In its November country report on Lesotho, the International Monetary Fund (IMF) said that while the country had made good progress towards macroeconomic stability, economic activity needed to pick up speed and the medium-term fiscal position needed to be strengthened to reduce poverty and to avoid its vulnerability to exogenous shocks.
“Lesotho’s fiscal and external positions have improved markedly, but economic activity has remained sluggish and poverty is widespread. With an anticipated large increase in receipts from the South African Customs Union (SACU), public expenditure is projected to rise sharply in 2006/07.
Lesotho’s medium-term outlook is clouded by several downside risks, including a further loss of trade preferences for the export sector and a decline in SACU receipts relative to GDP,” the IMF pointed out.
“Lesotho is facing several permanent shocks. Although there is considerable uncertainty about the timing and extent of the decline in SACU receipts, the downside risks are high. An adverse scenario, combining a fall in SACU revenue, shocks to the export sector, falling workers’ remittances, and inclement weather, while not a high probability at present, is not inconceivable and serves to highlight the need to strengthen economic policies and reform,” the IMF stated.
“A conservative fiscal strategy is needed. Under the exchange rate parity arrangement, the burden of safeguarding macroeconomic stability falls on fiscal policy and structural reforms. Large spending increases based on temporary revenue windfalls pose serious risks to fiscal sustainability,” the IMF pointed out.
The IMF added that the recent cut in company income tax would help attract private investment but the revenue impact needed to be offset through sustained improvement in tax administration.
“Staff strongly support the authorities’ efforts to improve public financial management and increase the execution rate of capital expenditure. As public expenditure amounts to over half of GDP, improving the efficiency of the use of these resources can make a key contribution to raising growth. Staff support the objective of improving public service delivery at the local level and encourage the authorities to take prompt actions to ensure that the implementation is broadly budget-neutral. Significant progress should be made to accelerate the execution rate of capital expenditure, especially concerning donor-funded projects, as it would help strengthen the growth orientation of the budget and increase aid absorption,” the IMF said.
To raise economic growth and broaden its base, structural reforms needed to be accelerated to make Lesotho one of the most competitive places in the region for private investment, the researchers said.
“The exchange rate peg has provided important benefits to Lesotho, but in light of the real effective appreciation of the loti in recent years, Lesotho needs to redouble its efforts to improve the investment climate, reduce structural impediments to private sector development, and increase competitiveness by enhancing labour productivity, infrastructure, and institutions. In this regard, Lesotho also needs to work with its regional partners on cross-country issues that are important for growth,” the agency said.
The IMF said its staff supported Lesotho’s efforts to improve the private sector access to bank credit and to strengthen the regulatory framework for the non-bank financial sector. ‒ I-Net Bridge