Documentof The World Bank FOROFFICIAL USEONLY ReportNo. 42059-SZ INTERNATIONALBANK FORRECONSTRUCTIONAND DEVELOPMENT INTERIMSTRATEGYNOTE: A FRAMEWORKFOR SCALINGUP SUPPORT FOR THE KINGDOMOF SWAZILAND FOR THE PERIOD 04/2008-04/2010 February26,2008 SouthernAfrica CountryDepartment1 Africa Region This document has a restricted distributionandmay be usedbyrecipients only inthe performance o ftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization THE KINGDOMOFSWAZILAND INTERIMSTRATEGYNOTE Dateof lastBank Strategy November 15, 1994 CURRENCYEQUIVALENTS Currency Unit = Lilangeni (SZL) US$1= SZL 6.8 (as o f December 31,2007) WEIGHTS AND MEASURES Metric system FISCALYEAR 1April -31March LIST OF ACRONYMS AND ABBREVIATIONS AfDB African Develeopment Bank AGOA African Growth and Opportunity Act (of the USA) AIDS Acquired Immune Deficiency Syndrome CPS Country Partnership Strategy CMA CommonMonetary Area COMESA Common Market for Eastern and Southern Africa DEC Development Economics Vice Presidency EC European Commission EFA EducationFor All EU European Union ETSDS ExpenditureTracking and Service Delivery Survey FDI Foreign Direct Investment FY Fiscal Year GAC Governance and Anti-Corruption Initiative GAMET Global AIDS Monitoringand EvaluationTeam GDDS General Data Dissemination System GDP Gross Domestic Product GFATM Global Fundfor AIDS, Malaria and TB HIV Human Immunodeficiency Syndrome IBRD InternationalBank for Reconstruction and Development ICA InvestmentClimate Assessment IDF InstitutionalDevelopment Fund IMF InternationalMonetary Fund JSDF Japanese Social Development Fund I S N Interim Strategy Note LIC L o w Income Country LICUS L o w Income Country Under Stress LMIC Lower Middle Income Country MAP Africa Multi-Country HIV/AIDS Program MDG Millennium Development Goal MDRTB Multi-DrugResistant Tuberculosis M&E Monitoring & Evaluation MFA Multi-Fiber Agreement MIC Middle Income Country FOROFFICIAL USE ONLY MIGA MultilateralInvestment Guarantee Agency MTEF Medium-Term ExpenditureFramework N D S National Development Strategy NERCHA National Emergency Response Council on HIV/AIDS ovc Orphaned and Vulnerable Children PEPFAR The U S President's Emergency Plan for Aid Relief PFM Public Finance Management PLWHA People Living with HIV/AIDS PPIAF Public-Private Infrastructure Advisory Facility PRSAP Swaziland's `Poverty Reduction Strategy and Action Plan' PRTF Poverty Reduction Strategy Task Force R A M P Reserves Advisory and Management Program SACU Southern African Customs Union SADC Southern African Development Community SDHS Swazi Demographic HealthSurvey SHIES Swaziland Household Income and Expenditure Survey S P A Social Impact and Participatory Assessment SLGP Swaziland Local Government Project SMLE Small, Medium and Large Enterprise SNL Swazi Nation Land SOE State Owned Enterprise SSA Sub-Saharan Africa SUDP Swaziland Urban Development Project TA Technical Assistance TB Tuberculosis TDL Title Deed Land UNAIDS United Nations A I D S Program UNDP United Nations Development Program UNICEF United Nations Children's Fund WBI World Bank Institute WFP World Food Program WHO World Health Organization WTO World Trade Organization XDR TB Extensively Drug Resistant Tuberculosis Vice President: Obiageli Ezekwesili Country Director: Rima Reinikka Task Team Leader: DirkReinermann Task Team: Anna van der Wouden, Bernard Drum,David DeGroot, Faith Chinva, Feng Zhao, Herawaty Anderson, Juan Gaviria, Mallory Saleson, Martien Van Nieuwkoop, Mmantsetsa Marope, Ntombini Marrengane, Oscar Picazo, Zeinab Partow This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may notbe otherwise disclosed without WorldBank authorization. FOR OFFICIAL USE ONLY TABLE OF CONTENTS -EXECUTIVE SUMMARY ........................................................................................................................................ i I INTRODUCTION 1 I1 .. ............................................................................................................................................. THE KINGDOMOF SWAZILAND-HISTORY AND SITUATION TODAY ......................................... 1 A. 1 B. A BRIEFHISTORICALPERSPECTIVE....................................................................................................... THESITUATIONTODAY ............................................................................................................................ 2 C . THREEOVERARCHINGDEVELOPMENTCHALLENGES................................................. I11 DEVELOPMENT STRATEGY OF THE KINGDOMOF SWAZILAND ........................................... 14 IV THE KINGDOMOF SWAZILANDAND WORLD BANK GROUP INTHE PAST ......................... 15 V... A FRAMEWORK FORSCALING-UP ......................................................................................................... 16 A. B. RATIONALE................................................................................................................................................ 16 GUIDINGPRINCIPLESFORSCALINGUP.............................................................................................. 17 C. THREESTRATEGICAREAS FORSUPPORT .......................................................................................... 18 22 E. D. PARTNERSHIPS.......................................................................................................................................... WORLDBANKGROUP CAPACITY......................................................................................................... 22 VI CREDITWORTHINESS,RISKS AND MITIGATION .......................................................................... 22 VI1 .. BEYONDTHE INTERIM STRATEGY .................................................................................................. 23 GRAP1IS: GRAPH1:POPULATIONOF SWAZILAND IN2025......................................................................................................... 1 GRAPH2: HUMAN DEVELOPMENT INDICATOR OVER TIME ( ) 2 GRAPH3: SWAZILAND 4 GRAPH TRENDSINANTENATALHIVPREVALENCEINSWAZILAND....................................................................... & SACUGDPGROWTH. .................................................................................................. ~ P.......................................................................... % 4: 9 'IA131ES: . TABLE1:SELECTED ECONOMICINDICATORS ............................................................................................................ 7 TABLE2: ESTIMATES FINANCINGGAPINHIVAND AIDSRESPONSE. 2005-2012 ............................................. OF 19 ANNkXbS: ANNEX 1:MATRIXOFPLANNEDINTERVENTIONS. EXPECTEDOUTCOMESAND INDICATORS.................................. 25 ANNEX 2: COUNTRYFINANCINGPARAMETERS 26 ANNEX 3:MDGMATRIXAND TABLE................................................................................................................... ..................................................................................................... 29 ANNEX 4: FISCALDECENTRALIZATION GRAPH ..................................................................................................... 32 ANNEX 5: SWAZILAND'S PLANNINGFRAMEWORK ................................................................................................ 33 CASANNEXES: CASANNEX A2: SWAZILAND AT A GLANCE CAS ANNEX B2: SELECTEDINDICATORSOF BANK PORTFOLIOPEREFORMANCEAND MANAGEMENT CAS ANNEX B3: IBRDPROGRAMSUMMARY CAS ANNEX B3: IFC & MIGA CAS ANNEX B4: SUMMARY OF NONLENDING SERVICES CASANNEX B8: OPERATIONSPORTFOLIO CAS ANNEX B8: COMMITTEDAND DISBURSEDOUTSTANDINGIFC INVESTMENTPORTFOLIO Box 1: Quote from Speech by Prime Minister. Hon. A.T. Dlamini. 2006 Box 2: Quote from PRSAP. 2007 Box 3: Swaziland-a GACpilot country THE KINGDOMOF SWAZILAND INTERIMSTRATEGYNOTE EXECUTIVE SUMMARY The Kingdom o f Swaziland in Southern Afnca has suffered from slow economic growth for over a decade, but the economy has been improving recently, bolstered by increased revenue inflows from the Southern African Customs Union(SACU), leading to a fiscal surplus for the first time inmany years. Inspite ofthisprogress, the Kingdomfaces tremendous economic andsocial challenges Swaziland's categorization as a lower middle income country masks severe social and economic challenges. A combination o f past policy choices and governance challenges, compounded by exogenous shocks, has left more than two thirds o f its citizens inpoverty. The unemployment rate stands at 30% and one quarter o f the population i s in need o f food aid on a regular basis. With a Gini coefficient o f 0.61, Swaziland has the 7" most unequal income distribution inthe world. Swaziland i s at the epicenter o f the global HIV/AIDSpandemic. It now finds itself facing a social disaster o f historic dimensions, comparable in scope to a lengthy violent conflict, worse in many ways than a devastating natural disaster. Despite a sound strategy, a strong national HIV/AIDS institution, and considerable international support, the country has not yet found a way to cope with this threat. As a consequence, Swaziland today has the highest HIV prevalence rate, the highest death rate and, at 31 years, the lowest average life expectancy o f any country in the world, with - if the pandemic remains unstopped - devastating effects on kture population trends (see Graph 1). A staggering one third o f Swazi children are orphans or vulnerable. Graph 1:Population of Swaziland in 2025 Swaziland: 2625 ALE FEMALE I I .vv 80 60 40 20 0 0 20 40 60 80 1 Population (in thousands) /Source: U.S. Ccnsus Bureau, Internationa1 Data Base. Given the country's lack o f competitiveness and economic vulnerability, should SACU revenues decline inthe medium to long term, the Kingdom would face an even greater challenge: finding ways to finance its deepening social crisis inan era o f declining fiscal resources. i A new constitution, the recent approval by cabinet ofthe national Poverty Reduction Strategy and Action Plan (PRSAP), improvements in governance as well as a general trend towards greater modernization o f Swazi society provide a historic opportunity to meet the country's challenges. They also provide the World Bank Group with the opportunity, one might argue the necessity, to strengthen these trends and reduce the risk o freversals by meetingthe government's request for scaled up support. Swaziland has not borrowed from the World Bank for a decade and a half; however the Bank has supported implementation o f one IBRD-financed project (Urban Development) until it closed successfully three years ago. Bank staff have also maintained regular contacts and supported the country mainly with limited knowledge services and free technical assistance. Very few development partners are active in Swaziland beyond HIV/AIDS programs. The authorities have recently expressed an interest in having the Bank significantly scale up its support and assist in implementing the new constitution and the PRSAP. This two year interim strategy focuses on rebuilding the Bank Group's relationship with Swaziland by scaling up support in three strategic areas: the fight against HIV/AIDS, improving governance and addressing key issues o f competitiveness. The proposed IBRD lending program contains a rapid intervention in the area o f HIV/AIDS and the Swaziland Local Government Project (together approximately U S$40 million). Executive Directors may wish to consider the following questions for discussion: 1. Does the I S N adequately address the threat to development posed by HIV/AIDS, given the Bank's comparative advantage and limited resources? 2. Are the I S N and the proposed Governance and Anti-Corruption (GAC) country pilot commensurate with the governance challenge? 3. Will the instruments and financing resources identified enable the Bank to scale-up its support for knowledge and capacity-building, given limited IBRDlending? .. 11 I. INTRODUCTION 1. The Swazi government has recently asked the World Bank Group to scale up significantly its support to the country. This comes after a decade and a halfof limitedengagement inthe country. 2. Although formally a lower middle income country (LMIC), the Kingdom of Swaziland i s facing challenges that in many ways exceed the challenges of Africa's poorest countries. It has the highest HIV/AIDS prevalence rate and the lowest life expectancy in the world and an estimated two-thirds of its citizens live inpoverty. Income inequality is among the highest inthe world. 3. The economy and the government's fiscal position have recently benefitedfrom a windfall of higher revenue inflows from the Southern African Customs Union, thanks to increased imports by Swaziland's large and dynamic neighbor, South Africa. These revenues, which account for 66% of Swaziland's revenue base, have affected Swaziland's economy and public finances in ways similar to natural resource revenue inflows in natural-resource-dependent economies, with many of the same frequentlyobserved detrimental effects. 4. Inresponseto the current deep and worsening social crisis and uncertaintyregarding the volume o f SACU revenues in the longer term, the government must initiate quickly a significant package of reforms and actions. These include addressing the HIV/AIDS pandemic with greater effectiveness, improving critical areas of public finance management and improving competitiveness of the economy. 