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Abstract: The objective of this paper is to understand whether the current trends in Lesotho’s fiscal policy is sustainable in the short to medium-term and in the event of shocks to key fiscal drivers such as growth, interest rates and concessional financing. The paper analyzes Lesotho’s fiscal sustainability. The results of the analysis lead to the conclusion that Lesotho’s fiscal policy is unsustainable in the short-run. Drastic fiscal adjustment measures are needed to put fiscal policy on a sustainable path in the medium-term and beyond. Sustainability improves with higher growth, donor willingness to provide concessional funds and lower cost of concessional as well as non-concessional funds.
In the aftermath of the global financial and economic crisis, fiscal sustainability has increasingly become a topical issue for all countries. Fiscal sustainability is of particular concern to Lesotho in light of the permanent drop in the countries revenue receipts from the Southern African Customs Revenue (SACU), the main source of budgetary resources which finances close to 50 % of the country’s recurrent budget. In an open economy like Lesotho, a vulnerable public sector has potential damaging effect on the external sector. It can lead to a twin deficit problem (government budget and current account balance). Given the country’s fiscal situation and its potential impact, access to concessional and non-concessional resources from the donor community remain critical for fiscal sustainability in the short to medium-term and even beyond.
In the baseline scenario of declining concessional financing, Lesotho might need to operate an annual average primary surplus of 0.2 percent for 2011-2016 and 0.1 percent for the period 2017-2031 in order to attain sustainability. This assumes growth rate of 5 percent per annum but higher growth would improve sustainability. This could be the case if investment in the phase II of the Lesotho Highland Water Project and construction of the Metolong dam generates growth of 12 percent per annum. This would allow the country to operate an annual average primary deficit of 0.5 percent (2011-2016) and 0.8 percent (2017-2031). It is noteworthy that fiscal sustainability in the face of declining concessional resources remains a critical challenge to the pursuit of the envisioned development in Lesotho. Inadequate concessional resources might impede the implementation of the new National Development Strategic Plan and the Vision 2020 which would require more financial resources to realize the overarching objective of inclusive growth and poverty reduction. The agreed reform measures between the Government and the International Monetary Fund under the Extended Credit Facility have since 2010 benefited the government but a lot needs to be done to attain sustainability in the medium-term. In the National Strategic Development Plan, the government was to reduce the fiscal deficits to 3 percent per annum which is still far below the required fiscal effort. The sustainable primary balance path towards the steady state (desired stable position) under various scenarios is well discussed in the paper. While at the initial level of primary deficit (2010, 4.5 percent), a lot of fiscal effort would be required to bring down the fiscal deficit to sustainable levels until it eventually stabilizes at steady state levels of between 0.15 and 0.7 percent of GDP depending on the growth target chosen, this may not rhyme well given Lesotho’s political sensitivities, inequalities and extreme poverty levels. It is, however, possible to gradually move towards the steady state primary balance by improving expenditure efficiency and rationalization as well as eliminating unproductive spending in addition to intensive resource mobilization including widening the tax base. Additionally, the paper underlines the need to take stock of the expected future expenditures, in particular, those related to pension and contingent liabilities which might increase the fiscal sustainability risk if not fully included in the primary balance.
Abstract: The objective of this study is to assess whether the formation of the Southern African Development Community (SADC) in 1992 has led to (i) convergence in real income or “catch- up” growth across the countries within the region or higher growth in the region as compared to advanced economies over the past two decades; and (ii) convergence in indicators of macroeconomic stability and/or the harmonization of macroeconomic policies within the region.
The paper investigates convergence in real per capita GDP and macroeconomic policy and stability indicators within the SADC, using primarily the concepts of beta and sigma convergence and common stochastic trends. Empirical tests for the period 1992-2009 showed no evidence of absolute beta and sigma convergence in real per capita GDP among the SADC economies. Although, absence of convergence does not necessarily imply lack of economic growth, further empirical assessment of possible conditional beta convergence did not reveal any tendency of convergence to own steady states. On an individual level, however, ADF unit root test indicated that Botswana and South Africa’s real per capita GDP converged to a common stochastic trend while the rest were characterized by a boundless drift.
With regard to the SADC macroeconomic convergence goals set for 2012, the findings indicate that most of the economies of the member states have shown a tendency of macroeconomic divergence in 2009 in monetary policy, fiscal policy, and foreign exchange reserve ratios. Since member countries are at varied levels of economic development, the goals themselves must be conditional on the level of convergence in economic structure and hence macroeconomic convergence may not be attainable. Furthermore, achieving the targets may be neither necessary nor sufficient to achieve good macroeconomic outcomes. We made further attempt to identify possible club convergence within SADC free trade area using Common Monetary Area criterion, including South Africa, Lesotho, Namibia and Swaziland. The result indicates that the real per capita GDP level of the CMA economies did not converge to the South African real GDP per capita level during the 18 years under consideration. The crucial implications of the above results are that the establishment of regional trading block did not enhance economic performance in the poorer member states in SADC during the 18 years under consideration. Poor member states failed to catch up with the more developed countries within the region. The same countries that were richer 18 years ago are richer today and the poorer countries remained largely poorer. This is not to suggest that regional trade agreements and economic blocks do not promote economic performance and help poor countries to catch up. It is rather the way member countries implement the regional integration agreements that matter most. Duplication of membership among the several Regional Economic Communities, low savings and investment, shortages of high level skills, high level of unemployment, inadequate and substandard infrastructure, and insignificant production and manufacturing capability all contributed to slow economic growth and lack of convergence in real per capita GDP. Regional economies need to urgently address these challenges in order to achieve deeper economic integration and catch up with the more developed economies in the sub region and the rest of the world. Macroeconomic policy strategies should also be designed conditional on the actual degree of convergence in the economic structure.
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