EXECUTIVE SUMMARY

This strategy document is a response to the declining performance of the sugar sector and is, in particular, a mitigation measure against the negative effects on the sugar industry and the wider economy that will result from the reform of the European Union (EU) sugar market.

Swaziland, the Sugar Industry and the EU Sugar Sector Reforms

The sugar industry is of critical importance to Swaziland’s development, and plays a multifaceted role in the economy. It contributes about 18 percent to national output and over 35 percent of the workforce in the agricultural sector is employed in the sugar industry. The Swazi sugar industry can be held up as a real success story from other sectors, in terms of growth and productivity. Presently, on less than 50,000 ha of irrigated land, it produces in excess of 650,000 tonnes of sugar per year, representing a turnover of more than E1.5 billion, or above € 200 million. Swaziland’s sugar industry has consistently ranked among the top ten most efficient producers of sugar. The industry is poised for some major expansions in the short to medium term with new entrants expected to come through the Komati Downstream Development Project and the Lower Usuthu Smallholder Irrigation Project, as about 16,000 hectares of land will be cultivated to sugarcane, producing an extra 200,000 tonnes of sugar.

The success of the industry, and of Swaziland’s export-led economy, and the basis for further expansion can be attributable to the preferential markets that have been provided by developed countries (particularly in Europe and the USA). The European market absorbs about 150,000 tonnes of the total sugar production of Swaziland, whilst representing over 30% of industry revenue due to the higher prices obtainable in the EU.

The sugar industry is now facing several challenges, primary of which has been the appreciation of the local currency, and, recently, the process of erosion of preferences in the EU market. The result of these developments is a reduction in export earnings and a reduction in industry revenues (due to a fall in the average sugar price).

The EU has announced reforms to its internal sugar market regime, which will result in the lowering of prices obtainable in the EU by a cumulative 36% over the next four years (between 2006 and 2009). In complement to its sugar market reform, the EU has pledged to support countries, in particular those dependent on the EU market through the Sugar Protocol provisions of the Cotonou Agreement, in their adaptation process. Swaziland is therefore, through this strategy document, responding both to the need for reform in order to ensure the continued viability of the sugar industry and the requirement of the EU to have a comprehensive strategy to which the support could be channeled.

Swaziland is also facing a host of economic challenges, ranging from low economic growth to high levels of unemployment and poverty. The HIV/AIDS pandemic has also reached alarming proportions, with an estimated 42.6 percent of the adult population being HIV positive and the public resources available to respond to these challenges are gradually diminishing.

The Strategy Objectives and Pillars

The over-arching goal of this strategy is to have the sugar industry continue playing the important economic development role that it has effectively played in the past. On this basis, the sugar industry should be able to continually maximize on its productivity, efficiency and competitiveness. Furthermore, where there is need to restructure operations, and possibly diversify, there is need to have a response mechanism that will ensure that society is not left worse off as a result of the EU sugar sector reforms.

In supporting the sugar industry to continue playing its strategic multifaceted role, the strategy seeks to respond along three pillars. First, the restructuring needs of the industry will be supported, whilst ensuring that a programme of continuous productivity and efficiency improvement is implemented. Secondly, the continued viability of smallholder sugarcane farming will be ensured. Thirdly, the value of markets will be preserved, and where possible (preferential) market access will be enhanced.

On the broader adaptation needs, the strategy seeks to minimize the possibility of deterioration in living standards resulting from the reforms and to support diversification initiatives, both within the sugar industry and outside to other sectors. This will also include the provision of social safety nets to ensure that people who were dependent on the sugar industry (retrenched employees, their families and the communities) are able to continue supporting reasonable livelihoods. Other macroeconomic imbalances will result from the EU sugar reforms. These will include negative effects on export earnings (and foreign reserves accumulation), balance of payments, government revenue and increased expenditures on social services, increasing unemployment and worsening poverty situations. Many other sectors of the economy will be affected due to the multi-sectoral linkage of the sugar sector, and therefore a need to provide cushions for the broader economy too. Diversification activities, although limited in the short-term, will be investigated, pursued and supported.

Priority Needs

Several priorities have been identified in the response strategy. First, the establishment of the institutional structures to coordinate the implementation of this strategy is paramount. These structures will also be useful in the further elaboration of the identified strategies into actionable projects and programmes. Whilst some institutions already exist for the implementation of the strategies, there is need to further strengthen them, and where necessary create new ones to facilitate fast and effective responses. The creation of a Restructuring and Diversification Management Unit is urgently needed. It will be responsible for the further elaboration of these strategies into actionable programmes, and to coordinate other agencies which will be involved in the strategy implementation.

Secondly, the stabilisation of the financial situation of smallholder cane growers will receive priority attention. It is recognized that without early and effective action on the plight of smallholder growers, the objectives of employment creation and poverty reduction will be seriously compromised. This will even further compromise the strategic role of the sugar industry as a whole in national development. The primary areas of action is the unsustainable debt situations already being faced by smallholders and the high cost of establishment, coupled with challenges of efficiency of production for the new entrants. A support scheme will be implemented as a matter of priority.

