Fiscal Space for Children: An Analysis of Options in...1.1 The objective of the Fiscal Space...

Fiscal Space for Children:

An Analysis of Options in

Eswatini

February 2018

Table of Contents

2

List of abbreviations 5

Preface 7

Executive Summary 9

1 Introduction and methodology 11

1.1 The objective of the Fiscal Space Analysis (FSA) 11

1.2 Methodology – priority expenditure 11

1.3 Methodology - the fiscal-space analysis 12

1.4 Data limitations 13

1.5 Organization of the FSA part 13

2 Eswatini’s macroeconomic and fiscal context 15

2.1 Longer-term national economic trends 15

2.1.1 Economic growth and recent developments 15

2.1.2 Structure and characteristics of the national economy 16

2.1.3 Socio-economic trends 17

2.2 Recent macroeconomic developments 18

2.2.1 International trade (and its consequences for the fiscal accounts) 19

2.2.2 Inflation and exchange rate 20

2.3 Recent fiscal performance 22

2.3.1 Government financial performance 22

2.3.2 Revenue performance 23

2.3.3 Current expenditure performance 24

2.3.4 Implications for priority expenditure 27

3 Priority expenditure trends and policy challenges 29

3.1 Priority-expenditure composition and recent evolution 29

3.1.1 Priority-expenditure components and fiscal space in recent years 29

3.1.2 Recent evolution of priority expenditure 31

3.2 Sectoral issues in priority expenditure 32

3.2.1 Education 32

3.2.2 Health 33

3.2.3 Social welfare 35

4 The base scenario 39

4.1 Base scenario and fiscal space “mapping” 39

5 Alternative scenarios 43

5.1 Options to increase fiscal space 43

5.2 Alternative scenarios and projections compared with the base scenario 44

5.2.1 Increasing tax and non-tax revenue 44

5.2.2 Decreasing non-priority expenditure 49

5.2.3 Improving efficiency of priority sector spending 50

5.2.4 Other options for enhancing fiscal space 51

5.3 Risks to fiscal space and their impact 53

5.3.1 Weak economic growth 53

5.3.2 Decrease in SACU transfers 54

Table of Contents

3

Fiscal Space for Children: An Analysis of Options in Swaziland

6 Conclusions 57

7 References 59

Appendix 1: Fiscal space projections 61

5


List of abbreviations

AGOA Africa Growth and Opportunity Act

ARV Anti-retroviral

CIT Corporate Income Tax

CBS Central Bank of Eswatini

CPI Consumer Price Index

CMA Common Monetary Area

DPMO Deputy Prime Minister’s Office

DSW Departments of Social Welfare

ECCDE Early Childhood Care and Development

FAR Fiscal Adjustment Roadmap

FPE Free Primary Education

FSA Fiscal Space Analysis

FY Financial Year

GDP Gross Domestic Product

IFC International Finance Corporation

IMF International Monetary Fund

MVAF Motor Vehicle Accident Fund

NHSSP National Health Sector Strategic Plan

NDS National Development Strategy

NPF National Pension Fund

OVC Orphaned and Vulnerable Children

PIT Personal Income Tax

SACU Southern African Customs Union

SARB South African Reserve Bank

SRA Eswatini Revenue Authority

U5M Under 5 Mortality

VAT Value Added Tax

7


Preface

The project team would like to thank the Representative and the staff of UNICEF Eswatini who

provided valuable support to the project. We also extend our sincere appreciation to officials from

the Eswatini Ministry of Finance, the Deputy Prime Minister’s Office and all the line ministries who

participated in this process. We are indebted to the officials within these ministries who made

themselves available at short notice to share their insights and experiences with the project team.

We also take this opportunity to mention the stakeholders from the non-profit sector and the political

parties, who gave of their time to share their thoughts with us. Finally, we express our gratitude to

UNICEF ESARO for their support and help throughout this project.

9


Executive Summary

Large fiscal deficits in several recent years will put pressure on Eswatini’s ability to expand fiscal

space for child-related priorities in the coming years. These deficits resulted from a combination of

unstable revenues alongside expansionary fiscal policies and in particular an increasing wage bill.

Revenues have been unstable due to Eswatini’s exposure to its larger neighbour South Africa. This

exposure results from long-standing economic ties to South Africa; in particular Eswatini’s reliance

on volatile Southern African Customs Union (SACU) revenues and its currency’s (the Lilangeni) peg

to the Rand. Continuing political and economic policy uncertainty in South Africa thus creates

significant downside risk for the country. A large and expanding public wage bill in Eswatini limits its

ability to respond to volatile revenues. While current debt levels are still relatively low, fiscal deficits

need to be brought under control in the medium term.

This report defines (child-related) “priority” expenditures as that within the sectors of education,

health and social welfare. Expenditures on education and health have been increasing consistently

since FY2011/12, in line with broader expansionary fiscal policy over the period. Social welfare

expenditure has been more volatile, largely due to instability in the Elderly Grant. Total priority

expenditure per capita has declined significantly in US dollar terms from US$916 in FY2012/13 to

US$604 in FY2016/17, although this reduction is almost exclusively the result of the substantial

devaluation of the South African rand (and hence the Lilangeni) relative to the US dollar.

Education receives approximately 60% of priority expenditure, and is dominated by spending

towards primary education. This spending has supported the implementation of the Free Primary

Education Act of 2010, but also results from the high repetition and drop-out rates throughout

primary grades. 70% of secondary school aged learners are still in primary school. These low

throughput rates are a major impediment to the country’s growth. Throughput rates are impacted by

a lack of qualified teachers, the limited public funding towards early childhood development,

inadequate funding of secondary education, the impacts of high (though stabilising) rates of HIV

and the lack of sufficient social welfare transfers to support learners to stay in school. More broadly,

social welfare expenditure should be better targeted towards the poor through the introduction of

effective means testing and case management, alongside expanded child grants.

Several scenarios have been modelled to estimate the fiscal capacity available to increase priority

expenditure. The baseline scenario, which assumes the continuation of recent trends, suggests that

priority expenditures in categories relevant for children would average 12.1 percent of GDP

between the years FY17-18 to FY21-22. Over these same years, in real terms, total priority

expenditures for children averages US$581.7 per child at FY16-17 prices and rates. Under the

base-scenario assumptions the projected flows of priority expenditures for children produce a fiscal-

space financing “gap” that would have to be covered with internal financing. In this scenario the

required internal-financing flow averages 13.6 percent of GDP over the projection years.

One option through which fiscal space can be expanded is through increasing tax and non-tax

revenue. Two scenarios are modelled in this regard. The first assumes an improvement in the

administration of CIT (Corporate Income Tax) and PIT (Personal Income Tax), under the

assumption that the Eswatini Revenue Authority (SRA) is effective in increasing tax compliance

rates over the medium term. In addition, it assumes an increase priority expenditure through an

increase in the elasticity of staff size within the respective priority sectors. The second assumes an

increase in the fuel levy and the imposition of a higher VAT (Value Added Tax) rate on alcohol and

tobacco products. The government of Eswatini has proposed tax revisions for these items in the

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past. As the exact proposed revision rates were not available, it is assumed that the size of the fuel

levy increases faster than GDP growth; with the rate of growth incrementally increasing to three

times GDP by end-FY22. Simultaneously, the VAT rate on alcohol and tobacco products gradually

increases to 18% over the projection period (from the standard rate of 14%). While it would likely

not be appropriate to initiate significant tax increases in the current macro-economic environment,

there could be room in the short to medium term for a number of targeted taxation efforts. Such

increases were shown to have relatively small impacts on total government revenue, but could still

be significant to support targeted investments in priority expenditure.

The next scenario assumes that fiscal space is bolstered through increased GDP growth as a result

of enhanced sugar production due to normalisation of weather conditions, maximised crop yields

and strong demand contributing to a strong performance in the sector. The scenario assumes an

average growth rate of 4.2% over the projection period: with growth rising incrementally to a high of

5.0% in FY2021-22; relative to 2% in the baseline scenario. As the National Development Strategy

(NDS) does not explicitly set out GDP growth targets, the Economic Recovery Strategy’s 5% target

is therefore used.1 Additional revenues from increased GDP growth is allocated towards priority

expenditure; resulting in average priority expenditure per child increasing by $22.52 to $602.67.

Another scenario considers redirecting non-priority expenditure to priority sectors, by way of

reducing the proportion of funds expended on defence and police. Currently, the ministries of

defence and police account for 6% and 5% of the budget respectively. This scenario assumes

spending in these areas is halved over a 5 year period and that all the resultant savings are re-

allocated to priority sectors. Relative to the base scenario, per capita priority expenditure is $44.82

higher and priority expenditure as a percentage of GDP 1 percentage point higher. This is a

significant increase, highlighting the potential impact if existing budgets can be reallocated.

Finally, improving budget execution rates in priority sectors is another feasible option for expanding

fiscal space. In 2016/17 government was able to execute 77% of their budget; with the execution

rate for recurrent and non-recurrent expenditure being 85% and 50% respectively.2 As recurrent

expenditures have a fairly high execution rate; this scenario focused on increasing non-recurrent

expenditure. In particular it assumes that non-recurrent expenditure in priority sectors doubles

within 5 years. In this case, the average spending on priority expenditure per child increases slightly

by $12.42 relative to the base scenario. However as this amount is fully allocated to non-recurrent

priority expenditure this is still a significant change; as total non-recurrent priority in this scenario

increases by E222 million or 0.39% of GDP.

Less viable options to increase fiscal space include reducing external debt service through

agreements with creditors, and increasing external debt disbursements. In general, non-

concessional external debt should not be used to fund education and health expenditure. The basic

reason is that the yields from education and health expenditure come only in the long term, beyond

the terms typical of non-concessional external debt. For similar reasons, internal term debt should

not be used to fund recurrent education and health expenditure.

Given Eswatini’s demographic profile and the high number of Orphans and Vulnerable Children

(OVC) in the country, it is critical that both the total amount allocated towards priority sectors is

increased and the effectiveness of priority spending is enhanced. Therefore some combination of

the above scenarios should be considered. While fiscal space is somewhat limited currently,

effective investment in priority sectors is essential if the country is to move onto a stable longer term

growth and development trajectory for the benefit of all its citizens.

1 (AFDB, 2012). 2 Data provided by UNICEF.

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1 Introduction and methodology

1.1 The objective of the Fiscal Space Analysis (FSA)

This report analyses the Kingdom of Eswatini government’s recent and future financial capacity to

carry out expenditure on which children depend for their human development and general welfare.

This financial capacity is understood to be the “fiscal space” underlying such expenditure. The

fiscal-space analysis has been carried out using a fiscal-projection model in Excel.

1.2 Methodology – priority expenditure

This report refers to expenditure categories regarded as beneficial to children as “priority”

expenditure. For Eswatini, such priority expenditure categories for children are defined as three

“institutional” expenditure categories: (i) education; (ii) health; and (iii) social welfare.

The composition of the government’s priority expenditures for children is, inevitably, somewhat

arbitrary. Government expenditure classified as “priority” includes aspects that are unrelated, or

only loosely related, to children’s welfare, such as higher education expenditure or expenditure on

an old age grant. At the same time, some expenditure categories classified as non-priority are

highly relevant to children, notably, for example, in the water and sanitation sector. This is

especially important to bear in mind when considering possible scenarios to enhance priority

expenditure by reducing non-priority expenditure. Future analyses of this kind may work with

different definitions of priority expenditures for children. Even so, the methodological approach used

in this study could work in the same way. That is, the methodological approach in itself is a core

recommendation.

It is also important to bear in mind that fiscal space discussions concern only expenditure carried

out by government within its budget. Government expenditure on education and health plainly

constitutes the bulk of the resources dedicated to education and public health in Eswatini. Much of

this expenditure is in categories that only the government carries out, or could carry out.

Nevertheless, non-governmental expenditure in these sectors is also significant. Especially in the

health and social welfare sectors, some important programmes are funded by private and NGO

entities, some of which receive donor support. These would not be included in the government

budget. The present focus, however, is expenditure in the priority sectors that flows through

Eswatini’s fiscal accounts and hence are recorded “on budget.”3

A final note refers to one of the key measures used in the FSA in order to examine and compare

both historical spending and the variation in priority expenditure under different scenarios, namely

priority spending per child. This measure takes the total spending in the priority expenditure

categories and divides this by the total number of children aged 18 or younger in Eswatini.

However, the figures on per-child priority spending should be treated with caution since only a

proportion of total expenditure at the institutional level benefits children directly.4

3 While it would be possible to carry out the kind of analysis this chapter describes using an enhanced set of accounts going

beyond the official budget accounts, it may prove challenging to identify and incorporate all relevant expenditure programs

and funding sources. 4 For instance, the old age grant, child grant and school feeding programme together constitute approximately 2.66% of

GDP of which the old age grant is responsible for the majority of this amount. However, in the absence of reliable

historical data that is disaggregated to this level, it is not possible to isolate data strictly focussed on children in all

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1.3 Methodology - the fiscal-space analysis

To analyse fiscal space for priority expenditure, the methodology first sets from the “identity” that

governs the relationship of priority spending with its underlying fiscal space.

This identity states that total expenditure (comprising current, non-interest, interest, and capital

expenditure) less the sum of total revenue and external grants is equal to the overall deficit, which

is in turn equal to the net flow of external and internal financing. If total expenditure is broken down

into the three categories of (1) priority and (2) non-priority non-interest expenditure and (3) interest

expenditure, this identity can be rearranged for any year as shown in the box.

The “below-the-line” accounts taken together constitute fiscal space for the priority-expenditure

flow. For a retrospective analysis – that is, for analysis of fiscal performance in historical years –

this structure can be applied directly to show how the below-the-line flows (the retrospective fiscal

space) combined to finance the priority expenditure flows. Section 1.3 describes the historical

quantitative analysis for Eswatini, for the years FY2012/13-

FY2016/17.

For the projection analysis, the accounting identity is applied in

a different way. For each projection year, the priority-

expenditure flow is projected on the basis of programming

assumptions, encompassing the various determinants of

recurrent and non-recurrent expenditure in the education,

health, and social welfare categories. Similarly, the below-the-

line accounts, except for the net internal financing flows, are

projected on the basis of programming assumptions. The total

net internal financing flow for each year is then calculated

residually, to ensure that the accounting identity is satisfied.

For any projection year, this net internal financing flow is the fiscal space “gap”, that is, the

difference between the projected priority-expenditure flow and the projected financing requirements.

