Download 4. The loan proposal

Loan Proposal for
Microfinance Project
The Government of Swaziland
Kwok Tsz Wai, Cynthia Y12 Hope
1. Development data: an overview of Swaziland’s
current level of economic development
1.1 Social and economic data
Social indicators of development
Human Development Index (HDI) ranking and value:
 Swaziland’s HDI value for 2013 is 0.53, being at 148th out of 187 countries and territories. The
ranking falls in the low human development category.
(Source: UNDP Human Development Report 2014)
HDI is a summary measure for assessing long-term progress of a country or territory in three basic dimensions of human development:
(1) a long and healthy life [ measured by life expectancy],
(2) access to knowledge [ measured by: mean years of education among the adult population, and expected years of schooling for children of
school-entry age] and
(3) a decent standard of living [measured by: Gross National Income (GNI) per capita expressed in constant 2011 international dollars
converted using purchasing power parity (PPP) rates].
1.1 Social and economic data
Population and growth rate:
 CIA World Factbook: 1,419,623 (2014 est.), growth rate: 1.14%
 Wiki: 1,106,000 (2014 estimate), growth rate: 1.195%
School life expectancy:
 11.3 yrs. in 2013
(Source: UNDP Human Development Report 2014)
Life expectancy at birth:
 49.0 years in 2013
(Source: UNDP Human Development Report 2014)
1.1 Social and economic data
Total fertility rate:
 2.88 children born/woman (2014 est.)
(Source: CIA World Factbook)
Education expenditures:
 8.3% of GDP in 2011
(Source: knoema.com)
Expenditure on education as a percentage of GDP appears relatively high, but
the amount itself is not sufficient to establish and maintain a quality education
system.
1.1 Social and economic data
Economic indicators of development:
GDP per capita:
 $6,367 on PPP basis, source: IMF World Economic Outlook April 2014
 $3,457 (nominal), source: wiki
GNI per capita (2011 PPP$):

$5,536 in 2013 according to the UNDP Human Development Report 2014
GDP- composition by sector:
 agriculture: 7.6%
 industry: 47.8%
 services: 44.6%
(2013 est.)
(Source: CIA World Factbook)
Economic indicators of development:
Unemployment rate:
 40% (in 2006)
(Source: CIA World Factbook)
Public debt:
 $703.1 million (2011 est.)
(Source: CIA World Factbook)
Government gross
debt as a % of
GDP
2010
2011
2012
2013
2014*
16.0%
17.4%
18.2%
18.8%
26.9%
*Estimate
(Source: IMF World Economic Outlook, April 2014)
Government net
lending/borrowing
as a % of GDP
2010
2011
2012
2013
2014*
-10.8%
-4.6%
4.0%
-0.7%
-1.8%
*Estimate
(Source: IMF World Economic Outlook, April 2014
Stock of direct foreign investment-at home:
 N/A
Labour force-by occupation:
 agriculture 70%,
 industry N/A,
 services N/A
Labour force: 424,100 (2011 est.)
(Source: CIA World Factbook)
1.2 Dependency ratio
 70 as of 2013 (Hong Kong 35, USA 50, Canada 46, UK 54, South Africa
54)
(Source: CIA World Factbook)
Definition: The percentage of its population under the age of 15 and over the age of 64
(i.e. those not of working age) divided by the percentage of the population between 15
and 64 (i.e. those of working age)
1.3 Income distribution
Gini: 51.5 (2010)
(Source: 2014 World Development Indicators by the World Bank)
Percentage share of income or consumption for Swaziland (Survey year: 2010)
Fourth
20%
Highest
10%
Highest
20%
Lowest
10%
Lowest
20%
Second
20%
Third
20%
20
40
57
2
4
7
12
(Source: 2014 World Development Indicators by the World Bank)
1.3 Income distribution

Income distribution in Swaziland is extremely uneven and unequal.

The above chart shows that the richest 10% of the population in Swaziland earn
40% of the national income while the lowest 10% earn only 2% of the income.

