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Rights and Permissions Attribution—Please cite the work as follows: World Bank. 2025. Eswatini Public Finance Review. Leveraging Fiscal Adjustment for Better Development Outcomes. Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The World Bank, therefore, does not warrant that the use of any third-party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permission is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Editor: Name Cover & report design: Cybil Nyaradzo Maradza ii CONTENTS Chapter 1. Macro-Fiscal Context: Making fiscal policy an instrument for macroeconomic stability and external competitiveness ....... 1 Introduction ....... 1 Fiscal policy and economic growth ....... 1 Health: Fiscal policies to build human Strengthening public financial management could capital with a focus on health increase resilience to shocks ....... 4 pgxiv Chapter 2. Revenue Mobilization: Increasing Abbreviations and Acronyms ....... vii domestic revenue while enhancing competition Acknowledgements ....... viii and market contestability ....... 10 Executive Summary ....... ix Key takeaways ....... 10 Macro-Fiscal Context: Making fiscal policy an instrument for macroeconomic stability and external Increasing domestic revenue ....... 11 competitiveness ....... xi Enhancing the mobilization of domestic revenue ....... 13 Revenue Mobilization: Increasing domestic revenue while enhancing competition and market Reforming the tax system to increase market contestability ....... xii contestability ....... 18 Public Spending: Strengthening public financial Strengthening tax administration to increase management to support fiscal consolidation and domestic revenue ....... 18 promote expenditure efficiency ....... xiii Maximizing the revenue impact of the Fiscal Public Investment Management: Building productive Adjustment Plan ....... 21 physical capital while mainstreaming climate considerations ....... xiv Policy options ....... 21 Health: Fiscal policies to build human capital with a Chapter 3. Expenditure Management: focus on health ....... xiv Strengthening public financial management to support fiscal consolidation and promote Conclusion and Policy Options ....... xv expenditure efficiency ....... 23 Policy Options ....... xv Key takeaways ....... 23 iii ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Eswatini’s public sector is large relative to the size of Integrating climate change into project its economy ....... 24 implementation ....... 40 Recurrent spending dominates the budget ....... 24 Institutional arrangements are critical for mainstreaming climate considerations into public Public employment costs take up a considerable investment management ....... 41 share of the budget ....... 25 Policy options ....... 43 Improving expenditure efficiency could facilitate progress on human development indicators ....... 26 Chapter 5. Reforming expenditure management to improve the performance Stabilizing public investment to facilitate high of the health system ....... 45 growth ....... 27 Key takeaways ....... 45 Reforming state-owned enterprises could bring significant fiscal savings ....... 28 Accelerating gains in public health indicators ....... 45 Strengthening public financial management is vital to The public sector’s unique role in the provision of improve the effectiveness of fiscal policy ....... 30 health services ....... 47 Enhancing public procurement systems would improve Stabilizing health spending and setting appropriate public spending efficiency and value for money ....... 31 expenditure priorities ....... 48 Proposed reforms by the FAP have so far proven Increasing the efficiency of public health spending ....... 52 difficult to fully implement ....... 32 Addressing the causes of inefficiency ....... 55 Policy options ....... 33 Policy options ....... 62 Chapter 4. Public Investment Management: Building productive physical capital while Appendix A. Statistical tables ....... 66 mainstreaming climate considerations ....... 35 Annex B. Health chapter methods and limitations ....... 70 Key takeaways ....... 35 References ....... 71 Enhancing the impact of public investment on gross capital formation ....... 35 Strengthening the public investment management system ....... 37 Improving project preparation and implementation procedures ....... 38 Enhancing the impact of public Mainstreaming climate considerations into public investment on gross capital formation investment management is critical to build resilience pg35 of the economy ....... 40 iv CONTENTS List of boxes 2018–21 .......................................................... 56 Table 5.9. Regional density of health facilities Box 1.1. The public sector wage premium is (2017) and health care workers high in Eswatini ................................................ 3 (2022) ............................................................... 56 Box 1.2. The Fiscal Adjustment Plan ....................... 8 Table 5.10. Budget requests and approved Box 2.1. The budgetary role of SACU transfers .. 12 budgets, FY2018–22 ................................ 60 Box 2.2. Taxing High-Net-Worth Individuals Table 5.11. Medicine budget requests and in Uganda ............................................................ 18 approved budgets, FY2018–22 ........... 60 Box 4.1. PIMA recommendations .............................. 38 Table 5.12. Ministry of Health budget structure, Box 4.2. Climate-smart public investment with selected activities and management frameworks in responsibility centers ............................... 61 East Africa ........................................................... 42 Table 5.13. Medicine expenditure allocation by Box 5.1. The Phalala Fund ............................................. 56 activity (program) description, FY2018–22 .................................................... 62 List of tables Table 5.14 Short- and medium-term health expenditure policy options ..................... 64 Table 2.1. Expected additional revenue Table A.0.1. Key economic indicators, 2013–25 .... 66 compared to outturn due to FAP, Table A.0.2. Tax revenues, 2011–20 ........................... 68 FY2022–24 ...................................................... 21 Public Expenditure (Percent of GDP), Table A.0.3. Table 2.2 Short- and medium-term policy 2016–21 ............................................................ 69 options for increasing revenue .............. 22 Table 3.1. Execution rates for capital spending, List of figures 2018–22 average ......................................... 28 Table 3.2. Challenges in public financial Figure 1.1. Real GDP growth, FDI and management .................................................. 30 fiscal balance ............................................ 2 Table 3.3 Short- and medium-term expenditure Figure 1.2. Contribution to economic growth .. 2 policy options ................................................. 34 Figure 1.3. Reak GDP growth, 2000–22 ............. 5 Table 4.1. Real GDP and investment ........................ 36 Figure 1.4. Public and private investment, Table 4.2 Short- and medium-term policy 2000–22 ...................................................... 5 options for public investment Figure 1.5. Education and health spending management .................................................. 44 and the Human Capital Index .......... 5 Table 5.1. Key health outcomes, 2017–21 ............ 46 Figure 1.6. Total spending and SACU receipts, Table 5.2. Key health indicators, MICS, 2010, 2000–22 ...................................................... 5 2014, and FY2022 ........................................ 46 Figure 1.7. SACU revenues and the deficit, Table 5.3. Prevalence and incidence of HIV, by 2000–22 ...................................................... 6 gender, 2017–21 .......................................... 47 Figure 1.8. Public debt, 2005–22 ........................... 6 Table 5.4. Health financing indicators, 2017–21 ... 49 Figure 1.9. SACU revenues and the deficit, Table 5.5. Sources of total current health 2000–22 ...................................................... 6 expenditure, 2017–19 average .............. 49 Figure 1.10. Public debt, 2005–22 ........................... 6 Table 5.6. Regional per capita spending for Figure 1.11. Poverty rates, 2000, 2009, 2016 ..... 7 each percentage point of Figure 1.12. Gini coefficient, 2016 ............................ 7 coverage, 2022 .............................................. 53 Figure 2.1. Tax revenue performance, 2022 .... 11 Table 5.7. Average public health spending by Figure 2.2. Non-SACU revenues, 2010–23 ........ 11 level of care, FY2018–22 .......................... 55 Figure 2.3. Revenue and growth patterns, Table 5.8. Patients referred for selected health FY2015–22 ................................................ 12 services under the Phalala Fund, Figure 2.4. Revenue composition, FY2015–22 .. 12 v ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Figure 2.5. Tax gaps, 2000–22 ................................ 14 Figure 3.12. Capital spending by sector, Figure 2.6. VAT rates in Africa, 2023 ..................... 15 2018–22 (% of GDP) ............................. 27 Figure 2.7. VAT revenue performance, 2021 .... 15 Figure 3.13. Transfers to SOEs, FY2018–22 ....... 29 Figure 2.8. Tax expenditures, FY2018–22 ......... 15 Figure 3.14. SOE arrears, FY2018–22 .................... 29 Figure 2.9. Composition of tax expenditures, Figure 3.15. Fiscal savings through e-government FY2018–22 ................................................ 15 procurement (% of GDP) ..................... 31 Figure 2.10. Income tax revenues, FY2015–22 ... 16 Figure 5.1. Human and other health Figure 2.11. Income tax performance, 2022 ....... 16 resources, 2022 ....................................... 48 Figure 2.12. Composition of income tax, Figure 5.2. Public health expenditure and FY2015–22 ................................................ 16 density of specialized surgical Figure 2.13. Personal income tax performance, workforce, 2022 ...................................... 48 2022 .............................................................. 17 Figure 5.3. Relative government health Figure 2.14. Corporate income tax spending, Eswatini and peers, 2022 .. 48 performance, 2022 ................................ 17 Figure 5.4. Sources of health spending, Figure 2.15. Tax investigations, 2010–22 ............ 17 Eswatini and peers, 2022 ................... 48 Figure 2.16. Tax productivity, 2015–22 ................. 17 Figure 5.5. Public health spending by budget Figure 2.17. Rates for all major taxes are type, FY2018–22 .................................... 50 significantly above peer-group Figure 5.6. Public health spending by GFSM averages (2016-2022 average) ....... 18 2014 classification, FY2018–22 ......... 50 Figure 2.18. Underscoring the importance of Figure 5.7. Public health spending by raising revenue through improvements administrative level, FY2017–22 ........ 51 in tax administration as private Figure 5.8. Public health spending by investment declined .............................. 18 administrative level (GFSM 2014 Figure 2.19. Index of e-Tax and e-Customs, classification), FY2018–22 .................... 51 Eswatini and peers, 2022 ................... 20 Figure 5.9. Public health spending by region Figure 3.1. Composition of public spending, (GFSM 2014 classification), 2015–22 ...................................................... 24 FY2018–22 .................................................... 51 Figure 3.2. Public expenditure, percent of Figure 5.10. Translating inputs into outputs and GDP, 2018-2022 ....................................... 24 outcomes, 2019 .......................................... 52 Figure 3.3. Share of public sector in total Figure 5.11. Macro-level efficiency using data employment, 2022 ................................. 25 envelopment analysis, 2022 ................... 53 Figure 3.4. Share of public wage bill in GDP, Figure 5.12. Regional health spending and expenditure, and revenue, 2022 inputs, 2022 .................................................... 54 Figure 3.5. Wage bill, FY2016–23 .......................... 25 Figure 5.13. Regional health spending and service Figure 3.6. Public service headcount, coverage, 2022 ................................................ 54 FY2016–23 ................................................ 25 Figure 5.14. Regional health spending and Figure 3.7. Functional classification of public outcomes, 2022 .......................................... 54 expenditures, 2016–22 (% of GDP) ... 26 Figure 5.15. Regional inequality in health outputs, Figure 3.8. Functional classification of public FY2022 ............................................................. 57 expenditures, 2018–22 (% of GDP) ... 26 Figure 5.16. Regional inequality in health Figure 3.9. Efficiency of education spending, outcomes, FY2022 .................................... 57 2010–22 ...................................................... 27 Figure 5.17. Wealth inequality in health outputs, Figure 3.10. Efficiency of infrastructure FY2022 ............................................................. 57 spending, 2010–22 ................................ 27 Figure 5.18. Wealth inequality in health outputs by Figure 3.11. Decomposition of capital gender, FY2022 ............................................. 57 spending by financing source, Figure 5.19. Ministry of Health budget execution FY2015–23 (% of capital spending) ... 27 rates, FY2018–22 ........................................ 60 vi ABBREVIATIONS AND ACRONYMS AIDS Acquired Immune Deficiency Syndrome ASYCUDA Automated System for Customs Data CSO Civil Society Organization e-GP Electronic Government Procurement ESPPRA Eswatini Public Procurement Regulatory Agency FAP Fiscal Adjustment Plan FY Fiscal Year GDP Gross Domestic Product HIV Human Immunodeficiency Virus IFMIS Integrated Financial Management Information System IMF International Monetary Fund MICS Eswatini Multiple Indicator Cluster Survey PEFA Public Expenditure and Financial Accountability PIMA Public Investment Management Assessment SACU Southern African Customs Union SADC Southern African Development Community SOE State-Owned Enterprise TADAT Tax Administration Diagnostic Assessment Tool UNDP United Nations Development Programme UNICEF United Nations Children’s Fund VAT Value Added Tax WHO World Health Organization All dollar amounts are US dollars unless otherwise indicated. vii ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES ACKNOWLEDGMENTS The Eswatini Public Finance Review (PFR) was developed under the collective guidance and leadership of Satu Kahkonen (Country Director, AECS1), Asmeen Khan Manager (Acting Country Director, AECS1), Marco Hernandez (MTI Practice Manager), Omowunmi Ladipo (Governance Practice Manager), Francisca Ayodeji Akala (Health Practice Manager), Ikechi B. Okorie (Resident Representative), and Wakhile Mkhonza (Senior Operations Officer, AEMSZ). The PFR was prepared by a joint team composing members of the Macroeconomics, Trade and Investment, Governance, and Health Nutrition and Population Global Practices, which was co-led by Marko Kwaramba (Senior Economist) and Raymond Muhula (Lead Public Sector Specialist). The authors of this report are Jacques Morisset (Lead Economist, EFI Program Leader), Elizabeth Ninan (HD Program Leader), Kenneth Munge Kabubei (Economist, Health, HAEH2), Faith Mamba (Senior Economist, Health, HAEH2), Tengetile Tsabedze (Human Development Specialist, HAEE2), Katelyn Jison Yoo (Consultant, Health), Sandile Malambe (Consultant, Health), Jay-Hyung Kim (Senior Public Sector Specialist, EAEG1), George Daniel (Senior Procurement Specialist, EAERU), Knut J. Leipold (Lead Procurement Specialist, EAERU), Joanna Alexandra Watkins (Senior Public Sector Specialist, EAEG2), Otto Williams (Young Professional, EAEG2), Graham Glenday (Consultant), Annelle Bellony (Consultant, EAEG2), Jason Joaquin Hayman (Consultant), Alex Giron Gordillo (Consultant, EMFTX), Hirut Wolde (Consultant), Shan Ni (Social Policy Specialist, UNICEF), and Chiara Pierotti (Chief of Child Survival & Development, UNICEF). Nani Makonnen (Senior Program Assistant, EAEM2), Simangele Batiti Nkambule (Executive Assistant, AEMSZ), and Nomagugu Goodness Khumalo (Team Assistant, AEMSZ) provided assistance. Janine Thorne (Consultant) edited the report. The team worked closely with the Ministry of Finance, the Ministry of Economic Planning and Development, the Ministry of Health and associated contributors, the Eswatini Revenue Service, and the Central Bank. The team would like to thank Thabsile Mlangeni (Principal Secretary), Sifiso Mamba (Chief Economist), Siphiwe Dlamini-Sibandze (Principal Economist), Nombuso Tsabedze (Principal Economist), Mcebo Zikalala (Principal Economist) and Phindile Masango (Senior Economist), from the Ministry of Economic Planning and Development, along with Vusie E. Dlamini (Principal Secretary), Abner Dlamini (Director, Fiscal and Monetary Affairs), Armstrong Dlamini (Director Debt), Khanyisile Dlamini-Dube (Principal Economist), Xolani Dlamini (Economist), and Muzi Thabo Dlamini (Economist) from the Ministry of Finance, and Sifiso Mavuso (Senior Planning Officer), Sifiso Ndlovu (Planning Officer), Zanele Nxumalo (Planning Officer) from the Ministry of Health for their valuable input. Phindile Tengetile Masuku (Manager Research) and Vincent Gcina Phiri (Director Research, Strategy and Statistics) from the Eswatini Revenue Service and Welcome Nxumalo (Principal Economist, Central Bank) also provided helpful comments. The team is grateful to peer reviewers, Nyda Mukhtar (Economist), Maxwell Bruku Dapaah (Senior Financial Management Specialist), and Thulani Matsebula (Senior Economist, Health) for their guidance and support. viii EXECUTIVE SUMMARY Eswatini’s fundamental policy challenge is to address percent from 1996 to 2020, as firms relocated to South the longstanding factors that have constrained Africa, and Eswatini’s economy became increasingly growth and hindered broad-based improvements in dependent on consumption.² On the positive, Eswatini living standards. Eswatini’s growth performance has experienced a strong post-pandemic rebound averaging been modest since the late-1990s when South Africa’s 5.3 percent from 2021 to 2023. Overall, from 1996, the emergence from political and economic isolation economy shifted from private-sector-led growth to diminished Eswatini’s comparative advantage as state-led growth, and fiscal policy became looser and an investment destination. From 1980 until 1994, less effective. Notably, revenues from the Southern Eswatini achieved high rates of economic growth— African Customs Union (SACU) have significantly averaging 8 percent per year—driven by large inflows contributed to sustaining high levels of public spending. of private investment. Firms were attracted by Eswatini’s However, their annual volatility led to substantial fiscal macroeconomic stability, underpinned by robust fiscal deficits in the 2010s, resulting in an increase in public policies, firm control over recurrent expenditures, and debt and the accumulation of expenditure arrears. high levels of public spending on education, health, and infrastructure.¹ However, average annual Gross Given the state’s significant role in the economy, Domestic Product (GDP) growth fell to an average of 2.8 the build-up of macro imbalances, and slow ¹ See World Bank (2014) Kingdom of Swaziland Growth Report, No. ACS8701. ² World Bank (2020) Eswatini - Systematic Country Diagnostic: Toward Equal Opportunity - Accelerating Inclusion and Poverty Reduction. ix ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES improvements in social indicators, it is vital to reform forward, structural reforms to strengthen fiscal policy fiscal policy to transition to faster, more inclusive, will play a central role in ensuring inclusive private and sustainable private sector-led growth. Sustained sector-led growth, robust job creation, and sustainable fiscal deficits and expenditure volatility have adversely poverty reduction. affected social spending and public investment, while feeble public financial management and inefficient The government has an opportunity to address public procurement procedures have undermined binding constraints on growth by pivoting from the efficiency of public spending. In 2023, the public a state-led to a private sector-led development debt stock stood at 40.4 percent of GDP though model through five “fiscal pathways.” (1) Ensuring declining from a peak of about 45 percent of GDP macroeconomic stability for greater competitiveness, in 2022 (more than doubling from 15.8 percent in including reforming the way the country collects 2015). Public expenditure arrears were estimated at and manages revenues to smooth expenditures 4.9 percent of GDP increasing from 2.8 percent in and avoid disruptions caused by inconsistent 2021. Revenue transfers from SACU play a critical funding (e.g., SACU); (2) Advancing fiscal reforms to role in Eswatini, but managing their volatility requires encourage private investment through competition specialized mechanisms. Meanwhile, expenditure and market contestability; (3) Improving public rigidity and inadequate expenditure oversight have financial management to support fiscal consolidation undermined the developmental impact of fiscal policy. and greater expenditure efficiency. Aligning budget The recent surge in revenue transfers from SACU allocations more closely with the government’s stated helped to reduce the fiscal deficit from 6.3 percent development priorities would make public spending of GDP in 2022 to an estimated 2.1 percent in 2023. a more effective policy instrument, and enhanced Continual implementation of fiscal reforms and financial oversight and better management of public the full implementation of the recently established procurement would further improve expenditure Revenue Stabilization Fund is critical to sustain efficiency; (4) Fiscal policies for building more macroeconomic stability. productive physical capital through better public investment management; and (5) Fiscal policies for Eswatini development prospects continue to hinge building human capital. on its attractiveness as an investment destination relative to its neighbors. Bolstering investor confidence will require strengthening the fiscal framework while enhancing the impact of investments in education, health, and social protection. A broad consensus has coalesced around the reforms necessary to achieve the country’s development objectives, but implementing these measures has proven challenging. In June 2020, the government launched a Fiscal Adjustment Plan (FAP) for 2021-2023 that aimed to reduce the fiscal deficit and reinforce debt sustainability by broadening the revenue base, reducing the public wage bill, reforming state-owned enterprises (SOEs), and improving the targeting of social assistance programs. Despite its slow implementation, the FAP reflects an important break from years of unproductive fiscal expansion. Nevertheless, socioeconomic indicators Public expenditure arrears were estimated at 4.9 percent of GDP in 2023 increasing such as rural poverty and income inequality have from 2.8 percent in 2021 shown limited improvement in recent years. Going x EXECUTIVE SUMMARY accelerate structural reforms. Fully operationalizing Macro-Fiscal Context: Making fiscal the Revenue Stabilization Fund established in 2023 policy an instrument for macroeconomic would help mitigate the volatility of SACU transfers, stability and external competitiveness. while creating a Treasury Single Account and implementation of an Integrated Financial Management Expansionary fiscal policy since the late 1990s has Information System (IFMIS) would strengthen financial adversely affected competitiveness and limited the management. Reducing the fiscal burden of SOEs government’s scope to respond to external shocks. would ease pressure on the budget while opening In the absence of a fully autonomous monetary policy, space for market contestation. Eliminating expenditure fiscal policy becomes critical to moderate the business arrears to the private sector would boost economic cycle. Multiple medium-term fiscal frameworks and activity while strengthening financial sector stability. National Development Plans have called for fiscal Finally, continued implementation of public wage bill sustainability. For macro-fiscal imbalances not to reforms will be essential to achieve the necessary continue hindering growth, the reforms started in 2019 fiscal adjustment. The public wage bill declined from need to be sustained, especially in mobilizing domestic 14 percent of GDP in 2017, to about 11 percent in revenues, controlling expenditures, and strengthening 2023. These efforts could be supported by efficiency public financial management. The fiscal deficit fell to gains achieved through digitalizing the public sector, 2.1 percent in 2023 from about 7 percent in 2018 partly enhancing budget preparation and execution, and due to an increase in revenue and spending controls, strengthening public procurement. especially the wage bill. In 2022, the public debt stock approached 45 percent of GDP before declining to 40.4 Eswatini has a solid foundation for adopting a percent of GDP in 2023. Despite the progress, public growth-supporting fiscal framework. Membership expenditure arrears were estimated at 4.9 percent in the SACU and the regional Common Monetary Area of GDP in 2023 increasing from 2.8 percent in 2021. have contributed to economic stability. The latter also Overall, the volatility of SACU revenues, along with the indirectly supports fiscal management, as expansionary rapid expansion of public spending, has contributed fiscal policies could threaten the effective peg to to the rapid accumulation of public debt and arrears. the South African rand. In addition, SACU revenues represent a significant net transfer of resources that Addressing macro-fiscal imbalances would reduce substantially augments the government’s own-source the country’s susceptibility to shocks. Eswatini relies revenue capacity. on South Africa for trade, investment, and jobs, but inadequate public financial management has increased The size of the fiscal consolidation adjustment is the country’s exposure to spillover effects, and a growing manageable. The International Monetary Fund’s (IMF) public debt burden has undermined Eswatini’s external 2023 Article IV review recommends that the government position. Higher interest payments on the debt, coupled attain a primary surplus over a three-year horizon through with lower SACU transfers and rising imports, led to a a cumulative fiscal adjustment of 3 percent of GDP—2 decline in gross official reserves from 3.5 months of percent from reduced expenditures and 1 percent from imports of goods and services in 2021 to 2.6 months increased revenues.