IMF Survey: Swaziland Uses IMF Monitoring Program to Fight Fiscal Crisis

IMF News, April 8, 2011

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IMF management approved a Staff-Monitored Program for Swaziland on April 4, 2011 to encourage fiscal adjustment while safeguarding spending on education and health.
The program entails IMF staff scrutiny of the authorities’ policies but does not include formal backing by the IMF Executive Board or any financial support.
The agreement monitors implementation of the Government of Swaziland’s economic and financial program during a specified period.

Overall budget deficit estimated around 13 percent of GDP for the 2010/11 fiscal year ending on March 31, 2011.
Swaziland faces a liquidity crisis (short-term financing constraints) rather than a solvency crisis, with a debt-to-GDP ratio around 20 percent of GDP.
Risk that the liquidity crisis could quickly turn into a solvency crisis if fiscal adjustment is not implemented promptly, as adjustment will take time and could imply a growing debt-to-GDP ratio over the coming years.
Heavy dependence on Southern African Customs Union transfers, which accounted for 63 percent of total revenues in 2009/10; these transfers fell by about two-thirds (11 percent of GDP) following the global financial crisis and are not expected to recover to pre-crisis levels.

Swazi authorities adopted a Fiscal Adjustment Roadmap in late 2010 focused on restoring fiscal sustainability.
Short-term measures in the roadmap include tax increases and a hiring and wage freeze.
Medium-term measures emphasize strengthening Finance Ministry functions: public financial management, expenditure policy, tax policy, and revenue administration.
The package proposes reducing the civil service by 20 percent through an enhanced voluntary early retirement scheme.
The roadmap was submitted for scrutiny under the IMF Staff-Monitored Program; approval does not represent endorsement by the IMF Executive Board nor involve IMF financing.

Wage bill described as one of the largest in sub-Saharan Africa, at around 18 percent of GDP in FY2010/11.
Budget weaknesses have led to off-budget expenditures subsequently regularized by supplementary budgets.
Specific budgetary pressures in 2010/11:
- A 4½ percent unbudgeted wage increase granted to civil servants and politicians in June 2010.
- Additional expenditure of around $50 million to finance overruns for a new airport project.

Large fiscal adjustment in 2011 and structural impediments are projected to dampen real GDP expansion to about ½ percent in 2011.
Consumer price inflation projected to accelerate to about 8 percent in 2011 from 6¼ percent in 2010, reflecting higher domestic taxes and levies, and increases in international food and fuel prices.
Mirroring the sharp fiscal adjustment, the current account is expected to improve significantly.

Key priority: protect pro-poor spending (education and health) while consolidating public finances.
Rationale: Swaziland has the highest incidence of HIV/AIDS and tuberculosis in the world, skewed income distribution, and pervasive poverty; protecting education and health is essential to progress towards halving poverty by 2015.
Under the Staff-Monitored Program, IMF staff recommended additional upfront measures to strengthen the credibility of the fiscal roadmap and to assist authorities in raising adequate financing for the budget.

IMF staff recommended nominal wage cuts for higher-paid civil servants, with smaller reductions for lower-paid civil servants, to reduce the size of the wage bill.
Government commitments and actions:
- Committed to cut the salaries of cabinet ministers by 10 percent.
- Negotiations underway with parliamentarians and trade unions to achieve a 5 percent cut in the overall wage bill.
These cuts intended to allow continued financing of pensions for the elderly, school programs for orphaned children, and medicines for people infected with HIV/AIDS.

Source: IMF Survey: Swaziland Uses IMF Monitoring Program to Fight Fiscal Crisis (IMF), April 8, 2011