amid falling Southern African Customs SWAZILAND Union (SACU) revenues (see figure 1). The Recent developments July 2016 salary review resulted in a mini- mum 17 percent salary increase for civil Swaziland’s economic growth declined to servants and 32 percent for politicians; an 1.7 percent in 2015 from 2.7 percent in additional E850 million to government Table 1 2015 2014. This was driven by declining SACU expenditure in 2016. Total public debt Population, million 1.1 revenues, adverse weather conditions stood at 16 percent of GDP for the second GDP, current US$ billion 3.5 caused by the El Nino phenomenon, and quarter of 2016- up from 14 percent in the GDP per capita, current US$ 3126 poor regional economic performance, es- first quarter of the year. Poverty rate ($1.9/day 2011PPP terms) a 42.0 pecially in South Africa. The 2015 eco- The current account surplus narrowed by a nomic decline in South Africa, the major 1.4 percent of GDP in the first quarter of Poverty rate ($3.1/day 2011PPP terms) 63.1 export destination for Swaziland, weighed 2016, from 4.2 percent in the third quarter Gini Coefficient a 51.5 negatively on textile exports. of 2015. This development is driven main- b School enrollment, primary (% gross) 114.3 The weak economic environment, togeth- ly by a decline in exports (falling 15.3 per- b Life Expectancy at birth, years 48.9 er with persistent drought conditions cent in the first quarter), linked to a drop Sources: World Bank WDI and M acro Poverty Outlook. slowed poverty reduction in the country. in soft drink concentrates and textiles. Notes: Three in four Swazis live in rural areas Overall, the BOP registered surplus dur- (a) M ost recent value (2009) (b) M ost recent WDI value (2014) making agriculture their main source of ing the first quarter of 2016, at about 0.5 livelihood. As a result, the adverse weath- percent of GDP. International reserves er conditions have limited poverty reduc- averaged 4.1 months of import cover tion, with the poverty rate at the interna- from January to July 2016, slightly above tional extreme poverty line of $1.9 per day 3.6 months estimated for the whole of GDP is expected to contract by some 0.9 in 2015 stagnating at 39.4 percent, com- 2015. However, current international re- percent in 2016, the weakest performance pared to 39.5 percent in 2014. Further, serves are lower than the regional target with a Gini coefficient of 49.5, inequality is of six months. in 34 years, and a falloff from 1.7 percent- high and indeed rising in rural areas. The Swaziland’s monetary policy is closely age growth in 2015. The decline in output labor force participation rate is lower interlinked with that of South Africa. The during the year is tied to persistent among women (46 percent) compared to lilangeni is pegged at par to the South drought, currency depreciation, and weak men (55.3 percent). And at 28.1 percent, African rand, which is also legal tender in the unemployment rate is high, exacerbat- the country. The scope to use monetary regional economic conditions. 2016 wage ed by skills mismatch and a high HIV/ and exchange rate policy is therefore lim- increases in the context of declining reve- AIDS prevalence rate of 27.7 percent ited by its membership in the Common nues threaten fiscal sustainability. And among adults. The bulk of employment is Monetary Area. In May 2016, the Central the persistence of drought poses further in low value added activities, particularly Bank increased the bank rate from 6.5 significant food and water security risks, in subsistence agriculture, contributing to percent to 7 percent, matching the repo relatively high poverty rates. rate of South Africa, and helping to miti- and is expected to increase poverty given The fiscal deficit has been on an upward gate capital outflows to South Africa. that the majority of the population depend trend, from 1.4 percent of GDP in However, the increase further pushed the on agriculture for their livelihood. FY2014/15 to 6.8 percent in FY2015/16, prime lending rate to 10.5 percent in the FIGURE 1 Swaziland / Fiscal balance and SACU revenue FIGURE 2 Swaziland / Actual and projected poverty rates and GDP per capita (constant LCU) 5 Poverty Rate (%) GDP per capita (constant LCU) 80 40000 0 70 35000 -5 60 30000 -10 50 25000 40 20000 -15 30 15000 -20 20 10000 -25 10 5000 2013 2014 2015 2016 2017 2018 0 0 SACU revenue- annnual % change 2001 2003 2005 2007 2009 2011 2013 2015 2017 Fiscal Balance-% of GDP GDP growth $1.9/day PPP $3.1/day PPP GDP pc Sources: World Bank staff calculations and Central Statistics Office. Source: World Bank (see notes to table 2). MPO 276 Oct 16 second quarter from 10 percent in the first 2016. SACU