Since Swaziland has a rather high Gini coefficient value, the country’s Lorenz curve
will bend away from the line of equality and move very close to the “line of perfect
inequality”.
1.4 Development data analysis
To what extent does Swaziland exhibit: Low incomes and low
standard of living?
 Swaziland’s GNI per capita (PPP US$) for 2013 was 5,536, well above the average
of both Sub-Saharan Africa (3,152) and Low HDI countries (2,904). Actually, it is
close to and slightly below the average of Medium HDI countries (5,960).
 Despite its middle-income country status, poverty levels remain high. Even though
poverty declined from 69% to 63% as reflected in the 2001 and 2010 Swaziland
Household Income and Expenditure Survey, huge regional differences in the
prevalence of poverty remain.
1.4 Development data analysis
To what extent does Swaziland exhibit: Inequality?
 High income inequality: Swaziland has a high value of Gini coefficient, up to 51.5
for 2010. 75% of the population is employed in subsistence agriculture on Swazi
Nation Land (SNL). Unemployment rate has remained very high (last survey at
40%).
 Gender inequality: Strong paternalistic traditions are still to be overcome. Female
representation in Parliament and at community levels are disappointing. The recent
elections resulted in less than 15% representation of women. Women make up 53%
of the labour force, and yet only 55% of them are employed compared to 76% of
their male counterparts.
1.4 Development data analysis
To what extent does Swaziland exhibit: Poor health?

Major health issues: Swaziland has been critically affected by HIV and AIDS
disease, and to a lesser extent, tuberculosis (Source: Wiki). The country has the
highest HIV infection rate in the world, i.e. 25.8% of all adults, according to the
2012 CIA World Factbook. Infant mortality is 57.19 per 1,000 in 2014, with the
WHO showing that 47% of all deaths under 5 are caused by HIV/AIDS.

The prevalence of HIV/AIDS has reduced life expectancy to less than 50 years,
adversely impacted labour productivity and has led to a smaller skill base. The fiscal
situation has also suffered as the dependency ratio increased, leading to higher
demands for public support.
1.4 Development data analysis
To what extent does Swaziland exhibit: Inadequate education?
 Being one of the countries with the highest literacy rates in Africa, Swaziland has
made good progress with respect to achieving universal primary education, with net
primary enrolment having risen from 72% in 2007 to 93% in 2013.
To what extent does Swaziland exhibit: Low levels of productivity?