11. THE KINGDOMOF SWAZILAND-HISTORY AND SITUATIONTODAY A. A BRIEFHISTORICAL PERSPECTIVE 5. The Kingdom o f Swaziland, territorially the third smallest and among the least populous countries on the African continent, i s also one o f the few African IBRD borrowers, based on its LMIC status. The last absolute monarchy in Africa, Swaziland became independent in 1968. The first post-independenceelections were heldin 1972. 6. Landlocked, and with South Africa and Mozambique as its only neighbors, Swaziland was considered an important ``frontline state" during the apartheid era in South Africa, which also coincided with the early years o f Swazi independence. During that time, Swaziland benefited from investments by many South African and other international firms, especially in manufacturing and trading, while South Africa was the subject o f increasing international boycotts and embargos. Most development partners gradually left the country in the early to mid 1990s as the large neighbor underwent its remarkable, peaceful transformation towards democratic rule. In the absence o f compensating actions by the Swazi authorities, an unintended consequence o f this transformation was to reduce substantially Swaziland's attractiveness as an investmentdestination. 7. From the 1970s until the early 1990s Swaziland's development indicators were broadly on par with those o f East Asia and Arab States, and well above those o f South Asia. For example, in 1993, life expectancy was 57.8 years, compared with 50.9 in Sub-Saharan Africa and 61.5 in all developing countries. Inthe 1990s however, Swaziland's development path changed dramatically for the worse, while those other regions continued to prosper (see Graph 2). Since the early 1990s a combination o f policy choices (especially in the areas o f macro-fiscal policy, public expenditure management and social expenditure) and governance challenges, compounded by exogenous shocks, has effectively wiped out three decades o f development gains. Sub Sahavan Africa - 8. Today, Swaziland i s well integrated in the Southern African region, economically as well as politically. The country i s a member o f all major regional bodies such as the Common Market for Eastern and Southern Africa (COMESA), the Common Monetary Area (CMA), the Southern African Customs Union and the Southern African Development Community (SADC). B. THE SITUATION TODAY THE GOVERNMENT 9. In2005, Swaziland's headof state andAfrica's last rulingmonarch, KingMswati111,ratified Swaziland's new constitution, the first in over 30 years. The King holds supreme executive, legislative and judicial powers over a populationof just under one million'. The preamble o f the new constitution states that the people o f Swaziland undertake to "start afresh under a new framework o f constitutional dispensation .... in search o f a sustainable home-grown political order." 10. Swaziland has inherited a dual system o f governance, where modem and traditional systems co-exist. The modem half i s based on a "Westminster" system o f a bi-cameral Parliament, a judiciary and an executive. Parliament houses a mixture o f elected and royally appointed senators and '0.96 millionaccordingto the 2000/1 Swaziland Household Income and Expenditure Survey (SHIES) 2 members. There are also four regional administrations under the DeputyPrime Minister's office, and - since 1964 - a system o f urban local governments that now includes two cities, three town councils, and seven town boards. In parallel traditional institutions o f local government (``Tinkhundla'') co- exist. 11. The new constitution recognizes that it has become necessary to review all laws, customs, decrees and practices so as to promote good governance and the rule o f law. This seminal legislative instrumentalso emphasizes greater decentralization as a means to improve accountability and service delivery and i s generally seen as a significant step forward in Swaziland's ongoing transition towards more modem and more effective forms o f governance. 12. The constitution codifies the King's role as the ultimate arbiter o f Swazi affairs: all Cabinet and Parliamentary decisions remain subject to the King's review as are appointments o f key government officials. Local government by-laws and state-owned enterprise (SOE) policies including tariffs are subject to Parliamentary - and thereby indirectly royal - review. These review processes can be lengthy, impacting on the ability o f local governments and SOEs to operate sustainably, and sometimes leavingkey government positions unfilledfor long periods. 13. The new constitution, however, has the potential o f becoming an important milestone in the country's ongoing governance transition, enshrining human rights as well as gender equity, and establishing the potential for important governance innovations. Importantly, chapter thirteen o f the constitution provides a critical opportunity to address Swaziland's endemic poverty by directing that within five years a unified, democratic, accountable and sustainable system o f local government will be established throughout the Kingdom, with the expressed objective o f bridging the rural-urban divide that has typifiedthe country since the coloniallandpartition in 1907. 14. Political commitment for reform has been growing inrecent years. Although government has in the past been criticized for interfering in the independence of the judiciary, Parliament, the freedom o f the press as well as political party formation and operation, most observers agree that progress has been made concerning the rule o f law in Swaziland as o f late. For instance, the explicit ban o f political associations and parties, which had existed since 1973, i s not contained in the new constitution. Instead, the constitution guarantees the protection o f freedoms o f expression and association. Inreality, however, some ambiguity around the formal status o fpolitical parties remains. 15. A new Anti-Corruption Act was recently passed and prominent former officials are facing prosecution. A new Public Finance Management Act, the first since 1967, i s under preparation. The Supreme Court has been staffed and i s now functioning. Local elections were held successfully in 2007 and Parliamentary elections are scheduled for October 2008. Despite this positive trend in political commitment, Swaziland continues to experience pressure for deeper governance reforms from SADC partners and from a growing civil society within. Implementation o f the constitution and other reform measures will be challenging, as there are significant vested interests in the traditional system. 16. In addition to the support expressed by His Majesty the King, there is also a pronounced generational shift underway in government. As a "frontline" state in the 1980s and early 1990s, Swaziland was the recipient o f significant external support, including development o f very capable human resources. As that generation now comes to the fore front in government and the private sector, there i s a growing recognition that fundamental changes are required to empower the 3 population through real participation and more equitable and transparent allocation o f resources. 17. Thus, after almost 40 years o f independence, the new constitution, complemented by a "coming o f age" in government, provides an opportunity for positive change in Swaziland. External support will be important, but this change process will be drivenby Swazi citizens through processes o f internal consultation and consensus building. It will be critical, therefore, for external assistance to focus on supporting the development o f frameworks, institutions and capacity to support change that will take place at a pace determined by the country. THEECONOMY 18. Inthe 1970s and 1980seconomic growthhadbeen volatile but on average high.Since 1991, however, the economy has expanded at just over 3% per year on average, and the rate o f growth since 2000 has fallen further to 2.4%, nearly 2 percentage points lower than growth in other SACU member countries (Graph 3). GDP per capita figures show a slight positive tendency, growing at about 0.8% per year since 2000, mainly reflecting the effect o f a falling population as a result o f HIV/AIDS and migration to South Africa. Following a slight upturn in 2006, growth returned to 2.3% in2007 as a result o f drought which has heavily affected agricultural output, forest fires which have had a large impact on the forestry sector inparticular, and deceleration in the sugar sector. The outlook over the next few years, given current policies, i s for growth o f around 2% per year (Table Graph 3: Swaziland & SACU GDP Growth, % Swaziland & SACUGDP Growth, 10 9 8 7 6 5 4 3 2 ! 1 O I P ' w R " ~ ' ' " ' I ' " " " ' 19. A combination o f variables is responsible for the secular decline in economic growth. Since the 1990s, poor policy choices, particularly in terms o f public expenditure and its management and declining competitiveness - due to weak institutional capacity and governance as well as the appreciation o f the currency - have all contributed to the slowing output growth. These have been compounded by exogenous shocks, affecting both traditional agriculture as well as the more modernized sugar and textile sectors on which the country depends for the bulk o f its GDP and 2While the appreciation o f the South African Rand has had an important impact o n the real effective exchange rate in Swaziland, a persistent inflation differential between the two currencies has also led to deterioration in Swaziland's competitiveness with respect to South Africa. 4 export^.^ The gradual erosion o f preferential treatment for Swaziland's main exports, textiles and sugar, and the end o f the Multi-Fiber Agreement (MFA) have reduced the relative attractiveness o f Swaziland for textile investments (these trends are expected to continue in the near term, with the sugar sector likely to be affected by the reduction in European Union (EU) sugar subsidies, which will reduce prices paid to Swazi sugar exporters). This was exacerbated by the reduction in Swaziland's relative advantage in attracting foreign investment with the end o f apartheid, and a number o f investors left the country in the early and mid-1990s. Last but not least, HIV/AIDS has had an enormous impact inall areas o f the economy, but particularly on subsistence agriculture. 20. Subsistence agriculture has suffered from a specific set o f problems. 75% o f the population depends on subsistence farming, with indigenous cattle meat, dairy and subsistence maize being the primary agriculture activities on rain fed Swazi Nation Land (SNL), while sugarcane i s produced mainly on irrigated Title Deed Land (TDL). Between 1999 and 2003 (latest available data), production on SNL declined by 55% inreal terms, while crops grown on TDL increased by 13%. As a result, the value o f sugarcane production was more than double the combined value o f indigenous cattle meat, dairy and maize productionand more than ten times the value o f maize production alone. Although little detailed analysis o f these trends i s available, the decline i s likely to be due to (i) persistent droughts, (ii) erosion, (iii) o f investment and credit, and, increasingly, (iv) the soil lack reduction in productivity brought about by the HIV/AIDS pandemic. Productivity declines have affected other food staples as well and since acreage was not increased, absolute declines in food production have occurred, leading to upwardpressures on prices. 21. The Lilangeni is pegged at parity to the South African Rand, and this has generally served Swaziland well. It has facilitated capital and current transactions with South Africa, the country's most important economic ~ a r t n e rMonetary policy i s determined by developments in South Africa, . ~ with the Central Bank o f Swaziland closely following the repurchase rate set by the South African Reserve Bank in order to maintain interest-rate parity and prevent speculative capital flows. Movements in the real effective exchange rate are therefore largely exogenously determined, implyingthat the focus o fpolicy to enhance macroeconomic stability needs to be on fiscal policy and competitiveness. The authorities' policy o f rebuilding international reserves through saving some o f the SACUwindfalls should also help insafeguardingexternal stability. 