## Structure of Financial Sector

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### Institutional and monetary arrangements
- Swaziland is a member of the Common Monetary Area (CMA) with Lesotho, Namibia, and South Africa; the Swaziland lilangeni is pegged at par to the South African rand, which is also legal tender in the country.
- CMA members and Botswana constitute the Southern African Customs Union (SACU).

### Development strategy, growth, and social indicators
- Government adopted a “Program of Action” through 2018 after 2013 elections, aiming to reduce poverty and inequality and sustain growth and employment.
- Growth and sectoral notes:
  - Growth recovered after the 2010–11 fiscal crisis, supported by manufacturing (notably food and beverages), construction, and wholesale and retail sectors.
  - Growth expected to slow in 2015 due to adverse weather and slowdown in tourism and transport.
  - Nominal GDP increased by 20 percent as a result of recent rebasing and recompilation of GDP.
- Social and macro indicators:
  - Unemployment: 28 percent in 2013/14.
  - Poverty head count: 63 percent in 2009/10.
  - HIV prevalence: 27.7 percent among adults.
  - Inflation: 4.5 percent in September 2015.

### External shocks and trade impacts
- Swaziland lost AGOA access in January 2015 after failing to meet U.S. benchmarks; authorities working on workers’ rights benchmarks.
- Textile exports to the U.S. in 2014: US$55 million, equivalent to 3 percent of total exports and 1½ percent of GDP.
- After AGOA expiration, more than 2,000 workers (about 10 percent of textile employment) were reported laid off.
- Some loss in U.S. market share was offset by increased exports to the South African market due to weakening South African rand.

### Fiscal dynamics, supplementary budget, and public debt
- 2010–11 fiscal crisis originated from a SACU revenue shortfall in 2011/12 (by 9 percent of GDP), weakening fiscal and external balances and increasing domestic financing including payment arrears.
- Fiscal policy turned expansionary post-crisis; domestic revenue collection improved; expenditures expanded due to increased recurrent spending (fast growth in public sector wages) and revival of capital expenditure.
- Fiscal balance trajectory:
  - After running surpluses for two years, fiscal balance turned into a deficit in 2014/15.
  - Deficit expected to increase in 2015/16 to 5 percent of GDP due to lower SACU revenues, wage adjustments, and increased spending with the supplementary budget.
- Public debt and financing risks:
  - Public debt projected to grow fast in 2015, with heavy reliance on short-term debt creating high rollover risks.
- Supplementary budget expected to amount to about E1.6 billion, including:
  - Cost of living adjustment for wages: E370 million
  - Increase in budget appropriations for goods and services mainly related to foreign travels: E265 million
  - Grants for the University of Swaziland: E80 million
  - Capital projects: E700 million
- Noted capital projects include an international convention center and a five star hotel at an estimated cost of E1.7 billion, or 3½ of GDP, expected to be completed for the 2020 African Union Summit.

### External sector, reserves, and exchange rate
- Current account:
  - A current account surplus recorded in 2014, supported by robust SACU revenues and exports (wood pulp, textile).
  - Net FDI flow turned negative in 2014 when a South Africa–based wood pulp company sold its facility.
- International reserves:
  - Reserves stayed at around 3½ months of imports, below authorities’ medium-term target of 5–7 months of imports.
  - Gross official reserves increased by 11.8 percent in October to E9 billion from E8 billion in September 2015 and covered an estimated 3.9 months of imports.
- Real effective exchange rate (REER):
  - REER has depreciated by about 14 percent since end-2010 (2.8 percent since end-2014) but appears moderately overvalued in overall assessment (by 1–10 percent).
  - The lilangeni recently hit historical lows against the dollar.
- Note: current account might not necessarily improve with exchange rate depreciation if expansionary fiscal policy continues.

### Financial sector structure and vulnerabilities (summary)
- Banking system: generally sound; all commercial banks meet regulatory capital requirement.
- Capital and asset concentration:
  - Capital ratios well above regulatory minima (8 percent of risk-weighted asset).
  - Banking system includes three subsidiaries of South African banks (which comprise 85 percent of Swazi banking system asset) and a state-owned bank.
  - System exhibits structural vulnerabilities: almost unitary business model of three banks and high concentration on both sides of banks’ balance sheets.
- Asset quality and concentration:
  - NPLs of the banking system average 6.4 percent of total gross loans, with some banks having NPL ratios around 20 percent.
  - Some banks have relatively high nonperforming loans and high credit concentration on large borrowers.
- Nonbank financial institutions (NBFIs):
  - Dominate the financial system in terms of asset size.
  - NBFIs include pension funds, collective investment schemes, insurance companies, a building society, the Savings and Credit Cooperatives (SACCOs), and other credit institutions.
  - NBFI deposits in banks are significant; banks estimate 10 percent of their deposits are from NBFIs.
  - Banks do not appear to lend directly to NBFIs.
- Institutional capacity:
  - Central Bank of Swaziland (CBS) established a Financial Stability Unit (FSU); FSU not fully staffed but has a work program.
  - CBS introduced a risk-based supervisory framework and finalized a self-assessment against the Basel Core Principles (BCPs).
  - Financial Services Regulatory Authority (FSRA) established in 2012 and almost fully staffed; will take time to implement robust NBFI supervision.
  - Most SACCOs licensed; on-site examinations for large SACCOs underway.

### Supervisory priorities and crisis preparedness (recommended actions)
- Strengthen banking supervision:
  - Eradicate shortcomings in risk-based supervision and remedy legislative gaps.
  - Address BCP shortcomings and facilitate move to Basel II with IMF TA.
- Strengthen crisis preparation:
  - Establish proper lender-of-last-resort functions.
  - Define cooperation among the CBS, the Ministry of Finance, and FSRA in crisis situations.
  - Manage contagion from South Africa, including crisis arrangements with the SARB in addition to information-sharing MOUs.
- Strengthen supervision for NBFIs and data:
  - Fully staff the FSU.
  - Strengthen regulation and supervision for NBFIs, fill data gaps, and improve data sharing with CBS.
  - Identify systemically important financial institutions and place them under close oversight.
- Fiscal consolidation to soften SACU shock impacts:
  - Build international reserves, reduce government financing needs, ease government liquidity, and reduce likelihood of arrears.

### Outlook and risks (Annex 1 highlights)
- Growth outlook and SACU revenues:
  - Growth projected to remain subdued; projected to slow in 2016/17 followed by modest recovery.
  - SACU revenues expected to decline markedly in 2016/17 (adjustments for overpayments in 2014/15 and expected slowdown in South Africa’s imports), followed by modest recovery.
- Transmission and spillovers:
  - Increased fiscal imbalances would necessitate large domestic financing and likely crowd out private sector credit.
  - Expected monetary tightening (following the SARB) would adversely affect growth.
- Downside risks:
  - Tighter or more volatile global financial conditions.
  - Weaker growth in South Africa.
  - Revision to the SACU revenue sharing formula.
  - Rand depreciation jeopardizing price stability.
  - Removal of the E.U. sugar quota in 2017 could lower European sugar imports including from Swaziland.
- Upside risk:
  - Strong government policy response could mitigate impacts of SACU revenue decline.
- Authorities’ stance:
  - Authorities shifted to a tighter fiscal policy stance and aim to keep international reserves above three months of imports; fiscal deficits targeted at 3‒6 percent of GDP, allowing a larger deficit in 2016/17 when SACU revenues fall markedly.

### Policy measures to prepare for expected SACU revenue fall
- Reserve benchmark and target:
  - Minimum international reserves: three months of imports.
  - Medium-term reserve target: 5‒7 months of imports.
- Fiscal and expenditure measures:
  - Contain recurrent expenditures by enforcing procurement reforms, postponing non-critical spending, streamlining transfers to state-owned enterprises, and safeguarding health and education resources.
  - Reduce domestically-financed capital spending by limiting new projects and reprioritizing ongoing and donor-funded projects.
  - Rationalize the wage bill by cleaning up unidentified workers, removing allocations for permanent vacant positions, postponing the salary review while allowing annual cost of living adjustments.
- Revenue and financing measures:
  - Enhance domestic revenue collection: improve taxpayer compliance (income tax and VAT), tax collection rate, and self-assessments.
  - Enhance availability of financing: reach out to potential investors (nonbank financial institutions) for government securities auctions, issue long-term bonds in floating interest rate, explore issuance of long-term bonds linked to specific capital projects.
- Risk management and capacity:
  - Develop a medium-term debt management strategy and an annual borrowing plan.
  - Improve cash management and forecasting with IMF technical assistance.

