Lesotho new government adopts austere fiscal policy
By Sechaba Mokhethi
MASERU – Lesotho’s new government has commenced its reign by proposing a series of austerity measures introduced to steer an ailing economy and a possible release of a tranche of funds withdrawn by international partners in budgetary support.
In March 2016 the European Union halted the disbursement of $29,47m in support of the country’s budget on grounds of non-compliance with agreed reforms relating to public financial management. The EU had, as early as November 2012, highlighted budget management, spending and transparency as areas of concern.
Economic commentators in the country were quick to voice expectation that the EU’s decision would quicken the pace of spending cuts to be factored into the next budgets.
The United States had similarly sent a warning that Lesotho risked losing eligibility to free trade benefits under the African Growth and Opportunity Act (AGOA) trade arrangement in 2017.
Failure to meet the rule of law and governance benchmarks, concern over an Amnesty Bill to grant members of security agencies a blanket amnesty for offences committed between January 2007 and December 2015 were deemed by both development partners as promoting impunity and bound to stymie donor support.
Outlining budget estimates for the 2017/18 financial year in the National Assembly in Maseru on July 19, Finance Minister Dr Moeketsi Majoro highlighted that the estimates tabled assumed a number of actions that government would necessarily have to take to control expenditure and intensify revenue collection in the medium-term.
The budget speech, aptly themed “Pursuing fiscal sustainability within the context of political instability and insecurity”, announced a number of measures aimed at curbing government expenditure.
As part of reducing expenditure, government has taken a decision that all ministers and equivalent ranks will no longer fly first class, a requisite amendment would be made to legislation concerning benefits of Members of Parliament.
Ministers would no longer travel for more than seven days without express permission of the prime minister based on elaborate justification, and that they should reduce their delegations to international meetings to exactly the limited number needed for the minister to perform effectively.
The Dr Thomas Thabane-led coalition government has also committed that when time of replacement comes, ministers’ utility cars will no longer be replaced with the Toyota Land Cruiser cars, instead a lower specification and cheaper vehicle would be purchased. A Toyota Land Cruiser 200 4.5 5D-4D V8 VX costs R1,304,200 at current market prices in South Africa where Lesotho buys its cars.
Government will further ensure that for procurement of accommodation, hotel catering, international travel, and other common supplies, it enters into framework contracts with potential suppliers at lower negotiated prices. In return, government is expected to improve its payment record with ministerial principal secretaries being surcharged for each late payment.
Dr Majoro also announced government’s resolve to remove conflict of interest in staff remuneration by establishing an independent mechanism for reviewing salaries and benefits for political posts; while also establishing a mechanism to review remuneration in state owned enterprises to ensure equity and fairness in the public sector. This review will also extent to salaries for staff in foreign missions.
Phone call entitlements will also be affected; to lower the cost of voice calls and roaming the finance minister said government officials will begin to use free and secure services such as Skype, WhatsApp audio, FaceTime and other VoIP services.
These measures, the minister continued, are taken on the backdrop of stimulating the economy in the short-term and mobilising revenue rapidly, “therefore, it will be left to government to implement policies that seek to contain expenditure both in the short and the medium term.”
The new government has indicated that the present policy and financial proposals for the 2017/18 fiscal year were formulated under very challenging global, regional and local environments. The finance minister pointed out that countries faced contracting economic conditions with painful impacts on jobs, especially for the youth.
Generally the strategic objective of the new coalition government’s fiscal policy remains that of maintaining fiscal prudence to ensure long-term macro-economic stability and sustainability.
The finance minister said that to achieve this objective there was need to broaden and diversify domestic revenue sources to sufficiently cover recurrent expenditure so that the Southern African Customs Union (SACU) revenue and donor funds were used to finance infrastructure and other capital expenditures and maintain sufficient reserves for financing forward capital spending commitments.
In addition, he said, the government would endeavour to create fiscal space through continuous reduction in recurrent expenditures.
The proposed total expenditure for the 2017/18 fiscal year is R18,709,3 million, of which recurrent budget is R13,506,7 million and capital budget is R5,202,6 million. This is a 7 percent increase over the 2016/17 budget, much of the increase is attributed to contractual obligations, such as rent, transfers and foreign exchange fluctuations.
Overall revenue target is estimated at R16,035 million, of which SACU revenue is R6,154,2 million; tax revenue has been put at R7,604.3 million and non-tax revenue at R1,236,3 million. At this level, total revenue is 15.8 percent over the 2016/17 revenue outturn.
Position on SACU
A sound fiscal policy continues to be the main instrument for macro-economic policy and management in Lesotho, and the country’s inability to generate adequate domestic revenue, declining SACU revenues, and increasing recurrent expenditure fuelled by a growing wage bill call for a major fiscal consolidation for the next few years.
Government has resolved to intensify efforts to reduce reliance on the volatile and pro-cyclical SACU receipts and move to a situation where all the recurrent expenditures are covered by domestic revenue sources. Currently, the country’s domestic taxes only cover wages and salaries, with the balance of spending funded by less reliable revenue sources.
As a result the minister observed that the development component of SACU revenue and any additional revenue resulting from over-performance of the revenue pool and donor funds should be used to finance one-off infrastructure and other capital expenditures and to build and maintain sufficient reserves for financing future capital spending.
During the coming year, government will explore revenue and expenditure measures that will guide the budget process for 2018/19 and the return to fiscal sustainability.
In withdrawing its budget support for Lesotho, the EU had noted the country’s failure to adopt austerity measures in response to dwindling revenue sources such as SACU. Lesotho’s share of SACU is steadily declining each year, having netted an estimated 32 percent of the country’s budget in 2016/17 – down from 42 percent in the 2014/15 fiscal year.