IMF warns of trouble

IMF warns of trouble

MASERU – THE International Monetary Fund (IMF) says the sharp decline in SACU revenues due to slow growth in South Africa will have a severe shock on Lesotho’s public sector. The Fund says “the government needs to adjust to restore fiscal sustainability and reduce pressure on international reserves” because the fiscal buffer is shrinking.

The IMF team made the observations and recommendations after its latest Article IV visit to Lesotho.
The IMF team, led by Christine Dieterich, met Finance Minister Moeketsi Majoro, Central Bank of Lesotho Governor Adelaide Matlanyane as well as senior government officials and business stakeholders.

The preliminary report out of those consultations makes for sombre reading and a warning to Lesotho that trouble lies ahead unless quick adjustments are made. “Lesotho’s new government faces difficult challenges due to external shocks compounded by a fragile political situation. A sharp drop of Southern African Customs Union (SACU) revenues and slim prospects for a quick recovery put severe pressure on the fiscal accounts,” the fund says.

It says the economic growth is expected to exceed three percent only because the government has shielded the economy from the sharp drop in SACU revenues by running huge budget deficits.

But it warns that such a strategy is unsustainable.  “After two consecutive years of fiscal deficits exceeding 6 percent of GDP, financed by drawing down government deposits at the central bank, these buffers have been dwindling. The fiscal situation has been compounded by shortfalls of domestic revenues,” the report says. “While SACU revenues have been difficult to predict in the past, prospects for a quick recovery are very slim, given the slow economic growth in South Africa”.

“The unsustainable fiscal position is mirrored in the external accounts. The current account deficit remains high due to the significant import share of aggregate demand. The trade balance is expected to further deteriorate as construction of the second phase of the Lesotho Highlands Development Project is scheduled to begin early next year.”

The Fund acknowledges the strides the government is making to “to improve domestic revenue performance, control spending this fiscal year, and substantially reduce the fiscal deficit for the FY 2018/19 budget.”
It however notes that given an environment of high income inequality the government’s challenge is to “identify high-quality fiscal adjustment measures, aimed at improving spending efficiency while limiting the negative impact on poverty and growth”.

The fund says in addition to its measure to strengthen Public Financial Management and procurement deeper fiscal adjustments are needed.
“In view of the large adjustment need, evaluating the efficiency of existing spending programs to identify room for cuts should be a priority.”
On the outlook the IMF says mining and the agriculture, which is expected to recover from two years of drought, will be the major contributors to the economic growth.

“The implementation of SADC recommendations to stabilize the political situation has reduced the risk for the textile sector to lose access to the U.S. market under AGOA.” It says short term measures to boast economic growth should include reducing red tape, enhancing job creation and removing obstacles that hinder private sector development.

“Over the medium-term, improving human capital formation is critical as stubbornly high HIV/AIDS rates, especially for women, and little progress in education standards have taken a toll on labour productivity.”

Staff Reporter

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