## _cr0886

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### Introduction and overview
- In the late 1990s Swaziland’s public finances deteriorated after sizable surpluses in the 1980s due to expansionary public spending and declining revenues.
- Augmented revenues from the Southern African Customs Union (SACU) have recently reversed the fiscal situation, even as spending continued to grow.
- SACU revenues are likely to remain high in the next few years because the South African economy is expected to perform well; however, most of the increase in spending is expected to be on current expenditures related to wages, transfers, and subsidies.
- The paper proposes a non-SACU fiscal balance as an alternative indicator to assess fiscal performance and provide a less volatile tool focused on domestic revenue generation compatible with fiscal sustainability.

### Fiscal performance, 1996–2007 — key outcomes and indicators
- Overall deficit including grants increased from 1.1 percent of GDP in 1996/97 to more than 4.5 percent of GDP in 2004/05.
- Economic growth slowed from an annual average of 3.6 percent in the 1990s to just over 2 percent since 2000.
- Total expenditures increased from 24 percent of GDP in 1996/97 to more than 31 percent in 2006/07.
- Wage bill rose from about 10 percent of GDP to 14 percent of GDP; wage expenditures have grown by about 10 percent in real terms since 2004.
- Expenditure on health: about 2.5 percent of GDP (budgetary allocations since 2000).
- Expenditure on education: 6.0 percent of GDP (budgetary allocations since 2000).
- Spending on agriculture: held at 4 percent of total expenditures.
- Poverty indicator: 69 percent of the population lives on less than US$1 a day.
- Food insecurity: about 25 percent of the population require food assistance.
- Capital expenditure: in real terms capital spending increased on average by 1 percent annually for 2001/04–2006/07; current expenditures grew by 1.5 percent annually in the same period.
- Budget execution: on average only 82 percent of budgeted capital expenditure was actually spent.
- Millennium Development Project: initially assessed at E2.4 billion, by 2007 had used E0.9 billion; estimated additional E0.6 billion needed over the next three years.
- Selected macro facts:
  - Area (square kilometers): 17,364
  - Population (2006): 1,146,050
  - Population growth rate (2006): 1.7 percent
  - Exchange rate as of November 30, 2007: US$1 = E 6.81
- Time-series highlights (selected): GDP at constant prices (2001–2006): 0.9, 2.2, 3.8, 2.6, 2.4, 2.8; CPI (end of period, 2001–2006): 10.8, 11.5, 4.6, 3.2, 6.3, 5.5.

### Fiscal revenues, SACU dependence, and recent windfalls
- Total fiscal revenues increased from 35 percent of GDP in 1996/97 to more than 40 percent in 2006/07.
- SACU revenues increased from 15 percent of GDP in 1997/98 to about 28 percent in 2006/07.
- SACU revenues contribution to Swaziland’s total revenues increased from 40 percent in 1992/1993 to more than 65 percent in 2006/07.
- Since 2005, after a new SACU revenue-sharing formula, Swaziland benefited from windfalls that accounted for additional revenues of between 5 and 8 percent of GDP.
- Definition: SACU windfall = much higher actual SACU payments than estimated, owing to a higher actual value for imports than the one used in forecasting SACU payments.
- Nontax revenue declined from about 2 percent of GDP in 1998/1999 to less than 1 percent in 2006/07.
- Domestic tax revenues were almost flat at 12 percent of GDP.
- General sales tax is yet to be replaced by a VAT.

### 2006/07 fiscal outcomes and reserves
- The overall fiscal surplus (including grants) reached 10.2 of GDP in 2006/07 because of augmented SACU revenues.
- The surplus allowed an accumulation of international reserves to an estimated 3.4 months of imports.
- Spending fell short of budgeted amounts because the early retirement voluntary scheme for public servants was not initiated and payments to the government pension fund were lower.

### Medium-term outlook and fiscal projections (2007/08–2012/13)
- SACU revenues are expected to remain high at least until 2010.
- Between 2007–2010 South Africa will spend an estimated R17.4 billion in preparation for the World Cup, with foreign visitors expected to spend about R9.0 billion.
- SACU payments as a share of South Africa’s GDP were on average about 0.8 percent of GDP (2000–04); estimates through 2010 are for an increase to about 1.2 percent of GDP.
- If SACU payments rise as estimated, annual SACU payments to Swaziland would average about R27 billion.
- World Cup-related increase to the SACU pool estimated at about R78 million a year (2007 to 2011); Swaziland’s share (about 20 percent) could bring an extra R16-20 million a year (0.09 percent of GDP).
- A balanced budget is expected for 2007/08 despite anticipated record expenditures of 37.6 percent of GDP, with a further rise in the wage bill to 14.4 percent of GDP.
- If spending increases on education, health, and agriculture without offsets, total spending could rise to a record 39 percent of GDP starting in 2008/09, with the wage bill escalating to above 15 percent.
- Projected decline of SACU revenues could bring about a deficit of almost 7 percent of Swaziland GDP by 2012/13.
- If policies are unchanged, the non-SACU deficit will continue to deteriorate, leading to a deficit of 26 percent of GDP by 2012/13.

### Non-SACU fiscal balance — indicator and sustainability implications
- Proposed metric: non-SACU fiscal balance = overall fiscal balance less SACU revenues; recommended as preferred indicator to assess domestic revenue effort and a financeable expenditure path.
- Observed averages (2005/06–2007/08):
  - Overall fiscal balance indicates an average surplus of 3 percent of GDP.
  - Non-SACU fiscal deficit is an average of 20 percent of GDP for the same period.
- A “normal” SACU revenue based on the median for 1996/97–2004/05 is about 14 percent of GDP.
- On this basis, estimates of a non-SACU sustainable fiscal deficit would be about 16 percent of GDP.
- Policy rule: Any SACU revenues above 14 percent of GDP could be used for progrowth capital investments, propoor priority expenditure, and building international reserves.
- Baseline scenario: without measures the non-SACU deficit trends toward large deficits; with measures a sustainable path toward about 16 percent of GDP is attainable.

### Required fiscal adjustment and policy mix
- Fiscal sustainability can be restored by measures to boost domestic revenues and reduce expenditures, targeting a non-SACU fiscal deficit of about 16 percent of GDP over the medium term.
- Durable fiscal adjustment generally relies primarily on reducing expenditures; reducing capital and current spending equally, with emphasis on a durable lowering of the wage bill, worked best.
- Swaziland would need to introduce measures to reduce expenditures by about 6 percent of GDP over five years.
- Recommended policy mix:
  - Expenditure-reducing and revenue-enhancing measures.
  - Strengthened public finance management (PEM) and adherence to the medium-term fiscal framework (MTEF).
  - Credible political commitment to achieve fiscal sustainability and free resources for public investment and private-sector participation.

### Revenue reform — measures and projected yields
- Current domestic tax collection: about 12 percent of GDP.
- Recommended revenue measures:
  - Strengthen tax collection and tax administration.
  - Establish large-taxpayer units.
  - Broaden the tax base.
  - Introduce the VAT and implement a Revenue Authority.
- Projected fiscal impact:
  - Small in 2008/09: 0.2 percent of GDP.
  - Could increase to more than 2.0 percent of GDP by 2012/13.
  - If Swaziland adopted a VAT rate similar to South Africa (14 percent), that could yield the equivalent of about 6.8 percent of GDP.
  - Current sales tax yields average 3.5 of GDP; a 14 percent VAT would be about 3 percent of GDP higher than current sales taxes.

### Expenditure reform — wage policy, civil service, and other measures
- Wage bill issues:
  - Government employees increased from 25,000 to 30,000 despite a 2004/05 civil service reform that would have eliminated 3,000 positions in three years.
  - Central government wages for 2005/06 reported as 14.4 percent of GDP (compared to 11.1 percent in 1998/99 and 12.8 percent in 2004/05).
  - High wage spending uses almost all domestic revenue collected.
- Short-term options to contain wage bill:
  - Combine attrition with a selective hiring freeze.
  - Better centralize recruitment.
  - Regularly audit the payroll system.
  - Avoid across-the-board salary increases.
  - Decompress the pay scale gradually.
  - Merge in-kind benefits and allowances into the pay scale over time.
- Other expenditure adjustments:
  - Implement privatization policy and improve oversight of SOEs to avoid excessive subsidies and transfers.
  - Streamline foreign travel and transportation costs.
  - Eliminate unproductive transfers.
  - Reduce subsidies to tertiary education.
  - Cut goods and services to a lesser degree.
- Projected savings from decisive actions:
  - Reduce current expenditures by about 2.4 percent of GDP in 2008/09 and 6.0 percent by 2012/13.

### Public expenditure management (PEM) and MTEF
- PEM weaknesses (World Bank 2006 PER):
  - Need to improve budget preparation, budget execution, reporting, transparency, and coordination with donors.
  - Improve management of commitments, prevention of arrears, payroll controls, audits, and quality of reporting.
  - Limited capacity at all levels of government; well-focused technical assistance recommended.
  - Supplementary budgets distort the budget exercise; strict adherence to budgetary rules advised.
- MTEF (introduced in 2003/04) guides a three-year budget outlook and one-year budgets; remaining needs include:
  - Public expenditure tracking system aligning annual budget with PRSAP.
  - Better project evaluation and monitoring of service delivery.
  - Review of capital expenditure programs to focus on high social rate of return projects.

### Expenditure composition and quality
- Recurrent expenditures have grown substantially; wages, transfers, and subsidies account for most of the increase.
- Social-sector spending is low by regional standards despite high HIV/AIDS prevalence; education around 6.0 percent of GDP and health about 2.5 percent of GDP.
- Primary universal education not fully implemented; up to 23 percent of eligible children do not attend school.
- Capital expenditures have been low and only minimally effective; project selection lacks adequate technical and feasibility appraisals.
- In 2006/07 up to 50 percent of capital spending was directed toward renovation of public buildings.

### Financial sector — structure, depth, and main risks
- Financial sector institutions include: Central Bank of Swaziland (CBS), four commercial banks, one building society, two unit trusts, two development finance institutions, 56 SCCOs, a stock exchange, over 200 pension funds, six life and insurance companies, and over 100 micro finance institutions.
- Estimated total assets of the financial sector (banks, SCCOs, pension funds and life and insurance companies) at end-2006: 105 percent of GDP.
- Banking system depth (end-2006):
  - Bank deposits-GDP ratio: 21.7
  - Private sector credit-GDP ratio: 22.5
  - M2-GDP ratio: 23.0
  - M3-GDP ratio: 25.0
  - Ratio of M1 to M2: 31.3
  - Gross National Income per capita US$: 2,430
- Ownership and size (asset-GDP ratios):
  - Standard Bank Swaziland Ltd: asset-GDP ratio 12.2
  - First National Bank Swaziland Ltd.: asset-GDP ratio 6.2
  - Swazibank: asset-GDP ratio 5.7
  - Nedbank Swaziland Ltd: asset-GDP ratio 5.4
  - Swaziland Building Society: asset-GDP ratio 3.2
- Concentration of lending: 70 percent of all loans are to sugar-related industries.
- Prudential indicators (selected exact figures):
  - Basle capital ratio (Tier 1): Dec-2003 14; Dec-2004 14; Dec-2005 15; Dec-2006 19.5; Mar-2007 18.6; Jun-2007 22.5
  - Nonperforming loans to total loans: Dec-2003 2; Dec-2004 3; Dec-2005 2; Dec-2006 3.6; Mar-2007 3.9; Jun-2007 3.6
  - Loans to deposit ratio (excluding Swazibank): Dec-2003 75; Dec-2004 78; Dec-2005 83; Dec-2006 85.5; Mar-2007 91.5; Jun-2007 87.9
  - Net income to average total assets (return on assets): Dec-2003 4; Dec-2004 3; Dec-2005 5.9; Dec-2006 1.5; Mar-2007 2.5
- Access to finance: World Bank (2007) estimate only 35 percent of the Swazi adult population has access to an account with a financial intermediary.
- SCCOs (end-2006):
  - Fifty five SCCOs active with 39,592 members (4 percent of the population).
  - SCCO deposits and lending grew markedly; top three SCCOs account for almost 50 percent of deposits or lending.
  - SCCOs required to submit audited accounts to MoAC but oversight and audit quality are weak; monetary accounts compiled by CBS do not include SCCOs.
- Pension funds and insurance:
  - PSPF assets at end March-2007: E7.4 billion (59 percent of GDP), equivalent to US$1 billion; PSPF accounts for almost 55 percent of the financial sector.
  - Rate of return on PSPF assets for financial year ending March 31, 2007: 30 percent; previous year: 42 percent; 10-year historical return: 25 percent.
  - Insurance market (end-2006) size estimated at E2 billion (16 percent of GDP).
- Local investment requirements introduced by legislation:
  - A portion of insurance and pension assets must be invested in Swaziland, starting with 10 percent in November 2007 and rising to 30 percent in three years.
  - Requirements: insurers to be incorporated in Swaziland, have a physical presence, and be partly owned by Swazis.
- Risks of domestic investment requirement:
  - Could lead to excess liquidity if market cannot absorb repatriated funds.
  - Could impair financial performance and solvency if domestic investments entail excessive risk.
  - Local incorporation and physical presence requirements could deter foreign entrants and limit competition.

