Budget fails fiscal transparency test
THE reading of the 2016/2017 budget speech last Friday has presented an opportunity to comment on the policy proposals the government of Lesotho is making to Parliament for consideration and approval. As was the case last year, I take this opportunity to share a few observations on the speech and accompanying information.
Does the budget follow international best practice and principles?
A full appraisal of any public sector budget must pit it against basic principles of international best practice. As the budget is a statement of policies financed by tax-payer resources, it must achieve credibility by presenting genuine agreed and ready-to-implement policies accompanied by accurate financial estimates. Large variations in policy and financial commitments between any two years signals lack of credibility of the budget, which undermines confidence. The 2016/2017 budget raises serious issues that speak to the principle of credibility. In May 2015, the government indicated that it planned to run a budget deficit of four percent of national output. The government is now predicting a surplus of 0.3 percent, implying that actual financial operations have deviated from the budget by some 4.3 percent of national output, equivalent to many millions of Maloti. This summary measure alone points to many large deviations in both revenue and expenditures during the 2015/2016 budget year.
Public sector budgeting must also be fiscally transparent. The executive must disclose to Parliament and the public as much information as possible regarding budget policy and the associated financial data. Based on the two budget speeches of 2015/2016 and 2016/2017, the government is demonstrating a worrying lack of fiscal transparency. The 2016/2017 budget speech does not disclose the political context underlying the proposals as well as the macroeconomic policy that underpins it. In particular, it ignores the political instability that has persisted since 2014, both in terms of the needed policy changes, the allocations required to restore normalcy to Lesotho and more critically that the uncertain political environment renders the budget itself uncertain. Finance Minister Dr ‘Mamphono Khaketla recognises this only in passing when in Paragraph 90, she says that reforms “have started at a very slow rate due to unfortunate incidents that befell our country in the last year”. At least three tables disclosing macroeconomic intentions that appeared in the 2015/2016 budget speech have been excluded in this speech, thus undermining fiscal transparency.
On the posture of macroeconomic policy, although there is mention of the level of deficit, there is insufficient information on how the deficit of M2.7 billion is to be financed in a manner that does not ignite a debt spiral and endanger macroeconomic stability. The government suggests it will use domestic borrowing and foreign currency reserves, but does not say how much of each source will be used and what impact this will have on the target of Net International Reserves of $600 million (Paragraph 17). The government also does not disclose the instruments it wishes to use to borrow domestically and how domestic lenders will be willing to lend large amounts of money to the government of Lesotho during a period of political uncertainty. Equally, the government does not disclose the increase in public debt that will result from implementation of the budget as proposed. Parliament should seek clarity on the mix of financing and the increase in public debt expected from this budget.
Also evident is the lack of accountability for financial resources appropriated by Parliament. As indicated in my previous commentary in June 2015, the actions (and lack thereof) of the government on one hand to produce and Parliament on the other to require proper public accounts are contributing to poor accounting for financial resources appropriated by Parliament. For its part, the government of Lesotho has failed to present credible public financial accounts since 1975. Each year, the government tables in Parliament audited public accounts which do not represent the true financial position. Each year, Parliament appropriates the next budget, without demanding accurate public accounts for the previous financial years. By not forcefully and persistently requiring accurate public accounts, Parliament is failing in its duty to exact accountability from the Executive. Evidence from other countries shows that democracy fails when Parliaments do not perform their constitutional duty of oversight and elect instead to protect sitting governments from scrutiny and accountability.
The budget proposal ignores Lesotho’s political and other challenges
Good governance and a good budget are important contributors to the attainment of economic growth and reduction of poverty. To increase economic growth and reduce poverty, Lesotho needs to have in place at the same time political stability, macroeconomic stability, a conducive investment climate, and strong entrepreneurial capacity. For most of its 50 years of independence, Lesotho has lacked political stability and this speaks eloquently to the continuing underdevelopment, poverty and extreme inequality. The semblance of political stability that seemed to gain momentum in recent years was rudely interrupted in 2014, leaving Lesotho in the clutches of a government that has since March 2015 focused on deaths, insecurity and strenuous attempts to wish these away. It is sensible to assume that the implementation of the recent SADC Commission of Inquiry resolutions will also occupy government for a good part of the budget year, once again denying it the time it needs to devote to preparing an implementation plan for the National Strategic Development Plan (NSDP).
