MONETARY POLICY CONSULTATIVE COMMITTEE (MPCC)

MONETARY POLICY CONSULTATIVE COMMITTEE (MPCC) ECONOMIC REVIEW AND INFLATION REPORT JULY 2018 PREPARED BY: ECONOMIC POLICY, RESEARCH AND STATISTICS DEPARTMENT

ECONOMIC REVIEW AND INFLATION REPORT 1 Major Highlights Real GDP Preliminary estimates reflect that real GDP is estimated to have increased by 1.9 per cent in 2017 compared to 1.4 per cent in 2016. Economic activity is projected to decelerate to 1.3 per cent in 2018 before picking up to 2.0 and 2.7 per cent in 2019 and 2020, respectively. Inflation Annual consumer inflation was unchanged at 4.8 per cent in May 2018, same as the previous month. Food prices continued to fall on a year-on-year basis while price indices for housing and utilities and transport grew by 13.9 per cent in May2018 from 13.3 per cent in the previous month. Foreign reserves Gross Official Reserves amounted to E6.1 billion at the end of June 2018, reflecting a 7.8 per cent decrease from E6.6 billion at the end of May 2018. The Reserves were sufficient to cover an estimated 2.9 months of imports of goods and services. Exchange rate Credit Extension The Lilangeni weakened by 9.83 per cent since the last MPCC meeting to average E13.30 against the US dollar in June 2018 from E12.11 in April 2018. Against the Pound Sterling the local unit weakened by 3.6 per cent from E17.05 in April 2018 to E17.67 in June. Credit to the private sector increased by 0.5 per cent month-on-month from E14.1 billion in April 2018 to 14.2 billion at the end of May 2018. The increase in demand for credit was observed in credit extended to both Other Sectors and Households while credit to the Business sector receded. Public Debt Preliminary debt figures for the month ending 30 June 2018 indicate that total public debt stood at E12.9 billion, an equivalent of 20.8 per cent of GDP. Balance of Payments As at May 2018, the country s trade balance recorded a trade deficit of E196.3 million from a deficit of E64.7 million recorded in the previous month.

PART A: ECONOMIC REVIEW 1.1 Global GDP Growth Global growth forecasts for the year 2018 and 2019 remain unchanged at 3.9 per cent, respectively, compared to 3.8 per cent recorded in 2017(World Economic Outlook, April 2018). While growth in advanced economies is expected to be above potential. Growth in emerging markets and and developing economies is expected to rise to 4.9 per cent in 2018 following a 4.8 per cent expansion in 2017. Looking ahead, emerging markets and developing economies will expand by 5.1 per cent in 2019. 1.0 GLOBAL ECONOMIC CONDITIONS The possibility of financial market stress, escalating trade protectionism and heightened geopolitical tensions continue to cloud the outlook. Financial market stress could arise because of escalating investor concerns about the creditworthiness of some emerging market and developing economies or as a by-product of faster-than-expected normalization of monetary policy in advanced economies. In advanced economies, labour markets have improved steadily. With output gaps nearly or already closed, inflation expectations have crept up and monetary policy is becoming less expansionary. Inflation, however, remains below central bank targets in many advanced economies. Across commodity exporters, inflation is generally moderating as the impact of past currency depreciations wanes. Activity in commodity importers continues to be robust. Growth in China is gradually slowing, but remains resilient, while constraints to growth are dissipating in other large commodity importers (notably India and Mexico), where investment is recovering. Inflation remains broadly stable so far, despite higher commodity prices and limited remaining slack. A further rise in oil prices, while beneficial for oil exporters, could amplify current account fragilities in some oilimporting EMDEs. The Eurozone economy expanded by 0.4 per cent quarter-on-quarter in the first three months of 2018, unrevised from the second estimate and following a 0.7 per cent advance in the previous period. The slowdown of the bloc's output growth was due to a negative contribution from external demand, while household consumption and fixed investment continued to rise (Eurostat, 7 June 2018). The US economy expanded by an annualized 2 per cent quarter-on-quarter in the first quarter of 2018, below 2.2 per cent in the second estimate and market expectations of 2.2 per cent. It is the lowest growth rate in a year as business inventories and personal consumption were revised down, the final estimate showed (US Bureau of Economic Analysis, 28 June 2018).

