## sipea2022002 - Section 1 and Section 2

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---

### Fiscal outlook and immediate pressures
- SACU transfers shrunk by a third in FY21/22 and are projected to rebound in the short run but remain subdued and uncertain.
- In the absence of upfront consolidation the government would be forced to either (i) cut spending abruptly or (ii) accumulate sizeable arrears.
- FY20/21 performance:
  - Revenue outturn was 5.3 percentage points of GDP higher than projected under the 2020 RCF/RFI.
  - Current expenditure fell by 3.6 percentage points of GDP relative to RCF/RFI projections.
  - Resulted in a small overall balance surplus for FY20/21.
- FY21/22 budget did not capitalize on FY20/21 gains and set out double-digit deficits over the medium term with no concrete adjustment measures; March 2022 Budget Speech provisionally tempered outlook but remains sensitive to revenue collection and spending control.
- Domestic payments arrears increased to LSL1.25 billion (3.4 percent of GDP) as of end-November 2021 from LSL720 million (2.1 percent of GDP) at end-March 2021.
- Reliance on cash-based warrants and a wage-preserving approach risks arrears accumulation and undermines growth and equality absent robust PFM mechanisms.

### Analysis of spending composition and trends
- Public spending growth:
  - Public spending rose from below 40 percent of GDP to beyond 50 percent of GDP over the last 15 years.
  - Share of compensation of public employees and social spending has been increasing, squeezing capital spending and other nonwage current spending.
- Lesotho versus peers:
  - Over past decade, jump of expenditure in percent of GDP increased by 4.3 percent on average, compared to 2 percent for sub-Saharan Africa (SSA), and 1.3 percent for LIDCs.
  - Compensation accounts on average for a larger share of total spending in Lesotho compared to SSA; capital spending accounts for almost 18 percent of total spending compared to a quarter for SSA.
- Public wage bill:
  - Wage bill as a percent of GDP increased from around 11.7 percent in FY05/06 to 18.4 percent in FY20/21.
  - Increased from around 60 percent to 70 percent as a share of domestic revenue.
  - Lesotho has the highest wage bill as a percent of GDP among SACU countries while having the smallest number of public servants per thousand population among SACU countries.
- Social spending:
  - Increased from 6.4 percent of GDP in FY16/17 to around 8.2 percent of GDP in FY20/21, or around 15 percent of total spending.
  - Largest budget transfers:
    - Tertiary bursary: LSL891.4 million; 2.64 percent of GDP; 4.81 percent of total spending; 32.12 percent of total social spending; coverage 4.
    - Old Age Pension (OAP): LSL806.9 million; 2.39 percent of GDP; 4.35 percent of total spending; 29.08 percent of total social spending; coverage >100.
  - Total social spending (FY20/21): LSL2,775.0 million; 8.23 percent of GDP; 14.96 percent of total spending; 100.00 percent of total social spending.
  - Program-level table (units: LSL Million; Percent of GDP; Percent of Total Spending; Percent of Total Social Spending; Coverage):
    - CGP: 57.6; 0.17; 0.31; 2.08; 22
    - School feeding: 187.2; 0.56; 1.01; 6.75; 100
    - Cash-for-work assistance: 98.22; 0.29; 0.53; 3.54; 20
    - Public assistance: 28.8; 0.09; 0.16; 1.04; 6
    - OVC bursary: 73.5; 0.22; 0.40; 2.65; 11
    - Other social spending*: 631.4; 1.87; 3.40; 22.75
    - Note: *Mainly employer social benefits.
- Capital spending:
  - Declined from a peak in FY11/12 of 20.2 percent of GDP and around a third of expenditure to 12.0 percent of GDP and around a fifth of expenditure by FY20/21.
  - Capital stock is relatively high as a share of GDP but of lower quality compared to peers; capacity issues and misclassified current spending hamper efficiency.