To the extent that the financial data proposed in the budget is accurate, the budget deficit of 9.9 percent of national output (M2,732 million shortfall) could endanger at least two constituent elements of macroeconomic stability, namely a rise of public indebtedness and loss of Lesotho’s stock of foreign currencies which is used not only to pay for government expenses, but more critically to supply enough rand in Lesotho to support the one-to-one pegging of the Loti to the rand. The government does not disclose enough details on its financing plans, but the International Monetary Fund (IMF) recently warned that Lesotho could move into a foreign currently shortage situation if its spending plans, particularly on wages are not controlled. Even if the government believed at the time of the speech it could maintain macroeconomic stability, political instability will complicate the management of the economy and render the revenue projections optimistic. The minister concedes in Paragraph 90 the role of political instability in disrupting the execution of government plans.
Lesotho has previously invested a lot of effort in securing macroeconomic stability, but not enough on attaining a conducive investment climate and strong entrepreneurial capacity. The Job Summit process launched in August 2014 was intended specifically to ignite entrepreneurial energy and undertake widespread investment climate reforms. This was the process that would result in district and national investment plans being developed to implement the NSDP. It is thus regrettable to hear that the Job Summit process has stalled, with the Ministry of Development Planning now looking for consultants to restart the process.
Growth policy is contradictory and wrongly focused
The government forecasts a medium term (3-5 years) growth of 4.3 percent (Paragraph 23) and at the same time indicates that the proposed expenditures target the NSDP growth rate of 5-7 percent and creation of 10 000 jobs per year (Paragraph 58). The analysis of growth in Paragraphs 18-33 demonstrate a bleak performance of the sectors that have traditionally supported growth in recent history. Construction declined 10 percent, reflecting the completion of the civil works related to health clinics and the Metolong Dam. Manufacturing declined 11 percent, reflecting economic slowdown in Lesotho’s export destinations and uncertainty from political complications. Although mining grew significantly by 16 percent, it remains a small sector that creates a small number of jobs. Going forward, the government has put its hopes on the ministries of Home Affairs, Energy and Meteorology, Local Government and Chieftainship Affairs and Mining to drive growth! But the paltry 12 percent it has allocated to these priority ministries cannot energise the growth sectors sufficiently to reach national output growth of 5-7 percent (see Paragraph 59). At any rate, this is not even how a government should think about growth — it is not the ministries of government in isolation that are going to create growth, but rather large investments by private investors supported by well-thought through policies and supportive public investment. Even this would still require political and macroeconomic stability and skilled and healthy workers.
The budget speech sees economic growth as driven by government spending through public procurement, which is a long-standing strategy of the key parties in the current governing coalition. But the focus is misplaced; decades of this procurement-driven approach bears testimony that it is inconsequential for growth and poverty and damaging for inequality. In its press release of 29 January 2016, the IMF concludes that “unemployment rates have remained high, especially among the youth, and the incidence of poverty is virtually unchanged from a decade ago”. Is it not time for a change in approach to something that has a chance to work?
Poor health, poor education, poor investment climate, and poor government capacity are the four foremost binding constraints to Lesotho’s investment, growth and poverty reduction. These are identified by the Lesotho NSDP (2013), Constraints Analysis conducted by the Millennium Challenge Corporation in preparation for Compact II (2015), and the World Bank’s Systemic Country Diagnostic (2015). A clear and forceful focus on these four should have been the focus of this and future budgets, provided long-term political stability is restored and risks to macroeconomic stability are tamed. Granted, social spending in Lesotho is very high, but the IMF observes that “….there has been little progress in the fight against poverty and unemployment, despite considerable spending on social sectors and transfers”.
The budget also does not address the risks to economic growth it identifies. In fact in Paragraphs 28-30, it downplays the risk of loss of investments linked to Lesotho’s eligibility to the Africa Growth and Opportunity Act (AGOA). It is true that the United States of America has so far not issued any warning related to Lesotho’s eligibility to AGOA. But it is also not correct to say that “there is no threat to Lesotho’s continued AGOA eligibility (Paragraph 30)” because the continuing political strife, insecurity and human rights and rule of law violations are persistent threats to AGOA eligibility. But even more critical is that investor decisions are driven by mere perceptions of risk. Investors are presently making assessments of the worsening polarisation of society and insecurity and are considering their options. Many of these can access AGOA from many countries in Africa where they already have operations — it would be easy to migrate their production activity. The Kingdom of Swaziland (effective January 1, 2014) and the Republic of Burundi (effective November 1, 2015) are examples of countries that have recently lost AGOA eligibility due to human rights violations. Also the speech notes, but does not provide details on how government intends to deal with competitive risk expected to come from the coming into effect of the Transpacific Partnership Agreement with the United States bringing together pacific rim countries.
