ii CONTENTS ABBREVIATIONS AND ACRONYMS vi ACKNOWLEDGEMENTS vii EXECUTIVE SUMMARY viii PART 1. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 1 1.1 Domestic economic developments 1 1.1.1 Economic growth: Positive prospects but domestic and external headwinds continue to trap Eswatini in a low growth path, hindering development 1 1.1.2 Prices: Rising inflation in 2022 affected livelihoods and poverty, especially as food inflation breached the 6 percent upper threshold 5 1.1.3 Poverty and inequality: Poverty remains high, and opportunities for young people are limited 6 1.1.4 Monetary policy and financial sector: Rising interest rates in response to inflationary pressures could further increase nonperforming loans and limit private sector credit 7 1.1.5 External sector: Foreign exchange reserves, a critical cushion against fiscal and external shocks, fell below international norms, with the current account in deficit for the first time in over a decade 9 1.1.6 Fiscal developments: The fiscal situation needs to be improved and the fiscal consolidation plan implemented fully to ensure macro-fiscal sustainability 10 1.2 Economic outlook 14 1.2.1 Outlook 14 1.2.2 Risks 16 1.3 Policy options: In search of the drivers of growth 17 PART 2. EFFICIENT STATE-OWNED ENTERPRISES CAN BOOST ECONOMIC GROWTH 22 2.1 Introduction 22 2.2 The role of SOEs in Eswatini has grown significantly 23 2.2.1 Context 23 2.2.2 SOE landscape: The legal definition of SOEs and public enterprises is broad and not in line with the internationally accepted definition 23 2.2.3 The financial performance of commercial SOEs is weak, and they are a net drain on the budget 26 2.3 An efficient SOE sector can bring economic and social benefits 28 2.4 Policy options: Looking forward 33 REFERENCES 35 Annex 1. Category A: Public Enterprises by Type 37 iii KINGDOM OF ESWATINI ECONOMIC UPDATE FIGURES Figure 1.1. Economic growth in Eswatini was below the lower-middle-income country average until 2020 2 Figure 1.2. Although it outperformed other SACU countries, except Botswana, growth remains slow 2 Figure 1.3. Private consumption declined in 2022 2 Figure 1.4. … reflecting high inflation 2 Figure 1.5. Industry’s contribution to growth fell in 2022, hampered by the invasion of Ukraine and lower sugar output 3 Figure 1.6. Inflation rose in 2022 but remained low relative to other SACU countries and to previous peaks 5 Figure 1.7. External shocks meant that traded inflation increased and nontraded inflation declined in 2022 6 Figure 1.8. The increase reflects higher food prices, which breached the 6 percent upper band 6 Figure 1.9. High food inflation led to a slight increase in the estimated poverty rate in 2022 6 Figure 1.10. Poverty headcount rate declines as GDP increases 7 Figure 1.11. Even though fewer people are working or looking for jobs, unemployment is rising 7 Figure 1.12. Interest rates have surpassed pre-pandemic levels 8 Figure 1.13. Credit to the private sector is recovering, though growth is still below pandemic levels 8 Figure 1.14. Nonperforming loans are rising again in 2023 8 Figure 1.15. The current account balance turned negative for the first time in a decade 10 Figure 1.16 … with a narrowing of the trade surplus 10 Figure 1.17. Exports are dominated by a few products 10 Figure 1.18. … and gross international reserves fell below international norms 10 Figure 1.19. Fiscal deficits remained sizeable 11 Figure 1.20. … contributing to rising public debt and interest payments 11 Figure 1.21. Revenues fell, as SACU receipts declined 12 Figure 1.22. Spending fell but is still dominated by a large, rigid public wage bill 12 Figure 1.23. Real GDP has been slowing since 2022 14 Figure 1.24. Inflation remains elevated, above target in many countries 14 Figure 1.25. The economic outlook depends heavily on SACU revenue trends 15 Figure 2.1. SOE interrelations with the government and households 22 Figure 2.2. The number of public enterprises has increased 25 Figure 2.3. … along with employee numbers 25 Figure 2.4. Most “SOEs” are in fact noncommercial parastatals and part of the budgetary central government 25 Figure 2.5. Transfers to EPEs have increased 25 Figure 2.6. … but arrears continue to rise 25 Figure 2.7. Total assets of commercial SOEs increased slightly increased, dominated by the EEC 27 Figure 2.8. Net income decreased in 2022 27 Figure 2.9. Net flow to the national budget was negative, with RENAC registering the highest losses 27 Figure 2.10. Total debt increased, dominated by the EEC 27 iv CONTENTS Figure 2.11. Pillars for efficient SOEs in Eswatini 28 Figure 2.12. SOEs are housed in various ministries 31 Figure 2.13. But only 10 meet the international definition of SOEs 31 Figure B1.1.1. Average growth declined, as foreign and domestic investment fell after apartheid 5 Figure B1.1.2. The regulatory burden is among the top three challenges facing companies in Eswatini 5 TABLES Table 1.1. Policy options 18 Table 2.1. Aggregate financial data for the seven largest commercial SOEs, 2018–22 (US$ ‘000) 26 BOXES Box 1.1. Export-led private sector growth for inclusive and sustainable economic growth 4 Box 1.2. Eswatini’s fiscal adjustment plan has not been fully implemented 13 Box 2.1. Public service obligations 30 Box 2.2. OECD Guidelines on the rationale for state ownership 31 v KINGDOM OF ESWATINI ECONOMIC UPDATE ACRONYMS & ABBREVIATIONS AML/CFT Anti-Money Laundering and Combatting Financing of Terrorism e-GP e-Government Procurement EPE Eswatini public enterprise GDP gross domestic product IFMIS Integrated Financial Management System IMF International Monetary Fund iSOEF Integrated State-Owned Enterprises Framework OECD Organisation for Economic Co-operation and Development PPP purchasing power parity SACU Southern African Customs Union SOE state-owned enterprise vi ACKNOWLEDGEMENTS ACKNOWLEDGEMENTS This is the first Kingdom of Eswatini Economic Update, prepared under the leadership and guidance of the Country Management Unit led by Marie Francoise Marie-Nelly (Country Director, AECS1), Ikechi B. Okorie (Resident Representative, AEMSZ), and Wakhile Mkhonza (Operations Officer, AEMSZ). The team benefited from technical support and guidance from Marco Hernandez (Practice Manager, EAEM2), and Jacques Morisset (Lead Country Economist, EAEDR). The Economic Update was prepared by a joint Macroeconomics, Trade and Investment, Governance and Poverty team. The authors of this report are Marko Kwaramba (Senior Economist, Task Team Leader), Ana Cristina Hirata Barros (Senior Governance Specialist), who led the chapter on state-owned enterprises, Olive Umuhire Nsababera (Economist), who led the poverty section, Jason Hayman (Consultant), and Guilherme Kono (Consultant). Ajai Nair (Senior Financial Sector Specialist), Justine White (Senior Private Sector Specialist), and Krista Alexandra Soininen (Consultant) provided valuable inputs. Peer reviewers were Nyda Mukhtar (Economist), Andrei Busuioc (Senior Financial Management Specialist, EECG1), and Zivanemoyo Chinzara (Economist, CMCCE, IFC). The team is grateful for valuable discussions with the Ministry of Finance, the Ministry of Economic Planning and Development, the Public Enterprises Unit, Eswatini Revenue Service, and the Central Bank of Eswatini. Simangele Batiti Nkambule (Executive Assistant) and Nani A. Makonnen (Senior Program Assistant) provided valuable administrative and logistical support, Cybil Nyaradzo Maradza (Consultant) created the graphic design, and Janine Thorne (Consultant) edited the report. vii KINGDOM OF ESWATINI ECONOMIC UPDATE EXECUTIVE SUMMARY Eswatini’s economy has been characterized by sociopolitical and external environment constrained. persistent low growth, high fiscal deficits, and Unsurprisingly, growth plunged during the pandemic, unprofitable state-owned enterprises (SOEs). and the economy contracted by 1.6 percent in 2020. Without significant reform, the country is unlikely to achieve its socioeconomic aspirations, and Domestic factors continue to constrain growth poverty and unemployment are likely to remain in 2023. Sociopolitical uncertainty and slow high. These problems are exacerbated by the reforms have undermined private investment and difficult external environment, with subdued global diversification. At only about 6 percent of GDP, demand and volatile international prices. In this private investment remains inadequate to generate context, the Government of Eswatini recognizes growth and create enough jobs to reduce the 33 that the country needs a series of policy reforms to percent unemployment rate. The government unleash the potential of the private sector. It also has long compensated for low private investment needs to improve the efficiency of SOEs in strategic by high public spending, but its unsustainable sectors, which deliver services to many businesses expansionary fiscal policy meant public debt soared and households. to a record 43 percent of GDP by end-2022. This report is divided into two parts. Part 1 discusses Rapidly rising prices have recent economic developments in the global and negatively affected household domestic economy and assesses Eswatini’s short- welfare and poverty. and medium-term prospects. Part 2 reviews the role that SOEs can play in the government's efforts to External shocks, especially Russia’s invasion of enhance economic performance. It assesses both Ukraine, saw inflation rising from 3.7 percent in their contribution to the economy and their limitations 2021 to 4.8 percent in 2022, although it remained to suggest directions for reform. low relative to other countries in SACU. Elevated global energy and food prices were soon transmitted Eswatini’s economy briefly improved to local prices. In June 2022 food inflation breached after the pandemic, but growth the Central Bank’s upper threshold of 6 percent for is slowing. the first time in five years, and by May 2023 it had accelerated to 15.7 percent. Poorer households were Economic activity rebounded in 2021, but global disproportionally affected, leading to a slight rise in challenges and structural weaknesses slowed the share of people living on less than US$2.15/day economic growth. Real GDP declined from 7.9 percent (2017 purchasing power parity [PPP]). to 3.6 percent in 2022. Government cash constraints led to a more severe decline in the construction In response, the Central Bank tightened monetary sector, while the manufacturing sector was adversely policy, increasing its discount rate by 375 basis affected by changes in the global economy. Before points to 7.75 percent (above pre-COVID rates) the COVID-19 pandemic, the economy grew at about between early 2022 and May 2023. This is expected 2.1 percent a year from 2015 to 2019. However, the to lead to higher nonperforming loans, which stood economic base was narrow, the public sector large, at 7.2 percent of banks’ portfolio at end of March 2023 government regulations cumbersome, and the from 6.6 percent at end-2022. viii EXECUTIVE SUMMARY The current account slumped, and revenue over the past decade and are expected foreign reserves critical to cushion to reach 42 percent in 2023. Any increase in SACU against fiscal and external shocks fell receipts should be carefully managed and used to below international norms. smooth future negative shocks in revenue. To this end, the proposed SACU Revenue Stabilisation Fund The external position weakened in 2022, with the is a step in the right direction. current account moving into deficit for the first time since 2011 because of higher import prices The outlook is encouraging, but and lower revenues from the Southern African subject to multiple downside risks. Customs Union (SACU). Export growth was muted, and imports grew by 2 percent. The capital account The medium-term economic outlook is promising, failed to improve, as foreign direct investment and with growth expected to reach 3.0 and 2.9 percent short-term capital flows declined. Foreign reserves in 2023 and 2024, respectively. The public sector fell to around 2.5 months of import cover in 2022 is likely to drive the growth, buoyed by an almost from 3.5 months in 2021, in part because of lower doubling of SACU receipts, but without significant SACU revenues and the use in financing the current reform of the business environment, the private account deficit. At only 2.7 months in May 2023, sector is likely to remain subdued. reserves remain low, below international norm of 3 months of imports, and Eswatini is vulnerable to Sustaining these gains will require the country external shocks. to shift from a state-led to a private sector- and export-led growth model. Relying on state-led The fiscal situation is improving, but growth meant high government expenditure in more reform is needed. the face of volatile SACU revenues, which led to persistent fiscal deficits, high expenditure arrears, low Eswatini needs to continue implementing its fiscal international reserves, and high debt levels. This has consolidation plan to sustain macroeconomic been exacerbated by heavy state involvement in the stability, reduce public debt, eliminate expenditure economy through SOEs (the focus of this report), all of arrears, and increase external reserves. After which hampered the private sector. Unlocking private a decade of expansionary fiscal policy (which investment through a better investment climate will worsened during the pandemic), the government facilitate economic stability, create jobs, and promote began to implement the Fiscal Adjustment Plan, sustained growth. 2021/22–23/24. Initial efforts were promising, but by 2022 implementation had become uneven, and the Moreover, there are several downside risks to overall fiscal deficit rose to 5.3 percent in 2022 from the growth outlook. Domestically the economy 4.6 percent in 2021. The public wage bill declined faces sociopolitical and economic volatility, and (due to a hiring freeze and conservative wage civil tensions remain high. External risks include the adjustments) and capital spending was contained, war in Ukraine, tight global financial conditions, and but most of these measures were not sustained. weaknesses in major partners (especially South Africa). The plan’s other measures, such as SOE reforms, In a pessimistic scenario, the economy would grow by containment of recurrent spending, and revenue less than 2 percent in 2023 and 2024. enhancement, are yet to be fully implemented. Without significant reform, Eswatini is unlikely Public finances remain extremely exposed to the to achieve its economic and social aspirations, volatility of SACU revenues, which represented especially in this uncertain external environment. nearly a third of revenues in 2022. SACU receipts The government recognizes the need for policy fluctuated between 55 and 31 percent of total reform to unleash the private sector and improve the ix KINGDOM OF ESWATINI ECONOMIC UPDATE efficiency of the SOEs. Implementing macroeconomic, The state plays multiple roles in the business, and SOE reforms could help Eswatini reach economy, which sometimes overlap. high-income status before 2050. Policy options are based on three pillars, which include specific policies As in many other countries, the Eswatini state acts for both the short term and the medium term:- as policy maker, owner of or shareholder in SOEs, address macroeconomic pressures, unlock private regulator, and implementor or enforcer of public sector investment and enhance services delivery for policy. These multiple roles can create conflicts of inclusive growth. Figure E1 gives a few policy options interest, especially where state-owned companies examples. For the full proposals see Table 1.1. have both commercial and noncommercial objectives. Noncommercial objectives may include universal Restructuring key SOEs will create new opportunities services (such as rural electrification), or services for the private sector and accelerate economic priced at below cost recovery levels. In these sectors, growth. SOEs provide basic infrastructure services the state also frequently acts as a market regulator. to businesses and households and improving their performance will support private sector activity. Also, There is no one-size-fits-all solution for balancing more efficient SOEs require less fiscal assistance, these roles, but Eswatini’s policy makers can apply freeing up public resources. Reforming SOEs could, several principles. It is generally accepted that SOEs therefore, boost growth by enhancing efficiency in should deliver quality services at a reasonable cost private and public development. Policy options related in an inclusive manner. They should be financially to SOEs are discussed in more detail below. responsible so as not to burden the national budget Figure E1. Policy options Rationalize tax expenditure ADDRESS MACRO-FISCAL Reduce the public wage bill PRESSURES to below 10 percent of GDP ENHANCE SERVICES DELIVERY UNLOCK PRIVATE FOR INCLUSIVE GROWTH SECTOR INVESTMENT Prioritize completion of big projects and allow more resources to be assigned to Operationalize the specialized those being efficiently implemented commercial court Separate entities into commercial and Strengthen the SME guarantee scheme regulatory functions of SOEs Source: World Bank staff. x EXECUTIVE SUMMARY or crowd out other public expenditure. Competition Eswatini legal definition are referred to as “Eswatini from other operators is often linked with better public enterprises” (EPEs). performance. Implementing these principles requires