22. Swaziland's inflation rate has usually followed South Africa's, although the differential between the two countries has widened to over 2 percentage points above South African inflation. Inflation stood at 5.5% at the end o f 2006, but i s estimated to have risen to near 9% by the end o f 3 Traditional agriculture i s generally practiced on the 60% o f the country classified as Swazi Nation Land (SNL). Most o f this land i s rain fed. The remaining 40% o f the country's land area i s Title Deed Land (TDL) where the bulk o f sugar cane and timber are planted, and which i s largely irrigated and thus less prone to the vagaries o f weather. Nearly 85% o f total agricultural productioninmonetary terms is producedo n TDL. 4Moreover, Swaziland i s beset by natural hazards, including drought, windstorms and floods, with growing numbers o fpeople affected. The impact o f droughts inparticular i s exacerbated by a number o f variables: the fact that nearly three fourths o f the population lives o n SNL without secure land tenure; Swazi farmers have beenreluctant to switch from maize to more drought resistant crops; access to irrigation i s limited outside large sugar plantations; and a "disaster welfare state mentality" appears to have set in, with affected farmers expecting food aid intimes o f crop failure. The appreciation o f the rand in recent years may have affected Swaziland's competitiveness, especially in the sugar sector, although evidence from other sectors, such as textiles, is mixed. An International Monetary Fund assessment o f the real exchange rate suggests no misalignment or a mild overvaluation o f the exchange rate. 5 2007, reflecting higher food prices as a result o f declining agricultural production. Rising wages and a growing government sector are other factors explaining the rise ininflation. 23. Although Swaziland has consistently run fiscal deficits in recent years, it recorded a surplus o f 10% o f GDP in the 2006/07 fiscal year. This i s largely due to windfall SACU revenues, which accounted for 66% o f the country's total revenues and grants, up from an average of 48% in the 1996-99 period. These revenues primarily reflect economic buoyancy in South Africa - inparticular its growing imports. 24. Increased dependence on SACU revenues i s a mixed blessing for Swaziland. On the upside, they have enabled the country to build up international reserves, which increasedto cover 3.4 months o f goods and services imports (as o f end 2007). High SACU transfers also helped to reduce the current account deficit to an estimated 0.9% o f GDP in2007 (the current account also benefited from stronger demand for Swaziland's major export, soft drink concentrate, and exports o f textiles that have benefited from the extension o f the African Growth and Opportunity Act (AGOA) to 2015). SACU revenues also have facilitated the servicing o f public debt. Public external debt remains very low, at 16.4% o f GDP at end-2006, and declined by some US$40 millionduring 2006. Lastly, and in view o f the worsening social situation, windfall SACU revenues have contributed to the growth o f the public sector inrecent years, which - inthe absence o f a formal safety net - has acted as a default safety net for an increasing number o fpeople. 25. However, increased SACU revenues have encouraged rapid growth in the public sector and have enabled the postponing o f underlying structural deficiencies in the Swazi economy. The public stagnant. There i s a risk therefore that - in the medium to long term - SACU revenues may have a sector wage bill i s today one o f the highest in Africa, while domestic revenues have remained similar effect on the Swazi economy as natural resources have on some natural resource dependent economies around the world, the so-called "resource curse". This `curse' could manifest itself inthe form o f an appreciated exchange rate; an expansionary public sector, which could end up affecting inflation negatively; an undiversified economy with fewer employment opportunities; and as a resultant declining competitiveness in the tradables sector, with further negative impacts on exports and employment. Nevertheless, assuming continued solid economic growth in South Africa, the SACU revenue pool i s anticipated to remain high in the medium term. In the longer term, SACU revenues may be subject to downside risks including the possibility o f a slowing down o f South African imports, and the reduction in SACU common external tariff rates due to advances in trade liberalization. 26. The medium term outlook in Swaziland i s for a continuation o f current trends. Absent major reforms, the economy i s projected to grow at rates close to 2%, constrained by a poor policy and governance environment, the HIV/AIDS pandemic, and few advances in terms o f competitiveness. Inflation i s expected to fall slightly as food prices decline. The current account deficit should also remain at near current levels o f 1% o f GDP as a result o f continued strong SACU transfers, exports o f textiles, and continued strong demand for soft drink concentrate. Fiscal balances are projected to be close to equilibrium despite continued high SACUrevenues. 27. A number o f significant risks for the medium and long term remain. Some o f these are exogenous, including the persistent drought in Southern Africa, compounded by the rapid increase in global food grain prices, and the continued erosion o f trade preferences for the 6 country's main exports. Another downside risk i s the uncertainty surrounding the trajectory of SACUrevenues inthe longer term. Swaziland does not currently have a programwith the IMF. Table 1:Selected Economic Indicators 1996- 1999 2ooo- 2004 2005 2006e 2007p 2008p 2009p 2010p GDP growth, % 3.6 2.3 2.4 2.8 2.3 2.0 2.0 2.0 Central Govt. Balance, incl. 0.1 -2.9 -1.5 10.2 0.0 0.3 1.1 0.3 grants* Total Revenues & Grants 29.7 27.2 32.0 41.4 37.3 39.8 40.4 39.4 (% of GDP)* of which SACU receipts 14.3 11.6 18.1 27.5 23.4 24.8 25.4 24.4 Total Expenditures & 29.6 30.1 33.5 31.3 37.3 39.5 39.3 39.2 Net Lending* External Debt, % of GDP 23.8 21.9 18.0 17.0 16.2 15.2 15.0 14.8 Export volume, fob 15.9 -15.4 -4.0 -3.9 3.6 0.4 0.6 % change Import volume, fob 1.2 -1.4 -1.7 3.4 5.3 6.5 5.8 % change Current Account Balance, -3.4 -0.2 -3.1 -2.9 -0.9 -1.3 -1.3 -1.3 % of GDP Inflation(CPI period avg, %) 7.9 7.4 4.8 5.3 8.3 6.6 6.0 6.0 Unemployment, % 27.6 30.3 32.0 Source: IMF Staff R ports and World Development Indicators * The fiscal year runs'from April 1to March 31 POVERTY AND INEQUALITY 28. Despite its lower middle income status, Swaziland i s deeply affected by poverty. According to a Swazi study6an estimated 69% o f the population lives below the poverty line, extreme or food poverty stands at 37% and approximately one quarter o f the population i s dependent on food aid7. The unemployment rate stands at 30%, with 34% in rural areas and 60% for persons under 20 years o f age. Poverty i s higher in rural areas compared to urban areas (75% vs. 49%) and also higher in female-headed households than inmale-headed ones (63% vs. 53%). 6 The 200011 Swaziland Household Income and Expenditure Survey (SHIES) defined the food or extreme poverty line at 68.30 Emalangeni per capita per month and the general poverty line at 128.60 Emalangeni. [Lilangeni :US$ =6.8 : 1as ofDecember 31, 2007). 7 According to the World FoodProgram(WFP) 7 29. With a Gini coefficient' o f 0.61, Swaziland reports the 7thmost severe income inequality in the world. An average person in the richest quintile spends 13 times more on consumption than the average person inthe poorest 20% o f the population. There i s widespread criticism inthe country and beyond o f the spending patterns o f the elite against this desperate situation o f the majority o f Swazi people. The Bank's Public Expenditure Review' also found a pattern o f expenditures more geared towards the wealthier segments o f society. 30. Swaziland i s likely to meet only two o f its MDG targets (see Annex 3). Possibly because o f the dropout o f low performers, learning outcomes are barely above average compared with thirteen other countries in East and Southern Africa" and higher than for other SACU MICs. Low cohort survival rates and net enrolment ratios leave Swaziland very far from its MDGs and "Education For All" (EFA) goals. On the positive side, gender parity in access is virtually attained at all levels. For some MDGs, primarily due to the HIV/AIDS pandemic and to some policy choices, Swaziland i s actually movingfurther away from the MDG targets (e.g. maternal mortality reduction). Monitoring the MDGs i s complicated by the fact that statistics and the capacity o f government to perform a monitoring role are currently weak. C. THREE OVERARCHINGDEVELOPMENTCHALLENGES 31. Inspite of theses formidable constraints, Swaziland and its donor supporters must find ways to deal with its three overarching development challenges: controlling HIV/AIDS, building a modem, diverse economy, and improving governance. FIGHTING HIV/AIDS - THE "CHRONICDISASTER '' 32. The ravages o f the HIV/AIDS pandemic have affected Swaziland not unlike a civil war, worse in many ways than a natural disaster, and are now the country's single greatest threat (see Graph 411). Twenty years ago (1987) HIV prevalence was first measured at 0.018%. Since 2004 Swaziland's adult prevalence has been the highest ever recorded anywhere in the world. It now stands at 26% (2006)". A staggering 49% o f women aged 25-29 are estimated to be HIV positive. Unless the trajectory o f the pandemic changes, it may claim the lives o f two thirds o f all 15 year olds. 33. A combination o f factors has led to the highest HIV/AIDS prevalence in the world. As in other countries in the sub region, Swaziland has so far failed to change sexual behaviors (despite a high level o f general awareness), combined with heavy stigma associated with the disease. Until recently the top leadership o f the country has not paid sufficient attention, leading to ineffective control strategies. Lastly, institutions, which were not designed to deal with a pandemic o f this magnitude at the outset, are now weakened by the pandemic and find themselves overwhelmed with the challenge, leading to a downward spiral. However, the recent slight decline inthe prevalence in pregnant women represents a ray o f hope. Following the latest Swazi Demographic Health Survey 8The Gini coefficient is a measure o f statisticaldispersion mostprominently usedas a measure of inequality of income distribution or inequality o f wealth distribution. 9Swaziland Public Expenditure Review, Strengthening Public Expenditure Policy and Management for Service Delivery and Poverty Reduction, August 31,2006, Report No. 35318-SW lo ''National Southern Africa Consortium for Monitoring Education Quality SACMEQ 11(2000) - Emergency Response Council on HIV/AIDS (NERCHA), 2007 l22006-07 SwazilandDemographic andHealthSurvey (SDHS) 8 (SDHS) and the recent census a realization has taken hold in the leadership o f Swaziland that Box I: "The HIV and AIDSpandemic is thus this challenge must be tackled as a matter of a human tragedy of unimaginable proportions. Dealing with this disaster has taught us that it urgentpriority. is a medical crisis, an economic crisis, a social crisis and apolitical crisis. Therefore winning 34. HIV/AIDS has put Swaziland in the this battle requires everybody's efort to come midst of a social disaster. Nearly a quarter o f all together andface this challenge. The burden children are orphans and nearly every other cannot be left with Government alone. We household hosts one or more orphan^'^. One mustform very strongpartnerships with our hundredthirty thousand children are considered eo-operatingpartners, our community leaders, OVC (Orphaned and Vulnerable Children) in a members of our communities and our NGOs at country o f just under one million people. This all levels of society andface this challenge as number i s projected to rise to 200,000 by 2010. a nation, and weshall conquer. "Prime HIV has brought the average life expectancy o f Minister, Hon. A.T.Dlamini, 2006 Graph 4: Trendsin Antenatal HIV urevalence in Swaziland16 l3Reviewing Emergencies, Shifting the Paradigm for New Era, Draft September 2007, Amy Whalley and Alan Whiteside, and National Plan o f Action for Orphans and Vulnerable Children 2006-2010, Government o f Swaziland, 2006 14Followed by Angola at 37 years. 15UNICEF's threshold for emergency inSSA: Crude Mortality Rate 1 Social Welfare (2006), 10* Round o f National HIV SeroSurveillance inWomen Attending Antenatal Care 9 35. Multiple drivers o f the pandemic are at work simultaneously. Among the most important are multiple concurrent sexual partners, inter-generational sex, high mobility o f the population, poverty and, inthe past, a lack o fpolitical commitment indealing with the pandemic17. 36. The consequences o f the HIVpandemic cut across all aspects o f society, the economy, social life and the family. In fact, it seems the pandemic has already started permanently altering the structure o f society. Attrition rates and absenteeism are reportedly high and AIDS i s now said to be responsible for an increasing portion o f deaths in the public and private sectors. For instance, it i s estimated that 32% o f all staff in central government agencies will be lost to AIDS over the next 20 years. By 2025, most school principals and middle managers will be 25 years old, and without a degree' *. 37. Increasing deaths among the productive age groups lead to an increasing dependency ratio, extreme coping mechanisms, lower productivity and lower growth. The pandemic imposes highcosts also on the health sector, with already 70% o f inpatients HNpositive today. Overall health spending i s low at 6% o f government spending and Swaziland spends even less on social protection (2.4%).There are currently only eight government social workers in Swaziland. The informal safety nets o f rural communities and NGOs have been strained beyond the breaking point. HIV i s destroying the social fabric o f families and communities, as it increases demoralization and fatalism among those affected. 