### Monetary policy, market infrastructure, and supervision
- Authorities are exercising flexibility in applying the domestic investment requirement while regulations are worked out, including investment in dual-listed companies.
- The SSX is small and illiquid: six stocks listed; market capitalization US$200 million.
- Pending legislation constraining development:
  - Securities Bill (1993) — pending.
  - Financial Services and Regulatory Authority Bill (FSRA 2003) — pending.
  - National Clearing and Settlement Systems Bill (NCSS, 2004) — pending.
- Key supervisory and capacity gaps:
  - SCCOs supervision limited; no prudential standards; cooperatives department lacks manpower and expertise.
  - RIRF (Registrar of Insurance Companies and Retirement Funds) established September 2006 with extensive technical assistance needs.
- Monetary policy implications of excess liquidity: central bank may need to mop up excess liquidity and bear associated costs.

### Financial sector efficiency, profitability, and constraints
- Selected comparative banking statistics (percent):
  - Net interest margin (percent of assets): Swaziland 6.2; Namibia 5.3; Botswana 3.6; South Africa 8.2; Sub-Saharan Africa (mean) 8.2.
  - Overhead costs (percent of assets): Swaziland 7.1; Namibia 3.7; Botswana 3.9; South Africa 5.2; Sub-Saharan Africa (mean) 6.1.
  - Return on assets (percent): Swaziland 5.9; Namibia 1.5; Botswana 6.1; South Africa 1.4; Sub-Saharan Africa (mean) 2.1.
  - Return on equity (percent): Swaziland 30.3; Namibia 19.9; Botswana 62.3; South Africa 18.6; Sub-Saharan Africa (mean) 20.1.
  - Bank concentration (three largest banks' assets as share of all commercial banks, percent): Swaziland 81.7; Namibia 77.5; Botswana 94.4; South Africa 98.5.
- Noninterest income rose from 36 percent of total income in 2001 to over 45 percent in 2006 for commercial banks in Swaziland.
- Constraints to deeper financial system:
  - Weak investor protection (Doing Business 2008: Swaziland ranked 175 out of 178 in protecting investors).
  - Structural constraints: Swazi Nation Land accounts for 60 percent of the land and restrictions prevent use as collateral.
  - Low economic growth and low financial depth persist; limited investment opportunities outside textiles and sugar.

### Textiles and sugar sectors — competitiveness and trade shocks
- Exchange rate: rand appreciation from R12 to $1 in 2003 to about R7.2 to $1 (peg 1:1), posing obstacles to textile sector competitiveness.
- Textiles:
  - Textile exports rose from US $15.2 million in 1998 to US $181.0 million in 2005; fell by 9 percent in 2006 from 2005.
  - Employment in factories peaked at more than 30,000; after MFA phase-out employment fell by two-thirds to below 10,000.
  - Plans include organic cotton cultivation up to 4,000 hectares.
- Sugar:
  - Area under cultivation (hectares) 2001/02–2006/07: 47,256; 48,307; 49,932; 50,932; 52,196; 52,233.
  - Production (tonnes) 2001/02–2006/07: 500,680; 583,014; 628,191; 597,563; 652,735; 623,357.
  - Exports (US $ million) 2001/02–2006/07: 196.5; 197.5; 157.9; 204.4; 259.4; 298.6.
  - Sugar contributes as much as 8 percent on average to GDP.
  - ACP/EU price per tonne: Previous regime € 523.700; 2006/07 € 496.80 -5.1; 2007/08 € 496.80 -5.1; 2008/09 € 434.10 -17.1; 2009/10 € 335.00 -36.0.
  - By 2015 price could fall to €261.85 per ton, a further 22 percent drop from anticipated 2009/10 level.
- Policy responses: reduce costs, seek alternative markets, negotiate trade agreements, pursue diversification (tourism, agribusiness), improve infrastructure and investment climate.

### Recommended financial sector strategy and sequencing
- Priority reforms:
  - Pass the three financial sector laws (Securities Bill, FSRA, NCSS).
  - Improve supervision of SCCOs; consider consolidated supervision via FSRA.
  - Include SCCO accounts in the monetary survey compiled by CBS.
  - Gradually phase domestic investment requirement for insurers and pension funds; explore PPPs and securitization; expand long lease arrangements for Swazi Nation Land to be used as collateral.
  - Build RIRF regulatory capacity per MCM action plan.
  - Promote competition and disclosure to reduce bank and SCCO charges; consider removing restrictions on women’s access to finance.
  - Seek technical assistance for CBS staff on Basel II monitoring for subsidiaries of South African banks.
  - Prioritize reforms that safeguard financial stability first, then reforms to increase market depth.

### Conclusions and policy recommendations — synthesis
- Fiscal sustainability is achievable with credible political commitment and a mix of expenditure cuts, revenue measures, and better public expenditure management.
- The authorities should use current high SACU revenues to implement fiscal measures to secure fiscal sustainability and support economic growth to at least 5 percent per year, as proposed by the PRSAP.
- Develop fiscal policy stance using the non-SACU balance to contextualize a fiscal path under domestic control and estimate needed adjustments.
- Key recommended actions: restart civil service reform; overhaul tax administration; introduce the VAT; privatize public enterprises; target a non-SACU fiscal balance; strengthen PEM and MTEF to ensure efficient use of fiscal resources and attract donor assistance and concessional financing.
- Structural reforms over the medium term could improve international perception, increase foreign investment, and make public investment more efficient.

*Source: IMF staff report excerpts and statistical appendices from the document _cr0886.*

### Appendix I .............................................................................................................

### Appendix I

### Introduction and overview
- In the late 1990s Swaziland’s public finances deteriorated after sizable surpluses in the 1980s due to expansionary public spending and declining revenues.
- Augmented revenues from the Southern African Customs Union (SACU) have recently reversed the fiscal situation, even as spending continued to grow.
- SACU revenues are likely to remain high in the next few years because the South African economy is expected to perform well; however, most of the increase in spending is expected to be on current expenditures related to wages, transfers, and subsidies.
- The paper proposes a non-SACU fiscal balance as an alternative indicator to assess fiscal performance and provide a less volatile tool focused on domestic revenue generation compatible with fiscal sustainability.

### Fiscal performance, 1996–2007
- Overall deficit including grants increased from 1.1 percent of GDP in 1996/97 to more than 4.5 percent of GDP in 2004/05.
- Deficit financing: drawing down international reserves, issuing domestic debt, and to a lesser degree borrowing from abroad.
- Economic growth slowed from an annual average of 3.6 percent in the 1990s to just over 2 percent since 2000.

Key fiscal figures (as reported)
- Total expenditures increased from 24 percent of GDP in 1996/97 to more than 31 percent in 2006/07.
- Wage bill rose from about 10 percent of GDP to 14 percent of GDP; wage expenditures have grown by about 10 percent in real terms since 2004.
- Expenditure on health: about 2.5 percent of GDP (budgetary allocations since 2000).
- Expenditure on education: 6.0 percent of GDP (budgetary allocations since 2000).
- Spending on agriculture: held at 4 percent of total expenditures.
- Poverty indicator: 69 percent of the population lives on less than US$1 a day.
- Food insecurity: about 25 percent of the population require food assistance.
- Capital expenditure: in real terms capital spending increased on average by 1 percent annually for 2001/04–2006/07; current expenditures grew by 1.5 percent annually in the same period.
- Budget execution: on average only 82 percent of budgeted capital expenditure was actually spent.
- Millennium Development Project: initially assessed at E2.4 billion, by 2007 had used E0.9 billion; estimated additional E0.6 billion needed over the next three years.

Selected macro and fiscal data (as presented in statistical summary)
- Area (square kilometers): 17,364
- Population (2006): 1,146,050
- Population growth rate (2006) in percent: 1.7
- Formal employment (2005): 92,102
- IMF Quota: SDR 50.70 million
- Fund holdings of emalangeni: SDR 44.15 million
- Holdings of SDRs: SDR 2.48 million
- Exchange rate as of November 30, 2007: US$1 = E 6.81

Selected time-series highlights (2001–2006 where shown)
- GDP at constant prices (2001–2006): 0.9, 2.2, 3.8, 2.6, 2.4, 2.8
- GDP per capita at constant prices (2001–2006): -1.7, -0.4, 1.3, 0.4, 0.4, 1.1
- GDP deflator (2001–2006): 6.9, 8.1, 6.0, 3.4, 4.8, 5.3
- CPI (period average, 2001–2006): 7.5, 11.7, 7.4, 3.4, 4.8, 5.3
- CPI (end of period, 2001–2006): 10.8, 11.5, 4.6, 3.2, 6.3, 5.5
- Current account balance (millions of U.S. dollars, 2001–2006): -56.8, 57.6, 124.2, 51.7, -81.4, -80.8
- Export volume, f.o.b. (2001–2006): 5.1, 19.7, 0.6, 34.4, -15.4, -4.0
- Import volume, f.o.b. (2001–2006): 38.5, -5.5, -15.4, -1.9, -1.4, -1.7
- Broad money (2001–2006): 10.7, 13.1, 14.1, 10.4, 5.9, 25.1
- Domestic Credit (2001–2006): -13.7, 58.3, 34.4, 30.9, 10.3, -3.4
- Private sector credit (2001–2006): 3.0, 16.2, 21.3, 26.1, 15.7, 21.8
- Prime lending rate (percent; end of period): 12.5, 16.5, 11.5, 11.0, 10.5, 12.5
- Interest rate on 12-month time deposits (percent; end of period): 6.3, 9.5, 4.2, 4.1, 3.5, 8.5
- Gross national savings (percent): 13.3, 24.7, 25.6, 20.6, 14.8, 14.0
- Gross domestic investment (percent): 17.6, 19.9, 18.8, 18.4, 18.0, 16.9
- Central government total revenue and grants (fiscal year): 26.8, 26.7, 27.6, 30.9, 32.0, 41.5
- Of which: SACU receipts (percent of GDP?): 12.9, 12.6, 13.3, 17.7, 18.1, 27.5
- Total expenditure and net lending (fiscal year): 29.7, 31.3, 30.4, 35.5, 33.5, 31.3
- Central government balance (including grants): -3.0, -4.6, -2.9, -4.6, -1.5, 10.2
- Government debt: 23.9, 21.8, 22.3, 17.8, 15.9, 16.8
- Current account balance (percent): -4.3, 4.8, 6.8, 2.2, -3.1, -2.9
- Gross official reserves (millions of U.S. dollars): 267, 260, 265, 262, 231, 364
- Net official international reserves (millions of U.S. dollars): 228, 235, 202, 258, 240, 324
- Total external debt (millions of U.S. dollars): 288, 351, 413, 485, 435, 441

### Expenditure composition and quality
- Recurrent expenditures have grown substantially; wages, transfers, and subsidies account for most of the increase.
- Social-sector spending is low by regional standards despite high HIV/AIDS prevalence; education and health allocations have remained around 6.0 percent and 2.5 percent of GDP, respectively.
- Primary universal education is not fully implemented; up to 23 percent of eligible children do not attend school.
- Capital expenditures have been low and only minimally effective in supporting economic growth and poverty reduction; capital project selection lacks adequate technical and feasibility appraisals.
- In 2006/07 up to 50 percent of capital spending was directed toward renovation of public buildings.