a framework for good governance of SOEs. … affecting service delivery and constraining private sector activity. Eswatini does not have many SOEs, but they retain a Although commercial SOEs do not currently impose considerable presence … an excessive fiscal burden, they should be closely monitored, as they remain vulnerable to changes in There is a widespread misconception that Eswatini domestic and external conditions. Budget support has over 70 SOEs. This is due to the country’s very to commercial SOEs uses public resources that could broad definition of SOEs —which does not conform have been used for priority social or infrastructure to the internationally accepted definition— which investments. For example, annual budget transfers includes traditional SOEs (commercial companies, to commercial SOEs amount to almost 10 percent of utilities, and state-owned financial institutions) along the education budget. with development agencies, universities, hospitals, the Eswatini Revenue Authority, regulatory agencies, An uneven playing field benefiting commercial the Central Bank, and some town councils. However, SOEs discourages private competition and if only entities that carry out commercial activity are efficiency gains. Some commercial SOEs are considered, the number is much smaller, but these subsidized to provide low-cost public services. The companies operate in strategic sectors (such as water, electricity, and airlines companies, for example, energy, water, transport, and tourism) with significant received almost 0.5 percent of GDP in subsidies from direct and indirect effects on the economy. the state, which allowed them to set prices below their cost recovery levels. But subsidies do not always Seven large, commercial SOEs operate in Eswatini— mean low tariffs. The water SOE’s industrial tariffs are the Eswatini Electricity Company, the Eswatini rising rapidly and substantially exceed those in peer Water Services Corporation, the Eswatini Post and countries. Tariffs for the lowest levels of industrial Telecommunications Corporation, Eswatini Railways, consumption (0–10 cubic meters) are between 7 and the Royal Eswatini National Airways Corporation, the 33 times higher than in peer countries. National Maize Corporation, and Pigg’s Peak Hotel and Casino. In the last five years, they received about Even well-intentioned government interventions US$22 million (0.5 percent of GDP) from the budget may undermine both SOE efficiency and the markets. every year. This figure comprises direct subsidies and Targeted subsidies may reward inefficient SOEs or, at equity injections of about US$31.5 million a year and least, discourage efforts to become more efficient. net equity flows (taxes and dividends) from the SOEs Further, some SOEs are assigned regulatory functions back to the budget of about US$9 million a year. Some in the sectors in which they operate, which can create fiscal support to SOEs is to compensate them for tariffs conflicts of interest and increase barriers to entry for that are set below cost recovery. For example, the other firms (Stockman, 2022). Monopoly positions in government froze electricity tariffs from April 2019 to sectors such as energy, transport, and communications March 2021, just when a currency depreciation meant might have been justified by the small economy, but rising costs for the Eswatini Electricity Company; this there is an urgent need for competition in sectors such negatively affected its profitability. as telecommunications. Moreover, SOEs that operate in sectors where the private sector is also active, such This study differentiates between the internationally as agribusiness, can distort markets if the competition accepted definition and the Eswatini legal definition framework is ineffective. For example, although the of SOEs. SOEs in the internationally defined sense Eswatini Electricity Company is the only company that are referred to as “commercial SOEs”. SOEs per the provides transmission services to electricity generators, xi KINGDOM OF ESWATINI ECONOMIC UPDATE it also competes with independent power producers for the renewable energy market. 1. Rethinking the state’s role in the economy: The government should consider an EPE/SOE The government needs to reconsider ownership policy that explicitly includes a clear the role of SOEs in the economy, with rationale for maintaining state shareholding in a more robust legal framework and them. As a shareholder, the state would have to stronger governance and oversight. carefully evaluate the costs and benefits of public ownership. It could also revisit the opportunity cost The authorities recognize the importance of EPE of providing grants and equity to EPEs and SOEs, reform. The EPE restructuring framework adopted at the expense of other needed investments. by Cabinet in 2021 aims to improve their effectiveness Another strategic consideration could be and enhance the business environment. Its measures opening markets to other operators, notably in include privatizing the Pigg’s Peak Hotel and Casino, energy generation and water distribution, which Eswatini Bank, the airport operations of the Eswatini could promote competition and innovation and Civil Aviation Authority, Eswatini Railways, and the generate substantial benefits for end users. Royal Eswatini National Airways Corporation. However, implementation of the EPE framework 2. Strengthening the legal framework to has been slow. One reason could be that the include a clearer definition of commercial strategic role of each EPE needs to be evaluated SOEs, separate from regulatory agencies: more carefully against the backdrop of the political Eswatini’s broad definition of EPEs includes economy in the country and in each sector. Such an entities that are not enterprises; this could be evaluation should also account for new technologies revised in line with the internationally accepted (renewable energy, desalinization, and smart water definition of SOEs. Also, a separate law is needed markets) and new demand from consumers who are to govern independent regulatory agencies, as becoming more ecologically aware. These changes their functions differ substantially from those will affect energy and water prices; they will also lead of enterprises. The legal and institutional to more decentralized markets where new companies structure of SOEs does not provide the powers can challenge the dominant commercial SOEs, which and independence needed to carry out these benefited from natural monopolistic power (based functions. Finally, the commercial and regulatory on the economies of scale). The revolution in global functions of commercial SOEs should be split infrastructure is both technological and financial. New into separate entities. investors are emerging, such as international and local pension and infrastructure funds, and blended instruments are increasingly used to de-risk projects. 3. Strengthening EPE governance and oversight: Suggested actions in this regard include improving To help reconsider the role of commercial SOEs the monitoring and disclosure of equity stakes and EPEs in Eswatini’s economy, this report held by the state, instituting clear and merit-based proposes three directions, which should be seen guidelines for the appointment of board members, as suggestions to promote dialogue in the country and requiring greater transparency of information and support policy makers. These directions are to enhance accountability and oversight. illustrated in Figure E2 overleaf. xii EXECUTIVE SUMMARY Figure E2. Three directions to reconsider the role of SOEs in Eswatini CURRENT PORTFOLIO Entities that Entities that do carry out not carry out commercial activity commercial activity Not operating Operating in Establish separate in competitive competitive institutional and environment environment governance framework Can competition May be be introduced? Yes considered for divesting No Strengthen institutional, regulatory and governance framework Source: World Bank staff. xiii KINGDOM OF ESWATINI ECONOMIC UPDATE PART ONE RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Eswatini is a small, open economy bordering tourism. In 2022 growth slowed to 3.6 percent, reflecting South Africa and Mozambique. The country has a constrained demand and supply, partly because of population of around 1.2 million, with a per capita external shocks. The global turmoil following Russia’s GDP of US$3,958 in 2021. Slightly more than half the invasion of Ukraine adversely affected exports, trade, economy is concentrated in services, and industry and foreign investment. It also precipitated a sharp (particularly manufacturing) comprises another third. increase in global commodity prices (oil, fertilizer, and South Africa continues to be Eswatini’s main trading food), raising the cost of production. Within Eswatini, partner, accounting for about 65 percent of its exports tighter economic policy further dampened economic and 75 percent of its imports. Recent projections activity. Both demand- and supply-side factors have based on the relationship between growth and contributed to low growth. The combination of slow poverty suggest that about 32.1 percent of the growth and high inflation saw a slight increase in the population lived below the international poverty line estimated poverty rate in 2022. Quarterly real GDP of US$2.15/day (2017 PPP) in 2022, and 55.2 percent growth slowed year-on-year to 1.1 percent in the first lived below the poverty line for lower-middle-income quarter of 2023, down from 8.1 percent a year earlier. countries ($3.65/day, 2017 PPP). This reflects growth of 3.4 percent in the primary sector, a 10.1 percent contraction of the secondary 1.1 Domestic economic developments sector, and 8.6 percent growth in the tertiary sector. 1.1.1 Economic growth: Positive prospects but Slack economic management, structural domestic and external headwinds weaknesses, and an unfavorable investment continue to trap Eswatini in a low growth climate have prevented the economy from path, hindering development reaching its full potential. Although Eswatini achieved the highest growth rate in SACU (after Although the economy of Eswatini initially rebounded Botswana) from 2015 to 2022 (Figure 1.2), growth after COVID, several challenges remain. In 2021 real was low relative to other middle-income economies, GDP growth reached 7.9 percent, driven by services until 2020 (Figure 1.1). Even before the pandemic, and manufacturing. The easing of lockdown measures economic management had been characterized and stronger external demand supported an export- by an expansionary fiscal policy, which increased led expansion and a recovery in services, including public debt and arrears and crowded out private 1 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK sector activity. This was exacerbated by structural relates to the enormous fines by regulators, and the weaknesses, including underinvestment in human overlap of scope between the Eswatini Competition and physical capital. The investment climate for Commission, the Financial Services Regulatory the private sector remains difficult, mainly because Authority, and the Eswatini Communication of excessive regulation and local politics (Box Commission. Companies also reported stringent and 1.1). The regulatory framework is challenging for limiting regulations in sourcing of work permits for businesses and has been cited among the top three foreign skilled workers. Perceived corruption also challenges in the last three company surveys.¹ The increased; on the Corruption Perceptions Index, challenging regulatory framework varies across Eswatini’s ranking deteriorated from 113 in 2019 to sectors; for example, for the financial sector this 130 in 2022 (Transparency International 2022). Figure 1.1. Economic growth in Eswatini was below Figure 1.2. Although it outperformed other SACU the lower-middle-income country average until 2020 countries, except Botswana, growth remains slow 10 8 8 6 4 6 Real GDP growth (%) Real GDP growth (%) 2 4 0 2 -2 0 -4 -2 -6 -4 -8 2015 2016 2017 2018 2019 2020 2021 2022 2015 2016 2017 2018 2019 2020 2021 2022 Eswatini Lower-middle-income countries Eswatini SACU average Source: WDI database. Figure 1.3. Private consumption declined in 2022 Figure 1.4. … reflecting high inflation 14 8 12 7 10 6 8 6 5 4 4 % % 2 3 0 -2 2 -4 1 -6 0 2015 2016 2017 2018 2019 2020 2021 2022Est 2015 2016 2017 2018 2019 2020 2021 2022 GDP Net exports Private consumption Annual inflation (%) Government consumption Gross fixed capital information Sources: Eswatini Central Statistical Office and World Bank staff estimates. ¹ Eswatini Ministry of Economic Planning and Development & Central Bank of Eswatini 2022. 2 KINGDOM OF ESWATINI ECONOMIC UPDATE implementation schedules, resulting in frequent disruption in project implementation because of cash flow constraints. This also contributes to an increase in Consumption: Since 2020 economic activity has been expenditure arrears. At only about 6 percent of GDP, driven by surging private consumption, especially private investment remains insufficient to generate after the pandemic (Figure 1.3). Together with public economic activity and jobs. SMEs typically face investment, private consumption drove GDP growth significant costs to enter new markets and maintain in 2021. However, consumption was dampened by their businesses, and securing financing is often inflationary pressures in 2022, and public consumption difficult. This has constrained competition and the has slowed because of fiscal consolidation (Figure 1.4). growth of the private sector. Another constraint on the private sector has been the accumulation of government expenditure arrears. The volatility of SACU revenues means government investment is not easily sustained; for example, the slowing of its Net exports: The contribution of net exports has largely construction projects in 2022 resulted in a contraction been negative, save for 2019, signaling the need to boost of the construction sector. exports and limit imports. Exports are concentrated in few commodities (see Figure 1.17). Export competitiveness Overall, a demand-side analysis shows that Eswatini is affected by high labor and production input costs needs to shift from a state-led to a private sector- (such as telecommunications).² Eswatini needs to take and export-led growth model, as the contribution advantage of trading opportunities if it is to expand from exports and private investment is low. This beyond its small domestic market and reap economies will require sustained efforts to improve the business of scale. But the combination of high consumption and climate, which has constrained the development of high commodity prices have hampered net exports, the private sector and the creation of formal jobs. which made a negative contribution to GDP growth The country needs to find a new growth model that in 2021 and 2022. Eswatini has not taken advantage of gradually shifts employment from low value-added its trade potential, which limits the growth of trade activities (such as subsistence agriculture) and low- and economic activity. The economy is overly reliant quality jobs to more productive ones. on key exports and, therefore, vulnerable to shocks. Figure 1.5. Industry’s contribution to growth fell in Box 1.1 summarizes the need for reforms to enable 2022, hampered by the invasion of Ukraine export-led private sector growth. 8 6 4 2 0 % Investment: Public investment, which is volatile, constitutes the bulk of total investment, thus crowding -2 out the private sector. Public investment management -4 is sometimes not efficient, as some projects are not -6 subject to rigorous formal appraisal before their 2015 2016 2017 2018 2019 2020 2021 2022Est. inclusion in the budget, and explicit and transparent Agriculture Industry Services criteria for prioritizing projects are not in place. There Net taxes on production Real GDP growth is also a disconnect between cash flow forecasts, Source: Eswatini Central Statistical Office and World Bank cash releases, commitment ceilings, and project staff estimates. ² Unbundling Eswatini Post Telecommunications Company will not only help lower prices and increase access but will also increase competition and private sector participation in the digital sector (Stockman 2022). 