The third priority relates to the protection of value of the trade dimension. Trade, in particular trade preferences, plays an important role in the continued viability and sustainability of the industry. There is need to ensure that expanded duty free access is pursued with the developed countries, in particular the EU as it is expected to continue being a high premium market for Swazi sugar for some time into the future. Regional markets will also need to be nurtured and protected in order to absorb Swazi sugar at reasonable prices. In this regard, Swaziland will initiative dialogue and intensify its lobby against any developments which seek to erode the value of regional integration and the regional markets. This will particularly focus on the possible retro-fitting of the RSA-EU TDCA into the whole of SACU (and other SADC countries presently negotiating an EPA with the EU), and further initiatives to seek expanded duty free access into the EU market. In the first instance, the protection and guarantee of the present SPS allocation of 30,000 tonnes will need to be secured. Support to trade negotiations, and lobby systems, is necessary.

A fourth priority relates to the welfare of retrenched workers and the ability of the sugar companies to continue providing quality social services at their estates for the benefit of workers and the neighbouring communities. A variety of initiatives are planned, including the provision of safety nets and support for adaptation and diversification. Of priority will be the issue of access to social services for retrenched workers, and the development of a model for the future management of the social services currently provided, and managed, by the sugar companies. In complement to this will be initiatives to support and re-train retrenched employees, particularly those wishing to venture into the outsourced services.

The present economic climate constrains the Government’s ability to provide good social services, and the provision of support programmes in response to the effects of the EU sugar reforms. As it stands, public resources are already overstretched owing to the many social and economic challenges facing Swaziland. Without any external help, the effects of the reforms will be profound. Besides the need to provide alternative revenue streams to replace the revenue to be lost from the reduction in the sugar levy and related taxation in the sugar sector, there is need to support fiscal stability and the ability of the Government to respond to the national problems. Without this, any effect due to the EU sugar reforms will be manifested and severe because of the multiplier impact of the sugar industry in Swaziland. As a priority, there is need to assist the Government in implementing its response strategy and the wider poverty reduction strategy programmes. This will involve on one part the provision of budget support, and on the other, the further elaboration of identified programmes. Presently, Swaziland is not eligible for budget support from the EU. As a matter of priority, the process allowing the mode of assistance to move towards budget support will be initiated with a view to conclusion and the provision of budget support in the medium term.

Phases, Financing and the Vision

This strategy is phased along the lines of the modalities for the deployment of the EU assistance. The first phase covers the period between 2006 and July 2007, which is defined as the short-term. The second phase covers the period from August 2007 to December 2008, and is defined as the medium term. The third phase covers the period from 2009 to 2013. It is expected however that implementation will not necessarily be in line with this phasing, as the nature of the projects to be implemented will determine the implementation schedule. It is expected that implementation may go up to 2015 for some activities, particularly those that will receive financial support in the 2013 financial year. This phasing method does not in anyway mean the support will be sought only from the EU. Other donors, including the Swaziland government and the sugar industry, will also be involved in the implementation and financing of the strategy. The alignment with the EU process is meant to allow for ease of reference, whilst at the same time it is expected that the EU will support, in line with its commitment, the major adaptation process.

The financial requirements for implementing this strategy are estimated at €349 million, or about E2.6 billion. This appears a huge figure but it represents the magnitude of the response needed and the need to support other complimentary programmes, without which the success of the adaptation process will be compromised. It should also be borne in mind that some of these resource requirements reflect those that will be financed from industry sources, some of which are already being implemented. The nature of such industry-financed activities will require loan financing, where concessional terms will be pursued. Other investments/interventions are necessitated by the need to relieve the industry of the financial burden on some operations which are social in nature, and therefore not core to the business of producing sugar.

Through this strategy, the country is espousing a vision of a more competitive sugar industry continually playing a significant role in the development of Swaziland. The sugar industry will be able to continually play its strategic role of facilitating the development of poor communities in the lowveld, through maintained viability of smallholder farming programmes and the provision of quality social services to the communities. In the long term, the efficiency and productivity of the sugar industry must ensure that it has achieved a competitiveness level that allows it to sell sugar profitably in a more liberalized trading environment. This focus reflects the fact that the sugar sector has a potential to grow further, provided the necessary support is given, and that there are limited opportunities for diversification to other sectors.

All stakeholders in Swaziland, including the Government, the sugar industry and civil society, were in concert in the elaboration of this strategy. The strategy is a product of extensive dialogue and consultation, and has the support of all stakeholders. The success of this vision and strategy rests on the continued support of this strategy, reviewed when/where necessary, by the stakeholders and the participation of the donor community in its implementation. A comprehensive review of this strategy is envisaged in late 2008/early 2009.