Budget fails fiscal transparency test
foreign currencies which is used not only to pay for government expenses, but more critically to supply enough rand in Lesotho to support the one-to-one pegging of the Loti to the rand.
The government does not disclose enough details on its financing plans, but the International Monetary Fund (IMF) recently warned that Lesotho could move into a foreign currently shortage situation if its spending plans, particularly on wages are not controlled.
Even if the government believed at the time of the speech it could maintain macroeconomic stability, political instability will complicate the management of the economy and render the revenue projections optimistic. The minister concedes in Paragraph 90 the role of political instability in disrupting the execution of government plans.
Lesotho has previously invested a lot of effort in securing macroeconomic stability, but not enough on attaining a conducive investment climate and strong entrepreneurial capacity. The Job Summit process launched in August 2014 was intended specifically to ignite entrepreneurial energy and undertake widespread investment climate reforms. This was the process that would result in district and national investment plans being developed to implement the NSDP. It is thus regrettable to hear that the Job Summit process has stalled, with the Ministry of Development Planning now looking for consultants to restart the process.
Growth policy is contradictory The government forecasts a medium term (3-5 years) growth of 4.3 percent (Paragraph 23) and at the same time indicates that the proposed expenditures target the NSDP growth rate of 5-7 percent and creation of 10 000 jobs per year (Paragraph 58). The analysis of growth in Paragraphs 18-33 demonstrate a bleak performance of the sectors that have traditionally supported growth in recent history. Construction declined 10 percent, reflecting the completion of the civil works related to health clinics and the Metolong Dam. Manufacturing declined 11 percent, reflecting economic slowdown in Lesotho’s export destinations and uncertainty from political com
plications. Although mining grew significantly by 16 percent, it remains a small sector that creates a small number of jobs. Going forward, the government has put its hopes on the ministries of Home Affairs, Energy and Meteorology, Local Government and Chieftainship Affairs and Mining to drive growth! But the paltry 12 percent it has allocated to these priority ministries cannot energise the growth sectors sufficiently to reach national output growth of 5-7 percent (see Paragraph 59).
At any rate, this is not even how a government should think about growth — it is not the ministries of government in isolation that are going to create growth, but rather large investments by private investors supported by well-thought through policies and supportive public investment. Even this would still require political and macroeconomic stability and skilled and healthy workers.
The budget speech sees economic growth as driven by government spending through public procurement, which is a long-standing strategy of the key parties in the current governing coalition. But the focus is misplaced; decades of this procurement-driven approach bears testimony that it is inconsequential for growth and poverty and damaging for inequality.
In its press release of 29 January 2016, the IMF concludes that “unemployment rates have remained high, especially among the youth, and the incidence of poverty is virtually unchanged from a decade ago”. Is it not time for a change in approach to something that has a chance to work?
Poor health, poor education, poor invest- ment climate, and poor government capacity are the four foremost binding constraints to Lesotho’s investment, growth and poverty reduction. These are identified by the Lesotho NSDP (2013), Constraints Analysis conducted by the Millennium Challenge Corporation in preparation for Compact II (2015), and the World Bank’s Systemic Country Diagnostic (2015).
A clear and forceful focus on these four should have been the focus of this and future budgets, provided long-term political stability is restored and risks to macroeconomic stability are tamed. Granted, social spending in Lesotho is very high, but the IMF observes that “….there has been little progress in the fight against poverty and unemployment, despite considerable spending on social sectors and transfers”.
The budget also does not address the risks to economic growth it identifies. In fact in Paragraphs 28-30, it downplays the risk of loss of investments linked to Lesotho’s eligibility to the Africa Growth and Opportunity Act (AGOA). It is true that the United States of America has so far not issued any warning related to Lesotho’s eligibility to AGOA. But it is also not correct to say that “there is no threat to Lesotho’s continued AGOA eligibility (Paragraph 30)” because the continuing political strife, insecurity and human rights and rule of law violations are persistent threats to AGOA eligibility.
But even more critical is that investor decisions are driven by mere perceptions of risk. Investors are presently making assessments of the worsening polarisation of society and insecurity and are considering their options. Many of these can access AGOA from many countries in Africa where they already have operations — it would be easy to migrate their production activity.
The Kingdom of Swaziland (effective January 1, 2014) and the Republic of Burundi (effective November 1, 2015) are examples of countries that have recently lost AGOA eligibility due to human rights violations. Also the speech notes, but does not provide details on how government intends to deal with competitive risk expected to come from the coming into effect of the Transpacific Partnership Agreement with the United States bringing together pacific rim countries.
There are however some welcome developments in the architecture of investment climate. The launch of the credit reporting facility (Credit Bureau) and the Maseru Securities Market could increase the ease and financing options available to Lesotho investors.
Although there are insufficient details provided, access to Arab Bank for Economic Development in the Africa (BADEA)’S private window could complement financing for domestic investment. Investors should however be on the lookout for Lesotho’s sovereign risk complicating their borrowing rates. Fitch ratings downgraded Lesotho in October 2015 from stable to negative outlook, observing that “continuing political tension is affecting governance”.