If this gap is “too large,” then the programming assumptions, taken together, would be considered

unfeasible. The criteria for “too large” include the limits on the government’s capacity to borrow in

domestic financial markets and the implied increase in the government’s debt-GDP ratio. In general

policy-makers want to keep net internal borrowing flow exceed 2 to 3 per cent of GDP in coming

years, to avoid having the internal-debt burden rise as a percentage of GDP.

The projection exercise is formulated by applying various assumptions, together constituting a

“scenario” to the historical data base. The relatively simplified, illustrative projection exercise

applies scenarios to historical data (as discussed in Appendix 1). Each scenario comprises

programming assumptions for the years FY2017-18 to FY2021-22, covering:

• world economic conditions;

• basic Eswatini macroeconomic variables;

• merchandise exports and imports;

• tax and non-tax revenue;

• external grants to the government;

• government expenditure in the priority and non-priority categories; and

instances. The projection exercise therefore takes all expenditure at an institutional level into account. It can be argued

that even though all this expenditure is not directly focussed on children, it still has significant secondary benefits to them.

Fiscal identity

Priority expenditure

=

Tax and non-tax revenue

+ External grants

- Non-priority expenditure

- External debt service

- Internal interest expenditure

+ External debt disbursements

+ Net internal financing flows

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• external and internal debt.

For each scenario, some of the assumptions are set as simple numbers (growth rates, percentages

of GDP, etc.). Many of the assumptions, however, are constructed from other assumptions. For

example, the growth rates of real GDP and of the price level are numbers that the analyst chooses

based on projections by either the World Bank or IMF. It is straightforward to combine these

assumptions into an assumed growth rate for nominal GDP.

1.4 Data limitations

This analysis is based on budgetary data covering actual figures (budget outturn) for Fiscal Years

(FY) 2012/13- 2016/17. The main data source is the Ministry of Finance. Additional data sources

include the Central Bank of Eswatini (CBS), UNICEF, as well as the World Bank/IFC and the IMF.

Despite a substantial data-collection effort, the quantitative analysis presented in the sections below

is subjected to an important caveat. Namely, data on spending in the priority-expenditure categories

is limited. Functional level breakdown of data was not available in more detail, in particular,

associated expenditures classified under the economic budget classification could not be obtained.

Thus, as noted before, for the modelling exercise, which looks into aspects such as increases in

staff levels, priority expenditure categories were taken to be those of the main government

institution responsible for the respective area. Since detailed data were not available for more

detailed expenditure categories, it was not possible to produce more refined definitions and

calculations for scenarios involving relevant sub-categories.

1.5 Organization of the FSA part

The remainder of this report is organized as follows. Chapter 2 summarizes Eswatini’s present

macroeconomic and fiscal circumstances. It also analyses the budgetary process and the general

efficiency of the fiscal framework. Chapter 3 looks at the recent evolution of priority expenditure

flows in the categories of priority expenditure and outlines some specific challenges in the various

areas relevant for expenditure on children. Chapters 4 and 5 discuss various options available to

policy makers to enhance fiscal space with an illustrative projection exercise for the priority

expenditure flows and fiscal space that would fund them for the years FY2017/18-FY2021/22. The

exercise consists of a base scenario (Chapter 4), comprising a broad range of macroeconomic and

fiscal policy assumptions, and various alternative scenarios (Chapter 5). Chapter 6 presents the

main findings from the analysis. Further projection details are included in Appendix 1.

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2 Eswatini’s macroeconomic and fiscal context

2.1 Longer-term national economic trends

2.1.1 Economic growth and recent developments

Figure 2.1 below shows Eswatini’s average growth trend during the twenty five years leading up to

20155. As shown, Eswatini has experienced tepid growth, with real GDP growth gradually declining

in each period, reaching negative levels between 2011 and 2015.

Figure 2.1 Real GDP growth in Eswatini, 1995-2015

Source: World Bank, WDI.

Average growth figures fell marginally between 1995 and 2000. This was the result of a

combination of factors including investment diversion from Eswatini to South Africa – following

South Africa’s economic freedom in 19946 – and contractions in the Swazi agricultural sector due to

severe drought conditions. The subsequent period saw a modest recovery in growth, to an average

nominal growth rate of 3.6% (and 1.5% in real terms) in 2005, supported by improved weather

conditions, as well as improved performance in the manufacturing sector (textiles) following market

access to the United States through the African Growth and Opportunity Act (AGOA) in 20017.

Although average growth rates remained unchanged in the following period, the long lasting effects

of the global financial crisis, together with a gradual shift away from private-investment8 in Eswatini,

lower average growth below 3% after 2010. Growth has continued to slow beyond 2015, due to the

effects of El Nino, as well as the continued weak global economic landscape. The chart also shows

a negative trend in real GDP growth; reflecting significant inflationary effects which give rise to a

decline in purchasing power, as well as rising interest rates over the observed period. Inflationary

trends and monetary policy are discussed further in Section 2.2.2.

5 Averages calculated for the 5 year period to each plotted year (average growth 1991 – 1995, etc.). 6 (IMF, 2003). 7 Eswatini began benefitting from the AGOA in 2001 when the Swazi Government voluntarily accepted the AGOA eligibility

criteria (Tralac, 2015). 8 “ An important determinant of the slowdown in growth in the 1990s and 2000s has been lower investment, and a

shift away from private investment-led growth.” From 2000 to 2009 public investment in percent of GDP rose from 5.7

percent to 10.4 percent, while private investment declined from 12.6 to 5.5 percent of GDP. The declining share of private

investment resulted from the loss of attractiveness of Eswatini as a destination for investment, the end of some preferential

trade agreements, and fierce competition from other textile producers. ( (IMF, 2010, p. Appendix II).

16


The effects of the global financial crisis in 2008, as well as the global economic downturn have had

considerable effects on Eswatini, mainly through the manufacturing industry which saw significant

contractions over the period (-4.5% in 2009).9 Meanwhile, extreme weather conditions have had

pronounced effects on the agricultural sector, which contracted by 11% in 2016.10

2.1.2 Structure and characteristics of the national economy

As a percentage of GDP, the output of the services sector has gradually increased over time from

46% in 1990 to just over 50% in 2014. During this same period, the industrial sector’s share

remained constant at just over 40%. The consistency of the industrial sector’s contribution to GDP

might be under threat however with Eswatini losing its preferential access to the US market after its

AGOA eligibility was revoked in 2015. Efforts towards tendering for readmission into AGOA have

been made by the government, through strengthening reforms, in particular the passing of the

Public Order Bill.11 Nevertheless, it is unlikely that readmission would be granted until such time

that amendments to the Industrial Relations Act and the Terrorism (as additional preconditions for

eligibility) have been effected.12

Meanwhile agricultural output as a percentage of GDP has declined significantly over the years,

almost halving, to 6% by 2014. Eswatini’s agricultural economy is largely constituted of subsistence

farming (70%) which contributed an estimated 11% of total agricultural output13. While agriculture

contributes less than 10% of overall GDP, the effect of the recent drought conditions (reaching a

peak in 2015 and 2016) is compounded by the high proportion of subsistence farmers –

heightening the risk of food security in the country.

Figure 2.2 Sector contribution to GDP (%)


The impact of the global economic downturn together with severe weather conditions have been

pronounced for Eswatini as a small middle-income country. These and other economic factors,

compounded by continued weak health and education outcomes, have meant that the country’s

strategic vision of becoming First World country by 2022, is unlikely to be achieved.

9 (Ministry of Economic Planning and Development, 2009). 10 (World Bank, 2017). 11 The Public Order Bill was passed to replace the Public Order Act (1963), with amendments made to meet the

recommendations and benchmarks specified by the US in a bid for qualification for AGOA. (Tralac, 2017). 12 The US highlighted the need for Eswatini to make amendments to the Industrial Relations Act, especially sections that

relate to civil and criminal liability to union leader during protest actions as well as amendments to the Suppression of

Terrorism Act and the Public Order Act. (Tralac, 2016). 13 (USDA, 2016).

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2.1.3 Socio-economic trends

Eswatini’s government recognises that in addition to the country’s weak macroeconomic landscape,

socio-economic factors have further exacerbated the country’s growth performance.14 The

macroeconomic environment has also made it difficult to achieve significant improvements in socio-

economic outcomes – despite the exerted efforts by the government.

Eswatini is characterised by high rates of inequality, unemployment, HIV incidence, and poverty.

Roughly 70% of Eswatini’s population falls within the labour force band (15 – 64 years of age), with

28.1% (41.7% using a broad definition) of this population classified as unemployed. This socio-

economic profile significantly constrains the government’s ability to increase tax revenues. In

particular, while technically 72% of the population are classified as employed, it is not necessarily

the case that this entire employed population is accounted for from a tax perspective. A large

majority of individuals fall within informal employment, working as subsistence farmers, and local

tradesmen.

Eswatini has been faced by rising HIV prevalence rates over the years (far outstripping other

diseases in terms of incidence)15. Official statistics estimate an adult HIV incidence rate of 26%

(amongst 15 to 49 year olds). The combination of high unemployment and rising mortality rates

amongst adults has contributed to rising child dependency rates, which is unsurprising given that

that more than half of the population are classified as children16 (see Figure 2.3 below). Adding

further pressure to the government, is the rising number of orphaned and vulnerable children

(OVC), which was estimated as 20% of the child population in 2015.17

Figure 2.3 Population profile and growth

Source: The Kingdom of Eswatini.

Note: Compounded Annual Growth Rate (CAGR).

The proportion of the population classified as poor stood at 63% in 2010, down from 69% a decade

earlier.18 High levels of unemployment, increased dependency on the older population, as well as

heightened food security risks in recent years, have jointly hindered progress towards poverty

reduction, despite modest progress over the years. According to the World Bank, 4 out of 10

individuals live off less than US$1.90 a day, and 6 out of 10 less than US$3.10 a day.

14 (CSO, 2010, p. 1). 15 (Health, 2015, p. 7). 16 Using UNICEFS classification. 17 (Whiteside, et al., 2016). 18 (CSO, 2010, p. 8).

18


Although a relatively small country, Eswatini’s topographical layout poses a major challenge in

terms of distribution of and access to basic services in many parts of the country; with 76.5% of the

population living in rural areas19. Moreover, limited access to quality health care and basic nutritious

meals heightens public health challenges; while consistently low enrolment rates in secondary

schools remain an issue for educational attainment and skills development.20

As highlighted above, the rising trend in unemployment and the considerable effects of HIV AIDS

on young adults (particularly through rising mortality rates) have increased children dependency,

while the increasing number of OVCs within the country is likely to require more resources from the

government in the coming years. Additional resources would also be required if access to basic

services in rural areas is improved.

2.2 Recent macroeconomic developments

Table 2.1 below provides a summary of Eswatini’s basic macroeconomic indicators for the fiscal

years FY2012/13-FY2016/17.

Table 2.1 Selected macroeconomic indicators, FY12-13 0 FY16/17 (US$ millions)

FY12-13 FY13-14 FY14-15 FY15-16 FY16-17

Gross domestic product* 41,290.0 41,716.1 44,841.9 45,211.6 44,261.6

Per-capita:

Gross domestic product* 38,499.7 40,898.6 40,750.1 39,424.4 36,311.6

Non-government consumption** 28,926.6 29,346.6 29,261.1 29,373.5 29,596.7

Per cent of GDP:

Gross fixed capital formation 5.1% 5.6% 6.2% 6.3% 6.1%

Fiscal balance 4.0% 0.8% -1.3% -5.5% -13.2%

Merchandise-trade balance -8.2% -2.0% 0.3% 0.7% -1.7%

Growth rate:

Consumer prices (December) 6.6% 5.1% 4.8% 7.8% 6.0%

Exchange rate (December) 20.8% 17.1% 2.8% 39.2% -16.1%

Source: Ministry of Finance.

As shown in the table above, GDP per capita has declined since FY2013/14 – signifying an overall

decline in productivity within the economy. This suggests that the country’s real economic growth

performance has not been sufficient to support the average population growth rate of 1.4% (see

Figure 2.3 above) over the last 10 years.

Notwithstanding global economic conditions and severe weather conditions, Eswatini’s economic

performance has also been affected by its strong economic and historical association with South

Africa – which has exposed it to a number of risks. Together with Lesotho, Namibia, and South

Africa, Eswatini falls under the Common Monetary Area (CMA). Established in 198621, this

monetary union was established primarily with the view of complementing the free trade

mechanism throughout the Southern African Customs Union (SACU). As such, each of these

respective economies have a fixed currency peg to the South African Rand, making their currencies

19 (The Kingdom of Swaziland, 2015, p. 1). 20 (CSO, 2010) Net enrolment in senior secondary school (Forms 4 to 6) is less than 15%. (Ministry of Education and

Training, 2015). 21 The CMA has its roots established in the Rand Monetary Area (RMA) 1974, which was later revised in 1986, to form what

is now known as the CMA (IMF, 2007).

19


susceptible to South Africa’s exchange rate performance. The Rand has depreciated substantially

against the dollar for a long period of time. As a result, the Swazi Lilangeni depreciated by 16% in

FY2016/17 alone.

While Eswatini’s government has not explicitly set out a medium term growth target, considerable

risks in South Africa are likely to weigh on the medium term outlook. In particular, rising political and

economic policy uncertainty in South Africa is set to result investment outflows, placing further

pressure on the rand. The World Bank and IMF each project Eswatini’s growth to average just

under 2% between 2018 and 2022.

2.2.1 International trade (and its consequences for the fiscal accounts)

Figure 2.4 below presents a breakdown of Eswatini’s trade profile in terms of origin of exports, and

destination of imports. It clearly shows that South Africa remains Eswatini’s major trading partner,

accounting for an average of 85% and 66% of imports and exports respectively. This is mainly due

to the structural arrangement within SACU, in which South Africa makes the largest economic

contribution to the union (both in terms of imports and exports). The union’s dependence on South

Africa’s large economic contribution consequently places the customs pool at risk to fluctuations

associated with South Africa’s growth performance.

So not only does South Africa’s economic performance affect Eswatini’s economic growth in

general, it also has a direct impact on the government’s fiscal position. South Africa’s projected low

growth outlook is set to substantially reduce the customs pool over the medium term. According to

the current revenue sharing formula, given the size of its economy and the proportion of imports

relative to the member countries, Eswatini consistently receives approximately 8 per cent of the

revenue pool.

Figure 2.4 shows that Eswatini’s export growth has typically outpaced imports in recent years,

supporting a modest adjustment from a trade deficit to surplus. Nevertheless, South Africa’s

protracted low growth environment is likely to place some downward pressure on Eswatini’s export

growth, while the Swazi government’s infrastructure development approach is likely to give rise to a

strong demand of capital goods; placing pressure on imports. All of which would likely reverse recent

improvements in the trade balance.

