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Lesotho Times - - Business -

The most im­por­tant as­pect of any pub­lic sec­tor bud­get is fi­nanc­ing of the deficit. In Para­graph 50, the min­is­ter is vague on how the deficit of M1,028 mil­lion will be fi­nanced, sug­gest­ing in­stead that govern­ment is still to de­ter­mine a strat­egy.

Since the choice of fi­nanc­ing strat­egy can un­der­mine the one-to-one par­ity of the loti to the rand, it is crit­i­cal that Cabi­net should have ap­plied its mind to fi­nanc­ing strate­gies be­fore re­quest­ing Par­lia­ment to ap­prove a bud­get with an in­com­plete fi­nanc­ing strat­egy.

An­nex I sug­gests that govern­ment will dis­burse net M526 mil­lion from in­ter­na­tional loans and fi­nance the bal­ance of M503 mil­lion by draw­ing down for­eign cur­rency re­serves, sell­ing bonds or bor­row­ing from the pri­vate sec­tor. Par­lia­ment is left to spec­u­late how the fund­ing short­fall will be fi­nanced.

This is not cor­rect be­cause Par­lia­ment must also ap­prove the fi­nanc­ing strat­egy it­self. More­over, loan dis­burse­ments al­ways un­der­per­form the bud­get in line with the usual lack­lus­tre im­ple­men­ta­tion of cap­i­tal projects.

This im­plies that govern­ment will use up more of its for­eign cur­rency re­serves than this bud­get pur­ports to show, and thus threaten the ex­change rate peg more than this bud­get pro­poses.

Par­lia­ment must seek de­tails of these planned loan dis­burse­ments to study very care­fully be­fore ap­prov­ing the fi­nanc­ing strat­egy.

It is also worth find­ing out how govern­ment will be able to raise fi­nance from the pri­vate sec­tor in an en­vi­ron­ment of in­se­cu­rity and poor busi­ness con­fi­dence.

Look­ing to the fu­ture, govern­ment will run deficits amount­ing to about M4,500 mil­lion in the next three fis­cal years.

This is un­prece­dented and there is no in­for­ma­tion what­so­ever how this mas­sive fund­ing short­fall will be fi­nanced, not­ing that the pri­vate sec­tor will not al­ways be will­ing to fund prof­li­gate spend­ing plans.

The govern­ment claims that it will bring its spend­ing un­der con­trol, how­ever as it will be shown be­low, govern­ment has no con­trol over SACU flows and is los­ing con­trol over the wage bill.

fi­nanc­ing

SACU fis­cal cliff Look­ing at bud­get speeches go­ing back to FY2000 (see www.fi­nance. gov.ls when it works, for previous bud­get speeches), min­is­ters of fi­nance de­cry that SACU rev­enue will van­ish, but with­out pro­vid­ing cred­i­ble cor­rec­tive poli­cies. This is re­peated in this bud­get as well.

Why is SACU is so im­por­tant? Nearly all the col­lec­tion of do­mes­tic tax­esover only the wage bill with the rest of the spend­ing (in­ter­est pay­ments, goods and ser­vices, cap­i­tal spend­ing, so­cial ben­e­fits, re­pay­ment of loans) fi­nanced by SACU rev­enue. Clearly, if SACU rev­enue was to be elim­i­nated or fall to a frac­tion of the cur­rent amount, Le­sotho would not be able to fi­nance these other im­por­tant items of spend­ing re­sult­ing in a fore­seen but not ad­dressed fis­cal cri­sis.

Crit­i­cal SACU risks SACU rev­enue could dis­ap­pear for two un­con­nected rea­sons:

Although SACU ar­range­ments are over a cen­tury old, there is a force­ful cam­paign in South Africa to elim­i­nate pay­ments to the smaller mem­bers and it is not clear when this could take place.

There has been spec­u­la­tion by an­a­lysts that South Africa could uni­lat­er­ally change the struc­ture of SACU and ei­ther re­duce pay­ments (base case) or with­draw com­pletely (worst case sce­nario).

Le­sotho has rat­i­fied the SADC Cus­toms Union whose en­try into force (EIF) in the fu­ture will elim­i­nate the fi­nan­cial ar­range­ments un­der SACU and with it the fi­nan­cial flows to Le­sotho and other mem­bers of SACU. Thus, even if South Africa de­lays to ab­ro­gate the SACU agree­ment, the SADC Cus­toms Union EIF will have the same rev­enue elim­i­nat­ing ef­fect.

