Ketso warns govt over forex re­serves

Lesotho Times - - Business - Billy Ntaote

FOR­MER Fi­nance Min­is­ter, Dr Leketekete Ketso, has warned the govern­ment to tread with cau­tion in draw­ing down its for­eign cur­rency re­serves to cover a bud­get deficit.

Run­ning down the re­serves, he said, would send neg­a­tive sig­nals to for­eign and do­mes­tic in­vestors as well as mak­ing the op­tion of bor­row­ing “more dif­fi­cult” for the govern­ment.

Dr Ketso made the re­marks last week while pre­sent­ing a re­view of the 2016/2017 na­tional bud­get to par­lia­men­tary port­fo­lio com­mit­tees scru­ti­n­is­ing the ex­pen­di­ture plan in the Na­tional As­sem­bly.

The M17.423 bil­lion bud­get was pre­sented on 19 Fe­bru­ary 2016 by Fi­nance Min­is­ter, Dr ‘Mam­phono Khaketla, with a strong em­pha­sis on rein­ing in the govern­ment’s run­away ex­pen­di­ture and ex­plor­ing new sources of rev­enue gen­er­a­tion among oth­ers.

Dr Khaketla pro­posed to fi­nance the bud­get through pro­jected rev­enues of M15.473 bil­lion of which govern­ment would pro­vide M13.370 bil­lion. The govern­ment’s pro­vi­sion would come from South­ern African Cus­toms Union (SACU) re­ceipts of M4.593 bil­lion, do­mes­tic taxes of M6.251 bil­lion and non-tax rev­enue of M2.525 bil­lion, leav­ing a short­fall of M1.950 bil­lion.

The min­is­ter pro­posed to fund the short­fall through do­mes­tic bor­row­ing, donor grants, loans and draw­ing down from the coun­try’s US$600 mil­lion re­serve fund.

“The govern­ment cur­rently holds re­serves worth 6.1 month of im­port cover (about US$600 mil­lion), which slightly ex­ceeds the de­sired pol­icy tar­get of five months of im­port cover; this level of re­serves lever­ages the govern­ment to fully fi­nance the deficit in the bud­get,” Dr Khaketla had said.

In his anal­y­sis Dr Ketso, who was en­gaged by the Na­tional As­sem­bly to ad­vise Mem­bers of Par­lia­ment on crit­i­cal is­sues to look for in their anal­y­sis of the bud­get, noted that the ma­jor chal­lenge fac­ing the govern­ment was the sub­stan­tial de­cline in SACU rev­enues from M7. 034.1 bil­lion in 2014/15 to M4 593 bil­lion in 2016/17.

He said the de­cline in SACU rev­enues posed a threat to macro-fis­cal sta­bil­ity, adding that it could lead to “ma­jor tur­moil in the econ­omy”.

“Al­though tax rev­enues are pro­jected to in­crease this year, this will not be enough to off­set the de­crease in SACU rev­enues and un­less other rev­enue-in­creas­ing mea­sures are ex­plored, the macro-fis­cal sta­bil­ity ob­jec­tive will be put at risk,” the for­mer min­is­ter said.

It was im­per­a­tive, Dr Ketso said, for the govern­ment to im­ple­ment a fis­cal ad­just­ment strat­egy that would re­duce the pro­jected deficit to a sus­tain­able level.

“Learn­ing from the ex­pe­ri­ence of the Phase I of the LHWP, it has been ar­gued in some cir­cles that large cap­i­tal in­flows dur­ing the con­struc­tion phase of Phase II of the pro­ject will re­verse the trend be­yond 2017 and there­fore help to avoid the risk to mi­croe­co­nomic sta­bil­ity,” he said.

“We are un­able to sup­port this ar­gu­ment as pro­ject im­ple­men­ta­tion can be­come a se­ri­ous chal­lenge it­self and it is also highly doubt­ful whether there will be such cap­i­tal in­flows if the govern­ment chooses to fi­nance the pro­jected 9.9 per­cent deficit by draw­ing its re­serves in the Cen­tral Bank of Le­sotho.”

Dr Ketso called for “a lot of cau­tion” in draw­ing down the for­eign cur­rency re­serves.

“. . .While the govern­ment ap­pears to be con­sid­er­ing fi­nanc­ing the deficit by draw­ing down its de­posits in the CBL (Cen­tral Bank of Le­sotho), we would rec­om­mend that a lot of cau­tion be ex­er­cised in go­ing in this di­rec­tion as run­ning down re­serves could send neg­a­tive sig­nals to in­vestors (for­eign and do­mes­tic) and in the end make even the op­tion of govern­ment bor­row­ing more dif­fi­cult in the medium term,” he said.

FOR­MER Fi­nance Min­is­ter Dr Leketekete Ketso

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