost/benefit framing
- Model-based approaches derive the adequate level from a cost/benefit analysis.
- The benefits of holding reserves (i.e., reducing the probability of a crisis and smoothing consumption) are assessed against the cost of holding reserves, in terms of foregone investment in the economy.
- The benefits are typically defined in two broad categories:
  - Protecting the economy against a sudden stop in capital flows (Caballero and Panageas, 2004, Jeanne and Rancière, 2006).
  - Reducing the probability of a crisis and its cost (Garcia and Soto, 2004).

### IMF (2011b) model-based approach and two-stage methodology for EM economies
- A new model-based approach developed by the IMF (2011b) derives optimal reserve holdings.
- Since 2002, emerging market and low-income countries have outpaced the traditional reserve adequacy metrics; subsequently, during shocks, these reserves have provided a useful cushion against economic crises, including the current global economic crisis.
- For emerging market (EM) economies, a two-stage methodology is employed:
  - First stage: estimate different potential losses of foreign reserves. Potential outflows during periods of exchange market pressure are estimated, when the specific sources of loss identified are:
    - potential loss of export earnings from a drop in external demand or a terms-of-trade shock;
    - external liability shock to short-term debt and medium- and long-term debt and equity liabilities;
    - capital flight risk.
  - Second stage: estimate the reserve coverage a country should hold based on the metric obtained from the first stage.

### Risk weights for fixed exchange rate regimes (IMF 2011b)
- For countries with a fixed exchange rate regime, the approach proposes the following risk weights, based on tail event outflows during exchange market pressure periods:
  - 10 percent of export income,
  - 30 percent of short-term debt,
  - 15 percent of other portfolio liabilities,
  - 10 percent of broad money (used as a proxy for liquid domestic assets).

*Source: Box 3. Standard and Modern Approaches for Estimating Reserve Adequacy, _afr1301 - Box 3. Standard and Modern Approaches for Estimating Reserve Adequacy*

### 11.5 to 35.7 percent (end-September 2012), well above the minimum statutory

### _afr1301 - 11.5 to 35.7 percent (end-September 2012), well above the minimum statutory

### Financial sector performance and short-term trends
- Capital adequacy: "11.5 to 35.7 percent (end-September 2012), well above the minimum statutory requirement of  8 percent."
- Profitability (2006–2011): banks have been profitable with ratios of return on assets and return on equity "above international standards."
- Profitability deterioration (first nine months of 2012): return on assets and return on equity "have decreased" while the ratio of nonperforming loans to total loans has "remained somewhat flat."
- Liquidity position: liquid assets cover "about 25 percent of liquid liabilities," indicating rapid illiquidity risk in the event of large deposit withdrawals.
- Stress on banks derives from economic contraction: customers struggling to meet obligations; loan books and deposits stagnant or growing only marginally.

### Stress tests: key assumptions and identified risks
- Overall identified risk types: exchange rate, credit, liquidity, and concentration risks.
- Credit risk assumption: "9 percent of all current loans will migrate to nonperforming loans (NPLs)." Asset quality of existing NPLs assumed to deteriorate (substandard → doubtful → bad).
- Exchange rate risk: assesses movements of the lilangeni against other major currencies and measures impact on the bank’s capital position. Net income effects from exchange rate shifts are not analyzed due to historical patterns of foreign exchange income being driven by buy-sell spreads.
- Liquidity risk: identifies banks that would first face problems meeting depositor demands in a systemic crisis.
- Concentration risk: assesses exposure to large borrowers and the effect of a failure of the largest borrower(s) on the capital adequacy ratio.

### Systemic vulnerabilities and crisis mechanisms
- Lender of last resort constraints: the central bank is the lender of last resort but "may not be in a position to exercise this role fully, owing to its limited resources and the need to preserve the parity against the rand."
- No crisis resolution or deposit insurance: "Should there be a significant deposit outflow, there is no crisis resolution mechanism in place to protect depositors in the event of a bank failure."
- Legislative need: "There is a need for legislation for the government to provide enough resources, if needed, for the central bank to intervene in commercial banks." Legislation could "also introduce a limited deposit insurance scheme to protect depositors."

