Macro Poverty Outlook Public Disclosure Authorized ...documents.worldbank.org/curated/en/926691525954797052/pdf/126… · Public Disclosure Authorized Southern African Customs Union

MPOMacro Poverty Outlook

Country-by-country Analysis and Projections for the Developing World

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Macro Poverty Outlook

Spring Meetings

2018

Southern African Customs Union

2 MPO Apr 18

Recent developments Economic activity decelerated in all SACU member countries during 2016-2017. In Namibia and South Africa, the average per capita income even declined during the period, as GDP growth could not catch up with the growth of the popu-lation. The regional economic slowdown was the result of the end of the commodi-ty super-cycle, members’ fiscal consolida-tion efforts, and the impact of the drought on agricultural production. The reversal of the commodity super-cycle and sub-dued global demand for minerals also resulted in a sluggish mining activity, which, in turn, had spill-over effects on tertiary sector activities, exports, and gov-ernment revenues. Most SACU member countries have ex-hausted their fiscal buffers due to previ-ous expansionary fiscal cycles and relat-ed public debt accumulation. During 2009-2017, the level of total public debt in Swaziland, South Africa and Namibia increased by 13 percent, 22 percent and 26 percent of GDP, respectively. With limited external financing options, the fiscal expansion led to large domestic borrowings and crowding-out of the private sector. The lack of policy com-mitment to correct a deteriorating mac-roeconomic and fiscal situation, resulted in the sovereign credit rating down-grades of South Africa and Namibia and thus, a loss of investors’ confidence more broadly. By 2016, most SACU members had no other choice but to reverse the course of

their fiscal stance and start curbing public spending mostly through cuts in capital expenditures, which then pre-cipitated the overall deceleration of aggregate demand and growth. The efforts of individual SACU members to raise their tax revenues have been largely thwarted by the depressed ag-gregate demand and subdued economic activity. Notwithstanding the positive effect of the depreciation of the South African Rand on the customs revenue collections denominated in Rands, the adjustment of the customs and tariffs at SACU level was also insufficient to off-set the impact of the lower domestic demand on indirect tax collection. Even after considering the recent up-ward GDP revision, the poor growth performance of the South African econ-omy resulted in lower customs and ex-cise collections as the main sources of SACU revenue pool, for which South Africa contributes more than 95 per-cent. The economic deterioration in South Africa has had adverse effects on the rest of the SACU member countries through multiple channels. Given the scale of South African demand for goods and services from the region, the trade channel is the most important direct channel together with the SACU transfers. These two channels have sec-ondary effect on government revenues and fiscal deficits in all SACU member countries but with different levels of intensity. Lesotho and Swaziland are the most vulnerable due to their high export dependence on South Africa and high reliance on SACU transfers. Na-mibia and Botswana are somewhat less

SOUTHERN AFRICAN CUSTOMS UNION

exposed given their lower share of the SACU transfers in their total revenues and lower export dependence on South Africa. Accordingly, the recent econom-ic deterioration in South Africa and the subdued aggregate consumption and imports in the region, resulted in mod-erate decline of the SACU transfers as a ratio of GDP in 2017. The general economic slowdown in the SACU region and contraction of per capita GDP in Namibia and South Afri-ca - the largest country in the region in terms of GDP and population, contribut-ed to increase in poverty in the region. The share of population living below USD1.9 a day (in 2011 PPP terms) in the region increased from 20.36 percent in 2015 to 20.74 percent in 2017.

Outlook Economic activity in the region is ex-pected to recover gradually in the medi-um-term, but to remain below the growth performance recorded during 2010-2015. In Namibia and South Africa, GDP growth is projected to outpace the popula-tion growth and therefore to restore posi-tive per capita income growth. The medium-term growth projection is based on a recovery of the mining and agriculture sectors as well as related services sectors. Mining production and exports are expected to benefit from further increases in global demand for minerals and international prices. With relatively subdued domestic consump-tion and imports, net exports of the

GDP growth in the SACU region has decelerated in 2016 and 2017 due to com-

bination of factors: the end of the commodity super-cycle, the slowdown of mining

activity, the pursuit of fiscal consolidation efforts in most member countries,

and the effects of a regional drought. In the medium-term, economic activity in

the region should moderately recover as mining production, agricultural activity

and their related services sectors rebound. This recovery is however not expected

to be strong enough, especially in South Africa, to increase SACU transfers,

which are projected to decrease gradually as a share of GDP until 2020.

The continuation of parallel fiscal consolidation processes will remain critical

to preserving the region’s macro and financial stability. Reforms to foster regional

trade and increase prospects for non-commodity exports would encourage regional

economic integration, product diversification and job creation.

3 MPO Apr 18

As part of the collaboration between the World

Bank Group and South African Customs Union

(SACU) Secretariat, the World Bank has agreed to

provide regular projections of SACU transfers

twice a year. This activity follows an initial en-

gagement between the SACU Secretariat and

World Bank Group on the Review of the SACU

Revenue Sharing Arrangement in a workshop

held in 19-20 October 2017 in Johannesburg,

South Africa.

The aim of this exercise is to provide independ-

ent estimates of SACU transfers according to

World Bank medium term macro projections.

The projections of SACU transfers are done con-

sistently within the global macro-forecasting

model that the World Bank is using within the

Macroeconomics, Trade & Investment Global

Practice, called MFMOD. This model ensures

consistency within the SACU member countries

and the developments in the rest of the world in

terms of GDP growth, trade, global price devel-

opments and other macro, fiscal and balance of

payments aggregates.

The estimates of the SACU transfers for each

Member Country is based on the SACU revenue

sharing formula described in the 2002 agree-

ment which has been in place since 2005. The

revenue share accruing to each SACU Member

State is calculated from three basic components:

a share of the customs pool; a share of the excise

pool; and a share of a development component.

These three different components are distribut-

ed as follows.

The customs component is allocated according

to each country’s share of total intra-SACU trade,

including re-exports. The excise component, net

of development component, is allocated on the

basis of the country’s share in SACU GDP. Finally,

the development component, fixed at 15 percent

of the total excise pool, is distributed to all SACU

members according to the inverse of each coun-

try’s per capita GDP.

The novelty of the World Bank approach in pro-

jecting the SACU transfers is that it projects the

customs and excise collections for each country

based on behavioral equations and thus, the

total SACU revenue pool. Described in non-

technical terms, the excise collections of each

SACU Member Country are set as a function that

is mainly determined from the volume of house-

hold consumption, whereas the customs collec-

tions are set as a function that depends mostly

on imports.

After estimating the excise and customs collec-

tions for each Member Country, the SACU reve-

nue sharing formula is applied where the World

Bank is using its own model based projections for

the major components that enter into the SACU

revenue sharing formula such as: GDP, GDP per

capita and intra SACU trade. The formula adjust-

ment errors that occur after t+2 years for 2016

and 2017, has already been accounted for in the

SACU transfer projections for 2018 and 2019.

