Download impact of global economic and financial crisis on

IMPACT OF GLOBAL ECONOMIC AND FINANCIAL CRISIS ON THE KINGDOM OF SWAZILAND
1. Introduction
Since independence in 1968, but especially in the 1980s and early 1990s the Kingdom of Swaziland
witnessed good economic performance. This was partly due to political stability, peace and security
and strong adherence to a firm macro-economic framework. This was helped in no small measure by its
membership of the Southern African Customs Union (SACU) and its Common Monetary Area (CMA) with
its currency, the “Lilangeni” is pegged to the South African Rand. The latter helped ensure the discipline
necessary for its sound monetary and fiscal policies; which together with its low integration into the
global financial system has to some extent insulated it from the first order contagion effect of the
global financial crisis. In the past the war in Mozambique and sanctions against apartheid South Africa
served to attract foreign direct investment (FDI) especially in the manufacturing sector . Although
Swaziland has a viable agricultural sector dominated by sugar, timber, livestock etc, it has done
extremely well in years when the manufacturing sector has performed well. This is also partly because
the agricultural sector is weakened by recurrent drought, which coupled by limited access of the poor to
productive assets such as arable land and water, has often led to poor harvest, severe food shortages
and dependency on food aid. The WFP which had closed its offices in Swaziland has had to reopen.
Swaziland’s performance has worsened by the “triple threat” of poverty and food insecurity, HIV&AIDS
and the ensuing weakened governance capacity for efficient service delivery. Key factors in this regard
include:
1.1. The end of the civil war in Mozambique and attainment of majority rule in South Africa diverted FDI
to these countries at the expense of Swaziland. Even established firms including in the textiles subsector shifted to South Africa.
1.2. The country is severely plagued by HIV&AIDS with the highest prevalence incidences in the world
(with prevalence rates of about 26% and 42% for 15-49 and 25-29 age groups) which has reduced GDP
growth by about 2% and threatened the social fabric of society.
1.3. Swaziland’s MIC status has not allowed her easy access to concessional loans or grants; a situation
worsened by little donor assistance partly because of perceived poor governance.
Thus although Swaziland is a MIC, its human development situation, exemplified by its human
development indicators is quite akin to an LDC. Although Swaziland has a relatively high per capita
income of about USD2, 450.00; about 69% of its population lives on less than USD1 per day. Its global
HDI ranking at 142/177 is very much below where it was in 1990; its HDI has declined from 0.633 in 1990
to 0.547 in 2005. It is in these dire circumstances that the global economic and financial crisis with its
effects on amongst others, demand for, and prices of, commodities, has found the Kingdom. Given
that it is landlocked, and has a sizeable manufacturing and services sectors, it is very vulnerability to
external shocks.
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2. The Global Economic and Financial Crisis and its effects
In the past two years or so, Swaziland experienced the food and energy crises, with their prices
especially fuel reaching an unprecedented peak of USD145 per barrel in July 2008. The recent lowering
of prices of fuel, food and interest rates that has led to reduced inflation, has been followed by the
financial crisis and economic meltdown. The crisis that began as an insignificant sub-prime mortgage
problem, initially limited to the American financial markets, blossomed and its spillover effects now
impacts negatively on Swaziland and its major trading partners. This has far reaching effects on the
economic wellbeing, political and social stability of the Kingdom.
2.1 Effects on Swaziland’s Real GDP Growth
Partly because of poor performance in export commodities, a decline in the contribution of
the construction sector to growth and a decline in the South African economy, to which
Swaziland is linked, real GDP growth fell by 2.6% in the past year.
2.2 Spill-0ver Effects of Recession in South Africa
Swaziland’s economy is very much integrated with that of South Africa, with which it shares
75% of its border; and from which it gets 80-90% of its imports and directs 60% of its exports.
It relies almost 100% on South African energy and petroleum imports; and is its main
“gateway” to the outside world. Most Swazi firms in all sectors of the economy are
subsidiaries of South African companies. South Africa is the economic power house of
(Southern) Africa. With South Africa in a recession, and its economic growth rate projected to
decline from 3.1% in 2008 to 1.2% in 2009, the consequences for Swaziland are severe.