### Key contextual items and fiscal data
- Public Procurement Act enacted in 2011; Swaziland Public Procurement Regulatory Agency commenced operations in late 2013.
- Payroll audit discovered about 800 unidentified workers (out of 41,000 public workers).
- As of August 2015, total outstanding tax arrears reached E2.1 billion, of which more than 30 percent is expected to be recoverable.
- SRA’s preliminary tax expenditure analysis estimates losses of E2.5 billion on corporate income tax and E0.36 billion on VAT from exemptions.
- Fiscal shortfall/identification issues:
  - Weak cash management led to large unidentified financing of 1½ percent of GDP in 2012/13‒2014/15.
  - Errors and omissions in balance of payments: 1.5 percent of GDP in 2014.

### Staff medium-term projections — Baseline (selected fiscal year series, 2011–2020)
- GDP growth (annual change): 1.2, 3.0, 2.9, 2.5, 1.7, 0.8, 1.1, 1.3, 1.2, 1.2.
- Credits to private sector (annual change): 26.0, -1.7, 20.2, 9.8, 6.5, 5.3, 4.7, 4.9, 4.8, 4.8.
- Fiscal balance: -3.7, 3.4, 0.7, -1.2, -5.0, -5.9, -4.3, -3.8, -3.9, -3.9.
- Total revenue: 20.2, 29.5, 28.7, 30.1, 27.8, 22.9, 24.6, 25.1, 25.0, 25.0.
- Domestic revenue: 12.3, 12.3, 12.3, 13.1, 13.9, 14.2, 14.1, 14.1, 14.0, 14.0.
- SACU revenues: 7.8, 17.1, 15.9, 15.3, 13.3, 8.2, 9.9, 10.5, 10.5, 10.5.
- Total expenditure: 23.9, 26.1, 28.0, 31.3, 32.8, 28.9, 28.8, 28.9, 28.9, 28.9.
- Recurrent expenditure: 21.2, 22.7, 22.7, 23.9, 25.3, 24.6, 24.8, 24.8, 24.8, 24.9.
  - of which wages: 12.0, 11.0, 11.6, 11.6, 12.1, 12.1, 12.2, 12.3, 12.3, 12.2.
- Capital expenditure: 2.7, 3.4, 5.3, 7.4, 7.6, 4.2, 4.0, 4.0, 4.1, 4.1.
- Current account balance (including grants): -6.8, 3.1, 5.1, 2.9, 0.7, -1.2, 0.1, 0.8, 0.8, 0.6.
- Gross international reserves (months of imports): 2.3, 2.9, 3.7, 3.5, 3.6, 3.3, 3.2, 3.2, 3.2, 3.1.
- Total debt: 13.9, 14.4, 14.8, 13.7, 17.4, 20.2, 21.8, 24.0, 26.4, 28.8.
- Baseline assessment:
  - With authorities’ planned measures, international reserves would remain with a thin margin above the targeted floor of three months of imports.
  - Fiscal deficits increase to 6 percent of GDP in 2016/17 with the SACU revenue fall, then stabilize between 3¾‒4 percent of GDP over the medium term.
  - Public debt remains below 30 percent of GDP throughout the projected period but increases steadily.
  - Large domestic financing needs could crowd out private sector credit and hurt growth.

### Reform scenario — outcomes and selected projections (2011–2020 series)
- Reform scenario outcomes:
  - International reserves: would stay above 3½ months of imports and reach 4¼ months of imports by 2020.
  - Fiscal account: balanced by 2020/21.
  - Government debt: would stay around 20 percent of GDP.
  - Short-term growth: lower than baseline due to larger consolidation.
  - Medium-term growth: improves, supported by structural reforms and crowding in private sector credit.
- Selected figures:
  - GDP growth (annual change): 1.2, 3.0, 2.9, 2.5, 1.6, 0.8, 1.0, 1.6, 2.1, 2.5.
  - Credits to private sector (annual change): 26.0, -1.7, 20.2, 9.8, 6.3, 5.5, 4.9, 6.7, 7.4, 9.2.
  - Fiscal balance: -3.7, 3.4, 0.7, -1.2, -4.2, -5.9, -2.7, -1.2, -0.3, 0.0.
  - Total revenue: 20.2, 29.5, 28.7, 30.1, 27.8, 23.5, 25.4, 25.9, 25.9, 25.9.
  - Domestic revenue: 12.3, 12.3, 12.3, 13.1, 13.9, 14.8, 15.0, 15.0, 14.9, 14.9.
  - SACU revenues: 7.8, 17.1, 15.9, 15.3, 13.3, 8.2, 10.0, 10.5, 10.5, 10.5.
  - Total expenditure: 23.9, 26.1, 28.0, 31.3, 32.0, 29.4, 28.1, 27.1, 26.2, 25.8.
  - Gross international reserves (months of imports): 2.3, 2.9, 3.7, 3.5, 3.6, 3.4, 3.4, 3.7, 3.9, 4.1.
  - Total public debt: 13.9, 14.4, 14.8, 13.7, 17.5, 20.2, 21.5, 21.2, 20.0, 18.4.
- Policy guidance: any upward revision to SACU revenue forecast should be saved to build reserves; downward revisions require enhanced consolidation.

### Exchange rate assessment (Annex I) — staff findings
- Overall staff conclusion: REER moderately overvalued by 1–10 percent at end-2014; further depreciation of 2.8 percent since end-2014 should be put in perspective.
- EBA-lite CA approach:
  - Original model suggests REER undervalued by 12.8 percent, but after adjusting for SACU revenues points to slight overvaluation of 3.5 percent.
  - CA-Actual: 2.9% (no adjustment / with adjustments).
  - Cyclically adjusted CA: 3.1% (no adjustment / with adjustments).
  - CA-Norm: -1.5% (no adjustment / with adjustments).
  - Cyclically adjusted CA-Norm: -1.3% / 4.1% (no adjustment / with adjustments).
  - CA-Gap: 4.4% / -1.0%.
  - Real Exchange Rate Gap: -14.9% / 3.5%.
  - Elasticity of trade balance to REER: -0.30.
- EBA-lite Index REER approach:
  - Original model points to undervaluation of 14 percent; SACU-adjusted indicates REER broadly in line with fundamentals (overvaluation of 1%).
  - ln(REER)-Actual: 4.49; ln(REER)-Norm: 4.63; Adjusted ln(REER)-Norm: 4.48; REER-Gap: -14% / 1%.
- EBA-lite External Sustainability approach:
  - Points to moderate overvaluation of the REER in the scenario stabilizing the net IIP at its 2014 level (15.8 percent of GDP); REER should depreciate by 10.1 percent to close CA-gap given elasticity -0.30.

### Debt sustainability (Annex III) — key findings
- Recent developments:
  - Public debt increased from 11 percent of GDP in 2009 to nearly 14 percent of GDP in 2014.
  - Gross financing needs remain high, at about 11 percent of GDP.
  - Share of domestic debt rose from 12 percent of total public debt in 2009 to about 50 percent in 2014.
  - By end-2014, treasury bills accounted for around 61 percent of government’s domestic debt.
  - External public debt represented 53 percent of total public debt by end-2014.
- Baseline DSA:
  - Public debt remains below the indicative threshold of 60 percent of GDP under the baseline.
  - Gross public debt would approach 30 percent of GDP by 2020.
  - Gross financing needs projected to grow from about 11 percent of GDP in 2014 to about 20 percent of GDP in 2020.
- Stress tests:
  - SACU revenue shock (fall in SACU revenue by 5 percent of GDP in 2016–17):
    - Gross public debt would rise up to about 40 percent of GDP.
    - Gross financing needs would approach 30 percent of GDP by 2020.
  - A 30 percent real depreciation would raise external debt-to-GDP to around 17 percent in 2020.
  - A large current account deficit shock (2.8 percentage points of GDP larger than projected) would increase external debt-to-GDP to 27 percent by 2020.
- Reform scenario:
  - Enhanced fiscal consolidation: primary balance turns positive by 2018.
  - Effects by 2020: gross financing needs reduced to around 10 percent of GDP; public debt stock stabilized around 14 percent of GDP.

