“Pursuing fiscal sustainability within the context of political instability and insecurity”

Delivered to Parliament by Honourable Dr. Moeketsi Majoro, Minister of Finance, in Maseru, Lesotho on 19 July 2017

Today, as I present the policy and financial proposals for the 2017/18 Fiscal Year, I wish to register from the outset that these are formulated under very challenging global, regional and local environments. Countries are facing contracting economic conditions with painful impacts on jobs, especially for the youth. Closer home, mounting insecurity, political instability and the deterioration in the rule of law have dampened the prospects for our economy and unless these are reversed quickly, economic recovery is likely to be protracted.

This is a transition budget in which Government has not, for legal reasons, not had adequate time to ensure that all the feasible campaign policies are incorporated. That task will be for next fiscal year.

Global economic performance and prospects

Let me provide highlights of economic developments and prospects on the global and regional front, and their impact on our domestic economy. The slow and uneven global and regional recovery continues to have negative effects on Lesotho’s export potential. Persistent economic slowdown in South Africa is impacting negatively on the employment of Basotho mineworkers, our exports and the stability of SACU revenues. We look forward to the expected recovery in South Africa of 0.8 percent in 2017 and 1.6 percent in 2018, owing to the improvements in the mining and agricultural sectors.

Further afield, economic activity gained momentum in the second half of 2016 due to recovery in global manufacturing which had weakened severely in 2015. The cyclical recovery in manufacturing and trade together with buoyancy in global financial markets, is expected to lead to global growth of 3.5 percent in 2017 and 3.6 percent in 2018, respectively. This will augur well for Lesotho’s garment exports, although we will have to confront the erosion of Lesotho’s competitiveness in the US from Asia and elsewhere in Africa.

Domestic economic performance and outlook

Let me share a few facts on our own economy. Following tiny growth of only 1.7 percent in 2015/16 and 2.1 percent in 2016/17, we project a recovery of economic activity averaging 3.4 percent over the medium term, building on agricultural production which declined significantly in 2016 due the El Niño, but is expected to recover significantly during the 2017/18 crop year. Area planted rose sharply by 139 percent over the 2016/17 crop year.

Mining growth is also projected at 17.3 percent in 2017/18 from 8.1 percent in 2016/17, as a result of the recapitalisation of Liqhobong Diamond Mine which has recently resumed full production. The recovery in global demand for diamonds is, as in South Africa, supporting growth in the diamond mining industry during this period.

As we all know, Lesotho's manufacturing activity is dominated by textiles and apparel and the sector’s exports are predominantly destined to the United States and South Africa. In 2015/16, 70 percent of Lesotho-made garments were exported to the United States under AGOA, while 30 percent terminated in South Africa. This represents a significant shift from reliance on the US market towards our neighbour, as only ten years ago, no more than 5 percent of Lesotho’s apparel entered the South African market. While textiles and clothing exports to non-AGOA destinations are expected to grow, exports to the US market are set to remain under pressure due to stiff competition from Asian producers.

In the external sector, the overall Balance of Payments continues 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 due to a significant drop in SACU receipts and flat remittance income. In the short term, Lesotho can avail balance of payments support, but the country must transform quickly and produce more and export more. This is the challenge both business and government must address in earnest in the coming months.

Official international reserves in months of imports were recorded at 4.5 in 2016/17 from a high of 6.1 months observed in 2015/16. The deterioration came from 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 should 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. Overall in 2016/17, Inflation in Lesotho is expected to average 6.6 percent mainly due to increase in cost of food and non-alcoholic beverages. Inflation is projected to decline marginally in 2017/18 to 6.3 percent.

Interest rates in Lesotho follow the same trend as those in South Africa. The prime lending rate has remained stable and is currently set at 7 percent, in line with that of South Africa. Commercial bank prime lending rate also averaged 11.7 percent from June to December 2016. The 1-year Deposit rate remained unchanged at 3.5 percent over the review period. The large margin between the lending and the deposit rates imply low lending by commercial banks, despite high demand for start-up and working capital. In the coming months, Government plans to set up a committee to develop proposals on lending to start-ups and small businesses. This Committee will also review the two-government partial risk guarantee schemes which have to date been a dismal failure The Government of Lesotho debt peaked at M12.6 billion in December, 2016 due in part to sharp depreciation of the Loti against the US Dollar and 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.

2017/18 fiscal policy stance and financing

The strategic objective of Government’s fiscal policy remains that of maintaining fiscal prudence to ensure long-term macro-economic stability and sustainability. Achieving this objective will require broadening and diversifying domestic revenue sources to sufficiently cover recurrent expenditures so that SACU revenue and donor funds are used to finance infrastructure and other capital expenditures and maintain sufficient reserves for financing forward capital spending commitments. In addition, the Government will endeavour to create fiscal space through continuous reduction in recurrent expenditures.

Let me now focus on the 2017/18 budget allocations. The proposed total expenditure is M18,709.3 million of which recurrent budget is M13,506.7 million and capital budget is M5,202.6 million. The overall 2017/18 budget proposals have increased by 7 percent over the 2016/17 budget. Much of the 7 percent increase however is attributed to contractual obligations, such as rent, transfers and foreign exchange fluctuations.

The overall revenue target is estimated at M16,035 million, of which, SACU revenue is M6,154.2 million, tax revenue; M7,604.3 million and non-tax revenue; M1,236.3 million. At this level, total revenue is 15.8 percent over the 2016/17 revenue outturn.

