FISCAL DEFICIT TO REACH 10.2%

MBABANE – The country’s fiscal deficit is forecast to reach an alarming 10.2 per cent of gross domestic product (GDP) this year due to the effects of COVID-19.

This is as per projections made by the African Development Bank Group (AfDB). This was presented in a 2020 African Economic Outlook report that was released two days ago.

The multilateral development finance institution’s figures are almost three times the country’s projections made in February this year. Before COVID-19 reared its ugly head in the country, Minister of Finance Neal Rijkenberg, in the budget speech, had estimated that budget deficit for the financial year 2020/21 would 3.6 per cent of GDP. In short, fiscal deficit, which is simply a shortfall in a government’s income compared with its spending, was estimated to be E2.9 billion in the 2020/21 financial year. This figure was in line with Southern African Development Community macroeconomic convergence deficit target not exceeding five per cent.

Disturbing

Justifying the disturbing figures, the AfDB reported that the Eswatini government revenue was expected to decline due to the negative effects of the tax relief measures, weak business activity, and constrained consumption as well as diminished Southern African Customs Union (SACU) receipts because of low trade flows.

“The fiscal deficit is forecast to reach 10.2 per cent of GDP in 2020 in the baseline scenario and 10.7 per cent in the worst-case scenario. Public debt, currently 30.3 per cent of GDP will likely breach the 35 per cent threshold as the government borrows to mitigate the effects of the pandemic,” reported AfDB.
An economist shared that fiscal deficits, spilled over, and could lead to macro-economic instability particularly if the government resorts to deficit financing.
“High fiscal deficits imperil national saving rates, thereby reducing overall aggregate investment. This further jeopardises the sustainability of growth. Low levels of public -investment renders poor physical infrastructure incompatible with a large increase in the national domestic product,” shared the expert.

Projected

According to AfDB report, the economy is projected in the baseline scenario to contract by 2.6 per cent in 2020, compared with a growth of 2.5 per cent envisaged before the outbreak of the pandemic.
“The export-oriented industrial sector (36 per cent of GDP) is expected to suffer from weak external demand, while the service sector (53 per cent of GDP) is expected to be weighed down by the demand-reducing containment measures and restrictions.

“In the baseline scenario, which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound, the economy is projected to grow by 2.1 per cent in 2021,” reported AfDB.
In the report, AfDB noted that the accommodative monetary policy stance adopted by the Central Bank of Eswatini (CBE) was expected to ease market liquidity, reduce the cost of domestic debt, and boost credit extension.

“Inflation is projected to increase to 4.3 per cent in 2020, amplified by the COVID–19 induced supply constraints and a weakening exchange rate. The external position is expected to weaken due to a deterioration of the trade balance and secondary income account, thereby shrinking the current account surplus to 2.3 per cent in 2020 in the baseline scenario, from 5.7 per cent of GDP in 2019,” reads the report.

Recovery

As the government prepares a post COVID–19 economic recovery plan, AfDB stresses that government should create mechanisms to help build adequate fiscal and external buffers for countercyclical policy purposes in case of similar emergencies.
“It (government) should also systematically increase, in the medium to long term, the share of the budget for investment in the public health system to build its resilience. The financial sector could leverage the measures and incentives put in place by the authorities to support local businesses adversely affected by the pandemic,” reads the report.

Continentally, according to AfDB, Africa’s growth stands to rebound to three per cent in 2021.
There is a call for governments and development partners to respond in a more coordinated targeted and rapid manner to be effective in limiting impact.
In a comprehensive socio-economic assessment of the pandemic’s impact, the Bank said growth was now projected to rebound to 3 per cent in 2021 from a -3.4 in the worst-case scenario for 2020.

Growth

Under projected scenarios for contraction of growth, Africa could lose over US$145.5 billion (over E2.4 trillion) of GDP in 2020, according to the Bank.
Proposed interventions include labour market policies to protect workers and their jobs, and structural policies to enable African economies to rebuild and enhance their resilience to future shocks. AfDB warned that the tourism, transportation, and entertainment sectors may take longer to recover.

Efforts to get comments from Minister Rijkenberg were fruitless, as he was yet to respond to a message sent to his phone at the time of compiling this report.

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