The unsustainable current fiscal trajectory in Swaziland is largely driven by the fiscal indiscipline by the Government, the drastic drop in revenue from the Southern African Customs Union (SACU) in mid-2010, an unsustainably high public wage bill (approximately 18% of GDP in 2010/11) and weak private sector performance. The Government is blamed for the lavish and severe expenditure by King Mswati’s administration and on the relatively large wage bill. In attempts to resolve the fiscal difficulties, in 2010 the Government started introducing measures aimed at attaining fiscal sustainability in the country’s budget process. The Ministry of Finance is working closely with the International Monetary Fund (IMF) to restore fiscal discipline within Government.

This CAI discussion paper draws attention to the current fiscal developments in Swaziland and highlights the measures being implemented by the Government to address these issues.

The Swazi Economy

Swaziland is a small landlocked country that is highly dependant on its strong ties with South Africa, from which it receives approximately 90% of its imports and to which it sends 60% of its exports. The country belongs to the Common Monetary Area (CMA) in which the lilangeni is pegged to the South African rand. Monetary policy of Swaziland tracks the South African trends. The Central Bank of Swaziland has managed to converge the interest rate (discount rate) with the South African Reserve Bank’s repo rate. The country also belongs to SACU, and intakes from the customs union have been contributing approximately 70% to Government revenue. However, the revisions of the revenue sharing formula among the SACU countries have significant implications for the Swazi economy. Due to the CMA arrangement, credible monetary policy has been attained in contrast to the country’s fiscal policy, which has resulted in unsustainable budget deficit.

The economy continues to underperform in terms of GDP growth, due to the recent global economic crisis and other existing obstacles to growth.⁽²⁾ Lack of competitiveness, structural impediments to growth and the heavy toll of HIV and AIDS on economic activity all contribute significantly to the underperformance of Swaziland as compared to other SACU members.⁽³⁾ Fiscal indiscipline, defined as excessive public spending over revenues, further threatens the already fragile economic confidence and increases the nervousness of capital markets and investors about the Government’s funding needs.

Build up to the fiscal crisis

Swaziland is facing a serious fiscal crisis, with an overall budget deficit estimated around 13% of GDP for the 2010/11 fiscal year. As a result, the Government is being confronted with significant short-term liquidity constraints in financing its large fiscal deficit. The crisis stems from structural imbalances in both Government expenditures and revenues. Discontent with the regime of King Mswati III triggered the public to express dissatisfaction with the fiscal trends in the country. Given the cost of living, disgruntled civil servants persist in expressing their dissatisfaction. However, to silence protestors, the Government continues to threaten those who embark on nationwide protests against the King’s rule and the need for political reform.⁽⁴⁾

Significant weaknesses in the budget process led to off-budget expenditures in the past which were subsequently regularised by supplementary budgets. For example, the unbudgeted wage increases granted to civil servants and politicians and additional expenditure of around US$ 50 million to finance expenditure overruns for a new airport project. At the moment, two-thirds of the population lives in poverty and the country has a 40% unemployment rate.⁽⁵⁾ In the build up to this fiscal crisis, the Government has been promising that education and health would not be affected, nonetheless, these sectors are the hardest hit.

The decline in the SACU revenues is also contributing significantly to the fiscal difficulties the country is facing. Swaziland benefitted from the boom in revenue payments in the SACU regional block. The SACU revenues provided an economic lifeline to Swaziland. With the recent global economic and financial crisis of 2008/2009, the SACU revenues dropped by about 70% in 2010.

Reviving the fiscus: The fiscal roadmap

In the absence of implementing effective corrective measures, the country’s fiscal deficit is expected to reach about 16% in 2011. To thwart this, the Government introduced a fiscal reform programme called the Fiscal Adjustment Roadmap (the FAR strategy) adopted in October 2010. The FAR strategy includes short-term measures such as tax increases and a hiring and wage freezes. It also carries provisions to be implemented over the medium-term, largely focused on strengthening the functions of the Finance Ministry such as public financial management, expenditure policy, tax policy, and revenue administration. In addition, the Government has also instituted a new revenue collection authority, proposed a 7000 public sector job cut to significantly reduce the wage bill, raised fuel taxes and proposed to significantly reduce other public expenditure items. To boost revenues, the government is introducing new revenue instruments, for example, a minimum of 3% per annum for the lower end of the tax-payers, capital gains tax and upward revision of casino levies, lotteries and gaming taxes as well as the introduction of valued-added tax (VAT). VAT will be introduced in 2012. It is expected that revenue collection from these initiatives will greatly improve the fiscal position going forward.

