Determinants of Milk Import Substitution in Eswatini

Abstract

Eswatini continues to face persistent dairy import dependency despite high per capita consumption and successive government policy commitments to achieve self-sufficiency. This study investigated the determinants of milk import substitution in Eswatini from 1981 to 2023 using annual time series data sourced from the Eswatini Dairy Board (EDB), the World Bank, and the International Monetary Fund (IMF). The milk import substitution ratio (IR) was constructed using the absolute measure of import substitution, calculated as the difference between import availability ratios over time: R = (M₀/S₀) - (M₁/S₁), where M represents imports and S represents total supply (domestic production plus imports). A positive IR indicates that domestic production is displacing imports (import substitution is occurring), while a negative IR indicates that imports are growing faster than domestic production's ability to displace them (import dependency is increasing). A higher IR value indicates greater import substitution, with positive values signifying successful substitution. The analysis employed the Augmented Dickey-Fuller (ADF) unit root test and the Autoregressive Distributed Lag (ARDL) Bounds Testing approach with an Error Correction Model (ECM). ADF tests confirmed mixed integration orders (I(0) and I(1)), validating the ARDL framework. The Bounds test established a robust long-run relationship at the 5% significance level (F-statistic = 61.31627; 5% upper bound = 4.923). The estimated Error Correction Term (ECT = -1.1238) confirmed oscillatory but stable convergence to long-run equilibrium. In the long run, a 1% increase in domestic milk production (INDM) improved the import substitution ratio by 0.00196 points, while a 1% increase in milk imports (INMI) reduced the substitution ratio by 0.00198 points. The structural break in 1995 showed a negative coefficient (-0.0748), suggesting a possible decline in the substitution ratio, though this was not statistically significant (p = 0.2713). Similarly, the negative time trend (-0.0006 points per year) was not statistically significant (p = 0.7398). Real GDP, population growth rate, and the real effective exchange rate were not statistically significant long-run determinants at the 5% level. In the short run, changes in population growth had significant effects: current changes negatively influenced the ratio, while lagged changes positively influenced it. The overall Import Substitution Ratio averaged approximately -0.75, confirming persistent structural dependency. This is the first study to construct and analyze the milk import substitution ratio in Eswatini over the 1981-2023 period, providing a unique contribution to understanding dairy policy effectiveness and import substitution dynamics. Recommendations include strengthening domestic production capacity through targeted subsidies and veterinary extension services, implementing strategic import management mechanisms including variable tariffs and domestic supply buffers, and investing in dairy value chain infrastructure to reduce post-harvest losses.