Figure 2.4 Trade profile (by source)

Source: ITC - Trade Map.

Note: Where; ‘X’ represents Exports, ‘M’ represents Imports, and ‘ROW’ represents Rest of the World.

While Eswatini is considered a soft commodity exporter, its export profile is quite diverse. Receipts

from sugar, Eswatini’s primary commodity export, contribute a small amount to total government

20


revenues. Trade thus has a limited impact on Eswatini’s fiscal accounts. This is particularly true

when comparing it to a hard22 commodity exporter such as Nigeria, in which exports are highly

concentrated in oil (70% of exports), and where oil-revenues contribute a significant amount to total

government revenues (more than 60%). Thus, the impact of lower global commodity prices (hard

and soft) has had a limited impact on Eswatini’s fiscal accounts relative to Nigeria – given its

diverse trade composition.

2.2.2 Inflation and exchange rate

Given the currency arrangement within the CMA, monetary policy is effectively guided by the South

African Reserve Bank’s (SARB) policy. Figure 2.5 below presents inflationary trends within the

CMA as well as the trend in Eswatini and South Africa’s key monetary policy rates. Inflationary

trends over the last decade can be summarised in 3 phases:

• Phase I: Effects from the global financial crisis saw inflation within the region rise to

heightened levels last seen in the early 2000s;

• Phase II: The period between 2010 and 2015 saw inflation peak at 9.6% in 2012, off the back

of rising administered prices within the region. The initial oil price downturn in 2015 contributed

to a moderation in inflation in the subsequent years;

• Phase III: The low oil price environment continued to provide some reprieve to oil importers.

Effects of lower fuel prices, and the associated translation into the transport component of the

CPI basket lowered inflationary pressures. Nevertheless, rising food prices, off the back of

severe drought conditions, offset the disinflationary effects from the transport component to

overall CPI, giving rise to higher inflation.

The SARB’s monetary policy has been consistent with its objective of guiding and maintaining

inflation within a 3 – 6% target band, and thus an interest rate hike cycle was instituted in Phase I.

However, with the delicate balance of promoting economic growth – the SARB adopted a fairly

accommodative monetary policy stance in Phase II, followed by a tightening cycle in Phase III.

Figure 2.5 Inflation and Central Bank Rates


22 Classified as mined or extracted natural resources.

21


Generally speaking, Eswatini’s inflationary trend has been much higher than its peers within the

CMA. This is unlike Lesotho, where inflation trends closer to South Africa, and often trends lower.

Over and above high import inflation from South Africa, high administered prices23 relative to its

peers, has been the main driver of this trend. Eswatini’s stubbornly high inflation has had a number

of effects on its policy rate more recently. CMA countries (excluding SA) typically seek to maintain

their policy rates at par, if not below the SARB’s, in order to limit capital outflows, Eswatini’s high

inflation has in effect warranted the current positive interest rate differential against the SARB. This

is the first time since 1999 that monetary policy rates have been placed higher than the SARB.

While there is a degree of flexibility, the policy direction ultimately follows from the SARB. This will

remain the case for as long as the exchange rate is pegged and the high trade composition with

South Africa remains – which gives rise to exchange rate and inflationary pressures. The SARB

reduced rates by 25 basis points in July 2017, while the CBS maintained rates at 7.25% citing

concerns around inflation. With the recent inflation reduction to 5.6% in September 2017, there may

be a motivation for the CBS to execute a rate cut. Nevertheless, the delicate balance between

growth and inflationary pressure is likely to see a continuation of an accommodative monetary

policy over the medium term.

With considerable inflation risks out of South Africa (due to a weak exchange rate outlook over the

medium term), it is unlikely that there will be a significant downward repo rate in the short term. As

a result, consumption is likely to remain somewhat constrained, while the private sector may retain

a bias towards investing in interest-bearing accounts as opposed to business expansion. This will

have a direct effect on unemployment rates as businesses storing cash are unlikely to expand their

employee numbers. Therefore the impact of South Africa’s monetary policy on Eswatini is

substantial. On a longer term basis however, the IMF projects limited inflationary risks to South

Africa and Eswatini (see Figure 2.6 below).

Figure 2.6 IMF Inflation forecast

Source: IMF.

23 Electricity, Public transport, Bread Indices.

22


2.3 Recent fiscal performance

2.3.1 Government financial performance

Eswatini’s government finances have come under scrutiny in recent years, with the effects of the

global financial crisis resulting in the country’s fiscal crisis in 2010.24 Despite a modest recovery in

the government financial performance in recent years – following efforts to strengthen the country’s

fiscal performance through the establishment of the Fiscal Adjustment Roadmap (FAR) in 2010 –

the IMF has argued that the current expansionary policy has become unsustainable25.

Figure 2.8 below presents a summary of Eswatini’s government revenue and expenditure growth

between FY2010/11 and FY2016/17. Revenue saw a sharp decline of 24.5% in FY2010/11, due to

a collapse in SACU revenues as regional trade slowed. This decline coincided with only a minor

decline in expenditure (of -1.6%) in the corresponding period, prompting the country’s fiscal crisis.

This period gave rise to a significant increase in domestic debt, which rose from E0.40bn to

E1.24bn between FY2009/10 and FY2010/11. With the exception of FY2012/13, where a windfall of

SACU revenues gave rise to a significant increase in total government revenues, growth in

expenditure has outpaced that of revenues over the years. This misalignment between revenue and

expenditure growth has resulted in fiscal balance deteriorating each year (shown in Table 2.1

above).26

Figure 2.7 Government fiscal performance - FY2010.11 to FY2016/17 (as a % of GDP)


24 (United Nations, 2012, p. 6). 25 (Placeholder1) (IMF, 2017). 26 (IMF, 2015, p. 8).

23


Figure 2.8 Growth in Government Expenditure and Revenue


2.3.2 Revenue performance

Eswatini’s revenue is mainly funded from Personal Income Tax (PIT), Company Income Tax (CIT),

Value-Added Tax (VAT) and transfers from the Southern African Customs Union (SACU). Figure

2.9 presents the composition of government revenues in the nine years leading to FY2016/17.

Between FY2010/11 and FY2015/16 there was a positive trend in total government revenues

(including grants) in nominal terms. However as a percentage of GDP government revenues have

been declining. Revenues fell to 30.8% of GDP in FY2016/17, from 32.2% and 34.4% in FY2015/16

and FY2012/13 respectively largely due to declines in SACU transfers. Figure 2.9 also clearly

shows the rise and fall of total government revenues due to the volatile nature of SACU transfers.

Figure 2.9 Composition of government revenues

Source: Ministry of Finance (historical), IMF (projection).

While the SACU is undoubtedly a beneficial arrangement for Eswatini, the reliance on these highly

volatile flows poses a risk to overall fiscal stability. As highlighted earlier, South Africa’s medium-

term economic outlook remains fairly negative. This creates a high level of risk to the size of the

customs pool, as South African trade levels significantly exceed that of other SACU members.

Eswatini receives just under 8% of the pool’s revenue, but makes a significantly lower contribution

than this in terms of trade.27

27 (SACU, 2016).

24


South Africa’s Ministry of Finance projects an increase in SACU payments28 from R39.4bn in

FY2016/17 to R56bn in FY2017/18. All else equal Eswatini is thus likely to receive approximately

R7.5bn29 up from R5.2bn in FY2016/17. Nevertheless, even with a projected rise in SACU

revenues in the current fiscal year, the reliance on this single item will continue to impact the

country’s overall fiscal standing: Eswatini will remain highly susceptible to shocks in periods of

significantly lower SACU revenues. A more fiscally prudent approach should likely be adopted in

the use of SACU revenues. Whereas additional SACU revenues (i.e. increased amounts years with

higher revenues) are currently often allocated to capital projects,30 such revenues could be spent

on child-focused sectors.

Beyond SACU transfers, CIT, PIT and VAT are the most significant internal tax instruments in

Eswatini; the main rates of which are given in Table 2.2. The most recent figures show that PIT

made up 22.8% of government revenues in FY2016/17, with VAT and CIT contributing 16.5% and

11.2% respectively. The relative contribution of each item has however fluctuated in each fiscal

year due the instability of SACU transfers: In periods with relatively high31 SACU transfers these the

sum of these three taxes account for approximately 35% of government revenue, but exceeds 50%

in the periods with low32 SACU transfers. Nevertheless, each item has increased in nominal terms –

specifically from FY2013/14, where possible efficiency gains may have been realised as a result of

the establishment of the Eswatini Revenue Authority (SRA) in 2011.33

Table 2.2 Eswatini main tax rates

Tax instrument Specifications Rate

Corporate income tax rate* Domestic and foreign companies 28%

Value-Added Tax (VAT) rate* Specified basic commodities 0%

Other commodities 14%

Personal income tax rate**

Income < 60 000 Lilangeni 20%

Income > 60 000 < 80 000 Lilangeni 25%

Income > 80 000 < 100 000 Lilangeni 30%

Income > 100 000 Lilangeni 33%

Source: (EY, 2014).

As it stands, Eswatini receives limited budgetary support in the form of grants. As a percentage of

GDP, grants currently stand at 1.2%. Grants have typically been allocated to the capital budget and

not the recurrent budget. Most of these grants are allocated to specific sectors, with the African

Development Bank being one of the largest contributors.34

2.3.3 Current expenditure performance

While government revenues have been relatively stable since 2012/13, expenditure has been rising

rapidly. This is true not only in nominal terms, but relative to GDP as well – reflecting the

28 This constitutes roughly 60% of SACU revenue pool- as it includes the portion paid out by South Africa to Botswana,

Lesotho, Namibia and Swaziland (BLNS). 29 Swaziland’s proportion of the revenue pool is relatively constant (13.5% of SACU payments from South Africa to BLNS |

8% of total revenue pool). 30 As stated in the Q1 Budget Performance Report FY2017/18, construction activity is expected to increase due to higher

SACU receipts expected for the year. (Ministry of Economic Planning and Development, 2017, p. 9). 31 For the following fiscal years: 2012/13, 2013/14, 2015/16. 32 In the following fiscal years: 2010/11, 2011/12, 2014/15, 2016/17. 33 (SRA, 2017). 34 (Ministry of Economic Planning and Development, 2017, p. 11).

25


government’s expansionary fiscal policy. Total government expenditure as a percentage of GDP

doubled in about 6 years, from 24.8% in FY2010/11 to just over 40% in FY2016/17.

Government expenditure consists of recurrent expenditure (80%), and non-recurrent expenditure

(20%), mainly capital. After Lesotho, Eswatini has the highest wage bill amongst the CMA

countries,35 with roughly 40% of recurrent expenditure being allocated to public sector employee

wages. Figure 2.10 shows the wage bill being fairly stable from 2010/11 to 2012/13 a sharp rise

from 2013/14 onwards. This reflects the government policy from 2010 to 2013 to both freeze

vacancies and implement no cost of living wage adjustments. In 2013 this policy was ended36 and

the rise between 2013/14 and 2016/17 appears to largely reflect the above inflation salary

adjustments to catch up after the period of no cost of living increases.37 Having compensation of

employees as the largest cost component reduces government’s ability to effectively manoeuvre in

case of significant decreases in revenues; often resulting in the misalignment between expenditure

and revenue growth trends noted earlier. Government again instituted a policy of not offering cost of

living adjustments in 2017, but maintaining such a policy could be difficult given significant union

pressure.

Figure 2.10 also shows a rising trend in the proportion of grants, increasing from 11% of total

expenditure in FY2010/11 to 20% in FY2016/17. This sharp rise results from the introduction of the

Free Primary Education (FPE) Act in 2011, which provides grants, teaching and learning materials,

teachers, infrastructure and meals to primary schools.

Figure 2.10 Composition of government expenditure

Source: Ministry of Finance (historical), IMF (projection).

The budget execution rate is also an area of concern, with spending outturn typically exceeding

budgetary outlays. For example, expenditure exceeded outlays by E500m (2.4%) in FY2016/17 –

largely due to the public sector salary review effective April 2016 38 – placing further pressure on

the fiscal position.

Over and above the highlighted expenditure items, the sharp decline in SACU revenues in

FY2016/17 added considerable strain on the government’s finances, resulting in the “accumulation

of arrears to government suppliers” (Ministry of Finance, 2017, p. 7). Although the size of arrears is

not clear, the risks associated with the accumulation of arrears are well document within the area of

35 (IMF, 2017, p. 53). 36 From interviews conducted with the Ministry of Public Service. 37 (IMF, 2017). 38 (Ministry of Finance, 2017, p. 15).

26


public finance management. For one, accumulation of arrears undermine the true reflection of a

government’s fiscal position, often masking the actual size of the deficit.39

While the government has noted the need to reduce its fiscal deficit, which stood at 9.9% in

FY2016/17 from 5.5% in the previous year, it appears likely to maintain an expansionary fiscal

policy over the medium term; particularly as the result of implementing a number of capital

investment projects.40 The 2017/18 capital budget grew by 45% from the previous year – from

E3.8bn to E5.6bn – and capital investments are budgeted to remain at this higher level in

subsequent years.41

While Eswatini does not have a clearly formulated medium term fiscal policy framework, there has

been consistent rhetoric espousing an expansionary fiscal policy across budgetary statements in

recent years. The rising trend in public debt is thus likely to continue over the medium term. Public

debt stock stood at just over 20% in FY2016/17, and while it is unlikely to breach the country’s self-

imposed ceiling of 35%, the increasing borrowing trajectory is set to pose a risk to debt

sustainability. However, it is important to note that Eswatini current debt levels and debt trajectory

are way below international safe threshold levels for emerging markets, which the IMF puts at 70%

of GDP. Eswatini’s exposure to South Africa, with its consistently depreciating currency and

considerable downside risks over the medium term, introduces the risk of rising debt servicing cost

– particularly for external debt. Moreover, the risk of further ratings downgrades in South Africa, and

the associated risk of investment outflows, could result in higher Swazi interest repayment rates –

adding pressure to domestic debt servicing costs. Moody’s, the credit ratings agency, recently

issued Eswatini with a first-time issuer rating of B2 with a negative outlook, citing concerns over the

country’s low growth, weak institutional governance and fiscal accounts.42

Figure 2.11 Total public debt stock (% of GDP)


The options for effectively managing the risks associated with raising debt through domestic and

external markets are also fairly limited. While there is the option of drawing down on the country’s

reserves, this creates the risk of depleting international reserves while also having to maintain an

import cover ratio of at least 3 months. Such a depletion would create a challenge to maintain the

required reserves to manage its currency at par with the rand (as per the CMA requirements).

39 (IMF, 2014, p. 6). 40 (IMF, 2017). 41 (Ministry of Finance , 2017). 42 (Moody's, 2017).

