Govt urged to cut spending

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Finance Minister Tlohang Sekhamane

Bereng Mpaki

THE government will need to curtail its spending for the 2017/18 financial year in light of the Lesotho Revenue Authority’s (LRA) failure to meet tax collection targets and the downgrading of South Africa to junk status by global rating agencies.

According to economist and Lesotho Council of Non-Governmental Organisations (LCN) Programmes Manager, Kanono Thabane, it would be prudent for the government to also come up with a medium-term fiscal adjustment plan to reduce recurrent expenditure.

For his part, Finance Minister Tlohang Sekhamane told the Lesotho Times this week there were no plans to cut back on expenditure, saying there was a contingency plan in light of the decline in revenue.

The LRA failed to meet the government’s target for tax collection by 6.7 percent in the financial year which ended on 31 March 2017.

While the M5.9 billion collected by the revenue collection agency in the 2016/17 financial year was slightly more than the M5.8 billion collected the previous year, it missed the M6.4 billion target by M430.8 million.

The LRA collected revenue through income tax, value added tax (VAT) as well as the Alcohol and Tobacco Levy which missed their set targets by 7.3 percent, 4.3 percent and 100 percent respectively.

This was announced last week by Mr Sekhamane who also explained that the previous financial year’s income tax of M3.7 billion was impacted by the poor performance of Company Income Tax (CIT).

CIT was hamstrung by the lacklustre performance of the mining sector which contributes up to 30 percent of its overall collections.

Also last week, Standard & Poor’s and Fitch rating agencies downgraded South Africa’s foreign and local currency ratings to sub investment grade, or junk status.

The agencies said the country’s long-term ratings downgrade followed recent political events, including the Cabinet reshuffle, which Fitch believes would weaken standards of governance and public finances.

Mr Thabane said the government would need to cut back on its spending in order to stay in the black.  He said the downgrading of the South African economy would also result in further reductions of Southern African Customs Union (SACU) revenues.

SACU is the world’s oldest customs union and consists of Botswana, Lesotho, Namibia, South Africa, and Swaziland.

“The decline in domestic revenue mobilisation means that the government has to consider some cuts in spending,” he said.

“The macroeconomic impact of the fall in domestic revenue could be exacerbated by declines in SACU revenues which constitute a larger percentage of Lesotho’s total revenue.

“At the moment, SACU faces a risk caused by the credit downgrading of South Africa.”

Mr Thabane indicated that a poor credit rating resulted in dramatic increases in the interest rates at which the government and companies borrow funds.

“That also means interest rates will also rise for the man on the street,” he said.

“If South Africa registers a low growth rate due to low investment inflow and high inflation, this will translate into low SACU revenue collections. In turn, this will affect the revenue allocations due to member states such as Lesotho. As a result, Lesotho will have to finance the resultant budget deficit and incur higher borrowing costs.”

On the remedial avenues the government can take to manage the expected decline in SACU revenues, Mr Thabane said: “The government should consider fiscal consolidation efforts over the medium-term, while protecting spending for critical social and development needs.

“Such a tight fiscal policy stance would help maintain a sufficient international currency reserve buffer and maintain modest debt distress.”

He suggested a medium-term fiscal adjustment plan to address the decline in domestic revenue mobilisation in 2017.

“It is important for Lesotho to resuscitate the Medium-Term Fiscal Framework which entails a three-year fiscal consolidation plan focusing on reducing recurrent expenditure and containing capital spending growth,” added Mr Thabane.

For his part, Mr Sekhamane the government would not undertake any major expenditure cuts in the short-term.

“We don’t anticipate anything major in the government’s budgetary operations, but only marginal tweaking of allocations here and there,” the minister said.

“This is because the budget estimates submitted by the Ministry of Finance are merely broad guidelines that assist in the allocation of funds. It does not mean we have to stick to them strictly.”

He added that the government also had contingency plans to deal with the decline in revenue.

“We may allocate funds to projects that use up their allocated money faster. These funds may be taken from projects that are not yet using their allocated money.”

Apart from domestic tax revenue and SACU receipts, the government of Lesotho finances its operations through donor grants and loans.

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