Basotho urged to brace for tougher times as 2020/21 budget beckons

 

. . . IMF, economists paint a bleak picture

BONGIWE ZIHLANGU

MASERU – As Finance Minister Dr Moeketsi Majoro prepares to table his 2020/21 annual budget in a fortnight, hard-pressed Basotho should brace for an even more austere period with bleak prospects of economic growth and salary increments.

Analysts blame government’s failure to generate sufficient revenue and the poor performance of the textile industry for the parlous state of the economy.

Poor performance in Lesotho’s Africa Growth and Opportunity Act (AGOA)-backed textile industry, coupled with an almost non-existent private sector and a suffering agricultural sector due to a prolonged drought have also been cited as key factors disabling the economy

The analysts who spoke to Public Eye this week also said the fracas over the regulations of the wool and mohair industry, and government’s failure to invest in the agriculture sector primarily for job creation, have eroded Basotho’s disposable income and dampened prospects more.

It did not help, the analysts added, that drought-hit Lesotho was importing more food which has seen prices sky-rocketing, in a country whose populace not only hardly has any disposable income but whose unemployment rate keeps soaring.

A statement by a visiting International Monetary Fund (IMF) team has aggravated the dim view of the economy.

After a two-week tour of the country, IMF staff has warned against salary increments to contain Lesotho’s ever-ballooning wage bill.

The only glimmer of hope is this year’s improved SACU revenues, although the experts were quick to warn that from next year these receipts will nosedive.

Lesotho, they said, needs to breathe urgent life into its private sector and explore new industries as the country’s textile sector was quickly shedding jobs as investors move their monies to the Asia-Pacific countries such as Vietnam and Bangladesh due to their proximity to the Pacific Harbour, giving them a full two-week head start ahead of Lesotho whose merchandise headed for the US market takes almost 30 days to reach there.

The economy of Lesotho is based on agriculture, livestock, manufacturing, mining, and depends heavily on inflows of workers’ remittances and receipts from the Southern African Customs Union (SACU).

Lesotho has relatively low inflation, around 5.4% at the end of 2014. The economy is mostly export driven, on the back of products such as garments, diamonds, water, electricity, wool and mohair. The major economic sectors are manufacturing, mining, agriculture and services.

Independent business consultant and economist Arthur Majara, told Public Eye that despite AGOA being the epicentre of Lesotho’s manufacturing sector since the year 2000 and creating textile jobs up to 55 000 jobs since 2004 “the irony of the matter is that AGOA is no more our darling of manufacturing”.

“This is because of two crucial factors, being stagnant job growth, foreign currency and diversification. In the 16 years of the existence of AGOA in this country, we have not exceeded 60 000 jobs created,” Majara said.

“This is a sign that it is a mechanism by investors, especially the Chinese, to siphon foreign currency, which is to the detriment of contribution of this sector to GDP and foreign currency earning which is so important to enable us to borrow cheap money on the foreign markets and pay it.”

Regarding SACU, Majara submitted that its receipts had been “Lesotho’s crucial shot in the arm amounting to 35% from previous years’ 65%”, adding “our days are numbered”.

“We have been members of SACU along with Namibia, Botswana, Swaziland and South Africa. The SACU receipts have been our crucial shot in the arm on our revenue amounting to 35% from previous years’ 65%. Clearly, our days are numbered on this form of revenue to pep up both capital and recurrent budgets,” Majara noted.

“The apartheid regime appears to have been generous to us as opposed to the democratic dispensation of 1994. South Africa continues to dominate the SACU market in both customs and excise. Again, it is time to change direction or negotiate a new agreement.”

On the capital and recurrent budgets, Majara said there was likely to be no notable improvement because previous governments as well as the current dispensation “lack serious innovation and creativity when it comes to macro economic and fiscal policy”.

Majara said there had been numerous attempts to balance the budget in what he called “template budgeting” since 1966 with no creativity whatsoever, further bemoaning the casual manner in which Lesotho governments over the years had treated the country’s private sector.

“For example, a crucial institution, the private sector, is being relegated to irrelevance and promoted in name only but not through articulated policy of how it can play its role as an engine of economic growth. All one sees is its abuse to promote corruption filtering all the way from the high Arabs to the ordinary entrepreneurs,” Majara said.

