FINANCE Minister Moeketsi Majoro has warned that the government risks running down all its reserves through unbridled expenditure, effectively jeopardising the parity between the local Loti and the South African Rand within a year causing a major trade crisis.
Dr Majoro delivered the warning in his maiden budget speech to parliament in Maseru yesterday.
The budget was delivered under the theme ‘Pursuing fiscal sustainability within the context of political instability and insecurity’.
The only way to avoid a fiscal crisis was through prudent management of the public purse and curtailing of the government’s runaway expenditure.
Dr Majoro revealed that the government debt had peaked at M12.6 billion in December 2016 “due in part to sharp depreciation of the Loti against the US Dollar”.
“Domestic debt amounted to M1.1 billion. Analysis of the sustainability of our debt suggests that Lesotho could quickly face the risk of debt distress. There is therefore need to slow down spending to levels that can be matched by revenues,” he added.
He also revealed that the overall balance of payments continued to portray vulnerability to external shocks.
“In 2016/17, the current account balance is expected to worsen further from a deficit of 8.6 percent in 2015/16 to 15.6 percent in 2017/18 due to a significant drop in SACU receipts and flat remittance income.”
He said official international reserves in months of import cover were recorded at 4.5 months in 2016/17 from a high of 6.1 months observed in 2015/16.
He said the deterioration was caused by lower SACU revenues and a draw-down on reserves to finance the large budget deficit in 2016/17.
“Reserves will deteriorate further to 4 months of imports in 2017/18, but stabilise and begin to recover during 2018/19 and 2019/20 to the government’s desired policy benchmark of 5 months of imports with bold steps to control spending”.
He said the 2016/17 targeted revenue was M12, 8 billion, of which SACU revenue was M4, 5 billion, tax revenue (M6, 3 billion) and non-tax revenue (M2 billion).
The total revenue was M12, 1 billion, which fell “short of target by some nearly 729 million”.
“On the spending side, Parliament appropriated M17, 4 billion, with M12, 4 billion being recurrent costs, and M5, 1 billion for capital outlays.
“The appropriated budget had proposed a fiscal deficit of M2, 7 billion or 9.6 percent of GDP. The 2016/17 actual recurrent and capital expenditures amounted to M11, 8 billion and M2, 7 billion, respectively.
“The fiscal deficit of M2, 3 billion was financed entirely by reduction in government deposits and foreign currency reserves, which fell from 6.1 to 4.5 months of imports,” Dr Majoro said.
He intimated that the proposed 2017/2018 budget would continue being financed through taxes and Southern African Customs Union (SACU) revenues.
He however, said that the inability of Lesotho’s economy to generate adequate domestic revenue, declining SACU revenues and increasing recurrent expenditure fueled by the growing wage bill called for a major fiscal consolidation for the next few years.
“This policy intervention has to involve a much more stringent fiscal strategy that aims at returning Lesotho to a sustainable fiscal path, providing sufficient fiscal space for financing investments in jobs, while ensuring that we maintain a sufficient foreign reserve buffer against possible domestic and external shocks,” Dr Majoro said.
“Without fiscal consolidation, government runs the risk of drawing down within the next year all its deposits, and thus jeopardise the parity between Loti and the Rand.
“Given Lesotho’s dependence on imports, a collapse in the peg between the Loti and the Rand would lead to fiscal and trade crises.”
He said government would intensify efforts to reduce reliance on the volatile and pro-cyclical SACU receipts and move to a situation where all the recurrent expenditures were covered by domestic revenue sources.
He said the current scenario was one where domestic taxes only covered wages and salaries, with the balance of spending funded by less reliable revenue sources.
Dr Majoro said the development component of SACU revenue and any additional revenue resulting from over-performance of the revenue pool and donor funds should be used to finance infrastructure and other capital expenditures and to build and maintain sufficient reserves for financing future capital spending.
He said capital expenditure should be directed to projects and programmes that aimed at providing the minimum infrastructure required to support rapid private investment.
He also spoke of the need to reduce the wage bill which “as a proportion of national output is the largest in the world”.
“It (the wage bill) has grown from just over 10 percent of GDP two decades ago to the current 19 percent and its growth has been financed by the reduction in the share of goods and services, which has cumulatively reduced the labour productivity of the civil service.
“Thus, the burden of reducing spending will fall significantly on the proper management of the wage bill evolution, including by strengthening institutions, human resource and public financial management.”
Dr Majoro said one of the wage bill management strategies which government was already implementing was the amendment of the Teaching Service Regulations.
He said as of June 2016, teachers’ salaries were no longer paid solely on the basis of qualifications but also on performance and availability of vacant positions to which teachers were being promoted.
The measure has already torched a storm of dissatisfaction and protests from teachers who say they spent huge sums of money on upgrading their qualifications through further study only for government to unilaterally deny commensurate remuneration.
Dr Majoro other austerity measures included the implementation of the biometric registration of all public servants as well as limiting wage increases to below the increases in domestic revenues.