IMF Country Analysis: Swaziland Faces Stagnant Growth, Financial Challenges

International Monetary Fund. External Relations Dept.
Published Date:
August 2008
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When the rest of sub-Saharan Africa was growing over the last decade, the economy of the Kingdom of Swaziland stagnated.

Swaziland’s real per capita GDP growth declined from an annual rate of 2½ percent during 1980-94 to 0.7 percent since then. In contrast, real growth in all of sub Saharan Africa has averaged 1½ percent annually since 1995, and in other lower-middle-income countries, growth averaged 7½ percent.

Poverty, inequality, and HIV/AIDS

The slow growth may have worsened already difficult conditions in the tiny, landlocked country, where in 2001, the latest year for which there is data, about two-thirds of its one million residents lived in poverty and 20 percent of the population claimed two-thirds of the income. A major contributor to the stagnating Swazi economy has been its financial sector, which, while in the main healthy, has taken steps backward in the past decade.

Some studies suggest that the deeper the financial system—that is, the more access businesses and individuals have to varied financial services—the better equipped it is to mobilize resources and the more important is its effect on growth, poverty reduction, and income equality. But Swaziland’s banking system has, by almost any measure, become shallower. Private sector lending, money supply, and bank deposits as a percentage of GDP have all declined since 1995 (see chart), while high poverty and income inequality persist in a country that also has the highest incidence of HIV/AIDS in the world.

Financial and real economies linked

A number of important linkages between the real economy and the financial sector in Swaziland explain, at least in part, the country’s performance:

• The country mobilizes too little domestic saving (8 percent of GDP) to finance investment, and foreign savings have fallen off since the 1980s and 1990s.

High government spending, well beyond current revenues, has produced a large civil service wage bill that, together with poor selection and appraisal of public investment projects, has hurt growth.

Banking sector recedes

Swaziland’s real per capita growth slowed markedly between 1981-94 and 1995-2006 at the same time that credit, money supply, and bank deposits as a percentage of GDP declined.


Sources: IMF’s International Financial Statistics; World Bank’s World Development Indicators.

Access to financing is limited, which constrains financing of growth-enhancing investment projects. The commercial banking system has concentrated on export financing and bypassed a large portion of the adult population.

• Despite the sizable loans it receives from banks, the export sector has not been an effective engine of growth and employment.

Swaziland has a weak investment climate, which tends to push up the cost of capital and the rate of return investors seek. With few viable real investment opportunities in Swaziland, most private domestic savings are invested in South Africa’s deeper financial markets, which offer a wider array of financial services to a broader spectrum of investors.

The financial sector has become more vulnerable as a result of inadequate regulation and supervision of nonbank financial institutions (NBFIs), especially the savings and credit cooperatives (SCCOs) that have sprung up to fill the financial needs of the many Swazis abandoned by the commercial banking sector. Since 2002, lending by SCCOs has grown 116 percent, compared with 26 percent for banks.

• The depth of financial markets is further limited by lack of access to collateral for many borrowers. About 60 percent of the land is held in public trust and cannot be used by farmers, for example, to secure loans to invest in increasing agricultural yields.

What is to be done?

To improve its growth performance, mobilize savings, and diversify and strengthen its export sector, Swaziland should consider:

• Identifying what constraints most hinder its growth and, in the process, assess the effects of continued dependence on temporary preferential trade treatments for exports.

• Taking steps to mobilize domestic savings to finance investment that would be permanent and durable, perhaps diversifying the Swazi economy into sectors like mining and tourism.

• Improving the investment climate. Swaziland must reduce labor market rigidities, simplify business licensing, enforce contracts, widen the coverage of credit bureaus, and grant ownership rights to lands held in public trust. As a landlocked country, it should also reduce the cost of trade that crosses its borders.

• Enhancing regulation and supervision of NBFIs.

• Scaling back government. Reducing the excessive wage bill, subsidies, transfers, and unproductive investment can, over time, create room to allow the government to fight HIV/AIDS and allow the emergence of a private debt market to promote investment.

Hamid R. Davoodi

IMF African Department

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