3 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Agriculture: Agriculture is recovering from the Services sector: The relaxation of pandemic recent adverse weather conditions. Activity in the restrictions supported growth of the sector in 2021 and sector was supported by favorable rains in the 2022 2022, on the back of a recovery in both tourism and planting season but hampered by the high cost financial services. However, heightened inflationary of imported fertilizer and pesticides. Agriculture pressures and growing expenditure arrears have is dominated by the production of animals (about constrained demand. Likewise, the pressure on real 47 percent) and crops (32) percent, followed by incomes has undermined the health and education forestry (14 percent). subsectors. The services sector is dominated by wholesale and retail trade (24 percent); financial and insurance services (16 percent); education (13 percent), and public administration (11 percent), and information and communication (11 percent). Industrial sector: Output fell after a sharp post- pandemic recovery. The sector grew by 15.4 percent in 2021, with manufacturing buoyed by growing export demand and the easing of pandemic restrictions. However, industrial growth is estimated to have been negative in 2022 (Figure 1.5), because of sharply lower growth in manufacturing output and a contraction in the construction sector. The industrial sector is dominated by manufacturing (88 percent) and construction (8 percent). Box 1.1. Export-led private sector growth for inclusive and sustainable economic growth Eswatini shifted from a private investment-led, higher-growth include targeted interventions to enhance SME capabilities model to a public sector-driven, lower-growth model in the and growth, advance regulatory reforms, and improve trade late 1990s, following a decline in foreign direct investment logistics, including through regional collaboration. The after the end of apartheid in South Africa. Weak investment in Country Private Sector Diagnostic proposes multiple cross- productive sectors constrained job creation. The private sector cutting reforms to streamline trade and business regulations; is unable to create enough jobs for the growing, young labor reduce the state’s footprint in the economy, including through force. The public sector-driven growth model is unsustainable SOE reform; improve access to financial services and land; in the context of a constrained fiscal space and underperforming and enhance skills development to boost human capital. It SOEs. Continuing the current growth model would trap Eswatini recommends scaling up investments and reforms in four key in a low-growth equilibrium and result in a rising public debt sectors: sugar, beef, forestry, and textiles and apparel value burden, which would further crowd out the private sector. chains. Eswatini has comparative advantages in these sectors and can leverage its preferential access to regional and global Eswatini needs to implement policies that enhance private markets to increase exports, create jobs, and stimulate broad- sector activity and export competitiveness. These reforms may based economic growth. 4 KINGDOM OF ESWATINI ECONOMIC UPDATE Figure B1.1.1. Average growth declined, as foreign Figure B1.1.2. The regulatory burden is among the and domestic investment fell after apartheid top three challenges facing companies in Eswatini 15 Challenges cited by companies in 2021 Climate change Access to finance Utilities 10 Competition Local demand Capacity constraints 5 Company-specific Government services delivery Input costs Regulatory framework 0 1980–1995 1996–2021 Human-related pandemics Local politics Real GDP growth (average %) FDI (average % of GDP) Private investment (average % of GDP) 0 5 10 15 20 25 30 35 Sources: Eswatini Central Statistical Office, Ministry of Economic Planning, and Central Bank of Eswatini. The Country Private Sector Diagnostic confirmed the human capital and inequitable service delivery; limited broad findings of the 2020 Systematic Country Diagnostic, resilience against natural disasters and economic shocks; which identified five binding constraints and pathways and weak governance, a lack of transparency, and limited to poverty reduction and shared prosperity. These are: accountability. Eswatini company surveys show that the weak macroeconomic management amid volatile SACU regulatory framework is among the top three challenges revenues and heavy state involvement in the economy, affecting the private sector. Also, the World Bank’s which increased fiscal strain and decreased space for Enterprise Surveys reported a sharp increase in the share the private sector (reduced private investment); a lack of of firms identifying corruption as the single biggest obstacle economic diversification and slow job creation; inadequate to doing business between 2006 and 2016. Sources: Stockman 2022; World Bank 2022. 1.1.2 Prices: Rising inflation in 2022 affected Figure 1.6. Inflation rose in 2022 but remained low relative to other SACU countries and to previous peaks livelihoods and poverty, especially as food inflation breached the 6 percent 8 upper threshold 7 6 5 Driven by external shocks, inflation increased from 4 % 3.7 percent in 2021 to 4.8 percent in 2022, although it 3 2 remained low relative to other SACU countries (Figure 1 1.6). Russia’s invasion of Ukraine elevated global prices 0 2015 2016 2017 2018 2019 2020 2021 2022 (particularly energy and food), which were transmitted Eswatini SACU average to local prices. Food prices and traded inflation rose rapidly, but nontrade inflation declined (Figure 1.7). Source: Central Bank of Eswatini. 5 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Figure 1.7. External shocks meant that traded inflation Figure 1.8. The increase reflects higher food prices, increased and nontraded inflation declined in 2022 which breached the 6 percent upper band 12 16 14 10 12 8 10 8 6 6 % % 4 4 2 2 0 0 -2 -2 -4 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Traded inflation (annual) Nontraded inflation (annual) Food inflation Nonfood inflation Source: Central Bank of Eswatini. Source: Central Bank of Eswatini. Inflationary pressures persisted in 2023, with annual Figure 1.9. High food inflation led to a slight increase in inflation rising from 5.3 percent in January to 6.0 the estimated poverty rate in 2022 percent in May—reaching the upper threshold. Poverty rate (%) Real GDP per capita (constant LCU) Annual inflation breached the upper band threshold 100 45,000 in September 2022 for the first time in five years. 90 40,000 Inflation has been driven by higher food and transport 80 35,000 prices, stemming largely from the war in Ukraine. Food 70 30,000 inflation also breached the Central Bank’s threshold for 60 25,000 the first time in five years in June 2022; it has grown at 50 20,000 double-digit levels since August 2022 and continued 40 15,000 to increase to 15.7 percent in May 2023 (Figure 1.8). 20 10,000 This has had a significant effect on poor households, 10 5,000 as discussed below. 0 0 2009 2011 2013 2015 2017 2019 2021 International poverty rate Lower-middle-income poverty rate 1.1.3 Poverty and inequality: Poverty remains Upper-middle-income poverty rate Real GDP per capita high, and opportunities for young people Source: Central Bank of Eswatini. are limited recent sociopolitical unrest reduced economic activity Despite some progress, Eswatini continues to and negatively affected households. The level of experience high and persistent poverty. The poverty remains high, particularly for a lower-middle- proportion of the population living below the national income country. Projections for 2022 suggest that poverty line fell moderately from 63.0 percent in 2010 55.2 percent of people fell below the poverty line for to 58.9 percent in 2017, driven by improvements in lower-middle-income countries ($3.65/person/day in educational attainment, the coverage of social 2017 PPP), up slightly from 55.0 percent in 2021. About protection, and labor incomes.³ However, most of the 32.1 percent of people lived below the international decline was in urban areas, thus widening the urban- poverty line of US$2.15/day (2017 PPP) in 2022, up rural poverty gap. Also, the COVID-19 pandemic and from 31.9 percent in 2021 (Figure 1.9 above). ³ The 2017 Eswatini Household Income and Expenditure Survey (CSO 2017) is the most recent household survey to officially measure and track the evolution of poverty and inequality. 6 KINGDOM OF ESWATINI ECONOMIC UPDATE Poverty persists in part because of the lack of Factors beyond the control of individuals, including quality jobs. According to the Integrated Labour early education, parental education, place of birth, Force Surveys, labor force participation among the and place of residence explained 38.5 percent of working-age population fell from 50.6 percent in 2016 consumption inequality in 2017.⁶ to 45.9 percent in 2021. Without sufficient formal job creation, employment is concentrated in low value- 1.1.4 Monetary policy and financial sector: added activities, such as subsistence agriculture, Rising interest rates in response to and low-quality jobs—40.8 percent of employed inflationary pressures could further people are in the informal sector.⁴ Unemployment increase nonperforming loans and limit is high and rising, having increased from 23 percent private sector credit in 2016 to 33.3 percent in 2021, the highest rate in over a decade (Figure 1.11). It is even higher among Strong inflationary pressures prompted the Central young people, with those between 15 and 24 facing Bank of Eswatini to tighten monetary policy, in step an unemployment rate of 59.1 percent in 2021. Quality with South Africa (Figure 1.12). Eswatini has contained problems in education mean that young people lack annual inflation within a band of 3–6 percent since the right skills to participate in the labor market; this 2018 (Figure 1.6 above). Moderate inflation of only undermines Eswatini’s potential to benefit from its 3.7 percent in 2021 allowed the Central Bank to keep large, young population.⁵ interest rates low (after downward adjustments during the pandemic) and so support economic activity. With Inequality in consumption per capita and access the discount rate at only 3.75 percent, banks could to public services remains high. Eswatini is among maintain lending rates at around 7.5 percent. By 2022 the most unequal countries in the world, with a Gini higher commodity prices caused inflation to rise to index of 54.6 in 2016. Disparities in access to basic 4.8 percent. In response, the Central Bank increased public services across income groups and geographic its rate by 275 basis points to 6.5 percent by end-2022 locations persist, although access is being expanded. and by a further 100 basis points to 7.75 percent, with Figure 1.10. Poverty headcount rate declines as GDP Figure 1.11. Even though fewer people are working or increases looking for jobs, unemployment is rising 100 10 60 90 9 80 8 70 7 60 6 50 5 40 40 4 30 3 20 2 10 1 20 0 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Poverty GDP per capita rate (%) US$ 2017 PPP (thousand) 0 International poverty line Lower-middle-income country line GDP 2010 2013 2016 2021 Upper-middle-income country line National poverty ltine Labor force participation rate Unemployment rate Sources: World Bank staff calculation, using Eswatini Household Income and Expenditure Survey (EHIES), SSAPOV, and the Global Monitoring Database (GMD). ⁴ Informal employment is defined as an employee who is not regulated or protected by the state and has no pension, no paid annual leave, no sick leave, and no maternity/paternity leave. ⁵ Fifty-six percent of Swazis are under the age of 25. ⁶ Based on an analysis of the 2017 Eswatini Household Income and Expenditure Survey (CSO 2017). 7 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK banks’ prime lending rates increasing to 11.25 percent nonperforming loans remains above the Common by May 2023. Tighter monetary policy is likely to Monetary Area threshold of 5 percent. Reasons adversely affect economic activity and growth. behind the increase include the ending of COVID-19 Relief Measures in December 2021, the effect of Although tight monetary policy is necessary to inflation on households and businesses in 2022, contain inflation, it might constrain a recovery in and the disruption to economic activity arising from credit extension and increase nonperforming loans adverse global developments. Continued interest (Figure 1.13). Most private sector credit is allocated to rate increases might further increase nonperforming the distribution and tourism sectors, followed by real loans in 2023. estate and agriculture. A recovery in private sector credit extension is critical for the overall growth of the The financial sector remains resilient, although private sector. South African banks still account for nine-tenths of all lending. The banking sector is profitable Nonperforming loans are rising, reaching 7.2 and well capitalized—at 17 percent, the capital percent in March 2023, up from 6.6 percent in 2022 adequacy ratio is well above the statutory and 6.8 percent in 2021 (Figure 1.14).⁷ The ratio of requirement of 8 percent. Figure 1.12. Interest rates have surpassed pre-pandemic levels 10 8 6 4 % 2 0 -2 -4 2015M01 2015M04 2015M07 2015M10 2016M01 2016M04 2016M07 2016M10 2017M01 2017M04 2017M07 2017M10 2018M01 2018M04 2018M07 2018M10 2019M01 2019M04 2019M07 2019M10 2020M01 2020M04 2020M07 2020M10 2021M01 2021M04 2021M07 2021M10 2022M01 2022M04 2022M07 2022M10 2023M01 2023M04 Eswatini nominal policy rate South Africa nominal policy rate Eswatini real policy rate South Africa real policy rate Source: Central Bank of Eswatini. Figure 1.13. Credit to the private sector is recovering, Figure 1.14. Nonperforming loans are rising again in 2023 though growth is still below pandemic levels 16 10 9 11 8 6 7 6 5 % 1 4 -4 3 2 -9 1 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 0 2015 2016 2017 2018 2019 2020 2021 2022 Mar-23 Private sector credit, annual growth (%) Nonperforming loans to total gross loans (%) Source: Central Bank of Eswatini. Source: Central Bank of Eswatini. ⁷ Central Bank of Eswatini 2022a, 2023b. 8 KINGDOM OF ESWATINI ECONOMIC UPDATE The government has taken steps to improve the the lilangeni depreciated by 11 percent on average stability of the financial sector. These include against the US dollar in 2022. amending the Consumer Credit Act in 2021, submitting a National Payment Systems Bill to Parliament in The financial account balance registered a 2022, and drafting an umbrella law on Anti-Money net inflow, driven by other investments (loan Laundering and Combatting Financing of Terrorism disbursements from World Bank and the African (AML/CFT). It also aims to consolidate the Financial Development Bank), which helped to finance the Sector Regulatory Authority (the nonbank regulator) current account deficit in 2022. Financial account and the Centre for Financial Inclusion, which currently inflows from the three subaccounts, foreign reports to the Ministry of Finance and the Central Bank. direct investment, portfolio investment, and other investment, amounted to about 2 percent of GDP. 1.1.5 External sector: Foreign exchange Inflows of foreign direct investment were minimal, reserves, a critical cushion against fiscal largely reflecting the activities of companies with and external shocks, fell below international foreign relations, through reduced assets and norms, with the current account in deficit positive inflows of liabilities. Portfolio inflows, which for the first time in over a decade were lower than in 2021, were also mainly depletions of assets. Other investment inflows, mainly from loan Despite a recovery in trade flows, the current disbursements by the World Bank and the African account registered a deficit in 2022 for the first time Development Bank, were relatively large. In 2021 since the 2010/11 crisis, primarily because of high a reduction in private sector financing outflows cost of imports (due to the war in Ukraine) and a enabled the economy to register a small surplus on sharp decline in SACU revenues. Eswatini has long the capital account. In the next year, likewise, limited maintained a surplus on its current account, averaging outflows of private financing resulted in a small deficit about 6.4 percent of GDP from 2015 to 2021 (Figure on the capital account. 1.15). High SACU revenues and growing exports (albeit dominated by a few products) generated a moderate The pressure on the overall balance of payments trade surplus in this period (Figure 1.16). However, in saw foreign exchange reserves falling below 2022 global turmoil brought a marked deterioration international norms of three months of imports in the current account, with a deficit of 1.3 percent. A (Figure 1.18). Gross official reserves increased slightly primary driver was the decline in the trade surplus: to 3.1 months of imports of goods and services in imports rose faster than exports, and the prices of 2021, supported by the inflow of Special Drawing major import baskets rose significantly, especially Rights of the International Monetary Fund (IMF) and food and beverages, fuel, and electricity. The major further mobilization of net foreign exchange inflows exports—chemicals, sugar, food, and textiles— from local banks. However, the current account declined in 2022. These four sectors account for 90 deficit, the decline in SACU revenues, and low foreign percent of all exports, which highlights the lack of direct investment in 2022 resulted in reserves falling diversification of the export base and the vulnerability to 2.5 months of import cover, which is lower than the of the economy to external shocks (Figure 1.17).⁸ This international norm. Concerted efforts will be needed was exacerbated by a sharp decline in SACU revenues, to increase reserves above the threshold of three coupled with an adverse shift in the terms of trade, as months of import cover. ⁸ Eswatini enjoys preferential trade agreements with the European Union, the United States, and regional bodies. However, it has been unable to fully harness these agreements to grow its export sector because of persistent economic weaknesses, such as the cost of services, challenges in doing business, insufficient credit, infrastructure constraints, and limited absorption of technology. 