July 4 (Bloomberg) -- Swaziland, where the government is running out of cash to pay its workers, will keep its currency peg with South Africa’s rand as it seeks funding to boost foreign exchange reserves, central bank Governor Martin Dlamini said.
Reserves stood at about 4 billion rand ($594 million) as of June 28, enough to cover 2.3 months of imports, Dlamini said in a June 29 interview in South Africa’s capital, Pretoria.
Swaziland, a landlocked nation bordering South Africa and Mozambique, is struggling to contain a budget crisis that has forced it to raise taxes and slash spending on wages to win funding from the International Monetary Fund, the African Development Bank and other lenders. South Africa is considering a request from Swazi authorities for financial aid, including balance-of-payments support to boost reserves, Dlamini said.
“We have foreign-exchange reserves that, if we eat into it, we can still maintain the peg,” Dlamini said. “The peg is not threatened. We will maintain the peg.”
Swaziland, Africa’s third-largest sugar producer, lost a third of its fiscal revenue last year after the global recession slashed trade, reducing income from a regional customs union that includes South Africa.
The government doesn’t have enough cash to pay salaries this month, Dlamini said. The Times of Swaziland said on June 28 the state may need to cut wages by half this month, citing Finance Minister Majozi Sithole.
“Swaziland is seriously under pressure,” Mthuli Ncube, chief economist of the African Development Bank, said in a speech in Johannesburg today. “It’s a fiscal problem. They’re draining resources.”
The Swazi currency, the lilangeni, is pegged one-to-one with the rand, which was at 6.7291 per dollar as of 9:47 a.m. in Johannesburg. South Africa sets monetary policy for the Common Monetary Area, which includes Swaziland, Lesotho and Namibia.
“It’s in the interest of South Africa and Swaziland that we have optimal stability in the economy,” South African Finance Minister Pravin Gordhan told reporters on July 1, declining to elaborate.
Swaziland’s government, which agreed with the IMF to reduce salaries by 10 percent to qualify for funding, has faced opposition from labor unions and delays in getting lawmakers’ approval for the spending cuts, Dlamini said.
“With commitment, the civil service will agree to some of these measures,” Dlamini said. “It’s either half a loaf or no bread at all. But if government is not committed, the program will not proceed as expected.”
The budget deficit reached 14.3 percent of gross domestic product as of March 31, the IMF said on May 18. The economy will probably contract 1.9 percent this year as the government implements spending cuts of 900 million emalangeni ($134 million), equivalent to 3 percent of GDP, the IMF said.
“The outlook is not promising,” Dlamini said. “We are faced with austerity measures that require the government to reduce substantially its spending. The government is a major employer and that will have an impact on demand for retail goods.”
The government is still in talks on how much funding is required from South Africa, though a minimum of about 1.5 billion rand will be needed, Dlamini said.
Swaziland has Africa’s last absolute monarchy. The nation’s 1.2 million people are ruled by 43-year-old King Mswati III, who appoints the prime minister. Lawmakers aren’t allowed to belong to a political party and the country is under emergency rule.
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