Can SACU be fully re­placed? No. In her speech, the min­is­ter pro­poses two so­lu­tions, namely mo­bil­i­sa­tion of ad­di­tional rev­enues (Para­graph 14, first and sec­ond bul­lets) and de­vel­op­ment of the pri­vate sec­tor.

These are eas­ier said than done. For one thing; pre­de­ces­sors have said the same, but so far with­out any new ad­di­tional rev­enues — in a rudi­men­tary and over-taxed econ­omy, there is no room for more tax­a­tion.

Fur­ther, pop­ulist gov­ern­ments do not want to raise fees, penal­ties and charges as the min­is­ter pro­poses — but in­stead tend to de­lay re­views (toll road fees as an ex­am­ple) or re­duce them (hos­pi­tal user fees, school fees). Pop­ulism refers to those poli­cies that are likely to be pop­u­lar as op­posed to those that are cor­rect.

They tend to sat­isfy short-term and elec­toral and con­sump­tive needs of ma­jori­ties and politi­cians, but may turn out to be ir­re­spon­si­ble in the long run.

Scrap­ping the graz­ing fee in 1993 was pop­u­lar, but the re­sul­tant de­te­ri­o­ra­tion of the ran­ge­land has proven far more dam­ag­ing. An un­pop­u­lar graz­ing fee would have been more ben­e­fi­cial years later.

Pa­tron­age is de­fined in dic­tio­nar­ies as the con­trol of or power to make ap­point­ments to govern­ment jobs or the power to grant other po­lit­i­cal favours; the dis­tri­bu­tion of jobs and favours on a po­lit­i­cal ba­sis, as to those who have sup­ported one’s party or po­lit­i­cal cam­paign.

Thus, it is dif­fi­cult to ex­pect govern­ment to raise these fees, ex­cept if driven by a fis­cal cri­sis. In short, the prospect of rais­ing ad­di­tional tax and non-tax rev­enue is nil and this speaks to the cred­i­bil­ity of the com­mit­ment to macro-fis­cal sta­bil­ity.

The min­is­ter also rightly places her con­fi­dence in a bour­geon­ing pri­vate sec­tor to cre­ate ad­di­tional jobs and ex­pand the tax base (Para­graph 11, 7th to 9th bul­lets). How­ever, in prac­tice this is un­likely.

This govern­ment has had 19 years of gov­ern­ing (1993-2012), say­ing in each bud­get speech that the pri­vate sec­tor will cre­ate jobs. With a long his­tory of bro­ken pol­icy prom­ises, it is dif­fi­cult to ac­cept that this time around it can hap­pen.

Wage bill risk un­ad­dressed The run­away wage bill is by far the most crit­i­cal risk that Le­sotho faces. Un­ad­dressed, it will am­plify the neg­a­tive im­pact of the fall or dis­ap­pear­ance of SACU rev­enue.

The min­is­ter recog­nises this and re­turns to it nine times dur­ing her speech (Para­graphs 13, 42, 43 and 80). How­ever, she of­fers no pol­icy so­lu­tion at this point and in fact her pro­posal to in­crease salaries across the board by six per­cent only wors­ens rather than cor­rects the prob­lem.

It is not sur­pris­ing that the speech of­fers no pol­icy so­lu­tions as the is­sue is very com­plex mainly be­cause of po­lit­i­cal pop­ulism and pa­tron­age. This is also re­ferred to in lat­est Govern­ment Fi­nance Sta­tis­tics clas­si­fi­ca­tions as com­pen­sa­tion of em­ploy­ees (see An­nex I).

Previous gov­ern­ments have kicked the can down the road and not wanted to be the first to tackle this is­sue. I do not ex­pect that this govern­ment will act dif­fer­ently, par­tic­u­larly as there are more favours to re­pay this time around.