38. In Swaziland there is also the real risk of a co-epidemic with Tuberculosis (TB), with possible detrimental effects for the region. In2003 the country's TB prevalence rate was estimated at 992 per 100,000 population, the highest in the world. The possible outbreak o f a `multi-drug (MDR TB)' or even an `extensively-drug resistant' strain o f TB (XDR TB) would pose very serious risks for the Southern Africa sub-region as a whole. Addressing the combined HIV/AIDS and TB challenge in Swaziland i s therefore also a regional imperative. 39. Swaziland must bring the HIV/AIDS pandemic under control if it i s to survive and prosper, but there are other challenges which must be tackled simultaneously. The country must wean itself from its dependence on SACU revenues, improve governance and create good jobs for its citizens. To do this it mustmodernize its economy, REFORMING THEECONOMY 40. Swaziland's dependence on SACU revenues and fight against HIV/AIDShas led it to neglect broader development o f its economy. As a consequence, poverty levels and unemployment are high and income highly unequally distributed. If Swaziland i s to prepare its economy for the future, it must improve its investmentclimate and educate its labor force. 17 GAMET is currently undertakinga new study ofthe drivers ofthe pandemic. 18 Sources:NERCHA, 2007 andReviewingEmergencies,Shiftingthe Paradigmfor a NewEra, Dra!?September 2007, Amy Whalley andAlan Whiteside 10 The InvestmentClimate 41. Swaziland benefits from being surrounded by growing economies in Southern Africa, its investment climate i s fairly strong, but challenges remainlg. Swaziland as a small, open economy i s geographically well situated in a region o f 53.4 million people (SACU countries) which has been growing at steady rates over the past decade and a half, pulled forward in particular by the South African economy with real per annum growth rates approaching 5% in the past years. Infrastructure i s good and labor productivity i s high, in fact much higher than in countries o f SSA, on par with China and Thailand, four times higher than in South Africa and twice as high as in Namibia. However, because firms in Swaziland invest less capital per worker total factor productivity remains low. 42. The other challenges for Swaziland's firms are mainly o f a regulatory nature. SMLE (small, medium and large enterprise) managers are mostly concerned about competition from the informal sector, crime, access to finance, tax rates, corruption as well as business licensing and permits. The HIV/AIDSpandemic is also placing a highburden on firms, with 65% firms conducting prevention activities, and despite this, absenteeism being far higher than inmost o f the comparator countries. 43. SMLEs report lower levels of worker education than any comparator country (except Mauritius), but only large manufacturing firms are concerned about a lack o f workers skills (the 5`h greatest constraint to them). Returns to experience and education, in the eyes o f SMLE managers, seem low, suggestingthat industryi s currently not skills-intensive. 44. The latest `Doing Business 2008' report confirms the findings o f the Investment Climate Assessment (ICA), namely that the burden o f regulation, while moderate overall, i s a bottleneck to growth2'. South Africa, Namibia, Botswana all rank very high globally while Swaziland ranks only 95th (out o f 178 economies), unchanged from the previous year. Starting a business (rank 142), registering property (142), protecting investors (175) and trading across borders (146) are key challenges, providing strong incentives to remain inthe informal sector. SMLE managers also report that `firms like theirs' underreport taxable revenue by 50%, the highest value for all comparator countries. This may be an indication for a perception o f high tax rates or burdensome and non- transparent tax payment processes. 45. Swaziland i s closely integrated into Southern African markets and i s a member o f all key regional institutions. For a country with a small domestic economy "Think Regional!" in all aspects o f public policy i s an appropriate strategy. However, in this context it also becomes paramount to focus on competitiveness and in that regard Swaziland i s currently missing out on opportunities. Currently low wages in some sectors still allow Swazi firms to remain competitive, despite existing investment climate bottlenecks. Over time however improving the investment climate, reducing the burden o f regulation, corruption and crime as well as fighting the HN/AIDS pandemic should allow Swaziland to attract more capital and skills-intensive industries,raising wages and improving living standards. 19 Findingsof a recent "Investment ClimateAssessment" preparedby the World Bank in2007, as well as "Doing Business 2008", World Bank, 2007. 20 DoingBusiness 2008, World Bank 11 The Skills Challewe 46. If poverty and unemployment are to be reduced and income distribution improved, Swaziland's workers must have the education and skills needed to fuel a modern economy. Educational achievement o f the head o f the household in Swaziland i s linkedwith lower household poverty: 50% o f households headedby a person with education below primary education are poor. In contrast, for household heads with secondary education this share drops by two-thirds to 17%21. 47. Expenditure levels in education in Swaziland are relatively high at 7.3% o f GDP and 21.2% o f total public spending (2005/06), but outcomes are not commensurate and spending not targeted at the most deserving. This high investment level secures relatively low total education efficiency. Average adult educational attainment is 8.6 years which still falls short o f the 10 years basic education equivalent. Net enrolment ratios, average repletion and cohort survival rates are low and internal efficiency i s very poor. School management i s weak and teacher absenteeism averages 10% on any normal day. Public expenditure in the sector i s near equal for primary and secondary education, but significantly pro-rich inhigher education. 48. The challenge in education is to align public spending better with public policy and to improve allocative efficiency and equity in order to produce the skills needed for a competitive economy. Currently the education, training and skills development sector (ETSDS) i s unable to build the skills required to promote growth. Especially in view o f the dramatic consequences of the HIV/AIDS pandemic and increasing competitive pressures within the SACUregion and beyond, it i s clear that investments inhuman capital will carry a very highpremium for the future o f Swaziland as a nation. The reverse i s also true: unless the pandemic i s stopped and reversed fast, and unless competitive skills are transferred to the next generation, the future may look rather bleak for Swaziland. IMPROVING GOVERNANCE 49. Swaziland's governance indicators compare unfavorably with LMICs and with its neighborhood in Southern Africa. They are more similar to other Sub-Saharan African countries (LICs) 22. In particular in the area o f voice and.accountability, but also regulatory quality, the rule o f law and government effectiveness Swaziland ranks lower than other LMICs, and by far the lowest in the SACU context. Except for the area o fvoice and accountability, governance inSwaziland is more comparable to IDA recipients in Sub-Saharan Africa. Inthis comparison the country ranks better in the areas o f political stability, regulatory quality and the control o f corruption. Transparency International last ranked Swaziland at 84 o f 179 countries, a jump forward o f 37 ranks compared to the previous year, apparently against the background o f new anti-corruption legislation. However, consistent with the voice and accountability rating by Kaufman et al, "Freedom House" considers Swaziland "not free" interms o fpolitical rights and civil liberties23. 21SHIES,2000/1 22KaufmanD.,A. Kraay, and M/ Mastruzzi 2007: Governance Matters VI: Governance Indicators for 1996 - 2006 23www.fieedomhouse.org 12 50. The Bank's Public Expenditure Review (2006) 24 has provided the authorities with a detailed analysis and roadmap for priority governance improvements. Public expenditures have generally benefited an oversized and in some key areas inefficient civil service. Especially, the oversized wage bill and excessive size o fthe civil service seem to be a root cause. Rising SACU revenues - as noted above, similar to revenues o f natural resource extraction in other countries - seem to have provided disincentives to move to a leaner and more efficient public sector and masked structural reform needs. 51. Expenditures are also geared more towards wealthier segments o f society and towards non- pro-poor spending, such as security sector spending, general administration and official travel. For instance, in 2004/5 official foreign travel accounted for more than the entire budget for primary education. A re-prioritization o f spending patterns appears urgent,if Swaziland i s to meet the MDGs, inparticular inview ofuncertainty regarding the long term evolution o f SACU revenue. Also, weak public expenditure management and weak controls combined with spending pressure from line ministries have contributed to poor expenditureperformance. Regarding public enterprises, the PER found that this sector i s indire need o f restructuring and privatization to improve efficiency, financial performance and service delivery. 52. Poor systems o f accountability and land management practices are among the most critical constraints to growth and poverty reduction, in particular in rural areas. In the past, the colonial administration moved to partition the country with a third of the land area set aside for the BritishCrown (whichrevertedto the Swazi Crown at independence), a third awarded through freehold titles to farming concessionaires, and the balance as Swazi Nation Land. Today, about 60% of the country i s still held in trust for the people by the King as SNL, on which 75% of the populationlive on subsistenceagriculture. 53. On the King's authority the allocation and administration o f SNL i s the core activity o f the more than 350 traditional chiefs, grouped into 55 "Tinkhundla " (local government areas). In accordance with customary law, male heads o f households can acquire a customary right o f use through "Kukhonta", i.e. by paying homage, as well as a tribute fee to settle on land parcels, and annual labor contributions known as "Kuhlehla to the traditional chief o f the area. This includes the right to " settle, but not to own, a particular piece o f land within the chiefdom. Prior to the new constitution women could only acquire a customary right o f use through a male relative or heir. 54. The lack of secure land tenure in rural areas makes it difficult to collateralize land for housing improvements or business development purposes, thereby hindering a source of finance for the poor. Securingland tenure is therefore one o f the challenges for the majority of Swaziland's poor. Inaddition, the current discrimination against women will have to bebrought inline with the new constitution, which guarantees equal treatment and opportunities for women inpolitical, economic and social activities *'. 55. The new constitution o f 2006 devotes one chapter to local government. It enshrines the introduction o f a single countrywide system o f local government within a defined period o f five years. The challenge now i s to design this system ina way that resources and controls are available to deliver services effectively, while maintaining overall fiscal sustainability. The latter has implications inparticular for the number o f local government areas. This transformation, which will be the most 24Swaziland Public Expenditure Review, Strengthening Public Expenditure Policy and Management for Service Delivery and Poverty Reduction, August 31,2006, Report No. 35318-SW 25 The introduction, with the assistance of the World Bank supported Swaziland UrbanDevelopment Project, of the 99-year lease instrument inurban areas (with equal access to plots independent of sex or marital status) demonstrates that this challenge can be resolved inthe Swazi context. 13 fundamental restructuring o f government since independence, will be a significant challenge for the country, but also presents a great opportunity for the achievement o f the MDGs inSwaziland. 