³ Systems to manage the inherent in 2023. The erosion of Eswatini’s fiscal and external and unavoidable volatility of SACU transfers could be buffers leaves it more susceptible to future shocks. integrated into these consolidation efforts through a medium-term fiscal framework that conservatively To sustain the fiscal consolidation and create a more estimates the permanent nature of these transfers and conducive investment climate, the government can utilizes effective stabilization mechanisms. ³ The authorities initially envisaged a 6.5 fiscal adjustment that was revised to a cumulative fiscal consolidation of 4.2 percent of GDP between the 2021 and 2023 fiscal years. This has not been fully implemented calling for another revised/ recalibrated FAP. xi ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES arrears of SOEs was subsequently written-off in 2023, Revenue Mobilization: Increasing conditional on the SOEs remitting PAYE taxes for six domestic revenue while enhancing consecutive months. Some SOEs are also subsidized competition and market contestability. to provide low-cost public services. Also, higher public sector wage premiums of about 50 percent limit private Domestic revenue mobilization can be optimized sector competitiveness. These challenges create to improve revenues while enhancing competition barriers to the entry of private firms. . and market contestability. Tax rates are relatively high in Eswatini compared to lower-middle-income In the short term, the focus could be on tax and aspirational peers. Thus, increasing revenue administration measures, including the capacity to while maintaining competitiveness will require a investigate tax evasion and enforce compliance. comprehensive effort to review and rationalize While procedures for tax registration and payment the country’s expansive array of tax holidays, tax have been streamlined, domestic revenues remain expenditures, and procurement preferences. below their potential, and the tax gap was estimated at about 5 percent of GDP in the 2022 fiscal year. Rationalizing tax incentives can support revenue Achieving 100 percent usage of electronic tax filing mobilization while promoting competition and could increase reported taxable income by as much market contestability. The government has used tax as 4 percent of GDP. In comparison, mandatory online policy to protect certain industries, while the tax code filing and payment could boost revenue by 1.6 to 3.3 shields SOEs from competition. Applying revenue percent of GDP. Increasing the overall performance of policies consistently across the economy would tax administration efficiency from the 40th percentile foster market contestation. There are opportunities to the 60th percentile could raise tax revenue by 1.4 to reform Eswatini’s complex tax system, which has a percent of GDP. The authorities recently established a considerable number of tax exemptions that prevent presumptive corporate income tax rate of 1.75 percent the efficient allocation of resources. Tax expenditures of turnover and lowered the corporate income tax rate amounted to nearly 13 percent of GDP in 2022 up from in 2024 from 27.5 percent to 25 percent which may 10 percent in 2017; the removal of value-added tax facilitate more private investment. Creating a high-net- (VAT) exemptions on electricity and dairy products worth individual unit in the tax service and streamlining may help reduce the amount. Distortive tax policies procedures for tax registration and payment could have contributed to a marked decline in total factor increase income tax revenue. Introducing a property productivity growth and hindered private and public tax could broaden the tax base and smooth revenue capital accumulation. Improving SOEs’ financial procyclicality. Finally, fully operationalizing the Revenue performance will enable many SOEs to pay taxes, and Stabilization Fund and passing fiscal rules governing avoid the accumulation of tax arrears, which were related savings and spending decisions would help estimated at 2.1 percent of GDP in 2022. Income tax minimize revenue volatility. Mandatory online filing and payment could boost revenue by 1.6 to 3.3 percent of GDP xii EXECUTIVE SUMMARY staff skilled in procurement planning and execution Public Spending: Strengthening public and still relies on paper-based processes. Despite financial management to support fiscal reforms, low levels of private sector confidence in the consolidation and promote transparency and integrity of the procurement system, expenditure efficiency. perceived corruption in procurement transactions, and a lack of regulatory compliance continue to undermine Public expenditures represent about 30 percent of efficiency. The rollout of the e-procurement system GDP, and strengthening public financial management would increase competition by making it easier for could improve the impact of government spending. a wider range of private firms, especially small and Budget allocations to the social sectors are relatively medium enterprises to participate in tenders for public high, but outcome indicators fall short of what contracts. Greater competition would improve value spending levels would predict. Education, health, and for money, reduce transaction costs, generate fiscal social protection spending absorbed about 9.6 percent savings, and enhance trust in the government. of GDP between 2018 and 2022, above the average for regional peers at 7.6 percent of GDP.4 Greater Strengthening the capacity to effectively manage, adherence to the Public Financial Management Act monitor, and sanction the 49 SOEs, some of which are and the implementation of IFMIS would help address loss-making and have overlapping mandates, may key public financial management challenges that help reduce the fiscal burden from these SOEs.5 Many include limited capacity in planning, budgeting, SOEs suffer from ineffective governance, inadequate and expenditure controls, and internal and external financing, political interference, and unfunded public auditing. Large arrears to the private sector reflect service obligations. SOEs often suffer from institutional financing gaps and deficiencies in procurement and deficiencies and weak internal processes, resulting in cash management. The FAP calls for broadening poor management and suboptimal outcomes. the revenue base, cutting the public sector wage bill, and reforming SOEs, but the implementation With expenditure reforms only partially implemented, of these measures has been uneven, and further an anticipated increase in SACU receipts in 2024 efforts will be needed to consolidate fiscal spending, and the end of the public sector hiring freeze are eliminate expenditure arrears, and enhance the expected to increase public spending. To promote efficiency of public procurement. The public sector fiscal sustainability and promote expenditure efficiency wage bill imposes a heavy fiscal cost and increases the government could implement a Treasury Single budgetary rigidity. Account, accelerate the digitalization of the public sector, strengthen budget preparation and execution, Enhancing public procurement systems would improve reform SOE management and oversight, clear the value of public spending. Given its small size, expenditure arrears, further reduce the wage bill, and Eswatini has struggled to find sufficient professional enhance public procurement systems. 4 Eswatini however spends approximately 1 percent of its GDP on the five major social grant programs (Orphan and Vulnerable Children, National Care Points, Elderly Grant, School Feeding and Emergency Food Aid), well below the average for Sub-Saharan Africa. 5 For more details see; Kwaramba et.al (2023) Kingdom of Eswatini - Economic Update: Raising the Game with Efficient State-Owned Enterprises (English). Washington, D.C.: World Bank Group. See also IMF Article IV report of 2022 which shows transfers to SOEs were at 4.75 percent of GDP and World Bank (2006) Swaziland Public Expenditure Review: Strengthening Public Expenditure Policy and Management for Service Delivery and Poverty Reduction. xiii ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Projects entering the design and appraisal process Public Investment Management: Building could be better aligned with national and sectoral productive physical capital while planning priorities. Institutional arrangements are mainstreaming climate considerations. critical for mainstreaming climate considerations into public investment management. The authorities Strengthening public investment management should strengthen the gatekeeping function of the while mainstreaming climate considerations is Public Investment Management Unit at the Ministry crucial to maximize the impact of public spending of Economic Planning and Development, and climate on economic growth and development. Improving change mitigation should be integrated into project project selection, strengthening the public investment identification and design. Reforming building and management system, and mainstreaming climate construction codes, regulations, and land-use policies considerations into public investment planning will would help promote climate resilience. Efficiency gains be crucial to maximize the impact of scarce fiscal from reforming public investment management could resources. Establishing a comprehensive public generate more than 2 percent of GDP in fiscal savings. investment management framework could improve the allocative and technical efficiency of public spending. Key objectives include incorporating climate change Health: Fiscal policies to build human mitigation and adaptation measures into project capital with a focus on health. planning and execution and enhancing the capacity of government agencies to manage and monitor public investments effectively. Policy options specified in the IMF and World Bank 2017 Public Investment Management Assessment have not yet been fully implemented due to delays and disruptions caused by the COVID-19 pandemic. These measures involve changes to the legislative and regulatory framework, improvements in public investment management guidelines and project appraisal manuals, capacity-building activities, enhanced budget procedures, and reforms of the procurement laws and regulations. There is an urgent Addressing Eswatini’s health sector structural need to improve the quality of projects entering the challenges, including inefficiencies in public financial budget. The public investment management system management and unequal access to health services, faces chronic challenges around under- and over- could result in better health outcomes relative to budgeting and delays in project implementation, expenditure levels. Despite substantial investments and no significant improvements have been made in health, key indicators such as under-five mortality, since 2019, with, for example, some projects taking maternal mortality, and stunting rates remain high. many years to complete, such as the Five Star Hotel The causes of inefficiency include: (a) low spending now at over seven years under construction and on primary care and high spending on specialized the International Convention Centre at more than care; (b) inequalities in health access and outcomes; ten years under construction. Actual cashflows (c) the unavailability of key health system inputs; (d) frequently fall short of expenditure commitments, weak budget performance; and (e) a complicated and weaknesses in the procurement system further budget structure. This Public Finance Review undermine implementation. identifies opportunities to improve the health system’s xiv EXECUTIVE SUMMARY performance by strengthening primary healthcare budget process would enhance efficiency and create services, enhancing the management of health additional fiscal space for productive investments in resources, and implementing strategic purchasing. infrastructure and human resources. Strengthening primary healthcare services is crucial to maximize the impact of health spending. Enhancing the Conclusion and Policy Options management of health staff, critical supplies, and other resources will be vital to improve service delivery and, in This PFR offers a detailed roadmap for reforming fiscal the medium to long term, health outcomes. Reorganizing policy and enhancing public financial management. the Ministry of Health’s administrative structure The recommended measures focus on stabilizing could rationalize its functions and allow regional and revenue streams, improving expenditure efficiency, facility managers greater decision-making power and and strengthening public investment management. financial autonomy and responsiveness. Undertaking Implementing the reforms outlined below will help reinforce a value-stream mapping exercise of key processes and fiscal stability, improve the efficiency of public spending, developing an integrated management strategy linked and enhance service delivery and outcomes, accelerating to the intended outcomes would strengthen supply- Eswatini’s long-term economic growth and advancing chain management processes and stabilize availability its social development goals. The five reform pathways of medical supplies. Finally, transitioning to a budget described above offer a comprehensive framework for structure that links health expenditures more closely achieving these objectives and putting Eswatini on a path to performance while streamlining the supplementary toward sustainable and inclusive development. Policy Options Pathways 1 and 2: (1) Making fiscal policy an instrument for macroeconomic stability and external competitiveness. (2) Mobilizing domestic revenues in a way that enhances competition and market contestability Policy options Short-term actions (1 year) Medium-term actions (2–3 years) Tax policy and Introduce a presumptive corporate income Tax policy and administration administration tax rate set at 1.75 percent of turnover. Introduce a high-net-worth-individual unit in Submit a bill to introduce a carbon tax. the Eswatini Revenue Service. Streamline procedures for tax registration Increase the fuel tax by $0.30 per liter within and payment. the context of the Fuel Tax Act of 2022. Introduce a property tax similar to that used in South Africa, with rates ranging from 0.5 percent to 1.5 percent of the property’s value. Build the capacity to investigate tax evasion and enforce compliance. Revenue Fully implement and operationalize the Develop a best-practice model for management and Revenue Stabilisation Fund and pass forecasting revenue. predictability legislation that includes clear fiscal rules governing its operations. Source: World Bank analysis. xv ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Pathway 3: Strengthening public financial management to support fiscal consolidation and promote expenditure efficiency. Policy options Short-term actions (1 year) Medium-term actions (2–3 years) Digitalization of Establish a Treasury Single Account. Rollout the Integrated Financial the public sector Management Information System. Budget Publish monthly cash-based budget Complete a public expenditure and financial preparation and execution and fiscal outturn reports. accountability assessment to inform a execution public financial management strategy. Identify adequate financing sources for the Increase budget transparency and citizen Medium-Term Fiscal Framework and annual participation by piloting mechanisms budgets to eliminate financing gaps. to engage the public during budget formulation and to monitor budget implementation and actively engage with vulnerable and underrepresented communities, either directly or through civil society organizations. SOE reforms Strengthen the institutional capacity of the Continue to implement the SOE Reform Public Enterprise Unit to implement the SOE Roadmap. Reform Roadmap. Support the merger, closure, or restructuring Strengthen the legal and institutional of the five SOEs identified as priorities by framework for the SOE sector. the Cabinet in the SOE Roadmap. Expenditure Prioritize arrears clearance and minimize Implement the arrears-prevention strategy arrears the accumulation of new arrears. by ensuring there are no financing gaps in the budget. Institute strong and transparent commitment controls and cash- management systems. Wage-bill reform Continue implementing the expenditure Develop and implement a revised FAP to controls specified in the current FAP. cover the period beyond 2024. Assess the fiscal and economic impact of efforts to address the public-sector wage bill and control expenditures. Public Professionalize public procurement by Fast-track the development and rollout of procurement building institutional capacity. an e-procurement program. Build the capacity of the Auditor General’s Strengthen the regulatory role of ESPPRA. office to conduct procurement audits. Sources: World Bank staff and IMF (2023). Note: ESPPRA = Eswatini Public Procurement Regulatory Agency; FAP = Fiscal Adjustment Programme; PEFA = Public Expenditure and Financial Accountability; SOE = state-owned enterprise. 1. Eswatini has a public (budget) participation score of 2 (out of 100), lower than South Africa at 19, but similar to Lesotho. xvi EXECUTIVE SUMMARY Pathway 4: Building productive physical capital through better public investment management, with due attention to climate considerations. Policy options Short-term actions (1 year) Medium-term actions (2–3 years) Public investment Ensure that all projects entering the design Ensure that all large, complex projects are management and appraisal process are aligned with backed by detailed feasibility analyses national and sectoral planning priorities and and complete appraisal documents that have a reasonable chance of being funded. adequately consider alternatives. Strengthen the gatekeeping function of the Public Investment Management Unit in the Ministry of Economic Planning and Development and build its capacity to provide technical support and advice to units in all line ministries, departments, and agencies. Mainstreaming Incorporate climate change mitigation Build the capacity to estimate loss functions climate in public or decarbonization plans into the project for each project based on hazard-frequency investments identification and design process. data and disaster-loss information. Strengthen budgeting processes to Monitor the implementation of climate incorporate climate-related hazards and adaptation or mitigation measures during natural disasters. Incorporate climate-related project construction and service delivery. regulations and standards into projects that are exposed to climate hazards. Develop building and construction codes, regulations, and land-use policies to promote climate change resilience, mitigation, and adaptation. Source: World Bank analysis. Pathway 5: Fiscal policies to build human capital, with a focus on health. Policy options Short-term actions (1 year) Medium-term actions (2–3 years) Budget and Streamline the supplementary budget Transition to a budget structure that public financial process and publish approved budgets, better links health expenditure to management supplementary estimates, and exchequer performance (e.g., through better tagging arrangements issues at sectoral level. of primary healthcare expenditures while consolidating expenditures on essential medicines and supplies). Supply-chain Undertake a value-stream mapping exercise Develop an integrated supply-chain management of key supply-chain processes and redesign management strategy to give the Central or improve them. Medical Stores greater autonomy and improve the efficiency of supply-chain management. Reconstitute and operationalize supply chain Establish a secure whistleblower system to governance structures (e.g., Pharmaceuticals strengthen accountability. and Therapeutics Committees). xvii ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Policy options Short-term actions (1 year) Medium-term actions (2–3 years) Strategic Use the development of the health financing Reorganize the Ministry of Health’s purchasing strategy to deliver a comprehensive administrative structure to rationalize its approach to payment reform. functions. Allow regional and facility managers more decision-making power and financial autonomy and responsiveness. Availability Build on the annual performance and budget Report on health system performance at a and use of reports to link reporting on expenditure and more disaggregated sub-regional level. information health system performance. Quality of care Accelerate the rollout of the Human Extend plans to improve primary care for and primary-care Resources Information System to improve noncommunicable diseases and other services the distribution and management of human emerging priorities. Realign health spending resources for health. to reflect a primary healthcare-led approach toward universal health coverage. Source: World Bank analysis. xviii CHAPTER 1 Macro-Fiscal Context: Making fiscal policy an instrument for macroeconomic stability and external competitiveness. Introduction Without significant policy reforms, annual economic growth is projected to average just 3 percent over the Eswatini’s economy has expanded at an average medium term. This growth rate would be insufficient rate of 2.8 percent per year since 2010—below the to meaningfully improve living standards and achieve average of 4.5 percent for lower-middle-income Eswatini’s development goals. To consolidate the public countries. The public debt stock has grown rapidly, finances and enable robust and sustainable private domestic arrears are mounting, and lending to the sector-led development, the government will need to government is crowding out private-sector activity. embrace a more sweeping set of structural reforms. Meanwhile, removing cumbersome regulations and market distortions caused by inefficient SOEs could promote the development of new industries and Fiscal policy and economic growth sectors. A sharp increase in public spending, coupled with volatile SACU transfers, has driven the rapid growth Eswatini’s growth has significantly diminished since of public debt and arrears. In 2023, the government the early 1990s. established the Revenue Stabilization Fund, but the fund does not appear to have received the initial E 1.5 Eswatini’s growth performance has been weak since billion ($82 million) capitalization planned for its first the early 1990s, when South Africa’s emergence from year of operation (IMF 2023). political and economic isolation diminished Eswatini’s relative attractiveness as an investment destination. Expansionary fiscal policy between 2013 and 2019 Eswatini achieved significant economic growth— increased total spending by about 5.7 percent of GDP, averaging 8 percent per year—from 1980 until apartheid endangering the sustainability of the government in South Africa ended in 1994, driven by high private accounts. After 2019, the new administration focused investment. During this period, among other factors, on fiscal consolidation to correct macroeconomic firms were attracted by Eswatini’s macroeconomic imbalances. In 2020, it adopted the FAP (Box 1.2), which stability: economic management was robust, recurrent aimed to boost revenue by increasing the collection expenditure was firmly controlled, and public spending of income tax, VAT, and other taxes. Planned savings emphasized education, health, and infrastructure. included compensation of employees, goods, and However, after the end of apartheid average growth in services; transfers to public enterprises; and capital GDP plummeted to 3 percent from 1996 to 2023, as expenditure. However, the FAP’s implementation has firms returned to South Africa, leaving the economy been slow, due in part to external shocks such as the mostly reliant on consumption to drive limited growth. COVID-19 pandemic and in part to a surge in SACU The economy shifted from private sector-led growth revenues in 2023, which alleviated pressure on the to state-led growth. Fiscal policy became less prudent, public finances. taking a toll on the economy. With growth picking up in 1 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES South Africa, SACU revenue flows to Eswatini initially to 10.7 percent in 2021. After falling to 0.5 percent increased between 1996 and 2007, which led to higher in 2022, the growth rate reached 4.8 percent in government expenditure. However, thereafter, SACU 2023, driven largely by higher services and exports. revenues became more volatile, with sharp declines Further, the doubling of SACU receipts enabled the in some years. Consequently, the country registered government to reduce the overall fiscal deficit and large fiscal deficits first in 2011, and then again from increase spending, which boosted government-linked 2016 to 2022. In 2023, the fiscal deficit declined, driven services. Nevertheless, overall growth remains volatile by higher SACU revenues. Fiscal deficits were financed and current growth will not lead Eswatini to achieve its primarily by domestic financing and the accumulation development aspirations. of arrears. To correct mounting fiscal imbalances, the government launched the FAP for 2021-2023 in June Deficiencies in fiscal policy have contributed to rising 2020. The FAP aimed to reduce the fiscal deficit and public deficits, debt levels, and expenditure arrears. public debt by widening the revenue base, reducing Key challenges include the loose management of the public wage spending and rationalizing SOEs. Given exchequer, expenditure inefficiencies, weak public the country’s shallow financial market, government financial management, volatile SACU revenues, low borrowing tends to crowd out the supply of credit to domestic revenue, and a rising public wage bill. A recent the private sector. Moreover, government arrears to World Bank study found inefficiencies in education, the private sector have increased rapidly, diminishing health, and infrastructure spending, with especially liquidity especially in the construction, wholesale, and acute challenges in the health sector (Kwaramba et retail sectors. al. 2019). The fiscal deficit averaged 6.9 percent of GDP in 2015–19 before narrowing to 4.1 percent in 2020– Addressing structural challenges and inefficient fiscal 23, which drove a steady increase in the debt stock. policies could boost Eswatini’s economic growth. Meanwhile, the public sector accumulated significant arrears, which constrained liquidity in the private Real GDP growth has recovered from the shock of sector and hindered economic activity. Consequently, the pandemic, with growth increasing to an average economic growth has been declining since 2000 and of 5.3 percent in 2020–23. In 2020, economic output lagged the middle-income-country average until the contracted by 1.6 percent, but growth rebounded post-pandemic rebound (Figure 1.3). Figure 1.1. Real GDP growth, FDI and fiscal balance Figure 1.2. Contribution to economic growth After South Africa’s economic isolation ended, inflows of …and growth became driven more by consumption than foreign capital into Eswatini plunged, the fiscal situation investment. deteriorated… 8 10 7 8 6 5 6 4 % 4 3 2 2 1 0 0 -2 -1 -4 -2 1980-1995 1996-2023 1980-1995 1996-2023 Real GDP growth (average, %) FDI-net inflows (% of GDP) Gross Fixed capital information Final consumption Fiscal balance (% of GDP) Net exports Source: WDI and Eswatini Ministry of Finance. 2 CHAPTER 1. MACRO-FISCAL CONTEXT: MAKING FISCAL POLICY AN INSTRUMENT FOR MACROECONOMIC STABILITY AND EXTERNAL COMPETITIVENESS Eswatini needs to strengthen mechanisms to cope which undermines the country’s long-term growth with revenue volatility and maintain consistent prospects. expenditure levels over time. During economic expansions, surging SACU revenues drove a sharp Reducing the state’s large economic footprint could increase in public spending that cannot be sustained help address distortions that inhibit competition. during a subsequent contraction (Figure 1.6). The High levels of public spending, coupled with mounting resulting fiscal procyclicality is exacerbated by the arrears, adversely affect price signals and liquidity. The large share of rigid expenditures, such as wages presence of numerous SOEs limits opportunities for and interest payments, in the annual budget. As a private firms. Higher public sector wage premiums of result, fiscal policy tends to overheat expansions about 50 percent affect private sector competitiveness and deepen contractions, and when revenues fall, (see Box 1.1). In addition, cumbersome regulations the government is forced to cut capital spending, have raised the cost of doing business. Box 1.1. The public sector wage premium is high in Eswatini The large wage gap between the public and private sector in Eswatini impedes private sector competitiveness. The wage gap is computed as the difference between public and private wages across percentiles. The estimated average public wage premium is 61 percent. This premium is higher than the emerging market and developing economies’ average public wage premium of around 12 percent. The wage gap is less at the lower end of the wage distribution, highest around the median and then low again at the upper end (Figure B1.1.1). The public wage premium in Eswatini remains high after controlling for individual characteristics (Figure B.1.1.2). Overall, according to Worldwide Bureaucracy Indicators, public sector employees in Eswatini are paid more than the global average. This is across all occupations, including hospital nurses and government economists (relative to the global median). However, Namibia and South Africa have the highest-paid hospital doctors in the region, receiving 2.3 times more than the global median while in Eswatini they receive 1.9 times. A standard Mincerian wage regression is used to calculate the average wage differential between public and private-sector workers (Kingdom of Lesotho, Selected Issues Paper 2023). In(Wijd) = θ* Publici+β * Xi + γj + δj + εij, where In(Wijd) is the natural logarithm of wage income; Publici is a dummy that takes the value of 1 if individual i is employed in the public sector and zero otherwise; Xi is a set of individual characteristics, including age, age squared, gender, educational attainment; and γj and δj are region and job type fixed effects, respectively. The “public sector” is defined to include those employed in national government, local government, and parastatals, while the “private sector” includes those employed formally in the private sector, private households, and self-employed in non-farm enterprises. The coefficient of interest, θ, measures the wage premium for public sector workers (if positive). Microdata from the 2021 Labor Force Survey is used for this analysis. 3 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Figure B1.1.1. Public-private wage gap Figure B1.1.2. Public sector wage premium 1.5 60 Log wage gap 1 40 .5 20 0 0 Liberia Ethiopia Tanzania Lesotho Malawi Eswatini Namibia 0 20 40 60 80 100 Percentile Public sector wage premium compared to private Total wage gap Average wage gap sector employees Source: IMF (2024) Country Report No. 2024/305. Source: Worldwide Bureaucracy Indicators and IMF. More investment in human and physical capital Strengthening public financial management could help close infrastructure and labor skill gaps. could increase resilience to shocks. The growth of total factor productivity and labor productivity has slowed over time, and productivity Expansionary fiscal policy amid volatile SACU revenues gains are concentrated in the manufacturing spilled over into external sector vulnerabilities. As a small sector.6 The current skills mismatch contributes to open economy, the country is heavily reliant on South a high unemployment rate of about 33 percent. The Africa for trade, investment and jobs. However, ineffective recent Eswatini Country Economic Memorandum management of public finances has increased the exposes more reasons for low economic growth country’s exposure to external shocks. Higher fiscal deficit and identifies sectors and strategies to stimulate led to high public debt. A growing public debt burden has inclusive economic growth. undermined Eswatini’s external position. Higher interest payments on the debt, coupled with lower SACU revenues Exports are heavily concentrated, and trade and rising imports, have led to a decline in gross official integration is limited. Eswatini is a signatory to several reserves, which declined from 3.5 months of imports of trade agreements, but its private sector has been goods and services in 2021 to 2.5 months in 2022. These unable to take full advantage of trading opportunities factors have eroded Eswatini’s fiscal and external buffers, while an overreliance on cross-border trade with South leaving it more susceptible to future shocks (World Bank Africa and Mozambique has hampered investment, 2023c). Eswatini had the first current account deficit particularly foreign direct investment (Figure 1.1). since 2010 in 2022. The current account returned to a Overcoming the challenges of a landlocked status surplus in 2023, reflecting higher SACU revenues and requires greater investment in infrastructure, financial an increasing trade surplus, but international reserves integration, and digital connectivity. remained constant at 2.6 months of imports. 6 For detailed drivers of growth see World Bank (2024) Eswatini - Country Economic Memorandum: In search of the drivers of inclusive growth (English). Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/099052824084561906/ P502878128184b0de192081bc6bd77c5f69 4 CHAPTER 1. MACRO-FISCAL CONTEXT: MAKING FISCAL POLICY AN INSTRUMENT FOR MACROECONOMIC STABILITY AND EXTERNAL COMPETITIVENESS Figure 1.3. Real GDP growth, 2000–22 Figure 1.4. Public and private investment, 2000–22 Eswatini’s growth lagged its peers in the last decade … … in part because investment is relatively low… Percent (5 year moving average) 40 Gross fixed capital formation 10 30 (% of GDP) MI average 20 5 10 Eswatini average 0 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Lower-middle income real GDP growth Public investment Private investment Middle-income real GDP growth Eswatini real GDP growth Lower-middle-income countries (average) Upper-middle-income real GDP growth Middle-income-countries (average) Sources: Government of Eswatini and World Bank estimates. Source: IMF Investment and Capital Stock Database.⁷ Figure 1.5. Education and health spending and the Figure 1.6. Total spending and SACU receipts, Human Capital Index 2000–22 …and fiscal policy is inefficient, affecting human capital. SACU revenues contribute to procyclicality. 1. 05 35 30 0.85 25 20 15 HCI 0.65 10 5 0.45 0 2000/01 2002/03 2004/05 2006/07 2008/09 2010/11 2012/13 2014/15 2016/17 2018/19 2020/21 2022/23 ESW 0.25 2 7 12 17 22 Education and Health spending/GDP SACU receipts (% of GDP) Total expenditure (% of GDP) Sources: Government of Eswatini and Country Economic Memorandum 2024. Note: GDP = gross domestic product; HCI = Human Capital Index; LHS = left-hand side (y-axis); MI = middle income; SACU = Southern African Development Community. 7 IMF Investment and Capital Stock Database. https://data.imf.org/?sk=1ce8a55f-cfa7-4bc0-bce2-256ee65ac0e4. 5 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Figure 1.7. SACU revenues and the deficit, 2000–22 Figure 1.8. Public debt, 2005–22 An expansionary fiscal policy, amid volatile SACU revenue …leading to a sharp rise in debt… affected public finances… 10 30 80 5 Public debt % of GDP 20 60 0 40 10 -5 20 -10 0 2000/01 2002/03 2004/05 2006/07 2008/09 2010/11 2012/13 2014/15 2016/17 2018/19 2020/21 2022/23 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 SACU receipts (% of GDP, RHS) Eswatini Botswana Lesotho Fiscal deficit (% of GDP, LHS) Namibia South Africa Figure 1.9. SACU revenues and the deficit, 2000–22 Figure 1.10. Public debt, 2005–22 …and in expenditure arrears... …while foreign reserves have been falling. 10 6 4 5 2 0 0 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18 2019/20 2021/22 Public expenditure arrears (% of GDP) International reserves (months of imports) 2023/24 Source: Government of Eswatini. Boosting inclusive economic growth could translate in 2000 to 36.1 percent in 2016. Moreover, poverty into lower poverty rates or higher living standards. reduction was concentrated in urban areas, while rural poverty remains pervasive. Most new jobs are of low Higher output could translate into large-scale job quality, with many in subsistence agriculture. The labor- creation or substantial poverty reduction. The share force participation rate fell from 50.6 percent in 2016 of people living below the national poverty line fell from to 45.9 percent in 2021 (CSO 2021). Unemployment 63 percent in 2010 to 58.9 percent in 2016, which is rose from 23.0 percent in 2016 to 33.3 percent in still high for a lower-middle-income country. Using the 2021, leaving nearly two-thirds of young people (ages poverty headcount ratio at $2.15 a day (2017 PPP) 15–24) unemployed in 2021. Inequality is high, with a (% of population) poverty declined from 56.1 percent Gini coefficient of 54.6 percent in 2016 (Figure 1.12). 6 CHAPTER 1. MACRO-FISCAL CONTEXT: MAKING FISCAL POLICY AN INSTRUMENT FOR MACROECONOMIC STABILITY AND EXTERNAL COMPETITIVENESS Figure 1.11. Poverty rates, 2000, 2009, 2016 Figure 1.12. Gini coefficient, 2016 Poverty has declined but remains relatively high. Inequality is very high relative to other countries. 60 70 Eswatini 60 50 40 40 30 20 10 20 0 Lithuania South Sudan Slovenia Bangladesh Indonesia Micronesia, Fed. Sts. Argentina Iran, Islamic Rep. Brazil United Arab Emirates Norway Denmark Poland Switzerland Tajikistan Spain Nigeria Mali Russian Federation Samoa Bolivia Hungary Maldives Mongolia Montenegro Burkina Faso Zimbabwe South Africa 0 2000 2009 2016 Lower middle income Eswatini World Source: Eswatini Country Economic Memorandum 2024. Note: Poverty is measured here as the share of the population living on less than $2.15 a day in 2017 international dollars. The Gini coefficient or index measures income distribution among different groups of households in a country. Thus far, though the authorities have been able to savings. However, spending controls were soon relaxed, make headway on fiscal reforms more is expected. and controls on cash management and procurement were eased. Meanwhile, revenue declined, and as a The implementation of the FAP has helped reduce result the fiscal deficit widened to 6.3 percent in 2022, the fiscal deficit, but progress has been inconsistent. with a commensurate increase in arrears to 5.3 percent Initial reforms narrowed the fiscal deficit from 6.5 of GDP. Higher SACU revenues helped to narrow the percent of GDP in 2019 to 4.5 percent in 2021, and fiscal deficit to about 2.0 percent of GDP in 2023, arrears fell from 9.4 percent of GDP to 2.8 percent. but expenditure arrears remained high while official Public wage costs fell as the government reduced reserves continued to be low (Figure 1.9 and Figure wages in real terms, imposed a hiring freeze, and 1.10). Furthermore, the envisaged SOE reforms have abolished redundant positions. The public investment yet to be implemented. There is a need for recalibration program was rationalized, with an emphasis on existing and thereafter a more systematic implementation of projects, and procurement reforms yielded efficiency the FAP to lower the public financing gap (Box 1.2). 7 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Box 1.2. The Fiscal Adjustment Plan To improve the sustainability and efficiency of public finances, the government launched a Fiscal Adjustment Plan (FAP) for the 2021–23 fiscal years in June 2020 and amended it in 2021. The FAP was designed to reduce the fiscal deficit and the public debt stock by broadening the revenue base, reducing spending on public wages, and rationalizing SOEs. Reforms focused on two pillars: lowering expenditure and raising revenue. Expenditures would have been reduced by: Lowering public sector employment costs; Reducing SOE transfers; and Cutting spending on capital, goods and services. Revenues would have been enhanced by: Applying a standard rate for some goods for example electricity; Increasing alcohol and tobacco levy; Increasing the fuel tax; Increasing individual income tax; and Increasing non-tax revenue through increases of the user fees, fines and efficiencies in dividends collections. The FAP initially envisaged a fiscal consolidation of around 6.5 percent of GDP in 2021–23, with a 1.7 percent adjustment in 2021 followed by adjustments of 2.3 percent in 2022 and 2.5 percent in 2023. Source: Ministry of Finance. Eswatini has a solid basis for adopting a strong the basis to adopt a credible and strong medium-term medium-term fiscal framework. fiscal framework. The adoption of a conservative monetary policy Participation in the Common Monetary Area has helped mitigate economic instability. Due to has helped strengthen fiscal discipline, as Eswatini’s participation in the Common Monetary unsustainable expansionary fiscal policies threaten Area and its de facto currency peg to the South the peg. Eswatini and South Africa share a common African rand, the Central Bank of South Africa heavily interest in maintaining the fixed exchange rate. A influence the country’s monetary and exchange-rate successful fiscal consolidation will shore up the policies. The most immediate objective of Eswatini’s peg while enhancing competitiveness, building monetary policy is to maintain the fixed exchange rate fiscal buffers, and promoting debt sustainability. with the rand, as this arrangement has kept inflation Systems to manage the inherent and unavoidable manageable, supported lower interest rates, promoted volatility of SACU transfers must be integrated into macroeconomic stability, and encouraged investment. these consolidation efforts through a medium-term In addition, SACU revenues represent a significant net fiscal framework that conservatively estimates the transfer of resources that substantially augments the permanent nature of these transfers and utilizes government’s own-source revenue capacity. This gives effective stabilization mechanisms. 8 CHAPTER 1. MACRO-FISCAL CONTEXT: MAKING FISCAL POLICY AN INSTRUMENT FOR MACROECONOMIC STABILITY AND EXTERNAL COMPETITIVENESS Improving the efficiency of fiscal policy will be vital framework will enable Eswatini to pivot from state-led to overcome structural challenges to growth. to private sector-led growth. Fiscal policy is critical to overcome low growth and Each of the following chapters examines a different address Eswatini’s longstanding developmental dimension of fiscal policy. Chapter 2 deals with challenges. Prudent fiscal policy—with modest fiscal domestic revenue mobilization. Chapter 3 focuses on deficits, low expenditure arrears, and a manageable improving expenditure efficiency through reforms to public debt burden—will help attract much-needed public finance management and procurement. Chapter investment. Fiscal reforms can also strengthen 4 examines reforms to public investment management. external competitiveness and foster a more attractive Chapter 5 explores how improvements in health investment climate. Establishing a sound fiscal spending can accelerate human capital formation. 9 CHAPTER 2 Revenue Mobilization: Increasing domestic revenue while enhancing competition and market contestability. Key takeaways repeated fiscal deficits, resulting in a rising public debt burden and the accumulation of arrears. By 2023, the This chapter examines how revenue policy can be public debt stock had increased to almost 40 percent optimized to improve revenues and reduce economic of GDP, and public expenditure arrears were estimated distortions. To establish a sustainable, growth- at 4.9 percent of GDP. Revenue shortfalls have also enabling fiscal stance, the government will need to constrained priority social spending and disrupted boost domestic revenue collection, alleviate distortions infrastructure investment, weakened the country’s caused by the current tax structure, and implement long-term growth prospects and hampered progress mechanisms to smooth volatile SACU transfers. on the United Nations Sustainable Development Goals This chapter analyzes Eswatini’s current revenue and climate-related objectives. performance, which is benchmarked against its global and regional peers. It highlights the main tax gaps and Fiscal consolidation will require increased domestic distortions, examines reform options, and presents revenue mobilization and the full implementation recommendations for strengthening fiscal policy. of the Revenue Stabilization Fund. Efforts to boost domestic revenue should focus on tax administration, First, improvements in tax policy would enable a including the capacity to investigate tax evasion mobilization in revenues required to support the fiscal and enforce compliance, and the rationalization of consolidation necessary to accelerate growth. Large tax tax incentives. Creating a high-net-worth individual expenditures, high rates of tax evasion, a narrow tax base, unit in the tax service and streamlining procedures and weak enforcement are major obstacles to revenue for tax registration and payment could increase 8 growth. While SACU transfers are a critical revenue stream, personal income tax revenue. Introducing a property they are both highly variable and procyclical, varying from tax could broaden the tax base and smooth revenue 16 percent of GDP in 2012 to 7.3 percent in 2022. procyclicality. Finally, fully operationalizing the Revenue Stabilization Fund and passing fiscal rules governing The analysis underscores the need for continued related savings and spending decisions would help fiscal consolidation. Shortfalls in revenue have led to minimize revenue volatility. 8 The 2002 SACU Agreement established the SACU Common Revenue Pool, which comprises customs, excise, and development components. The Agreement to seeks to promote trade within member countries and harmonize trade policies. The customs component comprises customs duties collected on goods imported into the Common Customs Area. The excise component consists of 85 percent of excise duties collected on goods produced in the Common Customs area; the remaining 15 percent is used to fund the development component, which is distributed in favor of the less-developed member states. 10 CHAPTER 2. REVENUE MOBILIZATION: INCREASING DOMESTIC REVENUE WHILE ENHANCING COMPETITION AND MARKET CONTESTABILITY. Second, ensuring revenue policy is applied transfers as a supplementary revenue stream rather consistently across the economy is essential to than relying on them to finance core expenditures. create a level playing field, stimulate competition and boost revenue contribution from the private Total revenue is both volatile and procyclical. sector. At present, an opaque and complicated tax Substantial annual fluctuations adversely affect system coupled with a considerable number of tax budget planning and execution (Figure 2.3). exemptions have distorted allocation of resources and Although revenue was buoyant in years when SACU limited competition. Some industries, particularly SOEs, revenue increased, it dipped in years when SACU have been aided, while others have been placed at a revenues declined (Figure 2.4). Revenue growth was competitive disadvantage. negative from 2020 to 2022, and its share of GDP diminished. Revenue then picked in 2023, reflecting higher SACU revenue. Increasing domestic revenue Stepping up domestic revenue mobilization could help Eswatini meet its expenditure needs. Although total revenue is high as a share of GDP, domestic revenue collection underperforms. Total tax revenues amount to 25 percent of GDP, well above the levels of most peer countries (Figure 2.1; Table A.0.2). However, when SACU revenues are excluded (Figure 2.2) this share drops to just 15 percent, below what Eswatini’s level of development would predict. Increasing domestic revenue to the level of peer countries would enable the government to treat SACU Figure 2.1. Tax revenue performance, 2022 Figure 2.2. Non-SACU revenues, 2010–23 Eswatini’s fiscal revenues compare favorably to peers if SACU …however non-SACU revenues are low relative to regional revenues are included… comparators. 35.00 35 LSO BRB 30 30.00 NAM JAM 25 25.00 WSM SYC % of GDP In percent of GDP KGZ ESW BWA 20 AGO GRD 20.00 MOZ MAR LCA 15 SEN FJI SUR RWA IND JOR MUS ARE 10 15.00 BDI LBR GHA DOM CIV 5 COD MYS BRN SGP 10.00 MDG GMB COG IDN 0 MWI BGD LKA 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 PAN 5.00 SOM HTI GNQ OMN Botswana non-SACU revenue 6.00 7.00 8.00 9.00 10.00 11.00 Namibia non-SACU revenue Log of GDP Per Capita Eswatini non-SACU revenue Source: Ministry of Finance and World Bank Staff calculations. 11 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Figure 2.3. Revenue and growth patterns, FY2015–22 Figure 2.4. Revenue composition, FY2015–22 Revenue inflows are procyclical… …and SACU receipts are their most volatile component. 30 100 25 80 % of total revenue 20 60 15 40 10 20 5 0 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 0 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 SACU receipts Income taxes Total Revenue (% of GDP) Goods and services taxes Other taxes Non-tax revenue Source: Eswatini Ministry of Finance. Note: FY = fiscal year; GDP = gross domestic product; SACU = Southern African Customs Union. Box 2.1. The budgetary role of SACU transfers SACU receipts are one of Eswatini’s most important forms of revenue, accounting for 12 percent of GDP in 2023. SACU transfers are financed by trade taxes and excise duties on imported goods. According to the SACU agreement, these revenues are collected and distributed between Botswana, Lesotho, Namibia, South Africa, and Eswatini according to a revenue-sharing formula that reflects each country’s level of imports and GDP. These transfers represent a large share of overall revenue and are an important source of foreign exchange, albeit one denominated in South African rand rather than US dollars. SACU revenues ranged from 15 percent of GDP in the 2015 fiscal year and to about 7 percent of GDP in the 2022 fiscal year. Annual fluctuations are substantial, with year-on-year changes varying from +33 percent in 2021 to 25 percent in 2017. Figure B3.1.1 SACU receipts as a share of GDP Figure B3.1.2 SACU receipts and growth in South and revenue, 2000–22 Africa, 2014–23 SACU revenues have been volatile... ...and depend heavily on the economy of South Africa. 25 70 16 6 60 4 20 50 11 2 15 40 0 10 30 6 -2 20 5 -4 10 1 0 0 -6 2000/01 2002/03 2004/05 2006/07 2008/09 2010/11 2012/13 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 -4 -8 2014 2016 2018 2020 2022 SACU receipts (% of GDP)-LHS SACU receipts (% of GDP)-LHS SACU receipts (% of total revenue)-RHS South Africa real growth rate (%)-RHS Source: Ministry of Finance. Note: GDP = gross domestic product; LHS = left-hand side (y-axis); RHS = right-hand side (y-axis); SACU = Southern African Customs Union. 12 CHAPTER 2. REVENUE MOBILIZATION: INCREASING DOMESTIC REVENUE WHILE ENHANCING COMPETITION AND MARKET CONTESTABILITY. Unpredictable trade flows dictate SACU revenues. Customs duty receipts depend on imports, which tend to vary more than economic output and are influenced by changes in duty rates and the exchange rate. Moreover, the formula includes an adjustment mechanism whereby any over- or underpayment resulting from past forecasting errors is recouped two years later. Since significant levels of trade, investment, and remittances flow between Eswatini and South Africa, Eswatini’s economic cycle is closely tied to South Africa’s, with a two-year lag. Stagnating real output growth in South Africa in 2019 and 2020 led to a considerable reduction in SACU revenues. By contrast, a subsequent resurgence in economic activity in South Africa in 2021, coupled with a recovery in trade flows, led to a sharp rise in SACU revenues in 2021. Fiscal reliance on variable SACU transfers has weakened budget planning and execution in Eswatini. Forecasting SACU revenues has proved challenging, with SACU revenue projections differing considerably from outcomes. Annual transfers for each year are decided by members at the end of the preceding calendar year, based on revenue prospects, which undermines budget execution. For example, the economic shock of the COVID-19 pandemic caused SACU revenue outturns in 2020 to fall far below forecasted levels, and the steep drop in SACU transfers in 2021 and 2022 forced major changes to expenditure plans. Source: World Bank analysis. Enhancing the mobilization of in 2022, due to noncompliance, including high domestic revenue. rates of nonpayment by SOEs, and the weak overall capacity of the tax authority. Domestic revenue performance varies across tax types but is consistently below its potential. Domestic revenues remain below potential, and revenue collection challenges have led to an estimated tax gap of about 5 percent of GDP in fiscal 2022. A tax gap analysis9 shows that the gap is high and increasing for VAT, corporate income tax, and excise tax (Figure 2.5). Tax collection is centralized at the national level. Local revenue- raising powers are limited, and government institutions other than the tax authority collect a modest amount of nontax revenue. Tax collection has been consistently below target since 2019 for most taxes. The debt owed to the tax authority remains high at 60 percent of total taxes collected 9 The tax gap is the difference between tax capacity (the potential revenue from a tax) and tax performance (the actual revenue raised). 13 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Figure 2.5. Tax gaps, 2000–22 a. Income tax b. Personal income tax c. Corporate income tax The income tax gap is shrinking slightly… …due to a narrowing personal income …though partly offset by a widening tax gap… corporate income tax gap… 12 10 7 In percent of GDP 6 4 In percent of GDP In percent of GDP 8 5 3 6 4 3 2 4 2 1 2 1 0 0 0 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 Years Years Years d. VAT e. Excise taxes f. Property tax …as well as vast and persistent gaps for VAT, excise, and property taxes. 12 1.0 4.0 10 3.5 0.8 In percent of GDP In percent of GDP In percent of GDP 8 3. 0 2.5 0.6 6 2. 0 1.5 0.4 4 1. 0 0.2 2 0.5 0 0. 0 0.0 2000 2005 2010 2015 2020 2014 2015 2016 2017 2018 2019 2020 2021 2022 2000 2005 2010 2015 2020 Years Years Years Tax Capacity (% of GDP) Tax Performance (% of GDP) Source: World Bank staff calculations. Note: GDP = gross domestic product; VAT = value added tax. Removing uneven application of VAT could all payments to government suppliers and remits it to improve the allocation of resources. the Eswatini Revenue Service on their behalf. VAT revenues are below those of other countries in High tax expenditures distort competition and Sub-Saharan Africa. At 15 percent, Eswatini’s VAT rate undermine VAT performance. Tax expenditures, or is consistent with rates in the rest of the SACU but revenue losses through deductions, credits, tax holidays, above the level of regional peers. Due to Eswatini’s and other benefits, are estimated to reduce worldwide large informal sector, which produces over 40 percent tax revenue by about 4 percent of GDP. Countries with of GDP and employs more than 60 percent of the high levels of tax expenditures may forgo more than employed workforce, a substantial share of trade in 10 percent of potential revenue due to the preferential goods and services is not subject to VAT. In addition, treatment of specific sectors, firms, or individuals. In many products are exempt from VAT. In September Eswatini, tax expenditures amounted to nearly 13 percent 2023, the government launched the Simplified Value of GDP in fiscal 2022 (Figure 2.8). VAT exemptions are Added Tax Mechanism for Government Suppliers, increasing due to the delayed implementation of the FAP. whereby the Treasury withholds 15 percent VAT from However, tax expenditures on income tax are declining. 14 CHAPTER 2. REVENUE MOBILIZATION: INCREASING DOMESTIC REVENUE WHILE ENHANCING COMPETITION AND MARKET CONTESTABILITY. Figure 2.6. VAT rates in Africa, 2023 Figure 2.7. VAT revenue performance, 2021 VAT rates compare favorably with those of peer countries… …but VAT revenues are low relative to Eswatini’s level of development. 20 18 18.00 16 16.00 BIH 14 MNE 14.00 HRV In percent of GDP 12 XKX ARG 12.00 MDA 10 HUN NZL DNK 8 10.00 KGZ KIRUKRSLV ALB SRB CYP SWE 8.00 LSO IND CHN NOR 6 MOZ NIC ARM BFA CMR GTM BWA TUR BHS KOR LUX 4 6.00 JPN CIV PRY CAN MDG GNB LAOESW MEXCRI IRL Mauritius Tunisia Nigeria Botswana Eswatini Equitorial Guinea Angola South Africa Kenya Zambia Tanzania Gabon Cameroon Madagascar 4.00 IDN SMR CAF KEN LBN CHE 2.00 COD TZA MAC LKA MYS 0.00 6.00 7.00 8.00 9.00 10.00 11.00 Log of GDP Per Capita Source: World Bank estimates. Figure 2.8. Tax expenditures, FY2018–22 Figure 2.9. Composition of tax expenditures, FY2018–22 Tax expenditures are increasing… …and are dominated by preferential VAT treatment. 14 1.0 60 12 40 0.5 20 10 0 0.0 2017/18 2018/19 2019/20 2020/21 2021/22 8 CIT tax expenditures - % total expenditures [LHS] 2017/18 2018/19 2019/20 2020/21 2021/22 VAT tax expenditures - % total expenditures [LHS] Non-tax revenue PIT tax expenditures - % total tax expenditures [RHS] Source: Eswatini Revenue Service. Note: CIT = corporate income tax; FY = fiscal year; GDP = gross domestic product; LHS = left-hand side (y-axis); PIT = personal income tax; RHS = right- hand side (y-axis); VAT = value added tax. Income taxes have remained stable, but there is Eswatini’s regional peers and 20.5 percent among scope to improve corporate tax revenues. The its aspirational peers.10 Revenue from total income performance of income taxes has been mixed. Most taxes rose from a low of 7 percent of GDP in 2015 revenue comes from personal income tax averaging to 9 percent of GDP in 2019 before declining to 8 5 percent of GDP from 2014 to 2023, with a smaller percent in 2023. Although income tax revenue is contribution from corporate income tax at 2 percent lower than in other SACU countries relative to GDP, of GDP. Personal income tax rates are high at 33 it remains above the trend line for Eswatini’s level percent, versus an average of 31.7 percent among of development. 10 In this Public Finance Review, Eswatini’s performance is compared with that of different sets of peers to provide more insight into its relative achievements. Four sets of peers are used in the analysis: SACU peers: Botswana, Lesotho, Namibia, and South Africa, Regional peers: African countries, Structural peers: Lower-middle-income countries, Aspirational peers: Four high-income (performing) countries—Costa Rica, Estonia, Mauritius, and Singapore. 15 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Figure 2.10. Income tax revenues, FY2015–22 Figure 2.11. Income tax performance, 2022 Income tax revenues have remained relatively stable… …and income tax performance is relatively high. 9 16.00 TTO 14.00 7 12.00 In percent of GDP NAM 10.00 MOZ 5 LSO SYC ZMB ESW 8.00 MAR BRB SLB JAM 3 COD KEN TUV KAZ 6.00 GHA SLE NPL BLZ LCA JOR DOM 4.00 LBR 1 BDI XKX GRD GMB 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2.00 NER BGD LAO LKA DMA 5.50 6.00 6.50 7.00 7.50 8.00 8.50 9.00 9.50 Income taxes (% of GDP) Log of GDP Per Capita Source: Ministry of Finance. Figure 2.12. Composition of income tax, FY2015–22 Income tax revenues depend mainly on personal income tax, and the share of corporate income tax is smaller. 5% 7% 8% 9% 9% 8% 10% 9% 11% 10% 30% 25% 29% 24% 24% 40% 36% 33% 28% 28% 55% 56% 58% 62% 62% 61% 64% 61% 64% 65% 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 Personal income tax Corporate income tax Taxes on property Other direct taxes Source: Ministry of Finance. Note: FY = fiscal year; GDP = gross domestic product. There is considerable scope to increase corporate few SOEs pay taxes and most accumulate tax arrears, tax revenues. At only 2 percent of GDP in 2023, the which were estimated at 2.1 percent of GDP in 2022. share of corporate income tax is low relative to other Some SOEs are also subsidized to provide low cost Sub-Saharan African countries. The corporate tax rate public services, creating a barrier to the entry of private is comparable with other rates in the SACU region at 25 firms. Further, the SOEs wage premium is higher percent but above the aspirational peers average. Tax compared to both civil servants and the private sector. 11 productivity is low at 8.8 percent, versus 11 percent An uneven playing field benefiting SOEs discourages among Eswatini’s regional peers and 14.6 percent competition while reducing the private sector’s among its aspirational peers (Figure 2.14). contribution to corporate income tax. Most SOEs do not pay corporate taxes, which distorts Overall, income tax revenues remain below their competition. Due to their weak financial performance, potential due to the small size of the formal private 11 Tax productivity is the ratio of the tax as a share of GDP to the tax rate. 16 CHAPTER 2. REVENUE MOBILIZATION: INCREASING DOMESTIC REVENUE WHILE ENHANCING COMPETITION AND MARKET CONTESTABILITY. sector, the large and inefficient SOE sector, the necessary reconciliations is not comprehensive. Finally, 12 narrow tax base, and low rates of tax compliance. the share of firms visited by, or required to meet with, The tax gap for income tax remains significant. The tax officials is also high. tax base focuses heavily on a few manufacturing and services subsectors. The large, inefficient SOE sector Taxing more high-net-worth individuals may further limits revenue mobilization. Corporate income tax boost income tax revenue.13 The Eswatini Revenue exemptions further reduce tax performance, and rates Service has implemented taxpayer segmentation and of tax evasion are high. A larger number of firms do compliance risk management initiatives. Taxpayers are not report all sales for tax purposes (Figure 2.15). Tax divided into five categories (large, large-medium, medium, registration, assessment, and enforcement processes small, and micro) based on annual turnover from income are weak. Registration systems for several types of tax declarations, with an additional category for SOEs. The taxes are not integrated, and penalties for failing to top 2,000 taxpayers with turnover above E 500,000 account register are lax. Information on tax arrears and the for 98 percent of revenue collection monitored through Figure 2.13. Personal income tax performance, 2022 Figure 2.14. Corporate income tax performance, 2022 Personal income tax performs relatively well… …but corporate income tax is below average. 8.00 6.00 NAM KAZ 7.00 In percent of GDP In percent of GDP 5.00 COD KGZ 6.00 SYC 5.00 ESW 4.00 ZMB NAM 4.00 SYC 3.00 KEN 3.00 KEN MDA SLE TUV XKX 2.00 MUS ESW TUV MUS KGZ MDA ALB 2.00 ALB 1.00 COD KAZ SLE LAO XKX LKA NGA LAO 1.00 0.00 6.50 7.00 7.50 8.00 8.50 9.00 9.50 6.50 7.00 7.50 8.00 8.50 9.00 9.50 Log of GDP Per Capita Log of GDP Per Capita Source: World Bank estimates. Note: CIT = corporate income tax; FY = fiscal year; GDP = gross domestic product; PIT = personal income tax. Figure 2.15. Tax investigations, 2010–22 Figure 2.16. Tax productivity, 2015–22 Tax evasion appears prevalent… …and corporate income tax productivity is low. 80 18 70 16 60 14 % of firms 50 40 12 Percent 30 10 20 8 10 6 0 4 Firms that do not Firms visited or Number of visits report all sales for required meetings or required 2 tax purposes with tax official meetings with tax 0 officials PIT productivity CIT productivity Eswatini Regional Structural Aspirational Eswatini Regional Structural Aspirational Source: Enterprise Survey, World Development Indicators Databank. World Bank, Washington DC. https://databank.worldbank.org/source/world- development-indicators. Note: PIT = personal income tax; CIT = corporate income tax. 12 Santoro and Mdluli (2019) find that taxpayers are nil-filing for various reasons, which might include tax evasion. A nil-filer is a taxpayer that files a tax return, thus abiding by the law, but reports zero business income. 13 Typically defined as those with wealth exceeding $1 million, excluding a person’s main residence (OECD 2009). 