### Revenue composition and macro-financial risks
- Revenue structure:
  - Total revenue comprises external transfers (grants and SACU transfers) and domestic revenues (taxes and non-tax revenues).
  - Share of external transfers declined from 60 percent in late 2010s to around 50 percent in recent years.
- SACU transfers:
  - Volatile and declining over time in percent of GDP, total revenue, and total expenditures.
  - Forecasted to shrink by a third in FY21/22 and remain subdued thereafter.
- Domestic revenue mobilization:
  - Lesotho’s domestic revenue in percent of GDP is among the highest in the region.
- Debt and reserves risks under current policies:
  - Chronically large fiscal deficits and a growing debt burden beyond 60 percent of GDP.
  - IMF–World Bank Joint Debt Sustainability Analysis (DSA) indicates present value of public debt would rapidly approach threshold after which country is at high risk of debt stress.
  - Net international reserves would decline to below 100 percent; gross international reserves will go below 3.5 months of imports coverage.

### Policy recommendations and saving scenarios
- Overall strategy:
  - Fiscal consolidation is crucial to reduce imbalances, rebuild fiscal space to protect the vulnerable, finance the recovery, and mitigate external shocks.
  - Given high revenue ratio, expenditure must bear the brunt of adjustment.
  - Authorities should contain current spending, scale back unproductive capital spending, and improve efficiency, while broadening domestic revenue mobilization to reduce reliance on SACU transfers.
- Targeted adjustment rationale:
  - Lesotho’s public expenditure in percent of GDP is among the highest in the world; targeted cuts are preferable to cross-board cutting to support growth.
- Recommended fiscal measures and quantified impacts:
  - Contain the wage bill:
    - Public employee compensation accounts for around 20 percent of GDP or over 70 percent of domestic revenues.
    - Freezing public wage and sizing public employment for 2–3 years could reduce wage bills by 3–5 percentage points of GDP or to below 60 percent of domestic revenues.
  - Rationalize social spending:
    - Eliminating ghost OAP beneficiaries and cutting tertiary bursary transfers while enhancing poverty-reducing programs could reduce social spending by about 2–3 percentage points of GDP while increasing poverty-reducing spending by 0.5–1 percentage point of GDP.
  - Improve capital spending efficiency:
    - Capital spending accounts for 12–15 percent of GDP; enhance project selection and cut room exists for efficiency and some expenditure reduction.
  - Aggregate savings potential:
    - Measures above could save spending by 5–8 percentage points of GDP and put Lesotho on a more sustainable fiscal path.
- Detailed recommendations for public compensation (over 4–5 years):
  - Implement a wage freeze with no cost-of-living-adjustments ("COLA") and no structural wage increases ("notches") for 2 to 3 years; then half “notch” and half “COLA” for 1 to 2 years.
  - Freeze the number of public servants: close established positions vacant for 12 months or more; freeze hiring of non-essential staff; fill existing posts by redeploying existing workforce. Definition of essential positions to be determined by the Establishment Committee and recorded in the Civil Service Establishment Policy.
  - If Establishment Committee deems Apprenticeship Program hires nonessential, wind up Apprenticeship Program.
  - After 2–3 years of freeze, add steps within job grades and reduce associated pay increases; explore performance-based compensation.
  - Adopt a new Civil Service Employment Policy to maintain a lean, professional, and efficient civil service.
- Detailed recommendations for social spending reallocation and integrity:
  - Continue to eliminate false payments to “ghost” OAP beneficiaries: World Bank study indicates around 38 percent of ineligible OAP beneficiaries; assume cleaning up 34 percent with 4 percent cushion in year T=1 and then 6 percent natural growth thereafter.
  - Link Government of Lesotho Social Assistance Benefits System (GOLSABS) with the National Identity and Civil Registry (NICR) via secure data exchange to ensure program integrity and eliminate ghost pensioners.
  - Reduce cost of tertiary bursary scheme over time starting in T+1 (e.g., FY22/23) by reducing intake of new students, enhancing collection of outstanding student loans, and improving targeting through means-testing.
  - Increase spending on key poverty-reducing social assistance programs while reallocating away from inefficient transfers.