revenues are projected to averaging 8 percent in 2016, and easing to quarter of 2016. Private sector credit decrease to E5.3 billion, representing a below 6 percent only by 2018. This will growth at the end of 2015 was -0.2 per- significant 25 percent decline between affect the poor who spend a very high cent and averaged 0.7 percent in the first FY2015/16 and FY2016/17. share of their total expenditures on food. six months of 2016. Swaziland’s inflation The current account surplus should con- rate remained the highest among the tinue to compress during the remainder of Common Monetary Area members at 7.5 percent on average. Inflation pressures 2016, amid an increase in grain imports, and a decline in exports-especially of tex- Risks and challenges are driven by rising food prices as a result tiles. The falloff in exports is expected to of the prevailing drought and depreciat- be cushioned by the depreciating ex- The fiscal situation poses significant risks ing exchange rate. change rate. Further, the manufacturing in the short and medium terms. Fiscal sector continues to suffer from the loss of risks emanating from the 2016 wage in- the country’s African Growth and Oppor- creases and declining SACU revenues Outlook tunity Act (AGOA) trade benefits since January 2015. might cause a crisis similar to the 2010/11 fiscal crisis. This is compounded by the As a result of these weak economic pro- persistent drought as well as low growth Swaziland’s economic outlook is weak, as spects, poverty and inequality are ex- in South Africa. The Swazi government drought and depressed regional prospects pected to remain critical challenges as initiated some measures to overcome continue to weigh on growth. GDP is ex- growth of disposable income and job cre- these challenges by raising domestic reve- pected to decline by 0.9 percent in 2016, as ation slows. The international extreme nues and stimulating growth through sugar production, one of the major export poverty ($1.9 per day) rate is projected to capital spending. However, such policy is earners, is viewed to drop by 25 percent; remain near 39 percent through to 2018 unlikely to succeed because SACU reve- maize by 64 percent, and electricity gener- (see figure 2 and table 2). The 2016 Swazi- nues are expected to remain low in the ation by 23 percent. Swaziland’s main land Drought Assessment Report con- foreseeable future and the expected im- trading partner, South Africa, is projected cluded that water sources declined by 50 pact of capital spending on growth may to grow by only 0.4 percent in 2016, a rate percent which resulted in a reduction of be less-than expected. Nominally, the fis- that presents risks to already declining 64 percent in crop production in the cal deficit is in large measure domestically SACU revenues and Swaziland’s textile FY2015/16 season and an increase in the financed and may hamper private sector exports. The fiscal situation is expected to number of vulnerable people by 68 per- growth, while the accumulation of double deteriorate further, as the impact of the cent in 2016. Further, the drought is ex- - digit fiscal deficits will rapidly elevate 2016 salary review and falling SACU reve- pected to exert more inflationary pressure public debt. nues take stronger effect, with the budget on food prices: the inflation outlook is deficit widening to 15.3 percent of GDP in expected to continue at an elevated level, TABLE 2 Swaziland / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2013 2014 2015 2016 f 2017 f 2018 f Real GDP growth, at constant market prices 4.6 2.7 1.7 -0.9 1.9 3.1 Private Consumption 2.9 -0.5 1.0 -1.0 2.8 4.9 Government Consumption 6.9 -1.2 11.2 -2.7 -0.3 12.9 Gross Fixed Capital Investment 8.3 12.0 -76.4 5.7 122.5 -1.4 Exports, Goods and Services 8.9 11.0 5.7 3.9 6.0 6.0 Imports, Goods and Services -1.6 0.0 1.6 4.5 3.0 9.2 Real GDP growth, at constant factor prices 4.6 2.7 1.7 -0.9 1.9 3.1 Agriculture 3.6 -4.5 7.4 -8.1 8.1 7.0 Industry 3.8 4.9 1.1 -2.1 2.2 3.1 Services 5.3 2.1 1.5 1.0 0.9 2.6 Inflation (Consumer Price Index) 5.6 5.7 5.0 8.1 6.2 5.5 Current Account Balance (% of GDP) 5.2 3.2 9.7 1.3 6.2 8.2 Fiscal Balance (% of GDP) 0.7 -1.4 -6.8 -15.3 -16.3 -19.4 Debt (% of GDP) 14.7 15.1 24.2 31.9 43.9 72.7 Primary Balance (% of GDP) 1.5 -0.5 -5.4 -13.1 -13.7 -15.9 Poverty rate ($1.9/day PPP terms) a,b,c 39.9 39.5 39.4 39.9 39.6 39.3 Poverty rate ($3.1/day PPP terms) a,b,c 61.0 60.5 60.3 61.0 60.7 60.1 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n 2009-HIES. (b) P ro jectio n using neutral distributio n (2009) with pass-thro ugh = 0.7 based o n GDP per capita in co nstant LCU. (c) P ro jectio ns are fro m 2013 to 201 8. MPO 277 Oct 16