THE ECONOMY
Overview
High oil and soaring food prices, coupled with tight monetary polices and a financial crisis triggered by the catastrophic US subprime mortgage market resulted in a slowdown in global economic growth, which is projected to fall from 4.9% in 2007/8 to 3.7% in 2008/9. The knock-on effect was felt predominately in Europe and Japan. However, the emerging economies of China, India and Russia performed well showing growth of 11.4%, 9.2% and 8.1% respectively. Overall growth in Africa was 6.2% and although Swaziland recorded only 3.5% growth, this was higher than the 2.9% of the previous year.
Swaziland’s Performance
Preliminary estimates place GDP growth at 3.5%. This is attributed to positive performance by export commodities such as sugar and sugar-based products, woodpulp and timber products, meat, soft drink concentrates and zip fasteners. Improved performance in South Africa also had a spin-off as 50% of Swaziland’s exports are sold to that country. There was also recovery in the agricultural sector, which grew by 2.9% following previous negative performance. Manufacturing, which accounted for 31.7% of the GDP, increased by 2.7% compared with2% the previous year. The outlook depends on promoting growth and addressing challenges, including lower EU sugar prices and Southern Africa Customs Union receipts. Added to that is the threat of recurring drought, HIV/AIDS and poverty. There is also the threat of reduced FDI inflows as a result of competition in the region for new investment. With her limited domestic markets, exportoriented industries are the backbone of Swaziland’s economy, which is influenced by global trends, commodity prices, capital and aid flow. About 50% of her export products, including sugar and citrus, are sold internationally, and as already noted, the balance to South Africa, which offers a diverse consumer profile, high potential and close proximity and is therefore a natural target market. Swaziland’s economy is closely integrated with that of South Africa, which accounts for about 87% of local imports, including consumer and petroleum products. Therefore that country’s economic performance has a major influence on the local climate.
Foreign Direct Investment
Data indicates an increase of 4.6% in the overall stock of FDI, from E5,791.9 million to E6,056 million. This can be partly attributed to the weakened local currency which resulted in more income being generated. The stock of FDI into the service sector was up from E731.9 million to E930 million, while stock in the investment sector increased by39.3% to reach E284.4 million. FDI in the agricultural sector was E980 million, a decline of 6.3%. The FDI equity component increased by 4.7% to reach E802.9 million. This compares with a previous 5.8% increase, supporting the claim that there has been a slow down in FDI inflows. The various components of FDI inflows are also detailed in the chart that appears on page 45.
Gross Domestic Product
As noted the GDP for the period 2007/8 is estimated at 3.5% from 2.8% the previous year, which indicates a positive trend for two consecutive years, compared with negative performance for 2005/6 when the GDP reduced to only 1.8%.
Revenue
Total revenue for 2008/9 is estimated at E9.1 billion (E7.9 billion the previous year), while grants are expected to increase to E145 million from E83.2 million. As always, receipts from the Southern African Customs Union (SACU) account for the largest portion of revenue, although at a reduced rate this year: 66.3% of total income against the previous 70.7%. This high proportion is not sustainable due to a predicted decline in import duties with the conclusion of free trade agreements and a decline in tariffs in line with World Trade Organisation requirements. The need for Swaziland to broaden her income base has long been recognised. Sales tax and personal tax (PAYE) account for 9% and 11% respectively, while corporate tax and other revenue make up 14% of the total.
Expenditure
Recurrent expenditure (excluding statutory) currently accounts for 70.3% of total outgoings and is expected to increase by 21.3% to E6.7 billion for 2008/9. General services and public order, safety and defence account for 36.2% of recurrent expenditure, education and training 20.8% and health 10.6%. Government’s initiative to increase health to 15% and agriculture to 10% is the main component of increased expenditure. The allocation to the health component is boosted through grants and subsidies to NERCHA (the major NGO dealing with the HIV/AIDS pandemic) which are expected to increase from E45 million. Capital expenditure for 2008/9 is predicted to increase to E2.23 billion from E2 billion with the focus on finance for ongoing projects to ensure they are completed and to standard. These include the Mbabane bypass road, the Lower Usuthu Smallholder Irrigation Project and the Komati Downstream Development. A total of E48 million has been allocated to water projects and provision of E10.3 million will be used
in the ongoing fight against invasive plants. The Millennium Projects (see page 91) will receive E453.7 million and E70 million is allocated for the completion of a TB hospital in Manzini and other health-related projects. Details of recurrent and capital expenditure are outlined in the chart.