There are however some welcome developments in the architecture of investment climate. The launch of the credit reporting facility (Credit Bureau) and the Maseru Securities Market could increase the ease and financing options available to Lesotho investors. Although there are insufficient details provided, access to Arab Bank for Economic Development in the Africa (BADEA)’s private window could complement financing for domestic investment. Investors should however be on the lookout for Lesotho’s sovereign risk complicating their borrowing rates. Fitch ratings downgraded Lesotho in October 2015 from stable to negative outlook, observing that “continuing political tension is affecting governance”.
Government spending remains high, fiscal policy risky
Southern African Customs Union (SACU) revenues to Lesotho are like oil to an oil producing country — no amount of telling them not to depend too much on oil revenue ever works — until the price of oil collapses. Much has already been said about the risks of Lesotho depending too much on SACU revenues. In its recent communication, the IMF warns of the threat to macroeconomic stability unless Lesotho implements a major fiscal adjustment. By contrast, the government hopes to achieve a rising spending profile and macro-fiscal stability despite a drop of 6 percent of GDP (M1.1 billion) in SACU revenues (Paragraph 8). It is also surprising that both Company Income Tax (CIT) and VAT are expected to increase at the same time economic growth is expected to slow down! Anecdotal data suggests that company balance sheets are getting tighter, profits are more likely to flatten out rather than grow, and for property owners, rents are collapsing as tenants leave. Moreover, donor support is dampening largely as a result of unfavourable political developments.
In one of her memorable statements, the minister talks of “filling an ocean using a teaspoon” (Paragraph 83). This extraordinarily apt observation is applicable to other aspects of the budget. Raising non-tax revenue as outlined in Paragraphs 53 to fill the hole created by the loss of SACU revenue is to fundamentally underestimate the magnitude of the problem. Likewise, efforts to control spending (Paragraphs 93-94) are hopelessly insignificant in relation to the fiscal hole Lesotho faces from SACU revenue losses. Finally, the efforts to grow the private sector, while welcomed, are fragmented and woefully inadequate.
I welcome the civil service review to be launched in March 2016 (Paragraphs 43 and 68) and hope it can deal with anomalies associated with Lesotho’s wage bill management I outlined in June 2015 in the Lesotho Times. I look forward to an aggressive implementation of the project and hope again it will not fall prey to populism, patronage and politicisation of the public service. In this respect, the proposed across the board salary increase of four percent is a bad omen as it signals business as usual and worsens the problem. Moreover, the project seems targeted at reconciliation of human resource and payroll data, which falls far short of what would be needed to reduce the wage bill to well below domestic revenue collections.
Commitment to reform remains doubtful
Government Fleet: The government discloses in Paragraph 41 that it entered into a traditional short-term lease for six months! Previously, we were told the government failed to reach an amicable settlement with Avis, as it demanded unacceptable conditions for extension of contract by six months. Why was the government prepared to use tax-payer money to pay Bidvest multiple times more for the same fleet as provided by Avis? The government always had the power and authority to guide Avis to a settlement if it truly wanted that! Taking into account its failure to manage the Avis contract properly, was it worth it in the eyes to stomp off the negotiation and instead pay so much more for the same service? Why was the government not able to put Avis to order for the 6 months it gave a short-term contract to Bidvest under questionable affordability conditions? Was the government’s reaction more emotional that logical? Should tax payers now consider the extra expense justifiable? Did the government exercise proper discretion? A new fleet provision will commence in April 2016 according to the speech. Will this be the contract led by Basotho fleet owners as promised by the government in 2015? These are the kind of questions a Parliament doing its job of oversight and not ingratiating itself to the government should ask.
Queen ‘Mamohato Memorial Hospital (QMMH): In my previous commentary, I doubted that the government would be able to re-negotiate the public–private partnership (PPP) contract with the shareholders of the QMMH, pointing out the complexity of the arrangement. This time around, the minister merely concedes that the hospital expended outside its budget and the government had to pay. There is no longer the commitment to renegotiate the QMMH contract! This cannot be acceptable. The government must prepare a clear road map for shielding Basotho against cost over-runs that arise from a poorly implemented contract. I welcome the improvement of facilities and services at the three filter clinics earmarked to manage referrals to QMMH and hope in future the government will run them at the level they were intended (Paragraph 34). Meanwhile, an independent and professional review of the fate of the Maseru District Hospital should be undertaken and its results published.
