On May 3rd, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Kingdom of Eswatini.

Eswatini has shown resilience to multiple economic shocks. Real GDP contracted by a comparatively modest 1.6 percent in 2020 but surged by 7.9 percent in 2021 as manufacturing rebounded on the easing of COVID-19 restrictions and strengthened external demand. Real GDP growth declined in 2022 due in part to base effects but also as construction projects slowed in response to government cash constraints, and sugar cultivation and processing were affected by excessive rainfall, high fertilizer and pesticide costs, and arson. Inflation rose in the wake of surging international food and fuel prices but appears to have peaked in 2022.

Fiscal and external buffers are low. The fiscal deficit held steady at 4.5 percent of GDP in FY21/22 despite a drop in SACU revenues but is estimated to have widened to 5 percent in FY22/23 in the wake of further declines in SACU revenues and higher spending on goods and services, transfers, and interest payments. Public debt rose to an estimated 42.3 percent of GDP by end FY22/23. The trade balance worsened in 2022 with the rising cost of food and fuel imports—driving the external current account into deficit for the first time in over ten years. Together lower SACU receipts and weakening foreign direct investment, central bank foreign exchange reserves fell to about $449 million by end-2022 (2.3 months of import cover). The external position is assessed as broadly in line with the level implied by economic fundamentals and desirable policies.

The banking sector is liquid and well-capitalized. Banks’ profitability improved in the first half of 2022. Lending to the government remained high, reflecting large fiscal financing needs. Financial sector holdings of government securities amounted to about 16 percent of total assets in June 2022, leaving the sector exposed to sovereign risk. The ratio of non-performing loans to total loans increased to 6.5 percent at end-June 2022, from 5.6 percent a year earlier. Nonbank financial institutions continued to be the dominant element in the financial system, accounting for roughly 70 percent of total financial system assets.

The near-term outlook is buoyed by continued recovery and a surge in SACU revenue transfers, but downside risks remain. Real GDP growth is projected at 3.2 percent in 2023 and inflation is expected to stabilize at around 5 percent. SACU transfers will double in FY23/24. This should allow the overall FY23/24 fiscal deficit to narrow to 0.3 percent of GDP despite an expansionary fiscal policy. Public debt is projected to decline to 40.6 percent of GDP. The outlook is subject to downside risks, including the impact of weaker growth in South Africa, and new shocks to food, fuel, and fertilizer prices.

Executive Board Assessment [2]

Directors welcomed the authorities’ response to the pandemic and efforts toward reform and fiscal consolidation even during difficult times. Directors noted that while the economy will be buoyed in the short run by strong Southern African Customs Union (SACU) revenue transfers, the medium-term outlook remains uncertain given low fiscal and external buffers and macro-structural weaknesses.

Directors called for continued fiscal adjustment to put public debt on a downward path, rebuild fiscal buffers, clear domestic payment arrears, and reduce pressure on the external accounts. While welcoming efforts to contain the wage bill, and the introduction of a SACU revenue stabilization fund, Directors emphasized the need for a revised medium-term fiscal adjustment plan anchored on a primary surplus and supported by macro structural reforms to facilitate private sector-led growth. In addition to further reductions of the public wage bill, they highlighted the criticality of public enterprise reform and rationalization of Eswatini’s tax expenditure regime, together with efforts to improve the social safety net.

Directors agreed on the need for further reforms to public financial management, revenue, and tax administration. They welcomed the authorities’ commitment to improving fiscal governance and saw the implementation of a Treasury Single Account and an Integrated Financial Management Information System as key. Directors noted that stronger budget planning and implementation are essential to avoid payment arrears.

Directors concurred that monetary policy should focus on price stability and maintaining adequate reserves to safeguard the exchange rate peg, and that the authorities should remain vigilant and maintain a data-dependent approach. They welcomed the financial sector’s resilience but emphasized the need for continued vigilance—particularly on nonbank financial institutions. Directors highlighted the need for further efforts on financial inclusion and financial literacy to foster room for extension of private sector credit. They also emphasized the importance of addressing gaps in AML/CFT compliance, supported by capacity development from the IMF.

Directors encouraged the implementation of macro-structural and governance reforms to support private sector-led inclusive growth to reduce poverty and inequality. They agreed that continued efforts to improve the business climate, diversify the economy, and close gender gaps are key. Addressing governance weaknesses with support of an IMF governance diagnostic and strengthening climate resilience would also be important.

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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.