Accordingly, the projections of the SACU trans-

fers can be different and even more conservative

compared to the official data revealed by the

Member Countries. This can especially be the

case for South Africa’s projections because the

World Bank estimates can be more conservative

compared to the ones used by the national au-

thorities. The more conservative estimates for

the South Africa’s GDP growth and other macro

aggregates will affect the SACU transfers to the

rest of the Member Countries because South

Africa is the major contributor to the SACU reve-

nue pool (contributes by more than 95 percent

of the revenue pool).

As presented in this text, the SACU transfers as a

share of GDP have a declining trend in each Mem-

ber Country. The explanation for their declining

trend in terms of GDP is for the following reasons:

I) Despite the recovery of the South African

economy in 2017, the tax collection, including

the customs and excise, has not improved. This

trend is expected to continue in medium term

where the pace of tax collections will not follow

the pace of GDP growth.

II) Although South African GDP growth is project-

ed to accelerate until 2020, it will still remain the

lowest among SACU Member Countries. Conse-

quently, it is expected that growth in the reve-

nue pool will be lower than that of GDP in all

SACU countries but South Africa.

IV) The impact of the rand appreciation will have

positive impact on the volume of imports in South

Africa, but nevertheless, the nominal Rand appre-

ciation will have dampening effect on the nominal

amount of customs collected. The latter will par-

tially offset the impact of higher volume of imports

on the nominal value of customs collections.

V) In the case of South Africa, the SACU transfers

decline in 2017 as a share of GDP and also in nom-

inal terms because, as the SACU revenue sharing

formula is set, South Africa received the remaining

amount of excise and collections after they are

spread to the rest of the Member Countries.

BOX 1 SACU / World Bank projections of SACU transfers

4 MPO Apr 18

SACU region are projected to contribute positively to the regional economic growth. Agricultural production should also rebound with the prospects of fa-vorable climatic conditions, after years of drought. Services activities should indirectly benefit from the recovery of the mining and agriculture sectors. In South Africa, the expected gradual economic recovery and policy measures to improve investors’ confidence should help strengthen the Rand moderately. In turn, the moderate Rand apprecia-tion should stimulate the volume of imports, although the higher volume of imports on customs revenue collections will be partially offset by Rand appreci-ation that will dampen the nominal val-ue of customs revenue collections de-nominated in Rands. In addition, the announced increase of excise duties on alcohol and tobacco in South Africa (for which the price elasticity of demand is relatively rigid), is expected to contrib-ute to the SACU revenue pool. Never-theless, the aggregate demand in the SACU region will remain subdued due to the low growth prospects and this will impact the SACU revenue collec-tions that will remain much below their level of 2013-2105 period. The aggregate demand will be further restrained by the government spending due to the continued fiscal consolidation efforts in South Africa and Namibia, and the ex-pected fiscal consolidations in Swazi-land and Lesotho. Accordingly, the SACU transfers as a share of GDP will continue with their gradual declining trend till 2020.

The gradual economic recovery of the SACU region together with raising per capita income in South Africa is project-ed to reduce poverty in the medium term. The share of population in the SACU region living below USD1.9 a day (in 2011 PPP terms) is expected to de-cline by 0.6 percentage points to 20.14 percent in 2020.

Risks and challenges A lack of fiscal discipline or policy credi-bility in South Africa is a significant risk factor for the region as a whole. In South Africa, the risk stems mainly from the fact that fiscal consolidation efforts could be compromised with the expected elec-tions. The pursuit of the fiscal consolida-tion process is indeed critical to preserve macroeconomic and financial stability and restore the confidence of both do-mestic and foreign investors. As we have seen in the past, further intensive bor-rowing on the domestic markets would crowd-out private investment, deterio-rate investor’s confidence and eventually jeopardize the macroeconomic stability of the region. The SACU member countries are also highly vulnerable to the vagaries of the mining sector and international mineral prices. Vulnerability arises from the possi-ble slower recovery of the global demand for minerals and volatile international prices. Furthermore, not all mineral prices are projected to rebound such as coal, iron ore and uranium. An unexpected further

increase in oil prices (and related deterio-ration of the terms of trade), is another potential risk that would have an adverse effect for the region. Reforms to foster regional trade and increase prospects for non-commodity exports would encourage regional eco-nomic integration, product diversifica-tion and job creation. These are among the key challenges. In particular, devel-oping the regional value chains and integrating further into global value chains, would provide significant bene-fit, not only in terms of specialization and productivity, but also in terms of technology transfer and know-how. These factors could contribute to boost income and reduce poverty. Over the medium term, SACU member countries would benefit from adopting fiscal stabilization mechanisms to smooth the impact of volatile SACU revenue on fiscal sustainability and public investment programs in particu-lar. The focus on fiscal stabilization mechanisms is further warranted by the constraints on monetary and exchange rate policies in region, given the peg to the Rand. Policy options would include adopting tailored counter-cyclical fiscal rules, amending the revenue-sharing mechanism with a view to improving SACU revenue predictability and re-ducing their volatility, establishing a stabilization fund, and developing in-struments to finance regional projects (e.g., industrial projects and regional value chains projects).

FIGURE 1 SACU / Real GDP growth (3-year moving average) FIGURE 2 SACU / Net SACU transfers in the SACU

Sources: WDI and World Bank staff calculations. Sources: WDI, SACU Secretariat and World Bank staff calculations.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0

5

10

15

20

25

30

35

2006 2008 2010 2012 2014 2016 2018f 2020f

Botswana Lesotho NamibiaSwaziland South Africa (rhs)

Percent of GDP Percent of GDP

0

1

2

3

4

5

6

7

8

9

2006 2008 2010 2012 2014 2016 2018f 2020f

Botswana Lesotho NamibiaSwaziland South Africa

Percent

5 MPO Apr 18

Sources: WDI, SACU Secretariat and World Bank staff calculations. Notes: e = estimate, f = forecast.

TABLE 1 SACU / Real GDP growth and net SACU transfers as percent of GDP

2010 2011 2012 2013 2014 2015 2016 2017e 2018f 2019f 2020 f

GDP growth

Botswana 8.6 6.0 4.5 11.3 4.1 -1.7 4.3 1.8 3.0 3.3 3.8

South Africa 3.0 3.3 2.2 2.5 1.8 1.3 0.6 1.3 1.4 1.8 1.9

Swaziland 3.8 2.2 4.7 6.4 1.9 0.4 1.4 1.9 1.1 1.7 1.8

Lesotho 6.1 6.9 6.0 1.8 3.1 2.5 2.4 3.1 1.8 2.6 2.8

Namibia 6.0 5.1 5.1 5.6 6.4 6.0 1.1 -1.0 1.5 2.3 3.0

Net SACU transfers (percent of GDP)