17 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES this approach. In high-income countries, high-net- income, capital gains (often on real estate), and rental worth individuals contribute a significant share of tax income. Policymakers in Eswatini could consider revenues. Much of their income comes from nonwage designing a reform agenda based on the example of sources, mostly professional services, investment Uganda (Box 2.2). Box 2.2. Taxing High-Net-Worth Individuals in Uganda The Uganda Revenue Authority introduced a dedicated unit to monitor the tax affairs of high-net- worth individuals. Within one year, the revenue collected from such individuals increased 1000 percent to about $5.5 million. The unit compiled a list of high-net-worth individuals based on information already available in the Revenue Authority data system and arranged meetings with them. The unit then created a register of wealthy people, of whom more than 65 percent filed tax returns. Source: Roel et al. 2022. Reforming the tax system to increase rationalize the country’s expansive array of tax holidays, market contestability. tax expenditures, and procurement preferences. The reduction of corporate income tax in 2024 from 27.5 Tax policies may hinder competition and slow percent to 25 percent is a welcome development and economic growth. A complex tax system has raised may help facilitate private sector investment. compliance costs for firms, limiting private sector development. Moreover, the government has used tax policy to protect certain industries, contributing to Strengthening tax administration to a marked decline in total factor productivity growth, increase domestic revenue. as well as the negligible contributions of private and public capital accumulation to overall growth. Tax rates Enhancing tax administration could significantly are already high relative to comparator countries, and improve tax revenues. Significant deficiencies in tax to raise revenue while maintaining competitiveness administration limit revenue generation and distort the the authorities will need to thoroughly review and allocation of resources. Figure 2.17. Rates for all major taxes are Figure 2.18. Underscoring the importance of significantly above peer-group raising revenue through improvements averages (2016-2022 average)… in tax administration as private investment declined. Selected tax rates Percent 35 30 formation (% of GDP) 30 Gross capital 20 25 20 10 15 0 10 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 5 0 Eswatini (%of GDP) Corporate income Personal income Value-added Sub-Saharan Africa (average, %of GDP) tax tax tax Lower-middle-income (average, %of GDP) Eswatini Regional Structural Aspirational South Africa (%of GDP) Source: KPMG, OECD and WDI. 18 CHAPTER 2. REVENUE MOBILIZATION: INCREASING DOMESTIC REVENUE WHILE ENHANCING COMPETITION AND MARKET CONTESTABILITY. A 2020 assessment of the system of tax administration in Eswatini using the Tax Administration Diagnostic • Naming and shaming corporations that have large Assessment Tool (TADAT) pointed to various weakness tax arrears (as in Montenegro and Bulgaria) or in tax administration. Key areas for improvement rewarding the country’s top taxpaying firms (as included reporting on tax performance, ensuring in Pakistan). compliance across all taxpayer obligations, encouraging electronic filing and payment, operationalizing the E-tax • Nudging taxpayers by text message, email, or letter Portal, processing disputes in a timely manner, linking to encourage voluntary compliance. the accounting systems of the Eswatini Revenue Service and the Ministry of Finance, using a wider range of audit • Sharing data and expanding the use of third-party techniques, and regularly evaluating the impact of audits data to strengthen enforcement. on compliance. Twenty of the 32 TADAT indicators received the lowest score (D), while only two indicators— • Building the capacity of the tax administration to efficient collection systems and tax-revenue forecasting ensure that the available tools are used effectively, processes—received the highest score (A). and tax officials are suitably motivated. The tax regime is complicated, and numerous The implementation of mandatory e-filing in 2021 exemptions raise compliance costs for firms. has improved filing behavior, but limited connectivity Although some VAT exemptions are necessary to hampers progress in rural areas. The uptake of e-filing reduce the regressivity of the tax, excessive exemptions significantly improved compliance, as electronically unnecessarily reduce revenue while increasing the registered taxpayers are almost 60 percent less likely complexity of the tax system and distorting price signals. than other taxpayers to report no taxable income, However, the process for introducing exemptions is and they declare 32 percent more turnover and 50 transparent, with limited official discretion, and most percent more taxable income on average. Technology tax exemptions stem from legislation. facilitates compliance through a reminder effect and by helping taxpayers track their records and fully report Perceptions of unfair taxation and ineffective their expenses and deductions (Okunogbe and Santoro revenue administration further reduce revenue 2023). However, taxpayers in remote, poorly connected potential. The Eswatini Revenue Service has limited areas still visit local offices or internet kiosks to access capacity to investigate tax evasion and enforce the web portal and file their returns (Santoro et al. compliance. Perceptions of corruption and inequality 2022). Raising the e-filing rate to 100 percent could in the country also undermine public trust and boost reported taxable income by up to 4 percent of discourage compliance. GDP, with an especially positive impact on corporate income tax. However, additional reported income Although Eswatini performs well on measures of the will not increase revenue unless enforcement is also ease of paying tax, but further reforms could improve strengthened (Santoro et al. 2022). Mandatory online compliance. The government has commended the filing and payment could raise tax revenue by 1.6 to Eswatini Revenue Service for adopting a client-centric 3.3 percent of GDP (Nose and Mengitsu 2023), while approach, but strengthening enforcement will require moving from the 40th percentile of tax-administration adopting new administrative methods and building the efficiency to the 60th would boost tax revenue by 1.4 capacity of tax officials to apply them. These include: percent of GDP (Adnan et al. 2023). • Using risk management systems to identify, While Eswatini’s performance on the e-tax index monitor, and mitigate risks around tax registration, is better than many of its regional and structural filing, payment, and reporting. peers, it still falls short of aspirational peers, and its 19 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES performance on the e-customs index is lower than practices in taxpayers’ declarations would be subject both its structural and aspirational peers (Figure to action to recover lost revenue. Finally, enforcement 2.19). The government launched the Integrated could be enhanced for taxpayers who had not applied Revenue Administration system in March 2024, and for the “debt relief” program (prioritizing taxpayers the Automated System for Customs Data (ASYCUDA) with debt exceeding E 1 million), particularly in the is to be upgraded by the end of 2024. ASYCUDA will enforcement stages, such as third-party collections simplify and speed up clearance processes at the and prosecution. port of entry. Fully digitalizing the tax administration would enhance compliance. Although taxpayer Other reforms could reduce tax evasion by formalizing registration has increased, the database needs to be the large informal sector and simplifying the taxation updated continuously, which requires the allocation of small business: of adequate resources. • Smuggling could be reduced through enhanced Figure 2.19. Index of e-Tax and e-Customs, Eswatini searches of taxpayers and individuals at the and peers, 2022 borders. The authorities would also follow up 0.8 on expired temporary imported goods where there is no proof of re-export or permanent 0.6 import or export. 0.4 • To enhance transparency, the government should review tax incentives, repeal initial allowances, 0.2 apply the corporate tax rate uniformly, simplify the tax system, and close tax loopholes. 0.0 e-Tax Index e-Customs Index • Taxing gains on the disposal of business assets Eswatini Regional Structural Aspirational could further increase tax revenue. Source: GovTech Maturity Index (GTMI) (database). World Bank, Washington, DC. https://www.worldbank.org/en/programs/govtech/gtmi Nevertheless, authorities are implementing tax reforms with the recent amendment of the Income The Eswatini Revenue Service is reforming its tax 1975, effective July 1, 2024. The Income Tax compliance function and imposing stiffer penalties (Amendment) Act, 2023 has introduced tax relief to to reduce tax evasion. As part of these reforms, natural persons who are members of co-operative filing VAT returns would require presenting invoices societies. With effect from July 1, 2024, persons supporting the information in the return, accompanied receiving interest from co-operative societies are by stiffer penalties for importers on VAT-deferred exempt from paying tax on interest earned regardless arrangements. Importers who fail to pay VAT by the of the interest amount received. Also from July 1, 2024, 27th of the following month after the importation of capital gains and losses from the disposal of business goods would be blocked from importing until they assets other than trading stock are taxed. Further, all settle their VAT debt, though net exporters would be businesses in Eswatini with an annual turnover of E excluded from this requirement. The investigation 500,000 or below are now eligible for presumptive tax, function would also be strengthened by introducing simplifying the tax system and making it easier for data matching and analysis of taxpayer administrative small business owners to meet their tax obligations data and relevant external data to identify and reduce tax compliance costs. Corporate tax rate underreporting. Inconsistencies and fraudulent was also reduced from 27.5 percent to 25 percent. 20 CHAPTER 2. REVENUE MOBILIZATION: INCREASING DOMESTIC REVENUE WHILE ENHANCING COMPETITION AND MARKET CONTESTABILITY. Maximizing the revenue impact of the expenditures, and improving tax administration. Fiscal Adjustment Plan Potential measures include submitting the bill to introduce a carbon tax; increasing the fuel tax by The second pillar of the FAP focuses on domestic $0.30 per liter within the context of the Fuel Tax revenue mobilization. The FAP aimed to increase revenue Act of 2022; introducing a property tax similar by around 2 percent of GDP over a three-year period by to that of South Africa, which ranges from 0.5 reducing tax exemptions on key goods and services and percent to 1.5 percent of property value through by amending the income tax legislation to broaden the tax comprehensive income tax legislation or consider base and strengthen administrative provisions. However, taxing market value of residential property as in most FAP reforms have yet to be implemented, due in Uganda.14 Further formalization efforts are also part to the impact of the COVID-19 pandemic, coupled necessary, as are measures to strengthen the with additional economic pressures. The government investigation and enforcement function of the has implemented reforms to eliminate key exemptions Eswatini Revenue Service, particularly for high- on VAT and reduce tax expenditures, but thus far the FAP net-worth individuals. The government started is estimated to have generated only about 0.23 percent implementing the provision in the Income Tax of GDP in additional revenue (Table 2.1). (Amendment) Act, 2023 (presumptive tax and reduction of corporate income tax). Policy options • Fully implementing the Revenue Stabilization Fund is necessary to improve fiscal management. The fund Revenue reform remains vital to consolidate the is designed to attenuate revenue volatility by saving public finances and enhance the effectiveness of excess resources when SACU transfers exceed a fiscal policy. Policy measures should focus on three given ceiling and enabling regular withdrawals when key areas: improving domestic revenue mobilization, transfers fall below a specified floor. Greater revenue smoothing the budgetary impact of SACU transfers stability will enhance budget implementation, by fully implementing the Revenue Stabilization Fund, strengthen the credibility of the Medium-Term and enhancing revenue forecasting. Fiscal Framework, and allow multiyear investment projects to proceed with minimal risk of interruption. • Increasing domestic revenue as a share of GDP The government intends to make an initial allocation should be the government’s top priority. There of about E 0.7 billion or around 0.9 percent of GDP is scope to raise additional revenue from VAT to capitalize the fund in 2024, down from the E 1.5 and corporate and excise taxes by reducing tax billion originally planned. Table 2.1. Expected additional revenue compared to outturn due to FAP, FY2022–24 % of GDP FY2022 FY2023 FY2024 FY2022–24 FAP Actual FAP Actual FAP Actual FAP Actual Income tax 0.45 0 0.45 0 0.45 0.04 0.45 0.04 Value added tax 0.33 0 0.33 0.1 0.33 0 0.33 0.1 Other taxes 0.25 0 0.25 0 0.25 0.09 0.25 0.09 Cumulative 1.03 0 1.03 0.1 1.03 0.23 1.03 0.23 Source: Ministry of Finance. Note: FAP = Fiscal Adjustment Plan; FY = fiscal year; GDP = gross domestic product. 14 Administrative reforms alone allowed Kampala, Uganda, to triple property tax revenues in three years (2011/12 to 2014/15). 21 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES • Enhancing revenue forecasting especially SACU policy. A risk assessment should outline key receipts is critical to increase the predictability assumptions, identify upside and downside risks, of the budget. Revenue projections are affected and explore how they may affect the analysis. The by the volatility of SACU receipts, tax evasion domestic revenue forecasting is better (as the and avoidance, and the large informal sector. forecasting error is less than 5 percent) but may Introducing a comprehensive revenue model be complemented by a risk assessment that could would enhance revenue forecasting, which is include variables such as economic shocks, tax critical for planning and implementing fiscal policy. evasion, and changes in economic behavior. Every At present, forecasting uses detailed econometric effort should be made to promote transparency techniques to project revenue and examine the and accountability in the revenue-forecasting impact of key variables. This approach could be process and ensure collaboration between the supplemented by input from a national economic government and various stakeholders, including model. Revenue forecasts should be subject both academics, development partners, and civil to sensitivity analysis, which assesses the impact society. Revenue-forecasting methods should of changes in economic variables on revenue, and also be subject to regular assessments to identify scenario analysis, which examines how different lessons learned and use them to strengthen the outlooks affect revenue projections and fiscal forecasting process. Table 2.2. Short- and medium-term policy options for increasing revenue Policy options Short-term actions (1 year) Medium-term actions (2–3 years) Improve the Streamline procedures for tax registration Continuous review of tax incentives and mobilization and payment. or tax expenditures (e.g., repeal initial of domestic allowances). resources (tax policy and Introduce a high-net-worth individual unit in Submit the bill to introduce a carbon tax. administration) the Eswatini Revenue Service. Increase the fuel tax by 30 cents within the context of the Fuel Tax Act of 2022. Introduce property tax similar to South Africa, ranging from 0.5 percent to 1.5 percent of the property’s value or consider taxing market value of residential property. Adequately expand the capacity to investigate tax evasion and enforce compliance. Improve the Fully implement/operationalize the Revenue Develop a best practice revenue model for predictability of Stabilization Fund, and pass legislation with forecasting revenue. revenue clear fiscal rules on the Fund. Source: World Bank analysis. 22 CHAPTER 3 Chapter 3. Expenditure Management: Strengthening public financial management to support fiscal consolidation and promote expenditure efficiency. Key takeaways by marked inefficiencies leading to limited impact on human development outcomes. Moreover, social This chapter aims to support the government in sector spending remains insignificant to notably identifying the main bottlenecks to efficient and improve human development outcomes. Third, public effective public spending.15 The chapter discusses investment levels have been low, due to being squeezed the key drivers and trends in public expenditures from by public finance pressures and a burgeoning wage bill. 2016 to 2023, including the public wage bill, expenditure However, given the small size of the private sector, arrears, transfers to SOEs, and progress on the FAP, and elevating public infrastructure remains a priority to it examines the sources of fiscal risk. The analysis uses accelerate economic activity. Finally, the sizeable SOE a multifaceted comparison to shed light on the country’s sector in Eswatini has curtailed competition and been performance relative to other SACU countries, regional a notable drain on the budget, with transfers to SOEs comparators, as well as structural and aspirational accounting for 3.1 percent of GDP in 2021. peers. The chapter concludes by presenting policy options for enhancing the quality of public spending Improvements in public financial management are and advancing Eswatini’s development objectives. vital to achieve the government’s fiscal objectives. The effectiveness of public spending is compromised Improving the allocation of spending could have a by deficiencies in public financial management, significant impact on economic activity and human including poor planning and budgeting, weak development outcomes. The economy has a large expenditure controls, and limited capacity for internal inefficient public sector, which has constrained and external auditing. Over the last decade, rising private sector activity and development. Four main public spending and weak revenue performance have spending areas are of particular interest: public wages, adversely affected public finances while hindering social sectors, investment and SOEs. First, a large economic growth. public wage bill constitutes a significant share of the budget, crowding out spending on social sectors To sustain the consolidation of fiscal spending, and investment. Second, adequate spending on reduce the fiscal deficit, and manage public debt, health and education sectors has been undermined the government could improve public financial 15 This chapter draws on data from the Boost Open Budget Portal (Database. World Bank, Washington, DC. https://www.worldbank. org/en/programs/boost-portal) and the IMF GFS (Government Financial Statistics) database. Certain sections, such the efficiency analysis, use specialized data on sectoral expenditure from the UNESCO Institute for Statistics; the Global Health Expenditure Database (WHO (World Health Organization), Geneva, https://apps.who.int/nha/database/ViewData/Indicators/ en); and the IMF Investment and Capital Stock Database. Note that data sources and government level in this section may differ from those in the macro-fiscal and revenue chapters. 23 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES management and procurement. The authorities are GDP in 2023, higher than most peers (Figure 3.1). For working to implement a Treasury Single Account and an 2016 to 2022 average, public expenditures stood at Integrated Financial Management Information System 28.6 percent of GDP, much higher than the average (IFMIS), but expenditure management still relies on for regional peers (21.1 percent) and structural a system of warrants. Commitment controls could peers (25.5 percent) (Figure 3.2). Although Eswatini be strengthened to sustain the clearance of arrears. allocates a larger share of GDP to public spending To enhance accounting controls, all payments could than its peers, its score on the 2020 Human Capital be processed through the existing system, including Index is relatively low at 0.48, well below that of foreign-currency payments and special accounts Mauritius (0.62), Costa Rica (0.63), Estonia (0.78), for capital projects. Comprehensive public financial Singapore (0.88), and the average for lower-middle- management reform will require: (a) strengthening income countries (0.48). expenditure controls; (b) digitalizing the public sector; (c) improving budget preparation and execution; (d) reforming SOEs to reduce their burden on the Recurrent spending dominates the budget. government; (e) eliminating expenditure arrears to the private sector; (f) accelerating the reform of the wage Recurrent expenditures make up the largest share bill; and (g) enhancing procurement systems. of total spending at 25.1 percent of GDP in 2023, whereas capital investment accounted for only 6.2 percent. Wages account for 10.4 percent of spending, Eswatini’s public sector is large relative to followed by current transfers spending at 5.9 percent. the size of its economy. By functional classification, general services stood at 7.1 percent of GDP and economic affairs (which Eswatini has a large public sector, with one-third of includes agriculture, energy, and transport) at 6.5 GDP devoted to public spending. The oversized role percent of GDP. These jointly account for almost half of the government, coupled with an uncompetitive of expenditure in Eswatini. The chapter concentrates business environment and the high cost of doing on four critical spending areas: (i) the public wage bill; business, has constrained the growth of the private (ii) health, education, and social protection; (ii) public sector. Public expenditure stood at 31.3 percent of investment; and (iv) transfers to SOEs. Figure 3.1. Composition of public spending, 2015–22 Figure 3.2. Public expenditure, percent of GDP, 2018-2022 Spending is picking up again, the public wage bill still accounts for a large share of public expenditures. Eswatini public expenditure is much higher than regional peers. 35 40 30 7 35 8 7 5 9 7 7 6.2 25 5 4 30 20 25 % of GDP 15 20 10 14 14 15 5 12 12 13 12 12 11 11 10.4 10 0 5 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 0 Eswatini Regional Structural Aspirational Wages and compensation Use of goods and services Wage bill Goods and services Interest payments Interest expense Current transfers Social benefits Subsidies Other Capital expenditure Other expenses Capital expenditure Source: Boost database. 24 CHAPTER 3. EXPENDITURE MANAGEMENT: STRENGTHENING PUBLIC FINANCIAL MANAGEMENT TO SUPPORT FISCAL CONSOLIDATION AND PROMOTE EXPENDITURE EFFICIENCY. Public employment costs take up a bill stem from uncontrolled hiring, weak personnel considerable share of the budget. management systems, and a lack of clear guidance on workforce planning, performance management, A large public wage bill has strained public finances, and payroll controls. The government has updated crowded out other expenditures and constrained its performance management system, but salary the development of the private sector. Despite increases and promotions are linked to years of service, pressures on the exchequer, public wages equaled 10.4 not performance, which undermines productivity. The percent of GDP in 2023, higher than the wage bill for public sector wage premium is high in Eswatini. regional comparators (7.04 percent) and aspirational comparators (6.90 percent). The size of the wage Public wages also constitute a large share of social bill reflects two factors: a large public workforce, sector spending, crowding-out vital non-salary with around 43,000 workers employed in the public expenditures. Social sector spending continues to sector in fiscal year 2023 (Figure 3.6), and generous be dominated by public wages, which has crowded salaries and benefits for civil servants. The long-term out crucial non-salary spending. The education sector growth of public employment and the public wage accounts for the largest share of the public wage bill. Figure 3.3. Share of public sector in total Figure 3.4. Share of public wage bill in GDP, employment, 2022 expenditure, and revenue, 2022 The public sector has an oversized role in SACU. This is reflected in the public wage bill’s share of GDP, expenditure, 20 and revenue. 15 14 50 10 12 40 5 10 0 8 30 Ethiopia Uganda Sao Tome and Principe Zambia Chad Senegal Mauritania Central African Republic Rwanda Benin Tanzania Guinea Lesotho Botswana Eswatini Madagascar Cabo Verde Burkina Faso Malawi Gabon Zimbabwe 6 20 4 2 10 0 0 Eswatini Regional Structural Aspirational Percent of GDP Percent of public expenditure (RHS) Percent of public revenues (RHS) Figure 3.5. Wage bill, FY2016–23 Figure 3.6. Public service headcount, FY2016–23 The wage bill is moderating... ...as the number of public servants declined. 8,000 46,000 45,627 7,413 7,332 7,498 45,264 7,000 6,914 7,089 7,124 45,133 6,505 45,000 44,771 6,000 44,279 5,320 44,000 Million LCU 5,000 43,456 43,126 4,000 43,000 3,000 42,000 41,907 2,000 41,000 1,000 - 40,000 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 Source: Eswatini Ministry of Finance; World Bank 2022; Boost. Note: FY = fiscal year; LCU = local currency units. 25 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES From 2018 to 2022, the public wage bill accounted average for regional peers. Around 3.6 percent of GDP for 10.8 percent of GDP, with the education sector went to the health sector in 2022, while 4.6 percent accounting for 4.0 percent of GDP. By contrast, regional went to education. Eswatini spends approximately peers spend an average of 2.4 percent of GDP of the 1 percent of its GDP on the five major social grant education sector, structural peers 2.7 percent, and programs (Orphan and Vulnerable Children, National aspirational peers 3.1 percent. At 12.1 percent of total Care Points, Elderly Grant, School Feeding and spending, the health sector wage bill is comparable Emergency Food Aid), well below the average for Sub- to the average for regional peers (11.6 percent) and Saharan Africa. Though pro-poor, these programs have structural peers (9.4 percent), but less than half the marginal effects on poverty and inequality. No program average for aspirational peers (30.2 percent). reduces either the Gini index or the poverty rate by more than 1 percentage point due to low benefit levels, the exclusion of many poor and vulnerable households, Improving expenditure efficiency and the inclusion of many non-poor households.16 could facilitate progress on human Overall, though the coverage of social protection is development indicators. high, the adequacy is low at 6.5 percent compared 11.9 for regional averages. Improving expenditure efficiency may help improve human development outcomes given the substantial Despite the relatively large public budget, spending resources allocated to the education and health is inefficient across sectors, particularly the health sectors. Spending on education and health is higher sector. While spending on primary education is relatively than regional averages, while spending on social efficient, the education system does not meet the needs protection is the lowest in the region. Education, health of the labor market. Spending on infrastructure is less and social protection spending absorbed about 9.6 efficient than in aspirational peers but more efficient percent of GDP between 2018 and 2022, above the than in other peers (World Bank 2019). Figure 3.7. Functional classification of public Figure 3.8. Functional classification of public expenditures, 2016–22 (% of GDP) expenditures, 2018–22 (% of GDP) Health and education spending are declining as a share of GDP. Health and education spending is relatively high. 7.0 20 Period average, 2018-2022, 6.0 5.0 15 % of GDP % of GDP 4.0 3.0 10 2.0 1.0 5 0.0 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 0 Eswatini Regional Structural Aspirational Social protection Education Health Health Education Social protection Source: World Bank estimates. 16 See World Bank (2021) The Social Assistance Programs and Household Welfare in Eswatini Report. 26 CHAPTER 3. EXPENDITURE MANAGEMENT: STRENGTHENING PUBLIC FINANCIAL MANAGEMENT TO SUPPORT FISCAL CONSOLIDATION AND PROMOTE EXPENDITURE EFFICIENCY. Figure 3.9. Efficiency of education spending, Figure 3.10. Efficiency of infrastructure spending, 2010–22 2010–22 Spending on primary education is relatively efficient. Spending on infrastructure is less efficient than in aspirational peers but more efficient than in other peers. 100 100 80 Electricity scores 80 60 60 Efficiency scores 40 40 20 0 20 and skills Gross primary enrollment Net primary enrollment Gross secondary enrollment Not secondary enrollment Youth literacy Average years of schooling Level of education 0 Transport Infrastructure Roads Air Transport Electricity Railroad Eswatini Regional Structural Aspirational Eswatini Regional Structural Aspirational Source: World Bank estimates. Stabilizing public investment to grants (11 percent). Most capital investment goes to facilitate high growth. “other sectors” (2.1 percent of GDP) and transportation (1.5 percent of GDP), which together account for over Capital investment, which accounts for 4.7 percent 75 percent of capital spending. Eswatini’s capital- of GDP (average for 2018-2022), is mainly financed expenditure-to-GDP ratio is higher than the averages by the government. Since 2016, more than three- for regional peers (3.6), structural (4.3) and aspirational quarters of capital spending has been financed from peers (4.6 percent) (Figure 12). Agriculture accounts local sources, and only in 2023 the share financed by for 12.2 percent of capital investment, almost twice the local sources dropped to 43 percent, with the balance average for regional peers (6.8 percent) and structural covered by foreign loans (46 percent) and foreign peers (6.2 percent). Figure 3.11. Decomposition of capital spending by Figure 3.12. Capital spending by sector, 2018–22 (% financing source, FY2015–23 (% of of GDP) capital spending) Capital spending is concentrated in transport. Capital spending is dominated by domestic financing. 