### Risks, indicators, and proposed fiscal metric
- Risks: Falling SACU revenues in the medium term and continued high spending pose risks for fiscal sustainability.
- Proposed metric: A non-SACU fiscal balance to focus on generating domestic revenues and provide a less volatile assessment of fiscal performance.
- Policy implication: A fiscal stance based more on domestic taxes and less on trade-related sources could provide resources to promote growth and prioritize social spending on health and education.
- Policy mix recommended: Combination of expenditure-reducing and revenue-enhancing measures, strengthened public finance management, adherence to the medium-term fiscal framework, and credible political commitment to achieve fiscal sustainability and free resources for public investment and private-sector participation.

### Conclusion highlights
- Fiscal sustainability is achievable with credible political commitment and a mix of expenditure cuts, revenue measures, and better public expenditure management.
- Improved targeting and quality of social and capital spending are necessary to translate fiscal resources into higher growth and poverty reduction.

*Source: IMF staff report excerpts from Appendix I (Swaziland: Fiscal Policy and Sustainability).*

### 10.      Total fiscal revenues increased from 35 percent of GDP in 1996/97 to more than

### _cr0886 - 10.      Total fiscal revenues increased from 35 percent of GDP in 1996/97 to more than

### Fiscal revenues and composition
- Total fiscal revenues increased from 35 percent of GDP in 1996/97 to more than 40 percent in 2006/07.
- SACU revenues increased from 15 percent of GDP in 1997/98 to about 28 percent in 2006/07.
- Domestic tax revenues were almost flat at 12 percent of GDP.
- Nontax revenue declined from about 2 percent of GDP in 1998/1999 to less than 1 percent in 2006/07.
- The share of domestic taxes in GDP is low compared with neighboring countries.
- Recent domestic revenue measures (removal of tax exemptions on rental income, a sales tax amendment to close loopholes, and enforcement of tax collections) did not contribute significantly to government coffers.
- The general sales tax is yet to be replaced by a VAT.

### SACU revenues and windfalls
- SACU revenues contribution to Swaziland’s total revenues increased from 40 percent in 1992/1993 to more than 65 percent in 2006/07.
- Since 2005 and after a new SACU revenue-sharing formula, Swaziland benefited from windfalls that accounted for additional revenues of between 5 and 8 percent of GDP.
- The new formula components: (i) customs; (ii) excise; and (iii) development (set at 15 percent of total excise component). The new formula enhances the receipts of the smaller countries.
- SACU windfall is defined as much higher actual SACU payments than estimated, owing to a higher actual value for imports than the one used in forecasting SACU payments.

### Fiscal outcomes 2006/07 and reserves
- The overall fiscal surplus (including grants) reached 10.2 of GDP in 2006/07 because of augmented SACU revenues.
- The surplus allowed an accumulation of international reserves to an estimated 3.4 months of imports.
- Spending fell short of budgeted amounts because the early retirement voluntary scheme for public servants was not initiated and payments to the government pension fund were lower.

### Medium-term outlook for fiscal policy and growth
- IMF (2003) identified capital accumulation, employment, and total factor productivity as sources of growth.
- Political changes in South Africa, the emergence of HIV/AIDS, and sluggish and unproductive Swazi public capital investment undermined capital accumulation and employment in the late 1990s.
- PRSAP estimates that to meet some of the MDGs by 2015, Swaziland needs an annual average growth of 5 percent.
- Total investment for 1997–2001 was slightly above the sub-Saharan average, but since 2003 it has fallen below the average.
- Capital expenditures averaged about 23 percent of GDP during the high-growth 1980s and 1990s; in the last five years they have declined to about 18 percent of GDP, and GDP growth has been about 2 percent.

### Fiscal projections and risks (2007/08–2012/13)
- SACU revenues are expected to remain high at least until 2010.
- Between 2007–2010 South Africa will spend an estimated R17.4 billion in preparation for the World Cup, with foreign visitors expected to spend about R9.0 billion.
- SACU payments as a share of South Africa’s GDP were on average about 0.8 percent of GDP (2000–04); estimates through 2010 are for an increase to about 1.2 percent of GDP.
- If SACU payments rise as estimated, annual SACU payments to Swaziland would average about R27 billion.
- World Cup-related increase to the SACU pool estimated at about R78 million a year (2007 to 2011); Swaziland’s share (about 20 percent) could bring an extra R16-20 million a year (0.09 percent of GDP).
- A balanced budget is expected for 2007/08 despite anticipated record expenditures of 37.6 percent of GDP, with a further rise in the wage bill to 14.4 percent of GDP.
- If spending increases on education, health, and agriculture without offsets, total spending could rise to a record 39 percent of GDP starting in 2008/09, with the wage bill escalating to above 15 percent.
- Projected decline of SACU revenues could bring about a deficit of almost 7 percent of Swaziland GDP by 2012/13.
- If policies are unchanged, the non-SACU deficit will continue to deteriorate, leading to a deficit of 26 percent of GDP by 2012/13.

### Non-SACU fiscal balance
- A non-SACU fiscal balance (overall fiscal balance less SACU revenues) is recommended as a preferred indicator to assess domestic revenue effort and a financeable expenditure path.
- The overall fiscal balance indicates an average surplus of 3 percent of GDP between 2005/06 and 2007/08; the non-SACU fiscal deficit is an average of 20 percent of GDP for the same period.
- A medium-term fiscal framework based on a non-SACU fiscal balance would minimize downside risks to SACU revenues and ensure fiscal sustainability by saving during above-trend SACU years and smoothing spending when SACU revenues fall.
- A “normal” SACU revenue based on the median for 1996/97–2004/05 is about 14 percent of GDP.
- On this basis, estimates of a non-SACU sustainable fiscal deficit would be about 16 percent of GDP.
- Any SACU revenues above 14 percent of GDP could be used for progrowth capital investments, propoor priority expenditure, and building international reserves.
- Baseline scenario: without measures the non-SACU deficit path trends toward large deficits; with measures a sustainable path toward about 16 percent of GDP is attainable.

### Fiscal sustainability and required adjustment
- Fiscal sustainability can be restored by measures to boost domestic revenues and reduce expenditures, targeting a non-SACU fiscal deficit of about 16 percent of GDP over the medium term.
- Durable fiscal adjustment generally relies primarily on reducing expenditures; reducing capital and current spending equally, with emphasis on a durable lowering of the wage bill, worked best.
- Swaziland would need to introduce measures to reduce expenditures by about 6 percent of GDP over five years.

### Revenue reform
- At about 12 percent of GDP tax collection is low compared with other countries.
- Recommended measures: strengthen tax collection, establish large-taxpayer units, broaden the tax base, introduce the VAT, and establish a Revenue Authority.
- The impact of these measures would probably be small in 2008/09 (0.2 percent of GDP) but could increase to more than 2.0 percent of GDP by 2012/13.
- If Swaziland adopted a VAT rate similar to South Africa (14 percent), that could yield the equivalent of about 6.8 percent of GDP (the current yield in South Africa).
- Current sales tax yields average 3.5 of GDP; a 14 percent VAT would be about 3 percent of GDP higher than current sales taxes.

### Expenditure reform — wage policy and civil service reform
- The wage bill has escalated due to both higher employment and wage growth; government employees increased from 25,000 to 30,000 despite a 2004/05 civil service reform that would have eliminated 3,000 positions in three years.
- Nominal wages have increased at a rate equal to or above inflation rates.
- The wage bill is now among the highest in Africa; central government wages for 2005/06 reported as 14.4 percent of GDP (compared to 11.1 percent in 1998/99 and 12.8 percent in 2004/05).
- High wage spending extracts resources from priority spending and uses almost all domestic revenue collected.
- Expenditures on health and education could be growth-enhancing, but outcomes will depend on the quality of spending.

*Source: IMF staff estimates and projections as presented in the provided content.*

### 34.      Moreover, higher public wages may increase pressure on private wages. Since a

### _cr0886 - 34.      Moreover, higher public wages may increase pressure on private wages. Since a

### Wage bill, public wages, and competitiveness
- Higher public wages may increase pressure to raise private wages, particularly in sectors with large public employment (education and health).
- Higher manufacturing wages could reduce export competitiveness.
- An excessive wage bill makes the budget more rigid and more vulnerable to shocks.
- Studies on experience with large fiscal adjustment indicate numerous cases where unsustainable wage bills contribute to fiscal crisis.

### Short-term options to contain the wage bill and civil service size
- Combine attrition with a selective hiring freeze.
- Better centralize recruitment.
- Regularly audit the payroll system to maintain its integrity.
- Avoid across-the-board salary increases.
- Decompress the pay scale gradually to facilitate recruitment and retention of skilled personnel.
- Gradually merge in-kind benefits and allowances into the pay scale to improve budgetary transparency and decision making.

### Other expenditure adjustments and SOEs
- The 2004 privatization policy still needs implementation; priority should be improving oversight of SOEs to avoid excessive subsidies and transfers.
- Over the medium term, privatization of SOEs can significantly reduce spending, potentially reduce service costs, and generate private sector activity.
- Other adjustment measures:
  - Streamline foreign travel and transportation costs.
  - Eliminate unproductive transfers.
  - Reduce subsidies to tertiary education.
  - To a lesser degree, cut goods and services.
- The World Bank’s study indicates that in 2004/5 official foreign travel accounted for more than the entire budget for primary education.
- On average the government spends about 4 percent of GDP on transfers and subsidies.
- The government should allow pricing practices in accordance with a market mechanism that calls for a move to full cost recovery in a timely fashion.

### Reorienting expenditures and projected savings
- Expenditures should be reoriented to support private sector–driven growth and poverty reduction; the budget proposal should be aligned to the goals of the PRSAP.
- Decisive actions to reduce wage bills, unproductive spending on goods and services, and subsidies and transfers to SOEs would help to reduce current expenditures by about 2.4 percent of GDP in 2008/09 and 6.0 percent by 2012/13 (Appendix II).

