Letsatsi Selikoe
THE International Monetary Fund (IMF) has called for urgent reforms to Lesotho’s public financial management (PFM) systems to prevent the mismanagement of new revenues.
In its 2024 Article IV Consultation report released last week, the IMF said the windfall transfers from the Southern African Customs Union (SACU) and renegotiated Lesotho Highlands Water Project (LHWP) royalties presented a unique opportunity to improve the country’s fiscal stability, but only if these revenues are managed strategically.
The IMF warned that “without these (PFM) measures in place, there is a danger that new revenues will be squandered”.
The report, released last week, urges the government to strengthen internal controls within the Integrated Financial Management System (IFMIS).
“Some procurement and contracting processes continue to be performed outside IFMIS, which is one of the leading causes of arrears. Based on the IMF’s assessment of internal controls, the authorities should improve the use and functionality of IFMIS, accelerating the deployment of digital signatures,” the IMF report states.
The report also stresses the importance of comprehensive fiscal risk analysis and management.
“Several fiscal risks have materialized in recent years, including from collapsed public-private partnerships, unquantified arrears, and contingent liabilities from loans and guarantees issued to state-owned enterprises (SOEs).
“The government should further strengthen the management of SOEs, expand the reporting coverage of government operations to decentralized entities and autonomous bodies, and publish a fiscal risk statement as part of the annual budget process, in line with IMF recommendations.”
To safeguard fiscal responsibility, the IMF recommended regular audits, improved monitoring of government accounts, and faster adoption of key public finance legislation.
“The PFM legislation should be passed swiftly. The most pressing items include the Public Financial Management and Accountability Bill, the Public Debt Management Bill, and secondary legislation to implement the 2023 Public Procurement Act. Together, these will improve the efficiency and transparency of procurement, enhance fiscal responsibility, and strengthen reporting.
“The bills will also support other laws related to procurement, digitisation, and SOE oversight, with strong controls, financial reporting, and transparency requirements. Additionally, they will ensure that the government’s borrowing plan is well integrated with the budget process. Passing these bills should be a priority.
“New revenues, if saved wisely, may allow for an expanded investment envelope. However, before Lesotho’s savings are allocated for investment, sufficient controls must be put in place to ensure that this investment aligns with national development objectives and represents value for money.
“To achieve this, the authorities should boost the efficiency of public investment, create a centralized asset registry, leverage the newly established asset management unit within the Treasury Department, establish a prioritized project pipeline, and enhance capacity for project appraisal, design, management, and monitoring, using the IMF’s newly developed Public Investment Management Information System (PIMIS) tool.”
On debt and reserve management, the IMF underscored the importance of building buffers through international reserves and repaying costly public debt. Lesotho’s gross public debt remains high at 61.5% of GDP. However, the IMF report notes that “windfall SACU transfers” and increased water royalties offer an opportunity to stabilise this debt.
The IMF advised the government to clear domestic arrears and use surplus revenue to repay more expensive public debt, reducing debt servicing costs and mitigating the risk of debt distress.
According to the IMF, Lesotho’s international reserves have improved significantly, reaching 4.5 months of import cover. The report recommends continuing to build reserves, with gross reserves expected to exceed six months of imports by the 2026/27 financial year.
However, the IMF also advises that once reserves reach a comfortable level, fiscal surpluses should be used to reduce public debt further.
“An appropriate level of reserves for a country like Lesotho is between 4.5 and 6 months of prospective imports.”
The report highlights data discrepancies between the Ministry of Finance and Development Planning’s budget, macro-forecasting, cash-forecasting, and debt-management functions, as well as with the Revenue Services Lesotho (RSL) and the Bureau of Statistics (BoS).
These discrepancies lead to misleading assessments of economic activity and financing needs, as well as unreliable medium-term fiscal frameworks (MTFF). Timely and reliable data would strengthen the MTFF, which should drive budget ceilings, the international body said.
The IMF also commended Lesotho’s GDP growth, which improved to 2.2% for the fiscal year ending in March 2024.
“GDP growth picked up modestly to 2.2% in 2023/24, from 1.6% the year before. This largely reflects accelerated construction from LHWP Phase II. However, while the growth is positive, the economy still faces ongoing challenges. Lesotho remains heavily reliant on public spending, with private sector growth hindered by high unemployment and a narrow industrial base. Key sectors like diamond and textile exports continue to underperform, further constraining growth.
“Unemployment remains high, with most of the adult population employed informally, mainly in agriculture. Furthermore, economic activity has only just returned to pre-pandemic levels, and Lesotho still has a negative output gap, which has kept inflationary pressures muted.
“Additionally, a decline in competitiveness in the apparel sector and lower diamond prices have depressed exports. High temperatures between January and March 2024 have led to an exceptionally dry season, with food insecurity projected to affect almost 700,000 people in 2024/25, up 20% from the previous year. All regions are expected to be in crisis by the end of 2024/25, and the authorities have declared a state of emergency.”
To curb these problems, the IMF said the government was focused on improving policy coherence and coordination across departments, aiming to achieve robust, sustainable, balanced, and inclusive growth through improved reform implementation.
“The authorities plan to closely monitor global and domestic developments, assess their impact on the country’s macroeconomic and financial stability, and implement necessary policy measures accordingly.”