Botswana 7.1 5.1 7.6 10.6 8.7 10.5 8.7 6.5 6.4 6.3 5.5

South Africa 0.8 0.8 0.7 0.9 0.9 0.9 0.9 0.2 0.2 0.2 0.2

Swaziland 11.7 5.6 7.3 15.8 14.7 14.7 12.4 13.1 10.8 9.1 8.5

Lesotho 20.4 10.7 12.5 24.4 22.1 23.9 19.4 17.7 16.2 13.5 11.8

Namibia 7.5 5.7 6.7 11.2 10.6 12.4 10.6 8.9 8.7 7.7 7.6

Nominal net SACU transfers (annual growth in percent)

Botswana -30.2 -14.5 58.2 70.8 0.3 25.7 4.0 -23.5 5.6 8.3 1.9

South Africa -9.4 6.3 1.0 29.7 10.0 9.4 4.8 -53.4 -8.3 4.4 -7.1

Swaziland -37.4 -47.6 46.3 145.1 1.3 6.3 -10.4 12.8 -11.7 -9.9 -0.2

Lesotho -27.2 -39.4 27.3 116.7 1.5 17.7 -11.5 -1.2 -1.4 -10.1 -6.3

Namibia -27.6 -16.3 38.6 93.3 6.7 24.6 -6.6 -12.7 3.2 5.5 6.9

6 MPO Apr 18

Recent developments Botswana’s economic growth slowed down from 4.3 percent in 2016 to 1.8 per-cent in 2017. This decline was the result of a contraction of the mining sector and a slow-down of most non-mining activi-ties. Mining production shrank because of the closure of the Bamangwato Con-cessions Limited (BCL) copper, cobalt and nickel mines in October 2016. Re-flecting the recovery of the global de-mand for minerals, the production of diamond increased by more than 10 per-cent and the production of coal and gold also expanded, but this was insufficient to offset the impact of the closure of the BCL mines. The contraction of the min-ing sector had spillover effects on the services sector. The growth of the ser-vices sector was cut to 3.2 percent in 2017 and impacted strongly trade, transport, real estate activities and government services. Electricity production and dis-tribution decreased with the closure of the Botswana Power Corporation, whose main client was the BCL mine. On the upside, a limited boost to the economy was provided by the recovery of the agri-cultural sector after years of drought. The manufacturing production expanded at an unchanged pace. The fiscal policy in FY2017/18 continues to be geared toward increased capital spend-ing and the continuation of the implemen-tation of the Economic Stimulus Program imposed the previous FY. With lower rev-enues due to lower SACU receipts, the

fiscal position is projected to switch from a small surplus in FY2016/17 to a small defi-cit of 1.3 percent of GDP in FY2017/18. As a result, Bostwana’s large current account surplus has narrowed to 10.2 percent of GDP, reflecting higher imports, and lower inflows on the basis of SACU receipts. Monetary policy was accommodative in 2017 and the Bank of Botswana (BoB) re-duced the policy rate by 50 basis points in November 2017. The nominal exchange rate appreciated slightly against the US Dollar in 2017 within the band of 0.26 point determined by the BoB. Inflation in 2017 increased slightly to 3.3 percent, and is attributable to higher import prices es-pecially oil. Economic growth in Bostwana has been pro-poor and has led to significant and rapid poverty reduction, especially in ru-ral areas. Between 2002/03 and 2015/16, the share of the population living on less than USD1.90 a day at the 2011 PPP ex-change rate declined steadily from 29.8 percent to 12.7 percent (Figure 2). This has reflected a combination of equitable growth, demographic changes (e.g., de-creasing fertility rates and dependency ratios), job creation (especially of agricul-tural employment in rural areas), and ex-pansion of social assistance schemes (especially direct transfers to rural house-holds). However, inequality in Botswana remains high with a Gini coefficient last estimated at 60.5 in 2009/10. Statistics Bot-swana recently finished collecting new household consumption data based on the Botswana Multi-Topic Survey 2015/16 and the new poverty data are expected this 2018/19.

BOTSWANA

FIGURE 1 Botswana / Share of each production sector in total value added

FIGURE 2 Botswana / Actual and projected poverty rates and real GDP per capita

Sources: Bank of Botswana financial statistics and World Bank staff calculations. Source: World Bank. Notes: see table 2.

In 2017, Botswana recorded a slow down

of economic activity across the mining

and non-mining sectors. In the medium-

term, the development of the mining and

service sectors as well as the implementa-

tion of large public investment projects

are expected to push real GDP growth

above 3 percent. Poverty had already been

reduced to 12.7 percent in 2016 and is

projected to decline further by 0.4 percent-

age point annually to reach 11.5 percent

of the population by 2020.

Table 1 2017

Population, million 2.3

GDP, current US$ billion 17.6

GDP per capita, current US$ 7504

International poverty rate ($1.9)a 18.2

Lower middle-income poverty rate ($3.2)a 37.1

Upper middle-income poverty rate ($5.5)a 57.5

Gini coefficienta 60.5

Life expectancy at birth, yearsb 65.8

(a) M ost recent value (2009), 2011 PPPs.

Source: WDI, M acro Poverty Outlook, and off icial data.

Notes:

(b) M ost recent WDI value (2015)

0

10000

20000

30000

40000

50000

0

10

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30

40

50

60

70

80

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

International poverty rate Lower middle-income pov. rateUpper middle-income pov. rate GDP pc

Poverty rate (%) GDP per capita (constant LCU)

0

10

20

30

40

50

60

70

80

90

100

2013 2014 2015 2016 2017

Percent

Agriculture Manufacturing Mining Services

7 MPO Apr 18

Outlook In the medium term, Bostwana economic growth rate is projected to recover above 3 percent and to be mainly led by the mining, services and construction sec-tors. The mining activity is expected to expand with the gradual recovery of the global demand for minerals. Services, which prospects are closely related to mining, are expected to remain the fast-est growing sector of the economy and to contribute the most to overall value addition after 2018. The construction sector is also expected to contribute sig-nificantly to growth because of the planned public investment projects in water, transport and energy. In particu-lar, the expansion of the power supply capacities of Morupule A station is pro-jected to reduce energy supply shortages and ease the pressures on the balance of payments from electricity imports. Fiscal expansion is expected to tempo-rarily continue in FY2018/19 with the completion of the priority projects in the 11th National Development Plan (2017-2023) before returning to past discipline. The fiscal deficit is expected to increase

to 1.6 percent of GDP in FY2018/19 and to turn into surpluses starting in FY2019/20. Higher expected mineral and non-mineral revenues are expected to compensate for lower SACU receipts. Budget surpluses will then contribute savings to the sovereign wealth fund (Pula Fund). Higher GDP growth and stronger domestic demand will put up-ward pressure on imports of goods and services and lead to a gradual narrowing of the current account surplus. Monetary policy is expected to preserve price sta-bility within the BoB target range and the exchange rate policy to manage the exchange rate within the determined band of fluctuation. Domestic demand pressures, rising oil prices, and the poli-cy of gradual depreciation of the Pula exchange rate, are expected to generate price pressures which are likely to lead to an acceleration of inflation to around 4 percent by 2020. With such a benign outlook, poverty is projected to further decline by some 0.4 percentage point annually to reach 11.5 percent by 2020. Achieving further pov-erty reduction will be challenging in the absence of more private sector job crea-tion, particularly in urban areas, and fast-er agricultural productivity in rural areas.