### Public expenditure management (PEM) and fiscal credibility
- Effective public expenditure depends on the quality of policies and institutions; efficient use of government resources requires sound public financial management and good governance.
- Key PEM weaknesses identified (World Bank’s 2006 PER):
  - Need to improve budget preparation, budget execution, reporting, and transparency, and coordination with donors.
  - Management of commitments and prevention of arrears, payroll controls, internal and external audits, and quality of reporting need improvement.
  - Limited capacity at all levels of government is a major factor behind poor performance; well-focused technical assistance could help.
  - The budget exercise is distorted by enactment of supplementary budgets to cover unbudgeted expenditures by line departments; strict adherence to budgetary rules would prevent future arrears.
- Improvements in the computerized commitment control system have somewhat strengthened PEM, but not all spending categories (e.g., transfers) and budgetary units (regional administrations and local governments) are automated, and some expenditure arrears persist.
- Ongoing improvement of the procurement system, with assistance of Crown Agents, plays a role in ensuring efficient use of the budget.
- Containing the fiscal deficit necessitates improved budget discipline and accountability, reform of the public procurement system, firmer control of expenditure commitments, and strengthening formulation, execution, and monitoring of the MTEF.

### Medium-term expenditure framework (MTEF)
- The MTEF (introduced in 2003/04) guides a three-year budget outlook and one-year budgets.
- Remaining needs:
  - Public expenditure tracking system aligning the annual budget with the PRSA.
  - Better project evaluation and monitoring of service delivery.
- A review of capital expenditure programs is needed to focus on projects with a high social rate of return (e.g., irrigation programs).
- Priority should be given to high-return, progrowth, and propoor projects to avoid jeopardizing debt sustainability.
- Well-functioning PEM systems and the MTEF improve governance, transparency, and the business climate.

### Governance and effectiveness of spending
- Empirical evidence shows good governance is essential for effective spending.
- Corruption is associated with poorly enforced property rights, weak rule of law, and few incentives for productive investment, damaging economic growth.

### Conclusions and policy recommendations
- Despite heavy spending, economic growth has been slow and large increases in recurrent expenditures seem not to have done much for the poor.
- Fiscal consolidation and improvements in the quality of spending are needed to better facilitate economic growth and poverty reduction.
- The authorities should use the current high SACU revenues to implement fiscal measures to secure fiscal sustainability and support economic growth to at least 5 percent per year, as proposed by the PRSAP.
- Develop fiscal policy stance using the non-SACU balance to contextualize a fiscal path under domestic control and estimate needed adjustments.
- A combination of revenue and expenditure measures is recommended, including:
  - Restarting the stalled civil service reform.
  - Overhauling the tax administration.
  - Introducing the VAT.
  - Privatizing public enterprises.
  - Targeting a non-SACU fiscal balance.
- Strengthened PEM and MTEF are required to ensure fiscal resources are used efficiently; timely implementation of measures might attract donor assistance and concessional financing.
- Structural reforms over the medium term could improve international perception, increase foreign investment, and make public investment more efficient.

### Appendix I — Selected SACU and GDP figures (as provided)
- South Africa, GDP (billions of rand): 1,289 1,431 1,586 1,783 2,002 2,230 2,459 2,724
- SACU payments (billions of rand): 9.7 13.3 14.1 25.2 24.7 28.4 32.1 36.8
- SACU/GDP (in percent) (2/1): 0.75 0.93 0.89 1.41 1.23 1.27 1.31 1.20
- Swaziland's SACU share (billions of Emalangani): 1.9 2.8 3.1 5.3 4.9 5.7 6.4 6.93
- Swaziland's SACU share (in percent of total) (4/2): 19.3 20.8 22.2 21.1 20.2 20.2 20.1 18.8
- World Cup spending effect on GDP (in percent): 0.07 0.28 0.27 0.36 0.41
- Estimated SACU increase due to improved GDP (billions of Rand) (1*3*6): 0.02 0.07 0.08 0.11 0.13
- Swaziland's share in new SACU's pool (billions of Rand) (7*20%): 0.004 0.014 0.015 0.023 0.027
- Forecasted Swaziland's share (in percent): 20.2 20.2 20.0 20.0
- Forecasted Swaziland's share to the pool (in percent): 4 4.9 5.7 4.6 2.7 3.6
- Adjusted SACU revenues for Swaziland (billions of Rand): 5.00 5.75 6.44 7.39

### Appendix II — Key Measures to Restore Fiscal Sustainability (selected items and estimated impacts)
Revenue measures
- Establish a large taxpayer unit by mid-2008 (0.01-0.3 percent of GDP).
- Implement the Revenue-Authority bill, and introduce VAT within the following two years (0.1-1.5 percent of GDP).
- Simplify the tax structure by eliminating some taxes that are not productive and use staff resources to focus on higher yield taxes.

Expenditure measures
- Restore budget credibility, avoid supplementary budgets and eliminate unbudgeted expenditures and arrears.
- Strengthen expenditure management and procurement system (0.3 – 0.9 percent of GDP).
- Implement the voluntary exit retirement scheme, reallocate resources to high priority sectors, and freeze hiring (0.8 – 1.8 percent of GDP).
- Prioritize expenditures to support pro-poor and productive projects.
- Reduce excessive transportation and foreign travel (0.1 – 0.3 percent of GDP).
- Accelerate implementation of privatization programs and approve all pending bills (0.1 – 1.1 percent of GDP).
- Reduce subsidies and transfers particularly through improving the operations of the Central Transport Administration (1.5 percent of GDP).

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0886.pdf*

### 6.      The financial sector is small, but includes numerous informal financial entities.

### 6.      The financial sector is small, but includes numerous informal financial entities.

### Overview of sector structure and size
- Financial sector institutions include: the Central Bank of Swaziland (CBS), four commercial banks, one building society, two unit trusts, two development finance institutions, 56 SCCOs, a stock exchange, over 200 pension funds (private and public), six life and insurance companies, and over 100 micro finance institutions (MFIs).
- Estimated total assets of the financial sector (banks, SCCOs, pension funds and life and insurance companies) at end-2006: 105 percent of GDP.
- Comparative totals: Namibia at end-2004: 160 percent of GDP; Botswana at end-2006: 118 percent of GDP.
- Estimated size in US Dollar terms at end-2006: about US$3 billion for Swaziland; comparative: US$10.7 billion for Namibia at end-2004; US$12 billion for Botswana at end-2006.

### Banking system: depth, structure, and performance
- Financial-depth measures (Swaziland, end-2006) from Table II.1:
  - Bank deposits-GDP ratio: 21.7
  - Private sector credit-GDP ratio: 22.5
  - M2-GDP ratio: 23.0
  - M3-GDP ratio: 25.0
  - Ratio of M1 to M2: 31.3
  - Gross National Income per capita US$: 2,430
- Comparative context: Ratios of M2, M3 and bank deposits to GDP are well below all income groups, the SSA average and other SACU members. However, private sector credit-GDP ratio exceeds levels recorded by the SSA and low income countries.
- Historical dynamics: Swaziland’s credit-GDP ratio trended down until 2001 and was below SSA and low income groups between 1998 and 2004; catch-up and overtaking occurred since 2004 due to low interest rates and strong prospects for textile and sugar industries.
- Ratio of M1 to M2 (implications): low ratio reflects less reliance on cash, higher reliance on term deposits, low inflation environment, and confidence in the banking system. Swaziland’s ratio declined from 37 percent in 1980 to 31 percent in 2006, but has been rising recently partly due to disintermediation to SCCOs.
- Ownership and size (Table II.2; sizes in percent and asset-GDP ratio):
  - Standard Bank Swaziland Ltd: Government 2, Foreign 56, Public 10, Size asset-GDP ratio 12.2
  - First National Bank Swaziland Ltd.: Government 1, Foreign 0, Public 0, Size asset-GDP ratio 6.2
  - Swazibank: Government 100, Foreign 0, Public 5, Size asset-GDP ratio 5.7
  - Nedbank Swaziland Ltd: Government 2, Foreign 36, Public 7, Size asset-GDP ratio 5.4
  - Swaziland Building Society: Government 100, Foreign 0, Public 3, Size asset-GDP ratio 3.2
- Ownership: Three commercial banks (Standard Bank, First National Bank, Nedbank) are subsidiaries of South African banks. Largest bank: Standard Bank. Government-owned Swazibank is the third largest commercial bank. All five financial institutions regulated by CBS.
- Concentration of lending: 70 percent of all loans are to sugar-related industries. Exposure requirements on large and sectoral clients are met by all banks. South African-owned banks hedge exposure through parent companies.
- Prudential indicators and trends (Table II.3; selected exact figures):
  - Basle capital ratio (Tier 1): Dec-2003 14; Dec-2004 14; Dec-2005 15; Dec-2006 19.5; Mar-2007 18.6; Jun-2007 22.5
  - Nonperforming loans to total loans: Dec-2003 2; Dec-2004 3; Dec-2005 2; Dec-2006 3.6; Mar-2007 3.9; Jun-2007 3.6
  - Loans to deposit ratio (excluding Swazibank): Dec-2003 75; Dec-2004 78; Dec-2005 83; Dec-2006 85.5; Mar-2007 91.5; Jun-2007 87.9
  - Net income to average total assets (return on assets): Dec-2003 4; Dec-2004 3; Dec-2005 5.9; Dec-2006 1.5; Mar-2007 2.5
- Nonperforming loans: generally low, though higher than the rest of SACU countries; many banks have low nonperforming loans except one bank under active CBS attention.

### Access to finance
- World Bank (2007) estimate: only 35 percent of the Swazi adult population has access to an account with a financial intermediary.
- Paradox: Swaziland shows higher access than Namibia but lower private sector credit-GDP ratio; lower access than Botswana but higher credit-GDP ratio — suggesting differing restrictions on availability versus access to credit.

### Nonbank financial sector — Savings and Credit Cooperatives (SCCOs)
- Governance: SCCOs governed by the Cooperative Societies Act (2003) and the Cooperative Societies Regulations (2005) promulgated in 2006; Commissioner of the Department of Cooperatives of the Ministry of Agriculture and Cooperatives (MoAC) empowered to regulate and supervise cooperatives, including SCCOs.
- Scope and membership (end-2006):
  - Fifty five SCCOs active with 39,592 members (4 percent of the population).
  - Also 60 active farmers/multipurpose cooperatives with 3,549 members (activities include consumer shops, vegetable farming, maize production and milling, tractor hire services and sale of farm inputs).
- Key features:
  - Each member is a depositor and may take out a loan only after establishing a history of regular depositing-making, which may take up to two years.
  - SCCOs formed by workers with a common goal (examples: police, army, prison services, hotel service providers, town councils, teachers).
  - As of end-2006, 10 inactive SCCOs and 49 inactive farmers/multipurpose cooperatives existed.
  - SCCOs tend to charge higher interest rates than commercial banks but have much lower overhead costs, charges and fees and provide credit to individuals who may find it difficult to get access from banks.
  - Some 41 SCCOs are members of Swaziland Association of Savings and Credit Cooperatives (SASCCO), an Apex organization providing education, training and auditing standards.
- Growth and regulatory shortcomings:
  - Lending and deposit operations increased from less then ½ percent of GDP each in 2002 to 1½ and 2 percent of GDP, respectively by end-2006.
  - Deposits of SCCOs grew from 3 percent of commercial banks’ deposits in 2002 to 10 percent in 2006.
  - Credit extended by SCCOs grew by 116 percent a year since 2002 compared with 25 percent by banks.
  - SCCOs are required to submit annual audited accounts to MoAC, but MoAC does not systematically scrutinize them; some audits do not follow internationally accepted accounting standards. Computers are not used extensively for bookkeeping.
  - Monetary accounts compiled by the CBS do not include SCCOs.
- Concentration and vulnerabilities:
  - Top three SCCOs account for almost 50 percent of deposits or lending of all SCCOs.
  - At end-2006, deposits of SCCOs that may face financial difficulties accounted for almost 1 percent of GDP, equivalent to 4 percent of commercial banks’ deposits; their membership is about 2 percent of the population.
  - Currently, no prudential indicators exist for SCCOs.

