South Africa Bails Out Swaziland After Cash Crisis Fueled Union-Led Riots

South Africa agreed to lend Swaziland, Africa’s third-largest sugar producer, 2.4 billion rand ($356 million) to help its neighbor plug a budget shortfall that sparked riots in April.

South Africa’s government will guarantee the loan that will be paid through the central bank, Finance Minister Pravin Gordhan told reporters in the capital, Pretoria, today. Reserve Bank spokesman Hlangeni Mathebula had earlier said the loan was 2.5 billion rand.

Swaziland, a landlocked country of 1.2 million people bordering South Africa and Mozambique, raised taxes and cut state spending this year after losing a third of its revenue when the global economic crisis slashed income from a regional customs union. Police fired tear gas, rubber bullets and water cannons to break up anti-government riots in April. The state may need to cut salaries by half if loan requests are rejected, Swazi Finance Minister Majozi Sithole said June 27.

The crisis “has manifested in a budget shortfall that the government of the Kingdom of Swaziland is unable to finance,” Gordhan said. “While the need for fiscal reforms is the primary objective, this has to be anchored by governance reforms.”

Rand Peg

The Swazi currency, the lilangeni, is pegged one-to-one with the rand, which weakened 0.2 percent to 6.7805 per dollar as of 4:40 p.m. in Johannesburg. The average yield on 182-day Treasury Bills jumped to 6.446 percent at a July 27 auction by Swaziland’s central bank from 5.8 percent on Jan. 20. The equivalent notes by South Africa’s central bank were 5.72 percent on July 29.

No competitive bids were received for 100 million emalangeni ($14.8 million) worth of 91-day and 182-day bills today, the country’s central bank said in an e-mailed statement.

The loan is conditional on “governance reforms” in Swaziland and the government holding talks with “all stakeholders” in the country, Gordhan said. Swaziland is also required to cut fiscal spending and protect the currency peg, he said.

Labor unions in Swaziland and South Africa have demanded political reforms in sub-Saharan Africa’s last absolute monarchy and are opposed to a bailout that doesn’t include that condition.

The 43-year-old King Mswati III appoints the country’s prime minister, while its lawmakers aren’t allowed to belong to political parties. Mswati, who has ruled the nation for 25 years, has 14 wives and a personal fortune of $200 million, according to Forbes magazine.

Wage Cuts

South Africa, which has an unemployment rate of 25.7 percent, is concerned a collapse in Swaziland may lead to a “flood” of immigrants across its border, Jerry Matjila, the director-general of South Africa’s international relations department, said June 22.

Gordhan said Swaziland must cut fiscal spending in line with targets set by the International Monetary Fund. The IMF has recommended Swaziland cut state salaries by 10 percent.

The European Union said the financial aid it gives to Swaziland is “ongoing” and doesn’t involve budget support to the country. The EU pledged in 2007 to give Swaziland 2.2 billion rand in the six years through 2013, most of it to the sugar industry, it said in an e-mailed statement today

To contact the reporters on this story: Franz Wild in Johannesburg at fwild@bloomberg.net; Nasreen Seria in Johannesburg at nseria@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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