Raising Lesotho’s savings rate

Lesotho Times
7 Min Read

BASOTHO’S piggy banks are either slim or starving and the current world economic uncertainty has not helped matters.

The aggregate savings rate of the country was last estimated at around 30 percent of GDP although analysts believe it has significantly deteriorated since the global recession.

Indications are that savings themselves in recent years have shrunk well below as evidenced by a widening current account scale at aggregate level.

Household savings themselves are a component of the aggregate savings figure and in recent times the level thereof has dwindled due to the generally difficult economic conditions.

As a relatively small country landlocked by South Africa, Lesotho faces many problems which have detrimental effects on the saving rate, such as poverty, unemployment, low skills levels, high levels of HIV/Aids, a detached second economy and a shortage of personal property ownership.

The last decade has seen up and down economic growth in the country generally within the two to six percent band which has been decent but nothing spectacular.

It is my view that the past and current levels of growth (the world economic recession not withstanding) have not been adequate so as to have a real spillover effect that would ease our broader socio-economic issues.

The importance of savings in the economy is twofold.

First, although an increase in the savings rate cannot lead to sustained per capita income growth, it can lead to a higher level of per capita income in the long-run.

Second, Lesotho’s excessive dependence on foreign capital inflows to finance its current account deficit leaves it vulnerable to external shocks and changes in investor sentiment towards developing countries.

An increase in the savings rate can help improve the ratio of domestic to foreign capital, thereby reducing the scope of the negative impact that capital flight can have on our growth momentum.

The government should attempt to improve the terms-of-trade, because studies indicate that external debt reduction greatly increases national savings, mainly due to reduced future tax expectations.

When compared to other fast growing developing countries, such as China, which has a growth rate of 10 percent and a saving rate of 50 percent, it is clear that Lesotho can improve its performance significantly.

On the other hand it is self-evident that individuals who have no income cannot save.

Unfortunately, various international and local studies continue to affirm that levels of poverty and unemployment remain “critically high” and Lesotho will continue to be in the league of least developed economies for the foreseeable future.

The fact that poverty and unemployment are structural rather than cyclical in nature makes it complicated to tackle these problems through policy intervention.

The various obstacles to the improvement of Lesotho’s mediocre savings rate include: The shortage of skilled labour contributes significantly to Lesotho’s high unemployment rate, with most firms indicating that managerial and professional staff is moderately or extremely hard to find.

Amongst unskilled and semi-skilled workers, current income plays a major role in determining consumption, because liquidity constraints prevent households from transferring resources across time.

These households, which represent the vast majority in Lesotho, typically engage only in buffer-stock savings, which means that only a small amount is saved for emergencies.

The result is that a small fraction of individuals, who can accumulate capital and resources to save and invest, holds the vast majority of wealth.

The unemployment level is further worsened by the “brain drain” Lesotho is experiencing, with droves of skilled workers relocating to South Africa for generations.

The effect of this exodus on the population is intensified by the fact that as many as 10 unskilled jobs might be lost for every skilled worker that leaves.

Even worse is the fact that the majority of these skilled workers were educated through government financing.

HIV/Aids infection also poses a significant threat to future savings in Lesotho, because its prevalence is the highest among the productive section of the population.

The propensity to save is highest in middle age, when earnings tend to be relatively high, which means that death amongst workers in the productive age-group will have a considerable negative effect on the overall savings level.

The majority of Lesotho’s economy is framed within the informal economy and without government assistance, citizens who form part of the informal economy have little hope of saving, because most of them struggle to survive and have little financial surety.

Without ownership of property, many unemployed workers do not have a positive net worth against which they can borrow and therefore cannot accumulate capital.

Excluded from the formal economy, they remain unable to engage in entrepreneurial activities because they do not have funds to cover their input costs.

To improve the savings rate, Lesotho needs sound credit legislation, the inclusive provision of access to financial institutions like banking facilities and, most importantly, widespread financial education.

It is necessary to actively work at reducing extreme income inequality by providing education to parts of the populace that have not had the opportunity to empower themselves.

With all the initiatives the government has promised, the central problem remains the lack of financial management knowledge that is clearly prevalent amongst all Basotho.

Education on basic money management and the cost of credit needs to be implemented at all levels of society, beginning as curriculum requirements in secondary schools and tertiary institutions.

Lesotho should learn from countries like Singapore, which has experienced great success with their “Thinking School, Learning Nation” vision, because the strong intergenerational links found in developing countries imply that parents also benefit from their children’s financial literacy.

Government and civil society organisations should contribute by funding financial fitness programmes accessible to the entire population.

It is essential that citizens realise that savings are a means to provide for future consumption, because saved resources will remain available tomorrow.

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