Public Sector Investment Committee: The establishment of the Public Sector Investment Committee (PSIC) in 2013 was intended to eliminate “a lot of underspending in some ministries” the Minister points to in Paragraph 45. As designed, it would prevent unnecessary and under-designed capital projects to be funded. It would also ensure that capital projects align well with policy and make an impact. The government should assess the capacity of this committee and strengthen it as soon as possible to avoid persistent underspending.
Primitive budget documentation and handling in Parliament: The documentation presented to Members of Parliament for scrutiny is archaic and prevents proper exercise of oversight. Even though the rest of the world has moved to the more logical three-year budgets, the Parliament of Lesotho has no choice but to consider one-year budgets. Public sector interventions are rarely fully implemented in one year; it is therefore logical to be transparent to parliament about the full multi-year costs of an intervention, which is possible in a Medium Term Expenditure Framework. For its part, Parliament has accepted the responsibility to scrutinise annual budgets without demanding full information including the full timing and geographical location of the requested interventions. By doing, this Parliament is failing to require accountability from the Executive and acting more as part of Government rather than an oversight body. Parliament should move aggressively to do its job by independently securing public financial management experts to undertake training of MPs.
Decentralisation: I welcome the intensification of reforms in decentralisation and hope that Lesotho will get it right this time around. The reforms should try to achieve best international practice in the re-design and in particular aim to achieve both subsidiarity and decentralisation. As the reforms will have far reaching political implications, they should be discussed with all political groupings as soon as possible, as local government elections are also slated for this year.
The responsibility for urban roads located at the Ministry of Local Government and Chieftainship Affairs (MLGCA) appears sensible at first. However, since the MLGCA is a ministry in the central government just like the Ministry of Public Works and Transport, the transfer of road construction responsibility from the latter to the former is not decentralisation, but rather merely transferring responsibility from the one central government ministry that is a centre of knowledge for road construction to another that is not! In proper decentralisation where power and responsibility are genuinely devolved, the responsibility for the construction of urban roads would fall under the urban councils themselves as separate and independent sub-governments. The current design of decentralisation is mainly deconcentrating power from central government ministries to the Ministry of Local Government and Chieftainship Affairs, which is itself part of the central government! The accusations from local councils and civil society that central government is resisting change emanates essentially from this misguided notion of decentralisation.
The fight against corruption and restoration of the rule of law are mentioned, but there are no specific new policies proposed (Paragraph 90-91). This is regrettable since both are closely linked to Lesotho’s insecurity and the absence of peace and their persistence will render the budget significantly un-implementable.
Other sectoral plans
I welcome the signing of the financing agreement with Kuwaiti Fund to improve the Moshoeshoe I International Airport (MIA), but wish the government’s ambition could have been more elevated. The upgrading effort could have designed the airport as an aerotropolis rather than the upgrading of the runway, terminal building and paradoxically expanding the VIP lounge! Transforming the MIA into an aerotopolis would mobilise commercial, industrial and economic investment opportunities centred on aviation only as a logistic node. The previous government began working with the Mohlakeng council and community to raise their ambitions for their land for commercial and industrial development using the land around the airport and this concept was broadly accepted. In the broader vision, sensitive industries such as diamond processing, conference facilities, catering, and sensitive aviation-related exports such as flowers would locate around the airport, creating a new aviation-centred commercial and industrial city. The rushed signature of the agreement excludes this broader development and design for the airport; a truly missed opportunity.
The prioritisation of the electricity connections is welcomed. However, there are two sides to the equation, namely bulk generation and consumption. The government’s intentions on the generation side are not spelt out in the speech even though Lesotho’s supply capacity is limited by shortages in South Africa and Mozambique. In particular, it would be helpful to learn about the progress the government has made on Kobong Pump Storage and on concluding a power sales agreement with Eskom. On renewable power, it would be helpful to hear about the progress made in concluding a power feed-in tariff policy and independent power producer policy. Past attempts to sign off Lesotho’s renewable wind and solar resources without these two policies created a climate where corruption could subsist and was halted by the previous government to ensure an above-board and accountable process. Parliament should seek a report regarding the development of these policies and the government’s intentions on renewable energy generation.