According to wiki, 75% of the population is employed in subsistence agriculture on
Swazi Nation Land (SNL), which suffers from low productivity and investment,
declining productivity. Swaziland has also been known to have an overly large and
inefficient government sector.
1.4 Development data analysis
To what extent does Swaziland exhibit: High rates of population growth
and dependency burdens?
 Real GDP per capita growth rate remains below the real GDP growth rate due to
relatively higher population growth. High population growth, coupled with reduced
life expectancy, have resulted in high dependency ratio. These factors, working
together, have hindered the country’s ability to accumulate savings and capital for
investment.
2012
2013 (e)
2014 (p)
2015(p)
Real GDP growth
1.7
3.5
2.4
2.5
Real GDP per capita growth
0.2
2.0
1.0
1.1
Source: Swaziland 2014, African Economic Outlook;
estimates (e) and projections (p).
1.4 Development data analysis
To what extent does Swaziland exhibit: High rates of unemployment?
 The unemployment rate was as high as 40% in 2006. However, since the majority of
the population is engaged in subsistence agriculture, unemployment rate alone may
not be a good measure of the economic condition of the country.
To what extent does Swaziland exhibit: Dependence on agricultural
production and primary product exports?
 While agriculture only make up to 7.2% of Swaziland’ GDP, it has been the source of
employment or income for the majority of the population. Total export from the country
in 2013 was estimated to be around US$1.6 billion, covering items including soft drink
concentrates, sugar, wood pulp, cotton yarn, refrigerators, citrus and canned fruit. The
majority of the country’s export are primary products or so related.
1.4 Development data analysis
To what extent does Swaziland exhibit: Imperfect markets?
 Despite being one of the most open countries in the world, Swaziland has been known
to have substantial regulatory restrictions, government distortions and high transaction
costs.
To what extent does Swaziland exhibit: Dependency on foreign developed
countries for trade, access to technology, foreign investment and aid?
 South Africa is its single major export and import partner. According to World Trade
Organization and International Trade Centre, Swaziland’s export to South Africa and
Botswana made up to 45% and 32% of its total export. The country’s import from
South Africa was 93% of its total import.
 Swaziland's currency is pegged to the South African rand. Also, customs duties from
the Southern African Customs Union (SACU) account for two-thirds of Swaziland's
government revenues, and worker remittances from South Africa substantially
supplement domestically earned income.
2. Obstacles to economic development faced by
Swaziland
Obstacles faced by Swaziland to further economic development:
 The major domestic obstacles
 The major International obstacles
2. Obstacles faced by Swaziland to further economic
development
The major domestic obstacles:
Poverty traps:
 It refers to a mechanism which makes it very difficult for people to escape poverty. A poverty trap
is created when an economic system requires a significant amount of various forms of capital in
order to earn enough to escape poverty. When individuals lack this capital, they may also find it
difficult to acquire it, creating a self-reinforcing cycle of poverty.
 Despite Swaziland’s middle-income country status, its poverty levels remain high and regional
differences is huge. The country has chronically experienced low growth, high inequality and
unemployment.
 The vast majority of its population are relying on subsistence agriculture for their livelihood on
Swazi Nation Land which suffers from low productivity and investment.
 Their situation has worsened due to unsustainable farming techniques, volatile weather conditions,
land degradation and the wide spread of HIV/AIDS. It seems that they are facing a poverty trap
from which they can hardly escaped without external aid.
2. Obstacles faced by Swaziland to further economic
development
Other domestic obstacles
Institutional and political obstacles
 Inadequate competitiveness and unfavorable business environment
 Ranking in the 2014 Doing Business Index by the World Bank was 123 out of 189
countries.
 The World Economic Forum’s Global Competitiveness Report 2013-14 ranked
Swaziland at 124 out of 148 countries.
 Example: starting a business in Swaziland requires 12 procedures and takes 38 days
while enforcing a contract takes 956 days , costs 56% of the value of the claim and
requires 40 procedures.
2. Obstacles faced by Swaziland to further economic
development
Institutional and political obstacles
 Corruption
 The country remains at the low end of the global rankings on governance.
 Transparency International’s Corruption Perception Index ranked the country 170th
out of 174 countries in 2013. (Source: Swaziland 2014, African Economic Outlook)
 Economic and political governance
 Swaziland’s governance indicators compare unfavourably with its neighbours.
 In 2013, the Ibrahim Index of African Governance ranked Swaziland 26th out of 52
countries with a score of 50.8.
 The 2013 Index ranks Swaziland poorly in participation and human rights, as well as
sustainable economic opportunity attributable to weak institutional capacity and a
relatively rigid political system.
2. Obstacles faced by Swaziland to further economic
development
International trade obstacles
 Overdependence on primary products: sugar, wood pulp and
citrus,
