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The consumption expenditure budget

by Lesotho Times
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By Peete Molapo

WHEN, in his budget speech presentation on February 20 2014, the Honourable Minister of Finance Dr Leketekete Ketso, conceded that “Government spending continues to incline towards the recurrent budget” my long held view was vindicated that X-inefficiency is a problem in Lesotho and its forbearance is now accepted as the norm.

In economics, X-inefficiency relates to a situation where political and bureaucratic considerations take the upper hand and lead to ever-increasing budget and salary increases that neither reward efficiency nor penalise inefficiency.

The Minister was not in his usual buoyant mood when announcing the annual salary adjustment for civil servants. This year, it is a paltry four percent which is even below the inflation rate. He said this modest adjustment was due to the fact that the government wage bill is already high.
He was right.

Although he quipped that public service morale has improved save for service delivery, I would beg to differ. In this kind of situation civil servants’ morale cannot be high. It is bound to be depressed, and with it, service delivery.

The reason behind the perverse relationship between the rising wage bill and poor morale and service delivery is that public servants are not rewarded on the basis of performance but other considerations as explained above.

This is starkly contrasted to the huge salary increases and pensions for parliamentarians, ministers and senior officers, not to mention the give-away car prices for the previous government. I am happy that as part of improving public sector efficiency and effectiveness, the Minister mentioned the urgency of introducing a performance management system in the public service.

This has been long overdue.

The lop-sided recurrent expenditure, by its very nature, means that development expenditure will always be taking a back seat; something a developing country like Lesotho can ill-afford.
In this year’s budget, capital expenditure has increased by only 3.3 percent which is well below the inflation rate of six percent. In real terms, capital expenditure has actually dropped and consumption expenditure increased by a whopping 13 percent.

This is unacceptable if we are serious about taking the country to the next level of development. Capital expenditure expands and grows the economy and creates jobs which the Minister said are the main objectives of the government as spelt out in the National Strategic Development Plan (NSDP).

According to Central Bank of Lesotho estimates, by the end of 2012 consumption expenditure in Lesotho was 235 percent of GDP. This includes private sector consumption. What this means is that Lesotho consumes more than twice the output it produces.
In effect, the country lives beyond its means.

Consumption expenditure can be good for the economy but only if it is underpinned by local production. The gap between consumption and production in Lesotho is filled by imports and obviously if government consumption is rising, it follows that imports are going to increase.

Imports have to be financed and in Lesotho’s case they are mainly funded by customs revenue, miners’ remittances, grants and loans. The difference between consumption imports and capital imports is that the former do not create sustainable value, if any.

In his presentation the Honourable Minister raised a very pertinent point about the volatility and uncertainty of SACU (the Southern African Customs Union) revenues and that a national position has to be taken.
He is right.

Unfortunately, he is not walking the talk in his budget. The budget is not transformative even though it is purported to be a derivative of the NSDP. A transformative budget would emphasise and foster an aggressive turnaround of the local productive capacity. It is only when the productive capacity of Lesotho’s economy is strong that dependence on customs revenues can be reduced.

As it stands, customs receipts are still a dominant source of revenue constituting 45 percent of total revenue and almost 11 percent higher than the locally-collected tax revenue. With increased consumption expenditure, dependence is bound to continue.

Four key or critical areas that inform the 2014/15 budget have been identified as:

  • Job creation; l An enabling investment climate;
  • Minimum infrastructure platform, and l Improving public sector efficiency and effectiveness.

On job creation the Honourable Minister has proposed the following interventions:

  • Government engagement with the private sector on an on-going basis
  •  Supporting commercial agriculture through the improvement of supply chains and marketing; l Diversification and promotion of alternative industrial and services clusters
  •  Promoting the development of existing tourism products;
  • Improving and modernising the policy and regulatory framework for the mining sector, and
  • Increasing the production of clean energy as well as promoting labour intensive land management programmes.

While the Minister is right that there has to be engagement between government and the private sector, he is not specific on the different approach the government is going to take from what has happened in the past where such engagement has been minimal and ineffective.
Broad-based economic growth, inclusivity and partnership have hitherto been quite illusive concepts albeit much talked about.

