Press Release No. 24/288

IMF Staff Completes 2024 Article IV Mission to Kingdom of Eswatini

July 24, 2024

• Growth is estimated to have reached 4.9 percent in 2023, driven by exports of sugar and soft drink concentrates, tourism, and the communication sector, and is poised to remain in the 4.5 to 5.0 percent range in 2024. The external current account strengthened, posting a surplus of 2.2 percent of GDP in 2023, which is expected to persist in 2024 thanks to high SACU receipts.
• Average 12-month inflation rose to 4.4 percent in June and is expected to rise further in the wake of electricity tariffs increases before easing in line with global trends. The increased cost of living has highlighted the importance of strengthening the social safety net.
• The government’s aim to boost growth and tackle social issues requires implementation of deep structural reforms, notably to strengthen the efficiency of public investment and increase support for entrepreneurship, while improving governance and revamping education policy to address skills mismatches and tackle structural unemployment.

Washington, DC: An International Monetary Fund (IMF) staff team, led by Mr. Jaroslaw Wieczorek, IMF mission chief for Eswatini, visited Mbabane during July 11‒24, 2024, to conduct discussions for the 2024 Article IV Consultation with Eswatini.

At the conclusion of the mission, Mr. Wieczorek made the following statement:

“Eswatini experienced a strong post-pandemic rebound, but potential growth remains uncertain. Growth is estimated to have reached 4.9 percent in 2023, driven by exports of sugar and soft drink concentrates, tourism, and the communication sector, and is poised to remain in the 4.5 to 5.0 percent range in 2024, before returning to its historical average of about 2.5 percent in the medium term. High capital investment, energy projects, and expansion in the mining sector can spur growth but concrete measures and a well-defined investment program to raise potential growth need to be articulated.

“Inflation in Eswatini has been lower than in South Africa. In May 2024, the difference exceeded one percentage point, some of which could be accounted for by administrative prices on utilities and staple goods. CPI inflation rose to 4.4 percent y/y in June 2024 from its recent lowest point of 3.5 percent in September 2023. Housing, fuel, and power were the largest contributors (1.9 percentage points) while food contributed 0.9 percentage points. Core inflation ran at 3.4 percent.

“Record high SACU revenues have significantly improved the fiscal position, with the deficit expected to narrow to 1.5 percent of GDP in FY24/25, but risks remain due to lower SACU receipts in the future, spending pressures, and slowing growth. Staff’s medium-term scenario projects the fiscal deficit to widen and greater expenditure restraint will be needed to cap the deficit at 3.5 percent of GDP starting in 2025/26 to stabilize public debt at around 40 percent of GDP, as is the government’s intention. The fiscal stance is broadly appropriate, but some key expenditure areas need attention. The public sector hiring freeze should end, accompanied by a rationalization of the public sector to increase productivity and adequately staff key positions, especially in statistics and delivery of social services. Spending on health and education is critical, but proper spending controls and increased efficiency must accompany additional funding to these areas.

“On the positive side, digitalization efforts underway in the government accounting systems are important steps for improving public financial management, while work on a well-defined medium-term fiscal framework is advanced. Ensuring the new systems are in line with international standards for chart of accounts and Government Financial Statistics is a priority.

“Fiscal financing is a concern as shortfalls in net issuance of treasury bills and bonds are contributing to cash management challenges and domestic payment arrears. In May 2024, the government raised 400 million rand on the Johannesburg Stock Exchange and further financing is needed, although costly in the current high interest rate environment.

“The external current account balance, strengthened by high SACU transfers, turned from a deficit of 2.7 percent of GDP in 2022 to a surplus of 2.2 percent of GDP in 2023. Following the improvement in the current account, foreign reserves are accumulating but not commensurately, partly due to banks and nonbanks increasing their net foreign asset positions and exporters’ being allowed to keep their proceeds abroad. The external position is expected largely to normalize once the SACU receipts revert to the baseline in the medium run. Strengthening buffers to manage SACU revenue volatility and structural reforms to improve external competitiveness will help keep the external position in line with fundamentals.

“At 7.5 percent, the policy rate is 75 basis points lower than that of the South African Reserve Bank (SARB). The prolonged deviation from the SARB policy rate could generate risks, especially as the current account is expected to weaken. Despite the interest rate differential, credit growth lags nominal GDP growth as domestic investment opportunities are limited. Given the concerns about foreign reserve adequacy, aligning the Central Bank of Eswatini (CBE)’s rate with the SARB rate remains the first best option.

“Buffers in the financial system are being rebuilt after the pandemic, but asset quality remains a concern. Banks are allocating their liquidity carefully, wary of rising NPLs and diminished credibility of the government and maintain a large excess reserve position at the CBE in the remunerated overnight call window. Orderly workouts can alleviate stress and reduce risks.

“His Majesty the King recognized high poverty and unemployment as a national emergency and job creation was a focus of the FY24/25 budget. Unemployment, which was 35.4 percent in 2023 and 48.7 percent among the youth, reflects a dearth of employment opportunities as well as large skill gaps and mismatches. The current initiatives to address this issue have yet to yield significant results. Policies to support private sector development should aim to attract foreign direct investment to address bottlenecks in the power sector and green financing to address climate change vulnerabilities. Long-term growth needs the support of entrepreneurship, business facilitation, and education policies.

“Efforts to strengthen governance are well noted. The Anti-Corruption Commission appears to have gained vigor and progress has been made on the AML/CFT front with the recently completed National Risk Assessment. However, more needs to be done to address key shortcomings, resource constraints, and alter negative perceptions, which is essential for strengthening the business climate and attracting much-needed foreign direct investment.

“Increasing the resources available to data producing offices, such as The Central Statistics Office, Treasury, and Ministry of Labor & Social Security, is key. Digitalization can also help improve data collection.

“The mission thanks the authorities for their excellent collaboration and warm hospitality.”