5 % of total capital funding 4 3 2 1 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 0 Eswatini Regional Structural Aspirational Education Health Water and sanitation Energy Domestic financing Foreign grants Foreign loans Transport Agriculture Other Source: Boost, Eswatini Ministry of Finance, and World Bank estimates. 27 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Budget execution is characterized by overspending on records of arrears. Limited project management recurrent expenditures and underspending on capital capacity contributes to the slow implementation of investment. In the 2018–23 fiscal years, the average capital projects, resulting in underspending, which budget execution rate was 85.6 percent.17 Recurrent further undermines the overall credibility of the budget expenditure had an execution rate of 103.0 percent, process (ADB 2022). indicating overspending, whereas the execution rate for capital expenditure was 54.6 percent (lower than all comparators), pointing to underspending. The execution Reforming state-owned enterprises rate of the public wage bill is 103.9 percent and spending could bring significant fiscal savings. on goods and services is 108.7 percent, underscoring the rigid nature of these expenditures. Overall, on total SOEs impose a considerable strain on the budget. expenditure by functional classification, the sectors Transfers to SOEs currently account for around 3 with below-average execution rates are housing (68.8 percent of GDP, and the size of the SOE sector has percent), and general services (72.4 percent) while been increasing over time. The number of Category A the rest like education overspends due to high wages. SOEs rose from 35 in 2010 to 49 in 2024.18 As a result, For capital spending, all sectors underspend overall, the size of the SOE workforce doubled from fewer than signifying that capital expenditure remains a residual. 4,000 employees in 2017 to about 8,000 in 2022. Weak budget execution stems from poorly prepared projects, unrealistic budgets, impractical financing Reforms to large, inefficient SOEs could improve instruments, persistent and growing expenditure service delivery, private-sector competition, and arrears, and cashflow problems (Table 3.1). In addition, reduce pressure on public finances. While only 10 the accounting system lacks an accounts-payable SOEs carry out commercial activities, seven are large. module, which makes it difficult to maintain reliable These SOEs play an important role in providing basic Table 3.1. Execution rates for capital spending, 2018–22 average % of approved amounts Eswatini Regional peers Structural peers Aspirational peers Capital expenditure 54.6 70.6 76.3 91.1 Education 79.5 64.1 72.4 82.5 Health 43.2 66.0 77.3 90.1 Water and sanitation 35.0 120.5 65.3 69.9 Energy 76.4 16570.2 69.2 96.0 Transport 74.5 102.0 80.2 86.8 Agriculture 42.0 64.5 117.6 83.3 Source: Boost. 17 The execution rate of the budget is the percentage of the approved budget that was actually executed, that is, for which expenditure was undertaken. 18 Eswatini has an unusually broad definition of SOEs, which include traditional public enterprises along with development agencies, universities, hospitals, the Eswatini Revenue Service, regulatory agencies, the central bank, and even some town councils. SOEs are classified as: (a) Category A: wholly owned by government, or in which the government has a majority interest, or which is dependent on government subvention for its financial support; or,(b) Category B: in which government has a minority interest, or which monitors other financial institutions, or which is a local government authority. Currently, there are 49 Category A and 22 Category B enterprises. Of the 49 SOEs in Category A, only 10 undertake commercial activity (Kwaramba and others 2023). 28 CHAPTER 3. EXPENDITURE MANAGEMENT: STRENGTHENING PUBLIC FINANCIAL MANAGEMENT TO SUPPORT FISCAL CONSOLIDATION AND PROMOTE EXPENDITURE EFFICIENCY. infrastructure services to businesses and households, regulations tend to restrict the entry of new market with significant direct and indirect effects on economic players, foster collusion among existing players, activity. Most SOEs are a net drain on the budget: undermining competition (IMF 2023). Given the chronic losses mean that few have paid dividends, social and developmental mandates of SOEs, they though the seven large commercial SOEs have been are sometimes required to set prices for their services marginally profitable (Kwaramba et al. 2023). Moreover, that are below cost-recovery levels, increasing SOE’s SOEs undermine competition by offering goods reliance on government transfers while discouraging and services at below-market prices, and many are private service provision. Restructuring the SOE protected by specific policies and regulations. sector would increase the level and quality of private investment, reduce inefficiencies, and free up public Although the commercial SOEs do not currently impose resources for investment and for paying down debt and an excessive fiscal burden, they should be closely eliminating arrears. The share of arrears has more than monitored, as they remain vulnerable to changes in tripled, from a low of 0.4 percent of GDP in fiscal 2018 domestic and external conditions. Budget support to to 2.2 percent in fiscal 2022 (Figure 3.13). commercial SOEs consumes scarce public resources that could otherwise be used for priority social spending The large SOE sector creates significant rigidity in or infrastructure investments. For example, annual budget execution, and SOE losses contribute to the budget transfers to commercial SOEs equal almost fiscal deficit. A recent comprehensive assessment 10 percent of the education budget. An uneven playing (ESEPARC 2021) identified several challenges: (a) the field benefiting commercial SOEs discourages private 1989 Public Enterprises (Control and Monitoring) Act competition and undermines efficiency. Both the FAP that governs SOEs is outdated; (b) the overlapping and the National Development Plan for 2024–28 identify mandates of SOEs create duplication; (c) a lack of SOE reform as an important priority for accelerating separation between the ownership, regulation, and growth and ensuring fiscal sustainability. The FAP aims management functions upend competitive neutrality, to reduce transfers to SOEs by about 4 percent of total and the resulting preferential treatment of SOEs crowds revenue or 1 percent of GDP. The implementation of the out the private sector; (d) there are no controls for SOE Roadmap could reform the management of these establishing new SOEs; (e) corporate governance and institutions and redefine their role in the economy. accountability practices are weak; (f) monitoring by the Public Enterprise Unit is weak; and (g) the 1989 Public SOEs constrain private investment by competing Enterprises (Control & Monitoring) Act and the 2017 directly with private firms, increasing operating Public Finance Management Act define conflicting costs, and creating barriers to market entry. Sector roles for the Public Enterprise Unit. Figure 3.13. Transfers to SOEs, FY2018–22 Figure 3.14. SOE arrears, FY2018–22 Despite significant growth in transfers to SOEs… …their arrears continue to rise. 3.5 2.5 3.0 2.0 2.5 % of GDP % of GDP 2.0 1.5 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: Kwaramba et al 2023. 29 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Strengthening public financial arrangements, and internal controls, along with high management is vital for improving the levels of arrears arising from a weak commitment- effectiveness of fiscal policy. control system and limited capacity for internal and external auditing (World Bank 2023b). Addressing these Deficiencies in public financial management systems, challenges (Table 3.2) will require fully adhering to the including procurement, contribute to inefficient 2017 Public Finance Management Act, introducing spending. Key challenges involve fiscal planning an IFMIS, and establishing a public investment and budgeting, cash management, accountability management information system (ADB 2022). Table 3.2. Challenges in public financial management Categories Challenges and actions Financial management The existing Treasury Accounting System is decades old. Its technology is outdated, and challenges it lacks an accounts-payable module. Ministries, departments, and agencies maintain insufficient information on the resources they receive directly, and regular bank reconciliations are not performed. Accounting records are unreliable, with errors in government bank balances, financial liabilities, and revenue reporting. The Treasury does not consolidate ministries’ quarterly budget-to-actual comparison reports to present a government-wide financial position, and ministry-generated data are not reconciled with the Treasury Accounting System. Donor projects are accounted outside the Treasury Accounting System, with independent banking arrangements. The recording of loans and guarantees to public enterprises and subnational governments is incomplete, and there is no system to verify the comprehensiveness, validity, and accuracy of loan and guarantee information. Resource allocation More transparent rules for horizontal allocations between regions are needed. Costing, planning and Multiyear plans are not adequately costed. other challenges Plans for managing and clearing existing expenditure arrears are not in place. Commitment controls are weak. Budget preparation and Financing sources for medium-term fiscal frameworks and annual budgets are not identified. execution challenges Budget circulars should be issued with expenditure ceilings for all line ministries and by main expenditure lines. The commitment approval processes should be transparent and rules-based. The Ministry of Finance should bear final responsibility for budget preparation. Budget preparation and budgetary controls should be automated through the rollout of the Treasury Single Account and the IFMIS. Project planning and execution procedures should be standardized by developing a public investment management manual and information system. Commitment controls The government still relies on a system of warrants to regulate expenditures, and weak commitment controls contribute to the accumulation of arrears. Certain commitments and payments are still processed outside the existing accounting system, such as foreign-currency payments and special accounts for capital projects. Source: World Bank analysis and IMF 2023. 30 CHAPTER 3. EXPENDITURE MANAGEMENT: STRENGTHENING PUBLIC FINANCIAL MANAGEMENT TO SUPPORT FISCAL CONSOLIDATION AND PROMOTE EXPENDITURE EFFICIENCY. Enhancing public procurement systems and efficiency. Overall, the large, inefficient public would improve public spending procurement system increases pressure on public efficiency and value for money. finances and constrains growth opportunities for the private sector. The 2011 Public Procurement Act and the 2020 Public Procurement Regulations form the legal foundation Implementing e-Government Procurement (e-GP) of the public procurement regulatory framework. could bring fiscal savings, improve efficiency and As Eswatini spends around $854 million (about 22.8 value for money. The government is implementing percent of GDP)19 on purchasing services, works, and an e-Government Procurement strategy and program, supplies, procurement plays a critical and strategic role in and the first modules of e-registration, e-procurement improving service delivery and development outcomes. planning, and e-tender advertising are expected to However, the government cannot fully leverage be ready in early 2024. The rollout of the system will procurement to improve value for public money, as generate high-quality procurement data and will increase it does not have sufficient professional staff skilled in competition by making it easier for private firms, procurement planning and execution and still relies on especially small and medium enterprises, to participate paper-based systems. The Eswatini Public Procurement in public contracts. Greater competition should improve Regulatory Agency (ESPPRA) has introduced some value for money, reduce transaction costs, generate good practices, but many procurement vulnerabilities savings, and enhance trust in government by increasing remain, including low private-sector confidence in the accountability and transparency. The World Bank Global transparency and integrity of the procurement system, Public Procurement Database shows that implementing unethical market practices, perceived corruption in e-Government procurement brought fiscal savings procurement transactions, and a lack of compliance of between 0.1 to 1.4 percent of GDP across various with procurement regulations. These issues stem countries. Eswatini’s full implementation of the system from the limited capacity of procuring entities, poor will bring much needed fiscal savings. The current paper- internal controls, weak contract management, the based public procurement system makes it difficult to absence of a framework for citizen engagement track and report on policy, performance, and compliance. in contract monitoring, and a lack of procurement The resulting lack of information constrains the ability data to inform evidence-based policymaking. A of institutions to assess the effectiveness of policy more robust regulatory environment that increases decisions and programs and monitor progress toward the accountability and responsibility of procuring public investment goals, leading to weak accountability entities and staff would help improve transparency and an inability to take corrective action. Figure 3.15. Fiscal savings through e-government procurement (% of GDP) 1.6 1.2 0.8 0.4 0 Bangladesh Austria Russian Thailand Federation Tajikistan Angola Indonesia Ecuador Bosnia and Herzegovina Kazakhstan Kyrgyz Republic Georgia Ukraine Nepal Fiscal savings from e-government procurement (% of GDP) Source: World Bank (2024) Global Public Procurement Database. 19 Government spending, percent of GDP–Country rankings (database). TheGlobalEconomy.com. https://www.theglobaleconomy. com/rankings/Government_size/Africa/ 31 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Building the institutional capacity to manage procurement is critical to enhance the effectiveness Proposed reforms by the FAP have so and quality of public services. Many ministries fail to far proven difficult to fully implement. separate procurement functions adequately or lack a procurement function altogether, which compromises The FAP targeted a cumulative reduction in public internal controls and transparency and leads to expenditures equal to 4.2 percent of GDP between bottlenecks in the procurement process. Currently there the 2021 and 2023 fiscal years. The civil-service are no clear schemes of service or job-effectiveness hiring freeze, the elimination of redundant posts, and descriptions. Public procurement training courses below-inflation cost-of-living adjustments helped and materials are also needed. The establishment of cut the public wage bill by about 2 percent of GDP a skilled, ethical, and capable cadre of procurement over the period (IMF 2023). According to the Ministry professionals would help improve service delivery and of Finance, the hiring freeze reduced recurrent value for money. expenditures by 3.0 percent in fiscal 2022 and by 4.8 percent in fiscal 2023, but in November 2023 A public-private partnership policy has been in place the government announced the cancelation of the since 2011, but public-private partnerships remain hiring freeze, jeopardizing the projected savings of 4.8 underdeveloped. It is unclear how it aligns with the percent for fiscal 2024. In response, the government latest procurement reforms. A few attempts to partner performed a management audit study to identify with the private sector were not properly structured critical vacant positions and eliminate redundant and immediately added to the government’s domestic and noncritical positions and underutilized units. The debt stock. authorities are also considering the introduction of the Enhanced Voluntary Early Retirement Scheme These procurement and public financial management in 2024 to reduce the civil service by 10 percent.20,21 challenges contribute to deteriorating institutional Meanwhile, progress on curbing transfers to SOEs via performance in various dimensions of governance, restructuring and privatization has been limited. The as reflected in international governance indicators. public investment program was partially rationalized, Eswatini ranked 35th out of 54 African countries on emphasizing the completion of existing projects, and the 2021 Ibrahim Index of African Governance. Its procurement reforms, such as eliminating trading score of 43.9 percent was well below the average accounts, were partially implemented. of 48.9 percent. According to the 2019 Open Budget Survey, Eswatini made more budget information Development partners have suggested including available in 2021 than in 2019, but this was not a revised FAP within the Medium-Term Fiscal sufficient to improve its transparency score. The Framework and anchoring this around achieving public is unable to participate in the budget process, a primary budget surplus by fiscal 2027. Partners resulting in a score of 0 percent for this dimension in have further suggested the development of a credible the 2021 Open Budget Survey. The 2020 Bertelsmann roadmap to guide reductions in public wage bill to Stiftung’s Transformation Index provides evidence of at most 10 percent of GDP in the medium term low levels of participation by civil society and limited (IMF 2023). Although the FAP has not yet been fully freedom of expression, with a score of 2 out of 10 in implemented, it demonstrates the government’s both dimensions. commitment to reform. The policy actions proposed 20 IMF (2023); Government of Eswatini (2023b). 21 For a synopsis of progress on the implementation of FAP, see Box 1.2 in Government of Eswatini (2021a). 32 CHAPTER 3. EXPENDITURE MANAGEMENT: STRENGTHENING PUBLIC FINANCIAL MANAGEMENT TO SUPPORT FISCAL CONSOLIDATION AND PROMOTE EXPENDITURE EFFICIENCY. in this PFR are in line with the measures of the FAP engage the public during budget formulation and to and will bolster its implementation. monitor budget implementation and actively engage with vulnerable and underrepresented communities, The COVID-19 pandemic, spillovers from Russia’s war either directly or through civil society organizations. in Ukraine, and rising domestic tensions have made it difficult to implement public finance reforms. Efforts Reforming SOEs. To improve the management to reduce the wage bill substantially or reform SOEs and accountability of SOEs, the authorities should proved politically inexpedient, given the environment as consider: (a) strengthening the institutional capacity these measures would significantly affect employment of the Public Enterprise Unit to implement the SOE and incomes. Reform Roadmap; (b) supporting the merger, closure, or restructuring of the five SOEs identified as priorities by the Cabinet in the SOE Roadmap; (c) continuing Policy options to implement the SOE Reform Roadmap; and (d) strengthening the legal and institutional framework Despite significant progress in improving public for the SOE sector. financial management, many gaps remain. The government is developing a Treasury Single Account, Eliminating expenditure arrears. To minimize the transitioning to an IFMIS by 2025, and introducing an economic consequences of arrears accumulation, e-Government Procurement program. However, further the government could: (a) prioritize arrears clearance work is needed to: (a) strengthen budget preparation and minimize the accumulation of further arrears; (b) and medium-term budget frameworks, (b) improve institute strong and transparent commitment controls budget execution and commitment controls, (c) develop and cash-management systems; and (c) implement an arrears clearance strategy, (d) manage transfers an arrears-prevention strategy by ensuring there are to public enterprises, and (e) better manage public no financing gaps in the budget. investment programs. Other policy options include: Introducing comprehensive public wage-bill reform. Accelerating the digitalization of the public sector. The To improve the fiscal outlook and enhance the government could (a) continue to rollout the Treasury performance of the public sector, the government Single Account, as a first step in digitalizing public could: (a) continue to implement the expenditure- financial management systems, and (b) advance the control reforms in the FAP; (b) develop and implement rollout of the IFMIS. a revised FAP for the period beyond 2024; and (c) assess the fiscal and economic impacts of measures Strengthening budget preparation and execution. To to control the public wage bill. enhance budget processes, the government could consider: (a) publishing monthly cash-based budget Enhancing public procurement. To improve public execution and fiscal outturn reports; (b) identifying procurement, the government could: (a) professionalize adequate financing sources for the Medium-Term the public procurement function through institutional Fiscal Framework and annual budgets to eliminate strengthening; (b) build the capacity of the supreme financing gaps; (c) completing a PEFA assessment audit institution to conduct procurement audits; (c) fast- as a precursor to a public financial management track the development and rollout of the e-Government 22 strategy; and (d) increasing budget transparency Procurement program; and (d) strengthen the and citizen participation by piloting mechanisms to regulatory role of ESPPRA. 22 The last PEFA assessment was completed in September 2011. 33 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Table 3.3. Short- and medium-term expenditure policy options Policy options Short-term actions (1 year) Medium-term actions (2–3 years) Improve Rollout the Treasury Single Account. Rollout the IFMIS. digitalization of the public sector Strengthen Publish monthly cash-based budget Complete a PEFA assessment as a precursor to budget execution and fiscal outturn reports. a public financial management strategy. The last preparation and PEFA was completed in September 2011. execution Identify adequate financing sources for Increase budget transparency and citizen the Medium-Term Fiscal Framework participation by piloting mechanisms to engage and annual budgets to eliminate the public during budget formulation and to financing gaps. monitor budget implementation and actively engage with vulnerable and underrepresented communities, directly or through civil society organizations representing them.1 Reform SOEs Strengthen the institutional capacity of Continue the implementation of SOE Reform the Public Enterprise Unit to implement Roadmap. the SOE Reform Roadmap. Support the merger, closure, or Strengthen the legal and institutional framework restructuring of SOEs identified and for the SOE sector. approved as “low-hanging fruits” (five entities) by the Cabinet in the SOE Roadmap. Eliminate Prioritize arrears clearance and minimize Implement arrears prevention strategy by ensuring expenditure the accumulation of further arrears. there are no financing gaps in the budget. arrears Institute strong and transparent commitment control and cash management systems. Introduce Continue the proposed expenditure Develop and implement a revised/recalibrated FAP comprehensive control reforms in the current FAP. to cover the period beyond 2024. public wage bill reform Assess the fiscal and economic impacts of the public wage bill expenditure control measures. Enhance public Professionalize the public procurement Fast-track the development and rollout of an procurement function through institutional e-Government Procurement program. strengthening. Build the capacity of the supreme audit Strengthen the regulatory role of ESPPRA. institution to conduct procurement audits. Source: World Bank staff and IMF (2023). 1. Eswatini has a public (budget) participation score of 2 (out of 100), lower than South Africa at 19, but similar to Lesotho. For more policy options, see the Open Budget Survey: https://internationalbudget.org/sites/default/files/country-surveys-pdfs/2021/open-budget-survey- eswatini-2021-en.pdf 34 CHAPTER 4 Public Investment Management: Building productive physical capital while mainstreaming climate considerations. Key takeaways projects are prepared, budgeted, and implemented, the sooner public service delivery can be improved. This chapter analyzes Eswatini’s public investment management system and the extent to which it Climate-smart public investment management is incorporates climate change mitigation and adaptation an opportunity for individual countries to make the measures. It examines the impact of public investment transformation to resilient, low-carbon development. on gross capital formation; considers reforms for A climate-smart public investment management strengthening the public investment management system, system is an important tool for governments to realize especially in terms of improving project preparation and their international climate commitments by embedding implementation procedures; and assesses how climate climate considerations in national policies and planning considerations can be more effectively incorporated decisions across all sectors. In the absence of a well- into public investment management to promote functioning public investment management system, resilient, low-carbon development. countries’ ability to address climate change through public and private investments is severely limited. Public investment management is crucial to the efficient allocation of scarce fiscal resources. Good project choices tend to bring economic benefits, Enhancing the impact of public growth, and better distributional outcomes. Project investment on gross capital formation choices also affect the future recurrent budget because completed projects need maintenance, staff, and other After falling as a share of GDP until about 2012, current spending.23 Conversely, poor project selection investment in Eswatini has risen slowly and steadily. can be costly, as the inefficient use of resources can Public investment has averaged around 6 percent of incur fiscal losses while resulting poor service delivery GDP, but it has fluctuated over time, reaching a low in and even slower growth. 2012 in line with a broader decline in total investment. Public investment execution rates are low (see previous Strengthening a public investment management system chapter). Private investment likewise fell significantly to improve economic performance takes persistence. through 2015, reaching a low of about 5 percent of The project preparation and construction phases are GDP before partially recovering. Since 2011, private often lengthy, and choices about capital assets can only investment in Eswatini has accounted for only 52 change from year to year, affecting the stock of assets the percent of total investment, down from 61 percent government can use in future years. The sooner good over the previous decade. 23 Over 90 percent of the physical and institutional assets currently available for producing public services have been determined by past capital budget choices. 35 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Table 4.1. Real GDP and investment Country or group Economic indicator Period of countries (Average over period) 2000-10 2011-22 Eswatini GDP growth rate (%) 3.4 2.6 (LMIC)1 Gross capital formation (% GDP) 18.4 12.8 Incremental capital-output ratio 5.4 4.8 South Africa GDP growth rate (%) 3.5 1.2 (UMIC) Gross capital formation (% GDP) 17.2 16.8 Incremental capital-output ratio 4.9 14.2 Botswana GDP growth rate (%) 3.1 3.6 (UMIC) Gross capital formation (% GDP) 29.5 29.0 Incremental capital-output ratio 9.6 8.0 Lesotho GDP growth rate (%) 3.3 1.1 (LMIC) Gross capital formation (% GNDI)2 18.2 20.3 Incremental capital-output ratio 5.6 18.6 Namibia (UMIC) GDP growth rate (%) 4.5 1.8 Gross capital formation (% GDP) 21.8 22.1 Incremental capital-output ratio 4.8 12.2 Mozambique GDP growth rate (%) 7.4 4.6 (LIC) Gross capital formation (% GDP) 14.2 28.5 Capital-output ratio 1.9 6.3 Sub-Saharan Africa GDP growth rate (%) 5.2 2.8 Gross capital formation (% GDP) 21.7 22.1 Incremental capital-output ratio 4.2 7.8 Lower-middle- GDP growth rate (%) 5.5 4.2 income countries Gross capital formation (% GDP) 29.3 29.1 Capital-output ratio 5.3 6.8 Upper-middle- GDP growth rate (%) 6.6 4.8 income countries Gross capital formation (% GDP) 28.0 34.1 Incremental capital-output ratio 4.2 7.1 Source: Estimates based on data from World Development Indicators. Note: SSA = Saharan Africa country group, LMIC = 54 lower-middle-income countries, UMIC = 54 upper-middle-income countries, LIC = low- income country 1. Indicators of the country income group for each country 2. GNDI = gross national disposable income = GDP + net foreign income + net transfers. In Lesotho, GNDI exceeded GDP by varying degrees between 35% and 81% over 2000-21. Hence, GNDI gives a better estimate than GDP of the size of the Lesotho economy. 