Risks and challenges Botswana remains vulnerable to external shocks because of its heavy dependence on commodity exports. A key risk to the outlook is therefore a slower than ex-pected recovery of global demand for commodities, especially diamonds. A slowdown in major developed economies would have the effect of lowering the pro-duction and exports of diamonds and other commodities with spillover effects on government revenues and the services sector. Further delays in upgrading elec-tricity and water infrastructure could also dampen non-mining activity, especially in the manufacturing sector. In the medium-term, the implementation of structural reforms in the water and energy sectors, as well as in the labor market, would be critical for strengthening Botswanas’ ca-pacity to manage volatility and sustaina-bility risks.

TABLE 2 Botswana / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2015 2016 2017 e 2018 f 2019 f 2020 f

Real GDP growth, at constant market prices -1.7 4.3 1.8 3.0 3.3 3.8

Private Consumption 3.9 2.2 1.9 2.5 3.0 3.2

Government Consumption 2.5 2.2 2.4 2.7 0.6 1.4

Gross Fixed Capital Investment 8.8 3.6 -1.5 2.2 4.2 5.1

Exports, Goods and Services -15.4 1.0 3.2 3.7 4.1 4.5

Imports, Goods and Services 2.3 -5.1 1.3 2.7 3.4 4.0

Real GDP growth, at constant factor prices -2.0 4.9 1.8 3.0 3.3 3.8

Agriculture 0.3 0.5 2.1 2.3 2.0 1.8

Industry -8.9 1.1 -1.4 2.5 3.0 3.2

Services 1.3 6.7 3.2 3.2 3.5 4.1

Inflation (Consumer Price Index) 3.1 2.8 3.3 3.6 3.8 4.0

Current Account Balance (% of GDP) 8.3 11.7 10.2 9.1 8.6 8.1

Fiscal Balance (% of GDP)a -4.8 0.6 -1.3 -1.6 1.3 1.5

Debt (% of GDP) 17.0 17.2 17.8 18.6 18.7 18.4

Primary Balance (% of GDP)a,b -4.2 1.2 -0.6 -0.9 2.1 2.4

International poverty rate ($1.9 in 2011 PPP)c,d 13.3 12.6 12.7 12.3 11.9 11.5

Lower middle-income poverty rate ($3.2 in 2011 PPP)c,d 30.2 29.0 29.0 28.6 27.9 27.0

Upper middle-income poverty rate ($5.5 in 2011 PPP)c,d 51.1 50.4 50.4 50.2 49.7 49.0

Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices.Notes: e = estimate, f = forecast. M ining is under " industry".(a) Fiscal year starts from April 1st.(b) Non-mineral primary balance.(c) Calculations based on 2009-CWIS. Nowcast: 2015 - 2017. Forecast are from 2018 to 2020.(d) Projection using neutral distribution (2009) with pass-through = 0.87 based on GDP per capita in constant LCU.

8 MPO Apr 18

Recent developments In 2017, economic activity in Lesotho in-creased by 3.1 percent, driven mainly by increased diamond production. Large diamond mining investment projects were carried out by two mines. The main factors constraining growth were the poor performance of the agricultural sector which grew by 0.7 percent (after experi-encing a strong recovery of 7.0 percent from El-Nino in 2016) and the services sector. The inflation rate declined to 5.3 percent from 6.3 percent in 2016 mainly because of the lagging effect of the 2016 agricultural recovery on the price of food & nonalcoholic beverages, which ac-counts for 36.1 per cent of the overall in-flation basket. The fiscal deficit exceeded 6 percent of GDP for the second year in a row as both revenues from the Southern African Cus-toms Union (SACU) and domestic reve-nues declined. Larger exports associated with the mining sector contributed to reduce the current account deficit by 4 percentage points of GDP to 6.5 percent of GDP. Notwithstanding, the improve-ment in the current account, the foreign exchange import coverage declined from 5.6 months in FY15/16 to 3.6 months in FY17/18 because the fiscal deficit was largely financed through a drawdown of reserves at the central bank due to lim-ited domestic borrowing opportunities. In early 2018, liquidity shortages and arrears emerged, as the drawing down of reserves has almost reached its limit.

However, the Central Bank remains com-mitted to maintaining the net internation-al reserves coverage. In 2017, Lesotho’s risk of external debt distress was revised from moderate to low. The revised rating was underpinned primarily by a rebasing of GDP, strong economic growth in 2017 and a 10 percent appreciation of ZAR/USD exchange rate. However, this improvement may hide a major increase in the stock of domestic debt due to large liabilities associated with pensions fund. Two actuarial reports doc-ument a shortfall in the range of 3.8 to 5.7 billion Maloti (10-15 percent of GDP) in the Public Officer’s Defined Contribution Pensions Fund (PODCPF). The economic growth Lesotho achieved over the past decades has not been shared equally, and poverty has remained wide-spread. Lesotho made virtually no pro-gress in reducing extreme poverty be-tween 2002 and 2010. The headcount pov-erty rate based on the international pov-erty line of USD1.90 per person per day (2011 PPP) was almost stagnant during the 2000s, falling slightly from 61.3 per-cent in 2002 to 59.7 percent in 2011. Esti-mates suggest that 57.7 percent of the population in 2017 is trapped in extreme poverty. Poverty in Lesotho is concentrat-ed in isolated rural areas, with limited income opportunities and high costs of service delivery. In addition, majority of the poor depend on the performance of the agricultural sector for their income. However, the agricultural sector has been underperforming following the drought in 2016 and as a result poverty reduction has been slow.

LESOTHO

FIGURE 1 Lesotho/ Real GDP growth and contributions to real GDP growth

FIGURE 2 Lesotho / Actual and projected poverty rates and real GDP per capita

Source: WDI and World Bank staff estimates. Source: World Bank. Notes: see table 2.

Economic growth improved slightly in

2017 driven by mining activities. Lower

SACU and domestic revenues coupled

with delayed fiscal consolidation are caus-

ing increased fiscal pressures. Although

the construction sector is expected to con-

tribute to growth in the near term, nar-

rowing fiscal space will limit the contri-

bution of the public sector to growth.

Sluggish growth, especially in the agri-

cultural sector is expected to lead to stag-

nation in poverty reduction.