ECONOMIC REVIEW AND INFLATION REPORT 3 The UK economy expanded by 0.1 per cent quarteron-quarter in the first three months of 2018, in line with the preliminary estimate and well below a 0.4 per cent expansion in the previous period. It was the lowest growth rate since a 0.1 per cent contraction in the fourth quarter of 2012 as household spending rose the least in over three years and business investment shrank the most in 2-1/2 years, the second estimate showed (UK Office for National Statistics, 25 May 2018). 1.2 Advanced Economies CPI In many advanced economies inflation remains below central bank targets, however there are observed positive developments in the Eurozone and the US. Across commodity exporters, inflation is generally moderating as the impact of past currency depreciations wanes. Activity in commodity importers continues to be robust. Growth in China is gradually slowing, but remains resilient, while constraints to growth are dissipating in other large commodity importers (notably India and Mexico), where investment is recovering. Inflation remains broadly stable so far, despite higher commodity prices and limited remaining slack. A further rise in oil prices, while beneficial for oil exporters, could amplify current account fragilities in some oil-importing EMDEs (IMF WEO, April 2018 and World Bank Economic Prospects Report, June 2018). Consumer prices in the United States increased to 2.8 per cent in May from 2.5 per cent in April, beating market forecasts of 2.7 per cent. It was the highest inflation rate since February 2012, mainly due to rising prices for gasoline and shelter. (Bureau of Labour Statistics, 12 June 2018). Annual inflation in the Eurozone went up by 1.9 per cent in May 2018 from 1.3 per cent in April, matching the preliminary estimate. It was the highest inflation rate since April 2017, mainly due to a rise in oil prices. (Eurostat, 15 June 2018). The rate of inflation across the UK stood at an annual rate of 2.4 per cent in May 2018, unchanged from the previous month's one-year low and slightly below market expectations of 2.5 percent (UK Office for National Statistics 13 June 2018). 1.3 Monetary Policy in Advanced Economies The US Federal Reserve raised the target range for the federal funds rate by a quarter of a percentage point to a range of between 1.75 per cent and 2 per cent during its June meeting, saying that the labour market has continued to strengthen and that economic activity has been rising at a solid rate. Policymakers projected two additional hikes by the end of this year, compared to one previously estimated (US Federal Reserve, 13 June 2018). The European Central Bank (ECB) held its benchmark-refinancing rate at 0 per cent on June 14th and said the monthly pace of the net asset purchases will be reduced to 15 billion from

ECONOMIC REVIEW AND INFLATION REPORT 4 September to December 2018, and will then end. (ECB, 14 June 2018). The Bank of England left its key Bank Rate on hold at 0.5 per cent on 21 June 2018, in line with market expectations. However, 3 out of 9 policymakers including BoE Chief Economist, voted for a rate hike compared with only 2 votes in the previous meeting. The Committee voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at GBP 435 billion (Bank of England, 21 June 2018). 2.0 ECONOMIC DEVELOPMENTS IN SOUTH AFRICA 2.1 GDP Growth According to Statistics South Africa, the economy shrank by a seasonally adjusted and annualized 2.2 per cent quarter-on-quarter in the first three months of 2018, reversing from a 3.1 per cent growth in the previous period, which was the highest in 1-1/2 years. It compares with market expectations of a 0.5 per cent decline. It is the biggest contraction since the first quarter of 2009 as production declined mostly for mining, manufacturing and agriculture. The mining sector went down by 9.9 per cent, extending the 4.4 per cent drop in the fourth quarter of 2017 and mainly due to lower production of gold and other metal ores, mainly platinum group metals and iron ore. Manufacturing decreased by 6.4 percent, the biggest drop since the second quarter of 2015 and reversing from a 4.3 per cent gain in the last quarter of 2017. (Statistics South Africa, 5 June 2018). The SARB s forecast for GDP growth is unchanged at 1.7 per cent for 2018, but has been revised up from 1.5 per cent to 1.7 per cent for 2019. The forecast for 2020 is unchanged at 2.0 per cent. 2.2 Consumer Prices Consumer prices in South Africa fell to 4.4 per cent in May 2018 from 4.5 per cent in the previous month and below market consensus of 4.6 per cent. The slowdown in inflation rate was mainly due to lower prices of food and non-alcoholic drinks. Annual core inflation rate, which excludes cost of food, nonalcoholic beverages, petrol and energy, eased to 4.4 per cent in May from 4.5 per cent in April, missing market expectations of 4.5 per cent. Compared to April, core consumer prices were unchanged, after rising by 0.6 per cent in the previous month (Statistics South Africa, 20 June 2018). Headline inflation is expected to average 4.9 per cent and 5.2 per cent in 2019 respectively. Food prices are expected to increase by 4.9 per cent in 2018 and by 5.5 per cent in 2019, lower than in the previous forecast. There is a degree of uncertainty regarding the likely impact of the VAT increase and the sugar tax on food, and the extent to which these increases will be absorbed by manufacturers and retailers (SARB, 25 May 2018).