56. The authorities have recently signaled their resolve to deal with these governance problems credibly and decisively. In2006 legislation was signed by the King that enables the Anti-Comption Unit to seize fraudulently obtained assets and enforce penalties on bribe takers and payers. The Poverty Reduction Strategy and Action Plan o f 2007 also lays out a comprehensive program towards improved governance and accountability, including by making local government more accountable. The challenge will now be to demonstrate that the rules o f the game have indeed changed and that there will be clear penalties for the abuse o fpublic resources for private gain. 57. Capacity for better governance i s severely constrained. Given attrition rates, widespread absenteeism, a lack o f performance-management practices in the public sector and a general lack of skills, capacity i s currently a real constraint. This constraint i s holding back well-intentioned initiatives by reformers in government. Unless this serious capacity gap i s addressed urgently, Swaziland will find it very difficult to achieve the envisioned outcomes foreseen in the PRSAP, including the MDGs. A significant part o f the solution lies in a much more effective allocation o f resources within the large public sector, enhanced by highly prioritized external assistance. 111. DEVELOPMENT STRATEGYOF THE KINGDOM OF SWAZILAND 58. Cabinet approved Swaziland's first PRSAP "Yingcamu - Towards Shared Growth and Empowerment - A Poverty Reduction Strategy and Action Programme" 26in September 2007. It for& the key document to implement the country's National Development Strategy - NDS (1997 - 2022) and the "Vision 2022". The PRSAP forms the Box 2: "The PRSAP cautions that framework for poverty focused planning and budgeting tacklingpoverty in Swaziland will not (through the MTEF - (see Annex 4 for the planning be a simple task, but will require framework.). It i s the result o f the work o f a Poverty fundamental institutional and Reduction Strategy Task Force (PRTF) which started structural reforms and a change in the already in 2000 and has benefited from a broad develoDmentamroach." PRSAP.2007 consultative process with many stakeholders. The World Bank in January 2000 had provided an input with the study "Swaziland - Reducing Poverty through Shared Growth". 59. The overall goal o f the PRSAP is to reduce poverty to 30% by 2015, and to absolutely eradicate it by 2022. It i s structured along six mainpillars: 0 Macro-economic stability and accelerated growth based on broad participation 0 Empowering the poor to generate income and reduce inequalities Fair distribution o f the benefits o f growth through fiscal policy Human capital development Improving the quality o f life o f the poor; and Improving governance and strengtheninginstitutions 26"Yingcamu" is the SiSwati term for provisions that a traveler takes along on ajourney. 14 60. The PRSAP acknowledges that while the country has seen notable growth since independence, "the benefits did not trickle down equitably to the whole population, thus widening inequalities". The urban-rural and regional imbalances are also noted, with Shiselweni and Lubombo identified as the two poorest regions. The document stresses the vulnerability o f the poor to HIV/AIDS, natural disasters, economic shocks and food insecurity (`only about 30% o f households have enough to eat'). 61. The PRSAP calls on all stakeholders to play their role in implementing the PRSAP, with government playing a major role as coordinator and facilitator and by providing a favorable policy environment. Annual monitoring will be conducted through a process led by cabinet; with a full review possible every five years. 62. The PRSAP i s now widely seen as the central reference document, approved by cabinet and focused on poverty and achievement o f the MDGs. In the Swazi context this constitutes a step forward. The consultative process was broad and inclusive; inputs by many stakeholders have been reflected in the document. The document lists strategic objectives, policy actions, baseline data (where available), targets, verifiable indicators andresponsible agencies. 63. However, reaching consensus has come at a price. It took a full decade to complete the PRSAP since the NDS, which has already led to many missed reform opportunities. Secondly, the process has produced a very comprehensive document which at this stage lacks prioritization and a sense o f urgency that would be warranted by the social disaster that i s unfolding in Swaziland. All strategic objectives under the six pillars currently appear to have the same level o f importance and urgency. This i s all the more regrettable as prioritization was one o f the explicit goals o f the PRSAP vis-a-vis the broad NDS. As has been the case for most first generation PRSPs the main two challenges for the Swazi authorities will now be to (i) rapidly prioritize and sequence the many identified measures, also inview o f very limited capacity, and (ii) linking that strategy effectively to budgets using the MTEF concept. Despite the shortcomings o f the NDS and the PRSAP, the country's leadership understands the gravity and urgency o f the economic and social situation, and the need for reform. IV. THE KINGDOMOF SWAZILANDAND WORLD BANK GROUP INTHE PAST27 64. Since 1962 Swaziland has borrowed US$113 million through 12 IBRD loans and 2 IDA credits, mainly for infrastructure, industrial development, agriculture, education and urban development. The GEF has approved one grant for biodiversity (UStS5.5 million). Inaddition IFC has invested $47.78 million in 8 investments. Swaziland has been a member o f MIGA since 1990 with one MIGA guarantee issued. 65. The last World Bank Country Assistance Strategy was discussed by the Executive Board in 1994. The base case lending program o f US$40 million foresaw two IBRD loans for the period o f FY94 - 9828.One o f the two identified base case loans, the "Power Interconnector Project", did not materialize. The CAS also envisioned support through a Country Economic Memorandum, an International Development Fundgrant as well as education, health and financial sector reviews. 27Swazilandjoined IBRD, IFC and IDA in 1969, ICSID in 1971and MIGA in 1990. 28Report No. 13622-SW.Three other projects (Rural Services, HumanResources Developmentand Second Urban) had been identified for a high case. 15 66. The other IBRD loan, the Swaziland Urban Development Project (SUDP, US$ 29 million), which was approved by the Board in FY95 closed in 2005, with all project development objectives met. Swaziland has not borrowed since FY95. One o f the main concerns o f the authorities has been IBRD loan pricing. However, the Bank has maintained a regular policy dialogue through SUDP implementation support as well as a series o f Economic and Sector Work and Trust Funds. 67. Inthe recent pastthe Bank has exploredthe possibilityof scaling up a program of support to Swaziland, facilitated by a process o f accelerated decentralization o f country and sector unit staff to the Pretoria Country Office (the Bank Group does currently not maintain a country office in Mbabane). This occurred in the broader context o f ramping up the Bank Group's support to all middle-income countries in the sub region (Botswana, Mauritius, Namibia, South Africa and Swaziland) inorder to improve services by the Group to these clients. 68. As a consequence, a series o f knowledge and grant services have been offered, which has been welcomed by the Swazi authorities, partners and other stakeholders: a `Public Expenditure Review' was conducted in 2006, followed by an IDF capacity building grant. A `History o f Upgrading and Urban Development in Swaziland 2007', a `Basic Education Review' 2006, an `Investment Climate Assessment' in 2007, an HIV/AIDS IDF grant (closed in 2007) plus GAMET support for M&E in HIV/AIDS, Hospital Sector Reform TA (ongoing) and Civil Service Pension Reform TA (ongoing) followed. Also, in 2004 a Regional Development Marketplace on HIV/AIDS awarded US$120,000 to seven projects in Swaziland and this fiscal year the Bank's Civil Society Fund will award a further US$20,000 to small HIV/AIDS projects of non-governmental organizations. Lastly, approximately 40-50 Swazi participants take part inWBI programs every year. V. A FRAMEWORKFOR SCALING-UP A. RATIONALE 69. Swaziland's M I C status i s misleading. With: more than two-thirds o f its citizens living inpoverty, one quarter survivingon food aid, 0 the highest HIV prevalence rate inthe world, the highestdeathrate inthe world, the lowest average life expectancy inthe world, one thirdo f its children orphaned or vulnerable and governance indicators closer to a LIC Swaziland has development challenges that,far exceed its current institutional or financial capacity. 70. A country with these characteristics requires the same levels and types o f assistance as a low income country. Worse even, some indicators such as the mortality rate and the drop in average life expectancy in the past years in fact resemble post-conflict countries and countries recently affected by natural disasters. However, as opposed to these categories, one o f the main factors causing the damage in Swaziland i s still ongoing and continues to rob Swaziland's youth o f a future: the "chronic disaster" o f the HIVIAIDS pandemic. Swaziland could indeed be considered a "fragile state", with some spillover risks for its neighbors. It is also worth repeating that the possibility o f a co-epidemic 16 with (MDRor XDR) TB poses a real risk for the sub region. It would therefore seem that there is a strong case for urgently scaling up the level o f support by the World Bank Group to Swaziland. 71. A new constitution, the approval by cabinet o f the PRSAP and a general trend towards greater modernization o f Swazi society provide the country with historic opportunities to turn things to the better. It also provides partners like the Bank Group with an opportunity and necessity to find suitable entry points for its scaledup support. 72. The authorities have expressed a great interest in scaled up WBG support for PRSAP implementation, and in particular to help stop and eventually reverse the HIV/AIDS pandemic, put Swaziland on a growth path and improve public finance management. This interest was firmly expressed in a recent Strategic Partnership Workshop conducted in Swaziland29, and reconfirmed duringthe Annual Meetings 2007. ImprovedIBRDlending rates as well as more flexible instruments have added to this greater interest. 73. Currently the Bank Group's relationship with Swaziland is not commensurate to help the country confront these great challenges effectively. Given the long hiatus o f limited engagement o f nearly a decade and a half and considering existing knowledge gaps the Bank will focus on rebuildingthe relationship and scaling upits support inthe context o f a two year ISNprior to moving to a full Country Partnership Strategy (see also below: "Beyond the ISN"). This approach also seems warranted by the limited implementation experience with the new constitution and the PRSAP. 74. Against this background it i s both premature to determine outcomes with certainty, and contrary to the intent o f a partnership agreement. However, the matrix o f planned interventions and expected outcomes inAnnex 1documents what the Bank expects to be able to achieve inthe coming two years. Also, each intervention will be results focused. If a CPS will be the next step (see also below: "Beyond the ISN"), it will include a full results matrix. B. GUIDINGPRINCIPLESFORSCALINGUP 75. Flexibilityand Speed.Giventhe hiatus and the uncertainties on both sides o fthe partnership the Bank will have to be flexible and adjust to opportunities and client demands as they arise. The magnitude o f the social crisis also implies that partners will have to act swiftly, in particular in the area o f HIV/AIDS.The Bank will therefore seek ways to flexibly and quickly adjust to the particular conditions and challenges o f Swaziland, including by using streamlined processing o f interventions available to rapid responses in"fragile states". 76. Strategic Selectivity. As the Bank develops a deeper understanding o f issues o f mutual interest and areas that the country's leadership i s strongly committed to it will scale up highly selectively. 77. Ownership and Commitment. Support under this ISN comes in support o f Swaziland's PRSAP, to the implementation o f which the authorities have expressed their full political commitment. The priorities presentedhere reflect the preferences for WBG support expressed by the client in the recent Strategic Partnership Workshop and subsequent discussions with senior management. 29Pigg's Peak, Swaziland, October4-5, 2007 17 78. Partnership.The Bank as a non-resident partner returning after nearly a decade and a half lendinghiatus will actively seek strategic partnerships with partners on the ground. Bank assistance will be complementary to existing programs and strengthen Swazi systems, inthe spirit o f the Paris Declaration. Where appropriate, the Bank will aim to use its convening role to mobilize assistance. 79. Poverty-focus. Bank interventions will be focused on those that have strong poverty- reducing potential. This i s particularly important in Swaziland due to the mutually reinforcing relationship between poverty and the HIV/AIDSpandemic. 