The engineering feat Phase I of the Lesotho Highlands Water Project has been sullied by the corruption led at the highest echelons of the project. It would be a calamity to begin the second phase with questions about governance at the project. There is a slow drip of sinister stories about goings-on at the Lesotho Highlands Water Commission. Investigative journalist, Billy Ntaote, penned a story on 28 August 2015 about irregular payments to an officer convicted of corruption under the project. There has also been allegations of irregular patronage and nepotistic appointments and this coincides with the government’s reported wish to remove the current chief delegate. Parliament should assure itself that the LWHC, LHDA and associated institutions are not dogged by any allegations of graft and employ only people of highest professional pedigree. Failure in this area will double or triple the cost of the project and subsequently the cost of water to South Africa and electricity to Lesotho.
I welcome the proposals to improve governance and management of the loan bursary fund (NMDS), but find them insufficient to stabilise the NMDS. In particular, there is need to update and modernise the policy framework from its 1978 roots so that the large fiscal outlays for scholarships are governed by the national interests of today rather than those of nearly 40 years ago. I note the plans to look at means testing, but feel that the supply of loan bursaries could be expanded by bringing other sources of loans into the loan bursary pipeline. By heavily subsidising loan bursaries, the government is limiting the number of Basotho that can benefit from education loans. Operating the fund on commercial principles could increase the number of beneficiaries as commercial banks and other financial institutions would be enabled to lend to students. In addition, students would take loans to study only those areas for which they are assured of getting jobs, thus removing the extensive inefficiency in the current system where students study courses for which there are no employers. By adding a small user charge on the repayment steam, the new NMDS could be run completely as a private commercial concern and shed the inefficiencies associated with being a government institution. Parliament should seek deeper clarity on the loan bursary plans to complement the vague intentions outlined in Paragraph 86.
In Paragraphs 87 and 88, the government outlines its intentions to evaluate the NSDP and to begin the process of developing a successor NSDP. This is surprising because the NSDP is currently not being implemented and one cannot therefore evaluate its implementation. Indeed the IMF on 29 January 2016 says “implementation of the National Strategic Development Plan, which provides a viable approach for transitioning from government dependence to private sector led growth over the longer term — particularly in sectors with potential for high employment — needs to be restarted”. The Job Summit process, which aimed to develop national and district investment plans, has also stalled, with the Ministry of Development Planning acknowledging its lack of capacity to take it forward and now seeking international consultants to restart the process. The government should instead devote more time to completing a properly designed national investment plan to implement the current NSDP, while also assiduously working on restoring political stability and the rule of law. Parliament must seek clarification from the government on the fate of an implementation plan for the NSDP.
Lesotho will be celebrating 50 years of independence later this year. That celebration will be hollow and only symbolic of the fact that in 1966 Lesotho gained independence from Britain. Ignoring symbolism for the time being, the substance of 50 years of independence is extreme poverty (57 percent), one of the highest inequality in sub-Saharan Africa, poor health (very high HIV infection rates and a sharp rise in non-communicable diseases), poor education (yes high literacy rates, but low livelihood skills), poor investment capacity, and worst of all, governance capacity that falls well short of that needed to redress these ills. If the empathy of John Magufuli (the new popular president of Tanzania) was available in Lesotho, our leaders would know that it is improper to expend scarce financial resources to celebrate a hollow date when the substance is so terribly disappointing. The Government needs to be tested to justify its planned celebration in the context of this painful legacy and neglect.
The 2016/2017 budget fails several tests of a good budget.
a) It does not meet the test of fiscal transparency (the macroeconomic posture of the budget is not fully disclosed (borrowing requirements and debt implications are glossed over);
b) It does not facilitate a policy oriented discussion by Parliament, instead it promotes discussion of government consumption items;
c) It is not credible because of large swings in the information provided at the beginning of the fiscal year and the final outcome—the VAT and CIT projections also appear particularly overestimated.
Finally, taxing every Mosotho, but funnelling tenders and government jobs to only card-carrying members of the governing parties is fundamentally unjust and will sustain a permanent sense of grievance. Such extreme patronage will make peaceful transfer of power difficult and stoke conflict. The damage to Lesotho will however not discriminate in its impacts. Basotho as a whole and supporters of all parties will experience equally the effects of a failing economy and nation. Let us all act in the interest of this nation, and not ourselves or our political parties.