Government spending remains high Southern African Customs Union (SACU) revenues to Lesotho are like oil to an oil producing country — no amount of telling them not to depend too much on oil revenue ever works — until the price of oil collapses. Much has already been said about the risks of Lesotho depending too much on SACU revenues. In its recent communication, the IMF warns of the threat to macroeconomic stability unless Lesotho implements a major fiscal adjustment. By contrast, the government hopes to achieve a rising spending profile and macro-fiscal stability despite a drop of 6 percent of GDP (M1.1 billion) in SACU revenues (Paragraph 8). It is also surprising that both Company Income Tax (CIT) and VAT are expected to increase at the same time economic growth is expected to slow down! Anecdotal data suggests that company balance sheets are getting tighter, profits are more likely to flatten out rather than grow, and for property owners, rents are collapsing as tenants leave. Moreover, donor support is dampening largely as a result of unfavourable political developments.
In one of her memorable statements, the minister talks of “filling an ocean using a teaspoon” (Paragraph 83). This extraordinarily apt observation is applicable to other aspects of the budget. Raising non-tax revenue as outlined in Paragraphs 53 to fill the hole created by the loss of SACU revenue is to fundamentally underestimate the magnitude of the problem.
Likewise, efforts to control spending (Paragraphs 93-94) are hopelessly insignificant in relation to the fiscal hole Lesotho faces from SACU revenue losses. Finally, the efforts to grow the private sector, while welcomed, are fragmented and woefully inadequate.
I welcome the civil service review to be launched in March 2016 (Paragraphs 43 and 68) and hope it can deal with anomalies associated with Lesotho’s wage bill management I outlined in June 2015 in the Lesotho Times. I look forward to an aggressive implementation of the project and hope again it will not fall prey to populism, patronage and politicisation of the public service. In this respect, the proposed across the board salary increase of four percent is a bad omen as it signals business as usual and worsens the problem. Moreover, the project seems targeted at reconciliation of human resource and payroll data, which falls far short of what would be needed to reduce the wage bill to well below domestic revenue collections.
Commitment to reform doubtful Government Fleet: The government discloses in Paragraph 41 that it entered into a traditional short-term lease for six months! Previously, we were told the government failed to reach an amicable settlement with Avis, as it demanded unacceptable conditions for extension of contract by six months. Why was the government prepared to use tax-payer money to pay Bidvest multiple times more for the same fleet as provided by Avis? The government always had the power and authority to guide Avis to a settlement if it truly wanted that! Taking into account its failure to manage the Avis contract properly, was it worth it in the eyes to stomp off the negotiation and instead pay so much more for the same service?
Why was the government not able to put Avis to order for the 6 months it gave a shortterm contract to Bidvest under questionable affordability conditions? Was the government’s reaction more emotional that logical? Should tax payers now consider the extra expense justifiable? Did the government exercise proper discretion? A new fleet provision will commence in April 2016 according to the speech. Will this be the contract led by Basotho fleet owners as promised by the government in 2015? These are the kind of questions a Parliament doing its job of oversight and not ingratiating itself to the government should ask.
Queen ‘Mamohato Memorial Hospital (QMMH): In my previous commentary, I doubted that the government would be able to re-negotiate the public–private partnership (PPP) contract with the shareholders of the QMMH, pointing out the complexity of the arrangement. This time around, the minister merely concedes that the hospital expended outside its budget and the government had to pay. There is no longer the commitment to renegotiate the QMMH contract! This cannot be acceptable.
The government must prepare a clear road map for shielding Basotho against cost overruns that arise from a poorly implemented contract. I welcome the improvement of facilities and services at the three filter clinics earmarked to manage referrals to QMMH and hope in future the government will run them at the level they were intended (Paragraph 34). Meanwhile, an independent and professional review of the fate of the Maseru District Hospital should be undertaken and its results published.
Public Sector Investment Committee: The establishment of the Public Sector Investment Committee (PSIC) in 2013 was intended to eliminate “a lot of underspending in some ministries” the Minister points to in Paragraph 45. As designed, it would prevent unnecessary and under-designed capital projects to be funded. It would also ensure that capital projects align well with policy and make an impact. The government should assess the capacity of this committee and strengthen it as soon as possible to avoid persistent underspending.
Primitive budget documentation and handling in Parliament: The documentation presented to Members of Parliament for scrutiny is archaic and prevents proper exercise of oversight. Even though the rest of the world has moved to the more logical three-year budgets, the Parliament of Lesotho has no choice but to consider one-year budgets. Public sector interventions are rarely fully implemented in one year; it is therefore logical to be transparent to parliament about the full multi-year costs of an intervention, which is possible in a Medium Term Expenditure Framework.
For its part, Parliament has accepted the responsibility to scrutinise annual budgets without demanding full information including the full timing and geographical location of the requested interventions. By doing, this Parliament is failing to require accountability from the Executive and acting more as part of Government rather than an oversight body. Parliament should move aggressively to do its job by independently securing public financial management experts to undertake training of MPS.
Decentralisation: I welcome the intensification of reforms in decentralisation and hope that Lesotho will get it right this time around. The reforms should try to achieve best international practice in the re-design and in particular aim to achieve both subsidiarity and decentralisation. As the reforms will have far reaching political implications, they should be discussed with all political groupings as soon as possible, as local government elections are also slated for this year.
The responsibility for urban roads located at the Ministry of Local Government and Chieftainship Affairs (MLGCA) appears sensible at first. However, since the MLGCA is a ministry in the central government just like the Ministry of Public Works and Transport, the transfer of road construction responsibility from the latter to the former is not decentralisation, but rather merely transferring responsibility from the one central government ministry that is a centre of knowledge for road construction to another that is not! In proper decentralisation where power and responsibility are genuinely devolved, the responsibility for the construction of urban roads would fall under the urban councils themselves as separate and independent subgovernments. The current design of decentralisation is mainly deconcentrating power
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