Executive summary
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The Swazi economy has continued to register sluggish economic activity even as rising Southern African Customs Union (SACU) revenue contributed to a large fiscal surplus and accumulation of international reserves. Growth has averaged just over 2 percent in the past six years as Swaziland struggles with drought, low productivity, erosion of preferential treatment for sugar and textile exports, and mounting social challenges. SACU revenues contributed to a record fiscal surplus in 2006/07, improved external accounts, and an increase in international reserves to over three months of imports.
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The authorities concurred with the staff that the medium-term outlook is subject to several risks and adjustment is required to restore fiscal sustainability. Risks include uncertainty about future SACU revenue, continued erosion of trade preferences, and vulnerabilities from the unregulated nonbank institutions. A 6 percent of GDP increase in expenditure in 2007/08 (with a parallel increase in the non-SACU fiscal deficit) is cause for serious concern and, unless reversed, this expansionary fiscal path could undermine macroeconomic stability in the medium term. Given the expected decline of SACU revenue after 2010, the authorities should use the opportunity to reduce expenditures while improving their quality.
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To underscore the need for adjustment, staff proposed the use of the non-SACU fiscal balance when assessing fiscal performance. The analysis helps put in context the current overall fiscal surpluses and underscores domestic revenue efforts. Consequently, staff proposed adjustments comprising revenue measures, expenditure cuts and reorientation, as well as enhanced fiscal management.
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Assessments of the real exchange rate and the current account suggest no immediate threat to external stability. However, structural reforms and fiscal adjustment are needed to maintain sufficient international reserves and support the peg under the CMA. Furthermore, the authorities should transfer all government’s offshore deposits to the Central Bank’s balance sheet.
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The unchecked growth of insufficiently regulated saving and credit cooperatives poses risks to the financial system. Prompt actions are required to strengthen the regulatory and supervisory framework of the nonbank financial sector.
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Staff welcomes the implementation of the Poverty Reduction Strategy and Action Program, and recommends that it be embedded within a fiscal framework that is consistent with a prudent fiscal stance.
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Further efforts are needed to improve the quality and timeliness of data to facilitate policy formulation and monitoring.
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- 932Kb ~ 5 min (52 pages)
