PESA
GDP Growth and Public Finance in Lesotho: FY2019/20

GDP Growth and Public Finance in Lesotho: FY2019/20

Lesotho’s real GDP growth rate increased from an annual average of 1.8% from 2015/16 to 2017/18, to a projected 2.9% in FY2018/19[1]. Real GDP growth increased partly due to capital intensive mining projects and the resultant increase in diamond exports. In addition to that, a rebound in the construction sector related to the Lesotho Highlands Water Project Phase II also spurred real GDP growth. The water project has had positive spill-overs on the other industries such as transport, communication, retail and financial sectors.

 

Figure 1: Real GDP Growth and Inflation in Lesotho (2015/16-2023/24)

Real GDP Growth and Inflation in Lesotho (2015/16-2023/24)

Sources: IMF 2019, Lesotho 2019 Article IV Consultation; IMF 2018, Lesotho 2017 Article IV Consultation. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2019.

However, in the forward-looking medium term from FY2019/20 to FY2023/24, real GDP growth is projected to decrease to an annual average of 2.4% due to among other factors, the slow recovery of the South African economy [2]. In turn this threatens migrant worker remittances and SACU revenues which have over the years contributed significantly to the economy of Lesotho. The continuous shrinking of the textile industry in the medium term also means Lesotho’s exports continue to weaken at a time when the country is heavily dependent on imports[3].

 

Figure 2: Sources of Government Revenue in Lesotho (2015/16-2023/24)

Sources of Government Revenue in Lesotho (2015/16-2023/24)

Sources: IMF 2019, Lesotho 2019 Article IV Consultation; IMF 2018, Lesotho 2017 Article IV Consultation. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2019.

The Government of Lesotho (GoL) has had a varying fiscal approach that changes from one year to the next due to fluctuations in real GDP growth. For example, when real GDP growth declined to 2.1% in 2015/16 the GoL increased public spending by 6.8% in 2016/17; and when real GDP growth improved to 2.7% in 2016/17 the GoL reduced total public spending by -4.0% in 2017/18[4]. This is consistent with countercyclical fiscal policy-making which dictates that the GoL ought to increase public spending to boost aggregate demand during slow GDP growth period, and reducing public spending in order to accumulate fiscal buffers when real GDP growth recovers. Although this approach is prudent fiscal policy and is responsive to changes in the economic context, this has constrained the GoL into making fiscal policy decisions based on year-to-year fluctuations in real GDP growth. This responsiveness is necessary given the small size of the Lesotho economy. Despite the year-to-year fluctuations in fiscal policy stance, the GoL has maintained a persistent fiscal deficit which also fluctuates in size depending on real GDP growth.

 

Figure 3: Government Revenue and Expenditure in Lesotho (2015/16-2023/24)

Government Revenue and Expenditure in Lesotho (2015/16-2023/24)

Sources: IMF 2019, Lesotho 2019 Article IV Consultation; IMF 2018, Lesotho 2017 Article IV Consultation. Notes (*) Figures from 2018/19 onwards are projections from the IMF, 2019.

The impact of real GDP growth on the fiscal deficit is direct due to the impact of GDP growth on tax revenues. Hence, during years where real GDP growth was improving the GoL’s fiscal deficit would narrow, and vice versa. In addition to reducing government revenue, slower GDP growth requires the GoL to increase fiscal spending which adds to the fiscal deficit. For example, when real GDP growth declined in 2015/16, the GoL increased public spending by increasing borrowing to a wider deficit of -LSL 2.7 billion (approx. -8.0% of GDP) in 2016/17; and when real GDP growth recovered in 2016/17 the GoL moderated public spending and the fiscal deficit narrowed to -LSL 1.2 billion (approx. -3.4% of GDP) in 2017/18[5]. Consequently, the GoL has had to increase its borrowing to finance its fiscal stimulus in response to real GDP movements. This has led to major swings in the fiscal position.

 

Figure 4: Government Expenditure Composition in Lesotho (2015/16-2023/24)

Government Expenditure Composition in Lesotho (2015/16-2023/24)

Sources: IMF 2019, Lesotho 2019 Article IV Consultation; IMF 2018, Lesotho 2017 Article IV Consultation. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2019.

