Lesotho's financial crisis provides an opportunity for bold and positive steps to change

The ministry of finance released a statement on Monday, 11 December 2018 on the state of financial affairs in the country and its not looking good.

The ministry of finance released a statement on Monday, 11 December 2018 on the state of financial affairs in the country and its not looking good. The government finally put some truth behind the rumours that had already been going around stating that the government of Lesotho (GoL) was going broke. The statement provided the following insights around the issue:

- The current government inherited a very bad economy due to declining SACU receipts and depleted reserves.

- Tax revenue and government borrowing had fallen short of government spending resulting in government accumulating payment arrears amounting to M1.1 billion (In feb 2018 the government had a total public debt of M12.5 billion).

This comes as no surprise as businesses and vendors that supply government, have felt the pinch of government's non-payment in recent months which has had a negative impact on businesses in the country.

Government's plan to save the day

At this point I'm sure you are wondering, "what is government's grand plan to save the situation?". The answer is provided by our minister of finance in the statement and it entails the following urgent steps and promised to keep us in the loop for additional measures in the future:

1. To increase revenue the government is planning on incurring more debt:

- "The government is currently in negotiations with the International Monetary Fund (IMF) to provide balance of payments (BoP) support", which in plain English is to get an additional finance (debt) from the IMF. Even though the minister is not exactly clear on what type of debt instrument the government is seeking from the IMF, we can speculate based on the type of support the IMF usually gives --> read here and here.

The government is also hoping that this support from the IMF will give other lenders the confidence to provide financing as well.

One may wonder, is it a good idea for a government in debt to take on more debt? The answer is yes and no, and it really depends on what the government is planning on spending the money it wishes to borrow. Currently, Lesotho's budget consists largely of recurring expenditure. Which means that, the government spends its money to maintain the status quo and doesn't have a good record of spending on investments that can boost the economy, which has resulted in a very flat real economic growth in the past few years. Therefore, if the government is planning on borrowing more money just to spend it on its recurring expenditure ( a big chunk of it being government salaries), then borrowing money is a BAD BAD BAD idea as it will merely send us into a state of perpetual indebtedness and put us in an even worse crisis. The money that government plans on borrowing will only be worth it if it's going to be used in capital expenditure (roads, hospitals, schools) and on other activities that can boost economic growth by growing businesses and increasing employment which will have the trickle down effect of increasing tax revenues and therefore, increasing the government purse and enabling it to pay off its debt in the future.

2. To decrease expenditure, the government is planning on taking the following two measures:

- Reducing spending on international travel

- Reducing government fleet costs

When I first read how the government wishes to achieve this, I got very excited as ridiculous travel spending by African governments has been the bud of many a joke both locally and internationally. However, the more I think about it, the more I realise that these two measures alone do not even scratch the surface in curbing government expenditure in this country. I really hope that the government is actually devising more serious plans to curb government spending that will yield real and long-term results.

The root of the financial crisis

The minister also states that Lesotho's financial position is as a result of structural problems that would need long-term strategies to fix and he's very right about that.

Here are some of the structural issues for those who wish to understand what he means:

1. 40% of Lesotho's revenue consists of South African Customs Union (SACU) receipts, which are customs and excise duty receipts shared between South Africa, Lesotho, Swaziland, Botswana and Namibia.

SACU receipts have been declining in the past few years and are very much dependant on the economic performance of South Africa. Furthermore, South Africa is the highest contributor to SACU revenue and is currently going on a drive to renegotiate the sharing formula in order to benefit more than it has in the past. This places Lesotho in a very vulnerable position and should South Africa succeed in increasing its share of the SACU receipts, Lesotho will continue to be negatively affected.

Therefore, it goes without saying that Lesotho (or any other country for that matter) shouldn't depend so much on revenues that are outside its control. Therefore, measures have to be taken to increase the country's tax revenues in order to achieve a reasonable balance.

2. Government expenditure is dominated by a high wage bill which constitutes 48% of the government budget. This is unjustified if one considers just how ineffective the government is on service delivery. In his 2017/2018 budget speech, the minister states that the government will remove ghost workers, freeze posts and limit hiring to critical positions in order to address the high wage bill. He's not clear on exactly what real impact will have on the wage bill, but my opinion is that the minister should consider restructuring the public sector by merging ministries and getting rid of some positions and portfolios that are ineffective and unnecessary, in order to decrease the wage bill, and directing the funds to boosting the private sector which will have the double impact of increased revenue and job creation.

3. As I have mentioned earlier, Lesotho's capital expenditure budget only consists of 20% of the total spending by the government of Lesotho. Capital expenditure amounts in investments in assets and infrastructure that can boost economic growth and yield long-term returns. In this post, I discuss why the government must invest in research and development to boost innovation in the country and the returns we could see if government was serious about this. Similarly, government has to spend more on electrification, building and maintaining roads, improving our education infrastructure, improving health infrastructure etc. These are the types of investments that can see our economy in a better position in the long-term. The current status quo of government spending 80% on salaries and other recurring expenditure is not sustainable at all and has to urgently change.

4. The cost of governance - As already alluded to in the wage bill, I believe that the structure of our government is one of the most expensive structures in the world. This is because our government is very confused about whether it wants to be centralised (managed at ministries) or decentralised (managed locally). This lack of decisiveness means that the government incurs high administration costs both at ministry level and at local government level. The cost of this is that the government is spending more on local government and chieftainship affairs than it is on the key ministries such as small business development; trade and industry; communications, science and technology; justice, human rights and rehabilitation and law and constitutional affairs. This would be justified if we had a high culture of service delivery, but the fact that we don't at either level, means we need to rethink this structure so that the money spent on painting this governance structure can be better spent on actual service delivery.

There are many other things that are wrong with the structure of our economy that are worth discussing on their own such as: the need to get more from our value chains in diamond mining, water and agriculture; the need for our economy to be less public-sector driven and more private-sector driven; the cost of corruption to economic decline in the country; negative impacts of political instability on our economy; and how the right investments in key sectors can boost our economy. I do hope that in the future we can find the time and courage to write more on these issues.

Until then, let's do our best to engage with the relevant stakeholders in our respective areas of influence to ensure that we hold the government accountable for fixing the financial mess that we are in.

Likeleli M.