Eswatini budgets for change

Eswatini’s new finance minister is trying to put the country on a new economic path. He may meet resistance along the way.

Eswatini finance minister Neal Rijkenberg didn’t mince his words when he delivered his maiden budget late last month. “Eswatini is facing an unprecedented economic crisis,” he told a packed parliament.

Indeed, the picture isn’t pretty. Preliminary estimates indicate that the economy, which is dominated by sugar, timber and agriculture, shrank by 0.4% in 2018. There was also a net decline in foreign direct investment — a years-long trend.

Rijkenberg is arguably the best person to turn things around. The entrepreneur, appointed by King Mswati III in November, has grown Montigny – the business he founded with his brother in 1997 – into the largest privately held timber company in Southern Africa, with annual revenue above R1bn.

He hopes the 22.97-billion emalangeni (about R23bn) 2019/2020 budget will be the first step towards “wealth creation and distribution, the promotion of a free-market economy and ensuring we have the appropriate balance between government and the private sector”.

This last point is central to Rijkenberg’s planned reforms. “The competitive nature of the private sector allows it to deploy capital more efficiently, respond to market realities better and innovate in ways the state cannot,” he tells the FM. “Government cannot create jobs; it can only create posts. What this administration must focus on is creating an enabling environment for the private sector to thrive.”

The sector has, however, been throttled by tax-exempt state-owned monopolies. “The state has been too central in developing noncore infrastructure and too involved in competing with the private sector through state-owned monopolies,” says Rijkenerg. “Eswatini has [more than] 60 public entities and, while many are well run, some have led to overly restrictive regulations and monopolies, which have crowded out investment and innovation.

“We have stagnated with a model of centralised economic control and state monopolies which made sense at independence [in 1968] but which no longer serves us well.”

As a result, government will be selling its stakes in private companies, freeing up much-needed cash and opening the market to competition.

But many of Eswatini’s regulations — those related to competition and labour, for example — have also proved to be a bad fit, “better suited to highly advanced, industrialised economies”. They were driven, he says, “by development partners or regional bodies, and not by the development needs of the country”.

Rijkenberg hopes to boost the business environment, and to this end is looking to revise work permit and immigration policies, improve land and broadband access, establishing 24-hour border operations with SA and issue mining licences. With the launch of a national strategic plan in the coming weeks, he also promises to lower the corporate tax rate, currently at 27.5%, to the lowest in the region. Already, Eswatini’s two “special economic zones”, established last year, “offer zero tax for 20 years and preferential treatment for forex and imports and exports”.

While Rijkenberg stresses the importance of protecting workers and union rights, he says the country’s “current labour legislation and environment disincentivises businesses from employing people” – something that has contributed to a 23% unemployment rate. Reforms, he says, will allow businesses to better respond to market forces.

If Rijkenberg succeeds in creating an enabling environment, foreign firms may well be tempted to set up shop there. While major SA retail and fast-food brands and banks are already well-established, other sectors are ripe for investment. A competitive tendering programme for solar and biomass renewable energy is expected later this year. And while the new international airport is short on connections, it is “well placed to export ‘just in time’ produce to any destination in the world. We have a lot of underutilised land available for high-value agriculture and we are promoting a strong agriculture and agro-processing export-based sector”, he says.

Rijkenberg’s budget contains a raft of measures to swell coffers, including new sin taxes, a fuel tax hike, charging VAT on electricity, and disposing of government assets worth E400m. Given that the largely untaxed “shadow economy” makes up about 37% of GDP, it makes sense to use consumption taxes to increase revenue. He’s also introduced a higher, 36% tax bracket for the wealthy.

But the task he faces is daunting, so change is likely to be incremental – more gradual evolution than speedy revolution.

The royal family dominates the economy; the king effectively controls the sovereign wealth fund, as well as agricultural and other assets. So pushback is likely from some who are vested in an uncompetitive status quo where success is often contingent on connections.

Bankrolling an absolute monarchy also doesn’t come cheap: royal emoluments and the civil list — those receiving a stipend by royal order — come to E394m in the budget. A further pressure is Mswati’s penchant for shiny new things — convention centres, hotels, airports. These, supposedly the trappings of First World status, don’t necessarily pay their own way.

Four years after it opened, for example, King Mswati III International Airport (which reportedly cost R2.5bn) only receives scheduled flights from Joburg — even though it can accommodate wide-bodied jets.

Then there’s the budget item “Royal Swazi Airline” — allocated E323m, with a further E645m promised over the next two financial years. By the time the FM went to press, Rijkenberg had not confirmed whether the allocations were for the king’s private aircraft or to resurrect the defunct national carrier.

Eswatini has hotels aplenty – many owned by the government or the nation’s sovereign wealth fund – and they typically struggle to fill beds. But a five-star hotel under construction in the mink-and-manure Ezulwini Valley is costing this year’s budget E634m, and the adjacent convention centre has been allocated E1.23bn. With a plethora of similar venues dotted around Southern Africa, competition will be fierce. So it’s highly unlikely that the costs of the hotel and convention centre – which investigative journalism outfit amaBhungane recently reported will likely run to R4.8bn – will ever be recouped.

While the government might disagree, the growth potential for Eswatini’s tourism sector lies not in gleaming white elephants but in the kingdom’s underappreciated landscapes: it has an astonishing array of climates, topography, flora and fauna, and is well suited to a range of adventure activities. Its central location is a boon (it’s a manageable drive from Durban, Maputo and Joburg). And it’s far safer than its two neighbours.

But its many attributes remain largely unknown — no surprise, given its anaemic marketing (the tourism authority budget is less than E15m and the National Trust Commission, the custodian of several key attractions is sclerotic and underfunded).

Rijkenberg says the government is considering “working with private operators to manage and operate our protected areas to better preserve, promote and utilise them”. This is promising: if Eswatini plays to its strengths and offers high-quality adventure tourism services, it could draw a flood of visitors. Considering that 40% of its citizens are trapped in extreme poverty, this can only be a good thing.

This article was first published in the 21 March 2019 edition of Financial Mail.

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