### Nonbank financial institutions: growth and risks
- Savings and credit cooperatives (SACCOs): "67 institutions serving about 37,000 members (out of a total population of 1.2 million) and holding about 2 percent of the assets of the whole financial system." Numbers as of "December 2011."
- Role: SACCOs mobilize domestic savings and provide affordable loans, partly because they "do not have to abide by risk-weighted prudential regulations."
- Capital market institutions: "four collective investment schemes (CIS) and two licensed stock brokerage firms," managing "about 14 percent of all assets in the financial system, equal to about 16 percent of GDP." Of the four CIS, "one controls about 70 percent of the total funds under management."
- Regulatory progress and gaps: Making the Financial Sector Regulatory Authority (FSRA) operational is positive; all SACCOs requested to provide financial statements; a regulatory framework for SACCOs is "in the development stage." "CIS are yet to be properly regulated and supervised."
- Safety-net gap consequences: Nonbank institutions lack deposit insurance and access to the central bank as lender of last resort. A failure of one or more capital market institutions or SACCOs "could jeopardize financial stability" and cause contagion to commercial banks.
- Estimated cost of limited SACCO deposit insurance: "Covering 80 percent of deposits in the SACCOs would cost about E 0.6 billion (2 percent of GDP)."

### Balance Sheet Approach (BSA) findings and cross-sector risks
- Data sources: monetary statistics, IIP, and government debt data reported to the IMF; latest IIP available for 2010 with 2011 estimates derived from preliminary 2011 balance of payments.
- Central finding: the financial sector’s credit exposure to the private non-financial sector is the main transmission channel of balance sheet vulnerabilities—most banking sector assets are loans to the private non-financial sector.
- External and reserve positions:
  - Central bank gross official reserves: "E 3.6 billion" at end-2011.
  - Private sector deposits in domestic banking system: "E 4.4 billion."
  - Private sector foreign assets: "E 16.2 billion."
- Government balance-sheet features:
  - Government liabilities at end-2011: "E 6.8 billion (23.6 percent of GDP)," driven by accumulation of external public debt "E 3.4 billion, 11.6 percent of GDP."
  - Government liquid financial assets deposited at the central bank: "E 1.9 billion, 6.6 percent of GDP." These assets "cannot be used because this would create pressures on the gross offi cial reserves of the central bank."
  - Government assets are "predominantly illiquid (i.e., part or full ownership of companies in competitive sectors) and cannot be sold quickly in the event of an external shock."
- Net positions at end-2011: the private sector was exposed primarily to the rest of the world and the government with net positions of "E -5.1 billion and E -1.7," respectively.
- Concentration and state exposure risks: dominance of government and a small number of large borrowers (SOEs and SMEs dependent on government business) increase systemic risk; corporate/household nonpayment could trigger bankruptcies and a significant recession.

### Outflow scenarios and second-round effects
- Deposit outflow resilience: "The financial system could withstand a shock of up to E2 billion in deposit outfl ows."
- Larger outflows consequences: "Should there be larger deposit outfl ows, the balance sheets of banks would shrink by more than half; and reserves of the central bank could be depleted to a level where external stability could be jeopardized."
- Second-round feedbacks:
  - Shrinking deposit base forces banks to shrink domestic assets, causing a "sizable negative impact on private sector credit."
  - Declining economic activity raises the risk of loans becoming nonperforming, increasing provisioning needs and intensifying the liquidity squeeze.
  - The central bank would be unable to act effectively as lender of last resort due to insufficient reserves.
  - Unless fiscal consolidation occurs and "confidence in the government sector is restored," adjustment falls on the private sector through "a much lower level of economic activity and consumption."

### Policy implications and recommended actions (explicit and implied)
- Strengthen crisis management framework:
  - Enact legislation to enable government support of the central bank to intervene in commercial banks when needed.
  - Introduce a limited deposit insurance scheme to protect depositors and reduce contagion risk.
- Improve regulation and supervision of nonbank institutions:
  - Operationalize FSRA oversight, complete the regulatory framework for SACCOs, and establish proper regulation and supervision for CIS.
- Address liquidity and reserve vulnerabilities:
  - Bolster central bank reserves relative to private sector deposits to improve capacity as lender of last resort.
- Reduce concentration and fiscal risks:
  - Stabilize the fiscal sector by aligning expenditure with available financing to restore confidence in the government sector and reduce spillovers to the banking system.