### Nonbank financial sector — Pension funds and insurance
- Pension funds: over 200 pension funds; largest are Public Service Pension Fund (PSPF) and the Provident Fund for private sector employees.
  - PSPF accounts for almost 55 percent of the financial sector.
  - PSPF assets at end March-2007: E7.4 billion (59 percent of GDP), equivalent to US$1 billion, exceeding combined assets of the four commercial banks.
  - Rate of return on PSPF assets for financial year ending March 31, 2007: 30 percent; previous year: 42 percent; 10-year historical return: 25 percent.
  - Investment objective: at least 5 percent real return on assets.
  - Under CMA rules: investment managers may invest up to 15 percent of the Fund’s assets offshore; investments in unlisted shares and unlisted debt instruments may only be made in Swaziland at Board discretion.
  - Between 70 to 85 percent of PSPF assets have to be placed in South Africa, primarily in equities.
  - Net actuarial liabilities of PSPF: E3.2 billion in 2004/05; E1.4 billion in 2005/06; E343 million in 2006/07.
- Insurance market (end-2006):
  - Size estimated at E2 billion (16 percent of GDP).
  - Until recently SRIC (Swaziland Royal Insurance Company) held monopoly; most life policies were written by South African companies via brokers or “briefcase agents.”
  - With new legislation and regulations, five new insurance firms, mostly from South Africa, have entered the local market.
- Regulatory framework and capacity:
  - Insurance Act (2005) and the Retirement Act (2005) assign responsibility for regulating insurance and pension funds to the Registrar of Insurance Companies and Retirement Funds (RIRF).
  - RIRF established September 2006; responsible for licensing and supervising insurance intermediaries and retirement funds.
  - Few members of the office of the registrar have experience in financial system supervision; technical assistance needs are extensive and MCM has a program in place to assist.
- Local investment requirements introduced by legislation:
  - A portion of insurance and pension assets must be invested in Swaziland, starting with 10 percent in November 2007 and rising to 30 percent in three years.
  - Additional requirements: insurers to be incorporated in Swaziland, have a physical presence, and be partly owned by Swazis.
- Constraints on local investment absorption:
  - Limited economic diversity; weak demand for funds by businesses outside sugar-related industries.
  - International financial institutions reportedly offer more attractive terms for infrastructure projects than the open market.
  - Medium- and long-term debt instruments are unavailable; government unlikely to issue beyond financing a residual deficit.
  - Swazi stock market is small and largely illiquid.

### Risks, monetary implications, and policy considerations
- Risks posed by domestic investment requirement for insurers and pension funds:
  - Could lead to excess liquidity if funds are repatriated from abroad and the market cannot absorb them.
  - Could impair financial performance and solvency of insurers and retirement funds if high domestic returns are sought with excessive risks.
  - Local incorporation and physical presence requirements could deter foreign entrants, limit competition, and increase operating costs for entrants.
  - Potential adverse effects on Swazi consumers if these risks materialize.
- Monetary policy implications:
  - Excess liquidity may be deposited with banks due to lack of suitable investment vehicles; central bank may need to mop up excess liquidity and bear associated costs, which can be large (experience cited from other countries, e.g., Botswana).

*Source: IMF staff report chapter titled "6.      The financial sector is small, but includes numerous informal financial entities."*

### 22.      The authorities are mindful of these risks and challenges for monetary policy.

### _cr0886 - 22.      The authorities are mindful of these risks and challenges for monetary policy.

### Monetary policy risks and liquidity management
- Authorities are exercising flexibility in applying the domestic investment requirement while precise regulations are worked out, including investment of these assets in companies dual listed in Swaziland’s Stock Exchange and the Johannesburg Stock Exchange.
- The central bank is taking stock of options to ensure liquidity is managed prudently for monetary policy purposes without adverse effects on its balance sheet.

### The nonbank financial sector: Swaziland Stock Exchange (SSX)
- The SSX is small, illiquid and underperforming relative to regional stock markets, holding little prospects as an avenue for the domestic investment requirement.
- There are only six stocks listed on the SSX, of which only one is dual listed with the Johannesburg Stock Exchange.
- Market capitalization: US$200 million — the smallest among SACU countries (South Africa, Namibia, and Botswana).
- A Securities Bill has been pending since 1993; once passed it should empower authorities to license, authorize, and regulate all securities markets, participants and activities.

### Financial sector efficiency and profitability (banks)
- Comparative assessment: Swaziland’s banks do not appear as efficient or cost effective as banks in Namibia and Botswana; high interest margins and overhead costs reflect less efficiency.
- Bank concentration: higher concentration in Swaziland may account for higher overhead costs and higher net interest margin.
- Selected banking statistics (latest available data 2005 or 2006 or averages over 2004-06):
  - Net interest margin (percent of assets): Swaziland 6.2, Namibia 5.3, Botswana 3.6, Lesotho 3.5, South Africa 8.2, Sub-Saharan Africa (mean) 8.2, Sub-Saharan Africa (median) 5.9.
  - Overhead costs (percent of assets): Swaziland 7.1, Namibia 3.7, Botswana 3.9, Lesotho 12.0, South Africa 5.2, Sub-Saharan Africa (mean) 6.1, Sub-Saharan Africa (median) 5.5.
  - Return on assets (percent): Swaziland 5.9, Namibia 1.5, Botswana 6.1, Lesotho 2.0, South Africa 1.4, Sub-Saharan Africa (mean) 2.1.
  - Return on equity (percent): Swaziland 30.3, Namibia 19.9, Botswana 62.3, Lesotho 27.0, South Africa 18.6, Sub-Saharan Africa (mean) 20.1.
  - Bank concentration (assets of three largest banks as a share of assets of all commercial banks, percent): Swaziland 81.7, Namibia 77.5, Botswana 94.4, Lesotho 100, South Africa 98.5, Sub-Saharan Africa (median) 88.6.
- Noninterest income trends:
  - Noninterest income rose from 36 percent of total income in 2001 to over 45 percent in 2006 for commercial banks in Swaziland.
  - Rising noninterest income raises concerns of disintermediation from the banking system; SCCOs have grown in size significantly.
- Profitability:
  - Despite high overhead costs, Swaziland’s banking system enjoys the second highest level of profitability among SACU countries by return on equity or on assets.

### Key constraints to a deeper and healthier financial system
- Pending legislation constraining development:
  - Securities Bill (1993) — pending.
  - Financial Services and Regulatory Authority Bill (FSRA 2003) — pending; aimed at consolidated supervision of nonbank financial institutions including SCCOs, insurance and pension funds.
  - National Clearing and Settlement Systems Bill (NCSS, 2004) — payment system operates but has no legal basis.
- Capacity and supervision weaknesses in the cooperative credit sector (SCCOs) under Ministry of Agriculture and Cooperatives (MoAC):
  - No prudential standards established by the regulator.
  - Insufficient monitoring and supervision due to lack of capacity.
  - Financial institution expertise lacking at all levels of the cooperative sector; inability to manage credit risk will lead to continued deterioration.
  - Audited financial statements of credit cooperatives do not meet international audit and accounting standards.
  - Cooperatives Department lacks manpower and expertise for effective off-site and on-site monitoring.
  - No credit cooperative in Swaziland has adopted a comprehensive banking computer software system to track deposits and lending operations.
  - SCCO Apex organization (SACCO) faces capacity constraints in enforcing best practices in risk management.
  - Delays in implementing the FSRA bill and unclear laws may have prevented the Central Bank of Swaziland (CBS) from assisting with supervision of SCCOs.

- Investment climate and access to finance:
  - World Bank Doing Business 2008: Swaziland ranked 175 out of 178 countries in protecting investors (financial disclosure, Directors’ rights, shareholders’ rights and investor protection).
  - World Bank Enterprise Survey (2006): top constraint cited by business firms was anticompetitive or informal practices; access to finance cited as the fourth most binding constraint.
  - Doing Business 2008: obtaining credit ranked 36 out of 178 countries, but investor protection remains weak once credit is granted.

- Structural constraints:
  - Ownership rights to Swazi Nation Land account for 60 percent of the land and are severely restricted, preventing use as collateral.
  - High poverty, high inequality and a sizable informal sector further constrain financial depth.
  - Low economic growth and low financial depth have coexisted for almost ten years; lack of investment opportunities outside textiles and sugar constrains growth.

### Textiles and sugar — trade challenges and recent performance
- Exports of textiles and sugar accounted for 31.2 percent of total exports in 2006.
- Trade regime changes threatening exports:
  - Removal of global textile quotas under the Multi Fiber Agreement (MFA) in December 2004 (phased under ATC).
  - Phasing out of preferential prices for sugar to the EU: in July 2004 the EU announced a phased reduction, over four years, of prices for sugar imports by 36 percent.
- Recent export outcomes:
  - Textile exports fell by 9 percent in 2006 over the 2005 level — the first decline in five years despite extension of AGOA to 2015.
  - Sugar exports failed to register their usual strong growth as the industry grappled with the drop in EU preferential prices.
- Textile sector history and impact:
  - Textile exports increased from US $15.2 million in 1998 to US $181.0 million in 2005.
  - In 2006 textiles represented 11 percent of total exports, most of it going to the US.
  - More than 30,000 workers found employment in newly opened factories (about one quarter of formal sector jobs).
  - After MFA quotas phased out on January 1, 2005, and with significant currency appreciation, many Asian firms left; employment fell by two-thirds to below 10,000 and exports dropped.

### Conclusion: recommended financial sector strategy and sequencing
- Authorities need a financial sector strategy addressing enhancing financial development and ensuring financial stability. Key elements could include:
  - Legislation: Pass the three financial sector laws to improve the investment climate and enforce regulatory powers.
  - SCCOs: Improve supervision of SCCOs to safeguard viability and expand financial access; consider consolidated supervision of all deposit-taking cooperatives by passing the FSRA bill; include SCCO accounts in the monetary survey compiled by the CBS and extend coverage to other cooperatives over time.
  - Restrictions on the financial sector: Opt for gradual phasing of the domestic investment requirements for insurance and pension funds; explore Public Private Partnerships to develop viable projects financeable under the domestic investment requirement; over time consider securitization; expand availability of long lease arrangements (99 years or more) for Swazi Nation Land and allow these leases to be used as collateral.
  - Insurance and pension funds: Continue building regulatory capacity of the Registrar of Insurance Companies and Retirement Funds in legislation, supervisory policy and staff development per action plan agreed with the MCM.
  - Access to finance: Promote competition and disclosure to reduce bank charges and SCCO informal charges; consider removing restrictions on women’s access to finance.
  - Growth strategy: Formulate a growth strategy that removes binding constraints; many constraint removals will also deepen the financial sector.
  - Basel II: Seek technical assistance for CBS supervision staff to monitor compliance of three subsidiaries of South African banks with Basel II, while banks continue to prepare accounts under Basel I as well.
  - Stock market development: Prioritize reforms across multiple areas to develop the stock market and consider development of a secondary bond market in time.
- Sequencing and prioritization:
  - Tackle reforms that safeguard financial stability first to limit systemic effects, followed by reforms that increase financial market depth.
  - Some reforms, such as the domestic investment requirement, will be more challenging in the short to medium term and require urgent attention.