ECONOMIC REVIEW AND INFLATION REPORT 5 2.3 Monetary Policy The South African Reserve Bank (SARB) left its benchmark repo rate unchanged at 6.5 per cent on 24 May 2018 after trimming it by 25 basis points in the previous meeting and matching market expectations. Policymakers said that the current monetary policy stance is accommodative and appropriate given the current state of the economy and the inflation trajectory. The Committee added that it will closely monitor that the inflation remains within the inflation target rate and will adjust the policy stance if necessary (South Africa Reserve Bank, 24 May 2018). 3.0 DOMESTIC ECONOMIC DEVELOPMENTS 3.1 GDP Developments 3.1.1 GDP Growth Preliminary estimates for GDP reflect that overall economic activity expanded by 1.9 per cent in 2017 compared to 1.4 per cent in 2016, mainly supported by an improvement in the primary and secondary sectors. These sectors broadly benefitted from a recovery from an El Nino induced drought that commenced in 2015 and intensified in 2016. Improved weather conditions particularly the above normal rains received in the last months of 2016 and early months of 2017 supported a recovery in agricultural production, agro-processing, water supply and hydro-power generation. The primary sector is estimated to have increased by 0.7 per cent in 2017, up from a decline of 5.6 per cent in 2016. Crop production, which is dominated by sugarcane, grew by 17.2 per cent in 2017 compared to a decline of 21.9 per cent the previous year. Maize output rose from 33,462 metric tonnes in 2015/16 harvesting season to 84,000 metric tonnes in the 2016/17 harvesting season. Sugarcane production on the other hand rose by 7.2 per cent in 2017 following a decline of 14.7 per cent the previous year. The secondary sector is estimated to have expanded by 0.7 per cent in 2017 compared to 0.5 per cent recorded in 2016. Growth in the secondary sector was largely driven by manufacturing particularly agro-processing, electricity and water supply. Manufacturing output is estimated to have increased by 1.8 per cent in 2017 following a flat growth recorded in 2016, mainly supported by an increase in sugar production. Sugar production rose by 9.1 per cent in 2017 after declining by 15.7 per cent the previous year, largely benefiting from improved weather conditions, which resulted in higher cane and sucrose production. The tertiary sector is estimated to have grown by 2.7 per cent in 2017 compared to 3.2 per cent recorded in 2016. Positive growth rates were mainly observed in the output for general government services, communication and financial intermediation and wholesale and retail trade. The