“I can understand why they don’t want the private sector to outshine others because it completes the value chain of corruption, making competing for government office a necessary evil. I must admit the ill-conceived notion that appointment of finance ministers must be attached to a person with a doctorate has proven to be defective in this country.”

On the possibility of salary increments, Majara said prospects were bleak because not only the IMF but also the World Bank, had made a clarion call to the Lesotho government to try and manage its civil bloated public service “which they said should be drastically reduced in numbers”.

“But this call has fallen on deaf ears as nothing has happened. Our civil service is indeed a votes ATM, emanating from the fact that most are employed on the basis of the “spoils system” aka politically motivated job offers,” Majara said.

“I don’t even understand why salary increases should be such an important issue when productivity is so bad. Demote, offer no increase, cut the number of years of employment terms and stop employing on political favouritism.”

 

Another local economic analyst, Letsatsi Sephepha also weighed in, saying the only three things that “we should be looking into in the coming budget” were AGOA and SACU proceeds, as well as a “poorly managed agriculture sector”.

According to Sephepha, through AGOA which was directly connected to Foreign Direct Investment (FDI), Lesotho’s textile industry had performed dismally in the current financial period, shedding an estimated 5 000 jobs while also grappling with competition from Asia-Pacific countries thus costing the country at M2 billion.

“It seems Lesotho’s performance this financial year was dismal as garments were exported at a lower rate. Production was dismal across the textile industry, meaning that textile products to the United States of America decreased,” Sephepha said.

“This is due to many firms closing and investors taking their money out of Lesotho due to bad business. As a result, in the 2019/20 financial year alone, we lost an estimated 5 000 jobs which translates to about M2.1 billion. We also failed to produce anything aimed at the European market.”

Sephepha added that the poor performance could be attributed to factors such as the advantage of proximity to the US market which the Asia-Pacific and West and East Africa countries enjoyed over Lesotho, as it took the country at 30 days for merchandise to reach the US market, while for the former it was just two weeks.

“The bad business and loss of jobs could be attributed to the fierce competition from Asia-Pacific countries such as Vietnam and Bangladesh which are closer to the US and have the luxury of a well-developed textile industry,” Sephepha said.

“Their main advantage over us though, is time. Due to their proximity to the west, it takes them just 15 days transport merchandise to the US market while on our part it takes a good 30 days to reach the pacific harbour. East and West African countries are also closer to the US than we are.”

These factors, Sephepha stressed, were reason enough for Lesotho to look elsewhere for revenue sources.

“This is to say that Lesotho did not generate much from AGOA this year. As such, my take is that it is time for Lesotho to stop relying on textiles only but to expand to other products.

“For instance, we are probably still busy producing winter jackets but it will already be summer in the West by the time they reach the market. We need to introduce new industries, otherwise we will experience a lot of problems and further loss of revenue. Again, the high unemployment rate means government now is under pressure as it has a huge deficit.”

Sephepha touched on what he called a poorly managed agriculture sector, noting that food production in Lesotho was bad, despite Minister Mahala Molapo’s promises of at least 45 percent job creation in the sector which we have “failed to live up”, and instead we have seen “food prices sky-rocketing”.

“Due to the poor production of grains, Lesotho has had no choice but to import commodities such as maize meal. Thus, we have seen food prices sky-rocketing despite Basotho not having disposable income. It is even worse in the highlands where 80kg of maize meal costs a whopping M600, due to failure to produce our own food this year,” Sephepha said.

Further crippling Lesotho’s economy, Sephepha added, was the wool and mohair industry fracas, which he said had set Lesotho back by at least M1 billion or 5 percent of the GDP.

“The fracas around wool and mohair in the last two years has also crippled this industry which contributes at least 5 percent of the GDP or M1 billion annually.

“Actually, we should be done fighting over the wool and mohair regulations. Instead, our focus should be on infrastructure as in the processing of the two commodities to generate maximum income,” Sephepha said.

“We should be looking into the rehabilitation and reallocation of pastures, as well as reducing our flocks in favour of improved breeds which are smaller in numbers but produce more wool and mohair. But we are busy bickering at the expense of our people.”

