Why Eswatini's Lower Interest Rates May Raise Borrowing Costs: IMF Reveals Banking Paradox

An IMF study reveals that Eswatini’s borrowing costs are heavily influenced by South African interest rates, with domestic rate cuts sometimes making loans more expensive instead of stimulating growth. The findings urge closer monetary policy alignment with South Africa, stronger financial regulation and structural reforms to improve credit access and economic stability.

A new study by the International Monetary Fund (IMF), conducted by economist Yumeng Gu of the IMF's African Department using banking data provided by the Central Bank of Eswatini (CBE), has revealed significant weaknesses in how monetary policy influences borrowing costs, savings and economic activity in Eswatini. Published in October 2026, the study, titled Monetary Policy Transmission Through Banking: Evidence from Eswatini, finds that interest rate decisions made by the South African Reserve Bank (SARB) have a stronger influence on Eswatini's banking system than decisions made by its own central bank. The findings raise concerns that attempts to stimulate economic growth through lower domestic interest rates may sometimes backfire, increasing borrowing costs and weakening access to affordable credit.

South Africa's Interest Rate Decisions Shape Eswatini's Economy

Eswatini operates under the Common Monetary Area (CMA), which maintains a one-to-one exchange rate between its currency, the lilangeni, and the South African rand. While this arrangement provides currency stability and supports cross-border financial transactions, it significantly limits Eswatini's ability to independently manage interest rates.

Because money can move freely between Eswatini and South Africa, domestic interest rates must remain broadly aligned with South African rates to prevent financial instability and capital outflows.

The IMF examined monthly banking data from January 2018 to December 2025, covering lending rates at all four major banks and deposit rates at the country's two largest banks. Researchers analyzed how changes in domestic and South African monetary policies influence borrowing costs and savings returns.

The findings show that a one-percentage-point increase in South Africa's policy rate produces an almost equivalent increase in Eswatini's average lending rates within approximately one month.

However, deposit rates respond more slowly, with approximately 73% of the increase passed on to savers after five months. This means banks adjust borrowing costs faster than savings returns, potentially increasing their interest margins when rates rise.

Why Lower Interest Rates May Make Borrowing More Expensive

One of the study's most surprising findings is that lowering Eswatini's interest rates below South African levels does not necessarily make loans cheaper for businesses and households.

Most commercial loans in Eswatini have variable interest rates linked to the Prime Lending Rate, which has remained 3.5 percentage points above the CBE discount rate since September 2003.

While changes in the discount rate automatically affect many existing loans, banks can adjust the additional interest margins charged on new loans according to funding costs, financial risks and market conditions.

Since 2000, Eswatini has experienced four sustained periods when its policy rate remained below South African levels. These occurred during 2000–2001, 2008–2010, 2014–2016 and 2022–2025. The difference was generally 50 basis points but occasionally reached 100 basis points.

Another difference emerged in May 2026 when South Africa raised its policy rate to 7%, while Eswatini maintained its discount rate at 6.75%.

Although such decisions aim to encourage borrowing and investment, the IMF finds that maintaining lower domestic rates relative to South Africa is associated with higher lending rates over one year.

Banks may increase lending margins to compensate for risks created when their funding costs remain linked to South African markets while domestic lending benchmarks decline.

Banking Dependence Creates Challenges for Businesses and Savers

The research highlights how Eswatini's financial system depends heavily on developments in South African banking and money markets.

Large companies and institutional depositors can transfer funds between the two countries to secure better returns. This forces domestic banks to maintain competitive deposit rates even when Eswatini's central bank pursues a different monetary policy.

The country's substantial nonbank financial sector adds another challenge. Retirement funds held approximately E60 billion in assets at the end of 2025, while total nonbank financial institution assets reached E128 billion, equivalent to approximately 137% of GDP.

These financial connections mean domestic policy changes may have limited influence over the actual cost of bank funding.

For businesses, particularly those relying on domestic credit, the findings raise questions about whether interest rate reductions can effectively support investment and expansion.

The study also compares Eswatini with Namibia, another Common Monetary Area member. While Namibia has experienced modest reductions in borrowing costs during periods of monetary policy divergence, Eswatini has shown the opposite pattern.

Researchers suggest that Eswatini's smaller financial market and stronger dependence on South African funding may explain these differences, although available evidence cannot establish the exact causes.

IMF Urges Stronger Financial Policies and Closer Rate Alignment

The IMF recommends closer alignment between Eswatini's discount rate and South Africa's policy rate to reduce financial risks and improve the effectiveness of monetary policy.

It argues that relying on lower domestic interest rates alone is unlikely to generate substantial increases in lending or economic activity.

Instead, policymakers should strengthen fiscal policy, financial regulation and structural reforms to support economic growth while maintaining currency stability.

The study also emphasizes maintaining adequate financial and fiscal reserves to protect the economy against unexpected shocks.

Researchers acknowledge limitations in the available banking data and recommend collecting more detailed information on newly issued loans and existing credit arrangements.

Such improvements would help policymakers understand how banks set interest rates and whether monetary decisions genuinely benefit borrowers.

Ultimately, the findings suggest that Eswatini's economic stability and credit conditions remain closely tied to South Africa, making stronger domestic financial institutions and coordinated economic policies essential for sustainable growth.