### Policy recommendations — staff priorities and concrete actions
- Fiscal consolidation while protecting social spending:
  - Contain the impact of the 2015/16 supplementary budget by reducing other spending under the original budget.
  - Further contain public sector wages, purchases of goods and services, and subsidies and transfers.
  - Safeguard critical high-return projects and postpone less critical capital projects.
- Improve quality and efficiency of spending:
  - Strengthen public financial management (PFM) and public investment management (PIM); strict project appraisal and selection.
  - Reorient expenditures toward education, health, and essential infrastructure.
  - Enact the Public Financial Management Bill to increase budgetary transparency and channel expenditures through appropriate procedures.
  - Prepare a coherent medium-term fiscal framework and improve cash management and commitment control.
  - Revisit privatization policies and rationalize public enterprises following a comprehensive public expenditure review.
- Domestic revenue measures:
  - Prioritize collection of outstanding tax arrears.
  - Explore ensuring dividend payments by profit-making public enterprises; increase fuel tax and excise taxes in tobacco and alcohol to levels comparable to South Africa.
  - Undertake tax-expenditure analysis, tax-gap analysis, and review tax incentives.
- Debt management and market financing:
  - Develop a medium-term debt management strategy and annual borrowing plan.
  - Reach out to nonbank financial institutions for government securities auctions; issue long-term floating-rate bonds and project-linked bonds.
- Financial sector supervision and stability:
  - Continue progress in risk-based supervision for banks given high credit concentration and external vulnerabilities.
  - Strengthen supervision and regulation for NBFIs, fill data gaps, and improve data sharing with CBS.
  - Prepare crisis management arrangements and lender-of-last-resort frameworks; define crisis cooperation between CBS, Ministry of Finance, and FSRA.

### Structural reforms and inclusive growth priorities
- Promote export diversification and quality upgrading; remove impediments for business (inefficient bureaucracy, corruption), enhance human capital.
- Reduce the cost of doing business: make it easier to start a business and enforce contracts.
- Enhance access to finance:
  - Establish legal framework for comprehensive credit information.
  - Establish legal framework for secured transactions and a collateral registry.
  - Enhance mobile banking.
- Improve education outcomes (raise low secondary school enrollment), finalize Draft Land Policy and Draft Land Bill, and strengthen anti-corruption and anti-money laundering regimes.
- Public-private partnerships (PPPs) Policy developed to unlock private finance for infrastructure; explore energy co-generation by sugar mills, timber producers, and others.

### Data and surveillance notes
- National accounts: staff welcomed rebasing and update of national accounts.
- Fiscal data shortcomings: weak cash management led to unidentified financing of 1½ percent of GDP in 2012/13‒2014/15; recommendation to conduct regular reconciliation exercises and strengthen cash management.
- Balance of payments: sizable errors and omissions of 1.5 percent of GDP in 2014; IMF technical assistance planned for mid-2016.
- Exchange restriction: one exchange restriction related to advanced payments for certain imports remains; staff does not recommend approval of this restriction under Article VIII.

### Selected key numerical indicators and projections (summary)
- Unidentified financing: 1½ percent of GDP in 2012/13‒2014/15.
- Errors and omissions in balance of payments: 1.5 percent of GDP in 2014.
- Reserve guidance: maintain international reserves above three months of imports; medium-term target of 5‒7 months of imports.
- National account and prices highlights (selected years):
  - GDP at constant prices: 2013 = 2.9; 2014 = 2.5; 2015 = 1.7; 2016 = 0.8; 2017 = 1.1; 2018 = 1.3; 2019 = 1.2; 2020 = 1.2.
  - Consumer prices (average): 2013 = 5.6; 2014 = 5.7; 2015 = 5.0; 2016 = 6.5; 2017 = 5.8; 2018 = 5.8; 2019 = 5.8; 2020 = 5.8.
  - Gross international reserves (months of imports): 2013 = 3.7; 2014 = 3.5; 2015 = 3.6; 2016 = 3.3; 2017 = 3.2; 2018 = 3.2; 2019 = 3.2; 2020 = 3.1.
  - Current account balance (including official transfers), percent of GDP: 2013 = 5.1; 2014 = 2.9; 2015 = 0.7; 2016 = -1.2; 2017 = 0.1; 2018 = 0.8; 2019 = 0.8; 2020 = 0.6.
  - Overall central government balance (percent of GDP): 2013 = 0.7; 2014 = -1.2; 2015 = -5.0; 2016 = -5.9; 2017 = -4.3; 2018 = -3.8; 2019 = -3.9; 2020 = -3.9.
  - Public debt, gross (percent of GDP): 2013 = 14.8; 2014 = 13.7; 2015 = 17.4; 2016 = 20.2; 2017 = 21.8; 2018 = 24.0; 2019 = 26.4; 2020 = 28.8.
- Fiscal operations (Emalangeni millions, selected):
  - Total revenue: 2013/14 = 12,178; 2014/15 = 12,911; 2015/16 = 14,675; 2016/17 = 14,538.
  - Total expenditure: 2013/14 = 10,778; 2014/15 = 12,582; 2015/16 = 15,271; 2016/17 = 17,145.
  - Net lending/borrowing: 2013/14 = 1,400; 2014/15 = 329; 2015/16 = -596; 2016/17 = -2,607.
  - Unidentified financing (financing gap): 2012/13 = 605; 2013/14 = 687; 2014/15 = 685.
- Balance of payments (US$ millions, selected):
  - Current account: 2012 = 154.7; 2013 = 233.0; 2014 = 128.5; 2015 = 29.8; 2016 = -47.6.
  - Exports, f.o.b.: 2012 = 1,926.1; 2013 = 1,895.7; 2014 = 1,903.9; 2015 = 1,626.3.
  - Imports, f.o.b.: 2012 = -1,848.3; 2013 = -1,693.6; 2014 = -1,691.2; 2015 = -1,503.1.
  - Transfers: 2012 = 975.1; 2013 = 901.4; 2014 = 798.3; 2015 = 634.8.
  - Overall balance (US$ millions): 2012 = 223.7; 2013 = 258.4; 2014 = 39.9; 2015 = -17.4.

### Risk assessment (selected risks and responses)
- Tighter or more volatile global financial conditions — Likelihood: HIGH — Expected impact: MEDIUM/SMALL.
  - Possible response: tighten fiscal policy if financing becomes problematic.
- Structurally weak growth in key advanced and emerging economies — Likelihood: HIGH (Euro area and Japan); MEDIUM (Emerging markets) — Expected impact: MEDIUM.
  - Possible response: expedite structural reforms to improve business environment and promote private sector development.
- Larger-than-forecasted decline in SACU revenues in 2016/17 and beyond — Likelihood: MEDIUM (2016/17); HIGH (2017/18 and beyond) — Expected impact: MEDIUM/LARGE.
  - Possible response: enhance fiscal consolidation by containing spending and enhancing revenue mobilization.
- Volatile energy prices — Likelihood: MEDIUM — Possible response: may need to tighten fiscal policy if pressures become problematic.

### Staff appraisal and concluding guidance
- Two key challenges:
  1. Near term: strengthen resilience to shocks and prepare for expected SACU revenue fall.
  2. Medium/long term: achieve higher and inclusive growth to meet social and development needs.
- Staff recommendation: pursue enhanced fiscal consolidation while safeguarding critical spending; strengthen financial sector supervision and regulation (including for NBFIs); implement structural reforms to promote private sector-led inclusive growth.
- Institutional and policy progress:
  - Public Debt Management Unit operational since April 2015.
  - Public Finance Management Bill finalized and resubmitted to Parliament.
  - CBS tightened monetary policy in first nine months of 2015 by increasing rates twice by a cumulative 50 basis points.
  - Authorities established the Swaziland Revenue Authority (SRA); domestic revenues performed better than targets driven by higher than expected income tax and VAT collections.

*Source: Annex 1 and main text of the IMF staff report contained in the PDF file _cr15353 - Annex 1).*

### 1. Structure of Financial Sector  __________________________________________________________________ 15

### 1. Structure of Financial Sector

### Institutional and monetary arrangements
- Swaziland is a member of the Common Monetary Area (CMA) with Lesotho, Namibia, and South Africa; the Swaziland lilangeni is pegged at par to the South African rand, which is also legal tender in the country.
- CMA members and Botswana constitute the Southern African Customs Union (SACU).

### Development strategy and policy intent
- Following parliamentary elections in 2013, the government adopted a “Program of Action” through 2018, committing to reducing poverty and inequality and aiming to sustain economic growth, employment, and poverty reduction while improving efficiency and lowering the cost of doing business.

### Growth and social indicators
- Growth recovered after the 2010–11 fiscal crisis, supported by manufacturing (notably food and beverages), construction, and wholesale and retail sectors; however, growth is expected to slow in 2015 due to adverse weather conditions and slowdown in tourism and transport sectors.
- Nominal GDP increased by 20 percent as a result of recent rebasing and recompilation of GDP.
- Unemployment: 28 percent in 2013/14.
- Poverty head count: 63 percent in 2009/10.
- HIV prevalence: 27.7 percent among adults.
- Inflation: 4.5 percent in September 2015.

