Robert Likhang
IT is the responsibility of any generation to ensure that the next generation is not worse of in terms of resources under its control, and that concept is behind the whole issue of sustainability, meaning our planet has to be no less valuable when we, the existing generation hand it over to the next generation. It is not about the planet and its beauty but also about the economy. If our next generation (posterity) should find the economy no worse, then we need to grow it or at least preserve it (austerity).
The importance of govt’s austerity
The recent budget speech by Finance Minister Moeketsi Majoro, clearly indicated economic challenges Lesotho is facing, which amongst others are declining reserves, inability to grow domestic revenues, declining SACU revenues, increasing recurrent expenditure etc.
In its 66th meeting, the Monetary Policy Committee released a statement which showed the following undesirable facts: contraction of domestic economic activity, quarterly inflation moving from 4.4 percent to 5.0 percent, the fall of overall money supply by 0.9 percent, Official Reserve coverage fell from 5.3 months to 4.9 months.
The Minister introduced austerity measures which include cuts in ministers’ travel benefits, supplier relationships leading to lower rates, cheaper utility vehicles etc. One can argue that they are too few too late, but however they are a good gesture of renewed responsibility and accountability on the fiscus of the country.
Institutionalising austerity
The government needs new laws and policies that will institutionalize austerity beyond the budget. Policies such as ‘Buy Local’ which will direct the countries revenue back into domestic circulation without leaks normally caused by government buying services, works, and goods outside Lesotho at high cost need to be put into place. Where foreign procurement has to be done, there has to be measures to ensure empowering of local capacity through joint assignments with locals, skills transfer etc.
The government has set up various state-owned agencies and entities whose existence has to be re-justified, which could lead to closing others, merging others, or making others lean and mean. Excess reserves in such institutions should back to the government’s consolidated fund. The salaries for such state owned entities need to be reviewed and henceforth receive cabinet approval at all times, to ensure that austerity goes beyond just the central government but touches all the public sector institutions.
Meaning of austerity for private sector
The low government expenditure might lead to less money for private sector, likely to reduce inflation but restrict growth, however there will be greater resource efficiency. The private sector will therefore have to improve their process efficiency and manage their overheads better. A better system of cost management is needed in businesses, to ensure that unnecessary expenditure is reduced. Less spending by government could translate into less revenue, thus businesses will be expected to exercise austerity as well
Government is clearly gunning for lower prices hence the supply chain management strategy over traditional transactional procurement, this then translates into businesses having to work on their prices thus harnessing their costs and looking for other sources of revenue outside government. As a business owner, you need to analyze your revenue, and start developing strategies for growing other customer/market segments.
Responsible austerity
The Government has to review its laws to ensure that private sector especially small to medium businesses are successful. It is expected that the small business sector development is the growth area for economy and jobs creation. The role played by small and medium businesses in developing countries is essential in providing the much needed jobs. If the small business sector is that important, government has to ensure that such businesses operate in supportive business ecology. The laws, policies and practices are important in creating conducive environment for domestic small business development.
A group of laws that need serious review are the Taxation laws. In 1993 when the Income Tax Act was promulgated into law, it looked at promoting manufacturing hence high depreciation allowance for special equipment and the depreciation allowance for the buildings. Since then the country has seen that other sectors such as tourism are critical for economic growth, yet for instance, hospitality establishments do not enjoy low income tax or depreciation allowance for their buildings.
Government ministries are not disbursing payments in time. They withhold 5 percent of the revenue, and not even issue a Withholding Tax Certificate for the business person to claim back the tax or use it to reduce the tax liability.
The Value Added Tax Act that was added later brought an option for accrual and cash basis, and making it hard to choose the cash basis. Companies have to pay Value Added Tax on accrual basis and they receive their payments much later, especially if they do business with Government, causing serious working capital (cash flow) problems for smaller businesses.
The working capital problem caused by delayed disbursements, accrual Value Added Tax, failure to issue withholding tax certificates by government departments are made worse with the enforcement of the pronouncements of the law on the provisional tax payments. Lesotho Revenue Authority is seen to enforce this part of the law, which when charged accordingly by LRA, the business person has to run to the commercial banks to plead for overdraft financing which also comes at ridiculous interest rates, making our business people uncompetitive, while at the same time being encouraged to export (uncompetitive prices will make exporting impossible), and even so the high finance costs make it difficult for locally manufactured products to compete inexpensive import brands.
Financing is still a problem, Lesotho National Development Corporation (LNDC) and the Ministry of Small Business only showcase the lame Partial Credit Guarantee product, which is insufficient to address the woes of a young entrepreneur as not even 70 percent will have value for the young business person as he or she cannot raise the remaining 30 percent if needed. In the unlikely event, the 30 percent security is not sought, the loan comes at ridiculous prices (interest rates compared to other countries especially RSA). We need to slice some financing activities of LNDC and of the government and create new lending instruments to form a Development Finance Institution, that will provide guarantee instrument, debt factoring, supply chain financing, venture capital, develop bonds etc. The state owned entities such as WASCO, LEC etc. have to obtain their funding from the market to reduce the burden of capital expenditure from government by issue of bonds which will be marketed and exchanged through the new Maseru Stock Market (MSM). To increase the MSM activities the Government including all shares held by LNDC should be sold to public through the same MSM. On a separate note the estates held by LNDC and BEDCO should be transferred to a new government as a Public Private Partnership with gradual transfer of government sharing to public.
Conclusion
The austerity still does not answer where the 7 percent increase in labour will come from, worse when other quarters are pushing for more. You don’t build more costs to business owners when you expect them to generate more jobs. Government must get it right this time or we will lose it completely. The Responsible Austerity will rebuild our wealth as a nation and pass a greater value to the generations following us. Let us make Lesotho great again. Let us make the posterity proud we could suffer for them.
- Mr Likhang FCIS, ACMA, CGMA, CA (L) is the founder RL Consulting – Chartered Accountants & Business Consultants. (Contact: business@yourfd.co.ls)
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