The International Monetary Fund (IMF) has cautioned Lesotho on government spending including large public sector wage bill which it says needs to be contained to address financing difficulties, while ensuring that the most vulnerable are protected.
business
Feb. 8, 2019
STAFF REPORTER
3 min read
IMF cautions Lesotho
Dr Moeketsi Majoro, Finance Minister
Following its team visit to Lesotho between January 24 and February 5 to conduct consultation discussions with the government, IMF has observed that “growth is recovering following last year’s slowdown, although the economic situation remains challenging, and the erosion of fiscal buffers highlights the need for adjustment.” The end-of-mission press release includes statements of IMF staff team that conveys its preliminary findings after a visit to Lesotho.
The IMF team led by Joseph Thornton released a statement advising that “reforms should empower the private sector, rather than the government, to act as the engine of growth and job creation.” Narrating its conclusion in the statement from its visit, Thornton’s team said economic growth is expected to slowly recover this fiscal year, driven by strong production in the diamond mines, higher textile exports, and the initiation of Phase 2 of Lesotho Highlands Water Project.
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Said the statement: “Inflation is projected to remain subdued, reflecting weakened household demand. There are downside risks emerging from a possible El Nino-related drought. “The current account deficit widened in FY 2018/19 owing to a decline in SACU revenue and higher imports, which offset increased exports. External buffers have so far been maintained, but pressures will remain in the absence of stronger fiscal consolidation. “The banking system continues to be stable and profitable, but banks are exposed to risks from nonperforming loans stemming from government arrears and from segments of the household sector that have significant debt burdens. Enhanced supervision of both the bank and non-bank financial sector could facilitate higher levels of financial inclusion and increase the sector’s contribution to growth.
“Public consumption has been the traditional driver of growth in Lesotho in recent years. Fiscal policy has therefore been characterized by large fixed expenditures, in particular a very high public-sector wage bill. As a result, when SACU revenues fell to historically low levels, continued spending rapidly depleted government deposits. The government’s efforts to mobilize additional domestic revenues and constrain procurement of goods and services were not sufficient to avoid the emergence of payment arrears. Long-standing weaknesses in ministries’ public financial management further hamper effective budget planning and implementation.
“The government acknowledges the fiscal challenges as it prepares the new budget. Strong measures to control spending would close the financing gap and allow for the elimination of domestic arrears, thereby supporting private-sector growth. Efforts to rationalize expenditures must be accompanied by a strengthening of social safety nets and more efficient spending to strengthen human capital and align spending priorities with the objectives of growth and job creation. Higher quality public financial management will be necessary for the government to effectively implement these measures. Reaching consensus on these reforms could also help to unlock financial support from international partners.
“Efforts to support the private sector should include improvements to the business climate. The authorities should refrain from introducing new red tape and reconsider the need for existing regulations. Greater policy certainty, enhancements to governance and anti-corruption efforts, and more intensive consultation with the business community will be critical to attract and sustain private sector investment. “The team met with Minister of Finance, Dr. Moeketsi Majoro, Central Bank of Lesotho Governor, Dr. Matlanyane, Minister of Public Service Joang Molapo, other senior officials, and financial market, business, and trade union representatives, as well as multilateral development partners. The IMF mission wishes to express its gratitude to the Basotho authorities for the constructive discussions and warm hospitality during its visit to Lesotho. The mission will prepare a report of the Article IV consultation which will be discussed by the IMF’s Executive Board in the next quarter.”