 Narrow range of exports: apparel and sugar
 Protectionism in international trade: substantial
 Swaziland is lowly ranked under the trade barriers (84), tariffs (78) and burden of
customs procedures(137) categories in the Global Competitiveness Report 2013.
(Source: African Economic Outlook Report 2014 on Swaziland)
3. Resources and potential: identification of existing
resources within Swaziland
3.1 Internal and external advantages Swaziland possesses that
will enhance its chances for development.
 Findings from recently concluded Investment Climate Assessment: Swaziland firms
are among the most positive in Sub-Saharan Africa, compare more favourably with
firms from lower middle income countries.
 The external debt burden has declined markedly over the last 20 years, and domestic
debt is almost negliagible; external debt as a percentage of GDP was less than 20%
in 2006.
 Swaziland is one of the countries with the highest literacy rates in Africa.
3. Resources and potential: identification of existing
resources within Swaziland
3.2 What geographical, social, institutional/political, economic,
technological, or other advantages does Swaziland already possess
that will make it a viable candidate for external aid?
 Despite complaints from progressive formations, support for the monarchy and the
current political system remains strong among the majority of the population.
 The Government is striving to reduce size of civil service and control costs at public
enterprises, and to improve atmosphere for foreign direct investment
3. Resources and potential: identification of existing
resources within Swaziland
3.3 Why should Swaziland receive scarce foreign aid?
 Swaziland has a good track record for honoring its obligations under these
international aid programs in terms of fund usage and repayment.
 Based on poverty trap analysis, a massive foreign aid to Swaziland to tackle the
above mentioned problem can act as “a ‘big push’ to instigate a virtuous circle of
higher rates of savings, investment and economic growth among the SNL farming
sector ”, and tens of thousands of households in these SNL would be benefited from it.
4. The loan proposal
The ultimate goals of the project:
 promote economic development and
 improve the people’s standards of living
in Swaziland.
4. The laon proposal
4.1 Project type
 MICROFINANCE PROJECT
• loan amount: US$20 Million
4. The loan proposal
4.2 Project goals
Parties/partners to be involved from Swaziland and from the
international:
 Domestic: Central bank, an apex financing institution specifically
created to implement the project, Microfinance Institutions,
particularly the savings and loan associations / financial
cooperatives
 International: the Africa Microfinance Network, The African
Development Bank, the Humanist Institute for Development
Cooperation, multilateral technical agencies and multinational NGOs
4. The laon proposal
4.2 Project goals
 Major types of resources are needed to make the project
possible:
 Long-term finance
 Technical support and skill training for microfinance and risk
management
4. The loan proposal
4.2 Project goals
 Time schedule:
 The time-span of the project is about 20 years and the project will be
rolled out in phases starting with small-scale pilot programs in
selected locations
 Location:
 Rural areas in Swaziland
4. The loan proposal
4.2 Project goals
How the project will promote human development in Swaziland?
 The long –term target of the project is to improve the standard of
living and productivity of the rural population in Swaziland by
providing them increased financial services not served by the
traditional banking sector.
4. The loan proposal
4.2 Project goals
How the project will promote human development in Swaziland?
 3 components or intermediate outcomes of the project are:
 Establishment of legal and regulatory framework for microfinance
operations;
 Expansion of microfinance skills; and
 Development of strong and sustainable microfinance institutions
through the establishment of a refinancing mechanism.
4. The loan proposal
4.3 Examples of similar projects
 Bangladesh Poverty Alleviation Microfinance Project in the amount
of US$105mn approved by the World Bank in 1996
 Loan of US$21.4mn granted to the Republic of Madagascar
approved by the World Bank in 1999 in support of its microfinance
program
4. The loan proposal
4.4 Financial analysis of the project
 A financial breakdown of the project
Major Components
Improve legal, judicial, and regulatory framework
Total Financing
(US$ 000)
1,000
Develop microfinance institutions
15,000
Build Capabilities in Microfinance
1,200
Conduct Studies
Coordinate Project
Totals
900
1,900
20,000
4. The loan proposal
4.4 Financial analysis of the project
 Cost estimates
Major Components
Improve legal, judicial, and regulatory framework
Total Financing
(US$ 000)
1,100
Develop microfinance institutions
16,000
Build Capabilities in Microfinance
1,500
Conduct Studies
1,200
Coordinate Project
2,500
Total Financing Required
Portion to be contributed by Borrower
22,300
2,300
4. The loan proposal
4.4 Financial analysis of the project
 Expected rates of return of Apex FI:
 Return on Average Assets of : 6% p.a.
 Return on Equity: 4% p.a.
 Repayment schedule detailing how and when development loan will
be repaid:
 loan tenor: 20 Years
 repayment terms: interest to be repaid annually after loan draw down, principal to be
repaid by 10 annual instalments starting from the end of the tenth year
 Source of fund for loan repayment: government revenues and dividends from Apex FI