### External trade shocks and sectoral impacts
- Swaziland lost AGOA access in January 2015 after failing to meet benchmarks set by the US Government; authorities have been making efforts to address benchmarks related to workers’ rights.
- Textile exports to the U.S. in 2014: US$55 million, equivalent to 3 percent of total exports and 1½ percent of GDP.
- Following AGOA expiration, more than 2,000 workers (about 10 percent of textile employment) are reported to have been laid off.
- Some loss in U.S. market share was offset by increased exports to the South African market as the weakening South African rand improved competitiveness relative to dollar-priced exports.

### Fiscal dynamics and public debt
- The 2010–11 fiscal crisis originated in a shortfall of SACU revenue in 2011/12 (by 9 percent of GDP), which significantly weakened fiscal and external balances, depleted international reserves, and increased domestic financing including domestic payment arrears.
- Fiscal policy turned expansionary after the crisis, with domestic revenue collection improving (notably corporate and individual income taxes) and strengthened VAT administration and compliance.
- Expenditures expanded due to increased recurrent spending (fast growth in public sector wages) and revival of capital expenditures.
- After running surpluses for two years, fiscal balance turned into a deficit in 2014/15. The deficit is expected to increase in 2015/16 to 5 percent of GDP due to lower SACU revenues, wage adjustments, and increased spending with the supplementary budget.
- Public debt is projected to grow fast in 2015, with heavy reliance on short-term debt creating high rollover risks.
- Supplementary budget expected to amount to about E1.6 billion, including:
  - Cost of living adjustment for wages: E370 million
  - Increase in budget appropriations for goods and services mainly related to foreign travels: E265 million
  - Grants for the University of Swaziland: E80 million
  - Capital projects: E700 million
- Noted capital projects include an international convention center and a five star hotel at an estimated cost of E1.7 billion, or 3½ of GDP, expected to be completed for the 2020 African Union Summit.

### External sector and reserves
- A current account surplus was recorded in 2014, supported by robust SACU revenues and exports (e.g., wood pulp, textile); there were financial account outflows related to limited domestic investment opportunities.
- Net FDI flow turned negative in 2014 when a South Africa–based wood pulp company sold its facility in Swaziland following its closure in 2010; other outflows were associated with portfolio and other investments in South Africa.
- International reserves stayed at around 3½ months of imports, below the authorities’ medium-term target of 5–7 months of imports.
- The real effective exchange rate (REER) has depreciated by about 14 percent since end-2010 (2.8 percent since end-2014) but appears moderately overvalued in overall assessment (by 1–10 percent).
- The lilangeni recently hit historical lows against the dollar.
- The current account might not necessarily improve with exchange rate depreciation if expansionary fiscal policy continues.

### Financial sector and vulnerabilities
- While buffers have been partially rebuilt since the crisis, vulnerabilities remain (including reliance on short-term debt and high rollover risk).
- International reserves strengthened since the crisis but have not reached adequate levels.
- Implementation of advice from previous Article IV consultations has been uneven; although there was broad agreement with authorities on macroeconomic policies and structural reform priorities, there have been no major policy changes since the last consultation.

*KINGDOM OF SWAZILAND  INTERNATIONAL MONETARY FUND*

### Annex 1).

### _cr15353 - Annex 1)

### Outlook and Risks
- Growth outlook: projected to remain subdued over the medium term, driven by a prospective decline in SACU revenues, low private sector activities, and ongoing impacts of the loss of Swaziland’s AGOA access.
- Growth path: projected to slow in 2016/17, followed by a modest recovery in the following years.
- SACU revenues: expected to decline markedly in 2016/17 (resulting from adjustments for overpayments in 2014/15 and expected slowdown in South Africa’s imports), followed by a modest recovery over the medium term.
- Transmission and spillovers:
  - Increased fiscal imbalances would necessitate large domestic financing and likely crowd out private sector credit.
  - Expected monetary tightening (following the SARB) would adversely affect growth.
- Downside risks highlighted:
  - Tighter or more volatile global financial conditions.
  - Weaker growth in South Africa.
  - Revision to the SACU revenue sharing formula.
  - Rand depreciation jeopardizing price stability.
  - Removal of the E.U. sugar quota in 2017 could lower European sugar imports including from Swaziland.
- Upside risk:
  - A strong government policy response could mitigate impacts of SACU revenue decline.
- Authorities’ stance:
  - Fully acknowledged risks and vulnerabilities, concerned about SACU revenue prospects and inflationary pressure from rand weakening and recent drought.

### Policy Discussions — Key Challenges
- Two primary challenges:
  1. Near term: strengthen resilience to shocks in preparation for the expected SACU revenue fall.
  2. Medium and long term: achieve higher and inclusive growth to meet social and development needs.
- 2015 Article IV consultation focused on addressing these challenges.

### Preparing for the Expected SACU Revenue Fall
- Reserve benchmark and target:
  - Minimum international reserves: three months of imports (viewed as important benchmark).
  - Medium-term reserve target: 5‒7 months of imports.
- Authorities’ current policy line:
  - Shift to tighter fiscal policy stance and keep international reserves above three months of imports.
  - Fiscal deficits targeted at 3‒6 percent of GDP, allowing a larger deficit in 2016/17 when SACU revenues fall markedly.
- Planned measures to achieve targets:
  - Contain recurrent expenditures by:
    - enforcing procurement reforms,
    - postponing non-critical spending,
    - streamlining transfers to state-owned enterprise,
    - safeguarding resources to health and education sectors as envisaged under the “Program of Action” for 2013–2018.
  - Reduce domestically-financed capital spending by limiting new projects and reprioritizing ongoing and donor-funded projects.
  - Rationalize the wage bill by:
    - cleaning up unidentified workers,
    - removing allocations for permanent vacant positions,
    - postponing the salary review while allowing annual cost of living adjustments.
  - Enhance domestic revenue collection by improving taxpayer compliance rate (income tax and VAT), tax collection rate, and enhancing self-assessments.
  - Enhance availability of financing by:
    - reaching out to potential investors (in particular nonbank financial institutions) for government securities auctions,
    - issuing long-term bonds in floating interest rate,
    - exploring issuance of long-term bonds linked to specific capital projects.
  - Risk management actions:
    - develop a medium-term debt management strategy and an annual borrowing plan,
    - improve cash management and forecasting with IMF technical assistance.

- Additional context and specific items:
  - Public Procurement Act enacted in 2011; Swaziland Public Procurement Regulatory Agency commenced operations in late 2013.
  - Payroll audit discovered about 800 unidentified workers (out of 41,000 public workers).
  - SRA measures: strengthening physical visits, introducing personal identification number, tougher penalties for non-compliance.
  - As of August 2015, total outstanding tax arrears reached E2.1 billion, of which more than 30 percent is expected to be recoverable.
  - SRA’s preliminary tax expenditure analysis estimates losses of E2.5 billion on corporate income tax and E0.36 billion on VAT from exemptions.

### Staff Medium-Term Projections (Baseline Scenario) — Selected figures (Fiscal year data; fiscal years run from April 1 to March 31)
- GDP growth (annual change): 1.2, 3.0, 2.9, 2.5, 1.7, 0.8, 1.1, 1.3, 1.2, 1.2 (2011–2020 series as listed).
- Credits to private sector (annual change): 26.0, -1.7, 20.2, 9.8, 6.5, 5.3, 4.7, 4.9, 4.8, 4.8.
- Fiscal balance: -3.7, 3.4, 0.7, -1.2, -5.0, -5.9, -4.3, -3.8, -3.9, -3.9.
- Total revenue: 20.2, 29.5, 28.7, 30.1, 27.8, 22.9, 24.6, 25.1, 25.0, 25.0.
- Domestic revenue: 12.3, 12.3, 12.3, 13.1, 13.9, 14.2, 14.1, 14.1, 14.0, 14.0.
- SACU revenues: 7.8, 17.1, 15.9, 15.3, 13.3, 8.2, 9.9, 10.5, 10.5, 10.5.
- Total expenditure: 23.9, 26.1, 28.0, 31.3, 32.8, 28.9, 28.8, 28.9, 28.9, 28.9.
- Recurrent expenditure: 21.2, 22.7, 22.7, 23.9, 25.3, 24.6, 24.8, 24.8, 24.8, 24.9.
  - of which wages: 12.0, 11.0, 11.6, 11.6, 12.1, 12.1, 12.2, 12.3, 12.3, 12.2.
- Capital expenditure: 2.7, 3.4, 5.3, 7.4, 7.6, 4.2, 4.0, 4.0, 4.1, 4.1.
- Current account balance (including grants): -6.8, 3.1, 5.1, 2.9, 0.7, -1.2, 0.1, 0.8, 0.8, 0.6.
- Gross international reserves (months of imports): 2.3, 2.9, 3.7, 3.5, 3.6, 3.3, 3.2, 3.2, 3.2, 3.1.
- Total debt: 13.9, 14.4, 14.8, 13.7, 17.4, 20.2, 21.8, 24.0, 26.4, 28.8.