80. Regional Integration. As a small, landlocked country Swaziland is looking for all opportunities to benefit from greater integration into the region. The Bank will actively support this by mainstreaming regional integration into its analytical, advisory, capacity building and lending services. C. THREE STRATEGIC AREAS FOR SUPPORT 81. Swaziland's development challenges are tremendous, but the urgency o f the worsening social crisis and the current status o f the relationship between the Bank Group and the country dictate that the coming two years be focused on rebuilding that relationship by focusing very strategically on a few keypriority areas o f support, where the Bank Group can add value. 82. Swaziland's governance challenges, combined with low capacity, have contributed to the country's inability to tackle the HIV/AIDS pandemic and high levels o f poverty. HIV/AIDS and poverty have now entered into a mutually reinforcing downward spiral. HIV/AIDS and poverty, however, cannot be fought effectively without timely improvements in governance, in particular in public finance management, the budget process and public procurement. Conversely, `good governance', viewed as the ability o f the public sector to deliver services to citizens in a cost- effective and equitable manner, cannot take hold in Swaziland without at the same time stopping and eventually reversing the destructive effects o f the HIV/AIDS pandemic. Hence, HIV/AIDS, governance and poverty are intimately interlinked in Swaziland and, to be successful, must be pursued inparallel. ISTRATEGICAREA 1: FightingHIV/AIDq 83. Unstopped, the HIV/AIDS pandemic will continue to devastate the economy and society and undermine all other development efforts in Swaziland. Addressing this challenge therefore must be top priority, also for Bank support. 84. Swaziland possesses a capable agency with strong leadership in charge o f this area. NERCHA is respected internationally and operates on the basis o f a sound strategy. The country 18 receives support in particular from the Global Fund (GFATM)30.Also, the EC, UNAIDS, UNDP, UNFPA, UNICEF, PEPFAR and WHO are active partners in this area. The Bank has in the past supported Swaziland with a US$500,000 IDF grant for strengthening M&E, plus GAMET support and technical assistance in the area o f social protection. The IDF grant proved instrumental in making the GFATM grant resources available, since a sound M&E system was a pre-condition for GFATMdisbursement, andmore effective. 85. Government has expressed a keen interest in the Bank strongly scaling up this assistance to address critical areas, which are currently not yet effectively covered, and to help close a financing gap (see table 3). The government has expressed its strong political commitment to tackle the great challenges the country i s faced with by the HIV/AIDS pandemic. Government and stakeholders are particularly interested inthe Bank's knowledge o f best practices inthe fight against the pandemic, as well as in the convening power that Bank involvement can bring. Due to Swaziland's L M I C status, however, Swaziland i s not eligible to IDA/MAP3' support and the Bank currently only has regular IBRD loans available as an instrument. Given that Swaziland is the country with the highest prevalence rate in the world, IBRD will aim to offer a more concessional total financing package in support for this Global Public Good, for instance by blending an IBRD loan with grants from other donors. GAMET i s also continuing its TA support to Swaziland. Table2: Estimatesof Financing Gav in HIV and AIDS Resvonse,2005-2012 (InUS$ Million) Items Actual Planned Est iated 2005 2006 2007 2008 2009 2010 2011 2012 Financing needs n.a. n.a. 127.10 125.60 127.10 136.50 150.15 165.17 Domestic + external 68.85 101-66 96.92 96.65 99.07 88.22 80.92 87.74 resources, excl. GF- R7 Financing gap 30.18 28.95 28.03 48.28 69.23 77.43 GF-R7 16.20 16.20 16.20 16.20 16.20 Financing gap, incl. 30.18 12.30 11.83 32.08 53.03 61-23 GFmR7 -- Data basedon Global FundRound 7 Proposal. 86. The exact size and nature of a Bank-financed HIV/AIDS operation are currently being worked out together with the authorities and partners, with a view to bringing it to the Board in FY09. After a first scoping mission four main components are currently envisaged for a possible operation, complementing the work o f other partners: (i) health systems reform, (ii) Private Public Partnership inthe hospital sector, (iii)HIV-AIDSrelated social protection (inparticular for PLWHA, OVC and the elderly) and (iv) institutional rebuilding. While the exact components o f the operation are still being worked out it i s already clear that to be effective the response will have to be o f a multi-sector nature. Linkages to other Bank-financed work (such as in education, local government, private sector development etc.) will be forged. The European Commission, the African Development Bank and the Global Fund are currently the key partners and the Bank i s putting together an innovative finance package for Swaziland which can address the pandemic with the 30The totalbudgetfor Swazilandfromthe GFAMTRound7 for 2008-2012, assumingadequateperformanceover the five-yearperiod, is US$D81million ingrants. 31Africa Multi-CountryHIV/AIDS Program 19 required urgency. The contribution by IBRD i s currently estimated at approximately US$20 ISTRATEGICAREA 2: ImprovingGovernance3T 87. As one specific priority in the governance arena the authorities have requested a successor project to the successful SUDP, to assist them with timely implementation o f the decentralization program, as mandated by the new constitution. The Swaziland Local Government Project - SLGP (up to US$20 million) aims to strengthen the capacity, accountability and resource mobilization functions o f Swaziland's local governance system to deliver and sustain basic services, inparticular to poorer sections o f the population. SLGP implementation i s being assisted by a Cities Alliance (US$SOO,OOO) and a PPIAF (US$300,000) grant. The project i s managedby the World Bank Institute hublocatedwithin the Pretoria Country Office. 88. The Bank has recently included Swaziland in the list o f pilot countries receiving particular support under the `Governance and Anti-Corruption' framework. This work will mainly focus on TA to follow-up on the recommendations o f the PER 2006, in particular with regard to improving the budget process and PFM, which have been stressed by the authorities as priorities for Bank support and therefore present good entry points. Under the umbrella o f SLGP preparation, the team i s now assisting the authorities in drafting a new Public Finance Management Act to replace the current legislation which goes back to 1967. A Country Fiduciary Assessment i s envisioned for FY09. IBRD's treasury department is assisting the Ministry o f Finance in optimizing its debt management strategy and i s providing assistance to the Central Bank with regard to reserves management (RAMP program). DEC i s buildingstatistics capacity inthe Central Statistics Office (GDDS program), which i s crucial for better monitoring Swaziland's progress towards the MDGs. 32 Dueto the early stage of project preparationand ongoing consultations with partners this figure maybe subject to change. 33 "Governance" i s defined here as the manner inwhich the state acquires and exercises its authority to provide public goods and services. 20 Box 3: Swaziland -a GACpilot country Swaziland has been selected as apilot country in the Africa Region (AFR) under the WorldBank's "Governance and Anti-Corruption ''initiative (GAC). The aim of AFR 's GACstrategy and implementation plan is topresent a systematic effort to address GAC impediments to growth andpoverty reduction through country-levelprocesses, tailored to specijk country needs. Additional resources are available topilot country teams. The activities currently envisionedfor Swaziland during the ISNperiod include: Swaziland Local Government Project in support of decentralization and greater accountability at local government level (including PPIAF, Cities Alliance grants) Supportfor a new Public Finance Management Law (with WDPsupport) Assistancefor improved statistics (DEC) Country Fiduciary Assessment Follow-up to the Public ExpenditureReview (IDFgrant) Governance diagnostic of the institutional framework for public finance management Support to strengthen the `demand-side of governance' (parliament, civil society, media, enhanced disclosure of information) Streamline governance work in all lending operations and advisory work The team intends to work closely with government and other developmentpartners in order to mobilize resources, strengthen systems, build capacity and broaden the coalition towards improved governance in Swaziland. 89. With 69% o f the population living in poverty, mostly on SNL in rural areas, and very high unemployment rates, especially among the youth, it will be critical for Swaziland to increase its competitiveness, develop human capital and create a better business enabling environment. The envisioned World Bank Group - financed activities will support these objectives directly by addressing key bottlenecks to private sector-led growth, but in the I S N period only some selective elements o f the agenda can be addressed. 90. The Investment Climate Assessment o f 2007 spells out a reform agenda and the Bank Group i s ready to assist the country in its implementation. The Bank's private sector development team together with Swazi stakeholders i s developing a proposal for grant-funded TA interventions in this area for mid 2008. IFC's PEP Africa i s also planning support to SME development, possibly via the Swazi Chambers o f Commerce. 91. A comprehensive policy and strategic framework for the education, training and skills development sector i s under preparation inorder to establish the cause, nature and extent o f the skills gap currently hampering competitiveness o f the Swazi economy. The framework will then outline a 21 future strategy for transforming the sector into a more effective tool for supporting national development goals presented inkey government policy and strategy instruments such as the PRSAP. Particularly the effective supply o f the knowledge and skills base required for Swaziland's medium to long term competitiveness and for its accelerated and shared growth will be addressed. 92. IFC currently has three investments inmanufacturing sectors in Swaziland for a total o f US$ 5.49 million. The Corporation continues to focus on proactive support to project development (both investment and TA) in Swaziland. IFC i s getting ready to implement the SME Market Access to Regional Tourism (SMART) Program in Swaziland. The Program aims to strengthen SMEs in the tourism sector by improving market access for smaller businesses and by increasing the competitiveness o f SMEs in Africa. MIGA currently has one guarantee for US$36.6 million on its books involving the construction and operation o f electricity transmission lines that will interconnect South Africa, Swaziland and Mozambique. D. PARTNERSHIPS 93. As a small African MIC with low governance indicators Swaziland does not currently have many active donors. The African Development Bank (AfDB), European Commission, GFATM, the UNfamily andvery few active bilaterals are Swaziland's mainpartnerstoday. Most ofthe support is focused on combating HIV/AIDS. Few partners have the resources and capacity to assist Swaziland in implementingits comprehensive development strategy at a relevant scale. The Bank will seek to build strategic partnerships with partners that are already active in certain areas, building on their knowledge and experience on the ground. Secondly, the Bank will proactively use its convening power and broaden the support to Swaziland's PRSAP for specific programs, by seeking additional partners to share some o f the financial burden as well as some o f the risks. E. WORLD BANKGROUPCAPACITY 94. The Bank Group does not have an office in Mbabane, which presents a limitation for rebuilding the partnership with Swaziland and international partners on the ground. We will use the staff in our offices in Pretoria (IBRD) and Johannesburg (IFC) to serve Swaziland, in addition to support by teams coming in from the Washington, DC office. It i s expected that by having decentralized many o f the direct counterparts, the World Bank Group will be able to be more responsive to the clients. VI. CREDITWORTHINESS,RISKSAND MITIGATION 95. Creditworthiness. Swaziland i s faced with vulnerabilities on the macroeconomic and fiscal fronts, as described above, in particular related to high levels o f dependence on SACU revenues, weak economic competitiveness as well as fiscal risks associated with decentralization. In addition, HIV/AIDS contributes to highmortality rates, a loss o f productivity and real income, and mounting fiscal pressures. The proposed I S N program mitigates some o f these risks, however due to the magnitude o f the challenges and the limited amount o f assistance available substantial risks remain. Those risks not withstanding, Swaziland's overall outlook for debt sustainability remains good. Swaziland's debt burden i s very low and debt levels are projected to continue to trend downwards, at 22 least until 2010/11. At the end o f 2006 public debt measured 16.4% o f GDP and total external debt stood at 15.8% o f GDP. However, should SACU revenues decline in the medium to long term debt- to-GDP ratios are projected to rise, The country has an unblemished track record o f servicing its external obligations. IBRD's current exposure to Swaziland (US$20 million) i s small, and IDA'S remaining exposure amounts to US$29 million. Swaziland has seen negative net flows from IBRD and IDA since 2006. 