36 CHAPTER 4. PUBLIC INVESTMENT MANAGEMENT: BUILDING PRODUCTIVE PHYSICAL CAPITAL WHILE MAINSTREAMING CLIMATE CONSIDERATIONS. The government’s climate-related expenditures 2020 and $60.7 billion in 2022. Total commitments by have been modest to date. Budget allocations to multilateral banks rose sharply from just $25.1 billion climate-related activities rose from 2.9 percent of the in 2015.27 The World Bank Group reported delivering national budget in fiscal 2018 to 9 percent in fiscal a record $31.7 billion in climate finance in fiscal 2022, 2021, then declined to 7 percent in fiscal 2023. Most up 19 percent from the prior year and representing 36 of these expenditures are related to infrastructure, with percent of total World Bank Group financing, exceeding about 70 percent going to the water and agricultural its target of 35 percent.28 sectors. About 90 percent of climate expenditures focus on adaptation.24 Accessing low-cost financing for climate-resilient investment over the medium term Strengthening the public investment will require improving the design of capital projects, management system building appraisal capacity at the preparation stage, and strengthening monitoring mechanisms.25 Mainstreaming climate considerations into the public investment management system is crucial to access The primary sources of funds for climate-related the growing supply of climate finance. In 2019, a joint projects are donor organizations such as the African team from the IMF and the World Bank conducted a Development Bank, the World Bank, the UN agencies, Public Investment Management Assessment (PIMA)29 and bilateral donors, but Eswatini’s use of climate in Eswatini. Given the extent of the weaknesses finance has not kept pace with the growing availability in the system, the PIMA report’s wide-ranging of these resources. Annual climate-finance flows recommendations include reforms to the legislative and reached $803 billion in fiscal 2020, up 12 percent from regulatory framework, improvements public investment two years earlier (UNFCCC 2021). Flows from developed management guidelines and project appraisal manuals, to developing countries increased by 6-17 percent capacity building, enhanced budget procedures, and 26 over the two years. Multilateral development banks reforms of the procurement laws and regulations (Box reported combined climate-finance commitments of 4.1). These recommendations, however, have not yet $66 billion in 2020 and $99.5 billion in 2022, with $38 been fully implemented due to delays and disruptions billion going to low- and middle-income countries in caused by the COVID-19 pandemic. 24 UNICEF Eswatini (2023). 25 The United Nations Development Programme (UNDP) has provided significant support to Eswatini to enhance its readiness to manage climate change projects and finance, in terms of its general approach (laid out in UNDP 2015). The UNDP has assisted Eswatini with the preparation of the Nationally Determined Contributions 2021, is supporting the development of a Long-Term Low Emissions Strategy for Eswatini, supported the development of its Inclusive Budgeting and Financing for Climate Change report (Government of Eswatini 2022a), and is also supporting specific climate change projects such as a proposed project for increasing the resilience of agropastoral communities through integrated ecosystem and watershed management. This project needs to develop a bankable proposal to be funded by a Green Climate Fund. The UNDP proposes to support this through its Green Climate Fund Readiness Program for assisting with the development of the capacity to access green finance. 26 UNFCCC SCF (2022). 27 Multilateral Development Banks (2021, 2023). 28 https://www.worldbank.org/en/news/factsheet/2022/09/30/10-things-you-should-know-about-the-world-bank-group-s- climate-finance 29 The report on the Public Investment Management Assessment (IMF 2019) is referred to here as PIMA 2019. 37 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Box 4.1. PIMA recommendations The recommendations of the 2019 PIMA assessment include: • Improving the reliability and credibility of the Medium-Term Fiscal Framework and annual budgets and strengthen the link between the framework, annual budgets, the planning process, and public investment decisions (Ministry of Economic Planning and Development, Ministry of Finance, Public Enterprise Unit). • Strengthening the project appraisal, prioritization, and selection processes by developing and implementing a regulatory framework and supporting guidelines and manuals (Ministry of Economic Planning and Development, Ministry of Finance). • Conducting, with independent advice, a review of these projects with a view to identifying the causes of cost and time overruns and finding the most efficient path to bring the project to completion and into viable operation (Ministry of Economic Planning and Development, Ministry of Finance). • Drafting, issuing, and enforcing the new procurement regulations (Ministry of Finance, Eswatini Public Procurement Regulatory Agency). • Strengthening budget execution, commitment controls, and cash management (Ministry of Finance, Ministry of Economic Planning and Development). • Reorganizing existing capabilities for project implementation management (Ministry of Economic Planning and Development, Ministry of Finance, Ministry of Public Service, Ministry of Public Works and Transport). • Assigning responsibility for overseeing the entire portfolio by administering the guidelines for appraisal and selection of projects to the Ministry of Economic Planning and Development (Cabinet, Ministry of Economic Planning and Development, Ministry of Finance, Ministry of Public Works and Transport). • Strengthening the maintenance of public capital assets to avoid unnecessary costs (Ministry of Public Works and Transport, Ministry of Finance). Source: IMF 2019. Improving project preparation and management procedures are weak, particularly for implementation procedures. project preparation. Although a public investment management information system is being Beyond the key issues raised in the PIMA, core developed, it does not differentiate between the elements of the public investment management analytical and screening techniques required by system require reforms and institutional different project types. Project design and appraisal strengthening. The processes governing the overall involve highly skilled professional services, and the development and regulation of public investment government may need to obtain expensive technical 38 CHAPTER 4. PUBLIC INVESTMENT MANAGEMENT: BUILDING PRODUCTIVE PHYSICAL CAPITAL WHILE MAINSTREAMING CLIMATE CONSIDERATIONS. designs, legal advice, and other information for a During the screening process, the design, appraisal, proper appraisal. review, and approval of project concept documents should proceed through three parallel channels: The initial screening should be performed at the Channel 1: Small repeated projects. The concept identification stage to ensure that all projects entering document and other proposal materials are prepared the process are aligned with national and sector by the line ministry’s project unit and are reviewed, planning priorities and have a reasonable prospect adjusted, approved, or rejected by the ministry’s project of gaining funding. The ministerial project committees committee. Approved projects are forwarded to the should be responsible for the initial screening. If the inter-ministerial project committee in the Ministry of project is approved, a more detailed concept document Economic Planning and Development for a rapid review can then be prepared. 30 Ideally the sector plans should and a decision to amend, approve, or reject the project. be informed by: (a) feedback from evaluations of As these are repeated projects, their financial viability and operational projects and appraisals of projects under implementation plans for procurement, construction, preparation; and (b) analysis of the gaps between and operations should be well established. Approved supply and demand for services in the various sectors. projects are made available for budget selection by the New projects should be initiated to fill existing demand Planning and Budget Committee. gaps or those predicted to emerge over the near term. Estimates of the supply necessary to fill demand gaps Channel 2: New or repeated medium-sized projects. At should consider both the need to meet new demand the proposal stage, a more complete appraisal of the and the need to rehabilitate existing infrastructure and financial viability and risks is conducted. Unless major service-provision systems in sectors such as electricity, economic externalities are expected, economic viability water, education, health, and transportation. is determined by the size and growth rate of demand for the project’s services and the anticipated cost- Large or complex projects require a more complete effectiveness of those services. These projects require appraisal and a more thorough review of alternatives. more thorough reviews by both the line ministry’s A full economic appraisal goes beyond estimating the project committee and the inter-ministerial project adequacy and cost-effectiveness of service delivery, committee before being forwarded to the Planning though specific appraisal methods may differ based on and Budget Committee. the size and sector of each project. The distribution of projects by size in Eswatini can be estimated based on Channel 3: Large projects or programs and new complex project expenditures for the 2016–23 fiscal years. 31 Of projects, including public-private partnerships. Large the 263 projects funded during this period, 56 percent projects should be subject to a full appraisal, including were small, 32 percent were medium, and 12 percent an estimation of their net economic benefits and were large. The distribution of expenditures is very distributional impacts. The appraisal of large projects similar: 4 percent of the investment budget was spent often occurs in two phases: prefeasibility and feasibility. on small projects, 21 percent on medium projects, The line ministry’s project committee reviews the initial and 75 percent on large projects. The average capital concept document, but the inter-ministerial project expenditure was E 576 million per project. committee is responsible both for the prefeasibility 30 Such as in the Concept Note document in the public investment management information system currently being developed by the Ministry of Economic Planning and Development. 31 Estimates based on Boost data for capital expenditure. Projects are classified as small if total capital expenditure is less than E 20 million (about $1 million), large if expenditure exceeds E 200 million (about $10 million), and medium-sized if expenditure falls between these limits. 39 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES and the feasibility appraisal. Careful consideration to informing project selection, disaster frequency should also be given to external, independent reviews estimates and loss projections can be incorporated of complex projects, focusing either on the whole into land-use decisions and construction regulations. project or on critical technical components. For example, the government could bar housing from being built in a flood- or landslide-prone area or adopt While strengthening project preparation is the most building regulations that require structures to be raised urgent priority for Eswatini, key elements of the a minimum distance above the ground. Monitoring implementation phase could also be improved. Given compliance with land-use and building regulations, serious weaknesses in the current system, reforms along with other environmental, health, and safety rules, are needed to address: (a) monitoring of project should be done early in the design and appraisal stage completion and actual service delivery over time; (b) to avoid unnecessary redesigns or the subsequent the use of funds and costs during construction and abandonment of excessively vulnerable projects. service delivery, including operating and maintenance expenses; (c) the adequacy of maintenance funding Climate change mitigation or decarbonization to sustain infrastructure; and (d) the evaluation of strategies set out in the Nationally Determined project performance. Contributions could be considered in the project identification and design stages. As with regulations promoting climate adaptation, measures to support Mainstreaming climate considerations decarbonization should be considered early in the into public investment management is design and appraisal process. For example, green critical to build resilience of the economy. building regulations can promote the use of low- carbon materials and require high standards for energy Eswatini is working towards mainstreaming climate efficiency. Land-use regulations are vital to protect change considerations in public investment carbon-absorbing natural areas such as forests, nature management. These commitments are laid out in the reservations, and wetlands. Preserving forest cover and October 2021 Update of the Nationally Determined indigenous vegetation also plays key a role in carbon Contributions of the Kingdom of Eswatini and are sequestration and water management. The climate integrated into the National Development Plan for externalities generated by each project, such as its net 2023/24–2027/28, which aims to achieve “green carbon emissions, should be estimated and valued as growth for economic recovery, sustainability and part of the project feasibility study. resilience” (Government of Eswatini 2021b, 2023b). For climate change mitigation and adaptation to be effective, these considerations must be systematically Integrating climate change into project integrated into the project cycle and public investment implementation management processes. Several climate considerations are important at the To build the resilience of the economy, climate budgeting stage: hazards need to be identified and adaptation measures considered in sector plans and projects. Identification and “tagging” of budget allocations Disaster risks could be estimated, and these estimates that advance climate goals. Given the crosscutting may be linked to damage and loss valuations for nature of climate impacts and programs, a system specific hazards in specific locations. In addition of expenditure tagging can be used to track climate- 40 CHAPTER 4. PUBLIC INVESTMENT MANAGEMENT: BUILDING PRODUCTIVE PHYSICAL CAPITAL WHILE MAINSTREAMING CLIMATE CONSIDERATIONS. relevant investments at the project budgeting Adequacy of operations and maintenance funding. 32 stage, enabling the government to report progress Maintenance is vital to ensure the resilience of toward climate goals and possibly enabling access infrastructure to natural hazards, particularly flooding. to climate financing. For example, drainage systems must be kept clear to prevent overflows, and the damage caused by heavy Adequate provisions for climate-related hazards and rain increases when a road surface has been poorly other disasters, along with insurance.33 Parametric maintained. It is vital to provide adequate operations 34 insurance facilities and disaster management and maintenance funding in the project operating assistance are provided by the African Risk Capacity budget and to monitor changes in the quality of 35 and other mechanisms. The government could also infrastructure over time. participate in the Global Risk Financing Facility, which aims to strengthen the resilience of countries vulnerable to climate and disaster shocks (World Bank 2018). Institutional arrangements are critical for mainstreaming climate considerations “Green” procurement. Public procurement systems into public investment management. increasingly include climate considerations, as recognized by the World Trade Organization and the Climate-related functions should be coordinated European Commission (World Bank 2021a). While across ministries, departments, and agencies over climate objectives should be embedded in the project the life of each project. Guidelines for integrating design and selection process, amending procurement climate change into public investment management legislation to require low-carbon procurement or procedures should be prepared to direct the workflow adherence to other environmental standards can and decision-making process, from identifying and further mainstream climate considerations into the preparing different types of projects to implementing and public investment system. The procurement process evaluating them. The government should work toward can require bidders to propose specific solutions developing a broad financial management framework to advance climate objectives, either during the with a sound public investment management system construction or operation phases of the project. that integrates all climate goals and policies. Countries typically structure this framework under public financial Project monitoring and evaluation. When a project has management legislation and regulations that establish identifiable climate objectives, such as net carbon guidelines and project appraisal manuals for all public reduction, nature conservation, or flood resilience, sector entities. Environmental management and monitoring and evaluation should include a specific climate policies and goals are then set out in legislation assessment of its performance in these areas. The and/or policy statements, and the public financial and results of these assessments may then be reported to investment management institutions are adjusted to internal government bodies, international bodies, and/ integrate these policies and goals into their operations or providers of climate financing. (Box 4.2). 32 See section 2: Institutional arrangement and coordination mechanism for implementation of the Climate Expenditure Classification and Coding, Budget Tagging system (Government of Eswatini 2022b). 33 See also Eswatini Disaster Risk Financing diagnostic (2022) which recommended a layered approach to disaster-risk financing incorporating. 34 A parametric insurance product is a contract in which the ultimate payment is determined by a weather or geological observation or index, such as average temperature or rainfall over a given period or the intensity of an earthquake or windstorm. Parametric insurance payouts are not based on individual loss adjustments but are determined according to the measurement of a highly correlated index (see, e.g., OECD 2015). 35 For more information, see the African (ARC Risk Capacity) Group website, https://www.arc.int/about 41 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES In Eswatini, climate issues are mainly coordinated the committee can promote awareness of climate by the Ministry of Tourism and Environmental Affairs issues, mainstreaming adaption and mitigation actions and the National Disaster Management Agency, into the public sector requires them to be integrated but the role of Ministry of Economic Planning and into public projects and investment systems. This Development is also critical. The Ministry of Tourism integration process should be coordinated by the and Environmental Affairs has taken the lead on climate proposed inter-ministerial committee for reviewing policy and has established a National Climate Change and approving projects led by the Ministry of Economic Committee with a far-reaching mandate.36 Although Planning and Development. Box 4.2. Climate-smart public investment management frameworks in East Africa The evolution of climate-smart public investment management frameworks in Kenya, Uganda, and Rwanda provides useful lessons for other countries. Kenya The Public Finance Management Act 2012 (revised in 2020) forms the backbone of public financial management in Kenya for all public entities and county-level authorities. The National Treasury publishes regulations under this Act.a In January 2020, it published Circular No 16/2019, Guidelines on Public Investment Management for National Government and its Entities. In April 2022, it published Public Financial Management Regulations covering investment operations in all public sector entities. The government also published an extensive project appraisal manual in 2021, the Economic Project Appraisal Manual for Kenya,b although further work is required to integrate climate change mitigation and adaptation considerations into the manual. Environmental management and climate change policy and actions have long had significant legislative support in Kenya. The Environmental Coordination and Management Act was passed in 1999 and revised in 2012. With the growing economic impact of climate change, in 2016 Kenya passed the Climate Change Act. To facilitate access to climate finance, it recently passed the Climate Change (Amendment) Act 2023, which provides a regulatory framework for trading in carbon credits. Uganda The core elements of Uganda’s public financial management framework are set forth in the Public Finance Management (Amendment) Act 2015 and augmented by the 2016 Public Financial Management Regulations. The following year, the Ministry of Finance, Planning and Economic Development published the Public Investment Manual for Project Preparation and Appraisal 2017.c This manual combines guidelines for public investment management and project appraisal and covers investment by all public entities, though further elaboration on integrating climate impacts into public investment management guidelines and appraisals is necessary. The government has also passed legislation to support its environmental and climate change policies, including the National Environment Act 2019 and the National Climate Change Act 2021. 36 See page 70 of Government of Eswatini (2022b). 42 CHAPTER 4. PUBLIC INVESTMENT MANAGEMENT: BUILDING PRODUCTIVE PHYSICAL CAPITAL WHILE MAINSTREAMING CLIMATE CONSIDERATIONS. Rwanda The management of finances and property by all public entities at all levels of government in Rwanda is covered by the Organic Law on State Finances and Property 2013. Based on this legislative framework, the Ministry of Finance and Economic Planning published the broad-based National Investment Policy in April 2017, which includes management guidelines for all types of public investment. This was followed in November 2018 by the Methodology for Project Appraisal (Guidelines for the Preparation and Assessment of Feasibility Study Reports of Projects at the Central Government Level in Rwanda).d These guidelines and manuals still need to be updated to integrate climate change mitigation and adaptation issues. In 2019, a Manual of Public Financial Management Policies and Procedures was published.e Rwanda’s environmental and climate change legislation includes the Law on Environment 2018 and the National Environmental and Climate Change Policy 2019 published by the Ministry of Environment. Notes: a. For more information, see the National Treasury of Kenya’s public financial management regulations, https://www.treasury.go.ke/ regulations/ b. ICON and PIM Consulting Group (2019). c. Government of Uganda and World Bank (2017). d. Government of Rwanda (2018). e. Government of Rwanda (2019). Policy options budget selection to ensure that they are economically viable and technically, that they are managerially, and There is an urgent need to improve the quality of financially feasible, and that key risks have been identified projects entering the budget. The project preparation and adequately mitigated. The following administrative and screening process suffers from: (a) weak arrangements and requirements could help strengthen appraisal and selection methods; (b) a lack of control the gatekeeping processes: over projects entering and completing preparation and appraisal; (c) projects of different types and Project support units in all line ministries that sponsor sizes not being channeled through different project and manage projects. These units should be equipped preparation, appraisal, and selection processes; (d) a with the technical capacity to identify, design, and lack of independent professional review; and (e) poorly appraise projects in the relevant sectors. prepared projects in terms of technical, managerial, and financial viability entering the budget process. A public investment management unit in the Ministry These challenges are confirmed by the findings of the of Economic Planning and Development to provide recent PIMA assessment. technical support, advice, and project preparation assistance for all project support units in ministries, The Planning and Budget Committee, which is led by the departments, and agencies. This unit would also Ministry of Finance and includes representatives from support the proposed inter-ministerial project review the Ministry of Economic Planning and Development and approval committee led by the Ministry of and the Ministry of Public Service, is the only major Economic Planning and Development, which would gatekeeper for projects entering the budget. Further approve, reject, or require redesign or further appraisal scrutiny is needed before projects are considered for of each project. 43 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES External technical review of projects, particularly large and design. Budgeting processes should account for projects with significant external impacts. climate-related hazards and natural disasters. Building codes, construction regulations, and land-use policies For mitigation and adaptation measures to be should promote climate resilience, mitigation, and effective, climate change considerations must adaptation. Finally, project design and execution be mainstreamed across the public investment should reflect climate considerations, with estimated project cycle. The Ministry of Economic Planning loss functions for specific projects based on hazard- and Development should mainstream climate change frequency data and information on damages from considerations into the public investment management previous disasters. These features should be monitored system. Climate change mitigation or decarbonization across the project cycle, including the ongoing service plans should be incorporated into project identification delivery and maintenance phases. Table 4.2. Short- and medium-term policy options for public investment management Policy options Short-term actions (1 year) Medium-term actions (2–3 years) Strengthen Ensure that all projects entering the Ensure all larger, more complex projects are project design and appraisal process are backed by detailed feasibility analysis and preparation and aligned with national and sectoral complete appraisal and consideration of implementation priorities and have a reasonable alternatives. A full economic appraisal (not just procedures prospect of gaining funding. adequacy and cost-effectiveness of service to achieve delivery) may be required. better budget and economic Strengthen the gatekeeping function of performance the public investment management unit in the Ministry of Economic Planning and Development and ensure that it can provide technical support and advice for projects being prepared by line ministries, departments, and agencies. Mainstream Incorporate climate change mitigation Adapt project design and execution for climate climate change or decarbonization plans into project change by developing the capacity to estimate considerations identification and design. loss functions for specific projects based on into the public hazard-frequency data and loss information investment from disasters. management system Strengthen budgeting processes Ensure monitoring of the implementation of to incorporate climate hazards climate adaptation or mitigation features during and natural disasters: incorporate project construction and service delivery phases. climate change-related regulations and standards into projects that are exposed to climate hazards. Develop building and construction codes, regulations, and land use policy to promote climate change resilience, mitigation, and adaptation. Source: World Bank analysis. 44 CHAPTER 5 Reforming expenditure management to improve the performance of the health system. Key takeaways of total current health expenditures, highlighting the limited financial protection of Eswatini’s households. An This chapter analyzes the adequacy, efficiency, and estimated 5 percent of the population faced catastrophic equity of public health spending from fiscal 2018 to health expenditures in 2016.37 2022. It evaluates the constraints faced by the health system as Eswatini strives to achieve universal health The government has a range of policy options coverage, and it identifies opportunities to create new to address these challenges. These include: budgetary space by improving the efficiency of the (a) strengthening budgetary and public financial system. Although health outcomes are improving, arrangements, (b) holistically addressing supply-chain progress has been slow and uneven, with little management challenges, (c) strengthening strategic improvement in critical outcomes such as maternal purchasing in the health sector38 through reforms to and neonatal mortality. Meanwhile, the limited and the provider payment system, (d) tightening linkages inconsistent availability of essential medicines and between financial and health-system performance medical supplies reflects deep-rooted challenges data, and (e) using a primary healthcare approach to across the health system. Suboptimal expenditure improve access and enhance the quality of care. patterns and weaknesses in financial management prevent the expansion of high-quality health services, with negative effect on health and economic outcomes. Accelerating gains in public health indicators Eswatini’s total spending on health compares favorably with peer countries, but households remain exposed Eswatini has made progress in improving some key to high out-of-pocket health costs. Government health health outcomes. Average life expectancy at birth rose spending, both as a share of GDP and as a share total from 46.6 years in 2010 to 60.5 years in 2020, but fell to public spending, exceeds the levels of Eswatini’s regional 57.1 in 2021 amid the shock of the COVID-19 pandemic and income-group peers (Figure 5.3). Between 2017 (Table 5.1). Other key health indicators stagnated or and 2021, total current expenditures in the health sector improved only marginally over this period. The maternal averaged 6.9 percent of GDP (Table 5.5), with spending mortality rate remained broadly unchanged between by the general government contributing 3.5 percent of 2010 and 2020, and modelled data suggest that the GDP. Out-of-pocket spending averaged 10.6 percent stunting rate and under-five and neonatal mortality 37 Global Health Observatory Data Repository (database). WHO (World Health Organization), Geneva. https://apps.who.int/gho/ data/view.main.UHCFINANCIALPROTECTION01v. Catastrophic health spending is defined as more than 10 percent of total household income. 