27


The medium-term outlook is likely to pose two key risks to public debt and overall fiscal

sustainability. Firstly, the poor economic outlook as well as the political instability in South Africa

creates the risk of continuing weakening in the Lilangeni – which in turn would cause the cost of

external debt to rise. Secondly, as government revenue does not seem to react significantly to

economic growth, without direct intervention in the tax system through new instruments or improved

efficiency, it will be difficult for Eswatini to address its annual fiscal deficit. The same is true if the

government does not reign in continually growing government expenditure.

2.3.4 Implications for priority expenditure

This preceding sections have clearly outlined a number of risks associated with Eswatini’s fiscal

standing. The first, being the dependence on the volatile nature of SACU transfers. The second

being the large wage bill, and the third being accumulation of arrears. While the government’s

pursuit of an expansionary fiscal policy has perhaps been warranted in the recent economic

conditions, a more sustainable fiscal strategy needs to be adopted. Unless the country is able to

implement adequate reductions in expenditure in periods of lower SACU revenues, or increased

savings in times of high revenues, the fiscal deficit and the debt levels will continue to increase.

While debt is unlikely to rise beyond the ceiling of 35% in the short term, rising debt and debt

servicing costs is still likely limit the government’s ability to significantly strengthen its investments

towards priority areas. Investments should thus be targeted towards not only the areas of greatest

need, but also those areas that can help put the country on a path to higher economic growth. All

three identified priority sectors (education, health and social welfare) are essential to the success of

the country. Section 1 will thus aim to highlight such areas in priority sectors that would not only

benefit citizens in the short term, but also the country as a whole in the longer term.

29


3 Priority expenditure trends and policy challenges

3.1 Priority-expenditure composition and recent evolution

3.1.1 Priority-expenditure components and fiscal space in recent years

This section briefly contextualises priority spending within the broader fiscal environment in the

country. To this end, Table 3.1 below summarises the trends in priority expenditure between

FY2012/13 and FY2016/17 - expressed as a percentage of GDP. Priority expenditure has

increased over this period, reaching 11.15% in FY2016/17, from just under 10% four years prior.

This trend is consistent with the Eswatini Government Programme of Action (2014 -2018), which

emphasises increased investment towards education and health as two of the eight focal areas of

the plan,43 and highlights social welfare as an important part of the service delivery focal area.

Table 3.1 Priority expenditure for children and its fiscal space FY2012/13 to FY2016/17 (% of GDP)

Fiscal year FY12/13 FY13/14 FY14/15 FY15/16 FY16/17

Per cent of GDP

Total priority expenditures for children 9.90% 10.03% 10.92% 10.71% 11.15%

Total education expenditure 6.04% 5.88% 6.38% 6.36% 6.74%

Total health expenditure 3.16% 3.08% 3.74% 3.70% 3.87%

Total social development expenditure 0.70% 1.07% 0.81% 0.64% 0.54%

Overall fiscal space 9.90% 10.03% 10.92% 10.71% 11.15%

Tax and non-tax revenue (excl. external

grants) (+) 34.43% 32.03% 33.01% 32.21% 30.85%

External grants (+) 0.12% 0.49% 1.84% 0.74% 1.15%

Total non-priority non-interest

expenditure (-) -19.69% -20.81% -24.18% -26.27% -32.84%

External-debt disbursements (+) 0.25% 0.54% 0.59% 0.48% 0.37%

External debt service (-) -1.02% -0.88% -0.76% -0.86% -1.21%

Net internal financial flows (incl.

internal interest) (+) -4.20% -1.36% 0.43% 4.40% 12.83%

Growth rates

Total priority non-interest expenditure: 14.08% 16.15% 2.53% 2.11%

Contribution to the growth of total

priority expenditure:

Tax and non-tax revenue (excl. external

grants) (+) 16.61% 31.44% 6.30% -18.45%

External grants (+) 4.40% 14.63% -9.71% 3.60%

Total non-priority non-interest expenditure

(-) -37.81% -49.57% -30.18% -55.32%

External-debt disbursements (+) 3.63% 0.86% -0.79% -1.08%

43 (The Kingdom of Swaziland, 2013).

30


Fiscal year FY12/13 FY13/14 FY14/15 FY15/16 FY16/17

Per cent of GDP

External debt service (-) 0.31% 0.68% -1.30% -3.00%

Net internal financial flows (incl. internal

interest) (+) -59.3% -224.6% -204.4% -74.10%

The education and health sectors account for a significant portion of the funds expended toward

priority areas. The relative contribution of each has however increased only modestly over the

period. Education expenditure increased from 6.04% in FY2012/13 to 6.74% in FY2016/17, while

health expenditure increased 3.16% to 3.87% over the same period. However, expenditure in social

welfare sector has declined in recent years, reaching 0.54% in FY2016/17, from a peak of 1.07% in

FY2013/14. This reduction reflects the decrease in the expenditure on elderly grants over this

period (as discussed below).

Table 3.1 above also provides a breakdown of how Eswatini’s priority expenditure is financed. The

following is observed:

• Tax and non-tax revenues have been declining in recent years - falling to 30.8% of GDP in

FY2016/17, from 32.2% and 34.4% in FY2015/16 and FY2012/13 respectively. Total

government revenues have largely been supported by strong growth in income tax revenue,

specifically between FY2013/14 and FY2016/17 (average of 19.1%), relative to SACU

revenues (average growth of -6% over the corresponding period). However, more recently

(FY2016/17) the decline in SACU revenue was much higher than growth in income tax

revenues, decreasing by 24% which the later grew by 18%. This effectively underscores the

considerable risk posed by large swings in SACU revenues: that even with an improvement in

income tax revenues (due to collection efficiencies), sharp declines in SACU revenues are

unlikely to be offset – not least without imposing significant increases in income tax compliance

rates;

• External grants, which account for a small portion of the budget, increased significantly in the

two years to FY2014/15, reaching 1.84% of GDP before falling to 0.74% in FY2015/16.

However, FY2016/17 saw a moderate improvement to 1.15%.44

• Non-priority expenditure has been on a steady upward trend in the observed period –

reiterating the government’s expansionary fiscal policy direction. Non-priority expenditure

averaged roughly 20% of GDP in the first 4 years of the period, thereafter rising to over 30% in

FY2016/17;

• External debt disbursements has been fairly low, rising to a high of 0.59% in FY2014/15,

followed by steady declines, to 0.37% in FY2016/17. Debt service as a percentage of GDP saw

a moderate improvement reaching a low of -0.76%, followed by a period of deterioration, to -

1.21% in FY2016/17;

• Lastly, net internal financial flows have seen a sharp increase over the years, from -4.20% in

FY2012/13 to 12.83% in FY2016/17.

44 It should be noted that the estimates of external grants provided by the Ministry of Finance differ significantly from those

provided by the Aid Coordination and Management Section (ACMS) in the Ministry of Economic Planning and

Development; with the ACMS estimates being considerably higher. The ACMS collects data directly from donors, rather

than through published accounts. The fiscal space model uses the Ministry of Finance data in this model to ensure

consistency with published government accounts. Nonetheless this data should be interpreted with caution.

31


It is clear from the above that large swings in SACU revenues, rising expenditure due to the wage

bill as well as prioritised infrastructure development projects have been the key contributors to the

pressures facing Eswatini’s government finances. If anything, this may suggest an increasingly

constraint fiscal space, in the absence of significant adjustment in expenditure. Nevertheless,

Eswatini’s government should be commended – given the observed increase in priority expenditure

in GDP terms.

3.1.2 Recent evolution of priority expenditure

Figure 3.1 below provides a breakdown by sector of priority expenditure for FY11-12 to FY16-17,

while Table 3.2 shows the expenditure growth rates in each sector over time. Education

expenditure makes up the majority of the expenditure, remaining stable at around 60% across all

the years. Health represents around a third of the total, but is more variable over time. Social

protection is typically under 10% of the total, and is particularly variable over the period (as shown

by the growth rates provided in Table 3.2) due to the tremendous instability of the Elderly / Aging

Persons grant; as discussed in section 3.2.3 below.

Figure 3.1 Priority expenditure for children, relative shares of total, FY2011/12 - FY2016/17

Source: (Ministry of Finance , 2017).

Table 3.2 Growth rates within priority areas, FY 2011/12-2016/17

FY11-12 FY12-13 FY13-14 FY14-15 FY15-16 FY16-17

Education -4.9% 8.4% 9.7% 15.6% 4.4% 3.9%

Health -0.4% 25.9% 9.5% 29.6% 3.6% 2.4%

Social Protection -7.1% -9.8% 72.9% -19.7% -16.9% -16.9%

Source: (Ministry of Finance , 2017).

Despite the recent increases in priority spending and GDP, spending per child reflects a less positive

picture. Table 3.3 shows a significant decline in priority sector spend per child in USD, from $915.56

in FY2012/13, to $603.91 in FY2016/17. The biggest cause of this change is the devaluation of the

South African Rand (and hence the Lilangeni) relative to the dollar, although the increase in the child

population (1.5% over the period) also had an impact.

32


Table 3.3 Per child spending in priority expenditure, US$, FY2012/13 - FY2016/17

US$ per child at prices and exchange

rate of 2015 FY12/13 FY13/14 FY14/15 FY15/16 FY16/17

Total priority expenditures for

children $915.56 $833.10 $848.08 $641.35 $603.91

Total education expenditure $558.39 $488.56 $495.12 $381.15 $365.08

Total health expenditure $292.66 $255.54 $290.29 $221.80 $209.41

Total social development expenditure[1] $64.51 $89.00 $62.67 $38.40 $29.43

3.2 Sectoral issues in priority expenditure

3.2.1 Education

The Ministry of Education and Training receives the highest proportion of the government’s budget

(16.2% in 2016/17) and represented 6.7% of GDP in 2016/17.45 Figure 3.2 shows that education

expenditure has been fairly stable by programme, with primary education taking up almost half

(roughly 45%) of total expenditures, followed by secondary education which comprises about a third

of the total.

Figure 3.2 Recurrent education expenditure by programme, FY 2013/14-2017/18

Source: (Government of the Kingdom of Swaziland, 2017).

A key policy in the education sector was the introduction of the Free Primary Education (FPE) Act

of 2010 and the associated FPE programme which provides grants, teaching and learning

materials, teachers, infrastructure and meals to primary schools. However net primary school

enrolment rates had already been increasing before the introduction of FPE, from 71 percent in

1999 to 95 in 2012.46. In more recent years, primary school enrolment rates have been relatively

flat, increasing by less than 1% between 2011 and 2015 as the country approaches full primary

enrolment.47

The country has however been less successful in enabling access to secondary education.

Average net enrolment rates in 2015 were only 28% at lower secondary (Form 1 to 3) and 12% at

45 (Ministry of Finance , 2017). 46 (Unicef, 2015). 47 (Ministry of Education and Training, 2015).

33


senior secondary (Form 4 to 6) levels.48 Indeed, the greatest inefficiency in the education system

appears to be the high level of repeats at primary level. In 2015, the primary school repetition rate

was on average 15.7% across grades 1 to 7. This leads to a very high number of over-age learners

in the system; by the end of Grade 7, 68% of learners are older than 13, and 29% are older than

16. More than 70 percent of the secondary aged learners are still in primary school. Less than 10%

of learners as estimated to complete primary school without any repeats.

These high repetition and low throughput rates are affected by the inability of many learners to

access Early Childhood Care and Development (ECCDE). The government provides little funding to

ECCDE and hence ECCDE is offered through private and independent centres that receive little

public regulation or support. As a result, reliable data on the level of ECCDE enrolments are hard to

find, but it appears that less than half of learners attend any formal form of ECCDE. Effective

investment at this early level could prevent learning backlogs from forming and act to increase

throughput / completion rates to higher levels; this would eventually enable greater access to

secondary and higher education. The Ministry of Education and Training has for some time

contemplated the inclusion of Grade 0 in public schools in the country, as articulated in the

Government Programme of Action (2013 to 2018),49 but this has not yet been implemented.

Personnel costs (E2.5 billion in 2017/18) represent more than 70% of education expenditure. In the

fiscally constrained environment, this severely constrains the government to make critically required

investments in educational infrastructure, teaching and learning materials and grants. This is

particularly the case in secondary education where virtually all the government’s recurrent

expenditures are directed towards personnel. Most secondary schools therefore charge fees, which

further restricts access to poorer learners.

In the medium term, the government should therefore aim to increase access to ECCDE and

improve the quality of primary school tuition, which would both help to increase throughput rates at

primary level and hence reduce current inefficiencies. Improved throughput rates however will

require a concurrent increase in expenditure at secondary level. These investments and inefficiency

improvements are critically important given Eswatini’s demographics and its need to develop a

more skilled workforce.

3.2.2 Health

Eswatini’s long term national development strategy’s (“Vision 2022”) strategic health care objective

is the universal health coverage, which is defined as “ensuring that all people have access to

needed promotive, preventive, curative and rehabilitative health services, of sufficient quality to be

effective, while ensuring that the use of these services does not expose the user to financial

hardship”. In support of these goals the country has developed the National Health Sector Strategic

Plan II (NHSSP II, 2014 – 2018), outlining the strategic approach to funding and implementing its

health care vision.

The greatest challenge facing the country’s healthcare system is addressing its HIV/AIDS epidemic.

Largely as a result of the epidemic, mortality rates increased from 1990 to 2005; but have been

declining since 2005 due to the increased availability of anti-retroviral (ARV) drugs.50 Despite

improvements, life expectancy at birth is still low compared to the Sub-Saharan African (SSA)

average (47.9 vs 58.6 years in 2014); which again is heavily influenced by HIV/AIDS prevalence

rates of 28.7% compared to the SSA average of 4.9%.

48 (Ministry of Education and Training, 2015). 49 (The Kingdom of Swaziland, 2013). 50 (Ministry of Health, 2015).

34


Nonetheless some achievements have been made through healthcare investments. Both infant and

under-5 mortality rates have been on the decline, with the Under 5 Mortality (U5M) recording the

biggest drop from 104/1,000 in 2010 to 67/1,000 live births in 2014.51

Figure 3.3 shows that personnel costs have been increasing slowly as a percentage of the

recurrent health expenditure, with a particularly large increase in FY2017/18. This increase appears

to be the result of increases in both salary levels as well as increases in staff numbers to address

capacity gaps across the system. As is the case for education, wage bill increases risk crowding out

of other key areas when an expansionary fiscal policy might no longer be sustainable in the future.