*Source: Excerpt from IMF chapter on Risks from Financial Sector Vulnerabilities (content unit: _afr1301 - 11.5 to 35.7 percent (end-September 2012), well above the minimum statutory).*

### Box 6. The Balance Sheet Approach

### Box 6. The Balance Sheet Approach

### Purpose and Key Concepts of the Balance Sheet Approach (BSA)
- The Balance Sheet Approach (BSA) examines the stock of variables in sectoral balance sheets and a country’s assets and liabilities to identify sources of vulnerability arising from mismatches between sectoral balance sheets.
- Four types of balance sheet mismatches are identified; all four inform the ability of a country to honor commitments under internal or external shocks:
  - Maturity mismatches: gap between liabilities due in the short run and available liquid assets; can lead to short-term interest rate spikes and rollover risk.
  - Currency mismatches: capital loss risk from exchange rate changes; large foreign-currency liabilities amplify debt burdens after depreciation and can contract investment.
  - Capital structure problems: heavy reliance on debt rather than equity financing reduces buffers because debt repayments are fixed while equity can absorb shocks.
  - Solvency problems: assets insufficient to cover liabilities (including contingent liabilities); e.g., government debt well above available assets and the net present value of expected future fiscal balances.

### Policy Implications and Role in External Financial Intervention
- The BSA can assess the case for external financial intervention:
  - If vulnerabilities stem from private-sector balance sheets, government restructuring of sector liabilities may be appropriate.
  - External financial support may be justified when, for example, the central bank lacks adequate foreign exchange reserves.

### Application to Swaziland: Fiscal Adjustment and Composition
- Overall adjustment and financing context:
  - The proposed fiscal adjustment would amount to about 6 percent of GDP.
  - Revenue improvement is about 1.8 percent of GDP (largely from VAT implementation and tax administration improvements).
  - The critical expenditure adjustment is about 4 percent of GDP, requiring new measures, notably on the wage bill.
  - An upfront cut in the wage bill of about E 300 million on an annual basis is needed to be implemented in 2012/13.
- EVERS (Revised Early Retirement Scheme) as a key adjustment tool:
  - Average final salary of EVERS candidates: 120 thousand Ω
  - Average time of service: 20 year D
  - Monthly payment, under the rule of 50, with 20 years of service: 48 thousand W = Ω*(D/50)
  - Lump sum payment by the pension fund: 240 thousand Σ = ¼ W * D
  - Revised EVERS saving goal: 1 600 million S
  - Number of takers needed: 5,000 people M = S/ω
  - Budget cost of EVERS, per candidate: 120 thousand L = ½ Σ
  - Budget cost of EVERS, total: 600 million K = L * M
  - Financing: 600 million
    - Existing allocation: 210 million
    - Allocation 2013/14: 300 million
    - Allocation 2014/15: 90 million
  - Notes on EVERS:
    - The revised EVERS assumes halving the lump sum amount topped up by government.
    - Savings are generated at separation; half of takers assumed to leave in 2013/14 and half in 2014/15.
    - The lump sum amount is paid over a period of 18 months.
- Additional measures and composition changes:
  - Further savings beyond the 4 percent of GDP may be needed to create room for poverty-alleviating spending.
  - Options to generate savings include structural reforms (e.g., liberalizing public transport to lower transfers to the Central Transport Agency) and reductions in spending with limited poverty impact.
  - There is scope to reduce sovereign and security spending to free resources for higher social expenditure.
  - Public investment projects still lack cost-benefit analyses; introducing and publishing cost-benefit analyses (starting with biggest projects) is recommended to increase transparency and accountability.