GWh ECONOMIC REVIEW AND INFLATION REPORT 6 output for government services is estimated to have increased by 6.6 per cent in 2017 compared to 13.9 per cent in 2016 broadly in line with increased payroll numbers in the public sector. Sub-sectors that underperformed in the tertiary sector in 2017 included transport and storage, tourism and the health subsectors. Figure 1: GDP Developments 2013-2017 GDP Developments 10 6.4 5 1.9 0.4 1.4 1.9 0-5 2013 2014 2015 2016 2017est -10-15 -20 Overall GDP Primary Sector quarter ended December 2017. Electricity consumption by the irrigation power and bulk category declined by 6.2 per cent in the first quarter of 2018 from an 11.4 per cent growth recorded in the previous quarter. Domestic electricity consumption declined slightly by 0.3 per cent in the quarter ended March 2018 from a 3.8 per cent growth in the previous quarter. Meanwhile, electricity consumption by the commercial category, which broadly represents the nonagricultural manufacturing sector, recorded a growth of 2.9 per cent in the quarter under review, from a 0.5 per cent decrease recorded in the previous quarter. Figure 2: Electricity Consumption; 2016Q1 to Secondary Sector Tertiary Sector 2018Q1 Source: CSO, MEPD and CBS Economic activity is projected to decelerate to 1.3 per cent in 2018 before picking up to 2.0 and 2.7 per cent in 2019 and 2020, respectively. The slowdown in 2018 is mainly linked to the government cashflow challenges that have led to an accumulation of arrears from the previous two years. This will weigh 290.00 285.00 280.00 275.00 270.00 265.00 260.00 255.00 250.00 heavily on the performance of the construction, financial and wholesale and retail sub-sectors. 3.1.2 Selected Economic Indicators Electricity Consumption Total electricity consumption (seasonally adjusted) recorded a 2.2 per cent decrease in the quarter ended March 2018 from a 6.3 per cent growth in the Source: Swaziland Electricity Company (SEC) Water Consumption Seasonally adjusted figures indicate that total treated water consumption increased slightly by 0.1 per cent in the quarter ended March 2018 from a decline of 2.9 per cent in the previous quarter.

Million Kilolitres ECONOMIC REVIEW AND INFLATION REPORT 7 Domestic water consumption increased by 2.5 per cent whilst commercial consumption recorded a decrease of 2.6 per cent in the quarter under review. The total number of connections increased by 1.5 per cent to 42 997 in the quarter under review compared to 42 345 at the end of December 2017. The domestic category recorded a 1.6 per cent growth while the commercial category recorded a growth of 0.9 per cent in the number of connections. Figure 3: Water Consumption; 2016Q1 to 2018Q1 trend for the second consecutive quarter, falling by 22.8 per cent in the quarter ended March 2018 from a 17.0 per cent decline recorded in the previous quarter. The fiscal challenges faced by the government resulted in a slow implementation rate for public sector road infrastructure projects, resulted in the decrease in the demand for the quarried stone. Figure 4: Quarried Stone and Coal Production; 2015Q1 to 2018Q1 70,000 200,000 3.150 3.100 3.050 3.000 2.950 2.900 2.850 2.800 2.750 60,000 50,000 40,000 30,000 20,000 10,000 - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 150,000 100,000 50,000-2015 2016 2017 2018 Source: Swaziland Water Services Corporation (SWSC) Mining and Quarrying Coal production significantly declined by 22.8 per cent in the quarter ended March 2018 compared to a 5.7 per cent decline in the quarter ended December 2017. Challenges concerning complex geological conditions continue to affect the overall performance of the coal production industry and were the main contributor to the decrease observed. Quarry stone production continued on a downward Quarried Stone LHS (in Cubic Metres) Source: Ministry of Natural Resources and Energy Construction Preliminary figures from the municipalities and town boards indicate that total building plans approved decreased further by 9.6 per cent to 160 units in the first quarter of 2018 from a decline of 19.9 per cent in the fourth quarter of 2017. All the sub-categories for building plans approved recorded decreases in the first quarter of 2018 as they continue to reflect a scaling down in planned

