LESOTHO’S public expenditure is growing at a rate faster than economic growth with subsidies, interest payments, wage bill and transfer payments among some of the non-developmental outlays.
This is according to a study that examined the long-run and causal relationship between government spending and economic growth in Lesotho.
Titled “Economic Growth and Government Spending Nexus: Empirical Evidence from Lesotho”, the study was conducted by Kanono Thabane and Sello Lebina and published last year in the African Journal of Economic Review.
Mr Thabane is from the Climate Change Division of the Food Agriculture and Natural Resources Policy Analysis Network, while Mr Lebina is from the Department of Economics at the National University of Lesotho.
The case study was prompted by Lesotho’s highest wage bill in Southern Africa and the country’s fiscal consolidation challenges.
Mr Kanono and Mr Lebeko cited an International Monetary Fund (IMF) report for 2014 which states that Lesotho’s public sector wage bill relative to gross domestic product of 23 percent between 2009 and 2014 was the highest in sub-Saharan Africa, partly due to political pressures to expand employment.
The study tested the validity of Wagner’s Law in Lesotho as opposed to the Keynesian theory in establishing the relationship between fiscal policy and economic growth.
Wagner’s law argues that public expenditure is an endogenous factor, driven by the growth of national income. In contrast, Keynesian hypothesis postulates that economic growth occurs as a result of rising private and public expenditure, with public expenditure considered as an independent exogenous variable to influence the economic growth.
“Furthermore, in Wagner’s law the causality runs from economic growth to public expenditure while in Keynesian theory, the direction of causality is the opposite, making the two theories fundamentally different,” said Mr Kanono and Mr Lebeko.
Lesotho’s public expenditure challenge, the duo noted, was further exacerbated by the expansionary fiscal policy stance espoused in the National Strategic Development Plan (NSDP). The NSDP is an implementation strategy to achieve the National Vision 2020 aspirations.
“However, a closer look at the public outlays of Lesotho indicates that a greater percentage of their budgetary resources are devoted to cater for public recurrent costs.
“These public recurrent costs have been on the rise in the recent years. Hence our aim is to contribute to the growing debate on Wagner’s Law by empirical understanding its validity in a country with high recurrent expenditures and wage bill.”
In their findings, Mr Kanono and Mr Lebeko suggest the existence of Wagner’s Law in Lesotho which indicates that public expenditure in Lesotho was growing at a rate faster than economic growth.
“The observed increase in the share of public expenditure relative to GDP is a result of continued growth in expenditure on subsidies, interest payments, wage bill and transfer payments some of which are non-developmental in effect.
“This suggests the need for fiscal prioritisation in Lesotho towards capital expenditure. This ratio can only be reduced if the balance between recurrent and capital expenditure shifted towards capital expenditure, such as physical infrastructure to promote economic activity.”
The European Union in March last year refused to release €26.85 million (about M460.65 million) it had allocated to Lesotho for budgetary support. The bloc cited the insufficient progress in the implementation of agreed policy reforms — especially in the area of Public Financial Management. The financing entailed general and targeted sectoral budgetary support.