38 Strategic health service purchasing aims to optimize this process, continuously, to meet the health system goals of quality, equity, efficiency, and responsiveness of service provision, and in so doing facilitate progress towards universal health coverage (Figueras et al., 2005). 45 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES rates declined slightly. This is in line with recent data from Modelled and administrative estimates suggest that the Eswatini Multiple Indicator Cluster Survey (MICS), the key causes of communicable disease remained which show key child health indicators improving rapidly largely unchanged. Between 2017 and 2019, HIV/ in 2010–14 and then changing more slowly in the eight AIDS, cardiovascular diseases, and tuberculosis and years leading up to fiscal 2022 (Table 5.2). other respiratory diseases were the top three causes of death. Noncommunicable diseases and injuries The burden of communicable diseases is high, and represented six of the ten leading causes of disability- the incidence of noncommunicable diseases is rising. adjusted life years in 2019. Table 5.1. Key health outcomes, 2017–21 Outcome 2017 2018 2019 2020 2021 Life expectancy at birth (years) 57.9 59.4 60.5 59.7 57.1 Maternal mortality ratio per 100,000 live births 237.0 218.0 228.0 240.0 No data Neonatal mortality rate per 1,000 live births 25.0 24.6 24.2 23.7 23.2 Infant mortality rate per 1,000 live births 49.0 45.4 43.9 44.2 41.5 – of which male 53.9 49.9 48.4 48.8 45.8 – of which female 43.8 40.4 39.1 39.4 36.9 Under-five mortality rate per 1,000 live births 63.2 59.6 56.9 56.2 52.6 – of which male 68.5 64.6 61.9 61.2 57.4 – of which female 57.7 54.3 51.7 51.0 47.6 Stunting (%) 24.3 23.6 23.1 22.4 21.8 Source: World Development Indicators. Table 5.2. Key health indicators, MICS, 2010, 2014, and FY2022 Indicator 2010 2014 FY2022 Neonatal mortality rate per 1,000 live births 19 20 21 Infant mortality rate per 1,000 live births 79 50 35 Under-five mortality rate per 1,000 live births 104 67 41 Stunting (%) 30.9 25.5 20.0 Source: Multiple Indicator Cluster Survey. Note: FY = fiscal year; MICS = Eswatini Multiple Indicator Cluster Survey. For the level of spending, health outcomes are quintile suffer nearly twice the infant mortality rate uneven, driven in part by unequal access to and per 1,000 live births as those in the richest quintile quality of health services by location, region, (45 versus 23). Stunting is also twice as prevalent wealth, and gender. For example, the estimated among the poorest households (26.7 percent) than infant mortality and under-five mortality rates for the richest (13.3 percent), and the severest form of boys exceed those for girls. Households in the poorest stunting is three times more common among the 46 CHAPTER 5. REFORMING EXPENDITURE MANAGEMENT TO IMPROVE THE PERFORMANCE OF THE HEALTH SYSTEM. poorest quintile (7.2 percent) than the richest (2.4 Community health providers (Level 1) and primary care percent) (CSO 2023). At 14.2 percent, HIV prevalence providers, including clinics and public health units among female adolescents and young women (Level 2) are typically the first points of contact with (ages 15–24) was on average three times higher the health system. Cases requiring more sophisticated than among male adolescents and young men (4.2 forms of care are often referred to health centers (Level percent). Within that age group, the incidence of HIV 3), regional referral hospitals (Level 4), and national per 1,000 uninfected people was on average five times referral hospitals (Level 5). In 2017, 64 percent of higher among females than among males (22.63 rural facilities are public, whereas private for-profit versus 4.60) (Table 5.3). Mortality from cardiovascular providers accounted for 56 percent of urban facilities diseases, cancer, diabetes, or chronic renal diseases (Government of Eswatini, 2017). Recent reforms, among adults between the ages 30 and 70 was nearly including the decentralization of key services for twice as high for men (45.2 percent) as for women noncommunicable diseases (such as screening and (24.1 percent) (World Development Indicators 2024). prescription refills) to primary care providers, have aimed to improve access to essential healthcare. Ongoing challenges include shortages of medicines The public sector’s unique role in the and supplies, weak referral systems (including poor provision of health services follow-up for cancer screening patients), and low levels of hospital efficiency, including low bed occupancy Eswatini’s five-tiered healthcare system suffers from rates, inadequate numbers of physicians, and limited gaps in the availability of care and weaknesses in specialization of services (Figure 5.1 and Figure 5.2) operational efficiency, particularly among hospitals. (World Bank 2020b). Figure 5.3. Prevalence and incidence of HIV, by gender, 2017–21 Prevalence of HIV Incidence of HIV 15–24 years (% ages 15–24) (per 1,000 population) Year Female Male Female Male 2017 15.7 4.3 27.56 6.15 2018 15.0 4.2 24.21 5.13 2019 14.3 4.2 22.89 4.58 2020 13.4 4.1 20.00 3.77 2021 12.6 4.0 18.49 3.38 Source: UNAIDS estimates. 47 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Figure 5.1. Human and other health resources, 2022 Figure 5.2. Public health expenditure and density of specialized surgical workforce, 2022 Selected indicator on human and 250 Specialist surgical workforce, other resources per 1,000 people per 100,000 population 200 7 6 150 5 100 4 50 3 2 0 1 0 2 4 6 8 10 0 Logarithm of public health expenditure per Physicians Nurses and Hospital capita, international dollars midwives beds Other Structural Regional Eswatini Eswatini Regional Structural Aspirational Sources: World Development Indicators and World Economic Source: World Development Indicators. Outlook databases.39 Stabilizing health spending and setting primary healthcare spending during the period (Table appropriate expenditure priorities 5.4). The government’s contribution to total spending on HIV/AIDS and other sexually transmitted diseases The health system relies on external financing and tuberculosis was especially low at 19.6 percent sources in key areas such as primary care, HIV/AIDS, and 31.2 percent respectively, with the balance mainly and tuberculosis to a greater extent than among derived from external sources. A heavy reliance on Eswatini’s structural peers (Figure 5.4). Primary external funding raises questions of sustainability and healthcare spending averaged 50.9 percent of total the risk of redundancy, misalignment of donor activities, current health spending between 2017 and 2019,40 unintentional neglect of other priorities, and high but the government contributed only 41.7 percent of transaction costs of coordination (Sparkes et al. 2017). Figure 5.3. Relative government health spending, Figure 5.4. Sources of health spending, Eswatini Eswatini and peers, 2022 and peers, 2022 20 100 18 90 16 80 14 70 12 60 10 50 8 40 6 30 4 20 2 10 0 Percent of GDP Percent of government 0 expenditure Eswatini Regional Structural Aspirational Eswatini Regional Structural Aspirational Public sector Private sector External sector Source: World Development Indicators. 39 World Economic Outlook Databases. IMF (International Monetary Fund), Washington, DC. https://www.imf.org/en/Publications/ SPROLLs/world-economic-outlook-databases#sort=%40imfdate%20descending 40 Global Health Expenditure Database. WHO (World Health Organization), Geneva. https://apps.who.int/nha/database/ViewData/ Indicators/en 48 CHAPTER 5. REFORMING EXPENDITURE MANAGEMENT TO IMPROVE THE PERFORMANCE OF THE HEALTH SYSTEM. Table 5.4. Health financing indicators, 2017–21 2017 2018 2019 2020 2021 Current health expenditure (% of GDP) 7.0 6.6 7.2 6.6 7.0 Domestic general government health spending (% of 50.7 43.5 53.5 53.6 53.1 current health spending) Out-of-pocket expenditures (% of current health spending) 10.5 11.1 10.0 11.1 10.4 Domestic general government health spending (% of GDP) 3.5 2.9 3.8 3.5 3.7 Domestic general government health spending (% of total 10.0 8.2 11.2 10.4 12.3 general government spending) Current health spending per capita ($) 267 266 275 223 280 Domestic general government health spending 136 116 147 119 149 per capita ($) Source: Global Health Expenditure Database. Table 5.5. Sources of total current health expenditure, 2017–19 average Percentage Domestic general External Domestic private government sources expenditure expenditure Primary health care 41.7 36.5 21.9 HIV/AIDS and other sexually transmitted diseases 19.6 77.9 2.4 Tuberculosis 31.2 67.3 1.5 Malaria 18.8 33.0 48.2 Neglected tropical diseases 51.0 2.9 46.1 Reproductive health 42.2 32.5 25.3 Source: World Bank using Global Health Expenditure Database. Public health spending increased in absolute terms Personnel and medicines were the two largest over the period. However, year-on-year changes were expenditure items (Figure 5.6). The top four as high as 33 percent between fiscal 2019 and 2020 expenditure items by economic category were and as low as 4 percent between fiscal 2020 and 2021, personnel (40 percent), medicines and supplies likely due to the impact of the COVID-19 pandemic. (26 percent), professional and special services Recurrent (personnel, medicines, grants, maintenance (14 percent), and internal grants and subsidies (12 etc.) spending averaged over 90 percent of total public percent). Personnel costs cannot be disaggregated health spending (Figure 5.5). Information on actual further.42 Spending on medicines included antiretroviral 41 budget execution is not available. drugs, vaccines, laboratory supplies, and equipment 41 Although budget releases are reported in annual budget reports, this information was not available from the financial statements that the analytical team for the health chapter used on the advice from the Ministry of Health. 42 The Ministry of Health’s financial statements do not disaggregate personnel data into basic salaries, allowances, and other payments. 49 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES for biomedical engineering. Professional and special Most spending at the national level goes to services composed professional services (77 percent), medicines, while personnel costs are distributed utility services (15 percent), and repairs to machinery across the national and regional levels (Figure 5.8). and equipment (5 percent). Internal grants and The centralization of spending on essential medicines subsidies were mainly disbursed to Raleigh Fitkin has implications for expenditure efficiency, as facility Memorial Hospital (53 percent) and Good Shepherd managers may be unaware of binding resource Hospital (35 percent), with the remainder shared constraints. However, centralized procurement can among 19 other institutions. mitigate the cost of essential medicines (such as antiretroviral drugs) and coordinate delivery logistics About 63.5 percent of spending occurs at the national (such as for the large volumes of supplies procured level and 36.5 at the regional level (Figure 5.7). during the COVID-19 pandemic). At regional level, Key areas of national spending include the Principal recurrent spending was lowest in Hhohho (E 2,538) Secretary Office (~16 percent), procurement of in per capita terms, probably because few of its antiretroviral drugs (~11 percent), Mbabane Hospital facilities are classified as regional service delivery (~10 percent), and the Phalala Fund (Box 5.1) (~7 units. For example, expenditures at Mbabane Hospital percent). Most regional spending is on administration are recorded at the national level. Average per capita (~50 percent), although this may also include spending spending in the other regions amounted to E 4,095 on clinics that lack specific budget lines. in Manzini, E 4,127 in Lubombo, and E 3,881 in Figure 5.5. Public health spending by budget type, FY2018–22 100% 95% 90% 85% 80% 75% Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Expenditure Expenditure Expenditure Expenditure Expenditure 2017-18 2018-19 2019-20 2020-21 2021-22 Recurrent Capital Figure 5.6. Public health spending by GFSM 2014 classification, FY2018–22 100% 4.2% 3.8% 2.8% 1.9% 4.2% 80% 7% 14% 10% 13% 13% 6% 6% 22% 16% 13% 60% 27% 24% 24% 22% 32% 40% 49% 46% 20% 34% 41% 33% 0% 2017-18 2018-19 2019-20 2020-21 2021-22 Personnel Costs Drugs Professional and Special Services Grants and Subsidies - Internal Consumable Materials and Supplies CTA Vehicle Charges Travel, Transport and Communication Grands and Subsidies - External Durable Materials and Equipment Rentals Source: World Bank using Ministry of Health data. Note: CTA = Central Transport Administration; FY = fiscal year; GFSM = Government Finance Statistics Manual. 50 CHAPTER 5. REFORMING EXPENDITURE MANAGEMENT TO IMPROVE THE PERFORMANCE OF THE HEALTH SYSTEM. Shiselweni. Manzini saw the largest increase in total (Figure 5.9). The internal grants to Raleigh Fitkin health spending, possibly because its specialized Memorial Hospital and Good Shepherd Hospital hospital was recently converted from a tuberculosis reflect the key role played by these facilities but center to a cancer-management center. Personnel distorted expenditure patterns in the Lubombo and spending was highest in Hhohho and Shiselweni Manzini regions. Figure 5.7. Public health spending by administrative Figure 5.8. Public health spending by administrative level, FY2017–22 level (GFSM 2014 classification), FY2018–22 100% 100% 0.00% 4.28% 5.27% 31.96% 80% 80% 21.26% 1.94% 1.21% 1.63% 60% 60% 32.57% 40% 54.11% 40% 20% 32.94% 8.98% 0% National Regional 20% Grants and Subsidies - Internal Public Debt - Interest/Principal Rentals Durable Materials and Equipment 0% Grants and Subsidies - External 2017-18 2018-19 2019-20 2020-21 2021-22 Travel, Transport and Communication CTA Vehicle Charges National Manzini Lubombo Consumable Materials and Supplies Hhohho Shiselweni Professional and Special Services Personnel Costs Drugs Source: World Bank using Ministry of Health data. Figure 5.9. Public health spending by region (GFSM 2014 classification), FY2018–22 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2017-18 2018-19 2019-20 2020-21 2021-22 2017-18 2018-19 2019-20 2020-21 2021-22 2017-18 2018-19 2019-20 2020-21 2021-22 2017-18 2018-19 2019-20 2020-21 2021-22 Manzini Lubombo Hhohho Shiselweni Personnel Costs Grants and Subsidies - Internal Drugs CTA Vehicle Charges Professional and Special Services Consumable Materials and Supplies Travel, Transport and Communication Rentals Source: World Bank using Ministry of Health data. Note: CTA = Central Transport Administration; FY = fiscal year; GFSM = Government Finance Statistics Manual. 51 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Increasing the efficiency of public levels of health spending (Figure 5.10, panels b, c, and d). health spending This finding of macro-level inefficiency is consistent In 2019, government health spending in Eswatini with previous assessments that found inefficiencies exceeded the levels of some of its lower-middle- in public health spending, despite its relatively higher income peers without the commensurate outcomes. level (Kwaramba et al. 2019). For its level of spending, Although public health spending translates into the Eswatini has lower-than-expected levels of infant expected levels of service coverage in terms of the survival and life expectancy relative to its regional, universal health coverage index (Figure 5.10, panel a), structural, and aspirational peers (Figure 5.11). it does not produce the expected health outcomes. For Enhancing the efficiency of health spending is critical, instance, under-five mortality, maternal mortality, and as the constraints on fiscal performance highlighted stunting rates are all higher than in countries with similar in the preceding chapters will limit expenditure growth. Figure 5.10. Translating inputs into outputs and outcomes, 2019 a. Current health spending and GDP per capita versus universal b. Universal health coverage index and under-five mortality rate health coverage index 80 150 Under-5 mortality (per 1,000) 100 70 UHC Index (WHO) 50 60 50 40 2 5 10 20 40 50 60 70 80 CHE as % of GDP UHC Index (WHO) c. Maternal mortality rate d. Stunting rates 1,100 60 Prevalence of stunting (%) 40 MMR (Per 100,000) 750 20 400 200 0 20 40 60 80 100 30 40 50 60 70 80 90 UHC Service Coverage Index UHC Index (WHO) Source: World Bank using World Development Indicators and Global Health Expenditure Database. Note: CHE = current health expenditure; GDP = gross domestic product; GGHE = domestic general government health expenditure; MMR = maternal mortality rate; UHC = universal health coverage; WHO = World Health Organization. 52 CHAPTER 5. REFORMING EXPENDITURE MANAGEMENT TO IMPROVE THE PERFORMANCE OF THE HEALTH SYSTEM. Figure 5.11. Macro-level efficiency using data envelopment analysis, 2022 100 90 80 Efficiency scores 70 60 50 40 30 20 10 0 Life expectancy Measles DPT Free Maternal Infant at birth immunization immunization tuberculosis survival survival Eswatini Regional Structural Aspirational Source: World Bank using World Development Indicators and Global Health Expenditure Database. Note: DPT = diphtheria, pertussis, and tetanus. Some regions are improving coverage at a lower cost correlation between expenditures and service- than others, suggesting their expenditures may be coverage indicators, such as the number of people more efficient (Table 5.6). Further analytical work with diabetes or hypertension who currently receive could examine more granular levels of programmatic treatment. Outcome indicators, including infant and spending, such as by sub-district (tinkundla) or at the under-five mortality rates, seem inversely correlated facility level. with health spending. Manzini, which has the highest level of health spending per capita, also has the There is a weak correlation among inputs, outputs, highest mortality rates among the four regions. and health outcomes at the regional level (Figure The weak correlation is likely due to the limited 5.12, Figure 5.13, Figure 5.14). Higher levels of expenditures tagged at the regional level, the small health spending per capita do not necessarily number of units being compared, and other factors translate into greater numbers of healthcare that may contribute to the observed distribution of workers or facilities per capita. There is also a weak health outputs and outcomes. Table 5.6. Regional per capita spending for each percentage point of coverage, 2022 Four or Pregnant Delivered Postnatal Postnatal Vitamin A Diarrhea Pneumonia more visits women in health health health supplemen- treatment treatment to any tested for facility check check tation 6–59 correct correct provider syphilis for the for the month newborn mother population Manzini 55.90 61.12 43.82 46.22 51.85 51.84 71.85 74.46 Hhohho1 37.53 37.33 26.44 27.59 30.05 29.52 43.76 35.75 Shiselweni 48.71 59.70 42.22 41.98 50.00 39.60 63.62 47.91 Lubombo 53.13 59.81 45.74 46.83 54.53 54.30 80.91 87.80 Source: World Bank using civil society organization (CSO) (2022). Note: 1. The low observed spending in Hhohho may be due to the limited tagging of spending at the regional level. 53 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Figure 5.12. Regional health spending and inputs, 2022 a. Physicians per 1,000 people b. Nurses per 1,000 people c. Facilities per 1,000 people .3 HHOHHO 2.2 LUBOMBO .6 LUBOMBO Numbers of physicians Number of Nurses Number of Nurses HHOHHO .25 2 MANZINI .5 in 1,000 in 1,000 in 1,000 .2 1.8 .4 1.6 .3 HHOHHO .15 MANZINI SHISELWENI 1.4 .2 .1 LUBOMBO SHISELWENI 1.2 SHISELWENI .1 MANZINI 400 600 800 1,000 1,200 400 600 800 1,000 1,200 400 600 800 1,000 1,200 Public health expenditure Public health expenditure Public health expenditure per capita. LCU per capita. LCU per capita. LCU Figure 5.13. Regional health spending and service coverage, 2022 a. Deliveries in health facility b. Women with diabetes c. Women with hypertension medical treatment for Hypertension 100 1.2 4.5 Delivered in health facility Percentage of women who took Percentage of women who took medical treatment for Diabetes HHOHHO SHISELWENI LUBOMBO 90 SHISELWENI 1 4 MANZINI 80 .8 3.5 LUBOMBO 70 MANZINI .6 3 60 .4 2.5 HHOHHO HHOHHO MANZINI SHISELWENI 50 LUBOMBO .2 2 400 600 800 1,000 1,200 400 600 800 1,000 1,200 400 600 800 1,000 1,200 Public health expenditure Public health expenditure Public health expenditure per capita. LCU per capita. LCU per capita. LCU Figure 5.14. Regional health spending and outcomes, 2022 a. Infant mortality rate b. Under-five mortality rate MANZINI 45 55 MANZINI Under five mortality rate Infant mortality rate 40 50 SHISELWENI 35 LUBOMBO 45 SHISELWENI 30 40 LUBOMBO 25 35 20 HHOHHO 30 HHOHHO 400 600 800 1,000 1,200 400 600 800 1,000 1,200 Public health expenditure per capita. LCU Public health expenditure per capita. LCU Source: World Bank using Ministry of Health data, Health Management Information System 2022,43 World Development Indicators, and Global Health Expenditure Database 2019, CSO (2022). Note: LCU = local currency units. 43 Health Management Information System (database). Global Health Data Systems. https://globalhealthdata.org/about/ 54 CHAPTER 5. REFORMING EXPENDITURE MANAGEMENT TO IMPROVE THE PERFORMANCE OF THE HEALTH SYSTEM. Addressing the causes of inefficiency healthcare as a share of total government spending on health than the national health accounts figure Spending on primary care is low, while spending on of 42 percent.44 Hospitals account for about half of specialized care is high. all personnel costs, while support services represent about half of all spending on medicines and supplies The largest component of public health spending (Table 5.7). is hospital care (36 percent), followed by ministry administration (29 percent), supportive services The Phalala Fund, which helps people access (20 percent), and then primary care (14 percent). specialized medical care, received 5 percent of Primary care includes spending mapped to public spending during the period under review. However, health units, clinics, health centers, and preventative the fund owes arrears to service providers (Box 5.1). services. It excludes spending on antiretroviral Services are financed on a fee-for-service basis, drugs and immunizations, which are included under which may lead to the overprovision of services, ministry-level administration and support services increasing overall costs. The number of patients such as the Central Medical Stores and laboratory referred to the fund continues to grow, not only for services. Hospitals also offer primary care due to traditionally costly services such as oncology and challenges with the referral system and the limited neurosurgery, but also for services that could be availability of supplies at the primary-care level. These provided by underperforming public hospitals, such features, along with methodological issues, produce a as orthopedics and ophthalmology (Table 5.8; World lower estimate for government spending on primary Bank 2020b). Table 5.7. Average public health spending by level of care, FY2018–22 Personnel Medicines Professional Grants and Consumable CTA vehicle Total costs and special subsidies: materials and charges services internal supplies Primary care 22% 16% 4% 0% 10% 14% 14% Hospitals 53% 23% 54% 0% 11% 32% 36% Ministry 15% 13% 38% 100% 8% 47% 29% administration Supportive 10% 48% 5% 0% 72% 6% 20% services Total 100% 100% 100% 100% 100% 100% 100% Source: World Bank using Ministry of Health data. Note: CTA = Central Transport Administration. 44 Global Health Expenditure Database. WHO (World Health Organization), Geneva. https://apps.who.int/nha/database/ViewData/ Indicators/en 55 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Box 5.1. The Phalala Fund The Phalala Fund was set up in 2001 and is governed by the Administration of the 2001 Specialist Medical Aid Fund Regulations under section 12(4) of the 1967 Finance Management and Audit Act. The fund’s objective is to help qualifying individuals access specialized medical care, either domestically or, in special circumstances, abroad. The fund is financed by the government and donations. The fund is overseen by the Principal Secretary of the Ministry of Health, with quarterly and annual reports provided to the Ministry of Finance. The Minister of Finance presents the fund’s annual report to Parliament within six months of the end of the financial year. The fund is audited by the Auditor General. Table 5.8. Patients referred for selected health services under the Phalala Fund, 2018–21 2018 2019 2020 2021 Oncology (adult) 332 330 162 239 Oncology (pediatric) – – – 16 Orthopedics 194 273 262 362 Urology 125 91 157 143 Neurosurgery 35 98 114 54 Ophthalmology 48 57 35 65 Source: Ministry of Health Annual Budget Reports FY2019 to FY2022. Healthcare access and health outcomes remain lowest density of health facilities, doctors, and nurses highly unequal. per 1,000 people (Table 5.9). Manzini has the highest density of health facilities, whereas Hhohho has the Key health inputs are not equally distributed at the highest density of physicians. These two regions host regional level. Of the four regions, Shiselweni has the major urban centers. Table 5.9. Regional density of health facilities (2017) and health care workers (2022) Region Health facilities, 2017 Doctors, 2022 Nurses, 2022 Number Density Number Density Number Density Hhohho 100 0.31 104 0.31 708 2.12 Lubombo 52 0.24 23 0.10 481 2.17 Manzini 130 0.36 64 0.17 769 2.07 Shiselweni 45 0.22 18 0.08 257 1.21 Source: World Bank using Ministry of Health data. Access to services and health outcomes are also to services (Figure 5.15). Only about half of mothers unequal across regions. Preliminary results from the delivered their babies in a health facility in the Lubombo 2022 MICS reveal significant differences in access region (48.5 percent), versus 95.3 percent in Hhohho. 56 CHAPTER 5. REFORMING EXPENDITURE MANAGEMENT TO IMPROVE THE PERFORMANCE OF THE HEALTH SYSTEM. However, the difference in the share of deliveries some poorly resourced regions seem to have better assisted by any skilled attendant is smaller across the health outcomes. best and worst performing regions at just 6 percent. The frequency of postnatal health checks is low in all Household-level inequality is associated with regions, which is a concern as postpartum hemorrhage stark differences in healthcare access and health is a significant cause of maternal mortality. The early outcomes. The poorest households are less likely initiation of postpartum family planning can improve to attend antenatal care, have babies delivered by maternal and child health and survival. Urban-rural any skilled attendant, and receive postnatal health differences were smaller for delivery in a health checks for neonates and mothers (Figure 5.17). facility (2.9 percent) and for delivery assisted by any However, men from the poorest households are 30 skilled attendant (5.5 percent). Key health outcomes, percent more likely to be screened for hypertension, including neonatal, infant and under-five mortality, possibly due to the availability of free mobile services present a similar pattern of geographical inequality in workplaces and the presence of dedicated male (Figure 5.16). However, these do not correlate well outpatient departments. For diabetes screening, the with inequality of access to services or key inputs, as poorest women fare the worst (Figure 5.18). Figure 5.15. Regional inequality in health outputs, Figure 5.16. Regional inequality in health outcomes, FY2022 FY2022 100 60 95 Per 1,000 Live Births 50 90 Percentage 85 40 80 30 75 70 20 65 10 4 or more Delivery Post-natal Post-natal visits to any assisted by health check health check 0 provider any skilled for the for the attendant newborn mother Neonatal Infant mortality Under-five mortality rate rate mortality rate Manzini Hhohho Shiselweni Lubombo Manzini Hhohho Shiselweni Lubombo Figure 5.17. Wealth inequality in health outputs, Figure 5.18. Wealth inequality in health outputs by FY2022 gender, FY2022 100 1.5 95 90 1.3 85 80 1.1 75 0.9 70 65 0.7 4 or more Delivery Post-natal Post-natal visits to any assisted by health check health check provider any skilled for the for the 0.5 attendant newborn mother Diabetes Screening Hypertension Screening Poorest Second Middle Fourth Richest Poorest Second Middle Fourth Richest Source: World Bank using CSO (2022). Note: FY = fiscal year. 57 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES The supply of key health-system inputs is unreliable. lengthy delay, resulting in persistent staffing gaps and overlapping responsibilities. Service readiness is undermined both by acute and chronic shortages of key inputs. Investments The inconsistent availability of medicines and medical in health facilities and other physical infrastructure supplies in health facilities is a chronic problem and have not been accompanied by an equivalent increase points to deficiencies at all levels of the supply chain. in necessary inputs, such as competent staff, The frequent unavailability of essential medicines has health products and technologies, and functional been the subject of high-level interventions, including 45 equipment. Staffing gaps through natural attrition the Prime Minister’s Inter-Ministerial Task Team on (including retirement) increased during the COVID-19 Health Service Delivery, along with forensic audits and pandemic and have yet to be fully addressed, due in intense media coverage.49 part to the government-wide restrictions on hiring discussed in previous chapters.46 The socioeconomic This PFR has identified various issues around costs of each COVID-19 infection of a healthcare supply-chain management that are linked to weak worker in Eswatini is estimated at $36,000, or about public financial management arrangements. While nine times GDP per capita (Wang et al. 2023). Over 26 additional analysis is required, the most important percent of this cost resulted from excess maternal and challenges include: child mortality due to the disruption of the healthcare workforce. Recent challenges with the medical officer Poor budget credibility, as allocations are low relative internship process47 have been resolved, but low to needs, while weak quantification for budgeting remuneration levels might have knock-on effects on purposes, inadequate supply planning (which fails to productivity and retention. account for delivery lags across financial years), and poor contract management (resulting in pending, and The vacancy rate for healthcare workers was possibly unreported, bills rolling over from one year estimated at 7.7 percent in the third quarter of fiscal to the next) undermine the predictability of financing 2022. This is close to the average of 7.9 percent for flows. There are challenges involved in tracking the preceding six quarters and lower than South spending on key inputs, such as vaccines (UNICEF Africa’s rate of 15.6 percent.48 The perception that 2022a, 2022b). vacancy rates are much higher may be due to poor information systems, which the recently introduced The high level of centralization, which may assist Human Resource Information System should help with the bulk procurement of antiretroviral drugs or to correct. This system will also improve recording vaccines, but which creates conflicts between the and tracking of in-service training to avoid duplication independent requisition system and the allocation and maldistribution, as there is anecdotal evidence of of budgetary resources. For example, a facility health workers being incorrectly posted. Also, planned without its own institutional budget constraint may changes to the Ministry of Health’s structure and the have weaker incentives to place efficient orders for updating of job descriptions have been subject to a medicines and supplies. 