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Be careful with the deficit, Mr Minister

by Lesotho Times
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THE role of fiscal and monetary policies during recessions has been explored over the years. These policies are used to counter the effects of shrinking output during recessions, credit contractions and asset price declines.

In Lesotho, where monetary policy is not autonomous, fiscal policy appears to be more effective in shortening the duration of recessions or at least cushioning the masses against the adverse effects of a recession.

There are two levers that are useful in this regard — cutting taxes or increasing spending. This should be done to ensure that fiscal stimulus is large, diversified, contingent, collective and sufficiently long-lasting.

However, the evidence is scanty in support of the efficacy of fiscal policy in fighting recessions that have been sparked by a financial crisis.


Why policy is effective:

● the dramatic drop in aggregate demand necessitates a larger fiscal stimulus to support the economy than in a standard recession

● the ability of consumers to spend is hampered by financial distress causing capital markets to freeze, collateral to fall in value and lenders to tighten loan standards

● the difficulty to finance fiscal expansion in a risk-averse environment.

The 2007/2008 credit crunch in the United States precipitated a financial crisis which, through contagion, culminated into a global problem that saw financial institutions across the world quake financially.

The advent of globalisation and international financial inter-connectedness made it easier for the crisis to permeate from the financial market in the US to other countries’ financial markets.

The economy of Lesotho was not immune to this global phenomenon.

As demand in the US plummeted, Lesotho’s exports shrank because a significant component of Lesotho’s exports is destined to the US to take advantage of the Africa Growth and Opportunity Act (AGOA).

Such a decline in Lesotho’s exports to the US had deleterious effects on employment in the manufacturing sector especially the textile and clothing industry.

Moreover, the South African mines which employ a large number of Basotho were also adversely affected by the crisis.

Against this background, the pressing needs of Lesotho this year still relate the economy to job creation, and social protection spending.

The budget rightly identified both short and long-term problems for Lesotho.

At the epoch was low productivity of the civil service, the need to diversify over products and markets, the need to anchor long-term expenditure planning on the long-term growth of the domestic revenue, the need for deeper private sector-led growth, the need to develop infrastructure, build the necessary skills and effective institutions as well as promoting financial inclusion.

There clearly was no scope for any tax cuts because the revenue was drying up due to dwindling Sacu revenue.

However, some expenditure rationalisation measures were embraced. For example, the expenditure on international travel was reduced to 2007/08 levels, training and workshops, furniture purchases, and short-term vehicle hire were eliminated.

This was done so as to reduce recurrent expenditure (from M7 536 million to M6 906 million) in favour of investment expenditure (from M2 529 million to M3 570 million) in order to ensure a speedy recovery and a sustainable fiscal deficit.

In order to ensure optimal revenue collection, the budget proposed the widening of the Lesotho Revenue Authority’s mandate to cover collection of all revenue for the government.

On the expenditure side, M50 million was to create a credit guarantee facility for small, micro and medium-scale enterprises to access credit was allocated and  M107 million was set aside for rural electrification.

M418 million has been set aside for the development of water supply projects across the country while M191 million has been set aside for construction and maintenance of rural and urban roads, of which M98 million will specifically finance the building of bridges.

Furthermore, M70 million and M469.6 million has been set aside for secondary education and the 2010/11 tertiary education scholarships, respectively.

However, there has been no proposed increase in per capital old age pensions. Nonetheless, the total budget for this purpose is increasing as the number of old people rises.

The budget made other proposals without making specific budget allocations on their implementation. These include, among others, financial inclusion through support to the Lesotho Post Bank. This is intended to develop market-led financial products focusing on the unbanked rural population.

In addition, performance management has to be improved to address the question of low productivity of the civil service through the implementation of a performance management system linked to the budget so as to reward good performance and penalise poor performance.

It is crucial to highlight that the budget deficit guideline of three percent of GDP was not observed by this year’s budget because the proposed deficit is 12 percent of GDP.

This is an enormous deviation from the guideline.

Furthermore, this deficit will be financed by M502 million of debt from multilateral development institutions.

This underscores the need to spend the budget largely on investment expenditure otherwise the deficit will be unsustainable.

Moreover, there is no allocation for the expansion of the capacity of the ’Muela Hydropower Station, and no recovery mechanism for the credit extended to farmers during the previous year has been proposed; this may encourage the culture of non-repayment in the country.


● Sephooko Ignatius Motelle is an economist and research associate with Africa Growth Institute.

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