Fuel Import Volumes_Index Jan 2008=100 ECONOMIC REVIEW AND INFLATION REPORT 8 construction activity in the private sector. In line with the drop in volumes, the total value of building plans approved declined by 15.3 per cent to E132.9 million in the first quarter of 2018 from E156.9 million in the quarter ended December 2017. Figure 5: Building Plans Approved; 2016Q1 to 2018Q1 250 200 150 100 50 0 in April 2018. On the contrary, petrol import volumes declined by a seasonally adjusted 2.5 per cent in May 2018 from an increase of 10.2 per cent recorded in the previous month. Following a persistent increase in international crude oil prices and a slightly weakening Rand, fuel prices increased by 50 cents per litre in May 2018. Figure 6: Fuel Imports; Jan 2017 to May 2018 156.0 154.0 152.0 150.0 148.0 146.0 144.0 Residential Industrial Other Source: All Municipalities Fuel Imports Total fuel import volumes slightly increased by a seasonally adjusted 1.2 per cent month-on-month in May 2018 from a 0.2 per cent growth observed in April 2018. This rise was mainly driven by increases in diesel and paraffin import volumes. Diesel fuel import volumes, which track commercial road freight activity in the economy accelerated by a seasonally adjusted 2.1 per cent in May 2018 from a 4.2 per cent decline observed in the previous month. In the same line, paraffin import volumes also rose significantly by a seasonally adjusted 22.4 per cent in May 2018 from a decline of 11.2 per cent recorded 142.0 140.0 138.0 Source: Ministry of Natural Resources and Energy 3.2 Monetary Sector 3.2.1 Gross official Reserves Gross Official Reserves declined by 7.8 per cent from E6.6 billion in May 2018 to E6.1 billion at the end of June 2018. This development was mainly due to a drawdown to finance Government expenditures. The Reserves were equivalent to an estimated 2.9 months of import cover, which is lower than the 3.2 months of imports recorded in May 2018. Compared year-on-year, Gross Official Reserves depicted a fall of 11.5 per cent.

PSCR, Businesses, Households (Per cent) May/17 Jun/17 Jul/17 Aug/17 Sep/17 Oct/17 Nov/17 Dec/17 Jan/18 Feb/18 Mar/18 Apr/18 May/18 Other Sectors (Per cent) May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 E'Billion Months ECONOMIC REVIEW AND INFLATION REPORT 9 Figure 7: Gross Official Reserves & Import Cover Agriculture & Forestry industries over the same 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 period. Credit to Other Sectors (Local Government, Parastatals and Other Financial Corporations) grew by 4.1 per cent in May 2018, a positive turnaround from the decline of 0.2 per cent recorded in the preceding month. Growth was supported by credit extension to Other Financial Corporations and Parastatals while credit to Local Government GOR Import Cover decelerated. Credit to Other Financial Corporations Source: Central Bank of Swaziland 3.2.2 Credit Extension Credit extended to the private sector increased by 0.5 per cent from E14.1 billion in April 2018 to E14.2 billion at the end of May 2018. The increase in demand for credit was observed in credit extended to both Other Sectors and Households while credit to the Business sector receded. Compared over the year, credit extended to the private sector increased by 11 per cent. Credit to the Business Sector trended downwards in May 2018, falling by 2.3 per cent month-on-month to settle at E6.0 billion at the end of the review month. Reduced demand for credit was observed in the following industries; Manufacturing, Distribution & Tourism, Mining & Quarry, Construction, Transport & Communications and Real Estate. In contrast, there was an increase in credit to Community, Social & Personal Services and rose by 4.8 per cent while credit to Parastatals grew by 3.3 per cent. On the other hand, credit to Local Government fell by 8.8 per cent over the month of May 2018. Figure 8: Private Sector Credit: Monthly Changes 8 6 4 2 0-2 -4-6 90 70 50 30 10-10 -30 PSCR Credit to Households Credit to Businesses Credit to Other Sectors Source: Central Bank of Swaziland Credit to Households & Non-Profit Institutions Serving Households (NPISH) recorded an increase of 2.2 per cent month-on-month to reach E6.1 billion at the end of May 2018. This development was

