THE International Monetary Fund (IMF) has forecast economic growth of only 2.5 – 3 percent for Lesotho in 2016, which it said could be lower depending on the severity of the current drought.
The IMF projected inflation to remain moderate at around 5-6 percent, despite rising food prices and the recent depreciation of the South African rand.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members usually on a yearly basis. A staff team visits a member country, collects economic and financial information as well as discussing with government. Upon returning to the IMF headquarters in Washington DC, the staff prepare a report which forms the basis for discussion by the Executive Board.
In a statement released last Friday and headlined “IMF Executive Board Concludes 2015 Article IV Consultation with the Kingdom of Lesotho”, the Fund expressed concern with government expenditures which it said amounted to 60 percent of gross domestic product (GDP) and “increasingly slanted toward recurrent expenditures”.
“The government wage bill rose to 21.5 percent of GDP in 2014/153 —the highest in sub-Saharan Africa — and is budgeted to increase to 23 percent of GDP in the current fiscal year,” the Bretton Woods institution noted.
The Fund urged the government of Lesotho to contain the “extraordinarily large” wage bill.
“Reforms to strengthen public service administration and public financial management are urgently needed, not only for a successful fiscal adjustment, but to also improve the delivery of government services. A lack of basic controls—such as the inability to fully reconcile government bank accounts on a regular basis—contributes to severe government inefficiencies,” the IMF noted.
The IMF said Lesotho’s “heavy reliance” on volatile Southern African Customs Union (SACU) revenue for government financing would also negatively affect the economy as there were forecast to significantly drop.
“After slipping to R6.6 billion (about 26 percent of GDP) this year, Lesotho’s allocation will drop sharply to R4.5 billion (about 16 percent of GDP) in 2016/17, with much of this decline expected to be long-lasting,” read the statement.
“Lesotho faces a challenging economic outlook. The imminent sharp drop in SACU revenues could threaten macroeconomic stability, unless a major fiscal adjustment is implemented.
“While existing buffers provide a cushion to allow an orderly adjustment over the next 2–3 years, it is critical that the authorities take a substantial first step in the upcoming fiscal year to ensure credibility.”
The Fund also observed that unemployment rates had remained high, especially among the youth, “and the incidence of poverty is virtually unchanged from a decade ago”.
“Most health, education, and social indicators have shown little or no improvement, even with considerable government spending in these areas (about 30 percent of GDP a year),” it said.
This was compounded, the IMF stated, by a weakened business environment “partly because of political difficulties around the collapse of the country’s first coalition government in 2014”.
“Despite early elections in February 2015 and a smooth transition to a new coalition government, tensions have persisted. Implementation of Lesotho’s National Strategic Development Plan (NSDP) has stalled in this environment and investment has slowed. Also, some development partners have dampened their economic support,” said the IMF.
“To achieve greater inclusiveness, the private sector needs to step up job creation. Implementation of the NSDP, which provides a viable approach for transitioning from government dependence to private sector led growth over the longer term—particularly in sectors with potential for high employment—needs to be restarted.
“In the near term, to quickly stimulate job growth, measures could be taken to eliminate unnecessary obstacles and bottlenecks to doing business. Continued implementation of the Financial Sector Development Strategy would improve access to credit and financial services.”
In his analysis of the statement, former Development Planning minister Dr Moeketsi Majoro said Lesotho’s perennial political stability was the underlying reason behind the poor economic performance.
Dr Majoro, who is also a former IMF executive director, said without political stability, which impacts on the investment climate and purchasing power, Lesotho cannot improve its social indicators.
“Due to the unstable nature of our governments, their main focus is on ensuring their own survival rather than addressing the economic and societal needs,” he said.
“The government needs to address four fundamental issues, namely the ailing health system of the nation which impacts on our ability to be economically productive; education that equips learners with the relevant skills; political will and awareness to address societal issues; and infrastructural development.”