The Balance of Payments For the second consecutive year the balance of payments improved, recording an overall surplus of E2,574.3 compared with a surplus of E1,026.5 million (revised figure). This is due to higher than estimated SACU revenue and export companies recording increases in volumes and earnings. Those exporting outside the CMA also earned more due to the exchange rate. Preliminary data indicates that the current account registered a reduced deficit: E461.8 million compared with E1,331.5 million the previous year. The deficit was largely due to increased imports and an upsurge in world prices. The trade account deficit increased to E1,910.1 million from E1,706.4 million. Much of this is attributable to the need to import food as a result of shortfalls in local production caused by continued drought. Exports were up by 8.4% to E11,453.1 million. These commodities include sugar and sugar-based products, soft drink concentrates, canned fruit and meat, wood pulp and timber, and textiles. An advantage for the textile sector is the Third Country Fabric Provision that runs from 2007 to 2013. It is estimated that imports were up by 11.6% to E13,631.3 million, mainly due to higher commodity and food prices. Transport costs were also significantly higher due to escalating oil prices.
THE EXCHANGE RATE
The South African Rand, with which the Swazi Lilangeni has parity under the Common Monetary Area Agreement, continued to weaken significantly during 2008. Towards the end of the year the currency became very volatile, reaching a seven year low of around E10.00/$US1.00, E15.50/UK Sterling and E12.50/Euro. This compares with around E7/US $1, E13.80/ UK Sterling and E9.50/Euro a year earlier.
INFLATION
In line with global trends, Swaziland has been adversely affected by escalating oil and food prices and for the first time since 2003, inflation reached double digit figures. Food inflation alone was at least 20% with the greatest impact being on maize and other cereal products. Globally, food prices were up by 26.8% during the period. During the second half of 2008, overall inflation in Swaziland stood at 14.7% and indications were that this upward trend would continue.
BUDGET SUMMARY
The 2008/9 budget focused on the socioeconomic challenges facing the economy, including poverty, increased mortality due to HIV/AIDS, unemployment and food shortages. Emphasis was also placed on infrastructure development, investment promotion, tourism, diversifying the revenue base, containing recurrent expenditure and public sector reform. Allocations include E100 million to educate the estimated 99,000 HIV/AIDS orphans, E34.9 million for primary level educational materials, E207 million for the University and E100 million for anti-retroviral drugs. Further funds were set aside for the elderly and the youth. Foreign exchange reserves were expected to improve due to increased customs union revenue and an injection of E705 million from Government, plus recapitalisation of the Central Bank totalling E142 million. The implementation of measures to control expenditure and widen the revenue base should ensure that the increased reserves are sustained. Various fiscal reform initiatives remain in hand, including more effective collection of income and sales tax through the planned merger of the Income Tax and Customs and Excise Departments to form the Revenue Authority and through more efficient collection at the borders. E200 million has been allocated to this It is expected that it will become fully functional during 2009. VAT is to replace the system of general sales tax (GST). The salaries bill, which currently accounts for 53.6% of recurrent expenditure, far exceeds the international norm of 35%. In order to reduce this, E153 million has been set aside to create a voluntary early retirement scheme. The capital budget is E2.23 billion, a slight increase over last year. This will be used to complete projects in hand. Total expenditure is E9.5 billion, an increase of 16.1%, mainly attributable to an increase of 21.3% in recurrent expenditure. The resultant deficit is E330.3 million, or 1.4% of GDP. However, much of this expenditure is for one-off items, such as the voluntary retirement scheme that will make the salaries component more sustainable. The deficit is considered to be a realistic one for the medium term.