96. Commitment risks. Political commitment has improved in recent years. There however remains a risk concerning the political will and ability o f government to follow-through on commitments made and questions have been asked regarding the ownership o f the Swazi leadership o f the required reform programs. Also, parliamentary elections scheduled for late 2008 could be followed by delays in cabinet formation. This I S N therefore suggests a gradual, highly selective scaling up o f WBG support. The reverse however i s also true: the risk o f external partners not supporting Swaziland at this time i s that the Swazi authorities would not have the financial and technical means to follow through on their PRSAP and firm commitments made under the new constitution for greater decentralization, greater equity and better governance. This I S N therefore balances and mitigates both risks. 97. Capacity risks. The HIV/AIDS pandemic i s exacting a great toll also on government capacity. There i s a risk that institutions will be further weakened and unable to follow through on reforms supported by the Bank Group. The proposed HIV/AIDS operation as well as mainstreaming capacity buildingin all interventions will helpto mitigate this risk. 98. Selectivity risks. Swaziland's NDS and PRSAP are not sufficiently prioritized. The risk for external partners i s to be drawn into too many activities and to loose focus, especially in light o f limited internal financial and human resources. This ISN is therefore focused on a few central challenges o f Swaziland, as a subset o f the NDS and PRSAP priorities. 99. Instrument risks. The Bank currently does not have appropriate instruments to assist LMICs such as Swaziland, especially in the area o f HIV/AIDS. This i s particularly apparent in Southern Africa, the epicenter o f the global pandemic. The risks are that (i) the Bank maynot be able to find a more concessional source o f funding and (ii) there may not be a grant donor willing to make the financing package more concessional by blending its grant resources with an IBRDloan. To mitigate this risk the team is actively seeking a solution internally and with external partners. Inaddition, the team i s mobilizing free TA services and grant resources available within the Bank Group. 100. Fiduciary risks. Swaziland has not borrowed in nearly a decade and a half. Also, public finance management in general i s an acknowledged weakness in the country's governance system. However, the last project SUDP as well as all trust-funded grants has been executed without any major fiduciary issues. In addition, to further mitigate this risk the team i s planning a Country Fiduciary Assessment inFY09 and other specific measures inthe context o f the GAC initiative. VII. BEYONDTHE INTERIMSTRATEGY 101. This ISN presents the first framework in nearly a decade and a half for scaling up World Bank Group support to Swaziland. It will be valid for a period o f two years and focus on rebuilding the partnership between the Bank Group and Swaziland. Progress will be assessedand updated on a regular basis through annual business planning discussions together with the client, in particular the 23 Ministries of Planning and Finance.At the end of the ISN period, if the partnership has grown as expected, a full CountryPartnershipStrategy wouldbe developed. 24 ANNEX 1:Matrix of planned interventions, exvectedoutcomes and indicators Strategic Area ExpectedOutcorno Indicator Task Fighting HlVlAlDSIIHealth system strengthened to scale up 1I % of men and women aged 15-49who IHlVlAlDS Project effective HIV/AIDS interventions. receivedan HIV test in the previous 12 (FYO9) monthsand know their results (baseline 16%,target 25%). Number of functioning HIVIAIDSCare Point Swaziland Local facilities increasedfrom 300 to 335 by 2010. Government Project (SLGP) (FYO9) Improving Improvedcapacityfor financial and 4 Regionshave budgetsapproved by their Swaziland Local Governance performance managementin Swazi local RegionalCouncils and effective FM systems Government Project authorities. are in operation. (SLGP) (FYO9) Framework for local government reflecting Cities Alliance Grant criteriafor well governed, sustainable, (US$240k)(FY08) productiveand inclusivesystem of local authorities. Resource mobilizationcapacity of Swazi At least 2 local governmentsor state- PPIAF sub-national local governments,communitiesand other owned enterprises have credit ratings from technicalassistance. service providersstrengthened. internationallyrecognizedfirms by 2010. (US$300k) At least 1out of 12existing local governmentshas raised privatefinancing by 2010. Improved publicfinancial management New macro-economicmodel and system IDF ($453k)(PER performance. designedand installedby 2009 (no fOllOW-Up TA) operationaltool for forecastingthe main (FY08/09/10)plus economicaggregratesor developingthe UNDP support budgetarymacro-frameworkcurrently (US$1OOk) exists). 1967 PFM Act revisedand enacted by end Country Fiduciary 2009. Assessment (FYO9) PFM Action Plan agreed among all PFM Dialogue stakeholders by 2010 (no Action Plan (ongoing) currentlyexists). Strengthening Findings and recommendationsof ICA have By 2009 findings of ICA are broadly ICA- follow-up TA Competitiveness been incorporatedinto governmentpolicy. discussed at the nationallevel. (FYO8-09) Improved sector knowledgeto guide future ESW completed and findings shared with Education ESW sector reform policies,strategyand governmentofficials by 2010. (ETSDS) (FYO9) programs. 25 ANNEX 2: Country FinancingParameters SWAZILAND:COUNTRY FINANCING PARAMETERS The cotiiif~~~~Jin~~nciiigpai~un~ete~s, set oui below huve been approved bjs the Regional Vice for Swaziland President, Apicu Region, utzd ure beingposted on the Bunk 3 i?ifernulwehsite. 1 and debt 26 SWAZILAND: COUNTRY FINANCING PARAMETERS This Annex provides additional information on the country financing parameters for Swaziland established pursuant to OPBP 6.00, Bank Financing. Introduction: Swaziland's economy has experienced a gradual deterioration in economic performance, from annual averages o f near 7% in the 1980s to about 2.5% since 2000. The country faces the fundamental policy challenges o f maintaining macroeconomic stability and addressing governance and structural impediments to higher and broader economic growth. Nevertheless, since 2005 performance has improved slightly, with 2006 registering GDP growth o f 2.8% and fiscal surplus at the central government level for 2006/07 expected at over 10% o f GDP. The current account surplus has narrowed, andpublic external debt levels continue to fall, today standing at about 16% o f GDP. Much o f this i s the result o f windfall SACU revenues which have grown rapidly as a result o f strong SACU imports. The medium term forecast is for SACU revenues to remain strong through 2010/11, with a positive impact on Swaziland's fiscal accounts. Nevertheless, Swaziland's economic Performance has been characterized by weak fiscal management and lack o f discipline in expenditures domestically and by declining external conditions - i.e. the erosion o f trade preferences for its major exports, textiles and sugar. Drought conditions in southern Africa have hurt agriculture, on which a majority o f the population depends. Such challenging circumstances have been made worse by alleged high levels o f corruption similar to LICs inAfrica and weak institutions. The HIVIAIDS epidemic has taken a heavy toll on the social fabric, as well as on growth and productivity. The categorization o f Swaziland as a low middle-income country hides highlevels o fpoverty and enormous inequality inthe distribution ofincome. Rising levels ofpoverty andunemployment have drivena growing number o f the rural into urban and peri-urbancenters, which are putting additional pressure on traditional institutions to keep apace of the service needs o fthe growingpopulation. Cost Sharing: The Government has shown ownership o f its development agenda - halving poverty by 2015 - as highlightedinits "Poverty Reduction Strategy and Action Plan (PRSAP)". Development spending accounts for about 8 `YOo f GDP and around 20 % o f government expenditure. Inthe most recent project, the Bank's financing as a share o f project costs has been just under 50 %. Going forward, the Bank's financing share in individual projects would be determined in a manner which supports government ownership o f projects, and on that basis counterpart funding by Government will generally be highly encouraged expected inall projects. However, 100% Bank financing may be applied to critical activities requiring rapid implementation as well as selected social sector operations such as HIV/AIDS. Therefore, while continuing to emphasize client commitment and ownership o f individual projects, the Bank would retain the option o f financing up to 100 % ofproject costs. A. Recurrent Costs: The proposed Local Government Project is fully consistent with the government's PRSAP and builds on a predecessor project (Swaziland Urban Development Project) which closed with all PDOs met in 2005. Government sees this second Bank-financed project as a critical instrument of support for the country's decentralization efforts, as foreseen by the new constitution. The project is aimed at improving human, institutional and fiscal capacity for sustainable service delivery for the country's population. Moreover, it will focus on the delivery o f basic services in growth 27 points, informal settlements in peri-urban areas and in the secondary towns where the incidence o f poverty and HIV/AIDS i s most pronounced. A second project i s now under preparation to address the HIV/AIDS pandemic, which has now reached the highest prevalence levels in the world. The authorities consider Bank support also in this area as a top priority, given the emergency nature o f the pandemic and the critical complementary assistance the Bank can provide to bolster domestic programs and support from other partners. The amount o f recurrent cost financing is not expected to significantly impact fiscal and debt sustainability. Swaziland's external public debt i s low, at about 16% o f GDP, and debt sustainability issues do not present a significant concern in the near or mediumterm. Moreover, the impact o f Bank financing i s expected to be small relative to the large flows Swaziland i s forecast to continue receiving from SACU revenue-sharing (accounting for near 25% of GDP today). (However, the Government i s weary o f over-borrowing, owing to the projected decline inSACUreceipts due to deeper regional integration, whichmightimpact negatively onits ability to pay). No country-level limit on Bank financing o f recurrent costs i s proposed. On a project by project basis, the Bank may finance recurrent costs after careful consideration of the sustainability of project achievements, and implied future budgetary outlays, within the overall context o f Swaziland's aggregate fiscal position andprospects. B. Local Cost Financing: Despite the temporary SACU windfall revenues, financing requirements for the country's development programme exceed the public sector's own resources (e.g., from taxation and other revenues) and expected domestic borrowing. Faced with challenging economic (very high rates o f poverty and a Gini coefficient o f close to 0.6, high unemployment) and social conditions (HIV/AIDS prevalence is the highest in the world, and tuberculosis is also rampant). Swaziland cannot finance its development programmeswithout external assistance. The local cost component o f envisaged investment lendingis expected to be significant share of total project cost. Therefore, the financing o f foreign expenditures alone would not enable the Bank to assist in the financing o f individual projects. The two requirements for Bank financing o f local costs are met, and the Bank may finance local and foreign costs in the proportion requiredfor individualprojects. C. Taxes and Duties Financing: Taxes andduties have been assessedas reasonable andthe Bank may therefore finance taxes and duties associated with project expenditures. At the project level, the Bank would consider whether taxes and duties constitute an excessively high share o f projects. Changes in tax and customs and/or related exemptions could trigger a review o f this parameter. Major taxes and duties are summarized below. Item Tax rates (range) Personal Income Tax 12%-33% depending o n income level Company Tax 30% i s the standard rate. However a concessionary rate is applied when a business is deemed "a development enterprise" by the Ministry o f Finance. Sales Tax A standard rate o f 14% is applied but rates range from 14%-25% depending on the product. Customs Tariffs The common ad valorem rates have 39 bands ranging from zero to 55 %. 