As real GDP growth declined from an annual average of 2.4% in 2015/16 and 2016/17, to 0.5% in 2017/18 the GoL increased public spending in 2018/19. Since the GoL has maintained a fiscal deficit since 2015/16 increasing public spending meant increased borrowing. This led to an increase in public debt from an annual average of 39.9% of GDP from 2015/16 to 2017/18, to 46.8% of GDP in 2018/19[6]. In the forward-looking medium term from 2019/20 to 2023/24 public debt is projected to increase to an average of 50.9% of GDP as real GDP growth moderates from 2.9% in 2018/19 to annual average rate of 2.4% requiring the GoL to increase public spending[7]. The major swings in the fiscal position are also worsened by the GoL’s reliance on Southern African Customs Union (SACU) revenues which have had major swings affecting fiscal sustainability.

 

Figure 5: Gross Government Debt in Lesotho (2015/16-2023/24)

Gross Government Debt in Lesotho (2015/16-2023/24)

Sources: IMF 2019, Lesotho 2019 Article IV Consultation; IMF 2018, Lesotho 2017 Article IV Consultation. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2019.

SACU revenues have been volatile declining from LSL 6.4 billion (approx. 41.8% of total government revenue) in 2015/16 to LSL 4.5 billion (approx. 32.2% of total government revenue) in 2016/17; before increasing to LSL 6.2 billion (approx.  41.3% of total government revenue) in 2017/18[8]. The GoL has also had to increase its borrowing to make up for the losses in income caused by declining SACU revenues. Hence, government borrowing increased by LSL 2.7 billion in 2016/17 when SACU revenues had declined by approximately LSL 1.9 billion (2015/16: LSL 388.0 million)[9]. This gradual increase in government borrowing has increased public debt and debt-servicing costs from an annual average of LSL 280.3 million (1.9% of total government revenue) from 2015/16 to 2017/18, to a projected LSL 313.0 million (2.0% of total government revenue) in 2018/19[10]. In the forward-looking medium term from 2019/20 to 2023/24 debt-servicing costs are projected to continue increasing to an annual average of LSL 947.4 million (4.7% of total government revenue)[11]. Nevertheless, at these levels the public debt-servicing costs are still moderate and sustainable from the perspective of the GoL.

 

Lesotho’s fiscal policy has been prudent in terms of its responsiveness to real GDP movements and its countercyclical approach in terms of expenditure. However, the GoL has maintained a fiscal deficit since 2015/16. Hence, in order to support aggregate demand through increase public spending, the GoL has been forced to borrow thereby increasing public debt and debt-servicing costs. Nonetheless, public debt and debt-servicing costs are still sustainable but the GoL needs to decisively reduce its dependence on SACU revenues which is a significant source of fiscal volatility.

 


[1] IMF 2019. Kingdom of Lesotho 2019 Article IV Consultation, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 18 May 2019] [2] IMF 2019.  Kingdom of Lesotho 2019 Article IV Consultation, ibid.
[3] LMoF 2017.  2016/17 Annual Public Debt Bulletin, Lesotho Ministry of Finance: Maseru. Available At: http://www.finance.gov.ls/ [Last Accessed: 18 August 2019].
[4] IMF 2019.   Kingdom of Lesotho 2019 Article IV Consultation, ibid.; IMF 2018. Kingdom of Lesotho 2017 Article IV; IMF 2018, International Monetary Fund: Washington, D. C. Available At: http://www.imf.org/ [Last Accessed: 2 October 2018].
[5] IMF 2019.  Kingdom of Lesotho 2019 Article IV Consultation, ibid.
[6] IMF 2019. Kingdom of Lesotho 2019 Article IV Consultation, ibid.
[7] IMF 2019. Kingdom of Lesotho 2019 Article IV Consultation, ibid.
[8] IMF 2019. Kingdom of Lesotho 2019 Article IV Consultation, ibid.; IMF 2018. Kingdom of Lesotho 2017 Article IV Consultation, ibid.
[9] IMF 2019. Kingdom of Lesotho 2019 Article IV Consultation, ibid.; IMF 2018. Kingdom of Lesotho 2017 Article IV Consultation, ibid.
[10] IMF 2019. Kingdom of Lesotho 2019 Article IV Consultation, ibid.; IMF 2018. Kingdom of Lesotho 2017 Article IV Consultation, ibid.
[11] IMF 2019. Kingdom of Lesotho 2019 Article IV Consultation, ibid.

 

 


Enerst Mhlanga

Role: Junior Regional Analyst
Contact: enerst@politicaleconomy.org.za
Enerst is a Social Scientist specialising in comparative analysis of socio-political development...

Advertisement

Follow PESA Online

Follow PESA Online

Follow us on some of your favourite social media.

Contact Us

Please complete the General Enquiry form and submit it to us for a response. Please use the subject “Media” for all media-related requests.