### Social spending reforms and targeted programs
- Increase spending on cash-for-assistance, child grants, orphans and vulnerable children (OVC), public assistance, and school feeding programs to expand coverage and adequacy of benefit levels and help alleviate poverty and inequality.
- Increased social spending on these specific programs can help offset the regressive impact of any tax policy changes.
- Specifically, double school feeding program and jump public assistance, OVC bursary and cash-for-work programs by fifty percent.
- Resulting impacts (as reported): Total social spending could be reduced by 2–3 percentages of GDP over three to four years while poverty-reducing spending could be improved from 1.4 to 1.6 percent of GDP.

### Quantitative simulation of social program reforms (values in LSL millions)
- Poverty-related social programs to be enhanced:
  - CGP: Base* 0.16; growth rate 0.3; T+1 0.19; T+2 0.23; T+3 0.28
  - School feeding: Base* 0.51; growth rate 0.3; T+1 0.61; T+2 0.74; T+3 0.91
  - Cash-for-work assistance: Base* 0.27; growth rate 0.15; T+1 0.28; T+2 0.31; T+3 0.33
  - Public assistance: Base* 0.08; growth rate 0.15; T+1 0.08; T+2 0.09; T+3 0.10
  - OVC bursaries: Base* 0.20; growth rate 0.15; T+1 0.21; T+2 0.23; T+3 0.25
  - Total (floor): Base* 1.21; T+1 1.38; T+2 1.60; T+3 1.86
- Programs to be contained:
  - Tertiary bursary: Base* 2.71; growth rate 1.75; T+1 1.15; T+2 0.75
  - OAP: Base* 2.19; growth rate 0.08; T+1 1.34; T+2 1.36; T+3 1.37
- Programs to be maintained:
  - Other social spending: Base* 1.72; T+1 1.66; T+2 1.65; T+3 1.64
- Total social spending (rows as presented): Base* 7.84; T+1 6.13; T+2 5.76; T+3 5.62
- Note: in LSL milllions
- * data are from the authorities.
- ** Cleaning up inellible  beneficareis  druing t+1, and then assuming natrual growth of 8 percent.

### Capital budget, asset registry, and efficiency gains
- Urgent need to strip out misallocated and unproductive capital spending alongside current spending.
- Rationalize the capital budget by identifying and eliminating unproductive projects and temporarily halting stalled projects.
- Improve investment planning and execution, including project appraisal and prioritization, to better target capital spending toward NSDP-II and SDGs objectives.
- Streamline capital budget further by eliminating inefficiencies, including items of current expenditure misallocated as capital spending.
- Deploy potential savings to build climate-resilient infrastructure.
- Clean up government-funded capital investment projects and then enhance them to support growth.
- Compile a registry of government assets to identify and dispose of unnecessary public nonfinancial assets; example saving includes reduction of the government vehicle fleet.

### Fiscal consolidation, growth implications, and revenue mobilization
- Fiscal consolidation through scaling back less-productive expenditure while focusing on more efficient, well-targeted spending, growth-friendly investment, and revenue administration could mitigate risks to growth.
- Rising expenditure in recent years has not led to higher growth, perhaps owing to inefficiencies.
- Strong social safety nets remain important to protect the vulnerable.
- Domestic revenue mobilization can help support the adjustment: non-SACU non-grants domestic revenue performance—driven by stable personal income tax revenues, VAT, and water royalties—stands out relative to peers.
- Authorities are encouraged to use all available opportunities to broaden the tax base, improve tax administration, and increase compliance as external transfers decline. Suggested measures include:
  - introduce excises on alcohol and tobacco;
  - improve the efficiency of tax administration by introducing cashless tax collection systems;
  - improve compliance by enhancing transparency and audit.
- It is vital to maintain the integrity of existing taxes, notably the VAT.

