The fiscal crisis in the Kingdom of Swaziland - emanating from a decline in revenue from the Southern African Customs Union and one of the largest public wage bills in sub-Saharan Africa - has reached a critical stage. Delays in implementing up-front fiscal measures committed under the Staff-Monitored Program led to a slowdown of economic activity, a drying up of budget financing, and a large buildup of domestic arrears. The fiscal crisis is also spilling over to the financial sector and affecting external stability.
In the Article IV Consultation discussions, staff emphasized the need for up-front measures embedded in a credible medium-term fiscal consolidation strategy.
- Key policy recommendations are:
* Cutting the wage bill by E 300 million (1¼ percent of GDP) on an annual basis, while protecting pro-poor spending, as a first step toward restoring fiscal sustainability. The authorities prefer a more gradual approach, based on reducing the civil service through an audit of the civil service roster, attrition, a reduction in the retirement age, and possibly a revised voluntary retirement scheme.
* Preserving parity with the rand by stopping central bank financing to the government and repaying the emergency credit line provided by the central bank. The authorities agreed that preserving the parity is a priority and took a decision in September 2011 to stop borrowing from the central bank.
* Addressing emerging pressures in the financial sector and strengthening nonbank financial sector supervision. The authorities are aware of the need for liquidity injections in the financial sector, and the central bank will shortly take over the regulation and supervision of savings and credit cooperatives.
Staff appraisal
33. Swaziland’s fiscal crisis has reached a critical stage. Budget financing has dried up, domestic arrears continue to mount, and the risk of not being able to pay civil servants’ wages over the next few months is high. More importantly, economic activity, the financial sector, and key priority programs on education, health, and social protection are being negatively affected.
34. The macroeconomic outlook is bleak, notwithstanding the windfall SACU revenue in 2012. Under unchanged policies, the economy is likely to contract significantly as a result of the projected global economic slowdown and the continued negative impact of the fiscal crisis. As a result, the current account deficit could widen further over the medium term, and external stability could ultimately be jeopardized.
35. Staff therefore urges the authorities to take up-front measures, including cutting the wage bill, embedded in a medium-term strategy to restore fiscal sustainability and access to budget financing. Although steps taken so far to cut wages of political appointees and parliamentarians in April 2011 and to pass the supplementary budget in November 2011 are welcome, they are insufficient to restore fiscal sustainability. A significant cut is needed to start restoring fiscal sustainability. Time is of the essence; otherwise, the permanent impact of the crisis on the economy and poverty indicators will be much larger.
36. The 2012/13 budget will be essential in the strategy to restore fiscal sustainability. The budget should aim at a significant surplus to use the windfall from SACU revenue to pay off domestic arrears. The wage bill will need to be cut further. In addition, the quality of spending needs to be improved, with a significant reorientation toward education, health, and vulnerable segments of society. The public investment program should be refocused on key national priorities, with projects clearly ranked according to their development impact. The authorities are also encouraged to work with other SACU members to reduce the volatility of SACU revenue.
37. Staff strongly supports the authorities’ objective of preserving the exchange rate parity with the rand. It provides the key anchor for macroeconomic stability and for trade and financial integration. A change in exchange rate policy would have a severe negative impact on the economy and the financial system. It is therefore essential for the government to stop borrowing from the central bank or drawing down its deposits at the central bank, so as to restore an adequate level of reserves. The authorities are urged to eliminate the remaining exchange restriction subject to approval under Article VIII.
38. Restoring competitiveness is critical for higher sustainable growth. Staff encourages the authorities to move forward with the privatization of the last remaining state-owned bank and with the liberalization of other markets. It is also imperative to redouble efforts at improving the business climate and making Swaziland an attractive environment for private sector–led growth.
39. The financial sector requires intensive supervision. The emerging signs of liquidity pressures could quickly turn into systemic solvency problems if not addressed up front. In addition, the central bank should take over, on a temporary basis, the supervision of savings and credit cooperatives to ensure adequate liquidity and appropriate regulation. The new regulatory agency for NBFIs should be made operational at the earliest possible opportunity.
40. It is recommended that the Kingdom of Swaziland remains on the standard 12-month Article IV Consultation cycle.
- Readers can access the 39 page report, published in February 2012, here.