This seems particularly important in terms of investing in the capital structures required to achieve

universal health coverage. Currently (in FY2017/18), only 15% of the budget is allocated towards

capital expenditure. More than two thirds of this capital expenditure is financed from outside (i.e.

non-government) sources; primarily through grants from the Taiwanese government and loans from

the World Bank.

Eswatini’s government health expenditure in FY2015/16 is estimated at US$104 per capita; a

significant decline from approximately US$130 a year earlier due to the severely weakened rand.52

Nonetheless this still exceeds the (somewhat crude) World Health Organisation target of US$86

and is close to the Sub-Saharan 2014 average of US$98 per capita.53

Figure 3.3 Recurrent health expenditure by type, FY 2013/14-2017/18 (E million)

Source: (Ministry of Finance, 2017).

Given the size of the HIV/AIDS challenge facing the country, procurement systems are particularly

important. The government has slightly increased the proportion of spending towards drugs in

recent years. ARVs have been ring-fenced within the budget (E261m in FY2016/17) to ensure that

this area continues to receive the necessary priority. However, inefficiencies in the procurement of

drugs reduce the potential impact of drug spending. Overall though, health inflation has been

declining in recent years, which has been ascribed to the greater role played by government in the

procurement of drugs. Some shortages of medicines have also been reported - in some cases due

to delays encountered in the procurement process. The broader issue around the accumulation of

51 (Central Statistical Office and UNICEF, 2016). 52 Based on expenditure data provided by the Ministry of Finance. 53 ( World Health Organisation, 2014).

35


arrears to government suppliers (mentioned in Section 2) could pose significant risks to

procurement of critical resources at reasonable prices, particularly in the Health sector.

Longer term plans include the creation of a National Health Insurance Fund which would form part

of the National Social Security Strategy,54 but progress towards designing, resourcing and

implementing such a fund appears to be very limited at the time of writing.

3.2.3 Social welfare

Eswatini is faced with significant levels of poverty: 63% of citizens live below the national poverty

line and 70% of children are classified as poor. 71% of children in Eswatini are orphaned and

vulnerable (OVC).55 Against this background an effective social welfare system is critically

important.

The Deputy Prime Minister’s Office (DPMO) directs and manages the key social welfare grants in

the country; primarily through the Department of Social Welfare (DSW). The DSW received almost

90% of the DPMO’s budget (E359m out of E405m) in FY2016/17.56 Of this amount the vast majority

(96% in FY2016/17) is allocated towards Social Welfare grants. Two social grants dominate in this

regard (see Figure 3.4 below):

• The Aging Persons (Elderly) grant supplies a fixed amount per month to all persons over 60;

this amounted to E171 million in FY2016/17. The allocation is expected to increase significantly

from FY2017/18 onwards since the amount per person has been increased from E240 to E400

per month. The elderly grant currently is not subject to any enforced eligibility criteria / means

testing. This implies that this (or other) grants could be better targeted towards those in the

greatest need;

• The Orphans and Vulnerable Children (OVC) grant for secondary learners is an in-kind

grant covering the secondary school fees (to an amount of E1 950 per learner), currently

benefiting approximately 78 000 learners.57 The total OVC secondary grant has been fairly

stable at around E150 million in recent years. However, this grant is not sufficient since it

doesn’t cover the full cost of fees in many schools, and more importantly the other costs

(transport, uniforms etc.) of attending school. This likely contributes to the high rates of

secondary school drop-out discussed in section 3.2.1 above.

54 (The Kingdom of Swaziland, 2013). 55 ( World Health Organisation, 2014). 56 (Government of the Kingdom of Swaziland, 2017). 57 Information provided by the Department of Social Welfare.

36


Figure 3.4 Key social welfare grants over time, FY 2013/14-2017/18 (including projections)

Source: (Government of the Kingdom of Swaziland, 2017).

A number of other grants are also administrated by the DPMO, but these typically represent

relatively insignificant amounts except when dealing with specific disaster (e.g. drought) related

issues.

A donor funded OVC child grant pilot has also been underway in the country since 2016, which

provides cash transfers to up to 12 000 children58; with the amount transferred varying between

E100 and E200 depending on the age of the child. This pilot is said to have shown promising

results, but is expected to expire in March 2018 without a plan for extending or expanding it.

There is a clear need for a more extensive social welfare safety net given the rates of poverty and

OVCs in the country. A World Bank study found that the low level of benefits and delayed payments

were the main causes of the limited impact of social welfare programmes in Eswatini; and hence

recommended an increase in assistance of this kind.59 While the elderly grant does undoubtedly

indirectly benefit many children, it is estimated that 55 percent of poor children do not live with an

elderly person and hence do not benefit from this grant.60 The secondary school OVC grant is an

in-kind grant which only benefits about 40% of poor children and is insufficient to meet the full costs

of schooling, not to mention other learner needs.

An improved social welfare system should more directly target those with the greatest need as well

as identify cases where it’s most likely to have a significant impact through alignment to other

policies. For example, an extended child grant could target those in ECCDE which could, if

combined with other interventions at this level, improve throughput rates in primary and secondary

schools. A case management system is currently being developed for the DSW which could serve

as a key input in (i) determining the appropriate welfare transfers, (ii) means testing benefits to the

most needy and (iii) integrating welfare with other government interventions.

In addition to the social welfare programmes managed through the DPMO, there is also a range of

social security programmes that fall under the Ministry of Labour and Social Security. These take

the form of ring-fenced funds; such as the public sector National Pension Fund (NPF), the Motor

58 Based on figures provided the DSW; although there are some identification challenges to determine the exact number of

beneficiaries. 59 (World Bank, 2012). 60 (Blank & Mistiaen, 2012).

37


Vehicle Accident Fund (MVAF) and the Phalala Medical Referral Fund. Such ring-fenced funds tend

to accumulate either large surpluses (the MVAF) that cannot be redirected, or deficits (the NPF) for

which government would eventually be liable. There have therefore been efforts to design a more

integrated social protection system (potentially including DSW Social Welfare grants), as part of the

National Social Security Strategy, but it appears that limited progress has yet been made in this

regard.

39


4 The base scenario

The first part of this chapter discusses a multiannual projection in Excel of Eswatini’s fiscal space

under a set of “base-scenario” assumptions. (Appendix 1 describes the base-scenario assumptions

in detail.) The second part describes alternative scenarios and the consequences of the options

they embody on fiscal space, as determined quantitatively by the projection exercise. While each

option takes account of Eswatini’s specific circumstances, it is important to remember that the

projection results are based on specified, quantitative programming assumptions. In no case should

the results be regarded as forecasts.

4.1 Base scenario and fiscal space “mapping”

In presenting the base scenario, Appendix 1 describes the programming assumptions and

characterises the projection results. The real-GDP growth rate (in Swazi Lilangeni) is assumed to

be 2% per cent over the projection period as per the World Bank’s forecast. Most of the remaining

programming assumptions are intended as “neutral”, non-controversial, base-line assumptions that

would produce no significant changes in the fiscal structure as the real economy grows. The results

of the base scenario provide a basis for comparison with alternative scenarios incorporating

different assumptions.

Under the base scenario, priority expenditures in categories relevant for children averages 12.1

percent of GDP over the years FY17-18 to FY21-22. Over these same years, in real terms, total

priority expenditures for children averages US$581.7 per child at FY16-17 prices and exchange

rates. Under the base-scenario assumptions regarding tax and non-tax revenue, external grants,

non-priority expenditure, and external- and internal-debt stocks and flows, the projected flows of

priority expenditures for children produce a fiscal-space financing “gap” that would have to be

covered with internal financing. Under these specific quantitative assumptions, the required

internal-financing flow averages 13.6 percent of GDP over the projection years.

Table 4.1 Eswatini Key projection results for the base scenario

FY16-

17

FY17-

18

FY18-

19

FY19-

20

FY20-

21

FY21-

22


Per cent of total expenditure 25.4 25.7 25.8 26.0 26.1 26.3

Per cent of GDP 12.0 12.4 12.2 12.1 12.0 11.8

Per child in USD at 2016 exchange rate and

prices $603.9 $640.2 $600.5 $577.7 $555.7 $534.2

Net internal financing gap (fiscal gap)


Per cent of GDP 13.8 14.5 14.3 13.9 13.2 12.0

Fiscal Deficit (surplus/deficit)

Per cent of GDP -9.0 -7.8 -5.7 -3.8 -2.4 -1.6

Source: Estimates and calculations from the projection workbook SDFS.xlsm.

40


Table 4.2 Results for the other elements of the fiscal account

Results Scenario 0

Average tax and non-tax revenue/GDP, FY17/18 -FY21/22 32.3%

Average priority expenditure/GDP, FY17/18 -FY21/22 12.1%

Average priority expenditure per child (USD at 2015 prices & exchange rate), 2017-2021 $581.7

Net internal debt flow/GDP, FY17/18 -FY21/22 13.6%

Total government debt/GDP, 2020 34.6%

Average fiscal deficit/GDP, FY17/18 -FY21/22 4.3%


Figure 4.1 shows a fiscal-mapping chart for FY13-14 to FY21-22, with projections from the base

scenario. All projections are shown as a percentage of GDP. In the “stacked-bar” presentation,

funding sources are above and expenditure flows below the horizontal axis: in effect, the sum of

everything above the horizontal axis effectively funds everything below. For each year, the sum of

all flows above the horizontal axis is precisely equal to the sum of all flows below the horizontal

axis. Stated differently, the tax and non-tax revenue, the external grants, and external-debt

disbursements, shown above the horizontal axis, together fund the priority expenditure, the non-

interest non-priority expenditure, the external-debt service, and the (negative) internal financing flow

including internal interest. The net internal financing flows include the interest on the internal debt.

Figure 4.1 Fiscal space and its components over the historical and projection period in the base scenario

(FY13-FY22)


The projection exercise can be used to evaluate different policy approaches involving priority

expenditure and its fiscal space. In general, if a scenario is proposed that involves an increase in

the priority-expenditure flow relative to what is in the base scenario, the “fiscal gap” would

presumably increase. The exercise would show an increase in the net internal financing flow to the

government compared with the base scenario. On the other hand, if a scenario is proposed

involving an enhancement through one or more elements of fiscal space, the exercise would show

a reduction in the net internal financing flow to the government compared with the base scenario.

Naturally, combined scenarios are possible, in which both the priority-expenditure and the fiscal-

space flows are increased. The idea would be to determine the net consequence of the two

changes. The exercise shows the multiannual internal financing flows for the whole projection

41


period, and accumulates these flows so that the exercise shows the government’s total debt at the

end of the projection period.

Since these results are quantitative, they can be discussed in terms of their feasibility: Would the

net internal financing flow be likely to exceed the capacity of internal financial markets? And would

the government’s total debt stock rise too high too quickly as a percentage of GDP?

43


5 Alternative scenarios

The projection exercise is set up to carry out sensitivity analysis. The procedure consists of

calculating projections based on alternative scenarios, which are set out in this chapter. The

assumptions of each alternative scenario are kept the same as those of the base scenario except

that one or two assumption lines are changed. Comparison of each alternative scenario with the

base scenario would indicate the order-of-magnitude consequences for the fiscal accounts of the

changed assumptions, given the exercise’s other assumptions.

Section 5.1 describes possible approaches to increase fiscal space. Section 5.2 then describes

some illustrative alternative scenarios as well as how results compare with those of the base

scenario. Finally Section 5.3 considers the potential impact of key risks facing fiscal space in the

country through a number of alternative scenarios.

5.1 Options to increase fiscal space

Policy-makers have the following general options for enhancing fiscal space for priority expenditure:

(1) increasing tax and non-tax revenue, and possibly earmarking some of this for priority

expenditure; (2) increasing expenditure efficiency; (3) reducing non-priority expenditure;

(4) reducing external debt service, presumably through agreements with creditors; (5) increasing

external debt disbursements; and (6) increasing net internal borrowing flows.

Apart from government policy choices, changes in the macroeconomic context can affect fiscal

space. For example, increased GDP growth would increase fiscal space by increasing tax revenue.

In general, evaluation of the alternative-scenario results suggests that the best policy approaches to

securing sustained increases in fiscal space to support priority-expenditure flows appear to lie with

improved tax administration. As explained below, the other approaches are likely, on the basis of

tax increases and reducing non-priority expenditure, to face political obstacles and may be

counterproductive in the medium term, since they might reduce GDP growth that powers revenue

flows. Debt funding for priority expenditure is inherently undesirable, because the cost of the debt is

likely to exceed the return on priority expenditure, at least until the long term. Finally, agreed

reductions in external-debt service are unlikely to be feasible – the international debt-reduction

programs of the 1990s and 2000s are unlikely to be repeated in coming years.

Other pathways to achieving improvements in fiscal space are possible as well, most notably in

terms of improving allocative and cost-efficiency within priority expenditure. In all priority categories,

achievement of development targets and objectives falls short of the original aims. It is plausible to

assume that significant resources could be freed up through improving decision-making and

management processes through the continuous use and analysis of performance information in

conjunction with budgetary allocation information.

44


5.2 Alternative scenarios and projections compared with the base scenario

5.2.1 Increasing tax and non-tax revenue

Enhanced CIT and PIT administration and increase priority expenditure

The assumptions of Scenario 1 (summarised in Table 5.1 below) are the same as those for the

base scenario, except that instead of CIT and PIT revenue growing at the same rate as nominal

GDP, it gradually increases over time from growing at the same rate as nominal GDP in FY16-17 to

growing 1.5 times by FY20-21. In addition to enhanced CIT and PIT collection, a simultaneous

increase in priority expenditure is incorporated.

Table 5.1 Key assumptions for Scenario 1

Growth rates FY16-17 FY17-18 FY18-19 FY19-20 FY20-21 FY21-22

Real GDP 1.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Consumer price index 7.9% 5.7% 6.2% 6.2% 6.3% 6.4%

Population growth 1.2% 1.2% 1.2% 1.2% 1.2% 1.2%

Elasticity of education staff size

with respect to child population 1.0 1.3 1.6 2.0 2.5 3.0

Elasticity of social protection

expenditure to child population 1.0 1.3 1.6 2.0 2.5 3.0


Tax and non-tax revenues have largely been supported by strong growth in income tax revenue,

specifically between FY2013/14 and FY2016/17, when income tax growth average of 19.1%,

compared to the average growth of -6% of SACU revenues over the corresponding period. This

growth performance is mainly ascribed to improved efficiencies following the formal establishment

of the SRA in 2011, as opposed to significant increases in tax compliance rates. Going forward, it is

expected that a number of measures, such as the introduction of a new income tax law, are likely to

further enhance income tax revenues.61

The first “alternative” scenario, Scenario 1 suggests that these improvements in the tax system

could bring about some increase in fiscal space. Tax compliance rates remain an area the SRA can

capitalise on to enhance revenue collection. For instance, income tax compliance was estimated at

45% in 2014, with a 10% improvement target for each year between FY2015/16 and FY2017/18.62

While tax collection has already improved somewhat in recent years, increasing tax compliance

rates will remain the SRA’s main priority over the medium term. This scenario assumes that the

SRA is effective in these attempts and thereby increases overall tax revenue above the baseline

levels.