*Source: _cr0886 - 22.      The authorities are mindful of these risks and challenges for monetary policy.*

### 12.      The continuing appreciation of the South African rand (to which Swaziland’s

### _cr0886 - 12.      The continuing appreciation of the South African rand (to which Swaziland’s

### Exchange rate and impact on textiles
- The South African rand (to which Swaziland’s currency is pegged 1:1) has appreciated from a level in 2003 of R12 to $1 to its current level of about R7.2 to $1.
- This appreciation poses an obstacle to growth and expansion of the textile sector, especially after the expiration of the MFA.
- The recent depreciation of the rand has resulted in a moderate depreciation of the lilangeni in real effective terms, but inability to contain rising inflation and wage/fiscal pressures could further erode competitiveness.

### Apparel sector challenges
- Key constraints:
  - High utility and transport costs.
  - Strong and consistent wage demands; wages in the garment sector are already considered high compared to neighboring countries (with the exception of South Africa).
  - Rising incidence of HIV/AIDS adversely impacts productivity.
  - Increased competition beyond 2012 from lower-cost Asian producers including China, India, Bangladesh and Vietnam.
- Ongoing discussions aim to better position the sector to address these mounting challenges.
- Policy focus: restoring exports, attracting new investments, and promoting organic cotton (plan to cultivate up to 4,000 hectares in the South of the country to satisfy AGOA sourcing rules and complete vertical integration).

### Sugar sector — production, exports, and prices
- Land and irrigation:
  - SNL accounts for 60 percent of land area and one fourth of agricultural production; mainly rain-fed and used for subsistence farming.
  - TDL accounts for most commercial sugar production; held by freehold tenure and well irrigated.
  - Maguga dam project (completed in 2006/07) allowed irrigation of over 6,000 hectares and benefited well over 30,000 households.
  - Lower Usuthu Smallholder Irrigation Project (LUSIP) expected to become operational in September 2008.
- Area under cultivation (hectares) by year:
  - 2001/02: 47,256
  - 2002/03: 48,307
  - 2003/04: 49,932
  - 2004/05: 50,932
  - 2005/06: 52,196
  - 2006/2007: 52,233
- Production (tonnes) by year:
  - 2001/02: 500,680
  - 2002/03: 583,014
  - 2003/04: 628,191
  - 2004/05: 597,563
  - 2005/06: 652,735
  - 2006/2007: 623,357
- Exports (US $ million) by year:
  - 2001/02: 196.5
  - 2002/03: 197.5
  - 2003/04: 157.9
  - 2004/05: 204.4
  - 2005/06: 259.4
  - 2006/2007: 298.6
  - Export markets (2006/2007 split, US $ million):
    - EU: 93.2
    - SACU: 144.4
    - Other: 61.0
- Macroeconomic contribution:
  - Sugar contributes as much as 8 percent on average to GDP.
- ACP/EU price changes per tonne (as presented):
  - Previous regime€ 523.700
  - 2006/07€ 496.80 -5.1
  - 2007/08€ 496.80 -5.1
  - 2008/09€ 434.10 -17.1
  - 2009/10€ 335.00 -36.0
- Impacts of EU policy change:
  - EU announced phased reduction in price paid for sugar imports and formally denounced the ACP arrangement in September 2007.
  - After the 5.1 percent reduction in 2007/08, price falls of 12.0 percent in 2008/09 and 19 percent in 2009/10 are specified.
  - By 2015 the price offered for ACP/LDC sugar on the EU market could fall to €261.85 per ton, a further 22 percent drop in price from the anticipated 2009/10 level.
- Observed and anticipated effects:
  - In 2006/07 sugar production dropped by 4.5 percent and overall sugar exports dipped by just under 1 percent.
  - Falling prices and drought led several small farmers in 2007 to default on loans and face credit refusals.
  - Increased competition from lower-cost producers (Brazil, Thailand) during transition and fully from October 2015 will challenge viability.
  - EU’s monitored duty free-quota free access and full duty free-quota free access beyond 2015 will intensify competition.

### Competitiveness, costs, and productivity
- Swaziland faces a high cost of doing business and declining worker productivity (linked in part to HIV/AIDS), undermining the ability to attract and sustain FDI.
- World Bank Doing Business (2006 vs 2007) indicates areas needing improvement in the cost of doing business (chart referenced: percent of countries scoring better than Swaziland across indicators such as Starting a Business, Getting Credit, Paying Taxes, Trading Across Borders, etc.).
- Key competitiveness-enhancing reforms recommended:
  - Increase productivity and land productivity (including land reform strategy).
  - Reduce cost of doing business by simplifying business licensing requirements and procedures.
  - Improve transportation, energy, and telecommunication infrastructures.
  - Skills-training combined with policies to alleviate impacts of skill mismatches, labor market rigidities, and HIV/AIDS.
  - Improve governance and investment climate (anticorruption bill passage and Business Economic Advisory Panel established).

### Trade arrangements, diversification, and market access
- Diversification priorities:
  - Tourism promotion and infrastructure investment.
  - Crop diversification, agribusiness development, and small business development.
- Trade agreements and market access developments:
  - US granted extension of duty free access under AGOA to 2015; Swaziland can only benefit from sourcing fabric from third countries through 2012.
  - Economic Partnership Agreement (EPA) between SADC and the EU (adopted by the EU in December, 2007) provides duty and quota free access from 1 January 2008 with transition periods for sugar and rice.
    - Phase 1 (January 2008-October 2009): continuation of sugar protocol with substantial improvement of LDC market access for marketing year 2008/09; initial market access for ACP non-LDCs not party to the Sugar Protocol and additional market access for ACP non-LDCs party to the sugar protocol.
    - Phase 2 (October 2009-October 2015): duty free and quota free access subject to safeguard arrangements.
    - Phase 3 (October 2015 onwards): full duty free and quota free access to the EU market.
  - Other negotiations/agreements in progress:
    - Concluded SACU-EFTA free trade agreement (awaiting ratification and implementation).
    - SACU negotiating with the US on a Trade and Investment Cooperation Agreement (TICA) with view to implementation by early 2008.
    - SACU negotiating preferential Trade Agreement with MERCOSUR (first phase: fixed preferential tariff; second phase: full Free Trade Area).
    - India indicated interest in an FTA with SACU; studies on China trade arrangement ongoing.
    - Negotiations to broaden SACU to include other SADC members.
    - Technical-level negotiations on the SADC FTA by 2008 and Customs Union by 2010 (uncertain if targets will be met).
- Regional market context:
  - SACU market accounts for nearly 50 percent of sugar exports; COMESA and rest of world account for a further 25 percent.
  - Efforts underway to reduce production costs and move Swaziland from the third least cost producer of sugar in the world to a more advantageous position.

### Policy responses and recommendations (summary)
- Immediate and medium-term policy priorities:
  - Revitalize textile sector via investment attraction and organic cotton production (target up to 4,000 hectares).
  - Pursue diversification: tourism promotion, crop diversification, agribusiness, small business development.
  - Implement competitiveness-enhancing reforms: simplify licensing, improve infrastructure (transportation, energy, telecom), increase land productivity (land reform), address skills and labor market rigidities, and mitigate HIV/AIDS productivity impacts.
  - Implement recommendations from The Swaziland Investor Roadmap 2005 (USAID) and World Bank’s Investment Climate Assessment Survey to improve investment climate and country image.
  - Prepare for changing EU sugar regime by reducing costs, seeking alternative markets, and negotiating trade agreements.
- Institutional and governance measures:
  - Strengthen anti-corruption measures (parliamentary passage of an anticorruption bill noted).
  - Continue Business Economic Advisory Panel work to improve country image and investor confidence.

### Conclusion and implications
- Global trade liberalization reduces Swaziland’s ability to rely on protected market access; emphasis must shift to productivity, competitiveness, and securing mutually beneficial trade arrangements.
- Success or failure of this strategy will have far-reaching implications for the Swazi economy, employment, and poverty reduction.
- The survival of the sugar sector is critical for rural poverty alleviation; expanding cotton production is also important.
- The country must work vigorously to mitigate the impact of a changing global environment.

*Source: Central Bank of Swaziland and IMF staff estimates*

### References

### _cr0886 - References

### Bibliographic references
- Cadot O. and Nasir J. (2001) Incentives and Obstacles to Growth: Lessons from Manufacturing Case Studies in Madagascar. Washington DC World Bank Regional Program on Enterprise Development Discussion Paper no. 17.
- Central Bank of Swaziland, April 2006–March 2007, Annual Report, (Mbabane).
- European Research Office, July 2007, “The ACP Sugar Trade with the EU,” (Brussels).
- Fontaine, Thomson, July 2007, “End of Quotas Hits African Textiles,” in IMF Survey.
- Naumann, Eckart, April 2006, “The Multifibre Agreement–WTO Agreement on Textiles and Clothing,” Tralac Working Paper, No 4/2006.

### Key macroeconomic aggregates and sector output (selected statistics)
- GDP at market prices (Table 2, current prices, in millions of emalangeni): 2006 = 18,854.1.
- GDP at factor cost (Table 1, 2006, at 2000 constant prices, in millions of emalangeni): 6,174.6 (Note: GDP at factor cost 2006 shown as 8,174.6 in Table 1 header — table lists GDP at factor cost 8,174.6 and GDP at market prices 10,240.2 for 2006 at 2000 constant prices; users should refer to table for context).
- Sector shares of GDP at market prices (Table 3, 2006):
  - Final consumption expenditure: 90.8 percent of GDP.
  - Private consumption: 68.6 percent of GDP.
  - Government consumption: 22.2 percent of GDP.
  - Capital formation: 18.0 percent of GDP.
  - Balance of trade for goods and nonfactor services: -8.7 percent of GDP.
- Services share of GDP at factor cost (Table 1, 2006): 49.7 percent.
- Manufacturing share of GDP at factor cost (Table 1, 2006): 32.0 percent.
- Agriculture and livestock share of GDP at factor cost (Table 1, 2006): 12.1 percent.
- GDP deflator (index, 2000 = 100) (Table 2, memorandum): 2006 = 184.1; (percent change) 2006 = 10.3.

### Fiscal position and public finances (selected fiscal indicators)
- Central government: total revenue and grants (Table 12, 2006/07, in millions of emalangeni): 8,021.0.
- Tax revenue (Table 12, 2006/07): 7,683.3 (in millions of emalangeni).
- SACU receipts (Table 13, 2006/07): 5,321.8 (in millions of emalangeni).
- Total expenditure and net lending (Table 12, 2006/07): 6,052.1 (in millions of emalangeni).
- Overall balance (including grants) (Table 12, 2006/07): 1,969.0 (in millions of emalangeni) — positive (surplus).
- Overall balance (excluding grants) (Table 12, 2006/07): 1,803.3 (in percent of GDP) listed as 9.3 (Table 12).
- Primary balance (Table 12, 2006/07): 2,132.4 (in millions of emalangeni).
- Government debt (Table 12, end-2006/07, in millions of emalangeni): 3,251.7.
  - Foreign debt: 2,742.3 (in millions of emalangeni).
  - Domestic debt: 509.4 (in millions of emalangeni).
- Central government current expenditure (Table 14, 2006/07): 4,661.8 (in millions of emalangeni).
  - Wages and salaries (Table 14, 2006/07): 2,621.8 (in millions of emalangeni).
  - Wages and salaries as percent of current expenditure (Table 12 memorandum): 56.2 percent.

### Public transfers and subsidies
- Total subsidies to public enterprises (Table 18): 2006/07 = 289.0 (in millions of emalangeni).
- Total subsidies (in percent of GDP) (Table 18 memorandum): 1.5 percent.

