On September 1, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation  with the Kingdom of Swaziland.
Since the 2010 fiscal crisis, Swaziland has experienced a period of macroeconomic stability and recovery. A rebound in South African Customs Union (SACU) revenues, expansionary policies and the peg to the South African rand have contributed to the rebuilding of buffers and supported a growth recovery. Yet, despite its middle-income status, structural impediments have hindered private investment and kept unemployment high, contributing to persistently elevated poverty and income inequality.
Macroeconomic conditions have recently deteriorated. In 2016, two shocks – a prolonged drought and a sharp decline in SACU receipts – severely hit the economy, while an expansionary fiscal policy worsened fiscal and external balances. Growth in 2016 stagnated, as agricultural productions declined, and headline inflation increased sharply, mostly due to rising food prices. Government’s policy of increasing public expenditure, while SACU revenues declined, widened the FY16/17 deficit to about 10½ percent of GDP. Public debt rose and domestic arrears accumulated, while the current account deteriorated and international reserve coverage declined below 3 months of imports. The economic slowdown and government’s domestic arrears have started having adverse effects on the banking sector’s asset quality, with non-performing loans (NPLs) rising.
Fiscal policy remains on an expansionary course, while the monetary stance has tightened. Despite a pickup in SACU revenue, the 2017 budget envisages a continuation of large fiscal deficits, and further increase in public debt. In the context of the peg to the South African rand, in early 2017 the Central Bank of Swaziland raised its policy rate above South African Reserve Bank’s rate.
The outlook is fragile, with an unsustainable fiscal policy. Growth is projected to pick up in 2017 due to the end of the drought and increasing SACU revenue, and turn negative thereafter as fiscal and external positions weaken. The large fiscal deficit would contribute to further reduce international reserves and bring public debt above sustainability thresholds.
Downside risks dominate the outlook. The main risk stems from further tightening in budget financing. Additional risks arise from deteriorating banks’ asset quality, lower SACU revenue and demand for key exports. With a fragile outlook, the materialization of risks could trigger abrupt fiscal adjustment. Linkages between domestic financial institutions and the government could further amplify the negative impact of shocks on the economy.
Executive Board Assessment 
Executive Directors noted that while Swaziland has experienced sustained growth and macroeconomic stability in recent years, the country is now facing formidable challenges. A prolonged drought, and a sharp decline in Southern African Customs Union (SACU) revenues have recently hit the economy. An expansionary fiscal policy has further worsened fiscal imbalances and created tighter links between the government and domestic financial institutions, contributing to the fragile economic situation. In addition, Directors noted that structural impediments have kept growth relatively low. They emphasized that implementation of sound policies and structural reforms will be key to managing the rising risks, maintaining macroeconomic and financial stability, and generating stronger growth to reduce poverty and income inequality.
Directors emphasized that significant fiscal adjustment is needed to ensure macroeconomic stability and debt sustainability. They stressed that, with tightening budget financing, adjustment efforts should be spread over time and focus on both revenue and expenditure measures that can support long‑term growth. Directors underscored that steps to contain the public wage bill, prioritize capital outlays, reduce transfers to extra‑budgetary entities, and boost tax revenues will be critical to the adjustment effort. They encouraged the authorities to improve budget formulation and expenditure controls, and strengthen the governance of extra‑budgetary entities to ensure the credibility of consolidation plans.
Directors noted that strong fiscal adjustment will help release pressures on monetary policy. They underscored that the Central Bank of Swaziland (CBS) should refrain from additional budget financing and, in the context of the peg with the South African rand, the CBS should maintain the policy rate at a positive spread with the South African Reserve Bank’s rate.
Directors welcomed the authorities’ plans to amend the CBS Act to bolster the central bank mandate and independence and strengthen its supervisory structure. They stressed the importance of monitoring and assessing financial stability and macro‑financial risks arising from tight linkages between the government and the financial sector, and systemically large non‑bank financial institutions. In this context, Directors recommended to accelerate plans to create a financial regulatory architecture and enhance the CBS’s capacity to assess macro‑financial risks and exercise macro‑prudential controls.
Directors emphasized that bolder structural reforms are needed to foster stronger and more inclusive growth. They highlighted that the reform effort should focus on reducing skill mismatches through improving access and quality of higher education, aligning wage and productivity dynamics, including by containing public sector wages, and simplifying business regulations and improving the institutional environment. Directors welcomed the authorities’ recent increase of cash assistance programs and suggested further scaling up and better targeting to address extreme poverty.