The Efficiency of Monetary Policy on Economic Growth in Swaziland

By Patrick Ndzinisa
April 2008

In this paper we have specified and estimated three equations linking monetary policy variables with economic growth to determine the efficacy of monetary policies on economic growth. In our view of the transmission mechanism, domestic interests are at the center of the analysis. The econometric model results indicated that real GDP is influenced by, amongst other variables, monetary variables such as domestic interest rate, exchange rate, credit extension and price differentials between Swaziland and South Africa. The study further finds that credit extension has temporary negative impact on real GDP but with positive long-run effects.

Domestic interest rates were found to be responding most on inflation which itself depends largely on external factors such as South African CPI and the exchange rate. Domestic factors such as wages and capacity utilization were found to be significant in explaining the variation in domestic inflation. The study also demonstrated that the inflation-induced monetary policy tightening has a temporary negative effect on growth in Swaziland and vice-versa. The main implied policy recommendation from the study therefore is that in order for monetary policy to translate into growth in the short to medium term policymakers should strive to maintain low inflation by designing policies that will address those factors responsible for inflation in Swaziland as identified in the equation for CPI.

Maintaining low inflation very close to that prevailing in South Africa should be the main target of policymakers which will not only ease monetary policy but also promote exports competitiveness in the South African markets and attract investments hence economic growth.