### Monetary and financial sector (selected indicators)
- Broad money (M2) (Table 20, end-2007 Oct.): 5,505.3 (in millions of emalangeni).
- Broad money annual change (Table 20, 2007 Oct.): 26.8 (percent).
- Reserve money (Table 20, 2007 Oct.): 725.0 (in millions of emalangeni).
- Net foreign assets of monetary authorities (Table 20, 2007 Oct.): 4,222.7 (in millions of emalangeni).
- Private sector deposits (commercial banks) (Table 20, 2007 Oct.): 5,254.0 (in millions of emalangeni).
- Currency in circulation (Table 20, 2007 Oct.): 249.9 (in millions of emalangeni).
- Commercial banks: claims on private sector (Table 22, 2007 Oct.): 3,750 (in millions of emalangeni).
- Commercial banks: total assets = liabilities (Table 22, 2007 Oct.): 7,017 (in millions of emalangeni).
- Commercial banks: total deposits (Table 23, 2007 Oct.): 4,264 (in millions of emalangeni).

### Interest rates and liquidity (selected)
- Central Bank of Swaziland discount rate (Table 26): 2007 Oct. = 10.50 (percent).
- South African Reserve Bank discount rate (Table 26): 2007 Oct. = 10.50 (percent).
- Treasury bills yield, Swaziland (Table 26): 2007 Oct. = 9.86 (percent).
- Prime lending rate, Swaziland (Table 26): 2007 Oct. = 14.00 (percent).
- Commercial banks: liquid assets to total deposits (Table 24, Sep 2007): 20 (percent).
- Basle capital ratio (Tier 1) for commercial banks (Table 39): Dec. 2007 = 23 (percent).

### External sector and balance of payments (selected)
- Current account balance (Table 27, US$ millions): 2006 = -80.8.
- Trade balance (Table 27, US$ millions): 2006 = -140.4.
- Exports, f.o.b. (Table 27, US$ millions): 2006 = 1,484.4.
- Imports, f.o.b. (Table 27, US$ millions): 2006 = -1,624.8.
- Transfers (net) (Table 27, US$ millions): 2006 = 132.5.
- Gross official reserves (end of period) (Table 27, US$ millions): 2006 = 364.4.
  - In months of imports of goods and services (Table 27): 2006 = 2.2 months.
- Lilangeni per U.S. dollar (end of period) (Table 27): 2006 = 6.96.
- Financial account — direct investment (Table 34, US$ millions): 2006 = 32.6 (net).

### Prices, labor, and social indicators (selected)
- Retail all-groups price index (January 1996 = 100) (Table 9): 2006 = 208.11.
- All-groups index percent change (Table 9): 2006 = 5.5 (percent).
- Consumer price index in South Africa (Table 9, memorandum): 2006 = 5.3 (percent).
- Population estimates (Table 4, in thousands): 2006 = 1,146.05.
- Annual population growth (Table 4): 2006 = 1.7 (percent) [table shows sequence; 2006 entry = 1.7].
- Labor force (Table 4, in thousands): 2006 = 337.2.
- Total employment (Table 4, in thousands): 2006 = 115.4.
- Unemployment rate (Table 4): 2006 = 30.0 (percent).
- Minimum wages for general workers (Table 10, 2006): Retail and wholesale Mbabane and Manzini = 833.0 (emalangeni); Elsewhere = 726.6 (emalangeni).

### Key sectoral production (selected)
- Sugar production and related (Table 6, crop year 2006/07):
  - Area under cultivation = 52.2 (thousand hectares).
  - Area harvested = 50.4 (thousand hectares).
  - Cane production = 4,931 (thousands of metric tons).
  - Sucrose = 711 (thousands of metric tons).
  - Sugar production = 623.4 (thousands of metric tons).
  - Domestic consumption and local sales (calendar year) = 318.2 (thousands of metric tons).
- Developments in crop production (Table 5, volumes and values):
  - Sugarcane volume 2006/07 (proj.) = 4,931 (thousand metric tons).
  - Maize volume 2006/07 = 69.2 (thousand metric tons).
  - Citrus fruit volume 2006/07 = 70.8 (thousand metric tons).

### Trade composition and partners (selected 2005 figures)
- Total exports, f.o.b. (Table 37, 2005, US$ thousands): 1,612,249; share to South Africa = 69 percent.
  - Sugar, mainly raw (Table 37): exports = 259,182; share to South Africa = 77 percent.
  - Paper products (Table 37): exports = 58,445; share to South Africa = 75 percent.
  - Textiles and yarns (Table 37): exports = 86,965; share to South Africa = 71 percent.
- Total imports (Table 38, 2005, US$ thousands): 1,876,992; share from South Africa = 91 percent.
  - Food and beverages imports = 229,749; share from South Africa = 95 percent.
  - Fuels (coal and petroleum) imports = 175,589; share from South Africa = 100 percent.
  - Machinery, transport equipment, and others imports = 701,933; share from South Africa = 92 percent.

*Italic: Content derived from the document "_cr0886 - References" (statistical appendix tables and bibliographic entries).*

### 1.  Taxes on net

### 1.  Taxes on net income and profits

### 1.1 Taxes on companies — Company income tax (normal tax)
- Legal basis: Income Tax Order, 1975, as amended.
- Scope:
  - Annual income tax levied on taxable income derived from sources in Swaziland, or deemed to be in Swaziland, by all companies, foreign or domestic, public or private.
  - Agricultural cooperatives, insurance societies, and public utility companies are considered companies for taxation purposes.
- Taxable income definition:
  - Gross income (excluding capital receipts, and foreign and exempt income) less allowable deductions (including loss offsets) incurred in the process of production in Swaziland.
- Assessment year ends June 30; tax (less provisional tax payments) payable annually.
- Integration with personal income tax: exemptions, deductions, and allowances appropriate for persons may be claimed where appropriate for a company.
- Farming companies: net change in livestock and produce held is deemed income and valued at purchase price or current market prices, whichever is lower, except for companies that opted otherwise under previous tax laws.
- Exemptions (inter alia):
  - Dividend receipts of companies.
  - Receipts and accruals (including those from investments) of life insurance companies.
  - Pension benefits or provident funds.
  - Noninvestment profits of societies and associations derived solely through transactions with individual members.
- Company tax rates:
  - (a) Companies: 30 percent of taxable income.
  - (b) Companies granted development approval order: 10 percent of taxable income.

Provisional tax (companies and other persons)
- Applicability:
  - All companies, directors of private companies, and any person whose income, other than remuneration under the PAYE scheme, exceeds E 1,000 per annum.
- Payment schedule:
  - (a) On or before the last day of the six months of the year of assessment, one-half of the tax payable on the estimated income for the year.
  - (b) On or before the last day of the year of assessment, the total taxes payable on the estimated income for the year less the amount of the previous provisional tax payment.
  - Companies are required to make a third payment for year of assessment: due six months after the close of the year of assessment.
  - Farmers: one payment of provisional tax on or before the end of the year of assessment on the estimated income for the year.
- Estimated income normally not less than the taxable income in the preceding year of assessment.
- Company year of assessment = year in respect of which financial accounts are drawn up.

Development approval order (tax concession)
- Conditions:
  - Minister of Finance may declare a new business a development enterprise with prior approval of cabinet.
  - Applicable to approved new investments, business or development enterprises in the manufacturing, mining, international services and tourism sectors; available to both local and foreign investment.
- Concession terms:
  - (a) a period of 10 years;
  - (b) a tax concession on corporate tax at the minimum rate of 10%;
  - (c) an exemption from withholding tax on dividends during the ten year period.

Deductions and allowances (companies)
- General deductible items:
  - Expenditures and losses incurred in the production of income (excluding capital expenditures and dividend payments).
  - Interest charges.
  - "Reasonable" depreciation allowances for machinery, plant, implements, utensils and articles (including vehicles and equipment).
- Initial allowances:
  - Available for machinery or plants, infrastructural machinery, or facilities (including transmission equipment, and lines and pipes) qualifying for wear-and-tear allowances, and for buildings housing such machinery or plants used for the first time in a manufacturing business at the rate of 50 percent granted in the first year of assessment during which the machinery or plant or building was first used.
  - Building initial allowance equal to 50 percent of the actual cost incurred by the taxpayer for a building and improvements if used to house machinery or plant used directly in manufacture.
  - An amount equal to 4 percent of the cost to the taxpayer of any industrial buildings used in production, along with actual expenditures on repairs and maintenance.
- Other allowances:
  - Scrapping allowance for machinery, implements, utensils and articles scrapped during the year.
  - Employee dwelling allowance: 20 percent for the first year and thereafter 10 percent for the next succeeding eight years in respect of expenditure incurred in connection with the erection of any dwelling occupied exclusively by employees and used in a manufacturing process.
- Retirement annuity/pension contribution limits:
  - The total contribution by a taxpayer to retirement annuity funds is limited to the greatest of:
    - (a) 15 percent of taxable income accruing to the tax-payer in respect of trade carried on by him, provided such amount shall not exceed E 12,000 per annum; or
    - (b) E 7,500 less contributions made by the taxpayer to a pension fund; or
    - (c) E 6,000.
  - Contributions to pension schemes are limited to 20 percent of employee remuneration and annuities (less employees' contribution) up to E 6,000 per employee.
  - Any amount not exceeding E12,000 paid by way of annuity during the year of assessment to:
    - (a) a former employee who has retired on grounds of old age, ill-health or infirmity; or
    - (b) any person dependent for maintenance upon a former employee (or where such former employee is deceased, was so dependent immediately prior to his death).
- Allowance for premium/consideration in nature of premium for rights of use or occupation of land/buildings, plant or machinery, patents, designs, trade marks, copyrights, or similar property used for production of income.
- Allowance for expenditure incurred to effect improvements on land or buildings under agreement where right of use or occupation is granted and property is used for production of income.
- Bad and doubtful debts:
  - Amount of any debt due to a taxpayer to the extent proved to be bad.
  - Allowance in respect of debts considered to be doubtful by the Commissioner.
- Interest:
  - Any interest payable on loans if the loan was employed in production of income or for trade purposes.
- Charitable and public contributions:
  - Any contribution, donation, grant or gift not exceeding 5 percent of taxable income made to an amateur sporting association, charity or educational institution of a public character.
  - Any grant made to the Government for erecting school or hospital buildings.
  - Any grant to an educational institution, school or hospital for capital projects (buildings, fittings, furniture, and other capital items).
- Training:
  - Expenditure incurred during the year for appropriate training of any person employed by the taxpayer in a business the income of which is subject to tax.
- Special allowances for handicraft/cottage and export trading houses:
  - Approved cottage industry companies: additional deduction of 133 percent in respect of "approved export promotion expenditure" (in addition to normal deductions).
  - Approved export trading houses: additional deduction of 150 percent in respect of "approved export promotion expenditure".
  - Additional expenditure allowance subject to company achieving an increase in volume of exports in the subsequent year.
- National emergency contributions:
  - Contributions (cash or in kind) during the year toward any national disaster scheme or national emergency body established by the government are deductible.
- Swaziland Stock Exchange listing fees:
  - Direct "listing" fees: only one-third claimable in the year of expense; balance spread equally in the next two years.
- Research expenditures:
  - Expenditures, direct and indirect, for research related to production are deductible at the rate of annual cost or 4 percent of the total contract value, whichever is greater.