9 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Figure 1.15. The current account balance turned Figure 1.16. … with a narrowing of the trade surplus negative for the first time in a decade 14 2,500 12 2,000 10 8 1,500 % of GDP 6 1,000 4 2 500 0 -2 0 2015 2016 2017 2018 2019 2020 2021 2022 2015 2016 2017 2018 2019 2020 2021 2022 Current account balance (% of GDP) Total exports (US$ million) Total imports (US$ million) SACU transfers (% of GDP) Trade balance (US$ million) Source: Central Bank of Eswatini. Source: Central Bank of Eswatini. Figure 1.17. Exports are dominated by a few products Figure 1.18. … and gross international reserves fell below international norms 2,500 4.5 2,000 4 3.5 US$ million 1,500 3 1,000 2.5 Months 500 2 0 1.5 2015 2016 2017 2018 2019 2020 2021 2022 1 Other exports 0.5 Wood and articles of wood Textiles and textile articles 0 2015 2016 2017 2018 2019 2020 2021 2022 Prepared foodstuffs; beverages; tobacco Products of chemical or allied industries International reserves (months of imports) Source: Central Bank of Eswatini. Source: Central Bank of Eswatini. 1.1.6 Fiscal developments: The fiscal salary increase to civil servants - well above inflation situation needs to be improved and the - after an increase in SACU revenues (Figure 1.19). fiscal consolidation plan implemented The ongoing large fiscal deficits stem from rising fully to ensure macro-fiscal sustainability expenditure amid declining revenues, especially SACU revenues. They resulted in a rising public Over the years, large fiscal imbalances have meant debt burden, a large public financing requirement a steady accumulation of debt and expenditure that crowded out credit to the private sector, and arrears, distorting economic management and an increase in public expenditure arrears, which growth potential. Fiscal deficits averaged 6.4 percent negatively affect private sector activity (Figure 1.20). from 2015 to 2020. The deficit reached a peak in 2016, Against this backdrop, the government implemented when the government awarded more than 17 percent the Fiscal Adjustment Plan for fiscal 2021–23. 10 KINGDOM OF ESWATINI ECONOMIC UPDATE The recent deterioration in revenue highlights the of expenditure arrears, which undermined private country’s exposure to volatile SACU receipts and the sector activity. The sharp increase in SACU need to increase domestic revenue mobilization. transfers in 2023 again seems to be leading to Revenues fell sharply from 29 percent of GDP in 2020 higher government spending. The authorities have, to 24 percent in 2022, when SACU receipts declined however, taken a vital step by establishing the SACU from 12.6 percent of GDP to 7.1 percent (Figure 1.21). Revenue Stabilisation Fund, which might help to SACU receipts have fluctuated between 55 and 31 mitigate the inevitable shock when SACU transfers percent of total revenue in the past decade but are fall again. The higher SACU revenue in 2023 could expected to almost double in 2023. The increase in help to moderate the fiscal deficit and improve gross SACU revenue is driven by the higher than projected official reserves. outturn of the 2021/22 Common Revenue Pool, a 25 percent increase in the projected size of the Pool Notwithstanding efforts to lower public spending for 2023/24, and an increase in Eswatini's share of and improve efficiency, spending pressures remain. total intra-SACU imports.⁹ Given that SACU revenues Central government spending decreased slightly have historically been volatile, the authorities should from 29.7 percent of GDP in 2021 to 29.2 percent in prioritize the country’s longer-term aspirations and 2022 (Figure 1.22), although it remains dominated avoid using the windfall revenue to increase short- by rigid public wages. Some progress has been term expenditure. Eswatini’s response to higher made in adjusting expenditures (Box 1.2): the public SACU transfers has often been to increase public wage bill was reduced by about 2 percent of GDP expenditure. As noted, in 2016 and 2017, higher SACU between 2020 and 2022 through a hiring freeze and transfers were followed by high expenditure and below-inflation cost-of-living adjustments. Public hefty salary increases for civil servants, which led investment was curbed, and spending on goods and to a larger fiscal deficit, along with the accumulation services was rationed. Figure 1.19. Fiscal deficits remained sizeable Figure 1.20. … contributing to rising public debt and interest payments 14 0 46 -1 41 12 -2 36 10 31 -3 8 26 % of GDP % of GDP % of GDP -4 21 6 -5 16 -6 4 11 -7 6 2 -8 1 0 -9 -4 2015 2016 2017 2018 2019 2020 2021 2022 2015 2016 2017 2018 2019 2020 2021 2022 Fiscal balance (% of GDP) [RHS] Domestic debt External debt Stock of arrears SACU transfers (% of GDP [LHS] Total public debt Source: Ministry of Finance. Source: Ministry of Finance. ⁹ The distribution of SACU revenue is determined by a formula, which consists of external trade and excise duties on imported goods, as well as a development component derived from excise taxes. The revenues depend mainly on South Africa’s projected customs and excise revenues and are shared across countries based on a formula that considers a country’s level of imports and GDP levels. The formula includes an adjustment mechanism where any over/underpayment from past forecasting errors is recouped two years later. 11 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Figure 1.21. Revenues fell, as SACU receipts declined Figure 1.22. Spending fell but is still dominated by a large, rigid public wage bill 30 35 25 30 25 20 % of GDP 20 % of GDP 15 15 10 10 5 5 0 0 2015 2016 2017 2018 2019 2020 2021 2022 2015 2016 2017 2018 2019 2020 2021 2022 Compensation of employees Income tax SACU receipts Goods and services tax Purchases or use of goods and services Other taxes Nontax revenue Interest Other expense Capital expenditure Source: Ministry of Finance. Source: Ministry of Finance. Expenditure reform has been hindered by the remainder. Eswatini’s public debt remains low pervasive inefficiencies in the large SOE sector. relative to the region.¹¹ Despite its debt being low, Annual transfers to SOEs constituted 3.1 percent of Eswatini is at high risk of debt distress because of GDP in 2021. Many SOEs are inefficient, for reasons its short-term debt, which accounts for 31 percent such as ineffective governance, inadequate financing, of the debt stock, and its vulnerability to exchange political and social objectives, and unfunded (or rate fluctuations.¹² The 2021 debt sustainability partly funded) public service obligations. Resource assessment by the authorities show that although constraints have meant that SOEs tend to underinvest the country’s debt level is still low by international in labor and capital (see part 2). Institutionally, they are and regional standards, the recent increase in often weak and their internal processes poor, leading central government debt and the high gross to weak management and suboptimal outcomes. A financing needs raise both sustainability and liquidity World Bank study that estimated efficiency scores concerns.¹³ Successful implementation of the Fiscal for education, health, and infrastructure spending Adjustment Plan and the updated Medium-Term in Sub-Saharan Africa in 2007–15 pointed to marked Debt Management Strategy of 2021 should help inefficiencies in all three these sectors, particularly reduce Eswatini’s fiscal deficit, expenditure arrears, health, in Eswatini.¹⁰ and public debt in the medium term. Public debt more than doubled between 2015 Although some progress was made in tightening and 2022. Public debt peaked at 43 percent of public finances, the measures set out in the Fiscal GDP in 2022, up from 41 percent in 2021, due in part Adjustment Plan were unevenly implemented, to borrowing during the pandemic (Figure 1.20). especially on the revenue side (Box 1.2). Initial External debt comprises about 40 percent of the reforms saw the fiscal deficit falling to 4.6 percent total, with domestic debt (including treasury bills, in 2021, but it rose again to 5.5 percent in 2022 as bonds, and infrastructure bonds) accounting for revenues declined and spending controls were ¹⁰ Kwaramba and others 2019. ¹¹ For instance, Namibia’s debt exceeds 70 percent of GDP, and Lesotho’s exceeds 60 percent. ¹² IMF 2013. ¹³ Government of Eswatini 2021. 12 KINGDOM OF ESWATINI ECONOMIC UPDATE relaxed. The authorities implemented an arrears suppliers of essential and critical supplies, such as clearance strategy in 2021, which led to a reduction in drugs or medical equipment, and contractors for public arrears from around 7.8 percent of GDP in 2019 major infrastructure projects. They arise mostly to 4.6 percent in 2021. However, arrears increased because of cash flow challenges. The government again to 6.0 percent of GDP in 2022, reflecting must continue its attempts to reduce arrears by financing gaps and lax controls on procurement implementing a treasury single account¹⁴ and an and cash management. Most arrears are toward arrears clearance strategy. Box 1.2. Eswatini’s fiscal adjustment plan has not been fully implemented Over the last decade, rising public spending and weak capital spending, and spending on goods and services. revenues have adversely affected Eswatini’s public The authorities have made progress on the public wage bill by finances. Sizeable investment programs, large transfers to implementing a hiring freeze, abolishing redundant posts, and SOEs, and the burgeoning public sector wage bill have caused keeping cost-of-living adjustments below inflation. Progress public spending to soar. On the revenue side, mobilization on cutting transfers to SOEs (by restructuring, privatizing, and efforts have been largely ineffective; revenues have been bringing some to the point of sale) has been limited (see part 2). volatile and remain reliant on SACU receipts. The public The public investment program was rationalized to some extent, financing requirement has risen sharply, with the fiscal deficit with an emphasis on completing existing projects. Finally, to hitting 9 percent in 2016. Consequently, the public debt burden achieve efficiency savings in spending on goods and services, increased from 21.9 percent in 2018 to 43 percent in 2022, and some measures, such as terminating trading accounts, were liquidity shortages led to rising arrears. The economy is trapped implemented in part. in a low-growth, high-inequality, high-poverty equilibrium. Revenue reforms entail enhancing the stability of To improve the sustainability and efficiency of public revenues and increasing their share in the economy. finances, the government produced the Fiscal Adjustment Measures to enhance revenues, such as expanding the Plan for the fiscal years 2021–23. The fiscal consolidation basket of value-added tax products to include eggs and dairy plan approved by Cabinet in 2020 was changed in line with products, applying a standard rating of electricity, improving the economic conditions. The initial aim was to save 6.5 percent administrative efficiency of some taxes, and raising fuel taxes, of GDP over three years, starting with a 1.7 percent adjustment have not been fully implemented. in 2021, followed by adjustments of 2.3 percent in 2022 and 2.5 percent in 2023. Given delays in implementing revenue With spending reforms only partly implemented, the measures during the pandemic, in 2022 the government revised projected increases in SACU receipts in 2023 are the planned adjustment of 6.5 percent down to 4.8 percent of expected to lead to higher spending. To accelerate GDP. But indications are that even the lower adjustment will economic growth, the government needs to implement be delayed further, as spending increased in 2023. policies to improve public finances and ensure their sustainability. This includes reviewing the Fiscal The proposed reforms include reducing four elements of Adjustment Plan and fully implementing its measures to spending: the public sector wage bill, transfers to SOEs, restore fiscal sustainability. ¹⁴ Setting up a treasury single account is part of the reforms under Development Policy Operations (DPO) II, which aims to reduce expenditure arrears in total government expenditure from 26 percent in May 2020 to below 15 percent by June 2023. 13 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 1.2 Economic outlook rise in the prices of imported fuel, food, and fertilizers in 2022 severely affected Sub-Saharan Africa, a net 1.2.1 Outlook importer of these goods. The high cost of fertilizer, coupled with recent climate shocks, undermined Global economic prospects: The global agricultural output, and increased food insecurity economy is expected to slow even further in in the region. On the positive side, energy prices 2023, limiting Eswatini’s growth potential. have eased considerably from their peak in the third quarter of 2022. Global economic prospects remain precarious, with GDP growth projected to reach 2.1 percent in 2023, Depressed global demand adversely affects down from 3.1 percent in 2022 (Figure 1.23).¹⁵ Eswatini’s the tradeable sector. Global trade is expected to small, open economy is particularly vulnerable to global slow in 2023, with goods trade particularly weak. developments and shocks. It relies heavily on external Sub-Saharan Africa relies heavily on trade as a trade and financing, its economic base is narrow, debt driver of growth, and the weak global conditions is high, and the economy is susceptible to natural reduce the demand for its exports, keep the prices disasters. Global trade and supply chains, already of its vital metal exports low, and reduce much- disrupted by the pandemic, have been further affected needed foreign investment. However, now that by Russia’s invasion of Ukraine, which also dramatically the World Health Organization no longer sees raised commodity prices (particularly oil, agricultural COVID-19 as a “global health emergency”, trade in inputs, and food). These growing inflationary pressures, services is recovering. A welcome consequence is combined with high levels of global public debt, led that international tourist arrivals in the region are to tighter monetary and fiscal policy and weaker returning to pre-pandemic levels. economic performance in the United States, Europe, and other emerging economies. Among the major Additional shocks could push the global and economies, China did see a recovery in early 2023. regional economies into recession. Higher inflation, tighter economic policy, growing weaknesses in major Although global inflation is slowing, it is still above economies, financial turmoil, or rising geopolitical target in many economies (Figure 1.24). The sharp tensions could all cause a recession in Sub-Saharan Figure 1.23. Real GDP has been slowing since 2022 Figure 1.24. Inflation remains elevated, above target in many countries 10 8 8 6 4 6 2 0 -2 -4 4 -6 -8 2 2020 2021 2022 2023 Proj 2020 2021 2022 2023 Proj 2020 2021 2022 2023 Proj 2020 2021 2022 2023 Proj 2020 2021 2022 2023 Proj World Advanced Sub-Saharan South China 0 economies Africa Africa 2020 2021 2022 2023 Proj Real GDP growth (%) Global inflation (% Source: World Bank 2023. Source: World Bank 2023. ¹⁵ World Bank 2023. 14 KINGDOM OF ESWATINI ECONOMIC UPDATE Africa. South Africa’s growth is slowing; as it is a major the ongoing war in Ukraine will continue to affect export and import destination for the other SACU global output, disrupt supply chains, and raise countries, this slowdown will negatively affect the commodity prices. Economic activity in Eswatini growth potential of Eswatini. will be further constrained by tighter economic policy, both to contain inflation and to manage Eswatini’s economic outlook: Promising, but public finances through the implementation of reforms are needed if the country is to achieve the Fiscal Adjustment Plan. Finally, the socio- its economic aspirations. political environment remains tense and difficult after unrest in 2021. The social unrest resulted in Eswatini’s economic prospects for 2023 and 2024 are property damage, with an associated economic loss favorable, partly because of higher SACU revenues estimated at US$210 million. (Figure 1.25). The government budget proposes an expenditure increase, as SACU revenues are High SACU receipts should help reduce the fiscal expected to double in 2023. The projected increase deficit to manageable levels. Despite higher in government expenditure will support economic election spending, the near doubling in SACU activity, and external funding of major capital projects revenues will see the deficit falling to 2.1 percent of such as the Mkhondvo-Ngwavuma dam will boost GDP in 2023 and increasing slightly to 2.4 percent in both demand and supply. The wholesale and retail, 2024. However, more progress needs to be made in construction, and public administration sectors are all implementing the Fiscal Adjustment Plan; should the expected to benefit from higher public spending. The authorities succeed in this, the deficit is projected to tourism sector is expected to continue its recovery, decline further to about 1.1 percent of GDP in 2025. and remittances are picking up. The growing public wage bill might pose risks in future should SACU receipts decline. However, to However, difficulties in the external and domestic manage the volatility of SACU receipts and enhance environments constrain the country’s growth macroeconomic management, the government has potential. Although real GDP growth is expected to committed to putting about E1.5 billion (1.8 percent reach 3.0 percent in 2023 and 2.9 percent in 2024, of GDP) into the new SACU Revenue Stabilisation global turmoil is likely to dampen economic activity. Fund. Full implementation of the Fiscal Adjustment With Ukraine and Russia together accounting for Plan would undermine growth in the short run over 30 percent of the global supply of food and but bring much-needed budget credibility and commodities (grains, oils, fertilizers, and energy), macroeconomic stability in the long run. Debt is Figure 1.25. The economic outlook depends heavily on SACU revenue trends 6 14 4 12 2 10 0 8 -2 6 -4 4 -6 2 -8 0 2022 2023 2024 2025 Fiscal balance (% of GDP) International reserves (months of imports) Current account (% of GDP) SACU transfers (% of GDP) [RHS] Source: World Bank staff estimates. 