What’s wrong with wage bill? In­creas­ing and un­con­trolled share of ex­pen­di­ture and de­clin­ing pro­duc­tiv­ity of labour

Un­der global re­port­ing stan­dards, spend­ing can be clas­si­fied into four ma­jor blocks, namely (i) wages and salaries (W&S), (ii) goods and ser­vices (G&S), (iii) sub­si­dies, and (iv) in­ter­est pay­ments. W&S as a share of na­tional out­put (GDP) has risen from around 14 per­cent in 2002/03 to nearly 22 per­cent to­day and will grow fur­ther ac­cord­ing to this bud­get to nearly 25 per­cent of GDP.

How has this huge in­crease been fi­nanced? Com­par­ing the shares of W&S and G&S in na­tional out­put, the sub­stan­tial rise in W&S has been at the ex­pense of or been funded by re­duc­tions shares of goods and ser­vices and the de­vel­op­ment bud­get. Should we worry about this?

Of course — labour pro­duc­tiv­ity or the per­for­mance of civil ser­vants is de­pen­dent on both their per­sonal com­pe­tence and the tools given to them to work with. Re­duce the vol­ume of tools; per­for­mance col­lapses.

Over a long pe­riod, govern­ment has steadily ran­sacked the tools bud­get to fund wages and this un­der­fund­ing is the main rea­son ex­plain­ing the long-term de­cline in civil ser­vice pro­duc­tiv­ity.

Worse, long-term idle­ness means that with each pass­ing year, the civil ser­vice learns less and less from on-the-job train­ing that comes with vig­or­ous work.

There are other com­pli­cat­ing fac­tors. Knowl­edge in the Le­sotho civil ser­vice is passed be­tween gen­er­a­tions with the next gen­er­a­tion learn­ing from the im­me­di­ate past gen­er­a­tion in the work place. But given grad­ual loss of knowl­edge, each gen­er­a­tion passes less and less knowl­edge to the next.

In ad­di­tion, se­nior man­agers (min­is­ters and prin­ci­pal sec­re­taries) are usu­ally not pro­fi­cient in the tech­ni­cal dis­ci­pline of the min­istry and must de­pend on the same civil ser­vants who are grad­u­ally los­ing com­pe­tence.

To il­lus­trate, the pub­lic ser­vice is in­creas­ingly em­ploy­ing con­sul­tants to get work done; the best knowl­edge of Le­sotho pub­lic fi­nan­cial man­age­ment is found amongst re­tirees.

Wage bill re­form dif­fi­cult Pop­ulism, pa­tron­age and the frag­ile pol­i­tics of coali­tion gov­ern­ments make it ex­tremely dif­fi­cult to im­ple­ment wage bill re­form. Lead­ers fear to im­ple­ment wage freezes and cuts and the lack of re­quired skills to un­der­take wage bill man­age­ment has not only un­der­mined re­forms, but ac­tu­ally made the prob­lem worse with each pass­ing year.

To­day’s wage bill of 23.5 per­cent of GDP (An­nex II), pos­si­bly the high­est in the world and cer­tainly in Africa, has risen from 14 per­cent of GDP in FY2002/03, which govern­ment al­ready recog­nised as dan­ger­ously too high.

It is pleas­ing to note that the min­is­ter in­tends to en­gage the World Bank Group to mo­bilise the knowl­edge nec­es­sary to un­der­take re­form. How­ever, the min­istry will find that the World Bank is scep­ti­cal be­cause it (along with other part­ners) has been in­volved in Le­sotho’s civil ser­vice re­form on and off since 1996, with no mean­ing­ful progress to speak of.

The re­luc­tance by govern­ment to re­form the wage bill is also ex­ac­er­bated by a col­lapse of con­trols re­lat­ing to hir­ing and pay­ing of civil ser­vants. The fol­low­ing are some of the ir­reg­u­lar­i­ties re­lat­ing to wage bill mis­man­age­ment:

Some min­istries (par­tic­u­larly the Min­istry of Lo­cal Govern­ment in re­cent his­tory) hire staff qui­etly and pay them il­le­gally through the goods and ser­vices bud­get and later present the unau­tho­rised hires as fait ac­com­pli em­ploy­ees of govern­ment. This type of sur­rep­ti­tious hir­ing could worsen un­der the multi-party coali­tion govern­ment as each party po­si­tions it­self for elec­tions.

Con­tin­ued next week . . .

Dr Ma­joro was the De­vel­op­ment Plan­ning min­is­ter in the previous govern­ment.

Min­is­ter of Fi­nance Mam­phono Khaketla.

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