- Baseline assessment:
  - With authorities’ planned measures (baseline), international reserves would remain with a thin margin above the targeted floor of three months of imports.
  - Fiscal deficits increase to 6 percent of GDP in 2016/17 with the SACU revenue fall, then stabilize between 3¾‒4 percent of GDP over the medium term.
  - Public debt remains below 30 percent of GDP throughout the projected period but increases steadily.
  - Large domestic financing needs could crowd out private sector credit and hurt growth.

### Policies to Strengthen Resilience (Staff recommendations)
- Contain expenditures while mitigating adverse growth impacts:
  - Reduce the impact of the 2015/16 supplementary budget on fiscal balances by reducing other spending items under the original budget.
  - Further contain public sector wages, purchases of goods and services, and subsidies and transfers.
  - Safeguard critical projects with high investment returns and postpone less critical capital projects.
- Enhance quality and efficiency of fiscal spending:
  - Strengthen public financial management and public investment management (strict project appraisals and selection).
  - Reorient expenditures towards priority areas: education, health, and essential infrastructure.
  - Enact the Public Financial Management Bill to increase budgetary transparency and ensure expenditures are channeled through appropriate budgetary procedures.
  - Prepare a coherent medium-term fiscal framework and improve cash management and commitment control.
  - Revisit privatization policies and rationalize public enterprises following a comprehensive public expenditure review.
- Explore domestic revenue measures:
  - Prioritize collection of outstanding tax arrears.
  - Explore additional measures: ensuring dividend payments by profit-making public enterprises; increasing fuel tax and excise taxes in tobacco and alcohol to levels comparable to South Africa.
  - Undertake tax-expenditure analysis, tax-gap analysis, and review of tax incentives.
- Prepare for a fiscal rule:
  - Staff analysis suggests a fiscal rule targeting a non-SACU fiscal deficit and saving windfall SACU revenues could help ensure fiscal and external sustainability once SACU revenues stabilize.

### Reform Scenario — Outcomes and Selected Projections
- Reform scenario effects:
  - International reserves: would stay above 3½ months of imports and reach 4¼ months of imports by 2020.
  - Fiscal account: would be balanced by 2020/21.
  - Government debt: would stay around 20 percent of GDP.
  - Short-term growth: lower than baseline due to larger consolidation.
  - Medium-term growth: improves, supported by structural reforms and crowding in private sector credit.
  - Policy guidance: any upward revision to SACU revenue forecast should be saved to build reserves; downward revisions require enhanced consolidation.
- Staff Medium-Term Projections (Reform Scenario) — Selected figures (2011–2020 series as listed):
  - GDP growth (annual change): 1.2, 3.0, 2.9, 2.5, 1.6, 0.8, 1.0, 1.6, 2.1, 2.5.
  - Credits to private sector (annual change): 26.0, -1.7, 20.2, 9.8, 6.3, 5.5, 4.9, 6.7, 7.4, 9.2.
  - Fiscal balance: -3.7, 3.4, 0.7, -1.2, -4.2, -5.9, -2.7, -1.2, -0.3, 0.0.
  - Total revenue: 20.2, 29.5, 28.7, 30.1, 27.8, 23.5, 25.4, 25.9, 25.9, 25.9.
  - Domestic revenue: 12.3, 12.3, 12.3, 13.1, 13.9, 14.8, 15.0, 15.0, 14.9, 14.9.
  - SACU revenues: 7.8, 17.1, 15.9, 15.3, 13.3, 8.2, 10.0, 10.5, 10.5, 10.5.
  - Total expenditure: 23.9, 26.1, 28.0, 31.3, 32.0, 29.4, 28.1, 27.1, 26.2, 25.8.
  - Recurrent expenditure: 21.2, 22.7, 22.7, 23.9, 24.9, 23.6, 23.0, 22.4, 21.5, 21.2.
    - of which wages: 12.0, 11.0, 11.6, 11.6, 12.1, 11.4, 11.4, 11.2, 11.1, 10.8.
  - Capital expenditure: 2.7, 3.4, 5.3, 7.4, 7.1, 5.8, 5.1, 4.7, 4.7, 4.7.
  - Current account balance (including grants): -6.8, 3.1, 5.1, 2.9, 0.8, -0.9, 0.5, 1.8, 2.0, 1.7.
  - Gross international reserves (months of imports): 2.3, 2.9, 3.7, 3.5, 3.6, 3.4, 3.4, 3.7, 3.9, 4.1.
  - Total public debt: 13.9, 14.4, 14.8, 13.7, 17.5, 20.2, 21.5, 21.2, 20.0, 18.4.

### Financial Sector Development and Managing Risks
- Banking system: generally sound; all commercial banks meet regulatory capital requirement.
- Identified vulnerabilities:
  - Some banks have relatively high nonperforming loans.
  - High credit concentration on large borrowers.
  - Almost unitary bank business models.
  - High concentration on both sides of banks’ balance sheets.
- Nonbank financial institutions (NBFIs):
  - Dominate the financial system in terms of asset size.
  - Directly or indirectly linked to the banking sector (including NBFI deposits at banks).
  - Banks do not appear to lend directly to NBFIs.
- NBFIs include pension funds, collective investment schemes, insurance companies, a building society, the Savings and Credit Cooperatives and other credit institutions.

*Source: Annex 1 of the IMF staff report contained in the PDF file _cr15353 - Annex 1).*

### Box 1. Structure of Financial Sector

### Box 1. Structure of Financial Sector

### System performance and structural features
- Capital ratios are well above regulatory minima (8 percent of risk-weighted asset).
- Profitability is high (Table 7).
- NPLs of the banking system remain moderate on average (6.4 percent of total gross loans), though there is wide variation among banks, with some banks having substantially higher NPL ratios (20 percent).
- The banking system includes three subsidiaries of South African banks (which comprise 85 percent of Swazi banking system asset) and a state-owned bank.
- The system exhibits structural vulnerabilities:
  - Almost unitary business model of three of the banks.
  - High level of concentration on both sides of banks’ balance sheets.

### Principal risks to the financial sector
- Main external risks:
  - A sharp decline in the SACU revenues.
  - A large drop in sugar price.
- Quantitative impact assessment indicates both solvency and liquidity of banks could come under pressure if either or both main risks materialize (Annex 2).
- Increasing links between banks and NBFIs pose risks to financial stability:
  - NBFIs deposits in banks are the most apparent link; NBFIs (mostly pension and insurance companies) place deposits with banks partly to comply with the local asset requirement and partly for liquidity management purposes.
  - Banks estimate that 10 percent of their deposits are from NBFIs.
  - Banks do not appear to lend directly to NBFIs.
  - Other indirect links are apparently growing but harder to measure.

### Authorities’ progress and institutional capacity
- The Central Bank of Swaziland (CBS) recently established a Financial Stability Unit (FSU) to strengthen its capacity to undertake financial stability analysis and reporting.
  - The FSU—while it is still not fully staffed—has developed a concrete work program, covering the legal framework for financial stability and institutional arrangements and reporting on financial stability.
- The CBS has:
  - Introduced a risk-based supervisory framework for banks and begun the process of introducing the practice of risk-based supervision.
  - Recently finalized a self-assessment against the Basel Core Principles (BCPs).
- The Financial Services Regulatory Authority (FSRA)—established in 2012—is almost fully staffed, though it will take time to implement a robust examination process to supervise a large number of NBFIs.
- Most of the Savings and Credit Cooperatives (SACCOs) have been licensed, and on-site examinations for large SACCOs are being conducted, following the IMF TA recommendations.