45 Ministry of Health (2019). Second Human Resources for Health Strategic Plan 2018–2022. 46 Ministry of Health Annual Budget Report 2021/22. 47 Medical internship is a period of supervised apprenticeship for medical and dental graduates. In Eswatini, this lasts two years, with interns receiving financial support from the Ministry of Health. The process had stalled owing to challenges in determining the terms of the financial support. 48 Government of South Africa (2022). 49 Report of the Prime Minister’s Inter-Ministerial Task Team on Health Service Delivery: An Assessment of the Status Regarding the Supply of Medicines & Medical Supplies in Swaziland, 2017. 58 CHAPTER 5. REFORMING EXPENDITURE MANAGEMENT TO IMPROVE THE PERFORMANCE OF THE HEALTH SYSTEM. Weaknesses in supply planning for essential medicines, were raised seven years later in the 2024 Forensic which diminishes the reliability of needs estimates. For Investigation Proposal and Audit of Acquisition, example, a list of essential medicines was developed Distribution, and Management of Pharmaceuticals. in 2011 but has not been updated since. World Health Several factors contribute to the payment delays, Organization guidelines require such lists to be updated including government cashflow issues and the lack of every two years to reflect therapeutic advances and a clearly defined payment procedure at the Treasury changes in cost, resistance patterns, and relevance to that specifies when and how payments are to be made. public health conditions. The capacity to project future These deficiencies significantly affect procurement, as demand for essential medicines and supplies, including some suppliers refuse to provide goods and services nutrition commodities, is inadequate, and the budget to the ministry or charge higher prices to mitigate the allocation for essential medicines is not necessarily problem of delayed payments. informed by service-coverage targets. Budget performance is suboptimal. Complex procurement processes for essential medicines, which results in delays. An ongoing supply- Budget absorption is high, especially for recurrent chain assessment by the World Bank suggests that expenditures, which suggests poor budget procurement takes place across 11 different offices credibility. Budget absorption averaged 103 percent in two government ministries, the Ministry of Health over the period under review and was lowest in fiscal 50 and the Ministry of Finance. Key processes are 2022 at 97 percent. The absorption of the recurrent centralized at the Ministry of Finance, which may budget was 110 percent, signaling poor budget introduce inefficiencies through weak prioritization or credibility (Figure 5.19). Although data on budget poor pricing if ministry officials lack in-depth knowledge issues were unavailable, there is a mismatch between of the relevant markets. Ministry of Health budget requests submitted during the preparation of the Medium-Term Expenditure Persistent payment delays that create supply-chain Framework and the budget that is eventually allocated. challenges. According to a 2017 report by the Prime This mismatch is also reflected in key expenditure Minister’s Inter-Ministerial Task Team on Health lines, such as spending on medicines, which may Service Delivery, only 53.49 percent of outstanding contribute to the shortages described above (Table 51 invoices were paid within 30 days. Similar concerns 5.10 and Table 5.11). 50 Central Medical Stores Pharmacy Department, Stores, Accounts, Central Medical Stores Assistant Director, Procurement Unit, Principal Pharmacist, Technical Evaluation Committee, Ministry of Health Principal Secretary, Government Tender Board, Ministry of Finance Budget Office, and Ministry of Finance Accounts department. 51 Report of The Prime Minister’s Inter-Ministerial Task Team on Health Service Delivery: An Assessment of the Status Regarding the Supply of Medicines & Medical Supplies in Swaziland, 2017. 59 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Figure 5.19. Ministry of Health budget execution rates, FY2018–22 140% 121% 120% 110% 113% 108% 105% 105% 105% Budget/Expenditure % 101% 98% 97% 100% 89% 80% 60% 45% 45% 40% 24% 20% 19% 0% 2017-18 2018-19 2019-20 2020-21 2021-22 Recurrent Expenditure/Budget Capital Expenditure/Budget Total Expenditure/Budget Source: World Bank using Ministry of Health data. Note: FY = fiscal year. Table 5.10. Budget requests and approved budgets, FY2018–22 Fiscal Medium-Term Expenditure Approved Difference year Framework budget request (E million) (approved as % (E million) of requested) 2018 2,006.2 1,574.4 -21.5 2019 2,063.1 1,740.4 -15.6 2020 2,063.1 2,008.3 -2.7 2021 2,618.1 2,158.2 -17.6 2022 2,538.8 2,541.0 0.1 Source: World Bank using Ministry of Health data. Note: FY = fiscal year. Table 5.11. Medicine budget requests and approved budgets, FY2018–22 Fiscal Medium-Term Expenditure Approved Difference year Framework budget request (E million) (approved as % (E million) of requested) 2018 557.2 453.8 -18.6 2019 549.7 460.6 -16.2 2020 549.7 496.6 -9.7 2021 697.1 513.7 -26.3 2022 782.0 885.7 13.3 Source: World Bank using Ministry of Health data. Note: FY = fiscal year. 60 CHAPTER 5. REFORMING EXPENDITURE MANAGEMENT TO IMPROVE THE PERFORMANCE OF THE HEALTH SYSTEM. The Ministry of Health’s excessively complicated activities is challenging, with some delivery units (e.g., budget structure makes it difficult to map expenditures intensive care) duplicated under multiple activities to inputs, thematic areas, and outputs, such as in part because of historical transitions. Similarly, spending on essential medicines, primary healthcare, key expenditure lines (such as for antiretroviral or programmatic objectives. The budget allocates drugs) are listed under the “Social Welfare” activity, spending to activities and then to responsibility centers whereas most other expenditures on medicines are (Table 5.12). The activities are grouped around themes listed under “Ministry Administration,” and none are (e.g., curative or preventive care) but are also linked to listed under “Curative Services.” The Central Medical regions. The responsibility centers are a mix of delivery Stores is listed under “Medical Support Services” units (hospitals or clinics), health programs (such as for (Table 5.13). The annual work-planning processes are noncommunicable diseases), and line items (such as mainly centralized, and there is anecdotal evidence antiretroviral drugs). Line items are then tagged to each of poor linkages between the ministry’s planning and responsibility center. Mapping responsibility centers to functional units. Table 5.12. Ministry of Health budget structure, with selected activities and responsibility centers Activity Responsibility center Curative Medicine Dvokolwako Health Center, Hhohho Regional, Hlathikhulu Hospital, Intensive Care Unit, Lubombo Region Clinics, Mankayane Hospital, Matsanjeni Health Centre, Mbabane Hospital, Mental Hospital, Nhlangano Health Centre, Pigg’s Peak Hospital, Shiselweni Region Clinics Hhohho Health Care Services Dvokolwako Health Centre, Health Inspectorate Hhohho, Hhohho Regional (Mbabane Sub-District), Hhohho Regional (Piggs Peak Sub-District), Hhohho Regional Health Offices, Mbabane Public Health Unit, Piggs Peak Hospital Medical Support Services Biomedical Engineering, Central Laboratory, Central Medical Stores, National Blood Transfusion Service Ministry Administration Emergency Response, Intensive Care, Minister’s Office, Phalala Fund, Planning and Statistics Unit, Principal Secretary’s Office National Referral Hospitals Intensive Care Unit, Mbabane Hospital, Mental Hospital, Special Medical Care, Tuberculosis Hospital Preventive Medicine AIDS Programme Unit, Childhood Illnesses Programme Unit, Community Based Care Programme Unit, Health Education Unit Social Welfare Antiretrovirals, Military Pension, Public Assistance Source: World Bank using Ministry of Health data. 61 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Table 5.13. Medicine expenditure allocation by activity (program) description, FY2018–22 Percentage FY2018 FY2019 FY2020 FY2021 FY2022 Social Welfare 44.4 37.7 51.8 53.6 32.2 Ministry Administration 5.2 5.5 13.2 11.2 42.1 Preventive Medicine 14.4 14.3 10.2 12.2 7.8 National Referral Hospitals 17.6 22.1 12.3 9.0 1.7 Shiselweni Health Services 4.7 5.0 4.0 3.3 2.8 Medical Support Services 1.6 3.1 0.1 2.9 7.6 Manzini Health Care Services 4.1 4.8 3.4 3.3 2.2 Hhohho Health Care Services 4.2 4.5 3.2 2.6 2.3 Lubombo Health Care Services 3.8 3.0 1.7 2.0 1.3 Curative Medicine 0.0 0.0 0.0 0.0 0.0 Source: World Bank using Ministry of Health data. Note: FY = fiscal year. The health sector suffers from weak public financial Planning and Development should streamline management arrangements which undermine the supplementary budget process and publish strategic health service purchasing practices. Global approved budgets, supplementary estimates, and budgets to recipients lack sufficient guidance or are exchequer issues at sectoral level . These actions not linked to performance requirements. The fee-for- are key to improving sectoral budget credibility and service approach of the Phalala Fund encourages encouraging budget discipline. They would also help the overprovision of services and contributes to high track how resource allocations match resource needs, costs. The procurement and distribution of some particularly for important expenditure items such as essential items for routine operations, such as fuel, is essential medicines. centralized beyond the remit of the Ministry of Health, which undermines responsiveness and service delivery. The Ministry of Health and Ministry of Finance should address supply-chain management challenges holistically. Policy options The ministries should clear payment arrears to Better budgetary and public financial management suppliers of essential medicines and streamline arrangements could improve the efficiency of the systems to prevent a renewed buildup of arrears. health system. This may include negotiating framework contracts, developing payment plans, streamlining payment The Ministry of Finance could use the Ministry of Health processes, and strengthening communication with to lead the transition to a budget structure that improves suppliers to address payment concerns or similar the link between resource allocation, activities, and issues promptly. expected outputs, such as program-based budgeting. The health sector provides a solid foundation to support Undertaking a value-stream mapping exercise of this transition, as it can build on existing practices, such important supply-chain processes and reengineer, as the programmatic annual performance reviews. redesign, or improve them could help identify and eliminate unnecessary steps and improve efficiency The Ministry of Finance and the Ministry of Economic and responsiveness of the system. Developing key 62 CHAPTER 5. REFORMING EXPENDITURE MANAGEMENT TO IMPROVE THE PERFORMANCE OF THE HEALTH SYSTEM. performance indicators could enable the authorities The Ministry of Health should leverage strategic to track performance in areas such as procurement. purchasing to improve the efficiency, equity, and For example, a separate tender board for the Ministry quality of the health system. of Health would speed up the adjudication of tenders for essential medicines. The use of standard The ongoing drafting of the health financing strategy tender documents would improve the efficiency provides an opportunity to adopt a comprehensive of the tender process. Routine market surveys for approach to provider payment systems and wider essential medicines would help benchmark realized health-financing arrangements. It also offers an prices against international reference prices. This opportunity to accelerate subvention (subsidy) reform could also facilitate the development of pooled- and improvements to the provider payment systems procurement arrangements with other Southern used by the Phalala Fund, such as transitioning from African Development Community (SADC) countries. fee-for-service to case-based payments linked to capped global budgets. The Ministry of Health could develop an integrated supply-chain management strategy to give the Central As both a purchaser and provider of health services, the Medical Stores greater autonomy and improve the Ministry of Health can improve the link between available efficiency and effectiveness of the supply chain. resources and the performance of the health system. Developing standard operating procedures and plans The ministry could consider organizing its administrative could increase the automation of the main supply-chain structure around programs and cross-cutting functions to management processes, such as contract management, enhance the allocation of activities and responsibilities. inventory management, and order processing. Although This would support the effective functioning of important converting the Central Medical Stores to an autonomous units such as the Central Medical Stores, decentralized entity would provide a better framework for addressing units such as regional health management teams, and challenges such as overall technical capacity, budget service delivery units such as health facilities under their and cashflow management, procurement, and respective programs. accountability, supply chain challenges in Eswatini will not be fully addressed unless the overall public financial Decentralized units, including regional and facility-level management system is improved. management teams, should have more decision-making autonomy, along with responsibility for operational The Ministry of Health could reconstitute elements spending lines (e.g., fuel, utilities, etc.) and essential of the supply-chain governance structure, such as the medicines using instruments such as prespecified Pharmaceuticals and Therapeutics Committees, at the drawing rights at the Central Medical Stores. national, regional, and hospital levels to help ensure that the essential medicines list is updated, support Strengthening the use of information will further the prioritization of essential medicines to be procured improve the performance of the health system. using government funds, and enhance the rational use of medicines. A quantification subcommittee chaired The Ministry of Health could build on the annual by the Chief Pharmacist should be established under performance and budget reports and aim to link the supply-chain technical working group to develop a performance reporting with expenditures, for example quantification protocol for essential medicines. by reporting on expenditures and execution rates by program or department, such as family and child health The government should put in place a secure or the Central Medical Stores. whistleblowing system to facilitate the reporting of malfeasance and create a culture of accountability. The ministry should provide disaggregated reports on Healthcare workers and the public should be encouraged health-system performance at the facility catchment or to report any suspicious behaviors or activities. sub-district (tinkundla) levels, as these are linked with 63 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES specific activities such as community health services. matched with quality-of-care improvements to close This would help link expenditures with performance the gap between health spending, access to services, and provide more meaningful data to support informed and health outcomes. Qualitative improvements decision-making. could include strengthening the core competencies of service providers through practice-level mentorship The Ministry of Health should conduct a more in-depth (as opposed to classroom-based approaches); assessment of health-system efficiency, with a focus implementing clinical audit and feedback activities on facility-level efficiency. Information provided at this for individuals, teams, and facilities; improving the level of analysis, rather than at national or regional level, availability and use of essential medicines such as will provide more meaningful recommendations for those required for emergency obstetric care; and improving performance and maximizing health gains. enhancing the functions and capacities of ambulance and urgent-care services. The Ministry of Health should strengthen healthcare access and quality by focusing on primary care. The ministry should accelerate the rollout of the Human Resource Information System to improve the The ministry could extend its plans to enhance distribution and management of human resources coverage of key primary-care services such as the for health and ensure that they are aligned with treatment of noncommunicable diseases. Better competencies and performance tracking. Information service coverage, particularly of nonvertical programs on competencies would help improve capacity-building such as efforts to combat HIV/AIDS, should be activities by aligning them with competency gaps. Table 5.14. Short- and medium-term health expenditure policy options Policy options Short-term actions (1 year) Medium-term actions (2–3 years) Strengthen Streamline the supplementary budget Transition to a budget structure that better links budget and process, and publish approved health expenditure to performance (e.g., through public financial budgets, supplementary estimates, better tagging of primary healthcare expenditure, management and exchequer issues at sectoral level. and avoiding the fragmentation of expenditures on arrangements essential medicines and supplies). Address Undertake a value-stream mapping Develop an integrated supply-chain management supply chain of key supply-chain processes and strategy to help the Central Medical Stores move management redesign or improve them. toward autonomy and to improve the efficiency challenges and effectiveness of supply-chain management. Reconstitute and operationalize Establish a secure whistleblowing system to supply-chain governance structures strengthen accountability. such as the Pharmaceuticals and Therapeutics Committees. Implement Use the development of the health Reorganize the Ministry of Health’s administrative key strategic financing strategy to deliver a structure to rationalize its functions. health service comprehensive approach to purchasing payment reform. Allow regional and facility management more actions decision-making and financial autonomy. 64 CHAPTER 5. REFORMING EXPENDITURE MANAGEMENT TO IMPROVE THE PERFORMANCE OF THE HEALTH SYSTEM. Policy options Short-term actions (1 year) Medium-term actions (2–3 years) Improve Build on the annual performance Report on health system performance at a more information and budget reports to link reporting disaggregated level than the regions. availability on expenditure and health and use system performance. Address Accelerate the rollout of the Human Extend plans to improve primary care for performance Resource Information System noncommunicable diseases and other emerging gaps by to improve the distribution and priorities. Realign health spending to reflect a improving the management of human resources primary healthcare-led approach toward universal quality of care for health. health coverage. and strengthening primary care services Source: World Bank analysis. 65 66 Appendix A. Statistical tables Table A.0.1. Key economic indicators, 2013–25 Period average, 18-22 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Eswatini Regional Structural Aspirational Growth of real GDP per capita 3.2 0.2 1.5 0.3 1.2 1.6 1.9 -2.5 9.6 -0.3 4.0 3.1 2.2 2.1 0.3 0.6 2.0 GDP growth, percent 3.9 0.9 2.2 1.1 2.0 2.4 2.7 -1.6 10.7 0.5 4.8 4.6 3.5 2.9 2.6 2.3 2.3 Demand decomposition, percentage points Absorption* 3.5 -3.2 2.6 -0.3 0.2 3.8 -3.5 -0.5 6.9 0.7 1.5 3.0 2.3 1.5 1.9 1.4 -1.4 Exports 0.4 4.2 -0.4 1.4 1.8 -1.5 6.2 -1.0 3.8 -0.2 3.3 1.1 1.0 1.5 0.8 0.9 3.6 Sector decomposition, percentage points Agriculture 0.6 -0.8 0.4 -0.8 -0.4 0.5 0.1 -0.6 0.4 0.4 -0.2 -0.1 0.1 0.1 0.6 0.3 0.0 Industry 1.6 0.5 -0.5 0.9 0.7 -0.1 2.0 -3.5 6.0 -0.1 0.5 1.4 1.0 0.8 0.6 0.5 0.5 Services, and others* 1.7 1.2 2.3 1.0 1.7 2.0 0.6 2.6 4.3 0.2 4.5 2.8 2.1 2.0 1.3 1.5 1.7 Total investment, percent of GDP 12.2 12.6 12.5 12.8 12.8 13.2 13.6 12.3 13.6 11.8 11.5 11.8 12.1 12.9 22.1 25.7 21.2 Public consumption 18.6 19.3 22.0 24.5 25.2 23.1 21.7 22.8 18.4 17.6 18.6 18.4 18.0 20.7 15.4 16.2 15.7 Private consumption 70.8 69.7 66.9 63.0 65.6 65.6 63.8 66.0 65.7 61.7 61.8 61.6 61.4 64.6 70.9 70.2 54.5 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Unemployment 24.2 24.4 24.4 24.5 25.2 25.7 26.1 29.1 28.6 28.2 28.2 28.2 28.2 27.5 11.2 9.7 9.8 Inflation 5.6 5.7 5.0 7.8 6.2 4.8 2.6 3.9 3.7 4.8 5.0 4.4 5.4 4.0 16.1 12.4 3.7 Fiscal revenues, percent of GDP 29.1 31.1 28.2 25.5 28.6 25.4 27.5 29.4 25.1 23.6 29.4 29.4 27.6 26.3 20.0 24.1 23.8 Fiscal expenditures 28.3 32.1 34.3 34.2 34.7 32.4 34.1 34.0 29.7 29.9 31.5 31.4 29.8 31.8 23.8 28.0 27.3 o.w. interest payments 0.8 0.7 0.7 0.9 1.2 1.3 2.1 2.2 1.9 2.2 3.0 2.5 2.6 1.9 2.0 2.2 2.4 Public sector balance 0.7 -1.0 -6.1 -8.6 -6.1 -7.0 -6.5 -4.6 -4.6 -6.3 -2.1 -2.0 -2.2 -5.5 -3.8 -3.9 -3.5 External financing 0.1 0.2 2.0 0.9 1.1 1.3 3.5 5.0 2.7 1.9 2.6 1.3 1.3 .. .. .. .. Period average, 18-22 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Eswatini Regional Structural Aspirational Domestic debt 7.2 6.4 6.3 10.7 13.1 16.6 18.2 24.0 22.9 22.3 19.6 17.4 16.2 .. .. .. .. Current account balance, percent of GDP 10.5 11.6 13.0 7.9 6.2 0.9 3.9 7.1 2.6 -2.7 2.2 4.8 2.7 2.4 -5.0 -3.3 1.1 Net foreign direct investment 1.9 0.6 -1.0 -0.7 2.8 -1.0 -2.4 -1.2 -1.2 -0.7 -0.8 -0.8 -0.7 -1.3 -4.1 -2.6 -14.9 International reserves 16.6 15.6 17.6 15.0 14.1 13.3 9.9 7.6 10.7 16.2 20.7 23.0 25.0 11.5 12.4 25.9 40.5 Average depreciation rate 17.7 12.3 17.6 15.3 -9.4 -0.7 9.1 14.1 -10.3 10.7 13.1 0.3 0.0 4.6 15.0 12.1 2.6 Poverty at $6.85 a day, percent of the population 78.1 77.7 76.1 76.2 75.1 74.6 74.2 76.6 80.3 64.2 15.0 Gini coefficient, 0-100 (worst) 54.6 39.6 37.0 39.6 Ratio of female to male labor 82.5 83.0 83.4 84.4 85.1 85.6 86.3 86.3 87.6 86.4 86.7 86.4 79.5 66.8 73.2 participation, percent GHG, metric tons of CO2-eq percapita 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.2 0.3 0.3 0.3 0.3 0.3 0.2 0.4 0.4 0.3 Fuel combustion 42.4 42.6 44.3 46.3 45.1 44.8 44.6 45.1 48.2 47.9 47.5 48.0 49.1 46.1 24.5 39.5 78.1 Agriculture 38.8 38.3 36.5 34.3 35.2 35.3 34.9 34.4 31.9 31.7 31.6 30.8 29.6 33.7 36.3 27.6 27.7 Waste 20.9 21.0 21.3 20.8 21.1 21.2 20.3 21.1 20.1 20.4 20.6 20.4 19.9 20.6 5.6 6.9 28.6 Other -2.1 -1.9 -2.0 -1.3 -1.4 -1.2 0.1 -0.6 -0.3 0.0 0.4 0.9 1.3 -0.4 33.6 26.1 -34.4 CO2 intensity of energy ktCO2 / ktoe 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 GDP per capita, $ dollar 4109 3929 3579 3340 3827 4025 3847 3373 4071 3990 3823 4099 4366 3861 2357 2410 29784 Note: (*) These variables were calculated as residuals. Source: World Bank staff’s estimates. APPENDIX A. STATISTICAL TABLES 67 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Table A.0.2. Tax revenues, 2011–20 Period average 18-21 Aspirational Structural Regional Eswatini 2016 2017 2018 2019 2020 2021 Percent of GDP Total revenues 25.5 28.7 25.4 27.4 28.7 25.1 26.6 20.8 24.8 26.5 Total tax revenues 23.3 26.7 24.2 25.2 28.1 24.1 25.4 14.6 15.2 16.9 Taxes on good and services 5.7 6.1 6.2 6.6 6.8 6.5 6.5 6.2 7.3 9.4 VAT 4.3 4.3 4.3 4.6 4.8 4.4 4.5 3.9 4.2 5.2 Excise taxes 1.3 1.7 1.7 1.9 2.0 1.9 1.9 1.6 1.9 2.6 Other 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.7 1.2 1.6 Direct taxes 8.1 8.3 8.4 8.7 8.5 8.6 8.6 5.7 5.4 5.9 Personal income tax 4.7 5.2 5.3 5.4 5.4 5.3 5.3 2.8 2.2 3.0 Corporate income tax 2.7 2.3 2.4 2.6 2.2 2.6 2.4 2.6 3.0 2.8 Other direct taxes 0.7 0.8 0.8 0.8 0.9 0.7 0.8 0.3 0.2 0.1 Taxes on international trade 9.4 12.2 9.5 9.7 12.7 8.9 10.2 2.3 2.0 0.4 Other taxes (*) 0.1 0.1 0.1 0.1 0.0 0.1 0.1 0.4 0.4 1.2 Social contributions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.6 5.5 Other revenues (**) 2.2 2.0 1.2 2.2 0.5 1.0 1.2 5.9 9.1 4.1 Percent of total revenues Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Total tax revenues 91.3 93.1 95.2 92.1 98.1 96.2 95.4 70.4 61.1 63.8 Taxes on good and services 22.4 21.4 24.2 24.0 23.8 25.8 24.4 29.9 29.4 35.5 VAT 16.8 15.0 17.0 16.7 16.6 17.4 16.9 18.8 16.7 19.7 Excise taxes 5.1 6.0 6.7 6.9 6.9 7.4 6.9 7.9 7.8 9.9 Other 0.5 0.5 0.5 0.5 0.4 0.9 0.6 3.2 5.0 5.9 Direct taxes 31.7 28.9 33.2 32.0 29.6 34.4 34.4 27.7 21.8 22.5 Personal income tax 18.6 18.1 20.8 19.6 18.9 21.2 21.2 13.7 9.0 11.4 Corporate income tax 10.5 8.2 9.3 9.6 7.7 10.2 10.2 12.7 11.9 10.7 Other direct taxes 2.7 2.6 3.1 2.7 3.1 3.0 3.0 1.3 0.8 0.3 Taxes on international trade 36.8 42.4 37.4 35.6 44.5 35.5 35.5 11.1 8.1 1.4 Other taxes (*) 0.4 0.4 0.5 0.5 0.2 0.5 0.5 1.7 1.8 4.4 Social contributions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.3 2.3 20.8 Other revenues (**) 8.7 6.9 4.8 7.9 1.9 3.8 3.8 28.3 36.6 15.4 Note: (*) It includes taxes on payroll and workforce, taxes on property, and other taxes. (**) It includes other social contributions, grants and other revenues. Source: GFS. 68 APPENDIX A. STATISTICAL TABLES Table A.0.3. Public Expenditure (Percent of GDP), 2016–21 Period average 18-21 Aspirational Structural Regional Eswatini 2016 2017 2018 2019 2020 2021 Economic classifications Total expenditure 27.7 29.5 29.2 27.1 30.1 29.5 28.6 21.1 25.5 38.5 Wage bill 9.6 11.6 11.3 11.4 10.9 10.4 10.7 6.9 8.0 9.2 Goods and services 5.9 5.4 5.3 4.4 5.3 4.0 4.6 3.4 3.8 7.0 Maintenance 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.5 Basic services 0.6 0.8 0.7 0.6 1.1 0.7 0.7 0.4 0.5 0.5 Interest payments 0.5 0.6 0.9 0.6 0.5 0.5 0.6 1.6 2.3 2.6 Social benefits 0.4 0.3 0.3 0.3 0.3 0.4 0.3 1.5 1.8 9.8 Subsidies 0.5 0.6 0.6 0.9 1.1 0.3 0.8 0.6 1.1 0.8 Other 6.0 6.5 6.7 6.4 6.9 7.1 6.9 3.3 4.3 4.5 Capital expenditure 4.8 4.5 4.1 3.1 5.0 6.7 4.7 3.6 4.3 4.6 Functional classifications Total expenditure 27.7 29.5 29.2 27.1 30.1 29.5 28.6 21.2 25.2 38.5 General services 5.4 6.6 6.8 6.0 5.6 6.1 6.1 7.2 6.9 10.1 Defense 2.0 1.9 2.1 2.1 2.0 1.8 1.9 1.3 1.5 1.7 Public safety 3.0 3.3 3.3 3.2 3.3 3.0 3.1 1.4 2.4 1.9 Judiciary 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.2 0.5 Public safety 2.8 3.1 3.1 3.0 3.1 2.8 2.9 1.1 1.2 1.5 Economic affairs 7.2 6.6 6.5 6.1 7.6 7.6 6.9 3.4 4.8 5.7 Agriculture 0.8 0.8 0.8 0.6 1.2 1.3 1.0 0.7 0.8 0.3 Energy 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.6 0.9 4.4 Transport 2.9 2.5 2.2 2.5 2.5 2.7 2.5 1.0 1.2 2.0 Roads 1.8 1.3 0.9 1.4 1.5 2.1 1.5 0.8 0.9 1.2 Railroads 0.1 0.2 0.2 0.0 0.0 0.0 0.0 0.1 0.2 0.0 Air transportation 0.7 0.6 0.6 0.9 0.7 0.2 0.6 0.0 0.1 0.2 Environment 0.1 0.1 0.1 0.0 0.1 0.1 0.1 0.2 0.2 0.4 Housing 0.8 0.9 0.8 0.5 1.0 0.8 0.8 0.5 0.4 0.7 Health 3.2 3.1 2.8 2.8 4.0 3.7 3.4 1.9 2.2 5.7 Recreation 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.3 0.9 Education 5.2 6.1 5.6 5.5 5.4 5.1 5.2 3.5 4.1 5.2 Primary 2.2 2.6 2.3 2.4 2.2 2.1 2.2 1.3 1.1 1.2 Secondary 1.7 2.2 2.0 2.0 2.0 1.9 1.9 1.0 1.4 1.2 Tertiary 0.7 0.6 0.6 0.6 0.6 0.5 0.6 0.6 0.6 1.1 Social protection 0.8 0.6 1.0 0.9 1.0 1.2 1.0 1.7 2.4 6.2 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Note: (*) It includes taxes on payroll and workforce, taxes on property, and other taxes. (**) It includes other social contributions, grants and other revenues. Source: GFS. 69 ESWATINI PUBLIC FINANCE REVIEW: LEVERAGING FISCAL ADJUSTMENT FOR BETTER DEVELOPMENT OUTCOMES Annex B. Health chapter methods and limitations Data sources and methods Budget and expenditure data for the 2018–22 fiscal years were collected from summary tables provided by the Ministry of Health. The data were validated against data provided by the Ministry of Finance for the overall Public Finance Review. Data were then recategorized and analyzed in various ways to provide an understanding of the levels and composition of spending on health. This included reclassification into fewer activities and responsibility centers (akin to programs and subprograms respectively). Data were classified based on the Government of Eswatini’s Chart of Accounts. These were then converted into the Government Finance Statistics Manual 2014 (IMF 2014) classification to facilitate analysis and interpretation. The Public Finance Review reports the total envelope for health, trends, and classes of expenditure, disaggregated to regional level where possible. A budget performance analysis compares budgeted expenditure to actual spending. Macro-level efficiency was assessed using a benchmarking approach. Current health expenditure as a share of GDP was used as a measure of inputs and resources to the health sector, with the WHO universal health coverage index as a proxy for health service coverage and maternal mortality and child mortality as proxies for health outcomes. Regions were benchmarked against each other, with regional health spending per capita compared against key health inputs (such as facility density), outputs (such as share of deliveries in health facilities), and outcomes (neonatal mortality per 1,000 live births, for example). 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