The Eswatini Public Finance Review (PFR): Leveraging Fiscal Adjustment for Better Development Outcomes reflects the centrality of fiscal policy to Eswatini's development and its importance for addressing longstanding constraints to growth and living standards. It shows options to; increase revenue streams, while enhancing competition and market contestability, improve expenditure efficiency, and strengthen public investment management and health systems. The five reform pathways offer a comprehensive framework to place Eswatini on a path toward sustainable and inclusive development.
Eswatini has an opportunity to make fiscal policy an instrument for macroeconomic stability and external competitiveness. The dynamics of growth in Eswatini have shifted over time. Early growth was boosted by prudent fiscal policies and the inflow of foreign capital during South Africa’s isolation before 1994. But growth has increasingly been driven by consumption rather than investment, making fiscal policy critical for macroeconomic stability. As expansionary fiscal policies resulted in fiscal deficits and expenditure arrears, the government adopted fiscal consolidation measures since 2019 and a Fiscal Adjustment Plan (FAP) since 2021. Continued fiscal prudence is essential to boost economic growth and competitiveness, especially through measures such as reducing the state's large footprint, particularly through state-owned enterprises (SOEs), eliminating expenditure arrears to the private sector, reducing the large wage premium between the public and private sectors, and fully operationalizing the Revenue Stabilization Fund established in 2023 to mitigate the volatility of Southern African Customs Union (SACU) transfers. Eswatini has a solid basis for adopting a growth-supporting, medium-term fiscal framework to improve its resilience to shocks, boost inclusive economic growth, and raise living standards.
Eswatini could increase revenues while enhancing competition and market contestability. Total revenue is both volatile and procyclical, largely shaped by SACU inflows. Domestic revenue mobilization is relatively low, despite tax rates being relatively high among its peer countries. To increase revenue while maintaining competitiveness, Eswatini could improve tax administration. The tax system is characterized by high incentives and tax expenditures (over 10 percent of GDP), exemptions, and evasion. To address these challenges reforms could include creating a unit in the tax service that focuses on high, net-worth individuals; streamlining procedures for tax registration and payment; and improving the financial performance of SOEs. This would enable more SOEs to pay taxes, avoid the accumulation of tax arrears, and ease pressure on the budget.
Strengthening public financial management could support fiscal consolidation and promote expenditure efficiency. The public sector is large (about 30 percent of GDP), and expenditure is dominated by recurrent spending, particularly on wages. Capital spending is low, expenditure arrears persist, and transfers to SOEs remain high. The FAP has helped moderate spending, especially on wages. Another welcome development is the development of a new Financial Management Information System to manage public expenditures. But the efficiency of spending could be improved, particularly in the social sectors that are vital to human capital development. Reforms could include enhancing budget preparation, improving budget execution and commitment controls, eliminating expenditure arrears, reforming SOEs, and enhancing public procurement, especially by implementing electronic procurement solutions.
Strengthening public investment management, while mainstreaming climate considerations is crucial to maximize the impact of public spending on economic growth and development. Although capital investment has increased moderately, execution rates remain low. Mainstreaming climate considerations into the public investment management system could also help Eswatini access the growing supply of climate finance to build the resilience of the economy. To this end, the government has developed new Public Investment Management Guidelines to guide the preparation and appraisal of capital projects.
Addressing Eswatini's health sector structural challenges, including inefficiencies in public financial management and unequal access to health services, could result in better health outcomes relative to expenditure levels. Public health spending in Eswatini, while relatively high among lower-middle-income countries, has not translated into the expected outcomes. Life expectancy has increased, but maternal and neonatal mortality rates remain unchanged. The burden of communicable diseases is high, and the incidence of noncommunicable diseases is rising. Reforms could include strengthening budget and public financial management, holistically addressing supply chain management challenges, implementing key strategic health service purchasing actions, strengthening the availability and use of health information, and improving health care access and quality, with a focus on primary care.