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FISCAL PRUDENCE: WHAT WILL IT TAKE?

21/02/2018 07:04:00 By Thabiso Dlamini

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ONE of the key strategies that came out as a result of the fiscal crisis in 2010/11 was the Economic Recovery Strategy (ERS), which was supposed to pull the country out of stagnation.

Specifically, through the strategy the country was to achieve a growth rate of five per cent and create more than 30 000 jobs by 2014. The success of ERS depended on prudent fiscal policies and development of a vibrant private sector in Swaziland. In terms of the prudent fiscal policies, government also rolled out the Fiscal Adjustment Roadmap (FAR) with a primary objective to reduce the fiscal deficit to around three per cent of GDP by 2014.

At the inception of FAR, government banked on a wage freeze and a vigorous increase in domestic taxes. Also on the table, government intended to strengthen public financial management and increase domestic revenue by introducing Value Added Tax (VAT).

The ballooning civil service wage bill was also part of FAR, in which government hoped to reduce it by 20 per cent through the Enhanced Voluntary Early Retirement Scheme, among other fiscal adjustment mechanisms.

It is now 2018, and the country is still grappling with growth rates of 1.9 per cent in 2015 down to 1.3 per cent in 2016/17. To be fair, according to the World Economic Outlook, growth in sub-Saharan Africa has been declining in recent years but projected to rebound in the period ahead, such that regional growth is anticipated to reach 2.6 per cent and 3.5 per cent in 2017 and 2018 respectively.

If anything, Swaziland too, should at least be achieving growth rates that hover around 2.6 per cent to 3.5 per cent rather than the disappointing 1.3 to 1.9 per cent growth rates. The persistent weak performance of the South African economy, including droughts in the region has reduced Southern African Customs Union (SACU) revenue inflows. For example, Swaziland SACU revenue has declined from about 16.1 per cent of GDP in 2013/14 to 12.2 per cent of GDP in 2016/17. According to ERS, the key to achieving higher growth rates (5 per cent and more) is through macroeconomic management, structural reforms, infrastructure development and pro-poor investment, as well as investment in human capital and income generation.

Has the country achieved anything sizeable in terms of the Fiscal Adjustment Roadmap? Well, looking at the country’s fiscal position, it is clear that government deficits have been widening, to about 12.3 per cent of GDP in 2016/17, three times higher than it was in 2015/16. The increase in the deficit owing to severely diminished SACU revenue comes with increased government payment arrears. The private sector in Swaziland is still largely dependent on government spending, which explains why economic activities slow down significantly when government faces fiscal challenges.

So in terms of developing a vibrant private sector as part of the goals of ERS, the country still has a long way to go. With these deficit challenges, government intends to reduce the fiscal deficit to 8.2 per cent of GDP in 2017/18. As a member state of the Southern African Development Community (SADC), the country is obligated to achieve a fiscal deficit of less than three per cent by 2018. The reality for our government at the moment is that it can only hope to reduce the fiscal deficit to 8.2 per cent within the target period, which indeed sets back all efforts towards nominal convergence within SADC targets.

Though government is struggling to get the civil service wage bill into order, it has successfully increased revenue generation through VAT, which replaced the sales tax. Now, more of the money collected through these added taxes in the economy must go into paying for government expenditures that will benefit all Swazis because if it does not, taxes and government deficits will continue to choke the ordinary Swazi and the private sector which is failing to grow.

Growing fiscal debt can pose serious threats to financial stability in the country. Increased growth in public debt indicates that government is not necessarily using the available money generated through taxes efficiently and it is also an indication that government is not diversifying enough of its income sources to let the G-wallet and the economy breathe.

When government has huge domestic debt which includes huge arrears on local suppliers, people doing business with government may protect themselves by hiking their prices, which in turn increases the cost of public service provision. Private sector confidence on government’s ability to pay is also negatively affected, while consumers and investors may anticipate increases in tax rates as government tries to balance up its cash flow challenges.

Government has an extensive reach in activities across many of the sectors of the economy in Swaziland, and so an accumulation of government arrears basically can have dire consequences on the entire economy, destabilising the country’s financial integrity and cutting prospects for economic growth.