On July 15, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Swaziland and considered and endorsed the staff appraisal without a meeting.²

Swaziland’s economic performance has improved since the fiscal crisis of 2010–11, underpinned by the recovery of revenues from the Southern African Customs Union (SACU). Real Gross Domestic Product (GDP) growth in 2013 is estimated at 2¾ percent, recovering from -½ percent in 2011. Business confidence has started to show signs of improvement, commercial bank credit to the private sector is growing strongly, and the risk premium on treasury bills has been declining. Meanwhile, inflation has slightly risen, reaching 5.3 percent in April 2014, owing to increases in food and some administered prices.

Improved SACU revenues since 2012/13 reduced the pressure on fiscal and external balances. A budget surplus of 4½ percent of GDP was recorded in 2012/13. In 2013/14, despite increasing spending pressure, a small budget surplus (¼ percent of GDP) is estimated, partly aided by enhanced domestic revenue collection efforts. International reserves have reached 3¾ months of imports by March 2014, recovering from the low level of 2 months at end-March 2012.

Swaziland’s banking sector appears well capitalized, with the capital adequacy ratio of the banks reaching 24 percent of risk-weighted assets. Nonbank financial institutions (NBFIs)— including pension funds, insurance companies, collective investment schemes, and savings and credit cooperatives—account for about two-thirds of the financial sector (in terms of assets). With less than complete supervisory surveillance over these institutions, assessing relevant risks remains difficult.

Swaziland faces significant forward looking challenges. Though growth rebounded after the crisis, the long-term growth trend remains low, with average real GDP growth over 2004–13 at about two percent per year, and Swaziland would remain vulnerable to exogenous shocks. Furthermore, there are risks to Swaziland’s economic prospects, in particular the uncertain global and regional economic outlook that could lower SACU revenues. In addition, Swaziland continues to face serious development challenges, including high unemployment, poverty, and the prevalence of HIV/AIDS. Swaziland’s key economic policy challenges therefore are to strengthen its resilience to exogenous shocks and achieve higher and more inclusive growth, while meeting critical social and development needs.

Executive Board Assessment

In concluding the 2014 Article IV consultation with Swaziland, Executive directors endorsed staff’s appraisal, as follows:

Swaziland’s economy has been recovering from the fiscal crisis of 2010–11. Improved SACU revenue has relieved the pressure on fiscal and external balances, and economic growth is gradually recovering. The buildup in international reserves (to 3¾ months by end-March 2014) suggests that the likelihood of an immediate crisis has receded. Swaziland’s economic outlook, however, remains subject to downside risks (mainly associated with the uncertain prospects for South African economy and the high volatility of the SACU revenue). Close monitoring on the regional and global economic developments is warranted.

Swaziland’s medium-term challenges remain significant. The recent fiscal crisis points to the need to strengthen Swaziland’s resilience to shocks, while the economy has suffered from weak growth performance, which has adversely affected social developments. Swaziland’s key economic policy challenges are therefore to strengthen its resilience to exogenous shocks and achieve high, inclusive growth, while meeting critical social and development needs. Building on the progress since the fiscal crisis, Swaziland now stands at a critical juncture to decisively address these challenges.

To strengthen Swaziland’s resilience to shocks, it is essential to build sufficient international reserve buffer and maintain modest debt distress. In light of these objectives and the need to safeguard the exchange rate peg, a prudent fiscal policy stance (with a fiscal deficit below 2 percent of GDP) should be maintained over the medium-term, while protecting critical social and development expenditures. Such a prudent fiscal policy stance would help build a sufficient international reserve buffer (five to seven months of imports) and maintain modest debt distress, and provide Swaziland with better protection for possible shocks. The prospects for achieving the prudent fiscal policy target over the medium term, however, appear challenging, in light of the prospective decline in the SACU revenue and the scheduled salary review for public officials. It is therefore important to (i) improve revenue administration, (ii) rationalize recurrent expenditure (while safeguarding critical social and development expenditures), (iii) effectively implement public sector reforms, and (iv) enhance efforts to strengthen public financial management (PFM).

To address a long-standing problem of weak growth performance, a set of comprehensive structural reforms should be implemented effectively. The weak growth performance has been largely associated with a low multiplier of fiscal spending and low private sector development (depressed private investment in particular). The authorities should improve the efficiency of spending, through strengthening PFM and public investment management, and allocating higher weight to growth-promoting capital expenditures. Furthermore, it is also essential to promote private sector-led, inclusive growth. In particular, enhanced steps should be taken to further improve business climate, facilitate financial intermediation, and pursue land management reforms. Should fiscal deficits increase substantially—as envisaged under the medium term fiscal framework, the government’s large financing needs would likely crowd out private sector credit, further squeezing private sector developments. Maintaining soundness of the financial sector—with further efforts to strengthen the supervision and regulation for nonbank financial institutions—is also critical for private sector-led growth. In most cases, the authorities have rightly acknowledged the areas of reforms. Staff encouraged the new government to step up efforts to implement reforms, seeking technical assistance from Swaziland’s international partners, as needed. The CBS’s initiative to embark on a financial sector strategy is encouraging.

While Swaziland continues to maintain one exchange restriction related to advanced payments for certain imports (subject to Fund approval under Article VIII), the authorities have not requested and staff does not recommend the approval of this restriction.

Staff recommends that the next Article IV consultation with Swaziland take place on the standard 12–month cycle.