LESOTHO: EXPANDED BUDGET SUPPORTS INFRASTRUCTURE, CIVIL

UNCLAS SECTION 01 OF 02 MASERU 000076

SIPDIS

SIPDIS

DEPT FOR AF/S, AF/EPS

E.O. 12958: N/A
TAGS: ECON ECIN EAID PGOV LT
SUBJECT: LESOTHO: EXPANDED BUDGET SUPPORTS INFRASTRUCTURE, CIVIL
SERVICE


MASERU 00000076 001.2 OF 002



1. SUMMARY: In February, Minister of Finance and Development
Planning Dr. Timothy Thahane presented a 2008/2009 budget to
Lesotho's Parliament that towers 23% over last year's government
expenditures. Minister Thahane praised new government
initiatives, such as increased spending on infrastructure,
heath, education, and business development, and warned about
threats to the economy such as declining transfer payments from
the South African Customs Union (SACU) and turbulence in the
fragile textile sector. A 15%-30% increase in the wages of
Lesotho's civil servants will make one of Africa's most
expensive public payrolls per capita even pricier. END SUMMARY.

--------------
The Budget
--------------


2. On February 13, Minister of Finance and Development Planning
Dr. Timothy Thahane presented the GOL's 2008/09 budget to
Parliament. The budget places the GOL's total expenditure and
net lending at M9.1 billion (approximately $1.3 billion),of
which 88% is financed by domestic revenue and the remainder is
funded by grants and soft loans from multilateral banks and
development institutions. The budget is 23% larger than the
previous year. Total GOL revenues are projected to be M9.0
billion, leaving a projected budget deficit of M399.4 million
(approximately $57 million, or 2.9% of GDP). These expenditures
include a 15%-30% salary increase for civil servants, which is
much greater than the previous year's 10% inflation salary
adjustment. The GOL's 2008/09 wage bill will account for 23% of
the government's total expenditures.


3. Minister Thahane stated that the non-wage budgetary increases
were largely focused on the following areas: 1) building
economic infrastructure including urban and rural roads,
telecommunications, water, and electricity; 2) investing in
health and education,; 3) "unleashing the energies of private
sector" through reduction of red tape and the high bureaucratic
costs of doing business; and 4) addressing the financing
constraints for small, micro, and medium sized enterprise,
particularly for women and youth, and diversifying export
products and markets.

--------------
Risks and Challenges
--------------


4. In his budget speech, Thahane discussed several challenges
for the GOL regarding the implementation of the 2008/09 budget.
First, he mentioned that AGOA preferences now do not fully
shield Lesotho's textile sector from large, experienced, and
aggressive competitors such as Vietnam, Cambodia, Bangladesh,
China, and India. Second, Thahane mentioned that Lesotho's
dependence on customs transfer payments from SACU poses a
challenge given the slowdown in the South African economy and
global reductions in tariffs as a result of trade
liberalization. He asserted that these factors will negatively
affect the SACU revenue pool, as well as Lesotho's share of it.
Managing SACU revenues and building adequate reserves for the
future are therefore critical for Lesotho, said Thahane.


5. According to Thahane, the Government of Lesotho is concerned
about the exodus of its labor force to other countries, the low
standard of living for its people, and that its weak economic
growth is not sufficient to create jobs and reduce poverty. In
addition, the country is experiencing daunting challenges from
global competition in the textile manufacturing sector, and an
investment climate which should be improved. The Minister
stated, "Lesotho cannot afford to lose to other countries the
race for jobs, the race for better life for its entire people,
and the race for high sustainable and shared economic growth."

-------------- --------------
An Expensive Civil Service, But Good Transparency
-------------- --------------


6. COMMENT: Following the budget speech, local newspapers
primarily commented on the hike in civil servant salaries, which
are poised to make one of Africa's most expensive public
payrolls per capita even pricier. While Minister Thahane
appears fully cognizant of major problems for Lesotho's future
revenue stream, such as trouble in the textile industry and
declining SACU revenue sharing payments, the GOL still poured
massive new spending into enlarging recurring expenses (i.e.,
government wages). However, as the GOL has operated in the
black for several consecutive years, such issues raise only
passing concern.


7. Of greater interest than the actual figures, perhaps, is the
transparency involved in this annual budget exercise. Thahane's
presentation to Parliament, observed by the diplomatic corps,

MASERU 00000076 002.2 OF 002


was one of the GOL's highest profile events of the season. On
the evening of the budget speech, Thahane addressed a question
and answer session hosted by a local bank and attended by
diplomats and a range of private sector representatives. He
subsequently returned to Parliament for subcommittee and general
debate and scrutiny of the GOL's budget. Although the governing
party's majority assures eventual passage of the budget, the
GOL's transparency has helped increase local confidence in the
nation's fiscal endeavors. END COMMENT.
NOLAN