IMF Wraps Up 2024 Article IV Consultation With Eswatini

Washington, DC: On September 25, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with the Kingdom of Eswatini and endorsed the staff appraisal without a meeting on a lapse-of-time basis.

Eswatini's growth is estimated to have reached 4.9 percent of GDP 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 percent range in 2024. Inflation was stable at 4.1 percent year on year in August and is expected to rise in the wake of electricity tariff increases, before easing in line with global trends. 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 receipts from the Southern African Customs Union (SACU). Despite the surplus, official reserves—equivalent to

2.2 months of imports at end-2023—were below adequacy metrics. The overall fiscal deficit narrowed to 1.5 percent of GDP in FY23/24 from 6.2 percent of GDP in FY22/23, reflecting high SACU transfers. However, public arrears persist, and financing challenges continue to weigh on fiscal sustainability. Public debt is below 40 percent of GDP, and debt vulnerabilities remain moderate.

Unemployment remains high at 35.4 percent in 2023 and 48.7 percent among the youth, with large skill gaps and mismatches being critical factors. While social indicators need to be updated, discussions indicated that poverty, food insecurity, inequality, and gender-based violence remain important social challenges.

Growth is expected to slow while inflation is projected to follow global developments and decline throughout the 5-year projection horizon. With SACU receipts projected to fall, the authorities are expected to exercise the expenditure restraint needed to keep debt around

40 percent of GDP. The current account is projected to remain in surplus but official reserves will likely remain low.

Executive Board Assessment[2]

In concluding the 2024 Article IV consultation with the Kingdom of Eswatini, Executive Directors endorsed staff's appraisal, as follows.

On the back of a post-pandemic rebound and favorable export prices, real GDP growth in Eswatini reached nearly 5 percent in 2023. Over the medium term, however, as these temporary factors wane, growth is expected to revert gradually to a historical baseline of 2.5 percent. This subdued outlook raises concerns as it constrains the government's ability to respond to social needs, tackle unemployment, and address poverty; however, this outlook can improve considerably if reforms aiming to boost potential growth are implemented.

A weak economic outlook is compounded by inflationary and external risks. Inflation could increase as electricity tariffs and potentially other administered prices are raised. While foreign reserves have increased thanks to high SACU transfers, their import cover remains below adequacy benchmarks. Going forward, reserves will remain under pressure as SACU receipts normalize.

The fiscal position has strengthened considerably, reaching the objectives of the 2020 fiscal adjustment plan. This reflects both windfall SACU receipts, which increased by 3.6 percent of GDP between FY19/20 and FY23/24, and importantly, in equal measure, expenditure restraint of 3.7 percent of GDP during the same period. The primary fiscal balance in FY23/24 is estimated to have reached a surplus of 1.5 percent of GDP and the public debt-to-GDP ratio was brought under 40 percent of GDP. This demonstrates the authorities' commitment to fiscal prudence. Taking advantage of this consolidation, the authorities are encouraged to improve public service delivery while ensuring sustainability. Most notably, an end of the hiring freeze should pave the way to a comprehensive civil service reform.

A widening of the deficit in FY25/26—as envisaged under the baseline—is appropriate in light of the anticipated drop in SACU receipts. Staff estimate that this temporary widening of the overall fiscal deficit by 2 ppt of GDP should be adequate to avoid a disruptive compression of expenditure and support growth, while the underlying fiscal position would be tightened (through a 1.7 ppt reduction in the structural deficit) steering it toward a sustainable medium-term level. Setting aside savings in the stabilization ahead of the SACU revenue decline could help cushion the fiscal transition, though difficult to achieve given current tight financial conditions, which present challenges for budget financing. In this context, the authorities are encouraged to pursue other financing options, including from IFIs, to support the public sector reforms and public investment.

Arrears should be cleared as soon as feasible, and public financial management strengthened to reduce their occurrence going forward. Government arrears intensify the bank-sovereign nexus and increase fiscal-induced risks. To this effect, the budget process should reflect realistic assumptions, especially on financing, and include a year-by-year plan to clear arrears while detailing controls that will prevent their further accumulation.

Public financial management remains weak and should be an urgent priority for reform. The authorities are implementing the IFMIS system in the Ministry of Finance, moving to IPSAS in the Treasury, establishing an invoice register, and progressing on a medium-term fiscal framework.[3] However, shortfalls remain in expenditure controls (contributing to arrears), liquidity management, and debt management. The medium-term fiscal framework requires full integration of the fiscal operations, including the financing assumptions and tracking their interest cost implications, to enable the debt sustainability assessment.

The external position of Eswatini in 2023 was moderately stronger than implied by macroeconomic fundamentals and desirable policies. The current account balance is projected to strengthen further in 2024 and weaken thereafter but remain in a surplus. International reserves are projected to remain below 3 months of imports over the medium-term. Going forward, better management of SACU revenues and structural reforms to bolster external competitiveness can support the external position and strengthen international reserve buffers.

Given Eswatini's peg to the rand, the policy rate should be realigned to the South Africa Reserve Bank SARB. This would also obviate the need for potentially distortionary stopgap measures. In the absence of immediate inflationary pressures, this realignment can occur gradually. Staff stand ready to assist the authorities in modernizing the liquidity management framework and strengthening financial sector surveillance, including its AML/CFT aspects.

The package of financial law amendments paves the way to a comprehensive modernization of the financial system. Before their adoption by Parliament, the amendments should be reviewed to ensure that they conform to international standards. Staff stand ready to assist with this task.

Raising potential growth faces many structural challenges, including a poor business environment and weak governance. More efforts are needed to support entrepreneurship, financial literacy, and credit to MSMEs. Stepped up anti-corruption plans are well noted as governance remains high among challenges of doing business, and negative perceptions in this regard limit Eswatini's attractiveness for foreign investors.

The legacy of COVID-19 compounded the pre-existing social problems, and the authorities have rightly recognized unemployment as a national emergency. While tackling chronic unemployment will require a multipronged effort to support job creation and skill acquisition, introducing a limited and sustainable job loss insurance scheme (including on account of sickness and maternity) would strengthen the social safety net and enhance labor market efficiency. More importantly, it is urgent to expand social protection on a broader scale to alleviate poverty, prevent gender-based violence, and improve access to health and education services.

Serious data weaknesses undermine the authorities' ability to monitor economic and social developments and make informed policy decisions. They also hamper staff's ability to conduct surveillance. Resource constraints affecting data collection and management, especially at the CSO, but also at the Department of Labor, the Ministry of ICT, the budget team, and debt management unit, should be addressed with high priority. The data work of these agencies is critically important for informing policy making and improving government effectiveness.

[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] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

[3] IFMIS stands for the Integrated Financial Management and Information System, a platform for public financing accounting and reporting. IPSAS stands for the International Public Sector Accounting Standards.