Bereng Mpaki
THE International Monetary Fund (IMF) has painted a bleak picture of Lesotho’s short-term economic prospects characterised by slower than expected growth on the back of a “steep decline” in Southern African Customs Union (SACU) revenues and high government expenditure particularly on salaries for civil servants.
The IMF says the country is headed towards a fiscal deficit, exceeding 6 percent of Gross Domestic Product for the second year running.
The multi-lateral lending institution also cautioned government against its practice of financing the deficit by using its deposits at the Central Bank of Lesotho (CBL), saying this only served to deplete the country’s foreign currency reserves.
It therefore recommended tough fiscal measures to mitigate the effects on the economy. Chief among these is the need for the government to reduce the high public wage bill, undertake public financial management reform as well as implement the multi-sector reforms that were recommended by the Southern African Development Community (SADC).
It said the multi-sector reforms were necessary to achieve macroeconomic stability in the country.
The IMF’s recommendations come on the back of the recent visit to Lesotho by its delegation for consultations with the government on economic issues.
The IMF noted in its report that “while Lesotho has grown faster than its regional peers over the last decade, partly driven by capital intensive mining and infrastructure projects, high levels of unemployment, poverty and inequality persist”.
It noted that GDP growth forecast at about 3 percent in the 2017/18 financial year was below the average of 4.1 percent for the past decade.
The IMF said that while SACU revenues were only expected to recover in the 2020/21 financial year in line with the cyclical upswing in South Africa’s economy, the short-term economic outlook was fragile.
“A steep decline in SACU transfers- a major source of government revenue- will result in a fiscal deficit that is likely to exceed 6 percent of GDP for the second year. The government is financing the deficit by using its deposits at the Central Bank of Lesotho (CBL), causing a sharp drop in the CBL’s international reserves. The drop in reserves is compounded by weaker remittances and demand for exports, particularly from South Africa.
“IMF Directors noted that even as recent expansionary fiscal policy has depleted fiscal buffers and undermined sustainability, adjustment will be politically challenging,” the IMF said.
The IMF said its directors have as a result recommended various measures aimed at mitigating the impact of the fiscal deficit and the consequent lower growth. These include a reduction of the public wage bill and structural and governance reforms.
“The CBL can reduce pressure on reserves by raising the cap on treasury bill issuances and adjusting the liquid asset requirement for banks.
“The directors also strongly encouraged the Lesotho authorities to undertake decisive fiscal adjustment to restore macroeconomic stability. They also encouraged the authorities to implement their development agenda and structural reforms to enhance resilience and lay the foundations for higher, inclusive growth.
“The directors stressed that fiscal adjustment should prioritise expenditure measures. Reducing the high public wage bill is essential to achieve fiscal sustainability. Public financial management reform can help reduce spending inefficiencies and improve the quality of social services.
“These efforts can be complemented by measures to improve domestic resource mobilisation, including selective measures to broaden the tax base and improve administration. In these efforts, steps should be taken to protect the vulnerable sections of society.”
While noting that over the next three years, GDP growth will be led by mining and construction related to the Lesotho Highlands Water Project Phase II, the IMF also advised the government to focus on promoting more labour-intensive sectors such as agriculture and tourism.
“The directors also underscored that promotion of labour‑intensive industries should be complemented by measures to reduce red‑tape. Over the longer term, improving the quality of health and education spending will support human capital development and reduce inequality.”
It was however not all doom and gloom as the IMF team also highlighted notable achievements including the CBL’s success in “implementing the new supervisory architecture for the non‑bank financial sector which has the potential to strengthen stability and improve the contribution to financial inclusion”.
“The directors also commended efforts to develop the private sector which are critical to create broad‑based growth and ease the impact of fiscal adjustment.”
“Rapid growth in the mobile money sector has brought a welcome increase in financial inclusion levels. Speedy implementation of the new supervision framework for the non-bank financial sector has the potential to further strengthen stability. Improvements to financial access and oversight would complement private sector development efforts, which are critical to reduce inequality,” the IMF noted.
