The Swaziland Government’s decision to increase public service salaries this year (2010) means its wage bill is likely to be the highest in sub-Saharan Africa. And that is a major reason why it has been unable to pay its bills and has gone running to the International Monetary Fund (IMF).
The government wanted to run a ‘budget deficit’ – that is spend more money than it had coming in from taxes and revenues from the Southern Africa Customs Union (SACU)
The government which has mismanaged the Swazi economy for years – long before the international banking crisis hit in 2008 – wanted to get a loan of E500 million (roughly US$50 million) from the African Development Bank to help pay for this deficit, but got turned down.
And that is the background to the economic meltdown that is facing Swaziland today.
Despite much of the coverage of the crisis in the Swazi media, it is difficult to get straightforward, unbiased, information about exactly what the deal was that the IMF and the Swaziland Government struck in October 2010 – there is surprisingly little in the public domain.
However, the IMF has released some background information about what is going on. The IMF is seeking to appoint two research assistants to help it monitor the Swaziland budget from January 2011. A document outlining the ‘terms of reference’ for the posts gives the background to the request the Swazi Government made to the IMF and how the IMF responded.
Much of the contents of this document was news to me (and may be to you too), so I am reproducing an extended extract of the document here.
The Kingdom of Swaziland is experiencing a fiscal crisis which is having serious financial, economic and social repercussions and needs to be addressed immediately. In March 2010, Government approved a deficit of 13 percent for the current financial year. This was based on the following financing plan; E1.5 billion would be sourced through a drawdown in the country’s foreign exchange reserves; another E1.5 billion sourced from the local market through Treasury Bills and Government Bonds and the remainder sourced as a budget support loan from the African Development Bank (AfDB). During the course of the year, the proposed plan did not materialize due to the fact that Budget Support Loan from the AfDB could not be approved pending Letter of Comfort from IMF and the finalization of the Bill increasing the domestic borrowing limit.
Due to the adjustment of the wage bill in the course of the year, the overall deficit for 2010/2011 financial year is expected to reach 16 percent of GDP in the absence of any remedial measures. This reflects an 11 percent of GDP decline in SACU transfers and the government’s decision to increase salaries this year. The wage bill for the current year is expected to reach close to 18 percent of GDP, the highest in Sub-Saharan Africa.
On realizing that the 2010/11 budget will not be sustainable, the Ministry of Finance approached the IMF and the World Bank to provide technical assistance to augment the financial assistance from the AfDB.
The Swaziland Government and the IMF entered into agreement for an IMF Staff Monitored Programme (SMP), which is an arrangement that does not require IMF resources but only monitors the implementation of economic policies and provides advice for a period of six months.
[There were discussions between the IMF and Swaziland Government in Washington DC, US, in October 2010. The IMF undertook to make a mission to Swaziland government to assess the fiscal situation and agree on the next steps.]
The IMF made specific recommendations as follows:
1. The government should increase domestic debt as an alternative source to external financing. The approval of the domestic debt ceiling from E1 billion to E1.5 billion by Parliament will enable the government to issue debt to cover most of its financing needs, which is currently estimated at about E3 billion, until the end of the financial year.
2. On the revenue side, government should increase certain taxes which could bring additional revenue to the budget. These include: a) the fuel levy to bring it at par with South Africa; b) the tax on gambling from 4.5 percent to 15 percent; and c) the excise taxes on alcohol and tobacco. These measures once implemented will raise up to E40 million for the remainder of the fiscal year, and another E100 million can be realized in the next budget round.
3. On the expenditure side, all new government commitments should be suspended for the remainder of the current fiscal year. The Education and Health sector is exempted due to the government commitment to improve service delivery in the social sectors. The government would also suspend the capital projects that have not been started to date and purchase of new goods and services. Government will further slow down the implementation of existing capital projects in line with available financing.
4. Further recommendations on the expenditure controls include the immediate reduction of the wage bill. This could only be achieved by the implementation of the following measures; a) the government should freeze wage increases and hiring of new staff for the next three years and b) the immediate implementation of the voluntary retrenchment of 7,000 civil servants under the Enhanced Voluntary Early Retirement Scheme (EVERS). When these measures are undertaken as proposed, this measure will protect the government from the mandatory retrenchment of civil servants which can bring severe implications on the country which has the majority (67 percent) of its population living under the poverty line.
In view of the above, government is committed to the implementation of the fiscal adjustment program with the assistance of the IMF through an IMF Staff-Monitored Program. The Staff-Monitored Program will allow other donors to disburse budget support and would establish a track record for possible financial support from the IMF in the future.
[The IMF will monitor the budget outturn on a quarterly basis, monetary targets and the reforms that will be undertaken during October 2010 to March 2011.]
The program will be reviewed in February and May 2011and if successfully implemented, the IMF will recommend the government’s request for a formal IMF arrangement in the second half of 2011, which will include financial assistance.
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