Housing, Motor vehicle (Per cent) May/17 Jun/17 Jul/17 Aug/17 Sep/17 Oct/17 Nov/17 Dec/17 Jan/18 Feb/18 Mar/18 Apr/18 May/18 Other Personal (Per cent) May/17 Jun/17 Jul/17 Aug/17 Sep/17 Oct/17 Nov/17 Dec/17 Jan/18 Feb/18 Mar/18 Apr/18 May/18 Per cent ECONOMIC REVIEW AND INFLATION REPORT 10 mainly due to an 8.7 per cent rise in Other Personal (unsecured) Loans. Growth was partially offset by a decline of 2.3 per cent in Motor Vehicle Finance. Housing Finance remained unchained over the month of May 2018. Figure 9: Household Credit by Product: Monthly Changes 10 5 0-5 -10-15 -20 10 8 6 4 2 0-2 -4-6 grew by 0.8 per cent while Savings Deposits rose by 0.7 per cent in May 2018. Figure 10: Money Supply: Monthly Changes 15.0 10.0 5.0 0.0-5.0-10.0-15.0 M1 Quasi Money M2 Source: Central Bank of Swaziland Motor Vehicle Housing Other Personal Source: Central Bank of Swaziland 3.2.3 Money Supply Broad Money Supply (M2) amounted to E16.8 billion at the end of May 2018, reflecting a monthon-month decline of 3.4 per cent. This was due to a fall in Narrow Money Supply (M1) that overshadowed an increase in Quasi Money Supply. Year-on-year, Broad Money Supply increased by 9.2 per cent. Quasi Money Supply stood at E11.2 billion at the end of May 2018, reflecting a month-on-month increase of 0.8 per cent. Growth was recorded in both its components over the review period. Time Deposits Narrow Money Supply (M1) declined by 10.7 per cent from E6.3 billion in April 2018 to E5.6 billion at the end of May 2018. This development was on account of Transferable (demand) Deposits which fell by 11.1 per cent over the period under review. Currency in Circulation, on the other hand, increased by 7.9 per cent over the same period. 3.3 Public Debt As at 30 June 2018, preliminary debt figures indicate that total public debt stood at E12.9 billion, an equivalent of 20.8 per cent of GDP. This reflects that total public debt increased slightly over the past month when compared to E12.8 billion recorded in May 2018.

E Millions E/$ ECONOMIC REVIEW AND INFLATION REPORT 11 At the end of June 2018, external debt stood at E5.2 billion, an equivalent of 8.5 per cent of GDP. This shows that external debt increased by 4 per cent in the month under review. The increase has been as primarily as a result of a slight depreciation of the Lilangeni against the USD and other major currencies in which the country s liabilities are denominated. Domestic debt stood at E7.7 billion at the end of June 2018, an equivalent to 12.3 per cent to GDP. Domestic debt remained unchanged when compared to the previous month. 3.4 External sector 3.4.1 Trade Developments not enough offset the effect of the widening trade deficit. Year-on-year however, exports fell by 2.6 per cent. Imports in the period grew significantly from E1.621 billion to E1.966 billion in April and May respectively. The import of mineral fuels increased by 19.3 per cent to E235.8 million in the month, while import of vehicles excluding rail decreased by 9.5 per cent to E114.4. billion. A year-on-year comparison shows that imports increased by 10.8 per cent over all. Figure 11: Merchandise Trade; December 2017 to May 2018 2,500 13.50 As at May 2018, the country recorded a wider trade deficit of E196.3 million from a trade deficit of E64.7 million recorded in the preceeding month. Exports increased for the first time in May since February 2018, expanding by 13.7 per cent month-on-month to E1.770 billion. Imports on the other hand, 2,000 1,500 1,000 500-13.00 12.50 12.00 11.50 continued to out-pace exports increasing by 21.3 per cent to E1.966 billion, resulting in the further deterioration in the trade balance. (500) Exports Trade Balance Imports E/$ 11.00 Exports overall increase was largely driven by sugar exports which grew by 4.0 per cent in May, coupled with 17.0 per cent month-on-month increase in miscellaneous edibles of E604.4 million. Wood and articles of wood recorded an increase of 20.7 per cent month-on-month to E122.1 million, contributing to the improved level of exports albeit Source: Swaziland Revenue Authority Although South Africa continued to be the Kingdom s biggest trade partner, the proportion of imports from that economy declined slightly from 78.8 to 77.9 per cent in the month of May. Exports destined to that market also fell from 69.3 per cent to a lower 66.5 per cent in the Month under review.