*Source: Addressing Fiscal Pressures, Kingdom of Lesotho, SIP/2022/002 (IMF Selected Issues Paper), completed June 15, 2022.*

### Section 1

### sipea2022002 - Section 1

### Fiscal outlook and immediate pressures
- SACU transfers shrunk by a third in FY21/22 and are projected to rebound in the short run but remain subdued and uncertain.
- In the absence of upfront consolidation the government would be forced to either (i) cut spending abruptly or (ii) accumulate sizeable arrears.
- FY20/21 performance:
  - Revenue outturn was 5.3 percentage points of GDP higher than projected under the 2020 RCF/RFI.
  - Current expenditure fell by 3.6 percentage points of GDP relative to RCF/RFI projections.
  - Resulted in a small overall balance surplus for FY20/21.
- FY21/22 budget did not capitalize on FY20/21 gains and set out double-digit deficits over the medium term with no concrete adjustment measures; March 2022 Budget Speech provisionally tempered outlook but remains sensitive to revenue collection and spending control.
- Domestic payments arrears increased to LSL1.25 billion (3.4 percent of GDP) as of end-November 2021 from LSL720 million (2.1 percent of GDP) at end-March 2021.
- Reliance on cash-based warrants and a wage-preserving approach risks arrears accumulation and undermines growth and equality absent robust PFM mechanisms.

### Analysis of spending composition and trends
- Public spending growth:
  - Public spending rose from below 40 percent of GDP to beyond 50 percent of GDP over the last 15 years.
  - Share of compensation of public employees and social spending has been increasing, squeezing capital spending and other nonwage current spending.
- Lesotho versus peers:
  - Over past decade, jump of expenditure in percent of GDP increased by 4.3 percent on average, compared to 2 percent for sub-Saharan Africa (SSA), and 1.3 percent for LIDCs.
  - Compensation accounts on average for a larger share of total spending in Lesotho compared to SSA; capital spending accounts for almost 18 percent of total spending compared to a quarter for SSA.
- Public wage bill:
  - Wage bill as a percent of GDP increased from around 11.7 percent in FY05/06 to 18.4 percent in FY20/21.
  - Increased from around 60 percent to 70 percent as a share of domestic revenue.
  - Lesotho has the highest wage bill as a percent of GDP among SACU countries while having the smallest number of public servants per thousand population among SACU countries.
- Social spending:
  - Increased from 6.4 percent of GDP in FY16/17 to around 8.2 percent of GDP in FY20/21, or around 15 percent of total spending.
  - Largest budget transfers:
    - Tertiary bursary: LSL891.4 million; 2.64 percent of GDP; 4.81 percent of total spending; 32.12 percent of total social spending; coverage 4.
    - Old Age Pension (OAP): LSL806.9 million; 2.39 percent of GDP; 4.35 percent of total spending; 29.08 percent of total social spending; coverage >100.
  - Total social spending (FY20/21): LSL2,775.0 million; 8.23 percent of GDP; 14.96 percent of total spending; 100.00 percent of total social spending.
  - Program-level table (units: LSL Million; Percent of GDP; Percent of Total Spending; Percent of Total Social Spending; Coverage):
    - CGP: 57.6; 0.17; 0.31; 2.08; 22
    - School feeding: 187.2; 0.56; 1.01; 6.75; 100
    - Cash-for-work assistance: 98.22; 0.29; 0.53; 3.54; 20
    - Public assistance: 28.8; 0.09; 0.16; 1.04; 6
    - OVC bursary: 73.5; 0.22; 0.40; 2.65; 11
    - Other social spending*: 631.4; 1.87; 3.40; 22.75
    - Note: *Mainly employer social benefits.
- Capital spending:
  - Declined from a peak in FY11/12 of 20.2 percent of GDP and around a third of expenditure to 12.0 percent of GDP and around a fifth of expenditure by FY20/21.
  - Capital stock is relatively high as a share of GDP but of lower quality compared to peers; capacity issues and misclassified current spending hamper efficiency.

