THE International Monetary Fund (IMF) has warned that Lesotho’s economy is “speeding towards a fiscal cliff”, adding that the Mountain Kingdom still has time to make fundamental improvements to ensure it becomes competitive.
In a podcast posted on the organisation’s website last week, IMF mission chief for Lesotho, David Dunn, said the economy’s growth rates had dropped owing to the slowdown in the South African economy to which it is closely tied.
“The area Lesotho is most closely tied to South Africa is on the government revenue side with about half of its total inflows coming from the Southern African Customs Union (SACU),” he said.
“In recent years it has been about 30 percent of gross domestic product (GDP), and when South Africa’s economy begins to slow down and imports and duty collections taper off, it has serious implications on Lesotho’s economy.
“In the 2016/17 financial year which begins in April, the government is already facing a very difficult fiscal situation. This drop in revenue is likely to persist for some time to come.”
Mr Dunn said the country’s stock of international reserves bought the government some time to address the challenges.
“On the positive side, there is a healthy stock of international reserves that have been built up over the years and that buys the country some time,” he said.
“Unfortunately, the country is speeding towards a fiscal cliff where these reserves could be run down and jeopardise the loti-rand parity. But they do have time to steer away from that cliff.”
The IMF mission chief said government expenditures were not sustainable in the long run, with a wage bill of 23 percent of GDP – the highest in sub-Saharan Africa.
“The gap between government revenues and expenditures is too wide over a sustained period of time,” he said.
“We do not recommend shock therapy, but we do recommend steering away from the cliff and taking a few years to make this fiscal adjustment.”
Mr Dunn said there was room for improvement in the administration of the civil service.
“The government spends 30 percent of GDP in social services such as health and education which is very high by international standards. But they have not really gotten the results,” he said.
“The government has been negotiating with the World Bank on a project to modernise the administrative systems and use money more effectively.
“In many countries similar to Lesotho’s situation, there is large number of irregularities in the civil service with the so-called ghost workers, where the names would be on the payroll while the people may no longer be serving the civil service.”
Lesotho, Mr Dunn said, risked losing its African Growth and Opportunity Act (AGOA) competitive advantage if a trade agreement between the United States and Pacific Rim countries is consummated.
AGOA gives duty-free and quota-free access to the United States market to eligible Sub-Saharan African countries including Lesotho.
However, if completed, the Trans Pacific Partnership would reduce tariffs and trade rules among the 12 countries involved. It would also allow very competitive economies such as Vietnam, with a much more competitive apparel industry than any African country, to do more business with the US under the same privileges AGOA beneficiaries currently receive.
“It’s a matter of time before the Asian countries have the same type of access to the US market, and that is going to be very difficult for Lesotho and require fundamental improvements in competitiveness,” he said.
On a positive note, Mr Dunn said the recent establishment of a credit information sharing platform would address the challenge of access to finance and in turn boost a private sector-led growth.
“One of the areas where there has been success is in the financial sector development strategy which was developed with technical assistance from the World Bank and IMF,” he said.
“There has actually been remarkable progress in dealing with some of the hurdles in dealing with access to credit such as establishing the credit reference bureau, and now they are trying to have a registry for collateral which makes lending to businesses more efficient.”
Mr Dunn added that Lesotho needed to improve the largely undeveloped micro-finance sector to ensure inclusive growth.
“Micro-finance is a challenge everywhere, but if we can make some strides in micro-financing for me I think that’s the biggest bank for the buck for inclusive growth,” he said.