### Implications and supervisory priorities
- The system-wide vulnerabilities and external shocks imply the need for strengthened supervision and crisis preparedness.
- Key supervisory and regulatory measures recommended:
  - Strengthening Banking Supervision:
    - Eradicate shortcomings in risk-based supervision and remedy gaps and inconsistencies in the legislative framework.
    - Following the completion of the self-assessment against the BCPs, make further progress in addressing shortcomings and facilitate the move to Basel II, with technical assistance by the IMF.
  - Strengthening crisis preparation:
    - Establish proper lender-of-last-resort functions.
    - Define cooperation among the CBS, the Ministry of Finance, and FSRA in crisis situations.
    - Take further steps to manage possible adverse contagion from South Africa through, for example, crisis management arrangements with the SARB in addition to the information sharing MOU.
  - Softening the adverse impact of SACU revenue shock on financial sector stability through fiscal consolidation, which would help:
    - Build sufficient international reserve (which helps containing risk premium).
    - Reduce government’s financing needs (allowing crowding in of private sector credit).
    - Ease the government’s liquidity situation (reducing the likelihood of government arrears).
  - Strengthening supervision for NBFIs and ensuring financial sector stability:
    - Fully staff the FSU.
    - Strengthen supervision and regulation for NBFIs, fill data gaps, and improve data sharing with the CBS.
    - Identify systemically important financial institutions and place them under close oversight.

*Source: Swaziland authorities and IMF staff estimates.*

### 26.      To address Swaziland’s development challenges, policy efforts from multiple

### _cr15353 - 26.      To address Swaziland’s development challenges, policy efforts from multiple

### Policy priorities to address development challenges
- Promote export diversification and quality upgrading by promoting private sector development:
  - Remove perceived impediments for business (e.g., inefficient government bureaucracy and corruption) and enhance human capital.
  - Further reduce the cost of doing business, including making it easier to start a business and enforcing contracts.
  - Explore other export potentials: mining resources, seeking possibilities to retain AGOA eligibility, diversifying export markets.
- Enhance access to financing through:
  - (i) establishing a legal framework for comprehensive credit information;
  - (ii) establishing a legal framework for secured transactions and a collateral registry;
  - (iii) enhancing mobile banking (using simple tools, such as cell phone).
  - These measures would be elaborated in the upcoming financial sector strategy.
- Other structural reforms:
  - Improve education outcomes, in particular raising the low secondary school enrollment.
  - Finalize the Draft Land Policy and the Draft Land Bill to improve land management.
  - Strengthen anti-corruption and anti-money laundering regimes to support the business climate.

### Authorities’ responses and implementation status
- Government actions:
  - Re-launched the Investor Roadmap in 2012 and created an Investor Roadmap Unit in the Ministry of Commerce, Industry, and Trade.
  - Intend to enhance financial sector developments and access to credit (particularly for small and medium enterprises), based on the financial sector strategy.
  - Noted progress in labor legislation to satisfy U.S. conditions and hope additional progress will allow the country to regain AGOA access.
  - Expressed difficulty in undertaking land reforms pending wider consultations due to the complexity of land management issues.

### Data provision and surveillance issues
- National accounts:
  - Staff welcomed authorities’ efforts to rebase and update national account statistics based on the new economic survey.
- Fiscal data shortcomings:
  - Weak cash management associated with lack of proper fiscal monitoring resulted in large unidentified financing of 1½ percent of GDP in 2012/13‒2014/15.
  - Recommendation: conduct reconciliation exercises regularly and strengthen cash management.
- Balance of payments statistics:
  - Sizable errors and omissions of 1.5 percent of GDP in 2014 reflecting data and capacity constraints.
  - IMF technical assistance planned for mid-2016.

### Staff appraisal — macroeconomic vulnerabilities and near-term priorities
- Macroeconomic context:
  - Recovery from the 2010-11 fiscal crisis is gradual; growth performance improved since the crisis but slowed recently.
  - International reserve buffer has not reached the medium-term target.
  - Government’s heavy reliance on short-term financing exposes it to high rollover risks.
  - Recent shift to an expansionary fiscal policy stance increased pressures on fiscal and external balances.
  - Serious social development challenges persist, including high inequality and unemployment.
- External risks and reserve guidance:
  - Weakening regional outlook and expected decline in SACU revenues pose significant challenges.
  - Important to maintain international reserves above three months of imports, while keeping the medium-term target of 5‒7 months of imports.
- Two key challenges:
  - Near term: address the expected SACU revenue fall and manage impacts on fiscal and external balances.
  - Medium/long term: achieve higher and inclusive growth to meet social and development needs.
- Fiscal policy recommendations:
  - Staff welcomes authorities’ intention to pursue fiscal consolidation.
  - Enhanced consolidation advisable while safeguarding critical spending for social and development needs.
  - Specific actions: rationalize recurrent and capital expenditures, enhance domestic revenue collection, and effectively implement PFM and PIM reforms.
  - Note: enhanced fiscal consolidation—as envisaged under the reform scenario—could help crowd in private sector credit and facilitate private sector developments.
- Financial sector stability recommendations:
  - Further efforts needed given vulnerabilities and risks.
  - SACU revenue fall could threaten financial sector stability; fiscal consolidation helps mitigate impacts.
  - Progress in risk-based supervision for banks is essential due to high credit concentration on large borrowers and external vulnerabilities.
  - Strengthened supervision and regulation for NBFIs are called for given their dominant size.

### Private sector and inclusive growth
- To address social and development needs, raise potential for inclusive growth through private sector developments.
- Impact of AGOA loss:
  - Recent loss of AGOA eligibility adversely affected export and employment; textile producers have explored alternative markets (South Africa).
- Fast-tracking policy efforts needed in multiple areas:
  - Promote export diversification, enhance access to financing, and improve the business climate.
  - Staff commends progress in preparing a financial sector strategy (with IMF and World Bank technical assistance) and calls for implementation of reform measures under the strategy.
  - Maintaining financial sector soundness is critical for private sector-led growth.

### Other policy notes and IMF engagement
- Exchange restrictions:
  - Swaziland continues to maintain one exchange restriction related to advanced payments for certain imports (subject to Fund approval under Article VIII); authorities have not requested and staff does not recommend approval of this restriction.
- Article IV consultation:
  - Staff recommends that the next Article IV consultation take place on the standard 12-month cycle.

### Key numerical indicators and projections (selected)
- Unidentified financing: 1½ percent of GDP in 2012/13‒2014/15.
- Errors and omissions in balance of payments: 1.5 percent of GDP in 2014.
- Reserve guidance: maintain international reserves above three months of imports; medium-term target of 5‒7 months of imports.
- Table 1 highlights (National account and prices, selected years):
  - GDP at constant prices: 2013 = 2.9; 2014 = 2.5; 2015 = 1.7; 2016 = 0.8; 2017 = 1.1; 2018 = 1.3; 2019 = 1.2; 2020 = 1.2
  - Consumer prices (average): 2013 = 5.6; 2014 = 5.7; 2015 = 5.0; 2016 = 6.5; 2017 = 5.8; 2018 = 5.8; 2019 = 5.8; 2020 = 5.8
  - Gross international reserves (months of imports): 2013 = 3.7; 2014 = 3.5; 2015 = 3.6; 2016 = 3.3; 2017 = 3.2; 2018 = 3.2; 2019 = 3.2; 2020 = 3.1
  - Current account balance (including official transfers), percent of GDP: 2013 = 5.1; 2014 = 2.9; 2015 = 0.7; 2016 = -1.2; 2017 = 0.1; 2018 = 0.8; 2019 = 0.8; 2020 = 0.6
  - Overall central government balance (percent of GDP): 2013 = 0.7; 2014 = -1.2; 2015 = -5.0; 2016 = -5.9; 2017 = -4.3; 2018 = -3.8; 2019 = -3.9; 2020 = -3.9
  - Total revenue and grants (percent of GDP): 2013 = 28.7; 2014 = 30.1; 2015 = 27.8; 2016 = 22.9; 2017 = 24.6; 2018 = 25.1; 2019 = 25.0; 2020 = 25.0
  - Total expenditure (percent of GDP): 2013 = 28.0; 2014 = 31.3; 2015 = 32.8; 2016 = 28.9; 2017 = 28.8; 2018 = 28.9; 2019 = 28.9; 2020 = 28.9
  - Public debt, gross (percent of GDP): 2013 = 14.8; 2014 = 13.7; 2015 = 17.4; 2016 = 20.2; 2017 = 21.8; 2018 = 24.0; 2019 = 26.4; 2020 = 28.8
- Fiscal operations (Table 2, selected levels in Emalangeni millions):
  - Total revenue: 2013/14 = 12,178; 2014/15 = 12,911; 2015/16 = 14,675; 2016/17 = 14,538
  - Total expenditure: 2013/14 = 10,778; 2014/15 = 12,582; 2015/16 = 15,271; 2016/17 = 17,145
  - Net lending/borrowing: 2013/14 = 1,400; 2014/15 = 329; 2015/16 = -596; 2016/17 = -2,607
  - Unidentified financing (financing gap): 2012/13 = 605; 2013/14 = 687; 2014/15 = 685
- Balance of payments (Table 5, US$ millions, selected):
  - Current account: 2012 = 154.7; 2013 = 233.0; 2014 = 128.5; 2015 = 29.8; 2016 = -47.6
  - Exports, f.o.b.: 2012 = 1,926.1; 2013 = 1,895.7; 2014 = 1,903.9; 2015 = 1,626.3
  - Imports, f.o.b.: 2012 = -1,848.3; 2013 = -1,693.6; 2014 = -1,691.2; 2015 = -1,503.1
  - Transfers: 2012 = 975.1; 2013 = 901.4; 2014 = 798.3; 2015 = 634.8
  - Overall balance (US$ millions): 2012 = 223.7; 2013 = 258.4; 2014 = 39.9; 2015 = -17.4

