20221205-IMF-Addressing_Fiscal_Pressures_Kingdom_of_Lesotho_16页_1mb

Summary of IMF Report: Addressing Fiscal Pressures in Lesotho

Introduction
Lesotho's fiscal outlook remains challenging due to high public spending and declining SACU transfers, which reduced by a third in FY21/22. Without consolidation, the fiscal position may worsen, forcing abrupt spending cuts or arrears accumulation. The FY20/21 fiscal performance was better than expected but not capitalized on in subsequent years, leading to medium-term deficits. Spending restraint efforts were undermined by growing domestic arrears.

Fiscal Challenges

• Spending Components: Public expenditure has been increasing faster than GDP, with high compensation of public employees (wage bill at 18.4% of GDP in FY20/21) and social spending (rising to 8.2% of GDP). Capital spending has declined significantly, from 20.2% of GDP in FY11/12 to 12.0% in FY20/21, limiting investment in growth-friendly projects.
• Revenue Issues: Revenue relies heavily on external SACU transfers (around 50% of total revenue), making it volatile. Domestic revenue mobilization is strong relative to peers, but efforts are needed to broaden the tax base and improve tax collection.
• Balance Deficit: The fiscal deficit (excluding SACU) has deteriorated, with debt exceeding 60% of GDP. This risks debt sustainability and exchange rate stability, as IMF analysis shows rapid debt buildup could lead to severe financing constraints.

Policy Recommendations

• Expenditure Consolidation: Contain the wage bill by freezing public employee wages and notches for 2-3 years, potentially reducing it by 3-5 percentage points of GDP. Rationalize social spending by eliminating ineligible beneficiaries and cutting inefficient programs like tertiary bursaries, while increasing poverty-reducing initiatives. Improve capital spending efficiency by eliminating unproductive projects and enhancing project appraisal.
• Revenue Actions: Strengthen domestic revenue mobilization by broadening the tax base, improving tax compliance (e.g., introducing cashless collection systems), and considering new taxes (e.g., on alcohol and tobacco). Protect vulnerable groups through targeted social spending.
• Overall Strategy: A growth-friendly consolidation plan is urg ent to rebuild fiscal space. Estimated savings from these reforms could reduce overall spending by 5-8 percentage points of GDP, improving fiscal sustainability. Domestic revenue efforts should complement expenditure adjustments as SACU transfers decline.

Conclusion
Fiscal consolidation is crucial for ensuring long-term stability, protecting the vulnerable, and financing recovery. Key risk areas include inadequate revenue measures and continued reliance on volatile transfers.