IMF Staff Completes 2024 Article IV Mission to Kingdom of Eswatini
IMF News, July 24, 2024
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Bibliographic details
- Published: July 24, 2024
Mission overview and context
- IMF staff team led by Mr. Jaroslaw Wieczorek visited Mbabane during July 11‒24, 2024 to conduct discussions for the 2024 Article IV Consultation with Eswatini.
- End-of-mission statement conveys preliminary findings of IMF staff; views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
- Staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.
Growth and external sector
- Growth is estimated to have reached 4.9 percent in 2023.
- Growth drivers in 2023: exports of sugar and soft drink concentrates, tourism, and the communication sector.
- Growth is poised to remain in the 4.5 to 5.0 percent range in 2024, before returning to its historical average of about 2.5 percent in the medium term.
- High capital investment, energy projects, and expansion in the mining sector can spur growth, but concrete measures and a well-defined investment program to raise potential growth need to be articulated.
- External current account:
- Turned from a deficit of 2.7 percent of GDP in 2022 to a surplus of 2.2 percent of GDP in 2023.
- The surplus is expected to persist in 2024 thanks to high SACU receipts.
- Foreign reserves are accumulating but not commensurately, partly because banks and nonbanks increased their net foreign asset positions and exporters were allowed to keep their proceeds abroad.
- The external position is expected largely to normalize once the SACU receipts revert to the baseline in the medium run.
- Recommendation: Strengthen buffers to manage SACU revenue volatility and implement structural reforms to improve external competitiveness.
Inflation and cost of living
- Average 12-month inflation rose to 4.4 percent in June.
- CPI inflation rose to 4.4 percent y/y in June 2024 from 3.5 percent in September 2023.
- Contributors to the June 2024 inflation:
- Housing, fuel, and power: 1.9 percentage points.
- Food: 0.9 percentage points.
- Core inflation ran at 3.4 percent.
- Inflation in Eswatini has been lower than in South Africa; in May 2024 the difference exceeded one percentage point, partly due to administrative prices on utilities and staple goods.
- Inflation is expected to rise further in the wake of electricity tariffs increases before easing in line with global trends.
- The increased cost of living has highlighted the importance of strengthening the social safety net.
Fiscal position, financing, and public debt
- Record high SACU revenues have significantly improved the fiscal position.
- Fiscal deficit expected to narrow to 1.5 percent of GDP in FY24/25.
- Risks to the fiscal position: lower SACU receipts in the future, spending pressures, and slowing growth.
- Staff’s medium-term scenario projects the fiscal deficit to widen; greater expenditure restraint will be needed to cap the deficit at 3.5 percent of GDP starting in 2025/26 to stabilize public debt at around 40 percent of GDP, as is the government’s intention.
- Fiscal stance: broadly appropriate, but some key expenditure areas need attention.
- Recommendations on public spending and staffing:
- End the public sector hiring freeze, accompanied by a rationalization of the public sector to increase productivity and adequately staff key positions, especially in statistics and delivery of social services.
- Spending on health and education is critical, but proper spending controls and increased efficiency must accompany additional funding.
- Fiscal financing concerns:
- Shortfalls in net issuance of treasury bills and bonds are contributing to cash management challenges and domestic payment arrears.
- In May 2024 the government raised 400 million rand on the Johannesburg Stock Exchange; further financing is needed, although costly in the current high interest rate environment.
- Positive fiscal management developments:
- Digitalization efforts in government accounting systems are important steps for improving public financial management.
- Work on a well-defined medium-term fiscal framework is advanced.
- Priority: ensure new systems align with international standards for chart of accounts and Government Financial Statistics.
Monetary policy and financial sector
- Policy rate is at 7.5 percent, which is 75 basis points lower than that of the South African Reserve Bank (SARB).
- Prolonged deviation from the SARB policy rate could generate risks, especially as the current account is expected to weaken.
- Despite the interest rate differential, credit growth lags nominal GDP growth due to limited domestic investment opportunities.
- Recommendation: Align the Central Bank of Eswatini (CBE)’s rate with the SARB rate as the first best option given concerns about foreign reserve adequacy.
- Financial system:
- Buffers are being rebuilt after the pandemic, but asset quality remains a concern.
- Banks are wary of rising NPLs and diminished credibility of the government; they maintain a large excess reserve position at the CBE in the remunerated overnight call window.
- Orderly workouts can alleviate stress and reduce risks.
Labor market, poverty, and social policies
- His Majesty the King recognized high poverty and unemployment as a national emergency; job creation was a focus of the FY24/25 budget.
- Unemployment rates:
- Overall unemployment: 35.4 percent in 2023.
- Youth unemployment: 48.7 percent in 2023.
- Causes: dearth of employment opportunities and large skill gaps and mismatches.
- Current initiatives to address unemployment have yet to yield significant results.
- Policy recommendations:
- Support private sector development to attract foreign direct investment to address bottlenecks in the power sector.
- Promote green financing to address climate change vulnerabilities.
- Support long-term growth with entrepreneurship, business facilitation, and education policies.
Structural reforms and governance
- Need for deep structural reforms to boost growth and tackle social issues:
- Strengthen efficiency of public investment.
- Increase support for entrepreneurship.
- Improve governance.
- Revamp education policy to address skills mismatches and tackle structural unemployment.
- Governance improvements:
- Anti-Corruption Commission appears to have gained vigor.
- Progress on AML/CFT with the recently completed National Risk Assessment.
- More work needed to address key shortcomings, resource constraints, and alter negative perceptions to strengthen the business climate and attract foreign direct investment.
Data, statistical capacity, and digitalization
- Increasing resources for data producing offices is key (The Central Statistics Office, Treasury, and Ministry of Labor & Social Security).
- Digitalization can help improve data collection.
- Ensuring new government accounting systems conform with international standards for chart of accounts and Government Financial Statistics is a priority.
IMF Staff Completes 2024 Article IV Mission to Kingdom of Eswatini — July 24, 2024