An International Monetary Fund (IMF) team, led by Mr. Todd Schneider, Mission Chief for Eswatini, visited Mbabane during February 27 to March 10, 2023, to conduct discussions for the 2023 Article IV Consultation with a broad range of counterparts from the public and private sector. The discussions covered the performance of Eswatini’s economy since the COVID-19 pandemic and policy challenges that lie ahead.

At the end of the visit, Mr. Schneider issued the following statement:

“Eswatini’s economy was comparatively resilient through the pandemic. Following a strong rebound of 7.9 percent in 2021, real GDP growth stagnated in 2022, at 0.4 percent. This reflects the continued dampening effect from civil unrest, government payment arrears, slowing growth in South Africa, and heavier than normal rainfall and industrial action on the sugar sector. Headline inflation rose to 5.6 percent at end-2022 due to higher food and transport prices. The government fiscal deficit is projected to widen to 5.4 percent of GDP by end-FY22-23 in the wake of lower SACU revenues and higher government spending. In the balance of payments, the current account balance has shifted to an estimated deficit of about 1.1 percent of GDP as the trade balance was negatively affected by higher import prices. Foreign reserves declined to $449 million, equivalent to about 2.3 months of import cover.

“The near-term outlook is positive but subject to numerous downside risks. Real GDP growth in 2023 is projected to rise to 3.2 percent supported by agricultural production and manufacturing, and higher government capital spending. Inflation is expected to stabilize at around 5 percent. SACU revenue transfers are expected to roughly double in FY23-24, facilitating a significant reduction in the fiscal deficit and a modest reduction in the ratio of public debt to GDP. Importantly, the government is establishing the SACU revenue stabilization fund which, if effectively implemented, should be a significant step forward in managing the swings in SACU revenue transfers and enhancing macroeconomic management. However, downside risks persist, and include volatile international commodity prices, tighter global financial conditions, and slowing growth in South Africa.

“While considerable progress was made on controlling public finances even through the pandemic, Eswatini’s macroeconomic and financial imbalances are a source of vulnerability. Eswatini’s risk of sovereign debt distress is high. Public debt remains elevated at 45.5 percent of GDP, domestic payment arrears (after a sharp reduction in 2021) rose again in 2022 and foreign exchange reserves of the Central Bank of Eswatini are below three months of import cover. Fiscal and external buffers have fallen as a result, leaving Eswatini less prepared to counter new shocks.

“Continued adjustment is needed to ensure fiscal sustainability and rebuild external buffers. A revised fiscal adjustment plan, linked to a medium-term fiscal framework, is needed to guide year-by-year adjustment. Adjustment should combine expenditure measures—focused on reducing the public wage bill (which is high by international standards) and transfers to public enterprises, and higher revenue by continued progress in tax administration and closing holes in the tax net. Lower fiscal deficits should reduce pressure on the external balance of payments and create room to increase central bank foreign exchange reserves. Successful adjustment will also rest on strengthening public financial management and more rigorous assessment of public investments. Importantly, fiscal adjustment should come with measures to mitigate the effects on low-income households.

“Facilitating private investment and strengthening competitiveness will be essential to lift growth and reduce unemployment. Continued efforts are needed to streamline licensing requirements and property registration, establish a one-stop shop for businesses, bolster protection of investor rights (e.g., contract enforcement, property, and investor rights) enhance the rule law and effective operation of the commercial court, simplify tax payment procedures, and address high electricity and communication costs. Gender-based disparities in access to education, healthcare, financial services, ownership of assets and the labor market prevent women from fulfilling their economic potential—hampering economic growth and development. Addressing these disparities and enabling women to participate fully in economic activities could play an important supporting role in the shift to private sector led economic growth.

“The financial sector remains sound. The banking system is generally well capitalized and liquid, and for most banks nonperforming loans appear to have peaked and are starting to decline. However, prolonged macroeconomic imbalances, a volatile global and regional economic environment, and the potential for additional shocks call for continued efforts to monitor and manage financial stability risks and advance financial sector reforms. Nonbank financial institutions (NBFIs) have been increasingly active, accounting for almost half of total household credit in 2022Q2 and accounting for about 70 percent of total financial system assets. Legislative efforts to update the regulatory framework need to be expedited together with supervision for systemically large NBFIs.

“The mission thanks the authorities and other counterparts for their hospitality and productive discussions.”