Lesotho Economic Update and how not to finance deficits…
IMF reviews Lesotho’s economy;
While Lesotho has grown faster than its regional peers over the last decade, partly driven by capital intensive mining and infrastructure projects, high levels of unemployment, poverty, and inequality persist. GDP growth is expected to be around 3 percent in FY 2017/18, below the average of 4.1 percent for the past decade, and driven by mining and agriculture. Over the next three years, GDP growth is expected to be led by mining and construction related to the Lesotho Highlands Water Project Phase II.
An expansionary fiscal stance has shielded the economy from external shocks recently, but at the cost of shrinking buffers. A steep decline in Southern African Customs Union (SACU) transfers, a major source of government revenue, will result in a fiscal deficit that is likely to exceed 6 percent of GDP for the second year. The government is financing the deficit by using its deposits at the Central Bank of Lesotho (CBL), causing a sharp drop in the CBL’s international reserves. The drop in reserves is compounded by weaker remittances and demand for exports, particularly from South Africa.
With SACU revenues only expected to recover in FY 2020/21 in line with the cyclical upswing in South Africa, the outlook is fragile. Addressing the fiscal and external challenges remains difficult in an environment of high inequality and weak institutions. While tax revenues are already relatively high, there is scope for expenditure measures, including by reducing the very high public wage bill. However, efforts by the authorities to stabilize the political environment, including by implementing the recommendations of the Southern African Development Community (SADC), should contribute to macroeconomic stability.
On the expenditure side several policy options are being explored including wage bill reductions, and improving efficiency of treasury processes.
For Discussion: Review the Lesotho : public health sector expenditure review , Lesotho — Systematic country diagnostic and 2017 PEFA. Can some of the public management related recommendations like below be implemented given the PFM capacity of the government? How reliable are the country’s National Accounts and Price Statistics?
Change the payment system for hospitals and provide greater autonomy in the day- to-day management of individual hospital facilities. Allocations to individual hospitals should be based on some measure of the services (in terms of volume and quality) delivered by the same health facilities, and not input-based norms. It is worrisome that bed occupancy rates of most district hospitals (both government and CHAL owned) are abysmal (32 percent), signaling service quality and reliability issues that need to be addressed.
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