Table 1 2017








School enro llment, primary (% gross)b 105.5




Notes:


-4

-2

0

2

4

6

8

2000 2002 2004 2006 2008 2010 2012 2014 2016

Percent

Agriculture Industry Services GDP at factor cost

0

2000

4000

6000

8000

10000

12000

14000

0

20

40

60

80

100

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020



9 MPO Apr 18

Outlook In the medium-term economic growth is expected to be driven by mining and con-struction activities associated with the second phase of the Lesotho highlands water project (LHWP2). However, growth is likely to be constrained by expected fiscal consolidation efforts, which are ex-pected to include cuts in the wage bill and expenditure on goods and services. With government revenues already accounting for approximately 39.8 percent of GDP in Lesotho, the scope (and appropriateness) for raising more revenues will remain limited. The fiscal deficit is projected to decrease to less than 4 percent of GDP in the medium-term. By contrast, the current account deficit is projected to widen in the medium-term, as imported capital goods associated with the Lesotho Highlands Water Project are expected to far exceed the projected increase in diamond exports. Imports for the Lesotho highlands water project will be financed by capital grants. The government is planning to finance the fiscal deficit by borrowing on the domestic

and international market. The financing will be mix of foreign development assis-tance and partly concessional loans (IDA, African Development Bank, EU, Saudi Fund, Abu Dhabi, BADEA and China). Given current growth projections, poverty rates are expected to remain stagnant. In the absence of specific measures to protect the poor, the expected fiscal consolidation may have a detrimental effect on the poor and vulnerable groups. However, priori-tizing the delivery of poverty-targeted labor market programs and increasing the efficiency and effectiveness of government spending would lead to faster poverty reduction and reduce inequality, even in a context of fiscal consolidation.

Risks and challenges The key risk to the outlook is the sub-dued growth prospects of South Africa and related shortfall in SACU revenue collection. Lower SACU revenue can only add pressure to Lesotho’s public finance. In addition, the prospects of Lesotho’s continued preferential access

to the U.S. market under AGOA remain unclear and weigh heavily on the com-petitiveness of the domestic textiles and clothing industry. Domestically, the main risk would be a delay in the fiscal and structural reforms and consequent lack of progress in fighting poverty. If the expected fiscal consolidation is not undertaken, the dete-rioration in the current account would be even larger, and the pressure on foreign exchange reserve and ultimately the peg could intensify. Rising debt and arrears, and uncertainty about the government’s fiscal position would adversely impact economic growth in the medium-term. Structural reforms to encourage the devel-opment of the private sector, especially improvement in business environment, are equally important to sustain growth in the medium term, create jobs and fight poverty. Indeed, although Lesotho spends a substantial proportion of its budget on social spending, social outcomes have not significantly improved. Thus, focusing policies on rapid private sector develop-ment and employment creation would lead to faster poverty reduction.

TABLE 2 Lesotho / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2015 2016 2017 e 2018 f 2019 f 2020 f

Real GDP growth, at constant market prices 5.6 2.3 3.1 1.8 2.6 2.8


Government Consumption -0.4 -1.9 -4.1 5.2 -5.3 -1.7

Gross Fixed Capital Investment 4.4 -3.3 12.6 1.4 0.7 0.9

Exports, Goods and Services 15.0 2.0 5.0 3.0 4.1 3.6


Real GDP growth, at constant factor prices 5.5 2.3 3.1 1.8 2.6 2.8

Agriculture -7.2 7.0 0.7 1.6 0.8 0.6

Industry 7.9 3.9 4.3 5.7 3.0 5.8

Services 5.7 1.2 2.8 0.0 2.6 1.5


Current Account Balance (% of GDP) -6.5 -10.5 -6.5 -11.4 -11.8 -4.0

Financial and Capital Account (% of GDP) 7.9 10.3 1.8 6.9 9.3 -3.5

Net Foreign Direct Investment (% of GDP) 3.6 1.1 0.8 0.8 0.8 0.8

Fiscal Balance (% of GDP) -1.4 -6.9 -6.3 -5.4 -4.6 -3.6

Debt (% of GDP) 48.4 47.3 36.2 38.1 40.7 46.5

Primary Balance (% of GDP) -0.5 -6.1 -5.1 -4.5 -3.6 -2.5

International poverty rate ($1.9 in 2011 PPP)a,b 57.9 57.9 57.7 57.6 57.5 57.3

Lower middle-income poverty rate ($3.2 in 2011 PPP)a,b 76.9 76.9 76.7 76.7 76.6 76.5

Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b 89.1 89.0 88.9 88.9 88.8 88.7

Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices.Notes: e = estimate, f = forecast.(a) Calculations based on 2010-CM SHBS, 2014-, and 2010-CM SHBS. Nowcast: 2015 - 2017. Forecast are from 2018 to 2020.(b) Projection using point-to-point elasticity (2010-2014) with pass-through = 0.5 based on GDP per capita in constant LCU.

10 MPO Apr 18

Recent developments Namibia’s ongoing fiscal consolidation, sharp contraction of the construction sec-tor and subdued economic activity in the region, eventually triggered an economic recession in 2017. The primary fiscal defi-cit reduction of 2 percentage point of GDP during the last two fiscal years, achieved mainly through cuts in public investment and other government ex-penditures, eventually stalled domestic demand and led to a 1 percent contraction of Namibia’s GDP. The contraction of domestic demand had spillover effects on most sectors of the economy. The con-struction sector shrank by more than 30 percent as its suffers from the base effects of the completion of major mine project in 2016 (Husab mine). The services sector also posted either sharp output contrac-tions (wholesale and retail trade services) or significant economic slow-down (financial services and tourism activity). Electricity production contacted sharply with the closure of two power plants for regular maintenance. The contraction of domestic demand was compounded by weaker external demand associated with the economic deceleration in Angola that affected mostly the services sector. On the upside, mining and agricultural activities provided a welcomed boost to the economy in 2017. Overall mining pro-duction was driven by the diamond and uranium production. Higher diamond pro-duction reflected partly a base effect from 2016 when some of the offshore diamond

extraction vessels were closed due to regu-lar maintenance. Uranium production was boosted by the coming on stream of the Husab mine in December 2016. After years of El Niño-related drought, agricultural production rebounded by 5 percent. Although the fiscal deficit decreased by almost 1 percent of GDP to 6 percent of GDP in FY2017/18, it turned out to be larg-er than in the budget law. Unanticipated budget expenditures related to the clear-ance of past arrears were introduced in the mid-term budget review in November 2017. The clearance of arrears, together with the budget support loan provided by the African Development Bank (AfDB), had the effect of significantly easing the liquidity shortage in the economy. Yet, this policy correction did not prevent Moody’s and Fitch to downgrade Namib-ia’s sovereign credit rating in August and November 2017, respectively, based on the overall deterioration of the macroeco-nomic and fiscal position in recent years. Monetary policy was closely tied to policy actions by the South African Reserve Bank, according to which the policy rate of the Bank of Namibia was reduced by 25 basis points in August 2017. The nominal exchange rate appreciated by 9.4 percent against the US Dollar in 2017, mirroring the appreciation of the South African Rand due to the currency peg. Thus, infla-tion decreased from 6.6 percent in 2016 to 6.2 percent in 2017 and fuel and food pric-es inflation were particularly subdued. The current account deficit narrowed by more than 5 percentage points of GDP in 2017 to 6.5 percent of GDP. The strength-ening of the external position was mostly

NAMIBIA

FIGURE 1 Namibia / Actual and projected current account and fiscal balances

FIGURE 2 Namibia / Actual and projected poverty rates and real GDP per capita

Sources: Bank of Namibia, Ministry of Finance and World Bank staff calculations. Source: World Bank. Notes: see table 2.