15 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK projected to stabilize in the medium term, falling to food, fuel, and fertilizer prices and even a sudden about 41 percent of GDP in 2023 and 2024. disruption in the supply of staple foods. Likewise, financial stresses, the global tightening of economic Prudent fiscal policy will help support the external policy, and weaknesses in major economies can position. The current account is projected to move negatively affect Eswatini, including through back into surplus in 2023 and 2024, on the back of higher debt financing costs. Another concern is higher SACU receipts and remittances and expected low growth in South Africa—the country’s main fiscal consolidation from 2024 onwards. The trade trading partner—because of ongoing power supply account is also expected to improve, with exports constraints. All these risks could create pressure growing faster than imports. This would mean gross to increase public spending. official reserves recovering to above the international benchmark of three months of import cover. Domestic downside risks are also significant. Local climate shocks could well damage agriculture and Monetary policy is expected to remain tight to the agri-processing industry. Also, in the absence contain inflation. Inflationary pressures are likely of public finance reforms and with elections on the to remain significant over the medium-term, in part horizon, public financing requirements could rise. because of the war in Ukraine. Inflation is projected to This could increase public debt, crowd out private exceed 5 percent in 2023 and 2024. Annual inflation sector activity, and even undermine economic has already increased from 5.3 percent in January stability. Finally, rising living costs coupled with 2023 to 6.0 percent in May 2023, reaching the upper high unemployment could spur further civil unrest, band for the first time in eight months. The Central possibly disrupting economic activity and resulting Bank is expected to increase the discount rate slightly in infrastructure damage. to restrain further price increases. Under the pessimistic scenario, significant global Current growth projections suggest Eswatini will headwinds would mean stagnant economic growth not reach high-income status before 2050. The of less than 2 percent in 2023 and 2024. Although gross national income per capita is expected to grow the scenario assumed no major escalation in the war by only 0.5 percent between 2022 and 2025. This in Ukraine or higher volatility in commodity prices, modest expansion will be insufficient to dent high significant inflation in the advanced economies levels of poverty and inequality. Higher food and would prompt further tightening of economic policy. energy prices will continue to constrain budgets Under this scenario, Eswatini’s financing costs would and livelihoods, particularly for lower-income increase, leading to additional public expenditure. households. Poverty is projected to decline slightly This could increase the fiscal deficit and expenditure from 55.2 percent in 2022 to 53.2 percent in 2025 in arrears to unsustainable levels. terms of the poverty line for lower-middle-income countries (US$3.65/day, 2017 PPP). By contrast, under an optimistic scenario, improvements in the external environment 1.2.2 Risks coupled with domestic economic reforms would support economic growth. A substantial reduction Given the current global challenges, Eswatini’s in global volatility would reduce both commodity growth outlook faces many external risks and prices and financing costs. The resulting recovery heightened uncertainty in the medium term. Both in worldwide demand would stimulate exports and adverse climate events and ongoing political and increase foreign investment in Eswatini. Meanwhile, economic volatility from the war in Ukraine could government efforts to eliminate arrears and reduce introduce additional demand and supply shocks. the fiscal deficit to sustainable levels would promote Such shocks could lead to substantial increases in stability and crowd in private sector economic activity. 16 KINGDOM OF ESWATINI ECONOMIC UPDATE 1.3 Policy options: In search of the with the changes in the macroeconomic environment. drivers of growth Focus areas include ongoing reductions in the public sector wage bill relative to GDP, by retaining the hiring To improve Eswatini’s growth prospects, the freeze, abolishing redundant posts, and ensuring authorities will have to strengthen macro- that cost-of-living adjustments remain below fiscal management and reduce structural and inflation. Savings can be made in capital spending governance rigidities. This section proposes a reform by prioritizing key programs and restructuring SOEs agenda in support of faster economic growth, based will help reduce public expenditure. The creation on three key pillars: (i) address macro-fiscal pressures of the SACU Revenue Stabilisation Fund is also a through prudent macroeconomic management, (ii) positive, forward-looking step. When SACU receipts unlock private sector investment through structural exceed an agreed threshold, the excess will be and governance reforms and (iii) enhance service paid into the fund, and when receipts fall below delivery for inclusive growth through an improvement a defined threshold, the fund will disburse earlier in public spending and SOEs reforms. The proposed receipts. This should help stabilize revenue flows and agenda is summarized in Table 1.1. promote macroeconomic stability. Domestic revenue mobilization needs to be intensified. Individual I. Address macro-fiscal pressures tax, value added tax, fuel tax, and the alcohol and tobacco levies need to be adjusted as envisaged Conservative economic policy will rest primarily in the Fiscal Adjustment Plan. Tax expenditure also on the continued reform of public finances. Two needs to be revisited, including in special economic elements of fiscal policy are vital here: first, measures zones. Also, rather than increasing rigid expenditure to consolidate public finances, including streamlining lines, the authorities can use the extra revenue from expenditure and reducing the volatility of revenues, SACU revenues to restore some fiscal space. Clearing and second, measures to eliminate public expenditure will help them to build the stability and expenditure arrears. These should be underpinned trust in institutions necessary for private sector by prudent monetary policy supporting the currency development and growth. peg between the lilangeni and the South African rand. Clearance of arrears Fiscal consolidation Public expenditure arrears increased again in The decline in the fiscal deficit in 2023 owes more 2022, threatening to limit the post-COVID recovery to high SACU revenues than to continued fiscal momentum. Public arrears need to be cleared to consolidation. Historically, the increase in rigid support private sector activity. The government should expenditure lines when SACU revenues were high revive the 2020 arrears clearance strategy. Public has led to large fiscal deficits, expenditure arrears, financial management should be improved through public debt, and lower external official reserves, the rollout of IFMIS, new e-procurement regulations, constraining potential growth. Even when SACU and the introduction of a treasury single account. revenues increase, the authorities should prioritize the These initiatives would improve the control and country’s long-term aspirations rather than focus on management of expenditure and constrain the build- short-term needs. The fiscal deficit must be reduced up of arrears. The treasury single account will help to to avoid crowding out private sector activity and operationalize the control of commitments against ensure the sustainability of public debt. To this end, budget allocations and, subsequently, payments the implementation of the Fiscal Adjustment Plan against commitments registered by the Treasury. should continue, both to reduce expenditure and to These reforms, along with prudent macroeconomic enhance revenue. The plan should be revised in line management, should help control expenditure arrears. 17 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Table 1.1. Policy options Policy pillar Shor term (1–6 months) Medium term (6 months–2 years) Address macro-fiscal pressures I. Fiscal consolidation Rationalize and review tax expenditure/ Reduce the public wage bill to below 10 incentives-currently at 13 percent of GDP¹ percent of GDP through implementation of measures in the Fiscal Adjustment Plan, such Institute an Income Tax Compliance Certificate as an enhanced voluntary early retirement to enhance revenue collection. scheme, below-inflation wage adjustment, and controlling the size of the civil service. Introduce a small taxpayer regime (presumptive tax or turnover tax) specifically Privatize some SOEs to reduce fiscal transfers. targeting the informal sector. Consider submitting the bill to introduce the Introduce taxation of gains on disposal of carbon tax and consider increasing the fuel tax business assets. once the impact of the war in Ukraine subsides. Consistently allocate revenues to the SACU Revenue Stabilisation Fund by incorporating capitalization of the Fund into the medium- term fiscal framework. II. Eliminate arrears Ensure the medium-term fiscal framework Roll out the Integrated Financial Management does not plan for any financing gaps. System (IFMIS). Implement an arrears clearance and Implement an e-Government Procurement prevention strategy. (e-GP) program, rolling out e-government procurement to 10 pilot entities. Roll out a treasury single account. Publish monthly cash-based budget execution/ fiscal outturn report. Unlock private sector investment I. Improve business climate Operationalize the specialized Commercial Support targeted reforms of the business Court to deal with complex business matters. environment. Strengthen the Anti-Corruption Commission Strengthen credit infrastructure. by clarifying its legal powers and enhancing its financial and human resources to address Strengthen the SME guarantee scheme. corruption. Streamline government regulations and Ensure public officials declare assets upon taking reduce bureaucracy. and leaving office to help reduce corruption. Implement electronic one-stop shops to boost Close all remaining trading accounts to the investment climate. control spending on goods and services. Unbundle the Eswatini Posts and Telecommunications Company to reduce digital/communication costs and promote private investment. 18 KINGDOM OF ESWATINI ECONOMIC UPDATE Policy pillar Shor term (1–6 months) Medium term (6 months–2 years) II. Support export-oriented Operationalize one-stop border post between Improve trade diversification by reducing growth policies Eswatini and South Africa. production costs. Open critical border posts (such as Mahamba, Enhance trade integration by participating in and Lavumisa border) for 24 hours a day. regional and global value chains, especially in sugarcane, beef, forestry, and textiles (as per the Country Private Sector Diagnostic). Enhance service delivery for inclusive growth I. Improve the efficiency of To enhance resource allocation, rationalize, Ensure self-reliance in electricity (and reduce public spending comprehensively review, and prioritize the dependence on South Africa) by investing in completion of big projects, and allow more other renewable services. resources for those being efficiently implemented. Mainstream climate change in public Strengthen the gatekeeping role of investment management: incorporate climate the Ministry of Economic Planning and change mitigation or decarbonization plans Development in providing technical advice into project identification and design; and and reviewing project preparation before develop green regulations. projects are considered for budget selection. Implement a comprehensive project appraisal and monitoring framework. II. Reform SOEs In line with the Cabinet-approved SOE Improve the operational performance and implementation plan, close or merge some accountability of the remaining SOEs. SOEs, starting with the easier changes on the five identified entities.² Privatise some SOEs in line with SOEs restructuring framework. Split the commercial and regulatory functions of SOEs into separate entities. Notes : 1. IMF 2023. 2. Closing the Sebenta National Institute, dissolving the Eswatini National Industrial Development Corporation, and merging the Financial Sector Regulatory Agency and the Centre for Financial Inclusion. II. Unlock private sector investment Bureaucratic requirements make it difficult and even prohibitively expensive for SMEs to set up and run Structural and governance rigidities limit both a business. Other priorities include strengthening private sector activity and the country’s growth the Anti-Corruption Commission (bringing the anti- potential. Structural rigidities include the dominance corruption legal framework in line with the UN of SOEs and the constrained business environment, Convention against Corruption) and operationalizing whereas governance rigidities relate to corruption, the Commercial Court established in 2022, along the rule of law, and the protection of property rights. with the Small Claims Court. To minimize corruption, public officials should also be encouraged to declare A better climate for business assets upon taking and leaving office. The business environment in Eswatini is seen to To improve access to finance for enterprises, be constrained (see Box 1.1), and perceptions enhancements to the business environment of public sector corruption continue to worsen. need to be complemented by better credit Improving the climate for private investment would infrastructure. Key actions include improving require streamlining the regulatory framework, frameworks for the sharing of credit information which often creates a barrier to the entry of SMEs. and the use of movable assets as collateral, as well 19 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK as strengthening the corporate insolvency system. good practice for SME credit guarantee schemes¹⁶ To improve credit information sharing, subordinate highlighted weakness in these schemes in terms regulations to the Credit Consumer Act 2021 need to of corporate governance structure, transparent be issued to support the licensing of credit bureaus, and consistent risk-based pricing policies, and the use of credit bureau analytics, data standards, disclosure of nonfinancial information. Improving and dispute resolution, among other issues. As for the SME guarantee scheme and providing technical the use of movable assets as collateral, a unified law support to build the capacity of firms could help for secured transactions is required, which covers high-performing SMEs secure financing to grow all types of movable assets, provides clarity on the their businesses. priority rules for secured creditors, and allows out- of-court enforcement; this should be complemented Export-oriented growth by an online, notice-based collateral registry system. Lastly, a modern commercial insolvency framework Better trade logistics and integration, along with that has special insolvency procedures for SMEs regulatory reform, would facilitate trade and drive can improve recovery rates and reduce the costs export-led growth. With Eswatini being a small for secured creditors during insolvency processes. open economy, the export sector is a key driver of economic growth. As noted in the Country Private The SME sector, which mainly comprises informal Sector Diagnostic, reforms to address trade logistics microenterprises, needs targeted support, and facilitation would help increase exports and including through credit guarantee schemes. An diversify the export base, and so reduce the country’s existing credit guarantee scheme, which guarantees vulnerability to shocks. Eswatini has comparative 50 percent of loans, is underutilized. A World Bank advantages in sugarcane and textiles and can assessment of the compliance of the Small-Scale leverage its preferential access to regional and global Enterprise Loan Guarantee Scheme and the Export markets to grow exports, create jobs, and stimulate Credit Guarantee Scheme with the principles of broad-based economic growth.¹⁷ ¹⁶ World Bank 2015. ¹⁷ Stockman 2022. 