2.3 Decline in Revenues from SACU
Over 60% and 70% of Swaziland’s Budget and total revenues respectively are from the SACU.
Swaziland and Lesotho are the major beneficiaries as their share of the revenue pool is slightly
enhanced by an adjustment factor that rewards these two land-locked countries more (30% of
the revenues are set aside for the two within the five-nation customs union). Revenues from
SACU are projected to fall by 9% in 2008/09 as a result of global/regional trade liberalization.
The volume of imports e.g. motor vehicles, are declining as are exports. Thus it is estimated that
Swaziland’s share of SACU revenues will decline by 6.4% in 2009/10 and by 12.5% in 2010/11.
They will now fall even more as a result of the fall in the levels of trade related to the economic
slowdown in South Africa. Partly because of forecasted decline in SACU revenues, Swaziland’s
budget deficit is projected at of 8% of GDP in instead of the 1% estimated earlier.
2.4 Declining Levels of Remittances
Swaziland receives substantial amounts of remittances from thousands of Swazis working in
South Africa especially in the mines; but also elsewhere in the world. The former is historical
legacy of migrant labour for the mines, the latter is brain drain especially of engineers,
doctors, nurses, teachers, etc who have migrated to greener pastures in South Africa, UK,
Australia,etc. If they manage to keep their jobs (IMF has estimated South African mining job
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losses to be about 250,000) their take home pay might be much lower in which case
remittances will go down. If they loose their jobs, this could further fuel unemployment in
Swaziland now estimated at 28%. However, for skilled and semi-skilled labour such as doctors
and nurses, their return home would while minimizing remittances, provide person-power for
hard pressed sectors. To meet the teachers demand for the free education programme
Swaziland badly needs teachers and it would be better to have their own rather than
expatriate personnel.
2.5 Declining ODA and FDI
Swaziland’s ODA is as low as 1% of the budget; while FDI is also low. As already noted the
Kingdom’s MIC status and its political governance record has put off donors. It is however
trying to diversify – including in particular opening up to the rich Sheikhdoms of the Middle
East. It has also received loans from the regional banks and other financial institutions such as
the AfDB and BADEA as well as the Kuwait Fund.
2.6 Loss of Trade Opportunities
Swaziland partly because of its limited domestic market and the structure of its economy - the
manufacturing sector accounts for 35% of GDP (and is composed of a narrow range of
commodities: sugar, pulp wood, textiles, beef, canned fruit, soft drinks concentrates) and has
an upcoming services sector, is dependent on regional and international trade. Since the
advent of the Africa Growth and Opportunities Act (AGOA) it has benefited from the USA
market for its textiles exports. Given weakened demand in the USA, benefits from AGOA are
likely to go down and textiles factories are threatening to close down with attendant loss of
thousands of jobs and income. In addition as demand for paper and pulp products has
dwindled, the largest timber company in the country-SAPPI has served notice to close with a
loss of over 600 jobs. Its recent signing of the Economic Partnership Agreement (EPA) with the
EU will reduce benefits from its hitherto very preferential access to EU markets for sugar.
However, Government hopes that within the context of the Aid for Trade initiative, it may
receive grants and concessional loans.
3. Concluding Remarks
The global economic meltdown will have dire consequences for Swaziland. Reduced revenues
from development partners including possibly the UN, and reduced SACU revenues will widen
the budget deficit (now at 8.2% of GDP) with adverse consequences for macro-economic
stability, which is important for ensuring a stable exchange rate and the Lilangeni /Rand parity.
Widening the budget deficit has the danger of depletion of the foreign reserves ( now at a
comfortable level of five months of imports). Reduced revenues will constrain the ability of
government to efficiently offer better and expanded services including free basic education
(now a constitutional requirement), and address HIV and AIDS which together with a number of
other basic services are key to the attainment of the MDGs .
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