FORMER Finance Minister, Dr Leketekete Ketso, has warned the government to tread with caution in drawing down its foreign currency reserves to cover a budget deficit.
Running down the reserves, he said, would send negative signals to foreign and domestic investors as well as making the option of borrowing “more difficult” for the government.
Dr Ketso made the remarks last week while presenting a review of the 2016/2017 national budget to parliamentary portfolio committees scrutinising the expenditure plan in the National Assembly.
The M17.423 billion budget was presented on 19 February 2016 by Finance Minister, Dr ‘Mamphono Khaketla, with a strong emphasis on reining in the government’s runaway expenditure and exploring new sources of revenue generation among others.
Dr Khaketla proposed to finance the budget through projected revenues of M15.473 billion of which government would provide M13.370 billion. The government’s provision would come from Southern African Customs Union (SACU) receipts of M4.593 billion, domestic taxes of M6.251 billion and non-tax revenue of M2.525 billion, leaving a shortfall of M1.950 billion.
The minister proposed to fund the shortfall through domestic borrowing, donor grants, loans and drawing down from the country’s US$600 million reserve fund.
“The government currently holds reserves worth 6.1 month of import cover (about US$600 million), which slightly exceeds the desired policy target of five months of import cover; this level of reserves leverages the government to fully finance the deficit in the budget,” Dr Khaketla had said.
In his analysis Dr Ketso, who was engaged by the National Assembly to advise Members of Parliament on critical issues to look for in their analysis of the budget, noted that the major challenge facing the government was the substantial decline in SACU revenues from M7. 034.1 billion in 2014/15 to M4 593 billion in 2016/17.
He said the decline in SACU revenues posed a threat to macro-fiscal stability, adding that it could lead to “major turmoil in the economy”.
“Although tax revenues are projected to increase this year, this will not be enough to offset the decrease in SACU revenues and unless other revenue-increasing measures are explored, the macro-fiscal stability objective will be put at risk,” the former minister said.
It was imperative, Dr Ketso said, for the government to implement a fiscal adjustment strategy that would reduce the projected deficit to a sustainable level.
“Learning from the experience of the Phase I of the LHWP, it has been argued in some circles that large capital inflows during the construction phase of Phase II of the project will reverse the trend beyond 2017 and therefore help to avoid the risk to microeconomic stability,” he said.
“We are unable to support this argument as project implementation can become a serious challenge itself and it is also highly doubtful whether there will be such capital inflows if the government chooses to finance the projected 9.9 percent deficit by drawing its reserves in the Central Bank of Lesotho.”
Dr Ketso called for “a lot of caution” in drawing down the foreign currency reserves.
“. . .While the government appears to be considering financing the deficit by drawing down its deposits in the CBL (Central Bank of Lesotho), we would recommend that a lot of caution be exercised in going in this direction as running down reserves could send negative signals to investors (foreign and domestic) and in the end make even the option of government borrowing more difficult in the medium term,” he said.