20 KINGDOM OF ESWATINI ECONOMIC UPDATE III. Enhance service delivery for SOE reform inclusive growth Reforming SOEs is key to the country’s success, More efficient public spending as they directly and indirectly affect the economy through both fiscal and private sector channels. It is vital to improve the efficiency of public Growing transfers to SOEs have contributed to high spending, particularly in the social sectors, to fiscal deficits over the years, but their inefficiency has enhance service delivery. A comprehensive project meant that service delivery has often been poor. In appraisal system is needed to select only the “best” general, a large SOE sector makes public spending programs, which represent value for money, for more inflexible, unable to respond to fluctuations public investment. Better monitoring and evaluation in revenue or to rapidly increase the delivery of of such programs will ensure that investments are critical services in times of crisis. SOEs also constrain properly implemented and maintained, and lessons private sector investment in various ways, including learned to inform future investment decisions. The through direct competition, higher operating costs, recommendations of the 2019 Public Investment and barriers to the entry of efficient private sector Management Assessment need to be implemented. providers. Sector regulations tend to restrict the These include sound planning within a credible entry of new market players, foster collusion among fiscal framework, the identification of viable projects existing players, and discriminate among market based on rigorous appraisal, appropriate scaling players, thus undermining competition.¹⁸ relative to affordability, and an implementation framework that minimizes the risk of adverse Restructuring the SOE sector would increase the level surprises (especially upward cost adjustments, a and quality of private investment. Privatizing key SOEs, serious problem in recent years). Comprehensive such as Pigg’s Peak Hotel and Casino, would help increase institutional reforms are needed to address private investment. Likewise, restructuring the sector the chronic weaknesses in public investment would reduce inefficiencies and free up public resources management that have undermined the efficiency for investment. Finally, improving the management of of such investments. The planned rollout of IFMIS SOEs would lead to better investment decisions, boost is a welcome initial step to improve budgeting and competition, and encourage private sector activity. implementation of public spending. Part 2 of this report discusses SOEs in more detail. ¹⁸ IMF 2023. 21 PART TWO: EFFICIENT STATE-OWNED ENTERPRISES CAN BOOST ECONOMIC GROWTH PART TWO EFFICIENT STATE-OWNED ENTERPRISES CAN BOOST ECONOMIC GROWTH 2.1 Introduction constrains private sector activity, and drains resources from the budget, which could have been used for State-owned enterprises retain a significant presence other priority investments, such as social services or in Eswatini. Eswatini has a broad definition of SOEs, infrastructure (Figure 2.1). Finally, the state’s multiple which includes traditional SOEs (such as commercial roles in the economy (as shareholder, regulator, and companies, utilities, and state-owned financial institutions) policy maker) sometimes overlap. These multiple roles along with development agencies, universities, hospitals, can create conflicts of interest and increase barriers to the Eswatini Revenue Authority, regulatory agencies, the entry for private firms. Reforming SOEs could, therefore, Central Bank, and some town councils. Although only a boost economic growth by enhancing efficiency in few of these carry out commercial activity, SOEs retain a private and public development. Such reforms could considerable presence and provide basic infrastructure focus on three main aspects: (i) rethinking the state’s role services to businesses and households—including in the economy; (ii) strengthening the legal framework energy, water, communication, and transport—with to include a clearer definition of SOEs, separate from significant direct and indirect effects on the economy. regulatory agencies; and (iii) strengthening SOE Their performance affects the quality of service delivery, governance and oversight. Figure 2.1. SOE interrelations with the government and households Source: Rigo and others 2021. 22 KINGDOM OF ESWATINI ECONOMIC UPDATE This focus section examines how SOEs in Eswatini fiscal 2024, transfers to SOEs by about 4 percent of can become more efficient and so boost economic total revenue or 1 percent of GDP.²⁰ growth. It is organized as follows: the first subsection discusses the role of SOEs in Eswatini, the second The government commissioned a study on sets out the key constraints to their performance, improving the performance of SOEs by the and the final subsection presents policy options. Eswatini Economic Policy Analysis and Research Centre. The report, along with a proposed roadmap 2.2 The role of SOEs in Eswatini has for reform, was published in August 2021. Its grown significantly recommendations include improving the legal and institutional framework for SOEs, imposing a 2.2.1 Context¹⁹ performance monitoring framework for SOE boards and management, and strengthening corporate The role of SOEs in Eswatini has grown significantly. governance. Implementation of the reforms has only Public enterprises were originally established to just begun, and no significant advances have been manage various aspects of the economy, such as made yet. transportation, utilities, and agriculture. However, after independence the role of the SOE sector was 2.2.2 SOE landscape: The legal definition of expanded to provide additional public services, SOEs and public enterprises is broad and protect strategic interests, and promote economic not in line with the internationally development. In the 1970s and 1980s, the main new accepted definition public entities to be established were the Eswatini Sugar Association and the Eswatini Dairy Board. Eswatini’s legal definition of SOEs and public However, since then, public enterprises have had an enterprises is broad and not in line with the extensive reach, operating or controlling significant internationally accepted definition. As noted, sectors of the economy. previously, the legal definition of SOEs includes government units (such as the Eswatini Revenue The authorities recognize SOE reform as an Authority) and regulatory agencies (such as the important priority if the country is to accelerate Competition Commission and Environmental growth and ensure fiscal sustainability. Eswatini’s Authority), which do not carry out commercial activity. development strategy, the National Development In its law, Eswatini recognizes two types of SOE, which Framework 2019–22, includes reorganizing the are termed “public enterprises”: (i) Category A: wholly SOE sector to enable them to operate efficiently, owned by government, or in which the government transparently, and accountably and to support the has a majority interest, or which is dependent on overall development agenda. The Framework also government subvention for its financial support; and sets objectives for containing the wage bill and (ii) Category B: in which government has a minority transfers to SOEs and for improving SOE performance interest or which monitors other financial institutions, through streamlining and privatization. The Fiscal or which is a local government authority. Currently, Adjustment Plan aims to reduce transfers to SOEs, there are 49 category A and 22 category B public most of which rely wholly on government support enterprises. Only 10 of the 49 category A enterprises for their recurrent and capital budgets. The Fiscal undertake commercial activity (annex 1) and should Adjustment Plan aimed to reduce, cumulative to be deemed commercial SOEs. ¹⁹ This section draws heavily on the World Bank Group’s Country Private Sector Diagnostic for Eswatini (Stockman 2022). ²⁰ This saw the results indicator in the Eswatini Economic Recovery Development Policy Loan II or Budget support anticipating the transfers to SOEs to decline from 23 percent of total revenue in 2020 to 19 percent in 2023. 23 PART TWO: EFFICIENT STATE-OWNED ENTERPRISES CAN BOOST ECONOMIC GROWTH Given the definitional issues in Eswatini, this legal definition are referred to as “Eswatini public analysis uses the generally accepted definition of enterprises” (EPEs), which includes commercial SOEs, SOEs: entities owned or controlled by the state that parastatals, and regulatory agencies. This is to avoid provide goods or services on a commercial basis. An the significant confusion caused by broad definition, entity is considered an SOE if: (i) it is controlled by as it is not always evident which entities are being the state, whether legally, through the ownership of deemed to be “SOE”. shares, or other means; (ii) it is legally and financially autonomous from the state such that it has legal Eswatini's public enterprises are active in key personality, specific rules of operation defined under sectors, and their numbers have grown rapidly from a legal regime, and its own revenues and sources 35 in 2010 to the current 49 for Category A (Figure of funding; and (iii) it operates in a market for goods 2.2). Staff numbers nearly doubled, from fewer than or services that could, in theory, be provided by a 4,000 in 2017 to about 8,000 in 2022 (Figure 2.3). Public private company. This definition is adapted from enterprises operate in a range of sectors, including the Organisation for Economic Co-operation and agribusiness, information and communication, energy, Development’s (OECD) Guidelines on Corporate automotive and ground transportation, health, housing, Governance of State-Owned Enterprises and the travel and tourism, construction, education, business World Bank’s Integrated State-Owned Enterprises development, finance, environment, publishing, and Framework (iSOEF). the social sectors. The complexity and size of the public enterprise sector have grown over time, and The focus is on nonfinancial, commercial SOEs previous attempts to reform the sector have met with with full or majority ownership by the central limited success. government; in the rest of this section, the umbrella term SOE is used for such entities. Most EPEs rely on subsidies, with implications The analysis excludes entities that do not have a for competition and government finances commercial objective, such as those that implement (Figure 2.5). Poorly targeted subsidies may create public policies or carry out public sector activities; an uneven playing field if they reward inefficient these are broadly referred to as parastatals. State- SOEs at the expense of private companies. Four owned financial institutions are also excluded, of the top seven commercial SOE beneficiaries of as the legal and institutional framework for the government funding operate in sectors in which financial sector is regulated by a separate set of the private sector is also active, such as air travel, international principles, and the financial indicators health (two hospitals), and broadcasting. The Royal used to analyze the sector are distinct (including Eswatini National Airways Corporation received the capitalization, asset quality, and exposure) or second-largest transfer, after the Eswatini Revenue interpreted very differently from the real sector (such Authority. The Eswatini Television Authority was the as profitability and liquidity). Finally, because of data seventh-largest beneficiary.²¹ limitations, the study does not cover minority owned SOEs; the government neither collects information on nor monitors these. Going forward, this section differentiates between the internationally accepted definition and the Eswatini legal definition of SOEs. SOEs in the internationally defined sense are referred to as “commercial SOEs”. SOEs per the Eswatini ²¹ ESEPARC 2022. 24 KINGDOM OF ESWATINI ECONOMIC UPDATE Figure 2.2. The number of Category A public enterprises Figure 2.3. … along with employee numbers has increased 50 10,000 8,000 Number of employees 30 6,000 4,000 10 2,000 -10 0 2010 2015 2023 2017/18 2018/19 2019/20 2020/21 2021/22 Number of active SOEs Source: World Bank staff calculations. Source: World Bank staff calculations. Figure 2.4. Most “SOEs” are in fact noncommercial parastatals and part of the budgetary central government Health Parastatal Education Public agency Public Sector Regulator Government Financial institution SOE/SOFI SOE 0 2 4 6 8 10 12 14 16 Source: World Bank staff calculations. Figure 2.5. Transfers to EPEs have increased¹ Figure 2.6. … but arrears continue to rise² 3.5 2.5 3.0 2.0 2.5 1.5 % of GDP % of GDP 2.0 1.5 1.0 1.0 0.5 0.5 0.0 0.0 2017/18 2018/19 2019/20 2020/21 (2021/22) 2017/18 2018/19 2019/20 2020/21 (2021/22) Transfers (% of GDP) Arrears (% of GDP) Source: Public Enterprises Unit, Ministry of Finance. Notes: 1. These figures are based on Eswatini’s legal definition of SOEs, which includes entities generally considered a part of the budgetary central government. 2. These include value-added tax and pay-as-you-earn (PAYE) tax. 25 PART TWO: EFFICIENT STATE-OWNED ENTERPRISES CAN BOOST ECONOMIC GROWTH Other factors that can crowd out the private sector SOEs, which were selected in consultation with the include weak regulatory governance and low Ministry of Finance: the Eswatini Electricity Company, prices for services. In some cases, EPEs regulate the Eswatini Water Services Corporation, the Eswatini sectors in which private and state-owned companies Post and Telecommunications Corporation, Eswatini compete. Also, given their social and developmental Railways, the Royal Eswatini National Airways mandate, EPEs are sometimes required to set Corporation, the National Maize Corporation, and unsustainably low prices for their services, below Pigg’s Peak Hotel and Casino. Table 2.1 presents their cost recovery levels. Such low prices discourage aggregate financial data for these SOEs, and Figures the private sector from entering these sectors. While 2.7 to 2.10 show the performance of each SOE. monopoly positions in sectors such as energy, transport, and communications have been previously Most commercial SOEs are a net drain on the been justified by the small size of the economy, there budget, and chronic losses mean that few have is an urgent need for competition in markets such paid dividends. The seven commercial SOEs have as telecommunications. Finally, without an effective been marginally profitable over the past five years, competition framework, the presence of commercial with an average of US$30.2 million in net income per SOEs in sectors in which the private sector is active year. Given their weak financial results and limited (such as agribusiness) can be distortive. cash generation, most cannot pay dividends to the state, despite the existence of a dividend policy. Only 2.2.3 The financial performance of commercial the Eswatini Electricity Company has consistently SOEs is weak, and they are a net drain on paid dividends, although these have been limited, the budget averaging US$6.6 million per year over the past five years.²² But its declining profitability, following The seven largest commercial SOEs represent frozen electricity tariffs and higher costs after the 99.6 percent of total assets of commercial SOEs currency depreciation, could mean the company in Eswatini. This analysis focuses on these seven might eventually need government support.²³ Table 2.1. Aggregate financial data for the seven largest commercial SOEs, 2018–22 (US$ ‘000) Year Total assets Total Total Net income Net flows to Return on Return on Return on Debt/ liabilities equity (loss) state budget equity assets invested equity capital 2018 604,014 312,731 291,283 31,990 (6,776) 12% 6% 12% 10% 2019 664,886 332,626 332,260 52,817 (127) 15% 7% 11% 9% 2020 682,895 304,114 378,780 32,697 (41,402) 8% 4% 2% 6% 2021 730,524 334,451 396,073 16,088 (38,321) 4% 2% 2% 11% 2022 743,892 346,326 397,566 17,544 (23,718) 4% 2% -1% 12% Sources: SOE audited financial statements. ²² Net contributions comprise dividend payments and income tax payments, minus grants from the state. ²³ In 2022 the Eswatini Electricity Company’s net contribution to the national budget was only US$300,000, as against over US$5 million in 2018. Most electricity is imported, mainly from South Africa’s Eskom, Mozambique’s EDM, and the Southern African Power Pool. 26 KINGDOM OF ESWATINI ECONOMIC UPDATE Figure 2.7. Total assets of commercial SOEs increased Figure 2.8. Net income decreased in 2022 slightly increased, dominated by the EEC 1,000,000 60,000 40,000 500,000 20,000 0 0 (20,000) 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 EEC EWSC EPTC ESR RENAC NMC PPHC EEC EWSC EPTC ESR RENAC NMC PPHC Figure 2.9. Net flow to the national budget was negative, Figure 2.10. Total debt increased, dominated by the EEC with RENAC registering the highest losses 20,000 60,000 0 40,000 (20,000) 20,000 (40,000) (60,000) 0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 EEC EWSC EPTC ESR RENAC NMC PPHC EEC EWSC EPTC ESR RENAC NMC PPHC Sources: SOE audited financial statements. Note: EEC: Eswatini Electricity Company; EWSC: Eswatini Water Services Corporation; EPTC: Eswatini Post and Telecommunications Corporation; ESR: Eswatini Railways; RENAC: Royal Eswatini National Airways Corporation; NMC: National Maize Corporation; PPHC: Pigg’s Peak Hotel and Casino. The seven commercial SOEs received about significant, reaching US$42 million for the seven US$31.5 million per year in budget transfers SOEs in the last five years. In 2020 the Royal Eswatini over the past five years, mainly through grants National Airways Corporation alone needed an and equity injections. The commercial SOE sector equity increase of about US$22 million. remains a net drain on the national budget: the cumulative outflow to SOEs from the budget (grants/ Total commercial SOE debt has been rising, with direct subsidies and equity) over the past five years the debt-to-equity ratio almost doubling between was US$158 million, whereas the inflow (dividends 2020 and 2022. Nevertheless, leverage is low relative and income taxes) was only US$47 million. Both to other Sub-Saharan countries; as such, Eswatini’s grants, a form of direct financial assistance, and commercial SOEs do not seem to present a fiscal equity injections drain budgetary resources and risk. The total debt of the commercial SOE sector is contribute to fiscal instability. The main recipients just above 1 percent of GDP, significantly lower than of direct subsidies over the past five years have in Tanzania (3%), South Africa (12%), and Mozambique been the Eswatini Water Services Corporation (27%). The aggregated debt-to-equity ratio for the (US$59 million), the Royal Eswatini National Airways sector has remained below 12 percent over the past Corporation (US$48 million), and the Eswatini few years, as the funding model relies heavily on Electricity Company (US$9 million). Although equity equity and grants. This limits the debt service of injections are less frequent than grants, they can be commercial SOEs and avoids the rising debt trajectory 27 PART TWO: EFFICIENT STATE-OWNED ENTERPRISES CAN BOOST ECONOMIC GROWTH commonly seen in other countries. In addition, most Figure 2.11. Pillars for efficient SOEs in Eswatini debt is long term and does not create an immediate cash flow concern for the government. Lastly, the growth of commercial SOE debt also appears to be Robust legal framework under control. The commercial SOE sector’s liabilities are relatively small at nearly 8 percent of GDP; in Stronger Pillars for Transparency in performance efficient public services emerging markets, SOE liabilities represent around SOEs in monitoring Eswatini obligations 24 percent of GDP, according to the IMF.