### Macroeconomic Timing, Growth, and External Balances
- Short-term and medium-term growth effects:
  - A recession is expected in 2012 partly due to private-sector constraints and negative fiscal imbalances.
  - Fiscal adjustment will contract demand and have a negative impact on growth in the short term; the negative impact is expected to last about two years.
  - Recovery and positive “crowding-in” effects from private sector development are expected to build over the medium term.
  - Short-term positive impact may come from clearing arrears and liberalizing state-dominated markets.
  - Medium-term growth prospects are favorable owing to comparative advantages (mining, agriculture) and potential regional integration benefits.
- Current account and reserves:
  - The current account balance would improve with the fiscal adjustment; medium-term improvement could reach about 1.5 percent of GDP.
  - Projected decline in SACU transfers of about 7–8 percent of GDP increases the need for external financing.
  - Recommended floor for gross official reserves of the central bank: about 17–19 percent of GDP.
  - External financing in the short term would be expected to come largely from budget support and exceptional financing, with private foreign investment restoring other net inflows over time.

### Broader Policy Recommendations and Social Considerations
- Achieving sustainability requires a broad reform package addressing fiscal imbalances, poverty and inequality, business climate, market liberalization, and privatization, alongside measures to restore external flows.
- Political and social consensus is critical; transparency and accountability are essential to demonstrate how fiscal space is used to reduce poverty.
- Fiscal adjustment should be designed to share sacrifices fairly and to increase the share of social spending to protect the most vulnerable.
- Strengthening institutions is paramount, including enhancing financial sector surveillance and the budget process, and considering fiscal rules to reduce the risk of recurrent fiscal crises.

*Source: Box 6. The Balance Sheet Approach (from the supplied IMF content).*

### Conclusions

### Conclusions

### Overview
- This Conclusions unit contains the list of references cited in the preceding chapters.  
- References focus on topics including: balance sheet approaches to financial crises; exchange rate assessment methodologies; reserve adequacy and contingent reserves management; fiscal policy and revenue volatility in Southern Africa and SACU countries; macroeconomic vulnerabilities and adjustment strategies for Botswana, Lesotho, Namibia, and Swaziland; the Global Integrated Monetary and Fiscal Model (GIMF); and assessments specific to South Africa and Swaziland.

### Major referenced themes
- Balance sheet approaches to financial crises and sovereign debt vulnerabilities.
- Exchange rate assessment methodologies, including Macroeconomic Balance and CGER approaches.
- Reserve adequacy and the optimal level of reserves for emerging markets; contingent reserves management.
- Fiscal policy, fiscal adjustment strategies, and revenue volatility in Southern Africa and SACU.
- Macroeconomic modeling and policy simulation using GIMF.
- Country-specific IMF consultations and staff reports for Swaziland and South Africa.
- Regional economic outlooks and World Economic Outlook analyses relevant to Sub-Saharan Africa.

