Monday, June 29, 2009

Central Bank explains the impact of SA’s recession to Swaziland

By Swazi Observer Reporter, 13 June 2009

The South African authorities, through their Central Statistics Office and Treasury, have announced that the South African economy has slipped into a recession succumbing to the vagaries of the ongoing global economic slowdown. The South African economy is said to have shrunk, recording the sharpest contraction in a quarter of a century, declining by an annualised 6.4 % in the first three months of 2009 and confirming the first recession in 17 years. South Africa finally felt the full brunt of the global economic crisis, aggravated by recession in developed countries, which slashed their demand for minerals and manufactured goods from the developing world including South Africa. The effects of the slowdown were felt by the manufacturing and mining sectors, which fell by 22.1 and 32.8 %, respectively and these sectors recording the biggest decline ever.

Definition of a recession

A country is said to go into recession if its real gross domestic product falls for two consecutive quarters. A recession, if prolonged resulting in abnormally low levels of economic activity and subsequently high levels of unemployment, can deteriorate further into what is then referred to as a depression.

What, therefore, does this development mean for countries like Swaziland and neighbouring South Africa, the continent’s economic powerhouse?

Swaziland, South Africa’s economy interlinked

To better understand this issue, it is important to appreciate the intricate and inextricable socio-economic relationships a country like Swaziland has with South Africa.

Swaziland is a small open and landlocked country sharing 75 percent of its border with South Africa and 25 percent with Mozambique to the East. Swaziland imports over 90 percent of its goods from South Africa and over 60 percent of its exports are destined for the South African market. It relies 100 percent for its energy and petroleum imports from South Africa and virtually all its exports destined to markets outside the Southern Customs Union (SACU) are shipped through South African ports.

Another important phenomenon of the Swazi-SA relations is that most of the corporations, though registered in Swaziland as Swazi business entities, are either subsidiaries of South African firms or have strong links with their South African counterparts with many having their Head Quarters in South Africa. This stretches from all the sectors of the economy from agriculture, banking, manufacturing, construction, tourism, retail and wholesale business sectors etc. Swaziland and its neighbouring states have a long history as a supplier of labour to the South African economy. Swazi and other regional migrant labourers have been working in South African mines for years have played a significant role in that country’s industrial revolution and history. There have been large worker remittances to Swaziland under The Employment Bureau of Africa (TEBA) initiative from the unskilled Swazi workers working in the South African mines. In recent years, more Swazis (skilled and unskilled) are now gainfully employed in other sectors of the South African economy given the limited job opportunities in Swaziland. The mining sector has been one of the worst affected sectors by the global economic crisis coming with the weakened global demand for commodities after a period of favourable price levels.

Swaziland is also a signatory to a number of economic agreements that serve to consolidate and entrench this historical linkages that stretch into the beginning of the century. These are the Common Monetary Area Agreement, which allows the South African Rand to circulate on a one-to-one basis with the Rand. Swaziland, in turn, receives compensation for the Rand circulating in Swaziland at any given time. This relationship started way before the Rand came into being and the Pound Sterling was used as legal tender in the region. This Agreement is also supported by yet another trade agreement that also began in 1910, the Southern African Customs Union (SACU) where the member countries of the Customs Union share a common customs border and all customs duties collected on entry to the Union are put into a common pool and thereafter shared by the member states. SACU is one of the oldest customs union in the world. Swaziland received well over 70 % of the total revenue collected by the Government of Swaziland in the last fiscal year from the common customs pool.
Considering the history and combination of these agreements, trade and monetary, the region under the SACU-CMA arrangement has enjoyed the oldest and highest form of economic integration that has just been attained by even some of the world’s most developed regions like the EU.

Swaziland is a predominantly agricultural economy, though accounting for just over 10 % of GDP, this sector has strong inter-linkages with the manufacturing sector accounting for over 37 % of GDP. The country’s major exports include sugar, timber and wood pulp, fresh and canned fruit, refrigerators, food and juice concentrates and coal, amongst others. South Africa is a major buyer of the country’s goods and services and a slowdown in economic activity in this market has a direct impact on the Swaziland economy. Swaziland also exports a greater part of wares to the European Union, the USA and the Far East and has been having preferential access to the EU and USA markets for some of its products viz; sugar and beef, in the EU and textiles in the USA. These preferences, however, have been under review in recent years also affected by the ongoing WTO Doha Round of trade negotiations culminating in uncertainties looking ahead.