This scenario also incorporates an increase priority expenditure through an increase in the elasticity

of staff size within the respective priority sectors.63 This assumption is based around two

arguments. Firstly, personnel costs are the biggest cost driver within each of these sectors,

accounting for more than 40% of expenditure64. Secondly, as highlighted earlier, in addition to

general efficiency issues within the priority sectors, there is a general shortage of staff within these

sectors. For example, increasing the provision of ECCDE in the public system would require an

increase in qualified teachers. Therefore, in order to maximise efficiencies, it may be necessary

61 (Ministry of Finance, 2016). 62 (SRA, 2015). 63 In this case elasticity refers to the rate at which staff size increases when GDP increases. In other words, when GDP

increases, at what rate does staff size increase in response relative to the base scenario response. 64 Education (76.1%), Health (38.3%).

45


grow the workforce with adequately trained staff. Our scenario is therefore modelled off the

assumption that elasticity in the Education and Social welfare expenditure will rise incrementally

over the projection period, to reach a multiple of three times over the base case. However, one of

the biggest challenges faced by the Ministry of Health has been the ‘shortage of positions and the

inability to quickly fill vacancies’. 65 Given the shortage of adequately skill staff relative to the other

two priority sectors, growth in health expenditure is therefore maintained in line with nominal GDP

growth.

Table 5.2 provides a summary of the projection results using the assumptions above.

Table 5.2 Key projection results for Scenario 1

FY16-

17

FY17-

18

FY18-

19

FY19-

20

FY20-

21

FY21-

22



Per cent of GDP 12.0 12.4 12.3 12.2 12.1 12.1


prices $603.9 $640.8 $602.3 $581.4 $562.3 $545.0



Per cent of GDP 13.8 14.4 14.1 13.5 12.5 10.9


Per cent of GDP -9.0 -7.8 -5.9 -4.3 -3.2 -3.0


In this scenario, as evidenced in Table 5.3 below, priority expenditure rises marginally, to an

average of 12.2%, compared with 12.1% under the base scenario. Meanwhile average priority

expenditure per child increase by $6.19, to $586.43 when compared to the base scenario. The

simultaneous increase in CIT and PIT would effectively offsets net internal debt flow by -0.5 when

compared to the base scenario. In the instance that the elasticity for health expenditure rises at the

same rate as that of Education and Social welfare (three times over the base scenario), average

priority expenditure rises to 12.3% - put differently it rises by $8.40 per child as compared with

$6.19.

Table 5.3 Enhanced CIT and PIT administration and increase priority expenditure

Results Scenario 0 Scenario 1 Variation

Average tax revenue/GDP, FY2017-2021 32.3% 33.0% 0.6%

Average priority expenditure/GDP, FY2017-2021 12.1% 12.2% 0.1%

Average priority expenditure per child (USD at 2016 prices

and exchange rate), FY2017-2021 $580.15 $586.34 $6.19

Net internal debt flow/GDP, FY2017-2021 13.6% 13.1% -0.5%

Total government debt/GDP, FY2021

34.6%

33.40% -1.2%


Increased fuel levy and VAT on alcohol and tobacco, increased priority expenditure

Scenario 2 models the combination of an increase in the fuel levy, as well as an increase in the

VAT rate on alcohol and tobacco products. The government of Eswatini has proposed tax revisions

65 (USAID, 2017).

46


for these items in the past. Although exact revision rates considered were not disclosed, it is

assumed that the proposed revisions where seen to be too high to be implemented at the time.66

The assumptions are put forward in Table 5.4 below.



Real GDP 1.0% 2.0% 2.0% 2.0% 2.0% 2.0%



VAT rate on alcohol and tobacco

products 14.0% 14.8% 15.6% 16.4% 17.2% 18.0%

Elasticity as related to Fuel Levy 1.0 1.3 1.6 2.0 2.5 3.0






Although fuel tax accounts for only around 5% of total revenues, it is an avenue through which

fiscal space can be enhanced. The medium term outlook on the oil price suggests an upward

trajectory, which would have implications for an oil importer such as Eswatini. The low oil price

cycle added some reprieve to oil importers, and a higher oil price environment would have an

inverse effect. An increase in the elasticity of fuel levy, rising incrementally to 3 times the current

rate by end-FY22, is therefore modelled.

In scenario 2, it is assumed that the VAT rate on tobacco and alcohol increases from 14% in FY16-

17 to 18% in FY21-22. Eswatini currently applies a standard VAT rate of 14% across all goods (with

exception for zero rated goods). While a break-down of VAT revenue per product is not available, it

was assumed that alcohol and tobacco products contribute approximately 0.39% of VAT revenue67.

Based on this assumption, VAT from alcohol and tobacco products constitutes approximately 0.6%

of total tax revenue (in the base scenario, the alcohol and tobacco products VAT rate is assumed to

remain at 14% and grow at the same rate as nominal GDP. Table 5.5 provides a summary of the

projection results using the assumptions above.


FY16-

17

FY17-

18

FY18-

19

FY19-

20

FY20-

21

FY21-

22



Per cent of GDP 12.0 12.4 12.3 12.1 12.0 11.9


prices $603.9 $640.5 $601.5 $579.7 $559.2 $539.7



Per cent of GDP 13.8 14.5 14.1 13.6 12.6 10.9

66 (Ministry of Finance, 2017). 67 This was based on the CPI basket which gives a weight of 0.39% on alcohol and tobacco products.

47


FY16-

17

FY17-

18

FY18-

19

FY19-

20

FY20-

21

FY21-

22


Per cent of GDP -9.0 -7.8 -5.8 -4.2 -3.1 -2.9


Table 5.6 shows the differential outcomes between the base scenario and scenario 3. While fuel

tax and VAT revenues cumulatively account for roughly 6% of total revenues, the above scenario

suggests that increases in each item would result in a 0.5 percentage point increase in average tax

revenues. 68 This projection exercise also points to a 0.1 percentage point increase in priority

expenditure, as well as a $3.99 increase in the priority expenditure per child. Meanwhile net internal

debt flows and total government debt would decline by 0.4 percentage points and 1.0 percentage

points respectively.

Table 5.6 Increased fuel levy and increased priority expenditure







Total government debt/GDP, FY2021 34.6% 33.60% -1.0%


Increased GDP growth due to greater sugar activity; allocated to priority expenditure

Scenario 3 puts forward another option related to enhancing tax and non-tax revenue. This

scenario is modelled on the assumption of increased GDP growth as a result of enhanced sugar

production due to normalisation of weather conditions, maximised crop yields, strong demand

contributing to a strong performance in the sector. The model assumption incorporates an average

growth rate of 4.2% over the projection period: with growth rising incrementally to a high of 5.0% in

FY2021-22. Because Eswatini’s National Development Strategy (NDS) does not explicitly set out

GDP growth targets over the term of the plan, the Economic Recovery Strategy’s 5% target is

used.69 This scenario transfers additional funding realised from increased GDP growth towards

priority expenditure.

Table 5.7 provides a summary of the projection results using the assumptions above, while Table

5.8 shows the projection results.



Real GDP 1.0% 1.9% 2.8% 3.7% 4.6% 5.5%



68 It should be noted here that a perfectly inelastic demand is assumed; meaning that the VAT revenue estimation is probably

overstated since it is assumed that consumption does not react to price increases. 69 (AFDB, 2012).

48



Elasticity of company-tax

revenue with respect to nominal

GDP

1.0 1.1 1.2 1.3 1.4 1.5

Elasticity of personal income tax

revenue with respect to nominal

GDP

1.0 1.1 1.2 1.3 1.4 1.5







FY16-

17

FY17-

18

FY18-

19

FY19-

20

FY20-

21

FY21-

22



Per cent of GDP 12.0 12.4 12.3 12.1 12.0 11.9


prices $603.9 $640.9 $606.4 $593.3 $586.2 $586.6



Per cent of GDP 13.8 14.5 14.1 13.4 12.3 10.4


Per cent of GDP -9.0 -7.9 -5.8 -4.0 -2.6 -2.3


The projection exercise factors in a considerable increase in the elasticity of priority expenditure to

nominal GDP growth. The results table below (Table 5.9 ) shows that tax revenue would

reach an average of 32.8 percent of GDP over the projection period, while the average spending on

priority expenditure per child would increase by $22.52 relative to the base scenario. The net effect

would be a moderate decline of 1.8 percent in net internal debt flow, when compared to the base

scenario.

Table 5.9 Increased GDP growth due to greater sugar activity; allocated to priority expenditure









49


5.2.2 Decreasing non-priority expenditure

Reprioritisation of non-priority expenditure to priority expenditure

A Performance Expenditure Review conducted by the World Bank, in cooperation with the Ministry

of Finance (MOF) in 2006 identified a number of key public expenditure challenges that needed to

be addressed in the country.70 The first source is related to an oversized wage bill due to high

salaries as well as a large civil service. Another source of public expenditure inefficiency results

from the high proportion of spending allocated towards security and military rather than to social

sectors. A third source stems from the weak and ineffective expenditure controls, which require

strengthening of budget institutions. And lastly, capacity constrains at all levels of government

further contribute to these inefficiencies.

This scenario examines the impact of the second issue mentioned: reallocation of spending from

defence and police to priority sectors. Currently, ministries of defence and police account for 6%

and 5% of the budget respectively. The scenario thus assumes that non-priority expenditure

increases at a slower rate than priority expenditure and that eventually half of the current spending

allocated to police and defence budgets are allocated to priority sectors. The elasticity of education,

health and social development expenditure to nominal GDP growth is therefore rapidly increased,

from 1.0 in FY16-17 to 18 in FY20-21 as opposed to staying at 1.0 over the period in the base

scenario. In this scenario the elasticity of non-priority expenditure reduces over the period. Table

5.10 represents the results of this dynamic compared to the base scenario.



Real GDP 1.0% 1.9% 2.8% 3.7% 4.6% 5.5%





Elasticity of health staff size with

respect to total population 1.0 2.1 3.9 6.7 11.1 18.0



Elasticity of non-priority recurrent

expenditure to nominal GDP growth 1.0 1.0 0.9 0.9 0.8 0.8


In this scenario, approximately all the hypothetical savings in the non-priority sectors have been

transferred directly to the priority sectors. Consequently, per capita priority expenditure and priority

expenditure as a percentage of GDP is higher than in the base scenario.


FY16-

17

FY17-

18

FY18-

19

FY19-

20

FY20-

21

FY21-

22



Per cent of GDP 12.0 12.5 12.5 12.7 13.2 14.5

70 (World Bank, 2006).

50


FY16-

17

FY17-

18

FY18-

19

FY19-

20

FY20-

21

FY21-

22


prices $603.9 $643.4 $612.3 $605.1 $613.0 $651.0



Per cent of GDP 13.8 13.8 12.7 11.4 10.1 12.1


Per cent of GDP -9.0 -8.4 -7.3 -6.6 -6.1 -2.5


The table below presents Scenario 4’s output results against that of the baseline. The projection

exercise points to a 1 percentage point increase in priority expenditure, as well as a $44.82

increase in the priority expenditure per child. This is a significant increase; and shows the large

impact that is achievable if existing budgets can be reallocated.

Table 5.12 Reprioritisation of non-priority expenditure




Average priority expenditure per child (USD at 2016

prices and exchange rate), FY2017-2021 $580.15 $624.97 $44.82




5.2.3 Improving efficiency of priority sector spending

Increasing budget execution rates

This scenario considers the effect of improving budget execution; a key public expenditure issue

mentioned in the previous section. In 2016/17 government was able to execute 77% of their budget;

with the execution rate for recurrent and non-recurrent expenditure being 85% and 50%

respectively.71 As recurrent expenditures have a fairly high execution rate; focus is turned to

increasing non-recurrent expenditure. In particular Scenario 5 assumes non-recurrent expenditure

in priority sectors doubles. Table 5.13 presents a summary of the scenario assumptions, while

Table 5.14 presents the scenario's projection results.


Growth rates FY16-

17

FY17-

18

FY18-

19

FY19-

20

FY20-

21

FY21-

22

Real GDP 1.0% 2.0% 2.0% 2.0% 2.0% 2.0%



Execution factor for non-recurrent expenditure 1.0 1.2 1.4 1.6 1.8 2.0


71 Data provided by UNICEF.

51



FY16-

17

FY17-

18

FY18-

19

FY19-

20

FY20-

21

FY21-

22



Per cent of GDP 12.0 12.5 12.4 12.4 12.3 12.3


prices $603.9 $644.2 $608.1 $588.8 $570.1 $551.6



Per cent of GDP 13.8 14.6 14.5 14.2 13.6 12.5


Per cent of GDP -9.0 -7.7 -5.6 -3.6 -2.1 -1.3


Table 5.15 shows that tax revenue remains unchanged in this scenario, while the average spending

on priority expenditure per child increases slightly by $12.42 relative to the base scenario. However

as this amount is fully allocated to non-recurrent priority expenditure this is still a significant change;

as total non-recurrent priority in this scenario increases by E222 million or 0.39% of GDP. The net

effect would be a 0.3 percentage point increase in net internal debt flow, and a 0.6 percentage point

increase in total government debt.

Table 5.15 Increase execution rate within priority sectors




Average priority expenditure per child (USD at 2016

prices and exchange rate), FY2017-2021 $580.15 $592.57 $12.42

Net internal debt flow/GDP, FY2017-2021 13.6% 13.9% 0.3%

Total government debt/GDP, FY2021 34.6% 35.17% 0.6%


5.2.4 Other options for enhancing fiscal space

Increasing external grants for budget support and projects

While the option of increasing external grants is indeed a potential source through which fiscal

space can be enhanced, this may be limited for Eswatini. There are two main factors which may

undermine significant growth in grants. Firstly, global economic conditions have placed pressure on

global donors’ revenue pool, resulting in reprioritisation of aid recipient criteria. While there are

signs of improved global economic conditions going forward, this recovery is likely to be slow

paced, thus limiting the prospect of burgeoning donor funds in the foreseeable future. Secondly, the

country’s middle income status will continue to limit its access to a number of financial

instruments.72

Reducing external-debt service through agreements with creditors

As shown in Figure 5.1 below, Eswatini’s proportion of concessional debt as a percentage of total

external debt has been on a steady upward trend since 2010. Concessional loans stood at 46% in

72 (Ministry of Economic Planning and Development, 2017).