²⁴ Countries like Mozambique, South Africa, and Tanzania all have a much larger SOE sector, with liabilities ranging from 20 to 35 percent of GDP. Eswatini’s commercial SOE Strengthen sector is also relatively small in terms of revenue. governance and accountability Forthcoming World Bank research suggests revenues averaged about 20 percent of GDP across 90 developing countries, but in Eswatini revenues Source: World Bank staff. averaged only 5.5 percent of GDP in the last five years.²⁵ beneficial. The Public Enterprises (Control and Commercial SOEs and EPEs are not allowed to Monitoring) Act²⁶ is the only legal instrument contract debt without government approval in governing SOEs. In addition to setting the governance terms of the Public Financial Management Act. arrangements for the SOE sector, it establishes the State-owned financial institutions also do not appear Public Enterprises Unit in the Ministry of Finance to to provide significant lending to commercial SOEs; monitor these enterprises. most financial institutions would require sovereign guarantees to lend to these institutions. Differentiating the various roles that the state plays in the economy can improve governance 2.3 An efficient commercial SOE and reduce conflicts of interest, thus promoting sector can bring economic confidence in the corporate sector. The legal and social benefits framework does not clearly separate the state’s role as shareholder from its policymaking, regulatory, The efficiency of SOEs needs to be improved to and commercial functions. Separating these roles help harness their potential economic and social would help avoid functional overlaps and minimize benefits. This report suggests four pillars that can any conflicts of interest that may arise when the roles create opportunities for efficient SOEs, as illustrated are combined, especially in sectors where the private in Figure 2.11. sector also operates. The water and sanitation sector illustrates the governance challenges stemming 1. A more robust legal framework could from unclear mandates of different stakeholders. promote investment and greater private sector From an institutional organizational perspective, the development. Eswatini Water Services Corporation has the mandate to provide water and sanitation services to urban Modernizing the legal framework for SOEs in customers. It also provides water services to some Eswatini, which dates from 1989, would be peri-urban household and reports to the Ministry of ²⁴ Harris and others 2020. ²⁵ World Bank Forthcoming. ²⁶ Public Enterprises (Control and Monitoring) Act, enacted on August 3, 1989. 28 KINGDOM OF ESWATINI ECONOMIC UPDATE Energy and Natural Resources, which is responsible independence, and transparency. SOEs are also for service provision. However, sanitation services under the purview of the Public Enterprise Unit; for peri-urban and rural areas are the responsibility this arrangement would not afford regulators the of the Ministry of Health, which historically has had necessary independence to function effectively. In no linkages with the water corporation. addition, the Public Enterprise Unit is unlikely to have the requisite capacity or resources to effectively Reducing overlaps between the government’s oversee independent regulators. ownership, regulation, and management functions can also improve competitive neutrality and There are no restrictions on creating new SOEs, support private sector development.²⁷ Some SOEs on establishing subsidiaries, or on SOEs acquiring carry out regulatory functions in the sector in which equity holdings in other companies. Without proper they operate, which can create conflicts of interest oversight, this could result in an expansion of the SOE and increase barriers to entry for other firms. For sector and undermine the current reform initiatives example, the Marketing Board combines regulatory that aim to reduce the size of the sector. and commercial functions in both the input and output markets. Likewise in the construction sector, 2. Fiscal gains could be possible if the financial the governance body of the regulatory council repercussions of public service obligations were comprises directors of construction firms; this creates considered more carefully. opportunities for collusion and regulatory capture. Such overlaps create incentives for decisions that SOEs must often undertake activities based on can harm both consumers and competition. Another political demands, without due consideration of concern is vertically integrated SOEs that provide their financial impact. Such activities include the essential services upstream and compete with their provision of goods and services at below-market customers for market share in the downstream prices, either nationally or to specific sectors or markets can distort competition. The Eswatini Post regions. Governments may also use SOEs to pursue and Telecommunications Corporation and the public policies, which may involve quasi-fiscal Eswatini Electricity Company are typical examples activities or public service obligations (Box 2.1). of SOEs in that position. The electricity company However, public service obligations may well not provides transmission to all electricity generators be in the best interests of an SOE. They are often but also competes for the renewable energy market unfunded and can impose considerable costs on with independent power producers. the SOE, undermining its long-term strategy. SOEs with onerous public service obligations can often not It is generally not advisable to have regulatory afford to conduct sufficient maintenance and make agencies set up as SOEs. The functions of other needed investments, which undermines their such agencies differ substantially from those ability to deliver quality services. For instance, the of enterprises, and the legal and institutional Eswatini Water Services Corporation was required to structure of SOEs does not provide the powers expand water supply and sanitation services to peri- and independence needed to carry out such urban areas. Although the policy of universal services functions. For example, regulators should have the may be laudable, the high costs of extending services capacity to issue regulations, investigate cases of to sparsely populated areas could have a significant noncompliance, and apply sanctions. No enterprise, financial impact on the water corporation and may regardless of its ownership, would be well suited for even require subsidies from the state budget. Any a mandate requiring such levels of accountability, extension of public service obligations should ²⁷ Stockman 2022. 29 PART TWO: EFFICIENT STATE-OWNED ENTERPRISES CAN BOOST ECONOMIC GROWTH therefore be carefully weighed. Ideally, the financial respective sectors. Cabinet (mainly through the reports of SOEs should show their performance Standing Cabinet Committee on Public Enterprises)²⁸ against social objectives separately from their is the ultimate decision-making body for SOEs. financial performance. The line minister, in consultation with the Standing Committee, must approve the following for category The Eswatini Electricity Company performs A public enterprises: (i) major adjustments to the relatively well, even better than some regional level or structure of tariff prices, rates, or other fees peers. Its aggregate technical and commercial or charges; (ii) any major investment; (iii) any major losses are estimated at 12.7 percent, and tariff expansion of its operations; (iv) the closure, sale, increases granted by the regulator, the Eswatini liquidation, or divestment of any major part of the Energy Regulatory Authority, have helped strengthen business; and (v) major adjustments to staff salaries. its financial health. Tariffs are determined under a multiyear price determination formula, which depends on the cost of power imports from South Africa. The average tariff is approximately US$0.14/ kilowatt-hour. 3. Exercising an effective ownership function could help improve SOE performance. The state’s ownership function of SOEs is exercised through various ministries and a standing cabinet committee (Figure 2.12). The Ministry of Finance oversees the management and performance of SOEs. Other ministries, such as Commerce, Industry and Trade; Agriculture; and Natural Resources and Energy, exercise ownership over the SOEs in their Box 2.1. Public service obligations Governments often use public service obligations, called quasi- requires public service obligations to be defined and costed, and fiscal activities, community service obligations, or public service the SOE to be compensated for these obligations through clear agreements, to pursue public policy through SOEs rather than and transparent budget transfers (which means they should be through regular budget channels. Common examples include reflected in both the national budget and the financial statements requiring SOEs to provide services to underserved communities, of the SOE). Uncompensated public service obligations are a key offer services at below-market prices, or carry out investments driver of SOE losses, indebtedness, and arrears, and thus a source that are not commercially desirable. Good international practice of significant explicit and implicit contingent liabilities for the state. Source: World Bank 2014. ²⁸ Art. 10 of the Public Enterprises Control and Monitoring Act. The Committee comprises 10 ministers and is chaired by the Minister of Finance. 30 KINGDOM OF ESWATINI ECONOMIC UPDATE Figure 2.12. SOEs are housed in various ministries Figure 2.13. But only 10 meet the international definition of SOEs 6 16 15 5 14 4 12 10 Number 3 10 9 2 8 6 1 6 4 4 0 4 Housing and Urban Development Deputy Prime Minister's Office Health Labour and Social Security ICT Tourism and Environment Affairs Education Public Works and Transport Natural Resource and Energy Sports, Culture and Youth Affairs Commerce, Industry and Trade Agriculture Finance 2 1 0 Government Education Health Financial institution Regulator SOE Agency Number of public enterprises Source: Public Enterprises Unit, Ministry of Finance. Source: Public Enterprises Unit, Ministry of Finance. There is no ownership policy or other document that evaluating and disclosing the objectives that justify provides a clear rationale for the state ownership its ownership of SOEs and subjecting these to regular of enterprises. Such a document would provide a review. It further recommends the development of framework for assessing whether an SOE is necessary an ownership policy, which sets out the rationale for or whether its activities could be better performed state ownership of SOEs and clearly defines public by the private sector. It would also consider any policy objectives that individual public corporations or potential or actual adverse effects of SOEs on the groups of such corporations must achieve. Assessing market. Good international practice, as reflected in whether SOEs respond to market failures, or whether the World Bank’s iSOEF and the OECD Guidelines goods and services could be adequately provided by on the Corporate Governance of State Enterprises the private sector, would be important considerations (Box 2.2), stresses the importance of the state carefully for any investment strategy for the SOE sector. Box 2.2. OECD Guidelines on the rationale for state ownership 1. The state exercises the ownership of SOEs in the interest respective roles and responsibilities of those government of the general public. It should carefully evaluate and disclose offices involved in its implementation. the objectives that justify state ownership and subject these to a C. The ownership policy should be subject to appropriate recurrent review. procedures of political accountability and disclosed to the A. The ultimate purpose of state ownership of enterprises general public. The government should review at regular should be to maximize value for society, through an efficient intervals its ownership policy. allocation of resources. D. The state should define the rationales for owning individual B. The government should develop an ownership policy. The SOEs and subject these to recurrent review. Any public policy should inter alia define the overall rationales for policy objectives that individual SOEs, or groups of SOEs, state ownership, the state’s role in the governance of SOEs, are required to achieve should be clearly mandated by the how the state will implement its ownership policy, and the relevant authorities and disclosed. Source: OECD 2015. 31 PART TWO: EFFICIENT STATE-OWNED ENTERPRISES CAN BOOST ECONOMIC GROWTH The Public Enterprises Act established the Public appointing and dismissing external auditors should Enterprises Unit in the Ministry of Finance to monitor be strengthened. The board nominates the external these enterprises. Its responsibilities include: (i) auditor of the public enterprise, who is then appointed monitor and review their financial affairs and budgets; or dismissed by the line minister, in consultation (ii) set performance targets, including statements of with the Standing Committee. This mechanism may objectives, operations (especially noncommercial need to be strengthened to ensure that auditors are services), financial assistance from government, tax independent, and audit quality is not compromised. and dividend payments, management procedures Auditor independence is crucial for the integrity of the and incentives, as well as a detailed medium-term audit process. If auditors fear dismissal for reporting corporate plan; (iii) provide or arrange for technical unfavorable information, they may be tempted to assistance to improve the financial management overlook or downplay issues; this undermines the capacity of SOEs; and (iv) prepare a consolidated quality of their audits. Proper safeguards around report on the SOE sector. The Minister of Finance auditor appointment and dismissal can help ensure is then responsible for submitting this consolidated that auditors remain independent and unbiased in report to Parliament. The Unit currently lacks their work. In addition to such audits, the relevant sufficient resources and staff to effectively monitor line minister may, in consultation with the Standing the full portfolio of SOEs and parastatals. Committee, direct the Auditor-General to examine the accounts of public companies. 