Swaziland - The flight of foreign direct investment out of Swaziland is apparent in falling tax revenues and is one sign of expected challenges to the economy this year.
Gross domestic product (GDP) growth has been surpassed by population expansion for two decades. This has resulted in more Swazis falling into poverty in a country where already two-thirds of the population is ranked as chronically poor.
“The depreciation of the domestic currency (the lilangeni, which is linked to the rand on a one-to-one basis) has led to an increase in public external debt stock and by extension, total public debt, which has increased by 2.5 percent to reach R6.3 billion at end of December,” the central bank reported.
Total public debt now stands at 18 percent of GDP. Total public external debt stock, which includes public and publically-guaranteed debt, stands at R3.4bn, or 9.7 percent of GDP, and again is attributed to the rand’s decline against major overseas currencies.
The good news associated with the fall of the rand/lilangeni is that Swaziland’s exports improved last year, resulting in a trade account surplus during the final quarter of last year of R1.06bn. Merchandise exports rose an impressive 31.3 percent to R5.1bn during the third quarter of last year compared with the third quarter of 2012. Imports were up 14.5 percent, to R4.05bn, quarter to quarter.
An International Monetary Fund (IMF) mission visiting Swaziland recently found that as long as it continues to be supported by receipts from the Southern Africa Customs Union (Sacu), the economy will not dip into recession. However, Sacu funds, which account for over 60 percent of government revenue, are not sufficient to push the country forward economically because the revenue is being used for consumption rather than investment.
“Swaziland’s economic performance has improved since the fiscal crisis of 2010/11, which followed a significant reduction in revenues from Sacu. For the first time since 2006/07, the country recorded a fiscal surplus in 2012/13, though a fiscal deficit of 2 percent of GDP is expected for 2013/14. International reserves exceeded four months of imports by the end of 2013,” Jiro Honda, the head of the IMF delegation, said.
Perhaps foreign business interests are wary of investing in a country kept from insolvency only by Sacu grants. During 2012/13, tax revenue earned from countries fell by half. The Central Bank of Swaziland reported a decline in taxes paid by companies from 14 percent of government revenues in 2011/12 to 7 percent last year.
“Swaziland’s challenges remain significant. In light of these challenges, there is a need to safeguard the exchange rate peg (with the rand),” Honda said.
“Not only is no new investment coming into the country, but businesses already operating here are not earning as much, trade surplus or not, and are paying less tax,” said Lester Dlamini, an accountant and investment adviser in Manzini.
“Businesses are worried that government has so mismanaged the economy that the lilangeni may have to be decoupled from the rand. That would lead to hyperinflation, economic collapse and any investments becoming worthless. The only good economic news is the result of things completely out of government’s hands, like Sacu receipts and the boost in export profits from the rand’s drop,” he said.
Swaziland’s corporate tax rate of 27.5 percent may be lower than that of Mozambique and South Africa, but it can not offer sea port access or the large local markets enjoyed by its neighbours. Botswana, Lesotho and Namibia, which like Swaziland are smaller and less developed countries, offer the inducement of corporate tax rates lower than Swaziland, at 22 percent, 25 percent and 18 percent, respectively.
Swaziland also has underdeveloped, but expensive telecoms systems and internet access. High electricity prices have been cited by businesses as a disincentive for more local investment.
Food prices are also high.
As for the country’s political system, foreign business interests find it problematic that despite King Mswati’s suppression of political dissent and public demonstrations, an absolute monarchy form of government can remain viable in Africa’s age of emerging democracies.
“Why take the risk of the unknown?” Dlamini said.
“The threat posed by a Renamo-led civil war now seems minimal in Mozambique, and against the country’s wealth of natural resources what risk there is can be overlooked. South Africa has political scuffles but they are non-lethal and the country is still where the action is. Swaziland needs to be imaginative to attract investors and not be lazy about relying on Sacu receipts,” Dlamini said.