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Staff Report for the 2005 Article IV Consultation

Prepared by the Staff Representatives for the 2005 Consultation with Swaziland
Approved by David Andrews and Juha Kдhkцnen

IMF Country Report No. 06/106

International Monetary Fund (IMF), The Kingdom of Swaziland

March 2006

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Executive summary

Economic Background

Economic activity has weakened since 2002, reflecting the impact of the real appreciation of the exchange rate in 2002-04, the removal of textile quotas in January 2005, and a prolonged drought. Poverty is widespread, aggravated by food shortages in parts of the country and a severe HIV/AIDS epidemic.

Fiscal imbalances have widened in the last two fiscal years. The overall fiscal deficit rose to 4.3 percent of GDP in 2004/05, driven primarily by a sharp increase in civil service wages. Spending pressures have continued to rise unabated in 2005/06. The deficits have been financed in large part by drawing down government financial assets and accumulating domestic arrears. As a result, official reserves declined to 1.1 months of imports by end-September 2005.

Swaziland is susceptible to a range of potentially permanent shocks over the medium term: anticipated reductions in the preferential prices for sugar exports to the EU, the expected removal of the AGOA provision allowing the use of third-country fabrics in 2007, and the forecast decline in SACU tariff revenues as a result of trade liberalization.

Policy Discussions

The authorities agreed that the current fiscal stance is not sustainable. In addition to immediate measures to deal with the government’s cash flow problem for the remainder of 2005/06, the staff urged a sharp reduction of the deficit in the 2006/07 budget and over the medium term, in view of the lack of access to concessional external financing, little room for domestic borrowing, the need to settle large payment arrears and contingent liabilities, and the need for rebuilding reserves. The staff emphasized the need for providing fiscal space to support poverty reduction.

The staff stressed that key policy reforms needed to be implemented without delay to underpin the fiscal consolidation. The authorities agreed that rightsizing the civil service is crucial for restoring fiscal sustainability but noted difficulties in implementation when the economy is stagnant. They also agreed that reform of the public expenditure system would help strengthen fiscal discipline. The staff urged the authorities to speed up the establishment of a Revenue Authority and the introduction of a broad-based VAT.

The authorities agreed that under the current exchange rate arrangement, Swaziland would have to rely on fiscal adjustment and structural reforms to restore competitiveness. There was broad consensus during the discussions that maintaining the exchange rate peg under the CMA is of vital importance to the economy. To improve the investment climate, the staff stressed the importance of privatizing the large number of public enterprises and improving economic governance. The latter should include enacting the anti-corruption legislation and enforcing internal and financial audits of public entities.



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