The ongoing fiscal consolidation and the

sharp contraction of the construction sec-

tor led to an overall contraction of the

Namibian economy in 2017. While the

fiscal adjustment is expected to continue

over the medium term, growth is project-

ed to recover gradually and to reach 3

percent by 2020. Yet, per capita growth is

unlikely to be sufficient to significantly

dent poverty in the coming years.

Table 1 2017











Notes:


0

10000

20000

30000

40000

50000

0

10

20

30

40

50

60

70

80

2003 2005 2007 2009 2011 2013 2015 2017 2019



-16

-14

-12

-10

-8

-6

-4

-2

0

2014 2015 2016 2017 2018 2019 2020

Current account balance Fiscal balance

Percent of GDP

11 MPO Apr 18

due to lower imports associated with the contraction of domestic demand. Foreign exchange reserves increased with the strengthening of the current account and the disbursement of the first tranche of a budget support loan by the AfDB to cover the equivalent of 1 month of import of goods and services at the end of 2017. With the economic recession, poverty at the international USD1.90 (in 2011 PPP terms) increased by 0.8 percentage point to 17.8 percent in 2017. The agricultural recovery could not compensate the effects of the recession in other sectors on the poor. Namibia’s economic growth has tended to be structurally jobless. The com-bination of high unemployment (28.1 per-cent in 2014) and relatively low labor force participation means that progress in the fight against poverty has been slow. With a consumption Gini coefficient of 0.6 in 2010, high inequality has also been a drag on poverty reduction.

Outlook Economic growth is projected to recover to 1.5 percent in 2018 and to gradually accelerate to 3 percent over the medium-term. The 2018 recovery will be driven by

the increase in mining production and recovery of domestic demand. Over the medium term, the uranium production is expected to increase as the Husab mine ramps-up its operation and reaches its full production capacity by 2020. Diamond production will also increase gradually consistent with the prospects for recovery in the global demand for minerals. Fur-thermore, as both domestic demand, in-cluding planned infrastructure projects, and the regional trading partners recover, the services sector is also expected to pick-up. Fiscal consolidation is foreseen until FY2019/20 when the fiscal deficit is projected to narrow to 3 percent of GDP. After the sharp adjustment in 2017, the current account deficit is projected to wid-en moderately with the economic recov-ery. Inflation is projected to decelerate further in medium term due to the sub-dued domestic demand and stable food prices. The monetary and exchange rate policies will continue to reflect the devel-opments in South Africa.

Risks and challenges Namibia remains highly vulnerable to external shocks. As an economy heavily

dependent on commodity exports, major risks stem from a weaker-than expected global recovery and lower international prices for minerals. Low uranium prices may alter production decisions of the Husab mine and keep production below full capacity. It remains also unclear how the recent sovereign credit rating down-grades will affect investors’ confidence. A more sluggish recovery of countries in the region would result in even lower than expected SACU revenues and com-plicate fiscal consolidation, especially in an environment of limited public-sector borrowing space. Finally, adverse weath-er conditions remain a constant threat to the economic prospects of the poor, whose livelihoods depend on low productivity subsistence farming. In that regard, the recent weather and infesta-tion warning issued by the Southern African Development Community (SADC) does not bode well for the 2017–18 agri-cultural season, particularly with regard to the maize crop. Food and nutrition insecurity can only slow progress toward poverty reduction.

TABLE 2 Namibia / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2015 2016 2017 e 2018 f 2019 f 2020 f

Real GDP growth, at constant market prices 6.0 1.1 -1.0 1.5 2.3 3.0

Private Consumption 11.8 6.8 -1.1 1.0 1.9 2.8

Government Consumption 11.9 -0.2 -1.2 -1.0 -0.8 -0.5

Gross Fixed Capital Investment 8.6 -25.3 -14.1 2.5 3.1 4.3

Exports, Goods and Services -0.6 6.1 6.3 6.6 6.9 6.5

Imports, Goods and Services 11.5 -4.7 -2.7 3.3 3.8 4.2

Real GDP growth, at constant factor prices 5.4 0.8 -1.0 1.5 2.3 3.0

Agriculture -5.6 3.6 5.0 3.8 3.4 3.4

Industry 3.0 -7.1 -2.5 1.6 2.8 3.6

Services 7.8 4.0 -1.0 1.2 2.0 2.7



Financial and Capital Account (% of GDP) 15.3 12.3 5.6 7.0 8.1 8.4

Net Foreign Direct Investment (% of GDP) 3.8 3.7 3.4 3.5 3.7 3.8

Fiscal Balance (% of GDP)a -7.0 -6.9 -6.0 -4.5 -3.5 -3.0

Debt (% of GDP) 38.2 40.3 41.8 42.9 43.5 43.6

Primary Balance (% of GDP)a -5.5 -4.7 -3.5 -1.9 -1.5 -1.6

International poverty rate ($1.9 in 2011 PPP)b,c 16.8 17.0 17.8 18.0 17.9 17.7

Lower middle-income poverty rate ($3.2 in 2011 PPP)b,c 40.0 40.4 41.4 41.6 41.5 41.2

Upper middle-income poverty rate ($5.5 in 2011 PPP)b,c 62.9 63.2 63.8 63.9 63.9 63.7

Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices.Notes: e = estimate, f = forecast.(a) Fiscal year starts from April 1st.(b) Calculations based on 2003-NHIES and 2009-NHIES. Nowcast: 2015 - 2017. Forecast are from 2018 to 2020.(c) Projection using annualized elasticity (2003-2009) with pass-through = 1 based on GDP per capita in constant LCU.

12 MPO Apr 18

Recent developments The South African business cycle is ex-pected to have bottomed out in 2016, when the economy slowed to 0.6 per-cent (revised upwards by StatsSA from 0.3 percent). In 2017, the economy grew at 1.3 percent, barely faster than the population but beating consensus. Growth in 2017 was mainly driven by agriculture. Although the sector only accounts for under 3 percent of GDP, it recovered at a fast pace from an histori-cal drought in 2015/16, which continues to linger on in some parts of the coun-try, including Cape Town. Mining also provided some support to growth due to relatively strong commodity prices. Other sectors have been weaker, alt-hough business cycle indicators suggest a pick-up in economic momentum. On the expenditure side, private consump-tion was the main driver of growth, partly supported by lower inflation. Exports contracted by 0.1 percent while imports grew by 1.9 percent. Investor sentiment has been low for years in South Africa, explaining low invest-ment, including low FDI. Poverty increased significantly in the af-termath of the 2008 global financial crisis and remains high for a middle-income country. Unemployment stood at 26.7 percent at the end of 2017. The share of the population living below USD1.9 a day (in 2011 PPP terms) increased from 16.5 percent in 2011 to an estimated 19.3 per-cent in 2017. And, with a GINI index of 63,