52


2015, from 22.2% in 2010. A large proportion of these funds have been directed to the

infrastructure sector, as well as capacitation projects within areas of health, water and sanitation,

and governance.73

Figure 5.1 Concessional debt as a percentage of total external debt

Source: World Bank.

Increasing external-debt disbursements

In general, macroeconomic policy specialists concur that it is not advisable to use commercial

external debt to fund education, health, or social-development expenditure. The reasoning is

straightforward: eventual returns to education and health expenditure are realized over decades,

but debt service on commercial external debt is generally due within a decade. Concessional debt,

with multi-decade terms and near-zero interest rate, is more realistic for such purposes.

The previous section shows that the share of concessional debt to total external debt has been on

an upward trend, although accounting for less than 50% of the total. As noted earlier, while the

country’s debt-to-GDP ratio (which stood at just over 20% in FY2016/17) has been rising in recent

years it is unlikely to breach the country’s self-imposed ceiling of 35%. Two arguments can be

made in this regard. On the one hand this rising trend could place pressure on the government’s

ability to meet upcoming maturities, which would add further strain on the government’s financial

position. However it should be noted international benchmark on total debt currently stands at

55%74, thus suggesting that Eswatini effectively has some room to increase borrowing before it is

considered unsustainable. Thus, in the instance that Eswatini maintains or increases its proportion

of debt comprised of concessional debt, the option of further debt disbursements as a means to

increase fiscal space becomes plausible.

Increasing net internal borrowing flows

In the analytical structure of the projection exercise, net internal borrowing is calculated residually.

In effect, it is the consequence of all the programming assumptions taken together. Evaluation of its

feasibility therefore amounts to evaluation of the feasibility of all the programming assumptions

taken together. Since internal borrowing is for shorter terms and has higher interest rates than

external debt, it would be even more inappropriate to use domestic loans specifically to fund priority

expenditure. Nevertheless, any fiscal-space financing gap would be covered with internal borrowing

flows.

73 (Ministry of Economic Planning and Development, 2017). 74 (IMF, 2017b).

53


Decreasing illicit financial outflows

The issue of illicit flows remains continues to pose a threat to many government’s finances. The

figure below presents the trend in Eswatini’s financial outflows over a 10 year period. While flows

have decreased significantly from a peak of close to $1.4 billion in 2007, it remains quite sizeable

relative to GDP: 35% of GDP in 2013.

The literature on illicit financial outflows is quite broad, and while there are a number of ways that

countries can be susceptible to the proliferation of illicit funds is through transfer pricing75. While

this process is legal, different corporate tax regimes between countries (or corporates) leaves room

for taxable income to be manipulated – thus reducing collectable income for the country (corporate)

on the other end of the spectrum (Adams and Adams, 2016).

Figure 5.2 Illicit Financial Outflows (USD millions)

Source: (Global Financial Integrity, 2015).

5.3 Risks to fiscal space and their impact

5.3.1 Weak economic growth

While global growth is off the back foot, with advanced economies expected to experience higher

growth over the medium term, this scenario is based on the risk of a protracted low growth

environment in South Africa. This is likely to affect Eswatini negatively, given its strong economic

association with South Africa.

In the base scenario, real GDP growth is assumed to average 2 per cent between FY17/18 and FY

21/22. In this scenario, Scenario 5, it is assumed that real GDP growth is negative; averaging -1

per cent per year over the period. Table 5.16 provides a summary of the projection results using the

assumptions above, while table 5.17Error! Reference source not found. shows the projection

results.


Growth rates FY16-

17

FY17-

18

FY18-

19

FY19-

20

FY20-

21

FY21-

22

Real GDP 1.0% -1.0% -1.0% -1.0% -1.0% -1.0%

75 Transfer pricing is defined as the “process by which related entities set up the prices at which they transfer goods and

services between each other.” (Adams and Adams, 2016, p. ii).

54






FY16-

17

FY17-

18

FY18-

19

FY19-

20

FY20-

21

FY21-

22



Per cent of GDP 12.0 12.6 12.6 12.6 12.6 12.6


prices $603.9 $628.7 $579.2 $547.3 $517.3 $488.6



Per cent of GDP 13.8 14.6 14.5 14.2 13.7 12.7


Per cent of GDP -9.0 -8.4 -6.8 -5.3 -4.1 -3.6


Table 5.18, shows that while revenue and priority expenditure as a percentage of GDP increases

slightly between the base and alternative scenarios, in absolute terms, there is a significant drop in

priority expenditure. Average priority expenditure per child is nearly 10 per cent lower in the

alternative scenario.

Table 5.18 Weak economic growth





and exchange rate), FY2017-2021 $580.15 $552.22 ($27.92)




5.3.2 Decrease in SACU transfers

As highlighted Eswatini depends on SACU in terms of trade and in terms of its fiscal situation. This

scenario seeks to model the impact of a decrease in SACU revenues would result in for the

country, given that it accounts for approximately 40% of total government revenues.

In the base scenario, it is assumed that Eswatini’s SACU revenue grows at the rate predicted by

the SACU secretariat; approximately 0.3 per cent per annum in nominal terms. Admittedly, this is

not significant growth and will lead to decreases in the contribution of SACU revenue as a

percentage of total government revenue in Eswatini. Nevertheless, in light of Eswatini’s reliance on

this revenue and its historical volatility, it is perhaps important to illustrate the effects of slower than

expected growth in SACU revenue over the period on Eswatini’s borrowing requirement. Error!

Reference source not found. provides a summary of the projection results when using the

assumptions in table 5.19.

55




Real GDP 1.0% 2.0% 2.0% 2.0% 2.0% 2.0%



SACU transfer growth rate 0.3% -0.3% -0.3% -0.3% -0.3% -0.3%



FY16-

17

FY17-

18

FY18-

19

FY19-

20

FY20-

21

FY21-

22



Per cent of GDP 12.0 12.4 12.2 12.1 12.0 11.8


prices $603.9 $640.2 $600.5 $577.7 $555.7 $534.2



Per cent of GDP 13.8 14.6 14.4 14.1 13.5 12.3


Per cent of GDP -9.0 -7.7 -5.5 -3.6 -2.1 -1.3


Scenario 6 is similar to the base scenario in all of its assumptions, except that it assumes that the

SACU transfer’s nominal growth rate averages -0.2 per cent over the period. Government debt

increases by 0.4% by 2021 in this case.

Table 5.21 Decrease in SACU transfers


Average tax revenue/GDP, FY2017-2021 32.3% 32.2% -0.2%

SACU transfer/GDP, FY2016–2021 10.6% 10.9% 0.3%







57


6 Conclusions

This paper’s fundamental recommendation is that, in support of its advocacy on behalf of

expenditure beneficial for children, UNICEF should continually formulate quantitative projections,

and make use of these in its dialogue with the Eswatini government and other stakeholders. These

projections should not only cover future expenditure needs in education, health, social development

and other sectors relevant for children, but should also encompass the main components of the

“fiscal space” that provides the funding for such expenditure. Quantitative projections of this kind

should assist UNICEF to engage in more effective dialogue.

The analysis this report describes is intended to be essentially illustrative, to show how the

methodology it recommends can be used to address the relevant policy issues. But certain tentative

conclusions regarding the substantive issues do emerge, including the following:

1. Given Eswatini’s demographic profile and the high number of Orphans and Vulnerable Children

(OVC) in the country, it is critical that both the total amount allocated towards priority sectors is

increased and the effectiveness of priority spending is enhanced. Effective investment at this

level is essential if the country is to move onto a longer term growth and development trajectory;

2. Throughput rates in the primary education system are currently very low, with the effect that

70% of secondary school aged learners in the country are still in primary school. Most drop-out

before reaching secondary schools. If these throughput rates could be improved, teaching

capacity could be re-allocated towards the secondary school system, which currently receives

limited resources and is unaffordable for many families. Improving throughput rates would likely

require meaningful policy initiatives such as the introduction of government funded Early

Childhood Education and a strengthened social welfare system;

3. Increases in social welfare transfers, targeted towards children, would not only support

education (and health) outcomes in the country, but also directly benefit those facing the most

extreme levels of poverty. The current OVC secondary schooling grant doesn’t support the full

cost of secondary schooling, and only supports approximately 40% of the school aged

population. A more comprehensive child grant is proposed – perhaps an expanded version of

the current World Bank funded pilot programme – the cost of which can be partially reduced if

all social welfare payments (in particularly the Elderly Grant) could be more effectively directly

towards the most needy through means testing;

4. Naturally, such investments in priority expenditure would need to be sustainably funded through

increased tax revenue. Income tax grew at an average of 19.1% over the review period,

compared to average growth of -6% for SACU revenues over the corresponding period. This

growth performance is mainly ascribed to improved efficiencies following the formal

establishment of the SRA in 2011, rather than significant increases in tax compliance rates.

Going forward, it is expected that a number of measures, such as the introduction of a new

income tax law, are likely to further enhance income tax revenues;

5. While it would likely not be appropriate to initiate significant tax increases in the current macro-

economic environment, there could be room in the short to medium term for a number of

targeted taxation efforts. The report modelled the impact of increasing the fuel levy or the VAT

rate on alcohol and tobacco. Such increases were shown to have relatively small impacts on

total government revenue, but could still be significant to support targeted investments in priority

expenditure;

6. Over the past five years, the SACU transfer revenue item has constituted approximately 52% of

Eswatini’s total revenue. Besides the fact that this means that 52% of Eswatini’s revenue is

largely outside of the ambit of its own policy, this revenue is also extremely volatile and

consequently difficult to predict. The projection exercise shows the significant deteriorating

58


effect of lower SACU revenue transfers on expenditure ceilings, budget deficits and the

trajectory of debt;

7. External grants are likely to decrease rather than increase over time. This will be a continuation

of the trend experienced over the last five years. A global economic slowdown and Eswatini

improving its status to a Medium-Income Country (from Low-Income) are seen as the main

contributors to this trend;

8. The country has pursued a relatively expansionary fiscal policy in recent years, including

significant increases in transfer payments (in support of Free Primary Education), the wage bill

and capital investments. Fiscal discipline and increased spending efficiency is required to

reduce the national deficit to sustainable levels while ensuring sufficient investment in priority

areas to achieve the country’s longer term growth and social development objectives;

9. The potential for the strengthening of the sugar sector, as a result of normalisation of weather

patterns (after the recent drought) and a potential increase in demand, represents a potential

opportunity for the country that would lead to an increase in GDP and hence increased tax

revenue;

10. On the other side of the argument, just as economic growth can drive fiscal space expansion, a

decrease in GDP will drive a contraction. In addition to domestic issues, Eswatini is very

vulnerable to South Africa’s economic performance; through SACU revenue and other

mechanisms. With the current economic and political uncertainty in the country, lower GDP

growth remains a legitimate concern in Eswatini.

59


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Blank, M., & Mistiaen, E. B. (2012). Eswatini: Using Public Transfers to Reduce Extreme Poverty.

The World Bank.

CSO Malawi. (2017). Retrieved from http://www.nsomalawi.mw/

CSO, U. (2010). 2009/10 Eswatini Household Income and Expenditure Survey - poverty in a

decade of slow economic growth: Eswatini in the 2000's.

Development, M. o. (n.d.).

EY. (2014). Worldwide personal tax guide: Income tax, social security and immigration. Retrieved

from http://www.ey.com/Publication/vwLUAssets/Worldwide_Personal_Tax_Guide_2013-

2014/$FILE/2013-2014%20Worldwide%20personal%20tax%20guide.pdf

Global Financial Integrity. (2015, December). Illicit Financial Flows from Developing Countries:

2004 -2013. Retrieved from http://www.gfintegrity.org/issues/data-by-country/

Government of the Kingdom of Eswatini. (2017). Estimates for the years from 1st April 2017 to 31st

March 2018.

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IMF. (2003). Eswatini: Selected Issues and Statistical Appendix.

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IMF. (2010). Kingdom of Eswatini: 2010 Article IV Consultation - Staff Report.

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IMF. (2015). Article IV: The Kingdom of Eswatini.

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Reforms.

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Sosa Padilla,. (2017). Fiscal Rules: Coping with Revenue Volatility in Lesotho and

Eswatini. Washington, D.C.: International Monetary Fund, 2017.

Ministry of Economic Planning and Development. (2009). Eswatini Economic performance report.

Ministry of Economic Planning and Development. (2017). External Assistance in Eswatini

2015/2016.

Ministry of Economic Planning and Development. (2017). Q1 Budget Performance Report

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Ministry of Education and Training. (2015). Annual Education Census (AEC) Report 2015

(Education Statistics).

Ministry of Finance . (2017). Historical Budgetary Data provided to DNA directly by the Ministry of

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Ministry of Finance. (2016). Eswatini Budget Speech.

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Government--PR_374119

SACU. (2016). Annual Report 2016.

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Eswatini Central Statistical Office. (2017). Eswatini CSO. Retrieved from

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The Kingdom of Eswatini. (2013). Eswatini Government Programme of Action for the year 2014-

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to-regain-agoa-status.html

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review-terrorism-law-as-precondition-for-agoa-readmission.html

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conomic%20Fact%20Sheet_Pretoria_Eswatini_11-16-2016.pdf

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61


Appendix 1: Fiscal space projections

This Appendix describes the details of the base-scenario projection exercise discussed above, and

then describes the results of a sensitivity analysis.

The base-scenario programming assumptions are intended to be relatively simplified, to make the

calculation relatively easy to carry out and to understand. The following general explanatory points

are noted:

1. The assumptions are “programming” assumptions. They are not intended, and should not be

understood, as forecasts, but rather as plausible possibilities for planning purposes. In

particular, the growth rates of government expenditure are intended as plausible policy settings;

2. In general, the aim for the base scenario is to set programming assumptions that are “neutral.”

For example, Lesotho’s merchandise export volumes are assumed to grow at the same rates as

the world trade volume, so Lesotho exports maintain the same share of the world trade volume.