28 .-In r, .-In r, c a, c % E - 3 3 x - x Y - a, Y - a, u m c 0 0 0 N 2% a 3e L 7 .. c ._ c v) 8 m -0 ._ we - zE -E 3 - 3 % ra -r 0 .-m 0 -0 .-c E 0 8 0 r 0 cc, i m ANNEX 4: FiscalDecentralization Graph Fiscal Decentralization Determine Sustainable services priorities, pay provided, rates/ tariffs accountabiIity SustainableLocat Governments Number andjurisdictions basedon empiricalanalysis Small matching Capital building Cost sharing grants for local grants framework services t t GOS Provides incentives and guidance for sustainable localsewices I and clearaceountabitity 32 ANNEX 5: Swaziland's Planning Framework Figure 10:Swaziland's PlanningFramework V Poverty ReductionStrategy and Action Plan Annual public lr Expenditure Redews or pragress reports Other Development Strategy ~ o c u m e n t ~ agriculture, eduction, water, naturalresources, electricity, health, industry, enwronment etc. i tZ Sectoral Development Plans li I I ii 1 I Medium Term expenditure Framework 1 T Budget V Rotting Development - Powity Monitoting I Plan L, i L System 33 CASANNEXES Swaziland at a glance 12/21/07 Sub- Lower Key Development Indicators Saharan middle ~ Swaziland Africa income AQedistribution, 2008 (2008) Male Female Population,mid-year(millions) 1.1 770 2,276 Surfacearea (thousandsq. km) 17 24,265 28,549 Populationgrowth(%) -0.4 2.3 0.9 Urban population(Ohof total population) 24 36 47 GNI (Atlas method, US$ billions) 2.7 648 4,635 GNI per capita (Atlas method,US$) 2,430 842 2,037 GNI per capita (PPP, international$) 5,170 2,032 7,020 GDP growth(%) 2.1 5.6 8.8 20 10 0 10 20 GDP per capitagrowth(%) 2.5 3.2 7.9 percent (most recent estimate, 200&2008) Povertyheadcountratio at $1 a day (PPP, %) 8 ' 41 Povertyheadcountratio at $2 a day (PPP, %) 23 Under-5mortality rate (per 1,000) a 72 Life expectancyat birth (years) 41 47 71 Infantmortality(per 1,000 live births) 110 96 31 2007 Chiid malnutrition(YOof childrenunder 5) 10 29 13 180 180 140 Adult literacy,male (% of ages 15 and older) 81 69 93 120 Adult literacy,female (% of ages 15and older) 78 50 85 100 Gross primaryenrollment,male (Ohof age group) 111 96 117 80 Gross primaryenrollment,female (% of age group) 104 86 114 80 40 20 Accessto an improvedwater source(Ohof population) 62 56 81 0 Accessto improvedsanitationfacilities (% of population) 48 37 55 1980 1885 2000 ZW5 OSwaziland OSub-Saharan Africa Net Aid Flows 1S80 ISSO 2000 2006 (US$ millions) Net ODA and official aid 48 54 13 46 Growth of GDP and GDP per capita (%) Top 3 donors (in 2005): Japan 0 0 6 26 Canada I 2 0 4 119 UnitedStates 11 14 0 1 8 4 \ Aid (% of GNi) 8.8 5.7 0.9 1.7 Aid per capita (US$) 85 70 13 41 Long-Term Economic Trends 80 95 W 05 Consumerprices(annual% change) 18.7 13.1 3.7 5.8 GDP implicit deflator(annual Oh change) 14.0 14.6 11.6 5.7 &GDP -GDP per capita Exchangerate (annualaverage,local per US$) 0.8 2.6 6.9 6.8 Terms of trade index(2000= 100) 90 100 100 198040 ISSO-2000 2000-06 (average annualgrowfh %) Population,mid-year(millions) 0.6 0.8 1.o 1.1 3.1 3.1 1.2 GDP (US$ millions) 542 882 1,389 2,650 7.5 3.1 2.4 (% of GDP) Agriculture 22.7 13.3 15.5 10.9 3.9 1.1 1.4 Industry 30.2 42.1 44.8 45.6 12.7 3.9 1.8 Manufacturing 20.9 34.8 35.8 36.8 16.7 2.8 1.4 Services 47.1 44.6 39.7 43.5 4.9 3.2 3.5 Householdfinal consumptionexpenditure 72.3 72.7 72.4 60.1 1.4 6.6 -1.3 General gov'tfinal consumptionexpenditure 27.0 18.1 24.5 27.9 -0.4 8.1 8.1 Grosscapitalformation 40.7 19.1 18.6 17.2 6.4 -4.7 3.3 Exportsof goodsand services 74.6 74.6 81.6 81.2 1.3 6.4 10.1 Importsof goods and services 114.0 87.1 97.2 86.3 -2.7 6.2 8.3 Grosssavings 16.7 24.9 13.2 18.7 Note: Figuresin italicsare for years other than those specified. 2006 data are preliminary. .. indicatesdata are not available. a. Country povertyestimateis for earlier period. b. Aid data are for 2005. DevelopmentEconomics,DevelopmentData Group(DECDG) 34 Swaziland Balanceof Paymentsand Trade 2000 2008 Governance Indicators, 2000 and 2006 (US$millions) Total merchandiseexports(fob) 906 - 1,877 Total merchandiseimports(cif) 1,112 1,192 Voice and accountability Nettrade in goods and services -216 -158 Political stability Currentaccount balance -75 19 as a % of GDP -5.4 0.7 Regulatory quality I I Workers' remittances and Rule of law compensationof employees (receipts) 74 81 Control of corruption I Reserves,includinggold 339 209 0 25 50 75 100 Central Government Finance #I2006 Country's percentilerank (0-100) 02000 higher velu~simply better rsfings (% of GDP) Current revenue(includinggrants) 27.7 34.1 Source Kaufmann-Kraav-Mastwzi.World Bank Tax revenue 26.2 33.4 Currentexpenditure 24.1 27.1 Technologyand Infrastructure 2000 2005 Overallsurplus/deficit -2.6 0.5 Paved roads (% of total) Highestmarginaltax rate (%) Fixed line and mobile phone Individual 39 33 subscribers(per 1,000 people) 62 208 Corporate 30 30 Hightechnologyexports (% of manufacturedexports) 0.4 External Debt and Resource Flows Environment (US$ millions) Total debt outstandingand disbursed 289 544 Agriculturalland (% of land area) 81 81 Total debt service 47 42 Forestarea (%of land area) 30.1 31.5 Debt relief (HIPC. MDRI) - - Nationallyprotectedareas (% of landarea) .. 3.5 Total debt (% of GDP) 20.8 20.5 Freshwaterresourcesper capita (cu. meters) .. 2,299 Total debt service(% of exports) 3.6 1.8 Freshwaterwithdrawal (% of internal resources) 40.1 Foreigndirect investment(net inflows) C02 emissionsper capita (mt) 0.96 0.86 Portfolioequity (net inflows) GDP per unit of energy use :omposition of total external debt, 2008 (2000 PPP $ per kg of oil equivalent) Energyuse per capita (kg of oil equivalent) Short-term,51, 22 PnvaIe 66 (US$ millions) IBRD Bilmeral,105 Total debt outstandingand disbursed 9 22 Disbursements 1 0 lateral 297 Principal repayments 1 1 Interest payments 1 1 IDA Total debt outstandingand disbursed 5 3 Disbursements 0 0 Private Sector Development 2000 2008 Total debt service 0 0 Time requiredto start a business(days) - 61 IFC (fiscalyear) Cost to start a business(% of GNI per capita) 41.1 Total disbursedand outstandingportfolio 18 6 Time requiredto registerproperty(days) -- 46 of which IFC own account 18 6 Disbursementsfor IFC own account 0 0 Rankedas a major constraintto business Portfoliosales, prepaymentsand (%of managerssurveyed who agreed) repayments for IFC own account 1 0 Anticompetitiveor informal practices 25.2 Crime .... 18.5 MIGA Gross exposure 67 36 Stock market capitalization(% of GDP) 5.3 7.5 New guarantees 69 0 Bank capitalto asset ratio(%) Note: Figures in italicsare for years other than those specified. 2006 data are preliminary. 12/21/07 ..indicatesdata are not available. -indicates observationis not applicable. DevelopmentEconomics,DevelopmentData Group (DECDG). 35 Millennium Development Goals Swaziland Withselected targets to achieve between 1990and 2015 (estimate closest to date shown, +/- 2 years) Goal 1:halve the rates for SI a day poverty and malnutrition 1990 1995 2000 2005 Poverty headcount ratioat $1 a day (PPP,%of population) 8.0 Poverty headcount ratioat national poverty line (% of population) Share of incomeor consumption to the poorestqunitile (%) 2.5 4.3 Prevalenceof malnutrition(% of childrenunder 5) 10.3 Goal 2: ensure that children are able to complete primaryschooling Priman,schoolenrollment (net. %) 75 76 80 Primarycompletionrate (% of relevantage group) . . . 61 61 64 64 Secondary schoolenrollment (gross,%) 42 43 45 Youth literacy rate (% of people ages 15-24) 85 88 90 92 Goal 3: eliminate gender disparity in education and empower women Ratioof girlsto boys in primaryand secondary education (%) 98 95 94 Women employed inthe nonagnculturalsector (% of nonagriculturalemployment) 36 33 32 30 Proportionof seats held bywomen in national parliament (%) 4 3 3 11 Goal 4: reduce under4 mortality by two-thirds Under-5mortalityrate (per 1,000) 110 110 142 160 Infant mortalityrate (per 1,000live births) 78 78 98 110 Measles immunization(proportionof one-year olds immunized, %) 85 94 72 60 Goal 5: reduce maternal mortality bythree-fourths Maternal mortalityratio (modeledestimate,per 100,000live births) 370 Birthsattendedby skilledhealthstaff (% oftotal) 56 70 Goal 6: halt and begin to reversethe spread of HlVlAlDS and other major diseases Prevalenceof HIV (%of populationages 15-49) 33.4 Contraceptiveprevalence (% of women ages 1549) 28 Incidenceof tuberculosis(per 100,000 people) 263 334 818 1,262 Tuberculosiscases detected under DOTS (%) 33 42 Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improvedwater source(% of population) 62 62 62 Access to improvedsanitationfacilities(% of population) 40 48 48 Forestarea (% of total land area) 27.4 30.1 31.5 Nationallyprotectedareas (% of total landarea) 3.5 C02 emissions(metrictons per capita) 0.6 0.5 1.o 0.9 GDP per unit of energy use (constant2000 PPP $ per kg of oil equivalent) Goal 8: develop a global partnership for development Fixed line and mobilephone subscribers (per 1,000 people) 18 23 62 208 Internet users (per 1,000people) 0 0 10 32 Personal computers(per 1,000people) 11 32 Youth unemployment(% oftotal labor force ages 15-24) 43.6 ::E Education indicators (%) Measles immunization (% of I-year olds) 1w 75 50 25 25 2000 2002 2005 *Primary net enrollment ratio -0-Ratio of girls to boys in pnmary & secondaryeducation 0Swaziland OSub-SaharanAfrica 0 Fixed +mobilesubscribers Note:Figuresin italicsare for years other thanthose specified. ..indicatesdata are not available. 12/21/07 DevelopmentEconomics,DevelopmentData Group (DECDG). 36 CAS Annex 82 - Swaziland Selected Indicators* of Bank Portfolio Performance and Management As Of December 31, 2007 ~~ ~ Indicator 2005 2006 2007 2008 Portfolio Assessment Number of Projects Under Implementation a 0 0 0 0 Average Implementation Period (years) 0.0 0.0 0.0 0.0 Percent of Problem Projects by Number 0.0 0.0 0.0 0.0 Percent of Problem Projects by Amount a, 0.0 0.0 0.0 0.0 Percent of Projects at Ris by Number 0.0 0.0 0.0 0.0 Percent of Projects at Risk by Amount a( 0.0 0.0 0.0 0.0 Disbursement Ratio (%) e 99.0 0.0 0.0 0.0 Portfolio Management CPPR during the year (yes/no) No No No No Supervision Resources (total US$) 90.0 50.0 0.0 78.0 Average Supervision (US$/project) 102.0 0.0 0.0 0.0 Since FY Last Memorandum Item 80 Five FYs Proj Eva1 by OED by Number 10 1 Proj Eva1 by OED by Amt (US$ millions) 91.4 29.0 O/Oof OED Projects Rated U or HU by Number 10.0 0.0 O/Oof OED Projects Rated U or HU by Amt 3.2 0.0 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (I P) d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's * portfolio at the beginning of the year: Investment projects only. All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 37 CAS Annex B3 -IBRD Program Summary Swaziland as of December 31, 2007 Proposed IBRD Lending Program Strategic Implementation Fiscal year Proj ID US$(M) Rewards b Risks (H/M/L) (H/M/L) 2008 Local Government Project SIL 20.0 H M 2009 HIV/AIDS Project SIL 20.0 H M TOTAL 40.0 38 CAS Annex 83 (IFC & MIGA) for Swaziland as of December 31, 2007 2005 2006 2007 2008* Commitments IUS$m) Gross 0 0 0 0 Net** 0 0 0 0 Net Commitments bv Sector (%) 0 0 0 0 Net Commitments bv Investment Instrument I0101 0 0 0 0 MIGA facilitated investments into Swaziland Gross Exposure (US$ mil) 46.6 36.6 36.2 33.3 MIGA facilitated investments financed by investors from Swaziland Gross Exposure (US$ mil) 0 0 0 0 ***Asof Aug 29, 2007 IFC's Own Account only 39 CAS Annex B4 -Summary of Non-lending Services Swaziland As of December 31, 2007 Completion Cost Product N (US$OOO) Audiencea Objectiveb Recent completions Public Expenditure Review 2006 150 G K, PS LocaI Government 2006 80 G, B PS Education Reform 2006 150 G, B K, PS Investment Climate Assessment 2007 20 G, B, p K, P, PS Underway Civil Service Pension Reform TA 2008 10 G, B K, PI PS Hospital Sector Reform TA 2008 25 G, B K, PS Fiduciary Assessment 2009 45 G, B K, PS Post-Basic Education Study 2009 20 G, 8, p K, PS Planned ICA Follow-UPTA 2010 50 GIP K, p PER Follow-UPTA 2010 50 G,B K, PS a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem- solving. 40 0 0 0 9 9 9 f 0 0 0 u 8 3 L 0 m Y E B aJ - .-m u Q Q :?? 2 0 0 0 0 QI '*: 0 s0 rl rl 3 0 0 al 5 0 I d s 0 Eo m d ! -.. 0 I- E0 0 -nm Y IBRD 33491 SWAZILAND SELECTED CITIES AND TOWNS DISTRICT CAPITALS NATIONAL CAPITAL SWAZILAND RIVERS SOUTH AFRICA To MAIN ROADS Hectorspruit RAILROADS DISTRICT BOUNDARIES INTERNATIONAL BOUNDARIES Ngonini Mlumati To Komatipoort To Nelspruit 31°E L Emlembe (1,862 m) e Bulembu Piggs Peak b 26°S Tshaneni Lomahasha 26°S g o Mhlume r Komati To e n Madlangampisi Maputo b b To Bethal s H H O H H O n o e Ka Dake k a Mbuluzi Mliba M r D MBABANE Mbuluzane t s Ezulwini L U B O M B O . Siteki Mhlambanyatsi Matsapha Manzini MOZAMBIQUE Bhunya Mzimphofu To M A N Z I N I Bethal Lusutfu Sidvokodvo Nyetane Siphofaneni Mankayane Ngwempisi Big Bend Lusutfu Sicunusa Sitobela To Mkuze Gege To ov Volksrust 27°S Mkond Hlatikulu 27°S Maloma Nsoko S H I S E L W E N I Nhlangano Mgwav um SOUTH AFRICA e Mhlosheni 0 10 20 30 Kilometers Lavumisa 0 5 10 15 20 Miles This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank To Group, any judgment on the legal status of any territory, or any Hluhluwe endorsement or acceptance of such boundaries. 31°E To Ulundi 32°E SEPTEMBER 2004