Looking into SACU which is Lesotho’s main source of revenue, Sephepha said the country performed well, which translated into improved proceeds for Lesotho.

“Remember that we import about 80 percent of products, which translates to 30 percent of SACU revenue, while 70 percent goes to the countries that import products to us,” he said.

However, he was quick to caution that there was no consistency in SACU revenues saying “we should guard against celebrating because things are bound to change drastically going forward”.

“If anything, Lesotho should be ashamed that its SACU receipts are increasing while countries like Botswana and Namibia, are gradually weaning themselves off as they are now producing more for themselves,” Sephepha said.

“Things look bleak as we speak but Basotho expect effective service delivery in their localities and that begins with the proper decentralisation of power to our local councils through the operationalisation of the decentralisation policy which is gathering dust somewhere.

“On salary increments, my prediction is that if the Minister of Finance does increase salaries, it will be by between 2.5 to 3 percent because anything beyond that would have an adverse impact on the Capital Budget.”

He added: “This means the country would have a well-paid civil force that is sitting idle doing nothing because development funds would have been poured into the recurrent budget.”

Meanwhile, at the end of its two-week mission to Lesotho which concluded on Tuesday, the IMF issued a statement warning government against reckless spending and increasing salaries in a civil service with a bloated and an unmanageable wage bill.

The team led by Jospeh Thornton, submitted in the context of policy uncertainty, the weak regional environment “has depressed growth below the levels needed to reduce poverty and unemployment”.

It added that high government spending should be refocused on areas that “can have the biggest impact on delivering vital services, protecting the vulnerable, and supporting private sector growth”.

Moreover, the team added that the country’s reforms programme of seven thematic areas which is already underway, should focus on improving the business environment “including through governance enhancements to ensure sound use of public resources”.

According to Thorton, Lesotho’s economy remained sluggish.

“The economy remains sluggish, as policy uncertainty, weak regional growth, and recurring drought continue to weigh on growth and depress investment and job creation,” Thornton said.

“While work on the Second Lesotho Highlands Water Project is keeping growth positive, prospects for exports and remittances are unpromising given continued subdued growth in South Africa and depressed prices for key exports. Government finances have also eroded after several years of relatively low inflows from the Southern African Customs Union, with the government incurring new domestic arrears.”

Thornton added that the IMF discussed policy options with the Lesotho government in pursuit of reigniting private sector investment and “addressing Lesotho’s long-standing challenges”.

“Measures should focus on improving governance to ensure transparency and accountability in the use of public funds, which should in turn enhance the quality of public service delivery—both infrastructure and services—to the population,” Thornton said.

“A strengthened policy environment could be attained through greater consultation with the private sector. The mission welcomed the authorities’ efforts to improve the business environment through streamlining regulations, including through on-line company registration and licensing.

“Efforts to encourage greater financial inclusion and access to finance are beginning to bear fruit, and the banking sector is stable, while its regulatory framework continues to improve.”

The mission, Thornton further said, welcomed efforts to increase and deepen financial markets, including through greater use of collateral and credit scoring.

“Further efforts are needed to enhance access to finance, including to small and medium enterprises, if the private sector is to play its necessary role as the engine of growth. Measures to that end should focus on making it easier for lenders to assess risk and use collateral, while ensuring that the private sector continues to play the lead role in project selection.”

Again, Thornton noted, the IMF mission discussed budgetary priorities with government such as the SACU revenue which he said while they seemed to have surged “over the term the trend is downward”.

Control of current spending, Thornton added, would therefore be essential to avoid a recurrence of government spending arrears and inject more into the private sector for the generation of the necessary tax base.

“In this context, IMF staff noted that the only sustainable basis for higher public sector wages over the long run would be a stronger and more vibrant private sector, which could provide the necessary tax base,” Thornton said.

“Further increases in wages and other perquisites of government workers – already among the highest in the world compared to the size of the economy – risk crowding out essential programmes over the short term.”

The IMF team leader also highlighted the need to respond to the needs of the marginalised population of Lesotho, further rendered vulnerable by the prolonged drought.

“Ensuring the ability to provide an adequate response to protect the poorest in the event of drought, for example, will require rebuilding adequate buffers, while avoiding the incurrence of large liabilities with dubious benefits in terms of growth or poverty alleviation.”

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