The volume of Lesotho’s merchandise imports is assumed to grow at the same rates as real

GDP, so merchandise imports would tend to maintain the percentage of GDP. For recurrent

expenditure, the assumption that staff sizes will grow at the same rate as the population would

be neutral in a similar sense. So is the assumption that government wage rates would grow at

the same rate as per-capita nominal GDP;

3. The elasticities that help determine the government’s revenue performance are taken to be

somewhat higher than one in the initial projection year, and then to decline gradually toward one

over the projection period. In general, it is inadvisable to apply econometric point estimates

based on historical data for these values, for at least two reasons. The first is that future

elasticities are likely to differ from historical elasticities. The second is that, say, if the elasticity

of a given revenue line with respect to nominal GDP is assumed always to exceed (be less

than) one, the projected revenue flow would rise (diminish) indefinitely as a percentage of GDP;

4. It is straightforward to set programming assumptions that adjust gradually over the projection

period, using (“geometric”) adjustment formulas. This is useful for several different assumption

lines. For example, a large proportion of the assumptions are set as growth rates. These can be

assumed to rise or diminish gradually from their initial projection values toward their final

projection values. Another way to use a gradual adjustment would be for the elasticity of a given

revenue line with respect to nominal GDP to take on an initial value somewhat different from

one, but then gradually adjust toward a long-term value of one.

For the base scenario, the programming assumptions are as follows:

Table A.1 Projection results for the fiscal-space projection exercise (base scenario)

GENERAL GOVERNMNET FINANCIAL ACCOUNTS: FY16

-17

Average

: FY21

-22 FY17-

18-

FY21-22

Per cent of GDP

(A) Total priority non-interest expenditure: 12.0 12.3 12.2

Total education expenditure 7.2 7.4 7.4

Total health expenditure 4.1 4.2 4.2

Total social-protection expenditure 0.6 0.6 0.6

62



-17

Average

: FY21

-22 FY17-

18-

FY21-22

Priority recurrent expenditure: 11.5 11.9 11.8

Recurrent education expenditure: 7.0 7.2 7.2

Expenditure on education staff 5.3 5.5 5.5

Non-staff recurrent education expenditure: 1.7 1.7 1.7

Recurrent education expenditure on goods and services 0.3 0.3 0.3

Other non-staff recurrent education expenditure 1.3 1.4 1.3

Recurrent health expenditure: 4.0 4.1 4.0

Expenditure on health staff 1.5 1.6 1.6

Non-staff recurrent health expenditure: 2.4 2.5 2.5

Recurrent health expenditure on goods and services 1.7 1.7 1.7

Other non-staff recurrent health expenditure 0.8 0.8 0.8

Social-welfare expenditure 0.6 0.6 0.6

Expenditure on social welfare staff 0.0 0.0 0.0

Non-staff recurrent social welfare expenditure: 0.5 0.6 0.6

Recurrent social welfare expenditure on goods and services 0.0 0.0 0.0

Other non-staff recurrent social welfare expenditure 0.5 0.6 0.6

Priority non-recurrent expenditure: 0.5 0.4 0.3

Non-recurrent education expenditure 0.3 0.2 0.2

Non-recurrent health expenditure 0.2 0.1 0.1

Non-recurrent social welfare expenditure 0.0 0.0 0.0

(B) Tax and non-tax revenue (excl. external grants) (+): 33.1 33.5 33.9

Tax revenue: 32.6 33.0 33.4

Income tax: 11.2 12.4 13.2

Company income tax 3.7 4.1 4.4

Personal income tax 7.5 8.3 8.9

Other income tax: 0.0 0.0 0.0

Taxes of international trade and transactions 13.0 11.0 9.3

Customs and other import duties (SACU) 13.0 11.0 9.3

Excises 0.0 0.0 0.0

Domestic taxes on goods and services 8.3 9.5 10.8

Value-added tax on internal transactions 5.4 5.7 5.7

Alcohol and tobacco products 0.0 0.0 0.0

Other goods and services 0.0 0.0 0.0

Taxes on specific services 0.0 0.0 0.0

Profits of fiscal monopolies 0.7 0.7 0.7

Taxes on use of good or on permission to use goods 2.0 2.1 2.1

Fuel tax 1.8 1.9 1.9

Other 0.2 0.2 0.2

Other taxes on goods and services 0.1 0.8 2.2

Other taxes 0.1 0.1 0.1

63



-17

Average

: FY21

-22 FY17-

18-

FY21-22

Non-tax revenue (excl. external grants) (+): 0.5 0.5 0.5

Property income 0.1 0.1 0.1

Sale of goods and services 0.2 0.2 0.2

Fines, penalties and forfeits 0.1 0.1 0.1

Other non-tax 0.1 0.1 0.1

(C) External grants (+): 1.2 1.0 1.0

External grants for current expenditure 0.0 0.0 0.0

External grants for capital expenditure (projects) 1.2 1.0 1.0

Total government non-interest expenditure 47.2 46.7 45.3

Recurrent expenditure 37.4 38.6 38.3

Non-recurrent expenditure 9.8 8.1 6.9

(D) Total non-priority non-interest expenditure (-): -35.2 -34.5 -33.1

Non-priority recurrent expenditure: 25.9 26.8 26.5

Non-priority expenditure on staff 12.4 12.5 12.2

Non-staff recurrent non-priority expenditure: 13.5 14.2 14.3

Recurrent non-priority expenditure on goods and

services 5.6 6.1 6.3

Other non-staff recurrent non-priority expenditure 7.9 8.1 8.0

Non-priority non-recurrent expenditure 9.4 7.7 6.6

(E) External-debt disbursements (+): 0.4 0.3 0.3

External-debt disbursements (+) (US$ millions): 0.0 0.0 0.0

(F) External debt service (-): -1.3 -0.9 -0.7

External interest expenditure (-) -0.3 -0.3 -0.2

External interest expenditure (-) (US$ million) 0.0 0.0 0.0

External debt repayments (-) -1.0 -0.6 -0.5

External debt repayments (-) (US$ millions) -0.1 0.0 0.0

(G) Net internal financial flows (incl. internal interest) (+): 13.8 13.1 11.0

Net internal financial flows (excl. internal interest) (+): 0.0 0.0 0.0

Internal-debt disbursements (+) 10.1 0.0 0.0

Internal debt repayments (-) -6.9 0.0 0.0

Internal interest expenditure (-) -1.0 3.5 25.9

Discrepancy (+) 11.6 9.7 8.2

64


Table A.2 Projected priority expenditure (US dollars per child and exchange rate FY2016/17)

GENERAL GOVERNMNET FINANCIAL ACCOUNTS: FY16-

17

Average

: FY21-

22 FY17-

18-

FY21-22

US$ per child at prices and exchange rate of 2016

(A) Total priority non-interest expenditure:

$1,408.

6 $1,720.8

$1,978.

6

Total education expenditure $851.6 $1,044.4

$1,202.

0

Total health expenditure $488.5 $592.9 $678.3

Total social-protection expenditure $68.6 $83.5 $98.3

Priority recurrent expenditure:

$1,355.

5 $1,667.8

$1,925.

8

Recurrent education expenditure: $821.0 $1,013.9

$1,171.

5

Expenditure on education staff $625.0 $776.2 $899.7

Non-staff recurrent education expenditure: $196.0 $237.7 $271.8

Recurrent education expenditure on goods and

services $39.0 $47.2 $54.0

Other non-staff recurrent education expenditure $157.1 $190.4 $217.7

Recurrent health expenditure: $467.6 $572.2 $657.8

Expenditure on health staff $179.3 $222.7 $258.1

Non-staff recurrent health expenditure: $288.3 $349.5 $399.7

Recurrent health expenditure on goods and services $195.7 $237.2 $271.3

Other non-staff recurrent health expenditure $92.6 $112.3 $128.4

Social-welfare expenditure $66.9 $81.8 $96.6

Expenditure on social welfare staff $2.3 $0.0 $0.0

Non-staff recurrent social welfare expenditure: $64.6 $81.7 $96.6

Recurrent social welfare expenditure on goods and

services $0.4 $0.4 $0.5

Other non-staff recurrent social welfare expenditure $64.3 $81.3 $96.0

Priority non-recurrent expenditure: $53.2 $52.9 $52.8

Non-recurrent education expenditure $30.5 $30.5 $30.5

Non-recurrent health expenditure $20.9 $20.7 $20.5

Non-recurrent social welfare expenditure $1.8 $1.8 $1.7

65


Table A.3 Additional sensitivity analysis for the fiscal space projection exercise - enhanced expenditure on child protection

Scenario: 0 1 2 3 4 5 6 7

Assumptions that vary with scenarios:

Real GDP growth rate (National

currency)

Growth rate

remains

unchanged at

2% over the

projection

period.

Growth

rate

remains

unchanged

at 2% over

the

projection

period.

Growth

rate

remains

unchanged

at 2% over

the

projection

period.

Growth

rate

gradually

rises over

the

projection

period;

from 3.5%

in

FY2017/18

to 5.0% in

FY21/22

Growth

rate

remains

unchanged

at 2% over

the

projection

period.

Growth rate

remains

unchanged at

2% over the

projection

period.

Growth

averages a

rate of -1%

over the

projection

period

Growth

averages a

rate of -1%

over the

projection

period

Elasticity of company-tax revenue with

respect to nominal GDP

Remains at 1

over the

projection

period.

Gradually

increases

over the

projection

period;

from 1.0

in FY16/17

to 1.5 in

FY21/22

Remains

at 1 over

the

projection

period

Gradually

increases

over the

projection

period;

from 1.0

in FY16/17

to 1.5 in

FY21/22

Remains

at 1 over

the

projection

period.

Remains at 1

over the

projection

period.

Remains at 1

over the

projection

period.

Remains at 1

over the

projection

period.

Elasticity of personal income tax

revenue with respect to nominal GDP

Remains at 1

over the

projection

period.

Gradually

increases

over the

projection

period;

from 1.0

in FY16/17

to 1.5 in

FY21/22

Remains

at 1 over

the

projection

period

Gradually

increases

over the

projection

period;

from 1.0

in FY16/17

to 1.5 in

FY21/22

Remains

at 1 over

the

projection

period.

Remains at 1

over the

projection

period.

Remains at 1

over the

projection

period.

Remains at 1

over the

projection

period.

66


Scenario: 0 1 2 3 4 5 6 7

VAT rate on alcohol and tobacco

products

Remains

unchanged at

14% over the

projection period

Remains

unchanged

at 14%

over the

projection

period

Gradually

increases

over the

projection

period;

from

14.0% in

FY16/17

to 18% in

FY20/21.

Remains

unchanged

at 14%

over the

projection

period

Remains

unchanged

at 14%

over the

projection

period

Remains

unchanged at

14% over the

projection period

Remains

unchanged at

14% over the

projection

period

Remains

unchanged at

14% over the

projection

period

Elasticity as related to Fuel Levy

Remains at 1

over the

projection

period.

Remains

at 1 over

the

projection

period.

Gradually

increases

over the

projection

period;

from 1.0

in FY16/17

to 3.0 in

FY21/22.

Remains

at 1 over

the

projection

period.

Remains

at 1 over

the

projection

period.

Remains at 1

over the

projection

period.

Remains at 1

over the

projection

period.

Remains at 1

over the

projection

period.

Elasticity of education staff size with

respect to child population

Remains at 1

over the

projection

period.

Gradually

increases

over the

projection

period;

from 1.0

in FY16/17

to 3.0 in

FY21/22.

Gradually

increases

over the

projection

period;

from 1.0

in FY16/17

to 3.0 in

FY21/22.

Gradually

increases

over the

projection

period;

from 1.0

in FY16/17

to 3.0 in

FY21/22.

Gradually

increases

over the

projection

period;

from 1.0

in FY16/17

to 3.0 in

FY21/22.

Remains at 1

over the

projection

period.

Remains at 1

over the

projection

period.

Remains at 1

over the

projection

period.

67


Scenario: 0 1 2 3 4 5 6 7

Elasticity of health staff size with

respect to total population

Remains at 1

over the

projection

period.

Remains

at 1 over

the

projection

period.

Remains

at 1 over

the

projection

period.

Remains

at 1 over

the

projection

period.

Remains

at 1 over

the

projection

period.

Remains at 1

over the

projection

period.

Remains at 1

over the

projection

period.

Remains at 1

over the

projection

period.


expenditure to child population

Remains at 1

over the

projection

period.

Gradually

increases

over the

projection

period;

from 1.0

in FY15/16

to 3.0 in

FY20/21.

Gradually

increases

over the

projection

period;

from 1.0

FY15/16

to 2 in

FY20/21.

Gradually

increases

over the

projection

period;

from 1.0

in FY15/16

to 5.5 in

FY20/21.

Gradually

increases

over the

projection

period;

from 1.0

in FY15/16

to 5.5 in

FY20/21.

Remains at 1

over the

projection

period.

Remains at 1

over the

projection

period.

Remains at 1

over the

projection

period.

Elasticity of non-priority recurrent

expenditure to nominal GDP growth

Remains at 1

over the

projection

period.

Remains

at 1 over

the

projection

period.

Remains

at 1 over

the

projection

period.

Remains

at 1 over

the

projection

period.

Decreases

gradually

over the

projection

period;

from 1.0

in FY16/17

to 0.5 in

FY21/22.

Remains at 1

over the

projection period

Remains at 1

over the

projection

period

Remains at 1

over the

projection

period.

SACU transfer growth rate

Grows at 0.3%

over the

projection period

Grows at

0.3% over

the

projection

period

Grows at

0.3% over

the

projection

period

Grows at

0.3% over

the

projection

period

Grows at

0.3% over

the

projection

period

Grows at 0.3%

over the

projection period

Grows at 0.3%

over the

projection

period

Grows at -

0.3% over the

projection

period.

68


Scenario: 0 1 2 3 4 5 6 7

Execution factor increase for non-

recurrent priority expenditure

Grows at 0.3%

over the

projection period

Grows at

0.3% over

the

projection

period

Grows at

0.3% over

the

projection

period

Grows at

0.3% over

the

projection

period

Grows at

0.3% over

the

projection

period

Increases from

1.0 in

FY2016/17, to

2.0 over the

projection

period.

Grows at 0.3%

over the

projection

period

Grows at 0.3%

over the

projection

period

Results:

Average tax revenue/GDP, FY2016–2021 32.35% 32.97% 32.85% 32.80% 32.35% 32.35% 33.33% 32.16%

Average priority expenditure/GDP,

FY2016–2021 12.13% 12.28% 12.19% 12.20% 12.34% 14.38% 12.57% 12.13%

Average priority expenditure per child

(US$ at FY2016 prices and exchange

rate), FY2016–2021

$581.65 $588.54 $584.13 $602.67 $591.24 $687.38 $552.22 $581.65

Net internal debt flow/GDP, FY2016–

2021 13.63% 13.16% 13.18% 12.97% 13.84% 15.87% 13.93% 13.82%

Total government debt/GDP, FY2021 34.56% 33.50% 33.60% 32.76% 34.99% 41.16% 35.25% 35.08%

Fiscal Space for Children: An Analysis of Options in...1.1 The objective of the Fiscal Space...

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Transcript of Fiscal Space for Children: An Analysis of Options in...1.1 The objective of the Fiscal Space...