### Risk Assessment (selected risks and policy responses)
- Risk: Tighter or more volatile global financial conditions — Likelihood: HIGH — Expected impact: MEDIUM/SMALL.
  - Impact channels: capital flow reversals in South Africa could weaken rand, push up sovereign borrowing cost in Swaziland, add to inflationary pressures.
  - Possible policy response: may need to tighten fiscal policy if financing becomes problematic.
- Risk: Structurally weak growth in key advanced and emerging economies — Likelihood: HIGH (Euro area and Japan); MEDIUM (Emerging markets).
  - Expected impact: MEDIUM — weaker demand could reduce sugar exports and exports to South Africa, deteriorate current account and growth.
  - Possible policy response: expedite structural reforms to improve business environment and promote private sector development.
- Risk: A larger-than-forecasted decline in SACU revenues in 2016/17 and beyond — Likelihood: MEDIUM (2016/17); HIGH (2017/18 and beyond).
  - Expected impact: MEDIUM/LARGE — revenue loss would worsen fiscal and external balance, threaten financial stability, and adversely affect growth.
  - Possible policy response: enhance fiscal consolidation by containing spending and enhancing revenue mobilization.
- Risk: Volatile energy prices — Likelihood: MEDIUM — impact: higher fuel prices add to pressures on prices and external balances.
  - Possible policy response: may need to tighten fiscal policy if pressures become problematic.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### Annex I. Exchange Rate Assessment

### Annex I. Exchange Rate Assessment

### Overview
- Staff analysis suggests that Swaziland’s real effective exchange rate (REER) is moderately overvalued compared to the level that would be consistent with fundamentals.
- The estimated results are mixed using different approaches, but overall point to moderate overvaluation.

### Current account developments and REER movements
- Buyoed by increased SACU revenues after the 2010-11 fiscal crisis, Swaziland’s current account has improved since 2010.
- The recent improvement of the current account can be mostly attributed to a rebound in SACU revenues (after 2010-11) and improved sugar exports (2013-14).
- In 2015, however, the closure of the Ngwenya iron ore mine and the expiration of access to the African Growth and Opportunity Act (AGOA) are expected to weigh on export earnings, leading to a slight decline in the current account surplus.
- Swaziland’s REER has depreciated since its peak at end-2010 and recently moved close to its historical average.
  - On average, the REER has depreciated by about 12 percent between end-2010 and end-2014, reversing the bulk of the appreciation of 2009-10.
  - The REER currently stands at 2.7 percent below its historical average over 1995‒2015.
  - Because the lilangeni is pegged to the South African rand, the depreciation has mostly followed the rand, although the pace of the recent depreciation was less pronounced for Swaziland.
- Staff assessment focuses on the 2014 REER using the IMF’s EBA-lite methodology, which comprises three methods (two panel regression-based analyses of the current account and real exchange rate, and a model-free sustainability analysis). EBA-lite accounts for a broader set of factors—including policies, cyclical conditions, and global capital market conditions—than CGER.

### EBA-lite: Current Account (CA) approach — findings and adjustments
- Based on the original IMF’s CA EBA-lite model, Swaziland’s REER is estimated to be moderately undervalued (12.8 percent), though this result requires caution.
  - The CA-gap is mostly explained by the regression residuals, and Swaziland has a unique current account structure with significant SACU revenues.
  - Actual current account in 2014 is a surplus of 2.9 percent of GDP and the CA-norm is -1.5 percent, so the CA-gap is estimated to be 4.4 percent of GDP, of which -1.7 percent is due to policy gaps.
  - The estimated elasticity of the trade balance to changes in the REER is -0.30.
  - Thus, the REER would need to appreciate by 15.2 percent to close the gap between the CA and the CA-norm (per original model interpretation).
- Taking into account characteristics of SACU revenues leads to an adjusted assessment pointing to a slight overvaluation (3.5 percent).
  - SACU revenues are about 16 percent of GDP on average over the last ten years and are volatile and not captured by EBA-lite fundamentals.
  - An ad-hoc adjustment estimates the impact of these revenues on the cyclically adjusted CA-norm to be 5.6 percent of GDP, making the cyclically adjusted CA-norm 4.1 percent of GDP (-1.5 plus 5.6).
  - With this adjustment, the new CA-gap is -1 percent of GDP, suggesting a slight overvaluation of 3.5 percent.
  - The contribution of policy gaps to the CA misalignment is estimated at -1.7 percent of GDP and is mostly due to a deviation of fiscal policy from its desirable position: the cyclically adjusted fiscal balance in 2014 (-3.6 percent) is judged to be below a level that would be recommended for the future (2 percent).
- Summary Table: EBA-lite CA approach (as presented)
  - No adjustment / With adjustments
  - CA-Actual: 2.9% / 2.9%
  - Cyclically adjusted CA: 3.1% / 3.1%
  - CA-Norm: -1.5% / -1.5%
  - Cyclically adjusted CA-Norm: -1.3% / 4.1%
  - CA-Gap: 4.4% / -1.0%
  - o/w Policy gap: -1.7% / -1.7%
  - Elasticity: -0.30 / -0.30
  - Real Exchange Rate Gap: -14.9% / 3.5%

### EBA-lite: Index REER approach
- The IMF’s index REER EBA-lite model points to some undervaluation of the REER (14 percent) in its original version.
- On a SACU revenue-adjusted basis, the index REER model indicates a REER broadly in line with fundamentals (an overvaluation of 1%).
  - Actual ln(REER) in 2014 is 4.49, compared with its norm of 4.63 (all expressed in logs).
  - Given the model does not capture SACU revenues, the REER-norm is adjusted down to 4.48.
  - With this adjustment, the adjusted model implies Swaziland’s REER is broadly in line with fundamentals (an overvaluation of 1%).
- Summary Table: EBA-lite Index REER approach (as presented)
  - No adjustment / With adjustments
  - ln(REER)-Actual: 4.49 / 4.49
  - ln(REER)-Norm: 4.63 / 4.63
  - Adjusted ln(REER)-Norm: - / 4.48
  - REER-Gap: -14% / 1%
  - o/w Policy gap: 0.00 / 0.00

### EBA-lite: External Sustainability (ES) approach
- The EBA-lite External Sustainability approach points to a moderate overvaluation of the REER in the scenario stabilizing the net IIP at its 2014 level (15.8 percent of GDP).
  - In this scenario, the underlying CA and the CA-norm are -3.3 and -0.3, respectively.
  - Therefore, the CA-gap is -3 percent of GDP and the REER should depreciate by 10.1 percent to close this gap, given Swaziland’s specific elasticity of the current account to the REER is -0.30.

### Staff conclusion
- In summary, staff analysis points to a moderate overvaluation (by 1-10 percent) at end-2014.
- This assessment should be put in perspective with a further depreciation of 2.8 percent since end-2014.

*Source: Annex I. Exchange Rate Assessment (IMF staff analysis).*

### Annex III. Debt Sustainability Analysis

### Annex III. Debt Sustainability Analysis

### Recent developments
- Public debt increased from 11 percent of GDP in 2009 to nearly 14 percent of GDP in 2014, owing to a large increase in primary deficit during the fiscal crisis in 2010–2011.
- Gross financing needs remain high, at about 11 percent of GDP.
- Improved SACU revenue after the fiscal crisis led to a fiscal surplus for 2012 and 2013, but the fiscal position turned to a deficit in 2014.
- Composition of public debt:
  - Share of domestic debt rose from 12 percent of total public debt in 2009 to about 50 percent in 2014.
  - By end-2014, treasury bills accounted for around 61 percent of the government’s domestic debt.
  - External public debt represented 53 percent of total public debt, primarily project loans from bilateral and multilateral sources as well as private creditors; this share is on a declining trend.