South Africa has the highest level of in-come inequality in the world. In light of weak economic growth and low inflation expectations, the South African Reserve Bank took a more dovish policy stance and, in July 2017, cut the policy rate by 25 basis points to 6.75 percent. Weak growth also contributed to poor fiscal rev-enue collection, which the government acknowledged in the October 2017 Medi-um-Term Budget Policy Statement (MTBPS). In addition, the bailing-out of poorly performing State-Owned Enter-prises put additional pressure on expendi-tures. The MTBPS did not announce new policy measures to address the fiscal slip-pages, thereby jeopardizing the long-standing debt stabilization target. This resulted in further downgrades in South Africa’s credit rating, after Standard and Poors had already downgraded South African debt to sub-investment grade fol-lowing a controversial cabinet reshuffle earlier in the year. The 2018 Budget put the country on a stronger footing again. In early 2018, the South African economy is off to a good start: the rand strength-ened by 12 percent and business confi-dence indices are ticking up (Figure 1). A change in political leadership translated into immediate steps to tackle the erosion of institutional quality exposed in the Public Protector report on the ‘State of Capture’. The 2018 Budget, tabled in Feb-ruary, reassured markets by restoring a commitment to debt-stabilization. While policy certainty is expected to strengthen in mining it weakened in agriculture after the ruling African National Congress (ANC) and opposition Economic Freedom

SOUTH AFRICA

FIGURE 1 South Africa / Business confidence in South Africa FIGURE 2 South Africa / Actual and projected poverty rates and real GDP per capita

Source: South African Chamber of Commerce and Industry. Source: World Bank. Notes: see table 2.

Confidence is up in South Africa and a

cyclical rebound is expected to further lift

GDP growth in 2018. The new political

leadership has stepped up efforts to fight

corruption, further strengthen confidence,

and relaunch the structural reform pro-

cess to reduce poverty and inequality—

South Africa is still the most unequal

country in the world.

Table 1 2017











Notes:


46000

48000

50000

52000

54000

56000

58000

0

10

20

30

40

50

60

70

80

2005 2007 2009 2011 2013 2015 2017 2019



86

88

90

92

94

96

98

100

102

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan

2016 2017 2018

Index: 2015=100

13 MPO Apr 18

Fighters voted to amend the Constitution to allow for expropriation without com-pensation to accelerate land reform.

Outlook In light of StatsSA’s GDP revisions as well as much improved confidence, the World Bank revised its 2018 forecast from 1.1 percent to 1.4 percent. This estimate acknowledges that scope for structural reforms may be limited ahead of the 2019 general elections, and relatively low prices for South Africa’s commodities as project-ed by the World Bank. In addition, the 2018 Budget introduced additional reve-nue measures (raising revenue-to-GDP by 1.1 percentage points) including higher VAT, likely slowing consumption. Poten-tial growth is only estimated at 1.4 per-cent. South Africa is currently expected to close its output gap by 2020. Rising per capita GDP is projected to bring poverty to 19.0 percent in 2019 and 18.8 percent in 2020), still 2.3 percentage points higher than the level seen in 2010/11. Inflation is expected to remain benign, given low supply-side pressures and a

relatively stable rand. Further monetary policy easing is possible in 2018 and the medium term, which may provide sup-port to credit extension, private invest-ment and household consumption. South African exports will continue to be domi-nated by commodities and related prod-ucts and, given commodity price forecasts, expectations on an export rebound are modest. Agribusiness products into Africa and cars may provide some stimulus to exports. Imports are expected to rise with stronger consumption and investment. Rising interest rates globally will help reduce the long-standing savings-investment imbalance. Overall, a current account deficit is expected around 2.2 per-cent of GDP. While FDI is expected to pick up, portfolio investment will remain an important source of financing for South Africa’s external position.

Risks and challenges In the short term, a key challenge is to keep the new confidence momentum. High market expectations for reform may be difficult to meet, especially

ahead of the 2019 elections. Notwith-standing the strong commitment to dis-cipline SOEs, their contingent liabilities remain a fiscal risk in the short- to medi-um-term. The drought in the south of the country and the scarcity of water are putting pressure on people and busi-nesses and eventually on the budget. The 2018 Budget has demonstrated enough commitment to fiscal consolida-tion to avert a downgrade by Moody’s to sub-investment grade in March. To boost South Africa’s low growth poten-tial and make a dent to the triple chal-lenge, a new compact is required, as acknowledged by President Ramaphosa. From the World Bank Group’s perspec-tive, five priority constraints to be tackled were identified in the recent Systematic Country Diagnostic: (i) insufficient skills, (ii) the skewed distribution of land and productive assets and weak property rights; (iii) low competition and limited integration in regional and global value chains; (iv) limited or expensive connec-tivity and under-serviced historically dis-advantaged settlements; and (v) C02 emis-sions and water insecurity.

TABLE 2 South Africa / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2015 2016 2017 e 2018 f 2019 f 2020 f



Government Consumption -0.3 1.9 0.6 -0.3 1.2 1.4

Gross Fixed Capital Investment 3.4 -4.1 0.4 3.0 3.4 2.8

Exports, Goods and Services 2.8 1.0 -0.1 1.5 2.2 2.1



Agriculture -6.4 -10.2 17.7 4.0 1.7 1.8

Industry 1.1 -1.3 1.5 1.6 1.9 2.1

Services 1.7 2.0 0.4 1.2 1.8 1.7



Financial and Capital Account (% of GDP) 4.4 3.1 2.5 2.1 2.2 2.1

Net Foreign Direct Investment (% of GDP) -1.3 -0.4 -0.3 0.3 0.4 0.6


Debt (% of GDP) 49.0 50.7 53.3 55.1 55.3 56.0

Primary Balance (% of GDP) -1.0 -0.5 -1.2 -0.2 -0.1 0.0




Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices.Notes: e = estimate, f = forecast.(a) Calculations based on 2014-LCS. Nowcast: 2015 - 2017. Forecast are from 2018 to 2020.(b) Projection using neutral distribution (2014) with pass-through = 0.87 based on GDP per capita in constant LCU.