Emalangeni May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Percent (%) ECONOMIC REVIEW AND INFLATION REPORT 12 Figure 12: Proportion of Trade to South Africa May 2017 to May 2018 85.00 80.00 75.00 70.00 65.00 60.00 55.00 Source: Swaziland Revenue Authority 3.4.2 Exchange Rates Developments The Lilangeni weakened against major external currencies in part due to global and domestic factors in South Africa. From a South African perspective, the Lilangeni weakened on the back of weak economic growth and the worsening of the current account deficit, which prompted a large rand sell-off. The continuous widening of the US treasury yields in the month of May 2018 and the renewed trade debacle promoted by the US which was extended to restrict imports of steel and aluminum from other developed economies further put pressure on emerging market currencies including the Rand, to depreciate. SA % of Total exports SA % of Total imports Since the last MPCC meeting the Lilangeni weakened by 9.83 per cent to average E13.30 against the US Dollar in June 2018 from E12.11. Against the Pound Sterling the local unit weakened by 3.6 per cent from E17.05 in April 2018 to E17.67 in June. Furthermore, the European Central Bank s (ECB) announcement on its intent to withdraw its quantitative easing (QE) policy in the month of June 2018 saw the local unit depreciate by 4.5 per cent since April 2018 to average E15.53 in June. As at 9 July 2018 the Lilangeni was weaker at E13.54 to the US Dollar, E17.92 to the Pound Sterling and E15.87 to the Euro. Figure 13: Exchange Rates 20 18 16 14 12 10 Ju n- 17 Source: Central Bank of Swaziland The local unit remains vulnerable to significant global market events in particular geopolitical tensions, proposed protectionist trade policy by the US and the prospects of a tighter monetary policy stance by developed economies in the near term, especially the US. Jul - 17 Au g- 17 Se p- 17 Oc t- 17 No v- 17 De c- 17 Ja n- 18 Fe b- 18 M ar- 18 Ap r- 18 M ay - 18 Ju n- 18 USD 12. 13. 13. 13. 13. 14. 13. 12. 11. 11. 12. 12. 13. GBP 16. 17. 17. 17. 18. 18. 17. 16. 16. 16. 17. 16. 17. Euro 14. 15. 15. 15. 16. 16. 15. 14. 14. 14. 14. 14. 15.

year-on-year % change May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 ECONOMIC REVIEW AND INFLATION REPORT 13 PART B: INFLATION DEVELOPMENTS 1.1 Headline Inflation The country s annual consumer inflation was unchanged at 4.8 per cent in May 2018 same as it was the previous month. Food prices continued to fall on year-on-year basis, recording a deflation of 1.3 per cent in May 2018 from a deflation of 0.9 per cent in April. Food items that recorded annual decreases included; cereal products, oils and fats, fruits and sugar and confectionery products. In addition to food, other categories that recorded year-on-year decreases were communication and clothing, and footwear, which recorded a deflation of 2.3 and 2.0 per cent, respectively. Figure 14: Inflation Trends and Components; May 2017 to May 2018 10.0 8.0 6.0 4.0 2.0 0.0-2.0 Food Overall Source: Central Statistics Office Transport Other The above decreases were counteracted by increases in the price indices for housing and utilities and transport. The price index for housing and utilities grew by 13.9 per cent in May 2018 from 13.3 per cent the previous month. The increase was largely due to 13.7 per cent increase in water tariffs effected over the month under review. Transport inflation, on the other hand, rose by 0.2 of a percentage point to 3.4 per cent in May, largely due to a 40 cents per litre increase in fuel prices effected in May 2018. On month-on-month rates, inflation grew at a lower rate of 0.3 per cent in May 2018 down from a significant increase of 3.6 per cent the previous month. Notable month-on-month increases in May 2018 were observed in the price indices for housing and utilities, transport and clothing and footwear. Core inflation, which is measured as the CPI excluding food and non-alcoholic beverages, autofuel and energy remained elevated, recording 7.3 per cent in May 2018 from 7.1 per cent in April 2018. On month-on-month rates, core inflation grew modestly by 0.4 per cent in May 2018 compared to the 4.9 per cent growth recorded the previous month. 1.2 Inflation and Interest Rate Trends in Swaziland The Bank maintained its discount rate at 6.75 per cent during its May 2018 MPCC meeting maintaining a differential of 0.25 per cent between Swaziland and South Africa., South Africa also maintained its repo rate at 6.50 per cent in May 2018. Since March 2017, inflation continues to hover below the discount rate.