### Medium-term public DSA — overall assessment
- Heat map assessment: public debt level not subject to imminent risks, but risks arise from gross financing needs and debt profile.
- Under the baseline, gross financing needs would increase continuously and exceed the 15 percent of GDP benchmark level by 2016.
- Standard macro-fiscal shocks, particularly a primary balance shock, would push gross financing needs higher.
- The large share of debt held by non-residents—albeit declining—highlights vulnerabilities in the debt profile.

### Baseline scenario (status-quo policies; consistent with 2015 Article IV Staff Report)
- Growth: expected to decline below 1 percent per annum in 2016 and remain sluggish (slightly above 1 percent per annum thereafter).
- SACU revenue: prospective decline; total revenues (including grants) decline to about 24.1 percent of GDP in 2016 and gradually recover to around 25 percent of GDP by 2019.
- Primary fiscal expenditure: slightly decline but assumed to remain expansionary under the baseline.
- Interest payments: increase over time due to accumulation of public debt and higher interest rate.
- Primary fiscal balance: remain negative and be around 4 percent of GDP in 2016; financing mainly from short-term borrowing and withdrawal of government deposits.
- Forecast track record: forecast errors for real GDP growth and inflation mostly in line with other countries; larger forecast errors for primary balance reflecting high uncertainty around SACU revenues.

### Baseline DSA projections and financing risks
- Public debt trajectory:
  - Public debt remains below the indicative threshold of 60 percent of GDP under the baseline.
  - Gross public debt would approach 30 percent of GDP by 2020.
- Financing composition and needs:
  - Expected to be financed mainly domestically by short- and medium-term treasury bills/bonds.
  - Gross financing needs projected to grow from about 11 percent of GDP in 2014 to about 20 percent of GDP in 2020.
- Risks: continuous increase in gross financing needs raises concerns about debt accumulation and rollover risks; potential crowding out of private sector credit.

### Alternative scenarios and stress tests
- Scenarios that lower debt and financing needs:
  - "Constant Primary Balance" scenario: primary deficit set constant from 2015 onwards reduces gross public debt and gross financing needs.
  - "Historical" scenario: real GDP, primary deficit, and real interest rates set at historical averages yield similar improvements.
- Customized stress test (SACU revenue shock):
  - A fall in SACU revenue by 5 percent of GDP in 2016–17:
    - Gross public debt would be estimated to rise up to about 40 percent of GDP.
    - Gross financing needs would approach 30 percent of GDP by 2020.
  - Rapid increase in gross financing needs could crowd out private sector credit and pose maturity and roll-over risks.
- Standardized macro-fiscal stress tests:
  - Primary balance shock significantly increases gross public debt and gross financing needs.
- Contingent liability shock: also examined and raises debt vulnerabilities (specific numeric outcomes summarized above under SACU shock).

### Reform (tighter fiscal policy) scenario
- Assumes enhanced fiscal consolidation to strengthen resilience to exogenous shocks.
- Primary balance assumed to turn positive by 2018.
- Effects by 2020:
  - Gross financing needs reduced to around 10 percent of GDP by 2020.
  - Public debt stock stabilized around 14 percent of GDP.
- Historical-scenario alternative (real GDP growth, primary balance, real interest rate at historical averages) yields similar sustainable outcomes.

### Medium-term external DSA
- Gross external debt declined from nearly 16 percent of GDP in 2010 to 11.5 percent of GDP in 2014.
- Baseline projection: gross external debt slightly increase to 12.3 percent of GDP in 2020.
- Sensitivity and stress test findings:
  - External debt resilient to interest rate and growth shocks.
  - A 30 percent real depreciation would raise the external debt-to-GDP ratio to around 17 percent in 2020.
  - A large current account deficit shock—2.8 percentage points of GDP larger than projected in the baseline (one-half standard deviations)—would increase external debt-to-GDP to 27 percent by 2020.
- Policy implication: moderating the non-interest part of the external current account balance is important for external debt sustainability.

*Prepared by Manabu Nose (AFR).*

### Conclusion

### Conclusion

### Debt sustainability and risks
- The DSA indicates that both public debt and external debt are on sustainable trajectories below the debt stock thresholds under the baseline scenario, but high gross financing needs and the projected pace of debt accumulation raise concerns.
- If the expected pace of debt accumulation continues over the longer period, Swaziland would eventually face higher debt distress.
- The public debt outlook is particularly vulnerable to a shock of SACU revenue.
- Increasing gross financing needs projections—with excessive reliance on short-term financing—raise concerns about risks associated with a distorted maturity structure and debt roll-over.

### Policy recommendation: fiscal stance and reforms
- Given the difficulty of securing stable external financing sources, shifting toward more prudent fiscal policy along the lines envisaged under the reform scenario is critical for macroeconomic stability and debt sustainability over the medium term.
- It is important to tighten the fiscal policy stance over the medium term with a view to maintaining fiscal and debt sustainability over a longer term.

### Key empirical observations and indicators
- Public debt remains low around 18 percent of GDP and is significantly lower than the authorities’ 35 percent limit.
- SACU accounted for about 63 percent of higher current transfers inflows (noted in Q3 2015 improvements).
- Gross official reserves increased by 11.8 percent in October to E9 billion from E8 billion in September 2015 and covered an estimated 3.9 months of imports.
- Economic activity: GDP growth decreased from 2.9 percent in 2013 to 2.4 percent in 2014.
- Growth outlook: growth in 2015 is expected to slow to 1.7 percent.
- Sectoral developments:
  - Primary sector contracted by 3.2 percent in 2014 (poor crop production, especially citrus, and poor livestock performance).
  - Primary sector projected to grow by 6.5 percent in 2015 (benefitting from commercial agriculture and forestry; subsistence and livestock farming expected to be affected by drought).
- Historical fiscal shock: fiscal crisis in 2010/11 was mainly due to a significant decline of almost 25% in revenues from SACU.
- Banking sector soundness:
  - Non-performing loans (NPLs) declined from 10.7 percent during the crisis to 6.9 percent.
- Monetary policy actions: the Central Bank of Swaziland tightened monetary policy in the first nine months of 2015 by increasing rates twice by a cumulative 50 basis points.
- Policy tools and institutions:
  - Public Debt Management Unit became operational in April 2015.
  - The Public Finance Management (PFM) Bill has been finalized and resubmitted to Parliament.
  - Authorities established the Swaziland Revenue Authority (SRA); domestic revenues have performed better than targets driven by higher than expected income tax and VAT collections.

### Fiscal adjustment and other policy measures under consideration
- Fiscal consolidation and precautionary steps to safeguard confidence include:
  - Reviewing spending priorities and containing recurrent spending.
  - Rationalizing the wage bill (authorities exploring a wage and hiring freeze across all sectors for the remainder of 2015; deferring and/or closing unused positions).
  - Minimizing expenditure on goods and services to essential items.
  - Enhancing domestic revenue collection (amend Income Tax regulations; introduce a levy on alcohol and tobacco).
  - Amendment to the Tax Law to reduce tax exemptions submitted to Parliament.
- Public finance management reforms and capacity building:
  - Implementation of a new financial management IT and accounting system with support from IMF, World Bank, and European Union.
  - Continued improvements in procurement and cash management processes.
- Financial sector regulation and stability measures:
  - Strengthened collaboration between CBS and the Financial Services Regulatory Authority (FSRA).
  - CBS established a financial stability unit and adopted a risk-based supervisory framework for banks.
  - FSRA is strengthening the regulatory framework for non-bank financial institutions (NBFIs).
- Structural reforms and private sector development:
  - Focus on facilitating private sector growth, improving investment climate, and promoting tradable goods sector expansion.
  - Public Private Partnerships (PPPs) Policy developed to unlock private finance for infrastructure.
  - Exploring energy co-generation by sugar mills, timber producers, and others to supply the national grid; reviewing legal framework to incentivize participation.

*Source: _cr15353 - Conclusion (IMF staff report excerpts).*

### Conclusion

### Conclusion

### Fiscal position and challenges
- Swaziland seems to have recovered from the 2010/11 fiscal crisis.
- The challenge now is how to respond to the looming shortfall in SACU revenues, especially when the fiscal buffers have not been sufficiently restored.

### Policy commitments and objectives
- The authorities remain committed to supporting and ensuring a more inclusive and sustainable economic growth.
- The authorities realize the need to pursue sound macroeconomic policies.

### Structural reforms and external support
- The authorities plan to undertake structural reforms that will reduce the country’s susceptibility to external shocks and reduce dependency on the volatile SACU revenues.
- They appreciate the ongoing Fund advice and Technical Assistance.

*Source: _cr15353 - Conclusion*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15353.pdf_