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Luis-Felipe Zanna, Olivier Basdevant, Ms. Susan S. Yang, Ms. Genevieve Verdier, Mr. Joannes Mongardini, and Dalmacio Benicio
Botswana, Lesotho, Namibia, and Swaziland face the serious challenge of adjusting not only to lower Southern Africa Customs Union (SACU) transfers because of the global economic crisis, but also to a potential further decline over the medium term. This paper assesses options for the design of the needed fiscal consolidation. The choice among these options should be driven by (i) the impact on growth and (ii) the specificities of each country. Overall, a focus on government consumption cuts appears to minimize the negative impact on growth, and would be appropriate given the relatively large size of the public sector in each country.
International Monetary Fund

$120 million during 2011–12 to offset the SACU shortfall, at an interest rate of 6 percent and maturity of 10 years. The current DSA does not make such an assumption. Instead, the authorities intend to use their deposits to cover the revenue shortfall. The current account balance (including official transfers) which broadly reflects changes in the fiscal position has widened by 5 percent of GDP to an average of 21 percent of GDP during 2010–12, reflecting projected higher imports related to the Metolong dam. However, by 2014 the external current deficit narrows to

Luis-Felipe Zanna, Olivier Basdevant, Ms. Susan S. Yang, Ms. Genevieve Verdier, Mr. Joannes Mongardini, and Dalmacio Benicio

additional borrowing, it may not be feasible . All the adjustment scenarios in our simulations are predicated on excluding borrowing strategies. The SACU shortfall is therefore completely offset by policy adjustments. Such an abrupt adjustment can, in practice, have a detrimental impact on growth, thus calling for a more spread-out adjustment. External borrowing can provide the additional cushion on the balance of payments side. Domestic borrowing also can be considered to alleviate the adjustment. However, delaying the adjustment may not always be feasible. It depends on

International Monetary Fund. African Dept.

policies ( Annex IV ). The government responded to the SACU shortfall by allowing the fiscal deficit to increase ( Tables 2 and 3 and Figure 4 ). Lower-than-expected domestic revenues in the first half of FY 2017/18 added to the revenue shortfall. The fiscal deficit of around 6 percent of GDP for two consecutive years was financed by drawing down sizable buffers in form of government deposits at the CBL, which has been mirrored in the loss of international reserves. Measures in the FY 2017/18 budget to contain the wage bill—one of the highest in the world ( Annex

International Monetary Fund
Lesotho’s fiscal and external balances have deteriorated as a result of the global economic downturn and a surge in spending. Undertaking key fiscal adjustments to restore macroeconomic stability is necessary for raising Lesotho’s growth potential. Executive Directors commend the measures taken in the budget to reduce expenditure. Further strengthening of debt management and accelerating structural reforms is crucial for raising Lesotho’s growth potential. Strengthening the institutional and regulatory framework for banks and non-bank financial institutions (NBFIs) will help to support financial sector health and stability.
International Monetary Fund. African Dept.
This 2017 Article IV Consultation highlights that high levels of unemployment, poverty, and inequality persist in Lesotho despite its faster growth compared with regional peers over the last decade. GDP growth is expected to be about 3 percent in FY2017/18, below the average of 4.1 percent for the past decade, and driven by mining and agriculture. Over the next three years, GDP growth is expected to be led by mining and construction related to the Lesotho Highlands Water Project Phase II. A steep decline in Southern African Customs Union transfers, a major source of government revenue, will result in a fiscal deficit that is likely to exceed 6 percent of GDP for the second year.