### Revenue composition and macro-financial risks
- Revenue structure:
  - Total revenue comprises external transfers (grants and SACU transfers) and domestic revenues (taxes and non-tax revenues).
  - Share of external transfers declined from 60 percent in late 2010s to around 50 percent in recent years.
- SACU transfers:
  - Volatile and declining over time in percent of GDP, total revenue, and total expenditures.
  - Forecasted to shrink by a third in FY21/22 and remain subdued thereafter.
- Domestic revenue mobilization:
  - Lesotho’s domestic revenue in percent of GDP is among the highest in the region.
- Debt and reserves risks under current policies:
  - Chronically large fiscal deficits and a growing debt burden beyond 60 percent of GDP.
  - IMF–World Bank Joint Debt Sustainability Analysis (DSA) indicates present value of public debt would rapidly approach threshold after which country is at high risk of debt stress.
  - Net international reserves would decline to below 100 percent (implicit context: reserve adequacy indicators); gross international reserves will go below 3.5 months of imports coverage.

### Policy recommendations and saving scenarios
- Overall strategy:
  - Fiscal consolidation is crucial to reduce imbalances, rebuild fiscal space to protect the vulnerable, finance the recovery, and mitigate external shocks.
  - Given high revenue ratio, expenditure must bear the brunt of adjustment.
  - Authorities should contain current spending, scale back unproductive capital spending, and improve efficiency, while broadening domestic revenue mobilization to reduce reliance on SACU transfers.
- Targeted adjustment rationale:
  - Lesotho’s public expenditure in percent of GDP is among the highest in the world; targeted cuts are preferable to cross-board cutting to support growth.
- Recommended fiscal measures and quantified impacts:
  - Contain the wage bill:
    - Public employee compensation accounts for around 20 percent of GDP or over 70 percent of domestic revenues.
    - Freezing public wage and sizing public employment for 2–3 years could reduce wage bills by 3–5 percentage points of GDP or to below 60 percent of domestic revenues.
  - Rationalize social spending:
    - Eliminating ghost OAP beneficiaries and cutting tertiary bursary transfers while enhancing poverty-reducing programs could reduce social spending by about 2–3 percentage points of GDP while increasing poverty-reducing spending by 0.5–1 percentage point of GDP.
  - Improve capital spending efficiency:
    - Capital spending accounts for 12–15 percent of GDP; enhance project selection and cut room exists for efficiency and some expenditure reduction.
  - Aggregate savings potential:
    - Measures above could save spending by 5–8 percentage points of GDP and put Lesotho on a more sustainable fiscal path.
- Detailed recommendations for public compensation (over 4–5 years):
  - Implement a wage freeze with no cost-of-living-adjustments ("COLA") and no structural wage increases ("notches") for 2 to 3 years; then half “notch” and half “COLA” for 1 to 2 years.
  - Freeze the number of public servants: close established positions vacant for 12 months or more; freeze hiring of non-essential staff; fill existing posts by redeploying existing workforce. Definition of essential positions to be determined by the Establishment Committee and recorded in the Civil Service Establishment Policy.
  - If Establishment Committee deems Apprenticeship Program hires nonessential, wind up Apprenticeship Program.
  - After 2–3 years of freeze, add steps within job grades and reduce associated pay increases; explore performance-based compensation.
  - Adopt a new Civil Service Employment Policy to maintain a lean, professional, and efficient civil service.
- Detailed recommendations for social spending reallocation and integrity:
  - Continue to eliminate false payments to “ghost” OAP beneficiaries: World Bank study indicates around 38 percent of ineligible OAP beneficiaries; assume cleaning up 34 percent with 4 percent cushion in year T=1 and then 6 percent natural growth thereafter.
  - Link Government of Lesotho Social Assistance Benefits System (GOLSABS) with the National Identity and Civil Registry (NICR) via secure data exchange to ensure program integrity and eliminate ghost pensioners.
  - Reduce cost of tertiary bursary scheme over time starting in T+1 (e.g., FY22/23) by reducing intake of new students, enhancing collection of outstanding student loans, and improving targeting through means-testing.
  - Increase spending on key poverty-reducing social assistance programs while reallocating away from inefficient transfers.