14 MPO Apr 18

Recent developments Economic growth was revised upwards to 1.9 percent in 2017 (from an earlier projec-tion of 1 percent) because of higher than expected agriculture production and pub-lic expenditure. The agriculture sector recovered from the 2015/16 drought and expanded by 0.5 percent in 2017 (Table 2). In particular, sugarcane production unex-pectedly picked-up by 7 percent in 2017. Higher than expected current public ex-penditure on wages, goods and services also stimulated demand and led to higher growth in the services sector. Swaziland’s fiscal deterioration in 2016 was not corrected in 2017. The fiscal defi-cit, which reached 7.7 percent of GDP in 2016, increased to 8.3 percent of GDP in 2017 (Figure 1). Because of lack of financ-ing capacity, the fiscal deficit continued to be partly financed through accumulation of arrears and use of foreign currency re-serves. The stock of domestic arrears more than doubled to reach 5 percent of GDP in February 2018. Gross official reserves de-clined by 12 percent to approximately USD560 million or the equivalent of 3.3 months of imports at end-December 2017. The build-up of foreign reserves was only temporarily possible when Swaziland received the quarterly Southern African Custom Union (SACU) revenues transfers. Taking into account the growing domestic arrears, the outstanding domestic public debt increased by 2.3 percentage points of GDP in 2017 to reach 12.4 percent of GDP. External debt largely remained stable at

8.9 percent of GDP, and total public debt amounted to 21.8 percent of GDP. Since the fiscal deficit was not monetized but led to the accumulation of arrears, the expansion of the monetary base remained under control and the inflation rate de-creased from 7.8 percent in 2016 to 6.2 percent in 2017; still slightly above the Central Bank target range of 3-6 percent. Food prices developments contributed the most to the overall price deceleration; which continued into 2018. The year-on-year inflation rate decreased to 4.6 percent in January 2018. With lower inflation, the Central Bank eased monetary conditions and reduced the discount/repo rate by 25 basis points to 7 percent in January 2018. The interest rate cut remains 25 basis points higher than that of South Africa. Total credit in-creased in 2017 with the recovery of the agriculture and forestry sectors. The fiscal deterioration contributed to weaken exter-nal position. The current account surplus declined to 0.3 percent of GDP in 2017. In contrast to the improvement registered during 2009-2013, Swaziland’s poverty reduction efforts have petered out since 2013. In 2017, 38.4 percent of Swazis were estimated poor at the international USD1.90 poverty line (in 2011 PPP terms). This stagnation reflects the overall poor performance of the agriculture sector in recent years. The agriculture sector con-tracted by 5.8 percent in 2016 before re-covering only modestly to 0.5 percent in 2017. Also, with a consumption per capita Gini index of 51.5 in 2009, Swaziland re-mains a highly unequal country. Such inequality, compounded by a low labor

SWAZILAND

FIGURE 1 Swaziland / Fiscal deficit and gross official reserves

FIGURE 2 Swaziland / Actual and projected poverty rates and real GDP per capita

Sources: Ministry of Finance and World Bank staff calculations. Source: World Bank. Notes: see table 2.

After a small and short-lived recovery in

2016-2017, economic growth is projected

to decelerate again in 2018, partly because

of mounting fiscal pressures. The expan-

sionary fiscal stance has resulted in large

fiscal deficits, the accumulation of domes-

tic arrears and a draw-down of foreign

reserves. In turn, increased domestic ar-

rears are expected to increase the non-

performing loans and government suppli-

ers will be discouraged from further en-

gaging with the government. Slow eco-

nomic growth is expected to reduce the

pace of poverty reduction.

Table 1 2017











Notes:


0

5000

10000

15000

20000

25000

30000

35000

40000

0

20

40

60

80

100

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019



-10

-8

-6

-4

-2

0

2

4

6

0

100

200

300

400

500

600

700

800

900

2013 2014 2015 2016 2017 2018 2019 2020

US$ millions Percent of GDP

Gross official reserves (lhs) Fiscal deficit (rhs)

15 MPO Apr 18

force participation and high unemploy-ment, makes it difficult to significantly dent poverty.

Outlook Swaziland’s fiscal stance will limit eco-nomic growth in 2018 and will continue to cast a shadow on the medium-term out-look. With a modest fiscal adjustment in 2018 and declining SACU revenues, real GDP growth is projected to slow down to 1.1 percent in 2018. The industrial sector is expected to contract by 0.2 percent be-cause of a severe adjustment in the con-struction sector. However, the industrial counter performance should be compen-sated by the ongoing agriculture recovery. In the medium term, growth is projected to remain relatively atone without strong-er efforts at fiscal consolidation and struc-tural reforms. Public debt could increase by close to 15 percentage points of GDP in the medium term to reach 36.4 percent of GDP in 2020. Inflation is projected to remain within the Central bank target range and mon-etary conditions to remain relatively

accommodative. The current account surplus is projected to slightly increase to 1.5 percent of GDP. Exports to the US market should pick-up with the return of Swaziland into the AGOA agree-ment, although the full effects will only materialize in 2019 and 2020. The poor economic growth outlook is ex-pected to be accompanied by an equally poor poverty reduction outlook. The pov-erty rate is projected to rise marginally to 38.7 percent and to hover around that level in the medium term. The number of poor Swazis is projected to increase as the population continues to grow. The eco-nomic prospects for the poor, who are predominantly employed in low produc-tivity subsistence farming, remains tied to typically adverse weather conditions.

Risks and challenges The lack of fiscal discipline remains the main downside risk to the outlook. In that regard, the forthcoming national elections could trigger additional ex-penditure on goods and services and adversely absorb any fiscal space left for

poverty alleviations measures. The fi-nancing of the fiscal deficit through do-mestic borrowing, domestic arrears accu-mulation and foreign reserve drawings will pose an increasing threat to macroe-conomic stability. Excessive government domestic borrowings will further crowd out the private sector, further constrain-ing investment and growth. The contin-ued accumulation of domestic arrears will directly hurt government suppliers and eventually most businesses and sec-tors of the economy, as well as the gov-ernment itself in its revenue mobilization efforts. Businesses may face difficulties in honoring their financial obligations to banks, which might lead to an increase in non-performing loans. Financing the fiscal deficits therefore rais-es serious challenges, especially in a con-text of declining SACU revenues. The use of foreign exchange reserves may threaten the exchange rate peg. The reliance on borrowings may increase public debt to unsustainable levels and put Swaziland at a high risk of debt distress in a few years. A clear fiscal adjustment path is therefore needed to ensure macroeconomic stability and debt sustainability.

TABLE 2 Swaziland / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2015 2016 2017 e 2018 f 2019 f 2020 f



Government Consumption 9.7 12.9 2.9 2.7 0.3 2.0

Gross Fixed Capital Investment 13.4 7.8 7.2 5.2 7.1 5.1

Exports, Goods and Services -1.5 -1.3 4.1 2.3 3.4 3.4

Imports, Goods and Services -5.0 5.9 8.5 9.1 8.5 8.2


Agriculture 3.5 -5.8 0.5 1.6 2.4 2.5

Industry -1.5 0.5 0.7 -0.2 1.9 2.8

Services 0.6 3.0 3.0 1.9 1.4 1.1


Current Account Balance (% of GDP) 10.4 0.7 0.3 1.5 1.8 1.8


Debt (% of GDP) 17.2 18.6 21.8 25.6 30.8 36.4

Primary Balance (% of GDP) -3.5 -6.3 -6.9 -5.8 -5.3 -4.9




Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices.Notes: e = estimate, f = forecast.(a) Calculations based on 2009-HIES. Nowcast: 2015 - 2017. Forecast are from 2018 to 2020.(b) Projection using neutral distribution (2009) with pass-through = 0.7 based on GDP per capita in constant LCU.

Macro Poverty O

utlook04 / 2018

Documents

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