With fiscal adherence to the reform strategy (FAR), the budget deficit is expected to decline and the Government’s project management is also expected to improve and reduce budget cost overruns such as those experienced on the airport construction project, where a supplementary budget of E350 million in November 2010 was made to complete the project (as it would have become more costly to the fiscus to abandon the project than to complete it). Due to the fact that the 2011/12 budget has been prepared based on the FAR strategy, there is a significant indication of the Government’s commitment to bring the budget deficit to sustainable levels in the medium term. This will facilitate the possible reduction of the fiscal deficit from 13% in 2011 to 12.2% in 2012 and eventually to 3% in the 2014/2015 fiscal year.

The country’s fiscal management is likely to improve because of the emphasis on budget elaboration, execution and discipline. Additional institutional reforms, expenditure management, monitoring, transparency as well as fighting corruption can also go a long way in pursuing the common goal in reviving the fiscal soundness of the government. Managing the wage bill is the most urgent matter and it is noted that the government has already moved in to clean up the government payroll of ghost workers and freezing all recruitment except to priority areas of health and education. With commitment already shown by treasury in implementing the FAR strategy, the fiscal deficit will be reduced to the desired level in the short- to medium term.

The Swazi authorities requested that the roadmap be scrutinised by an IMF Staff-Monitored Program. Following advice from IMF, an agreement between national authorities and IMF staff was made to monitor the implementation of the Government of Swaziland’s economic and financial program during a specified period. IMF management approved the program on 4 April 2011 to encourage the needed fiscal adjustment while safeguarding Swaziland’s spending on education and health. The program also seeks to enhance administrative capacity, notably in the area of public financial management, expenditure controls, and revenue administration. The IMF Staff-Monitored Program is also aimed at helping fiscal adjustment and safeguarding proper spending.⁽⁶⁾ In this way, improved public financial management, expenditure control and fiscal discipline can be achieved in the country.

The country has since received the “letter of comfort” from the IMF which provided the much-anticipated green light to apply for loans from the African Development Bank (AfDB) and the World Bank.⁽⁷⁾ The Minister of Finance indicated that the government intends to borrow US$ 100 million (about E 700 million) from the AFDB and US $20 million (about E140 million) from the EU to finance the country's budget. The two loans are strictly intended to finance the country’s budget and not meant for any particular project. With the close monitoring by the IMF, it is likely that the Government will embark on strategic fiscal discipline measures aimed at reviving the budget status of the country.

However, these reform measures will continue to receive stiff resistance from labour and the general public, especially against the backdrop of alleged opulence of the life led by the royal family and the ruling elite. As such, it is feared that any attempt to curtail public spending to correct the deteriorating fiscal position may culminate into a socio-political crisis. This puts the country at cross-roads as to whether or not to instigate full fiscal reforms to correct the fiscal crisis and risk political backlash. With the fiscal indiscipline that the country has practiced, the Government should adopt measures to bring down the level of spending before it can rely on measures to enhance revenue.

Concluding remarks

Some of the proposed measures to rectify the fiscal situation in Swaziland have the potential for secondary negative effects on the economy. For instance, significantly reducing the disproportionately large public sector wage bill by cutting public service jobs has the potential to save the wage bill. However, this move can also compromise service delivery and perpetuate the already high unemployment rate in the country. The proposal to introduce the value-added-tax (VAT) to raise the revenue and replace the lost receipts from SACU may further drive the burden on the poverty-stricken population. Further misallocations of resources by the Government will slowdown the long-term growth and development path.

Government’s commitment to the reforms is an important decision to massively reduce the fiscal deficit. Nonetheless, the discontent in the public domain remains a threat to these reforms. In other words, it is imperative for the Swazi Government to also listen to the concerns of the public. To avoid the crisis from resurfacing in the future, fiscal disciplinary principles need to be adhered to. With the monitoring of the IMF, the roadmap strategy is a key driver towards the revival of economic activities in the Southern African country. However, the continued structural impediments to growth will dampen the real GDP growth in the country. The currently high and volatile oil prices in international markets threaten the domestic inflation developments resulting in food and fuel price increases.

NOTES:

(1) Contact Anthony M Makwiramiti through Consultancy Africa Intelligence: African Finance and Economy Unit. ( finance.economy@consultancyafrica.com This e-mail address is being protected from spambots. You need JavaScript enabled to view it )
(2) IMF, “Kingdom of Swaziland: 2010 Article IV Consultation – Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Swaziland”, 2011. IMF Country Report No. 11/25.
(3) Africa Economic Outlook, Social Context and Human Resource Development,http://www.africaneconomicoutlook.org.
(4) Economist Intelligence Unit. The fiscal crisis triggers mass protests. April 2011 http://country.eiu.com.
(5) IRIN. “Swaziland: Facing up to a financial crisis” 12 January 2011. http://www.africafiles.org.
(6) Basdevant, O. “Swaziland Uses IMF Monitoring program to fight Fiscal Crisis”, 08 April 2011. http://www.imf.org.
(7) Ndlovu, H. “Financial Crisis: Relief as IMF issues crucial letter” 09 April 2011, http://www.observer.org.sz.

Written by Anthony M Makwiramiti ⁽¹⁾