### Representative citations (selected exactly as listed)
- Allen, M., C. Rosenberg, C. Keller, B. Setser, and N. Roubini, 2002, “A Balance Sheet Approach of Financial Crisis,” IMF Working Paper 02/210 (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/wp/2002/wp02210.pdf
- Asonuma, T., X. Debrun, and P., Masson, 2012, “Welfare Effects of Monetary Integration: the Common Monetary Area and Beyond” in Building a Common Future in Southern Africa: Challenges and Opportunities, J., Mongardini, ed. (Washington: International Monetary Fund). Available via the Internet: www.imf.org/external/pubs/ft/wp/2012/wp12136.pdf
- Aydin, B., 2010, “Exchange Rate Assessment for Sub-Saharan Economies,” IMF Working Paper, No. 10/162 (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/wp/2010/wp10162.pdf
- Basdevant, O., 2012, “Fiscal Policies and Rules in the Face of Revenue Volatility Within Southern Africa Customs Union Countries (SACU)” IMF Working Paper, No. 12/93 (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/wp/2012/wp1293.pdf
- Basdevant, O., C. Baba, and B. Mircheva, 2011, “Macroeconomic Vulnerabilities Stemming from the Global Economic Crisis: The Case of Swaziland” African Department Paper #11/7 (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/dp/2011/afr1107.pdf
- Basdevant, O., D. Benicio, B. Mircheva, J. Mongardini, G. Verdier, S. Yang, and L.-F. Zanna, 2011, “The Design of Fiscal Adjustment Strategies in Botswana, Lesotho, Namibia, and Swaziland,” IMF Working Paper WP/11/266 (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/wp/2011/wp11266.pdf
- Caballero, R., and S. Panageas, 2004, “Contingent Reserves Management: An Applied Framework,” NBER Working Paper No. 10786 (Cambridge: Mass.: National Bureau for Economic Research).
- Canales-Kriljenko, J., 2011, “South Africa: Macro Policy Mix and its Effects on Growth and the Real Exchange Rate: Empirical Evidence and GIMF Simulations,” IMF African Department Paper #11/4 (Washington: International Monetary Fund). Available via the Internet: www.imf.org/external/pubs/ft/dp/2011/afr1104.pdf
- Cuevas, A., L. Engstrom, V. Kramarenko, and G. Verdier, 2012, “SACU Revenue Volatility: Roots and Options for Mitigation” in IMF, 2010, The Economics of Regional Integration: Current and Future Challenges for Southern Africa (Washington: International Monetary Fund).
- Garcia, P., and C. Soto, 2004, “Large Holdings of International Reserves: Are They Worth It?” Central Bank of Chile Working Papers No. 299, December.
- IMF, 2011a, “Kingdom of Swaziland: 2010 Article IV Consultation,” IMF Country Report 11/25. Available via the Internet: http://www.imf.org/external/pubs/ft/scr/2011/cr1125.pdf
- IMF, 2011b, “Assessing Reserve Adequacy,” IMF Policy Paper (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/np/pp/eng/2011/021411b.pdf
- IMF, 2012a, Regional Economic Outlook: Sub-Saharan Africa, [month?] (Washington). Available via the Internet: http://www.imf.org/external/pubs/ft/reo/2012/afr/eng/sreo1012.pdf
- IMF, 2012b, World Economic Outlook”, IMF World Economic and Financial Survey. Available via the Internet: http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf
- IMF, 2012c, “South Africa: 2012 Article IV Consultation Report,” Forthcoming IMF Country Report.
- IMF, 2012d, World Economic Outlook Update: New Setbacks, Further Policy Action Needed, IMF World Economic and Financial Survey. Available via the Internet: http://www.imf.org/external/pubs/ft/weo/2012/update/02/pdf/0712.pdf
- IMF, 2012e, “Kingdom of Swaziland: Staff Report for the 2011 Article IV Consultation” IMF Country Report #12/37. Available via the Internet: http://www.imf.org/external/pubs/ft/scr/2012/cr1237.pdf
- Isard, P., and H., Faruqee, 1998, “Exchange Rate Assessment: Extensions of the Macroeconomic Balance Approach,” IMF Occasional Paper, No. 167 (Washington: International Monetary Fund).
- Jeanne, O., and R. Rancière, 2006, “The Optimal Level of Reserves for Emerging Markets: Formulas and Applications,” IMF Working Paper 06/229, (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/wp/2006/wp06229.pdf
- Kumhof, M., D. Laxton, D. Muir, and S., Mursula, 2010, “The Global Integrated Monetary and Fiscal Model (GIMF)—Theoretical Structure,” IMF Working Paper #10/34 (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/wp/2010/wp1034.pdf
- Lee, J., G. Milesi-Ferretti, J. Ostry, A. Prati, and L., Ricci, 2008, “Exchange Rate Assessments: CGER Methodologies,” IMF Occasional Paper, No. 261 (Washington: International Monetary Fund).
- Manasse, P., N. Roubini, and A. Schimmelpfennig, 2003, “Predicting Sovereign Debt Crises,” IMF Working Paper 03/221 (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/wp/2003/wp03221.pdf
- Mathisen, J., and A. Pellechio, 2006, “Using the Balance Sheet Approach in Surveillance: Framework, Data Sources and Data Availability,” IMF Working Paper 06/100 (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/wp/2006/wp06100.pdf
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*Conclusions — References as listed in the content unit*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2013/_afr1301.pdf_