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State of govt finances worries IMF

Mohalenyane Phakela/Bereng Mpaki

LESOTHO continues to face fiscal challenges stemming from declining Southern African Customs Union (SACU) revenues and high government expenditures.

This was said by the International Monetary Fund (IMF) after its recent visit to Lesotho to collect economic and financial information and discuss with officials the country’s economic developments and policies.

Following the visit which ended on 26 April 2019, the IMF noted that due to the continuously declining SACU revenues which are below historical averages, the government has run into fiscal difficulties. The organisation said this has also been coupled by persistently high government expenditure, which has led to the emergence of government payment arrears.

Due to the fall in SACU revenues, the current account deficit is projected to widen to 8, 4 percent of gross domestic product (GDP) in 2018/19 financial year.

The government and the IMF have been in discussions since last June for a financial bailout which will help the country to reduce its budget deficit of M476, 9 million and boost foreign currency reserves.

However, the IMF said there is a need for both short and medium-term measures to preserve fiscal and external sustainability, as well as generating strong and inclusive growth.

“Lesotho continues to face significant challenges, stemming mainly from the declining SACU revenues and high government expenditures,” the IMF said after the visit.

“Against this background, the IMF underscored the need for both short and medium-term measures to preserve fiscal and external sustainability, as well as generate strong and inclusive growth.”

The IMF also welcomed the “ambitious 2019/20 budget” and emphasised that its strict implementation will be key to preserving fiscal sustainability, “especially in terms of clearing the accumulated domestic arrears and strengthening the external position”.

It also underscored the importance of strengthening expenditure controls, resisting pressure to enact additional spending and improving tax administration.

“The IMF directors recommended improvements to debt management, a prudent approach to debt contracting, and addressing contingent liabilities related to the public sector pension fund to strengthen debt sustainability.

“The directors emphasised that the fiscal adjustment needs to be reoriented to favor growth and efficiency. Reducing the high public wage bill over time will provide space for the authorities’ strategic priorities.

“They also stressed the need for greater efficiency in health and education spending to ensure better outcomes. They further urged for enhanced public financial management, including through improved financial reporting and cash management, which will accelerate the clearance of arrears. The directors welcomed the authorities’ efforts to protect the most vulnerable from the impact of the adjustment,” the IMF said.

The IMF also welcomed the steps being taken to strengthen the financial sector’s contribution to growth. The institution highlighted the need to continue to closely monitor household indebtedness and credit concentration as well as to further enforce the AML/CFT framework.

The fund said strengthening the regulation of the non-bank financial sector will also be needed to support the financial inclusion agenda.

It also supported government efforts to encourage job creation and underscored the need for continued improvements to the business climate.

The IMF further highlighted the importance of a stable regulatory framework, with greater engagement with the private sector prior to the introduction of new regulations.

The IMF also emphasised that fiscal adjustments need to be re-oriented to favor growth and efficiency of the economy, also noting the government’s willingness to decrease the wage bill, which is said to be one of the highest in the world.

“Over the past decade, capital intensive projects and government consumption have driven growth in Lesotho. Most recently, work is beginning on Phase 2 of the Lesotho Highlands Water Project, and together with a recovery in the diamond and textile sectors, has resulted in growth of around three percent of gross domestic product (GDP) in 2018/19.

“However, with SACU revenues below historical averages and government expenditure persistently high, the government has run into fiscal difficulties, leading to the emergence of government payment arrears.

“The recently passed 2019/2020 budget envisages strong fiscal consolidation which should ensure a fully financed deficit and allow space for the clearance of arrears. The authorities plan to increase the VAT on telecoms and introduce a levy on alcohol and tobacco. On the expenditure side, savings will be generated by a zero cost of living adjustment for civil servants, which will begin to address the issue of the wage bill, currently one of the largest in the world as a percent of GDP.

“IMF recommended improvements to debt management, a prudent approach to debt contracting, and addressing contingent liabilities related to the public sector pension fund to strengthen debt sustainability. They emphasised that the fiscal adjustment needs to be reoriented to favor growth and efficiency. Reducing the high public wage bill over time will provide space for the authorities’ strategic priorities.

“IMF supported efforts to encourage job creation and underscored the need for continued improvements to the business climate. They highlighted the importance of a stable regulatory framework, with greater engagement with the private sector prior to the introduction of new regulations. However, the IMF complained of the banks’ contribution to the private sector.

“The banking sector’s contribution to growth has been limited, and lending to the corporate sector and SMEs has been anemic. Reforms to improve the legal framework aim to encourage lending, while technological change, such as the rapid growth in the mobile money sector, is providing new channels for households and small businesses to access the formal financial system.

“The IMF welcomed the steps being taken to strengthen the financial sector’s contribution to growth. They highlighted the need to continue to closely monitor household indebtedness and credit concentration as well as to further enforce the AML/CFT framework. Strengthening the regulation of the non-bank financial sector will also be needed to support the financial inclusion agenda.”

The institution also stressed the need for greater efficiency in health and education spending to ensure better outcomes. It further urged for enhanced public financial management, including through improved financial reporting and cash management, which will accelerate the clearance of arrears.

The IMF further welcomed the government’s efforts to protect the most vulnerable from the impact of the adjustment.

Economic analyst, Leonard Nyambuya seconded the IMF and said the country’s biggest risks in the short to medium term include the “renewed political instability as a result of fissures within the main party to the coalition government, which has derailed the reform process and risks missing the SADC deadline, effects of the El-Niño induced drought, insufficient fiscal adjustment to stagnation in SACU transfers”

He said Lesotho suffers from a twin deficit in budget deficit and the current account deficit as a result of high imports exports.

“Going forward, the current account is expected to remain in deficit due to upward pressure on imports from construction activities related to mining investment and implementation of the LHWP II. The current account deficit is projected to grow to 8.4 percent during this financial year. This was exacerbated by limited FDI and a growth in investment outflows. This has negatively impacted the gross international and reduced the months of imports cover. The volatile rand has not helped the situation either.

“As a result of high spending and limited fiscal space, macroeconomic stability faces strong opposing forces, more reforms are required to contain the budget deficit. Fiscal discipline must be restored as a matter of urgency.  Although the 2019/20 budget statement made pronouncements around fiscal discipline what is left is the implementation part which in most cases is the difficult part,” Mr Nyambuya said.

Mr Nyambuya said shocks to SACU revenues can become a source of systemic risk by affecting the fiscal position and the balance of payments.

He also warned that the government’s financing options must be increased from the current levels as limited resources to fund government expenditure will eventually crowd out the private sector and inhibit investment which the country sorely needs.

Mr Nyambuya said the economy needs to be diversified to allow the private sector to play a meaningful role in the development of the economy, participate in job creation and poverty alleviation.

“Growth in the economy has traditionally been driven mostly by government consumption. This requires an investment enabling and conducive environment, policy consistency. The government needs to help develop and operationalise the capital markets in Lesotho and this can be done by full or partial privatisation of some of the state owned enterprises (SOE’s), through the Maseru Securities Market. It is through such structural reforms that the economy can be turned around, most of the SOE’s have ceased or have not meaningfully contributed to the fiscus,” Mr Nyambuya said.

He said the austerity measures being implemented will result in more pain to the already suffering workers and without wage adjustments and increasing tariffs it will be difficult to further tighten the belts.

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