*Italic: Source: Addressing Fiscal Pressures, Kingdom of Lesotho, SIP/2022/002 (IMF Selected Issues Paper), completed June 15, 2022.*

### Section 2

### Section 2

### Social spending reforms and targeted programs
- Increase spending on cash-for-assistance, child grants, orphans and vulnerable children (OVC), public assistance, and school feeding programs to expand coverage and adequacy of benefit levels and help alleviate poverty and inequality.
- Increased social spending on these specific programs can help offset the regressive impact of any tax policy changes.
- Specifically, double school feeding program and jump public assistance, OVC bursary and cash-for-work programs by fifty percent.
- Resulting impacts (as reported): Total social spending could be reduced by 2–3 percentages of GDP over three to four years while poverty-reducing spending could be improved from 1.4 to 1.6 percent of GDP.

### Quantitative simulation of social program reforms (Table 2)
- Poverty-related social programs to be enhanced (values in LSL millions):
  - CGP: Base* 0.16; growth rate 0.3; T+1 0.19; T+2 0.23; T+3 0.28
  - School feeding: Base* 0.51; growth rate 0.3; T+1 0.61; T+2 0.74; T+3 0.91
  - Cash-for-work assistance: Base* 0.27; growth rate 0.15; T+1 0.28; T+2 0.31; T+3 0.33
  - Public assistance: Base* 0.08; growth rate 0.15; T+1 0.08; T+2 0.09; T+3 0.10
  - OVC bursaries: Base* 0.20; growth rate 0.15; T+1 0.21; T+2 0.23; T+3 0.25
  - Total (floor): Base* 1.21; T+1 1.38; T+2 1.60; T+3 1.86
- Programs to be contained:
  - Tertiary bursary: Base* 2.71; growth rate 1.75; T+1 1.15; T+2 0.75
  - OAP: Base* 2.19; growth rate 0.08; T+1 1.34; T+2 1.36; T+3 1.37
- Programs to be maintained:
  - Other social spending: Base* 1.72; T+1 1.66; T+2 1.65; T+3 1.64
- Total social spending (rows as presented): Base* 7.84; T+1 6.13; T+2 5.76; T+3 5.62
- Note: in LSL milllions
- * data are from the authorities.
- ** Cleaning up inellible  beneficareis  druing t+1, and then assuming natrual growth of 8 percent.

### Capital budget, asset registry, and efficiency gains
- Urgent need to strip out misallocated and unproductive capital spending alongside current spending.
- Rationalize the capital budget by identifying and eliminating unproductive projects and temporarily halting stalled projects.
- Improve investment planning and execution, including project appraisal and prioritization, to better target capital spending toward NSDP-II and SDGs objectives.
- Streamline capital budget further by eliminating inefficiencies, including items of current expenditure misallocated as capital spending.
- Deploy potential savings to build climate-resilient infrastructure.
- Clean up government-funded capital investment projects and then enhance them to support growth.
- Compile a registry of government assets to identify and dispose of unnecessary public nonfinancial assets; example saving includes reduction of the government vehicle fleet.

### Fiscal consolidation, growth implications, and revenue mobilization
- Fiscal consolidation through scaling back less-productive expenditure while focusing on more efficient, well-targeted spending, growth-friendly investment, and revenue administration could mitigate risks to growth.
- Rising expenditure in recent years has not led to higher growth, perhaps owing to inefficiencies.
- Strong social safety nets remain important to protect the vulnerable.
- Domestic revenue mobilization can help support the adjustment: non-SACU non-grants domestic revenue performance—driven by stable personal income tax revenues, VAT, and water royalties—stands out relative to peers.
- Authorities are encouraged to use all available opportunities to broaden the tax base, improve tax administration, and increase compliance as external transfers decline. Suggested measures include:
  - introduce excises on alcohol and tobacco;
  - improve the efficiency of tax administration by introducing cashless tax collection systems;
  - improve compliance by enhancing transparency and audit.
- It is vital to maintain the integrity of existing taxes, notably the VAT.

*sipea2022002 - Section 2*

---


_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2022/english/sipea2022002.pdf_