Sector-specific rules
- Farming:
  - Special 100 percent deductions (not exceeding 30 percent of gross income) allowable for a variety of on-farm expenditures (e.g., irrigation and fencing). Where these deductions are made, initial and depreciation allowances are not allowable.
- Mining:
  - Amount deductible each year in respect of income from mining operations is the capital expenditure incurred in the year of assessment after subtracting any recoupments received during the year from capital expenditure (irrespective of the date when such capital expenditure was originally incurred).
  - The capital expenditure is in lieu of allowances for depreciation, initial allowances for plant and machinery, building initial allowance, scrapping allowance, employee dwelling allowance, and allowance in respect of premiums/consideration for rights of use or occupation.
  - Capital expenditure defined to include:
    - (a) shaft sinking, building, works or equipment including renewals or replacements of equipment;
    - (b) development, general administration and management (including any interest payable on loans utilized for mining purposes) prior to commencement of production or during any period of nonproduction but excluding the cost of acquiring mineral rights;
    - (c) “expenditure” means net expenditure after taking into account any rebates, recoupments or returns expenditure;
    - (d) “expenditure of shaft sinking” includes expenditure on sumps, pump chambers, stations and bins accessory to a shaft.

### 1.12 Casino tax
- Legal basis: Casino Tax Act, 1963, (Act No. 56, 1963, as amended). Effective from July 1, 1985, composed of:
  - an annual license fee; and
  - a levy based on a percentage of the gross gaming room takings of the licensee less any amount paid out as winnings to casino patrons.
- Licensee is liable to normal tax.
- Rates and fees:
  - (a) The annual license fee is E 2,000.
  - (b) Levy on gross gaming room takings less payouts:
    - In respect of the first year of operation of the casino, no levy shall be paid.
    - In respect of the second, third, fourth, fifth, and sixth years of operation of the casino, a levy of 2.0 percent shall be paid.
    - In respect of the seventh year and subsequent years of operation, a levy of 4.5 percent shall be paid.

### 1.21 Individual income tax (normal tax)
- Legal basis: Income Tax Order, 1975, as amended.
- Scope:
  - Payable on income received by or accruing to all persons from sources within Swaziland or deemed to be within Swaziland.
  - Taxable income = gross income (excluding capital receipts and exempt income) less losses and allowable deductions.
  - Taxable income includes annuities, wages and salaries, rent, investment income, and benefits in kind (perquisites).
- Rebate and reliefs (effective from July 1, 2007):
  - (a) By way of a rebate:
    - (i) a primary rebate not exceeding E3,000 in any year of assessment; and
    - (ii) a secondary rebate of E1 200 if the individual is over the age of sixty years on the last day of the year of assessment.
    - The rebates do not apply where the concessionary rates (rates of normal tax for retiring or redundant individuals) apply.
  - (b) By an amount equal to 10 per cent of the amount paid for mortgage interest during the year of assessment subject to a maximum of E2,400.
  - (c) Death, accident, sickness, or unemployment insurance and contributions to provident and benefit funds (other than a medical aid fund) are subject to a tax rebate of 10 percent to a maximum of E 360.
- Historical note: With effect from July 1, 1991, both men and women are subject to a uniform system of taxation.
- Administration:
  - Employees subject to monthly withholding at source; other taxpayers assessed annually.
  - Nonresidents liable for income tax on income earned in Swaziland (including benefits in kind for services rendered); dividends and interest to nonresidents subject to special taxes (see 1.31 and 1.32 in source).
- Primary rebate and thresholds (examples from source text):
  - The primary tax rebate of E3,000 when combined with the lowest marginal rate of 12 percent gives an individual a threshold of E25,000.
  - Tax payable by an elderly person will be reduced by an amount not exceeding E4,500 in any year of assessment.
  - A person over the age of sixty years is entitled to both the primary rebate of E3,000 plus the secondary rebate of E1,200. When a tax rebate of E4,500 is combined with the lowest marginal rates, an elderly person would have a threshold of E34,200.
- Exemptions (examples):
  - Salaries of U.K. and South African civil servants.
  - Consular personnel not permanent residents of Swaziland.
  - War pensions and gratuities.
  - The first E 1,000 of interest income received by or accrued to an individual from a deposit in a financial institution.
  - Interest received by nonresidents from Swaziland government securities and bonds.
  - Capital sums due from a provident fund or benefit fund (pension one third of the total value of the annuity to which any employee becomes entitled may be commuted for a single payment).
  - Capital sums in commutation of a retirement annuity.
  - Severance allowance or notice pay payable under the Employment Act to an employee on termination of services is exempt from normal tax.
  - The first E 30,000 received by or accrued to an individual on retrenchment or retirement.
- Taxable income marginal rates (normal taxpayers)
  - Taxable income (in emalangeni) — Marginal (In percent)
    - 0 – 33,000: 12
    - 33,001 – 49,500: 20
    - 49,501 - 66,000: 25
    - 66,001 - 82,500: 30
    - 82,501: 33
- Trust income:
  - 33 percent of taxable income.
- Rates of normal tax for retiring or redundant individuals
  - Taxable income (in emalangeni) — Marginal (In percent)
    - 0 - 60 000: 12
    - 60,001 – 120,000: 20
    - 120,001 – 180,000: 25
    - 180,001 - 240,000: 30
    - 240,001: 33
- Provisional tax system:
  - Applies to self-employed persons and other individuals whose income, other than remuneration subject to PAYE, exceeds E 1,000 per annum (see 1.11).
- Final Deduction System (FDS) for employees:
  - Introduced by Income Tax (Amendment) Act No. 6 of 1994; in operation from July 1, 1993.
  - FDS constitutes a final liability to tax related to a full year of assessment.
  - All employees are subject to FDS provided they have not derived any other taxable income during the year of assessment.
  - Such employees are not required to furnish an income tax return if income consists solely of employment income subject to FDS.
- Dividends received by nonresidents: see 1.32 in source.
- Deductions for individuals:
  - In addition to company deductions where appropriate, employee contributions to pension funds (maximum E6,000 where the pension fund is not established by law).

### 1.22 Graded tax
- Legal basis: Graded Tax Act of 1968, as amended.
- Scope:
  - Payable by all persons resident or domiciled in Swaziland, subject to exemptions noted; akin to a head tax.
  - Tax determined on basis of gross income; payable annually for all except employees whose deductions are made monthly at source.
- Exemptions include:
  - All persons under apparent age of 18.
  - Women earning less than E 15 per month.
  - Visitors, students, and the chronically ill.
- Tax payable by gross income bands:
  - Gross income E 0 - E 299: Tax payable E 4.20
  - Gross income E 300 - E 449: Tax payable E 6.00
  - Gross income E 450 - E 600: Tax payable E 12.00
  - Gross income Over E 600: Tax payable E 18.00

*IMF Staff Country Report excerpt: "1.  Taxes on net income and profits" (section content).*

### 1.31  Tax on

### _cr0886 - 1.31  Tax on

### Tax on nonresidents' interest receipts (Income Tax Order, 1975, as amended)
- Scope: payable by persons or the estate of a deceased person not resident in Swaziland or a company not registered in Swaziland on accrued interest where the debtor (person or company) is domiciled in Swaziland.
- Legal liability: recipient legally liable; payable within 14 days of the accrual of interest.
- Collection practice: normally paid by the debtor and deducted from interest remitted.
- Exemptions:
  - interest on loans specifically exempt by government (usually government and other public body loans);
  - building society shares;
  - interest from loans to agricultural cooperatives and public utilities established by parliament;
  - interest received by church, charitable, or educational organizations;
  - interest amounting to E 20 or less in a full tax year;
  - interest on importers’ bills or notes exempt where these have been handled through the banking system.
- Rate: Tax is payable at 10 percent of the interest accrued.

### Tax on nonresident shareholders (Income Tax Order, 1975, as amended)
- Scope: payable by persons or the estate of a deceased person not resident in Swaziland or any company not registered in Swaziland on dividends received from a company domiciled in Swaziland.
- Timing: payable on both interim and final dividends and is due within 30 days.
- Legal liability: resides with the recipient, but normally paid by the payer and deducted from remitted dividends.
- Exemptions:
  - dividends paid by agricultural cooperatives;
  - dividends received by church, charitable, or educational institutions;
  - dividends accruing to a nonresident shareholder which the government has, in terms of a written undertaking, exempted from tax.
- Rates:
  - 12½ percent where dividends are payable to a company incorporated (but not a branch of company headquartered in a third country) in Botswana, Lesotho, Namibia, and South Africa.
  - 15 percent for all other destinations.

### Tax on branch profits
- Scope: tax on the deemed repatriated income of a branch of a nonresident company.
- Exemptions: No exemptions.
- Rates:
  - 15 percent.
  - 12½ percent where repatriated profits are payable to a company incorporated (but not a branch of company headquartered in a third country) in Botswana, Lesotho, Mozambique, Namibia, and South Africa.

### Tax on nonresident contractors (Income Tax Order, 1975, as amended)
- Scope: payable by every person who makes payment to a nonresident person under an agreement relating to construction operations.
- Collection: tax is deducted from each payment made to the nonresident.
- Compliance: the nonresident is not relieved from obligations to furnish returns for income tax; any assessment raised on the nonresident for income tax will be credited with the nonresident contractors' tax that has been paid on his behalf.
- Exemptions: No exemptions.
- Rate: Tax is payable at the rate of 15 percent.

### Tax on nonresident for Swaziland source services contract (Income Tax Order, 1975, as amended)
- Scope: payable by all nonresident persons on amounts derived from performance of services that give rise to Swaziland source income.
- Collection: payable on gross amount at source by withholding.
- Character: the tax is a final tax.
- Exemptions: No exemptions.
- Rate: Tax is payable at the rate of 15 percent.

### Tax on nonresident entertainers and sportsmen (Income Tax Order, 1975, as amended)
- Scope: payable by all nonresident entertainers and sportsmen who perform in Swaziland on remuneration or gross receipts of theatrical, musical, or sports performance where these receipts are received directly by the performers.
- Legal liability: resides with the recipients; payer legally required to withhold the tax due from any remuneration payable.
- Exemptions: There are no exemptions.
- Rate: Tax is payable at the rate of 15 percent.

### Nonresident Tax on Royalties & Management Charge (Income Tax Order, 1975, as amended)
- Scope: payable by nonresident persons on gross amount of any royalty and management charge derived from a source in Swaziland.
- Collection: tax is withheld at source and it is a final tax.
- Exemptions: There are no exemptions.
- Rate: Tax is payable at the rate of 15 percent.

### Tax on interest paid to residents (Income Tax Order, 1975, as amended)
- Scope: payable by residents on the gross amount of interest derived from every financial institution.
- Collection: tax is withheld at source and is a final tax.
- Exemptions: There are no exemptions.
- Rate: Tax is payable at the rate of 10 percent.

### Withholding tax on dividends paid to resident persons
- Scope: tax is payable by a person (other than a company) resident or carrying on business in Swaziland.
- Exemptions: There are no exemptions.
- Rate: Tax is payable at the rate of 10 percent.

### Tax clearance certificates
- System: tax clearance is in operation.
- Current requirement (gazette regulation): tax clearance is needed for:
  - issue, renewal, or transfer of any license, other than renewal of motor vehicle licenses, or similar document relating to any trade, business, profession, or vocation;
  - the transfer of immovable property or any endorsement to any title deed having the effect of transferring property;
  - the registration or deregistration of a company;
  - first registration of motor vehicles in Swaziland;
  - the tendering for the provision of goods or services to the government or a parastatal body, in excess of E 5,000.

### Social security contributions
- None.

*Source: _cr0886 - 1.31  Tax on*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0886.pdf_