In his opening remarks, the Minister mentioned how they partnered with the IMF to dialogue on the transformation of the economy which dialogue also informed his budget. I could be wrong but I have not heard any mention of the private sector and/or civil society participation which is critical in our democratic dispensation.

Support for commercial agriculture is not a new idea in Lesotho. Here too, the Minister ought to have elaborated on the different approach the government wants to take. M166 million has been earmarked for agricultural subsidies under block-farming.

The difference is that this time it would cover other activities except crops. This is a good thing.
My main worry is that although having a good demonstration effect that Lesotho has the potential to produce food and feed itself, block-farming needs structural and operational overhauling to maximise its efficiency and effectiveness.

A thorough cost-benefit analysis of the scheme needs to be conducted that would tell us whether it has so far had any “demonstrable improvements in the livelihoods of the people” and the creation of jobs as the expected outcomes. The reason why so many millions of maloti were lost or could not be accounted for by the previous government was due to the nebulous structure and weak operational processes of the scheme.

On manufacturing, the Minister talked about transforming the subsector by diversifying and promoting alternative industrial services clusters and improving linkages between FDI and SMMEs.
Precise actions to be taken were not specified except an allocation of M19 million for agro-industry infrastructure which I found inadequate. There was no mention either of how many jobs manufacturing would create in 2014/15 of the 10 000 expected to be created annually in the medium-term.
Industrial development of the country is one area that needs direct involvement of the

private sector. It is imperative that a public/private sector strategic framework be developed to inform future budgets.
Although the tourism sector has been identified as one of the priority sectors for economic growth and employment creation, there has so far been no significant achievement.

Still, this year the budget does not promise much action. This gives the impression that the Ministry of Tourism does not have a development plan and, should that be the case, there is need to develop one soon.

The mining sector has recently realised robust growth but it does not create many jobs. The Minister said it currently needs substantial infrastructure for which the budget cannot provide due to financial constraints. Such infrastructure could unlock the potential of up and down-stream industries and create many jobs.

It is commendable that the budget has allocated M157 million for watershed management to promote a “Green Economy”. Going forward, more attention has to be given to the proper management of land and water resources in Lesotho given the fragility of our eco-system.
We owe it to posterity.

With regard to an enabling environment for investment, minimum infrastructure platform and improving public sector efficiency and effectiveness, the Minister highlighted a number of interesting initiatives, most of which are on-going, but one can single out the Public Financial Management Programme.

The scourge of corruption and abuse of public funds in Lesotho needs to be exorcised, and if this can happen now, the coalition government could get all the credit.

To my chagrin, a generally good presentation ended in bathos on three issues.
Firstly, while the Minister did the honourable thing of reducing the effective tax rate for those in the lower income bracket from 22 percent to 20 percent, he did the same for high income earners from 35 percent to 30 percent.

Effectively, he has given back more to those who earn more (five percentage points) than the low income earners (two percentage points).

Secondly, on his end-note, the Minister commented about youth unemployment which is a serious problem faced by this country. I was surprised that he did not elaborate on the initiatives the government is undertaking except to simply gloss over it by saying it has been factored in sectoral allocations.

I found this bizarre because, if job creation is one of the priorities of this year’s budget, youth unemployment could have been dealt with in a more substantive manner.

Thirdly, the allocation of recurrent expenditure of M554 million or 80 percent out of M687.5 million of the health budget to Queen ‘Mamohato Memorial Hospital is ludicrous. I would urge the coalition government to give this private/public sector project (PPP) a big red flag and review its socio-economic rate of return.
Much like other budgets before it, this year’s instalment was rather run-of the-mill and did not spring any surprises.

The coalition government has to immediately break with the past practice of passivity and adopt more proactive budgets.

As the Honourable Minister rightly pointed out, fiscal policy in Lesotho is the only instrument at the disposal of authorities to transform the economy. Lesotho needs urgent and aggressive economic structural transformation to generate jobs, feed its people, and rid itself of abject poverty.

For all these, we need dynamic budgets that reflect a paradigm shift away from consumption expenditure.

  • Peete Molapo is an economic consultant. He writes in his personal capacity.

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