Central Bank’s contractionary fiscal policy to challenge economic welfare

MBABANE – Following last’s week article on the Central Bank of Eswatini’s (CBE) shift to contractionary monetary policy by this publication, economist believe the move will challenge the economic welfare of the country.

They said challenge will mostly be felt by investors as well as business owners.

This was mentioned by Southern African Research Foundation for Economic Development (SARFED) regional coordinator and Economist Dr. George H. Choongwa in a statement.

Choongwa said more than 50 per cent of the private sector, mainly the SMEs (small and medium-sized entreprises) in Eswatini have been dependent suppliers of government and they constitute most of its spending trends through payment of supplies for both goods and services.

“In the event that contractionary measures were implemented, we expect to see a huge loss of business and flow of income to both industries and households,” said the economist.

He said this is expected to work against the 2022/23 national budget where government, through the Ministry of Commerce, Industry and Trade was in pursuit to create about 9 000 new jobs in the same financial year, while continuing to explore all avenues and to grow a competitive and export-driven economy.

Choongwa also mentioned that though it was reported that CBE’s first step in execution of this policy option was to reduce government spending, the ripple effect to such decision was likely to fuel poverty level as most jobs would be lost.

Jobs

He said this was against the national budget of 2022’s aim of creating at least 9 000 jobs through investments and stimulated economic activities.

“Contractionary measures means reduction in economic activities at least in the short and medium terms,” he said.

The economist further mentioned that this might contribute to the reduction in Gross Domestic Product (GDP) against the backdrop of the annual gross financing needs, having been remained high with average of about 19.4 per cent of GDP, leading to continued financing vulnerabilities.

He said this might then affect future SACU revenue, particularly for the year 22/23, thus generating additional budget and external financing pressures.

Choongwa said though the measures were taken to cut down on government spending through clearance of arrears, possible delays in arrears clearance to its trade partners, mainly the private sector would further weigh on growth.

He said inflation was expected to continue increasing, way beyond its range of to four per cent since 2020 as temporary inflation pressures from the depreciation of the exchange rate and rent increases are only partially being fuelled with increasing oil prices on the global economy and economic slack in general.

Affect

The economist said government’s decision to continue with its contractionary measure will equally affect the financial sector generally which is likely to bring attract existing macro-financial vulnerabilities on the basis that the banking sector plays a critical role in facilitating a smooth and sustainable circular follow of income in the society.