4. There is a need for robust governance and accountability practices to achieve more The legal framework does not sufficiently recognize efficient SOE operations the importance of managerial autonomy (or nonpoliticization) of SOEs. Much decision-making SOE boards should help oversee the financial power seems to be concentrated in the government. operations of their enterprises; however, they Effective SOE governance requires the proper do not always exercise this function effectively. allocation of power and responsibilities among The board of directors of an SOE comprises five to stakeholders, including different parts of government, nine members, including the chief executive officer. the board of directors, and management. The Principal Secretary in the Ministry of Finance (or their representative) must be a full member of the The law does not set specific transparency governing body of category A public enterprises. requirements for SOEs, although in practice some Apart from the chief executive officer, members of information is made public. Annual and quarterly the governing body are appointed by the relevant financial statements, along with annual reports, line minister, in consultation with the Standing are made public, since these are approved by Committee. The chief executive officer is nominated Cabinet and presented to Parliament. A report that by the board and appointed by the line minister, also aggregates the financial information of the portfolio in consultation with Standing Committee. Boards are of commercial SOEs, however, is not prepared; most effective when they have adequate decision- this would be a useful tool for monitoring SOE making powers and can make decisions in the best performance. The names of board members and interest of the company and shareholders. In the senior management are disclosed in annual reports case of SOEs, the ultimate shareholders are the on a voluntary basis; some SOEs choose to publish citizens of Eswatini, rather than the government, this information online. The appointment of board which is an “agent” that ought to represent the members is published in the Official Gazette. Finally, interests of the citizens. while some performance data is readily available on SOE websites, the Public Enterprises Unit also Public enterprises must undergo an external provides such information upon request once it has financial audit every year. However, the process of been approved by Cabinet. 32 KINGDOM OF ESWATINI ECONOMIC UPDATE 2.4 Policy options: Looking forward The reform of SOE governance requires careful consideration of political economy factors, as Rethink the state’s role in the economy. reforms can stall without the buy-in of actors with the authority and political will to drive them.²⁹ 1. Enact an SOE ownership policy that explicitly SOEs often manage significant revenue streams includes a clear rationale for maintaining state and are sometimes used by the state or political shareholding in SOEs. Evaluate the rationale for state groups to exert political influence over economic ownership and consider the costs and benefits of outcomes and resource allocation. Successful such ownership given resource constraints and any reform requires strong leadership and capacity adverse market effects of SOE participation. In view to withstand resistance from vested interests.³⁰ A of the demands on limited public resources, analyze case in point is the Eswatini Electricity Company, the costs and benefits of maintaining equity stakes in whose profits have been rising on average. In 2020, companies, particularly in SOEs that do not deliver a however, the government restricted tariff increases, public service mandate or meet a strategic objective. and the company’s profits declined sharply. SOEs Consider whether SOEs respond to a market failure or may also encounter political interference in their whether the private sector could adequately provide operations to benefit vested interests who may such goods and services. SOEs that fail to meet the seek to misappropriate funds. Successful reform criteria for continued state ownership could be requires strong leadership and capacity to withstand privatized, restructured, or wound down over time, resistance from vested interests. as appropriate. SOEs’ unique mix of commercial and political 2. Carefully consider the trade-offs between mandates also poses significant challenges to funding the SOE sector and investing in, say, governance reforms. Public service obligations infrastructure or the social sectors. Eswatini’s SOE can exacerbate tensions between the commercial funding model relies heavily on equity, rather than and noncommercial mandates of SOEs, particularly debt; thus, the fiscal risks commonly observed in if these are imposed without adequate funding. For other countries are not present here. However, the example, an otherwise well-governed SOE may still large amounts of equity involved, coupled with the incur losses or fail to deliver adequate services if the poor profitability of the sector, suggest that the state requires it to operate commercially unviable allocation of public funds is suboptimal. Without projects or to provide services at below market rates relevant reforms, new investments into these SOEs without sufficient compensation. Conversely, where would not necessarily generate the desired return, SOEs provide public services essential to achieving while also diverting resources away from other development outcomes, governance reforms should important sectors. also consider their wider societal impact (for example, the impact on the public of higher electricity, water, 3. Ensure that all SOE decision-making with or transport costs). (potentially) significant fiscal impacts follow a transparent due process and involve all This study proposes three directions that can help interested parties. For example, due process improve the efficiency of SOEs and accelerate the should be established to define the public service pace of reforms, as follows: obligations of SOEs, with appropriate approvals, ²⁹ World Bank 2020. ³⁰ The iSOEF provides guidance on mitigating political economy factors in Thematic Guidance Note 2: Political Economy Analysis of SOE Reform. 33 PART TWO: EFFICIENT STATE-OWNED ENTERPRISES CAN BOOST ECONOMIC GROWTH oversight, and transparency. The impact and longer- be taken of the state’s minority shareholdings and of term sustainability of public sector obligations or the equity stakes that SOEs hold in other companies. investment projects ought to be considered more Currently, the government only monitors category A systematically, as they may create future fiscal risks. public enterprises. 8. Establish clear and merit-based guidelines for the appointment of board members. In view of their critical role in the governance of SOEs, the board of directors Strengthen the legal framework to include should be professional and independent and possess a clearer definition of SOEs, separate from sufficient expertise to govern the SOE effectively. regulatory agencies. Transparent guidelines for their appointment, including requirements for their qualifications and experience, 4. Clarify the definition of SOEs and reclassify can help to ensure that only competent and qualified public enterprises. The current definition of public individuals are appointed. enterprises in Eswatini is broad and includes entities that are not enterprises. SOEs could be limited to 9. Enhance the transparency of SOE information. enterprises that meet the OECD definition of carrying Transparent reporting increases accountability and out commercial activity that could be performed by allows stakeholders to assess the performance of a profit-seeking company. SOEs. SOEs should be required to disclose relevant information to the board and the public, including 5. Enact a separate law governing independent board decisions, financial reports, operational regulatory agencies. Independent regulatory performance, executive compensation, and agencies have different requirements because their potential conflicts of interest. A report aggregating functions differ substantially from those of enterprises. the financial information of the SOE portfolio should The legal and institutional structure of SOEs does not also be prepared on an annual basis and made provide the powers and independence needed to available publicly. Moreover, SOE management and carry out these functions. employees’ compensation and bonuses should be linked to key performance indicators. This would 6. Separate the commercial and regulatory encourage a results-driven culture and align the functions of SOEs into different entities. The Country interests of management with the objectives of Private Sector Diagnostic cited as among the most the SOEs. critical of SOE reforms the unbundling of the Eswatini Post and Telecommunications Corporation. This is an important step that would enhance competition and private investment in the digital sector and contribute to lower prices and better access. Strengthen SOE governance and oversight. 7. Improve monitoring of SOEs, including of equity stakes held by the state. SOE performance monitoring should be strengthened, including through capacity development of SOE oversight agencies and boards. Further, an inventory should 34 KINGDOM OF ESWATINI ECONOMIC UPDATE REFERENCES Central Bank of Eswatini. 2022a. Eswatini Financial Stability Report. Issue 6: June 2022. Mbabane: Central Bank of Eswatini. https://www.centralbank.org.sz/financial-stability-report/. Central Bank of Eswatini. 2022b. Governor’s Monetary Policy Statement. June 2022. Central Bank of Eswatini. 2023a. 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Washington, DC: World Bank. https://www.ifc.org/wps/wcm/connect/ publications_ext_content/ifc_external_publication_site/publications_listing_page/cpsd-eswatini. World Bank. 2022. International Debt Statistics. https://datatopics.worldbank.org/debt/ids/region/SSA World Bank. 2023. Global Economic Prospects, June 2023. Washington, DC: World Bank. doi:10.1596/978-1-4648- 1951-3. World Bank. Forthcoming. Business of the State: Why Looking Beyond State-Owned Enterprises Matters for Private Sector Development. Washington, DC: World Bank. 36 KINGDOM OF ESWATINI ECONOMIC UPDATE ANNEX 1 CATEGORY A PUBLIC ENTERPRISES, BY TYPE No. Name of entity Type Description and role 1. Eswatini Electricity Company (EEC) SOE Procures, generates, transmits, and distributes electricity 2. Eswatini Post and Telecommunications SOE Provides postal and telecommunication services in Eswatini Corporation (EPTC) 3. Eswatini Railways (ESR) SOE Provides transport services for import and export commodities; also serves as a bridge railway for transit cargo, linking Eswatini’s main industrial centers with the railway systems of South Africa, Mozambique, and other Southern African Development Community (SADC) countries 4. Eswatini Water Services Corporation SOE Abstracts, purifies, stores, transports, and supplies water and collects, (EWSC) conveys, treats, and disposes sewage in the areas specified in the schedule of the Water Services Act: Croydon, Hlatikulu, Hluti, Kubuta, Kwaluseni, Lavumisa, Lobamba, Lomahasha, Lubuli, Malkerns, Mananga, Mankayane, Manzini, Matsapha, Mbabane, Ngwenya, Nhlangano, Nkoyoyo, Piggs Peak, Siphofaneni, Siteki, and Vuvulane 5. National Maize Corporation (NMC) SOE Guarantees market to local maize producers at competitive prices; also provides good quality maize to consumers at affordable prices 6. Piggs Peak Hotel and Casino (PPHC) SOE Operates in the hospitality industry under the Ministry of Tourism and Environmental Affairs 7. Royal Eswatini National Airways SOE National airline, offering charter brokerage and ground-handling services, Corporation (RENAC) and operating a subsidiary travel agency (Royal Eswatini Travel Agency); also mandated to manage two state aircrafts and the VVIP terminal at the KM 111 International airport 8. Royal Science and Technology Park (RSTP) SOE Sets the foundation for the growth of a knowledge economy in Eswatini; seeks to create infrastructure to enable the development of science, technology and innovation through research and development in the economy 9. Eswatini National Petroleum Company SOE Secures, markets, and trades in crude oil and petroleum products (ENPC) 10. Eswatini Television Authority (ETVA) SOE National television broadcasting company 11. Central Transport Authority/Organization Agency Purchases, maintains, and disposes of government vehicles and related (CTA/CTO) equipment, and provides fuel for government vehicles 12. Conciliation Mediation and Arbitration Agency Alternative dispute resolution and social justice agency Commission (CMAC) 13. Eswatini Cotton Board (ECB) Agency Promotes, regulates, and grows the cotton industry and markets cotton products 14. Eswatini Dairy Board (EDB) Agency Develops and regulates the dairy industry 37 ANNEX 1: CATEGORY A PUBLIC ENTERPRISES, BY TYPE No. Name of entity Type Description and role 15. Eswatini Environment Authority (EEA) Agency Ensures that the environment of Eswatini is treated in a proper way now and in future 16. Eswatini Housing Board (EHB) Agency Promotes home ownership and housing in Eswatini 17. Eswatini Investment Promotion Agency Agency Attracts, promotes, and facilitates foreign and local investment and trade (EIPA) in the country 18. Eswatini National Council of Arts and Agency Develops and promotes the preservation of arts and culture Culture (SNCAC) 19. Eswatini National Housing Board (ENHB) Agency Provides affordable housing to middle- to low-income earners 20. Eswatini National Trust Commission (ENTC) Agency Conserves the country’s cultural and natural heritage 21. Eswatini National Youth Council (ENYC) Agency Coordinating body for all youth programs mandated by the government 22. Eswatini Tourism Authority (ETA) Agency Implements the National Tourism Policy and develops the tourism sector 23. Eswatini Water and Agricultural Agency Facilitates the planning and implementation of the Komati Downstream Development Enterprise (ESWADE) Development Project (KDDP), the Lower Usuthu Smallholder Irrigation Project (LUSIP), and other large water and agricultural development projects 24. Eswatini Youth Enterprise Revolving Fund Agency Promotes youth employment and alleviates poverty among young people (YERF) between the ages of 18 and 35 years 25. National Disaster Management Agency Agency Delivers strategic and technical leadership and direction on a well- (NDMA) coordinated framework for the growth and enactment of practical disaster risk reduction or management programs and activities and aligns them with national and regional development plans 26. Eswatini Medical Christian University Education University (EMCU) 27. Sebenta National Institute (SNI) Education Provides basic and functional education and training to all communities through basic and functional literacy programs, life skills for out-of- school and other disadvantaged people, and effective partnerships 28. Southern Africa Nazarene University Education University (SANU) 29. University of Eswatini (UNESWA) Education University 30. Eswatini Bank Financial Retail and corporate bank institution 31. Eswatini Development Finance Corporation Financial Economically develops Eswatini through the provision of accessible (FINCORP) institution financial services 32. Eswatini National Industrial Development Financial Sovereign wealth fund, serving as a special purpose vehicle (SPV) for Corporation (ENIDC) institution investing on behalf of government to maximize investment returns in the various investing avenues 33. Public Services Pension Fund (PSPF) Financial Manages and administers pensions for public servants institution 38 KINGDOM OF ESWATINI ECONOMIC UPDATE No. Name of entity Type Description and role 34. Sincephetelo Motor Vehicle Accident Fund Financial Provides compensation for certain losses or damages caused unlawfully (SMVA) institution by means of motor vehicles and for matters incidental thereto 35. Small Enterprises Development Company Financial Provides technical and financial assistance and infrastructure at (SEDCO) institution subsidized rates to SMEs; facilitates their purchase of equipment and other inputs and the sale of outputs 36. Eswatini Revenue Authority (SRA) Government Tax administration 37. Baphalali Eswatini Red Cross Society Health “Partner of choice in alleviating human suffering” in Eswatini (BERCS) 38. Eswatini Nazarene Health Institutions Health Hospital (ENHI) 39. National Emergency Response Council on Health Oversees, coordinates, and facilitates the national multisectoral HIV/AIDS (NERCHA) response to HIV/AIDS, under the Prime Minister’s Office 40. Siteki Good Shepherd Hospital Health Hospital 41. Construction Industry Council (CIC) Regulator Regulates, develops, and promotes the construction industry 42. Eswatini Civil Aviation Authority Regulator Manages airports and regulates air transport services and civil (ESWACAA) aviation activities 43. Eswatini Communications Commission Regulator Regulatory authority for the information and communication (ESCCOM) technology sector 44. Eswatini Competition Commission (ECC) Regulator Independent statutory body under section 6 of the Swaziland Competition Act (No. 8 of 2007): encourages competition by controlling anticompetitive trade practices, mergers, and acquisitions; protects consumer welfare; and provides an institutional mechanism for implementing the Act. Also administers the Fair-Trading Act of 2001, a consumer protection statute. Monitors, regulates, controls, and prevents acts likely to adversely affect competition among businesses 45. Eswatini Energy Regulatory Authority Regulator Core responsibility to exercise control over the electricity supply industry (ESERA) 46. Eswatini Standards Authority (ESWASA) Regulator Promotes standards and quality in local industry, commerce, and the public sector; also responsible for eliminating tariff and nontariff barriers to trade 47. Financial Service Regulatory Authority Regulator Regulatory and supervisory authority for all nonbank financial (FSRA) institutions 48. National Agricultural Marketing Board Regulator Regulates the importation of “scheduled agricultural products”, such (NAMboard) as maize and maize products, rice, fresh vegetables and fruits, wheat and wheat products, and poultry and poultry products 49.z Eswatini Public Procurement Regulatory Regulator Independent regulatory body under the Procurement Act (No. 7 of Agency (ESPPRA) 2011) with responsibility for policy formulation, regulation, oversight, capacity building and professional development, and information management and dissemination in public procurement 39