Hard times need hard choices

LIVING on a wing and a prayer is by all means not an option for Lesotho.

If we can use history to predict the future, I have no doubt that Lesotho could still make it through during these difficult times.

It has done so many times before.

But this time around the odds are quite stacked.

To mention a few examples, first prophets of doom had written off the economic sustainability of Lesotho and its sovereignty after the democratisation of South Africa in 1994.

The major concern was the uncertainty pertaining to policy reversals that could have had adverse effects on Lesotho in the new South Africa.

Nothing much happened.

Second, when the going got tough in the 1980s and structural adjustment was introduced for the first time, the Lesotho Highlands Water Project (LHWP) came at the right time to provide the much needed relief. 

Third, when LHWP came to its completion and there was nothing imminent to replace it the US promulgated the Africa Growth and Opportunity Act in 2001.

Scores of Asian investors came to Lesotho to take advantage of access to US market.

The expiry of the MFA led to closure of some factories and loss of employment.

The economy was shaken and again as usual anxiety about the future outlook became commonplace.

Fourth, it was at this time that the improvement in international price of diamonds led to revival of the diamond mining industry.

Despite the above near-misses this time things are different. The challenges are many and more difficult. 

According to the Three Year Arrangement Extended Credit Fund Facility (ECF) recently contracted between the government of Lesotho and the IMF, Lesotho has to grapple with the following problems:

Sacu revenue has fallen by 56 percent in 2009/10 and is projected to decline by 23 percent in 2010/11 to 2011/12.

Persistent increases in public expenditure in the past three years have led to a deterioration in the fiscal balance.

The fall in global demand, particularly in the US for garment exports, has hit Lesotho hard.

The sharp decline in international diamond prices has led to production cuts and mothballing of some mining operations

It is obvious that government has to rise up to the occasion and do what is expected of it to arrest the decline in output, promote growth, avert runaway poverty, and protect the vulnerable.

My intention is to make a brief generalised critical analysis on what government is doing to check its expenditure excesses.

As is usually the case with IMF assistance, the facility is mainly about crisis management. The ECF is for all intents and purposes a balance of payments support programme.

It is a programme premised on the notion that Lesotho has realised a decrease in its income while its consumption/absorption remains high.

To correct the imbalance the latter has to be contained and hard choices made.

In the current fiscal year current expenditure cuts are expected to amount to 8.3 percent of GDP.

When it is crunch time cuts must be made, but most importantly on a criterion of necessity not convenience.

Common practice is that they are usually done on easy targets such as educational institutions, parastatals and scholarships.

For the past three years the government’s wage bill has grown by an annual average of 18 percent which is way above the inflation rate thus indicating either increase in recruitment or above inflation wage increases.

In 2009/10 wages and salaries constituted 35 percent of recurrent expenditure while subsidies and transfers were 26 percent.

The point is that the cut in the wage bill deserves to be much higher. If the increase in the wage bill is due to recruitment, then government must review and rationalise the civil service with immediate effect.

If salaries have been excessively increased, the simple solution would be to reduce them as has happened in some countries or if not employ few civil servants and pay them well. 

Cutting civil servants salaries would not be the preferred option but reviewing those of top officials and their perks would set a very good example of commitment by government.

Goods and services, the third highest expenditure category of recurrent expenditure, has actually gone up to 25 percent of recurrent expenditure from 24 percent last year.

Instead of getting to the heart of the problem, this is an area where the Minister of Finance in his budget speech talked about cuts in international travel and other trivial items.

The fact that this category of expenditure continues to be incompressible gives one the impression something has gone wrong in planning, implementation and oversight of budgetary operations of government.

A number of measures have been enumerated for improving the public expenditure programme and public financial management.

This is not the first time we hear these and not much has happened except IFMIS and its problems.

In a situation where transparency and accountability in the use of public funds has been seriously compromised by absence of a culture of producing timely annual audited public accounts, that compelling sense of urgency to correct mistakes has been lost.

The ECF addresses other areas like broad-based growth and poverty alleviation including strengthening the legal and regulatory framework for the financial sector.

While these are indeed also important, the programme does not provide any detail. This is not unusual as ECF is a stabilisation programme addressing mostly macroeconomic imbalances.

The concluding point is that government must take bold decisions to cut its wage bill and unnecessary expenditure on goods and services.

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