TRADE AGREEMENTS
Swaziland is party to a number of trade agreements, including:
Growth & Opportunity Act (AGOA)
Swaziland is among the countries that benefit from AGOA, a trade drive initiative by the USA for sub-Saharan African countries. This enables products from qualifying countries to be imported into the US duty free. AGOA III came into force in 2004. Benefits to eligible countries have been enhanced by the extension to 2012 of the Third Country Fabric Provision, which allows for raw materials to be sourced from other third parties. Swaziland currently exports large volumes of textile and clothing products to the US under AGOA.
The Southern African Customs Union (SACU)
SACU is the oldest customs Union in the world. It was established in 1910 between South Africa, Swaziland, Lesotho, Botswana and Namibia. The agreement allows for the free movement of goods between member states and provides for a common external tariff and a common external excise to be charged in the Customs Union Area. The revenue generated from the duties charged on commodities imported from non-SACU member countries is shared by the union member states. SACU currently represent the largest market for Swaziland’s export products.
Southern African Development Community (SADC)
The much-anticipated SDC Free Trade Area came into effect in January 2008 when the SADC community achieved the status of an FTA. This means that the SADC countries now work towards eliminating tariffs and non-tariff barriers on all trade between them. The benefits of the SADC FTA include no tariffs, elimination of nontariff barriers, easy cross-border trade, growing market opportunities within SADC to US $430 billion, creating value chains across the region, lowering input costs, creating regional competition to reduce consumer prices, and increased employment opportunities. The SADC FTA marks a milestone towards a SADC Customs Union by 2010. The member countries are Angola, Botswana, DR Congo, Lesotho, Malawi, Madagascar, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Tanzania, Zambia and Zimbabwe.
Common Market for Eastern & Southern Africa (COMESA)
Swaziland is a founder member of the Preferential Trade Area of Eastern and Southern Africa, the predecessor to COMESA. The objective is to strengthen the process of regional integration that had been initiated under the PTA in order to help member states achieve sustainable economic growth. COMESA is currently working towards the establishment of a Customs Union, which will allow for the free movement of goods and services between member states. A large volume of exports from Swaziland enjoy preferential market access to the COMESA member states, which are Burundi, Comores, DR Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Uganda, Zambia and Zimbabwe.
Generalised System of Preference (GSP)
Swaziland is a beneficiary to the GSP schemes, which provides for goods that originate from developing countries to be imported into industrialised countries at reduced customs levies. The countries that grant GSP include some of the EU member states, USA, Canada, Japan, Australia, Russia and New Zealand. A wide range of export products from Swaziland enjoy market access through the GSP scheme.
Other Trade Agreements
Swaziland is also party to other trade arrangements. These include the SACU-EFTA (European Free Trade Association), which comprises Norway, Switzerland, Iceland and Liechtenstein. The EFTA agreement has been ratified by all member states and became operational in May 2008. The other agreement at SACU level is the SACUMercosur Preferential Trade Agreement (Brazil, Argentina, Uruguay and Paraguay). Negotiations under this have been completed and awaited the Trade Minister’s signature at the end of 2008. SACU has opened negotiations with other countries such as China, India and USA and is also negotiating the Economic Partnership Agreement under the SADC-EU EPA configuration. This will replace the trade component of the Cotonou Agreement, which expired on 31 December 2007 as it was not WTO compatible. The EPA agreement, which offers quota and duty free market access for goods from SADC, commenced in January 2008. The SADC EPA configuration comprises Angola, Mozambique, Namibia, Botswana, Lesotho, South Africa and Swaziland. At the multilateral level, the country is a member of the WTO and is actively involved in the ongoing Doha Development Round of Negotiations.
Other Links
Swaziland is also linked to other regional and international organizations, including:
Commonwealth
International Trade Center/UNCTAD
United Nations
The World Bank
African Union
International Monitory Fund
For more detailed data on Swaziland’s Economy and Monetary issues, please refer to the
Central Bank of Swaziland’s Annual Report.
Contact the Research
Department on +268 404 200
or go to
www.centralbank.org.sz