THE International Monetary Fund (IMF) executive board of directors has said Lesotho is faced with an extraordinarily high government wage bill, the highest in sub-Saharan Africa relative to Gross Domestic Product (GDP).
According to a press release following the conclusion of consultation between the IMF’s executive board and the government of Lesotho, the wage bill is crowding out public investment projects needed to promote inclusive growth under the National Strategic Development Plan (NSDP).
However, the Bretton Woods Institution said the country’s economic outlook looks positive with strong economic growth and low inflation.
Economic activity is expected to be supported by large public investment projects, including the second phase of the Lesotho Highland Water Project.
“The authorities are also taking steps to strengthen the role of the private sector,” read the release.
“However, there are risks, most notably from the high volatility of Southern African Customs Union (SACU) revenues.”
“In the near term, the authorities are faced with the issue of domestic tax performance.
“In 2013/14, the domestic tax revenue experienced a shortfall of four percent of (GDP) and resulted in the overall fiscal deficit of more than one percent of GDP, compared with a strong surplus the previous year,” the body further states.
While commending Lesotho’s robust economic growth with moderate inflation, and welcoming the recovery of international reserves on the back of a period of fiscal adjustment, the IMF also notes the high unemployment rate and widespread poverty.
The board said there was need to strengthen fiscal policies and step up reform implementation to enhance resilience and promote private sector-led inclusive growth.
“The directors saw a need for a tighter fiscal stance consistent with maintaining an adequate level of international reserves and creating space for priority social and capital spending.
“They encouraged the authorities to improve revenue administration and tax policy, including in mining, and to contain recurrent expenditure, notably the wage bill.”
The IMF has also urged the completion of the ongoing pilot payroll audits and extension of the exercise to the entire civil service while strengthening control over hirings.
They also encouraged the authorities to step up public financial management reforms.
“The directors noted that substantial financing will be needed for the second phase of the Lesotho Highlands Water Project, and encouraged the authorities to pursue a prudent debt policy to ensure sustainability.”
They recommended prompt submission of the new public debt management bill to parliament.
The body also observed that the loti’s peg to the South African rand has successfully anchored Lesotho’s macro-economic stability. The authorities were encouraged to consider moving towards a transparent and predictable rules-based fiscal framework, which, in addition to maintaining a sufficient stock of international reserves to secure the peg, would further reduce risks.
The IMF described the banking sector as “sound”, urging the financial sector to deepen to enable private sector-led growth.
They recommended further strengthening of the regulatory and supervisory framework, including effective cross-border supervision with South Africa, and establishing a functional credit reference bureau.
The implementation of the Financial Sector Development Strategy, the IMF added, would be important in this regard.
The body also urged the authorities to step up implementation of the NSDP to improve the business climate, raise competitiveness, and promote broad-based growth and poverty reduction.