May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Per cent ECONOMIC REVIEW AND INFLATION REPORT 14 Figure 15: Inflation and Discount Rates 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 inflation outlook in the medium term. The Bank s forecasts for 2019 has been reviewed upwards from the previous 6.08 per cent to 6.66 per cent. Figure 16: Inflation Projections for 2018 (Fan- Chart) SD inflation SD Discount rate Source: Central Statistics Office and central bank of Swaziland 1.3 Inflation Outlook Inflation averaged 4.8 per cent in the first two months of the second quarter of 2018, 0.25 percentage points below the forecast average of 5.05 per cent for the quarter. The annual average inflation forecast for 2018 remains unchanged at 5.41 per cent; however, inflation forecast for the third and fourth quarter have been revised up. Inflation is now forecasted to increase from 5.66 per cent for both quarter three and four to average 5.89 per cent and 6.31 per cent, respectively. Risks to the inflation outlook appear to be biased upwards mainly due to the volatile exchange rate and the rising oil prices. Domestic drivers to the upward adjustment include the VAT increase and the increase in utility prices (15 per cent in electricity & 13.7 per cent for water tariffs) which were effected in April 2018. Source: Central Bank of Swaziland The Organization of the Petroleum Exporting Countries (OPEC) decision to raise oil supply by 600 000 barrels a day pose a downside risk to the

ECONOMIC REVIEW AND INFLATION REPORT 15 References Global Overview- The World Economic Outlook (WEO) Update, April 2018. Available from: http://www.imf.org/external/pubs/ft/weo/2018/upd ate/06/> (Accessed 20 June 2018) Advanced, Emerging Market and Developing Economies, June 2018.http://www.worldbank.org/en/news/pressrelease/2018/06/20/global-economic -prospects (Accessed 20 June 2018) World Oil Market Prospects H2/2018, sourced from OPEFC Monthly Oil Market Report, June 2018. Available from: https://momr.opec.org/pdfdownload/index.php (Accessed 20 June 2018) USA GDP Growth, May 2018. Available from: https://www.bea.gov/newsreleases/national/gdp/20 18/gdp4q17_adv.htm (Accessed 20 April 2018) US FED Monetary Policy Stance, June 2018. Available from: https://www.federalreserve.gov/ (Accessed 13 June 2018) USA CPI and Unemployment May 2018. Available from: https://www.bls.gov/ (Accessed 1 & 12 June 2018) Eurozone GDP Growth, June 2018. Available from: http://ec.europa.eu/eurostat/search? (Accessed 7 June 2018) European central bank Press Release, Monetary Policy Decisions, June 2018. Available from: http://www.ecb.europa.eu/press/ (Accessed 14 June 2018) Eurozone CPI and Unemployment, May 2018. Available from: http://ec.europa.eu/eurostat/search? (Accessed 15 June & 31 May 2018) Office for National Statistics. Available from: https://data.gov.uk/data/search; https://data.gov.uk/dataset/gdp_and_the_labour_ma rket (Accessed 17 and 28 May 2018) UK Bank Rate, June 2018. Available from: https://www.bankofengland.co.uk/monetary-policy- June -2018 (Accessed 21 June 2018) UK CPI and Unemployment, May & June 2018. Available from: https://data.gov.uk/data/ (Accessed 12 & 13 June 2018) Japan GDP, CPI and Unemployment Published by The Cabinet Office of Japan in collaboration with the Ministry of Internal affairs and Communications and Statistics Japan/ Statistics Bureau. Available from: http://www.stat.go.jp/english/data/; http://www.esri.cao.go.jp/index-e.html (Accessed 18 May & 8 June 2018) Japan Monetary Policy Data ( Interest Rates ) Published by - Bank of Japan, March 2018. Available from: https://www.boj.or.jp/en.htm/ (Accessed 15 June 2018) South African GDP, April 2018. Available from: http://www.statssa.gov.za/ (Accessed 5 June 2018) South Africa Interest Rates, May 2018. Available from: https://www.resbank.co.za/pages/default.aspx (24 May 2018) South Africa Consumer prices, May 2018. Available from: http://www.statssa.gov.za/ (Accessed 20 June 2018) South African Unemployment, Q1-2018. Available from: http://www.statssa.gov.za/ (Accessed 29 May 2018) United Kingdom GDP Growth, CPI and Unemployment, December 2017 & February 2018. Published by the