Figure 1: Real GDP growth (S)

Figures for 2010 are estimates; for 2011 and later are projections.

Table 1: Macroeconomic indicators

Figures for 2010 are estimates; for 2011 and later are projections.

Swaziland’s GDP is consumption driven. In 2009, the share of consumption was estimated at above 100% of GDP. While this is predominantly private consumption (over 88%), public consumption is equally sizeable (14%). In 2010, the volumes of public consumption increased by 8.4%, contributing 1.7% to economic growth. Wages and salaries constituted 54% of public consumption and are the main source of aggregate demand. However, the expected implementation of some of the reforms recommended by FAR in 2011 should cause public consumption growth to decline. This is coupled with an absolute decline in private consumption leading to a drop in real consumption. Gross investment contributed 2.4% to overall economic growth in 2010 and is expected to add another 2.7% in 2011. This will be underpinned by increases in capital expenditure (mainly health and education) financed by donor inflows. Despite this increase, the share of investment in GDP remains low. This reflects the risks posed by changing climatic conditions on pineapples but also difficulties in accessing credit, which constrains investment in the mining and quarrying sector.

Overall, in 2011, growth is projected to reach 1.9% driven by public investment in donor supported projects. Notable amongst these are donor inflows for budgetary support and investment in a multi-billion dollar water project supported by the Millennium Challenge Account (USD 362.2 million). Additionally, the global economic recovery is expected to increase demand formanufacturing and tourism. The agricultural sector is expected to benefit from improved access to water for irrigation from the lower Usuthu basin, thus contributing to growth.

However, water remains a constraining factor for economic growth. The country is perennially affected by drought and the bulk of water resources have been earmarked for the production of sugarcane, the country’s main export. The availability of water is limited by the tripartite arrangement with Mozambique and South Africa concerning the management of water bodies (mainly rivers passing through Swaziland to neighbouring countries). None of these rivers originate in Swaziland.

Figures for 2010 are estimates; for 2011 and later are projections.

Swaziland is a member of the Common Monetary Area (CMA) in Southern Africaand has limited discretion in influencing monetary policy although it has full control over fiscal policy. The country still ensures that there is monetary stability and that the financial sector thrives through controlling interest rates. The Central Bank of Swaziland (CBS) has pursued an inflation target of 3 to 6% as a framework for price stability. During 2010, CBS pursued an expansionary policy stance, which was started in 2009 in response to the need to stimulate the economy and arrest the recessionary impact of the global economic recession. The discount rate was maintained at 5.5%, which was lower than the 6.5% repo rate pursued by the South African Reserve Bank (SARB). However, domestic credit growth was slower than anticipated, growing at an annual rate of 10.3% by end of November 2010. Despite the reform in the pension law, which required that 30% of asset holdings be returned to the country, credit extension remained low. The commercial banks have accumulated excess liquidity due to limited instruments for investing the funds within the country, availing instead of South Africa as alternative investment destination for some of these funds.

In 2011, the expansionary monetary policy stance pursued in 2010 is expected to continue. This will provide a credit stimulus to the economy while ensuring that inflation does not spiral out of control. Nonetheless inflation is expected to accelerate to 7.7% in 2011, reflecting the lagged impact of water and electricity tariff increases during the second half of 2010. The local currency is expected to appreciate moderately which will mitigate the impact of imported inflation. Additionally, the anticipated SMP, which the government is negotiating with the International Monetary Fund, is expected to deter inflation expectations.

In 2010, the external sector remained vulnerable, mainly dependent on global demand, which was depressed for some exports. The narrow export base and sluggish global recovery is likely to continue to impact on the external sector in 2011. Growth in the main exports, which comprise sugar, citrus fruits and minerals has remained sluggish. For instance, worldconsumption of sugar is expected to grow at a rate of 2%, somewhat below the long-term 10-year average of 2.6%. This lower global demand has been attributed to record high prices although in 2011, world availability of sugar is expected to surpass demand, which might depress export prices. Further, the euro zone, Swaziland’s main export destination for sugar, has continued to open its market to Asian competitors and all these factors could slow down the country’s exports in 2011. On a positive side, prospects for both cane and sugar are brighter with the completion of the Lower Usuthu Smallholder Irrigation Project (LUSIP) and the Komati Downstream Development Project. The development of 1 200 hectares in 2010 under LUSIP should greatly contribute to exports.