The proposed revenue and expenditure allocations for 2017/18 are projected to result in a fiscal deficit of M1,597.7 million or 4.8 percent of GDP. Taking into account that SACU revenues improved by 3.3 percent of GDP, this still very high deficit suggests once more that Government should move quickly with fiscal consolation.

It is proposed that the 2017/18 Budget deficit be financed from budget support for up to M400 million, issuance of domestic bonds for up to M450 million and drawdown of reserves for the balance. This financing strategy is cautiously calibrated to avoid full crowding out of the still fragile private sector and to restrain the depletion of international reserves. With this financing strategy, Government is targeting a reserve level of 4 months of imports in 2017/18 and a recovery to a target of 5 months in the next couple of years. Additional austerity measures will be studied and introduced next fiscal year to avert a fiscal crisis and to preserve lending room for the private sector.

Economic growth, jobs creation and the private sector

Lesotho’s growth diagnostic work identifies poor education, poor health, poor investment climate and failing state as critical impediments to growth and job creation. Political instability, politicisation of the public service, and weak institutions are the hallmarks of a state of failure. At the same time, there is emerging dynamism in Lesotho's private sector, which combined with a rehabilitated government could place Lesotho on upward growth trajectory. The next NSDP, whose implementation will start in 2018/19, will consolidate the efforts of the private and public sectors to focus on jobs.

During 2017/18, Government will re-launch a dialogue with the private sector in a collaborative effort to accelerate investment, economic growth and job creation. This social compact will define the specific roles to be played by the private sector, civil society, local government councils, and the central government and will determine modalities for mutual accountability. This type of dialogue, which was launched in 2014 as the job summit process, will result in job creation actions for each of the participating partners and will form part of the implementing plan for the NSDP.

The private sector faces many constraints, but financing is one of the most limiting. Government will implement the Financial Inclusion Strategy which seeks to: i) increase access to financial products and services in the rural areas by bringing access points closer; ii) deepening usage of financial products across a wide spectrum of instruments; and iii) increase the take-up and effective use of mobile money and digital finance products and services, especially where such products and services are more affordable.

Again, in support of the development of the Lesotho private sector, the Ministry of Trade and Industry will undertake trade and market access facilitation, development of industrial infrastructure at Tikoe and Ha Belo, and establishment of effective national standards and quality infrastructure. The Ministry will also present to Parliament the Business Licensing and Registration Bill, the Competition Bill and Trade and Tariff Administration Bill. When passed, these bills will simplify trade licensing, reduce uncompetitive firm behaviour, and consolidate the administration of tariffs under the SACU Agreement. M194.8 million is proposed for this Ministry.

The Private Sector Competitiveness and Economic Diversification programme is spearheading the economic diversification, enterprise assistance and investment climate reform. However, the good work generated in the last decade needs to be scaled up significantly. Building on this, and during the course of the year, Government will establish a cabinet-level investment climate reform process similar to that under the Job Summit process.

Micro, Small and Medium Enterprises are the pillar of our economy. To increase job intake of these enterprises and to expand business opportunities for the youth, Government will promote and support the establishment of cooperative enterprises, construct market centres and slaughter houses, and refurbish BEDCO Estates and the Lesotho Cooperatives College. To this extent, M211.9 million is proposed to be allocated to the Ministry of Small Business Development, Cooperatives and Marketing. Lack of security of tenure as well as safety prevent these enterprises from investing and expanding their operations even when opportunities present themselves. The Ministry of Local Government will explore policy options for extending security of tenure to these enterprises wherever they are located.

The Government of Lesotho continues to identify tourism as a key pillar of development in its quest to diversify the economy. To further promote tourism, Government will during 2017/18 introduce a regulatory regime to promulgate sound tourism legislation to regulate the tourism sector for the benefit of domestic investors. In addition, government will review the cost of obtaining a visa and divest its interest in Molimo Nthuse Lodge, Bokong and Liphofung chalets, Thaba-Chitja Island and Sehlabathebe chalets to aid job creation and good upkeep of these facilities. These will be transferred transparently and without any form of conflict of interest to Lesotho tourism investors. Grading of tourism facilities is also ongoing to uphold international service standards. Government will also complete the revised tourism master plan, tourism investment policy and promotion strategy, and the community-based tourism blue print. An amount of M220.8 million is proposed for the Ministry of Tourism, Environment and Culture.

Conclusion

As I conclude, I wish to reiterate that the Budget I have just presented assumes a number of actions that the Government would necessarily have to take to control expenditure and intensify revenue collection in the medium-term. Most importantly and given the difficulty in stimulating the economy in the short-term and therefore mobilise revenue rapidly, it will be left to Government to implement policies that seek to contain expenditure both in the short and the medium term. We have in the past enjoyed growing revenue, especially SACU shares, and in the process entertained spending that would not assist us in growing the economy. It is now opportune for the Government to consider options for curbing expenditure and ensuring reserves build-up in anticipation of difficult times ahead. During the coming year, Government will explore revenue and expenditure measures that will guide our budget process for 2018/19 and the return to fiscal sustainability.

All of what is planned for 2017/18 can only be successful if we, as a collective, put our hands together in ensuring success. Macro-economic stability and sustainability can only be guaranteed in an atmosphere of political stability and security. More importantly, fiscal discipline and the rule of law will ensure that where transgressions have been committed, the perpetrators are brought to book and public funds recovered. It is our duty as public servants to deliver on the promises made to the people of this country and to lift the poor and destitute out of their predicament. I therefore call on all my colleagues in Cabinet and public servants as a whole to join hands and turn these commitments into reality.