Poor response of the pulp industries to resumption in external demand remains a real impediment for Swaziland. There no explicit successor plans for the Sappi mill, which was closed in January 2010. The country has remained extremely open and exposed to external shocks as the share of total trade in its GDP demonstrates (averaging 170.1% for the 2005-08 period and 191.6% of GDP in 2009/10).1 The current account deficit is expected to reduce by 2.2% of GDP in 2011.

Figures for 2010 are estimates; for 2011 and later are projections.

The 2011 Doing Business report ranks Swaziland 118th out of 183 economies, three places lower than in 2010. The main areas of weakness relate to dealing with construction permits, enforcing contracts, protecting investors, registering property, starting a business and trading across borders. These areas are critical impediments to private sector development including attracting foreign direct investment (FDI) in the country. In order to improve the functioning of the private sector, structural constraints in the financial sector, in particular those threatening credit stability and borrower access to credit have to be removed. While the global financial crisis had very little effect on the Swazi financial sector, some vulnerability remains. These include inadequately regulated non-bank financial institutions. The proposed new regulatory system for the Savings and Credit Co-operatives (SACCOs) and for the non-bank financial institutions (NBFIs) is expected to strengthen the financial sector. Further, the strengthening of the capital market should boost the extension of credit to the private sector and government.

During the 2010/11 budget speech, the government made a number of commitments to address these critical constraints. It constituted a task force chaired by the Minister for Trade with performance indicators linked to improvements in the country’s annual rating in the Doing Business report. There are planned reforms tailored towards improving the country’s environment encapsulated in the FAR. These entail among others, trade facilitation through opening the country’s border posts on a 24-hour basis.

There are initiatives spearheaded by Swaziland Investment Authority (SIPA) which include reviewing the legislature covering investment and auditing the implementation of the Investor Roadmap. Additionally, with the assistance of the United States Agency for International Development (USAID) Trade Hub, SIPA has prepared a draft investment policy which has been submitted to the government for consideration. In 2011, the African Development Bank (AfDB) is expected to provide funding for an economic diversification study aimed at identifying potential and constraints to broadening Swaziland’s economic base and to increasing competitiveness. The outcome of this study is expected to greatly enhance Swaziland’s drive to promote FDI and diversify its economy, which is critical for the country’s growth.

The government is developing a Public Private Partnership framework which would effectively be implemented with a functional stock market. These initiatives, coupled with the Financial Services Regulatory Bill, should promote private sector investment in 2011. In the telecommunication sector, where MTN is currently the sole service provider albeit with private participation in mobile and internet services, the plan is to introduce competition. A telecommunications regulator should be introduced by 2010/11 and a fully operational energy regulator by December 2011.2 These, it is envisaged, will facilitate the licensing of various power plants.

The government has heightened its commitment to dealing with short and medium-term economic challenges using various measures. Since the 2009/10 fiscal year, it has embarked on mobilising resources by contacting multilateral donors for potential budget support. As a direct result of these efforts, it has received technical assistance and prepared the FAR. Of particular note is the establishment of the Swaziland Revenue Authority (SRA) which was officially launched in February 2011. Further, the November 2010 decision to lift the ceiling on public borrowing will allow increased domestic borrowing and will shelve international reserves from financing the domestic budget. In consequence, the Lilangeni-Rand parity will be protected. Although the country’s debt stock is expected to increase as the government borrows to finance its fiscal deficits, Swaziland is expected to remain within sustainable debt levels as revealed by IMF/World Bank debt sustainability analysis (DSA). The country’s gross public debt which was at 12.5% of GDP in 2009/10 is expected to rise but remain under the critical level of 40% in the medium term. However, this will only be possible if the country implements the FAR reform measures.

Public management reforms aimed at strengthening the country’s controls and eliminating budget leakages are underway. In particular, these reforms include modernising the Ministry of Finance, strengthening the budgeting system, consolidating procurement reforms, expenditure reporting, internal and external auditing, and Parliamentary oversight. This is in addition to addressing the recommendations of the 2010 Country Integrated Fiduciary Assessment (CIFA)report.