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Central Bank of Lesotho Annual Report

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Central Bank of Lesotho Annual Report CENTRAL BANK OF LESOTHO ANNUAL REPORT 2011 Maseru March 2012 BOARD OF DIRECTORS M. P. Senaoana - Governor & Chairman (Board)1 R. A. Matlanyane - Deputy Governor I Vacant - Deputy Governor II J. Q. Lesitha - Director P. M. Mangoela - Director M. Posholi - Director MANAGEMENT M. P. Senaoana - Governor R. A. Matlanyane - Deputy Governor I Vacant - Deputy Governor II M. Motebang/J. Ntšekhe - Director of Operations (acting) M. Morokole - Director of Supervision (acting) M. Molekane - Director of Administration (acting) M.G. Makenete - Director of Financial Markets M. S. Mahooana - Director of Information & Communication Technology (acting) M. P. Makhetha - Director of Research M. Malope - Director of Corporate Affairs M. Mohasoa - General Manager – Lehakoe Recreation and Cultural Centre (acting) DIVISIONAL HEADS Governor’s Office P. Letlela - Internal Audit L. Khaka - Accounts & Budget T. Malataliana - Currency Vacant - Security Administration M. Molekane - Human Resources S. Phate - General Services & Maintenance Information and Communications Technology M. Sekoati - Business Solutions Development (acting) R. Motjolopane - Business Solutions Development (acting) 1 Until March 2011 T. Mpheteng - Infrastructure & Operations Operations J. Ntšekhe - Banking Operations M. Motebang - National Payment Systems M. Tabane - Development Finance Vacant - Rural Finance Supervision T. ‘Mokose - Financial Institutions Supervision (acting) F. Morokole - Insurance Supervision L. Leuta - Policy, Regulations & Exchange Control (acting) N. Bereng - Non-Bank Supervision Financial Markets B. Phakoe - Investments and Market Operations M. Mohapi - Treasury Operations Research T. Tlelima - Real Sector (acting) L. M. Lephoto - Finance R. Masenyetse - Macroanalysis Corporate Affairs N. Mokitimi - Legal Services (acting) T. Ntlhakana - Corporate Governance T. Mohasoa - Public Relations (Acting) Central Bank of Lesotho P O Box 1184 MASERU 100 Lesotho March 29, 2012 Honourable Minister Ministry of Finance and Development Planning P O Box 395 MASERU 100 Lesotho Honourable Minister I have the honour to transmit the Annual Report of the Central Bank of Lesotho for the year 2011, which includes: (a) a review of economic developments during the year; and (b) in accordance with Section 53 (1) of the Central Bank of Lesotho Act No.2 of 2000: i) the Bank’s annual accounts for the year ended December 31, 2011, certified by Deloitte and Touche and Letacc ; and ii) a report on the Bank’s operations and statement of affairs during 2011. Yours faithfully A. R. Matlanyane (PhD) GOVERNOR PART I FISCAL POLICY SUSTAINABILITY IN LESOTHO: LESSONS FOR THE FUTURE 1.1 Introduction Of major macroeconomic challenges facing economies globally, the attainment of fiscal sustainability stands out as the most predominant in recent years. Policy makers and academics have deliberated on how best to conduct fiscal policy without jeopardizing sustainability. Nevertheless, no consensus has been reached. The concern about fiscal sustainability has intensified since the onset of the global financial crisis as most countries responded to the crisis by undertaking huge financial injections in order to mitigate the effects of the global financial crisis. As a consequence, this pushed many countries, especially Europe and the US, into financial woes. Although the financial crisis had a disproportionate effect on all countries, the impact was felt by almost every country. Developing economies such as Lesotho were also not immune to the contagion effects of the crisis. The impact was felt mostly on the fiscal side through the deterioration in customs revenue. The Southern African Customs Union (SACU) revenue, which accounts for over 50 per cent of Lesotho’s revenue, deteriorated by over 50 percent at the height of the crisis. Consequently, Lesotho had to undertake major fiscal adjustments aimed at restoring fiscal sustainability. Despite the fiscal consolidation efforts by the Government of Lesotho (GoL), the fiscal deficit as percentage of GDP still remained high. Therefore, it is important to discuss the sustainability of Lesotho’s fiscal policy in light of these challenges. Although there are many definitions of fiscal sustainability, the commonly adopted definition is the ability of a government to maintain the debt to GDP ratio stable or declining over time. The paper starts by giving the evolution of fiscal policy over the period 2000/01 to 2012/13 as well the structure of both revenues and expenditure over time. The next section evaluates Lesotho’s fiscal sustainability by adopting the following determinants of changes in the debt-GDP ratio; primary balance, the differential between the interest rate and economic growth, stock-flow adjustment. 1.2 Evolution of Fiscal Policy 2000/01 -2012/13 Figure 1 below depicts the evolution of fiscal policy over the period 2000/01 to 2012/13. A quick glance at figure 1 shows that the overall balance has been volatile over the period 2000/01 to 2012/13. That is, between 2000/01 and 2003/04 fiscal policy was largely expansionary and the deficit was financed through the domestic banking system, specifically the drawdown of Government deposits with the Central Bank of Lesotho. However, from 2003/04 to 2009/10, fiscal surpluses were attained. In 2006/07, the fiscal surplus as a percentage of GDP reached a peak of 15.2 per cent. The surpluses were underpinned by a steady increase in SACU receipts over that period. Consequently, Government deposits with the banking system increased substantially over this period. The relatively high SACU receipts 1 resulted from significantly high imports, from the rest of the world, into the SACU region. It is important to emphasize that the higher the imports into the SACU region the higher the customs revenue pool. However, as the financial crisis set in, there was a deterioration in trade performance between the SACU region and the rest of the world, and that led to a steep decline in the customs revenue pool. The deterioration in SACU receipts, triggered by the global financial crisis, showed the susceptibility of the customs revenue to trade volatility. But of even much concern is the vulnerability of Lesotho’s fiscal performance to changes in SACU receipts as it accounts for over 50 percent of total revenue. In the absence of a buffer, Lesotho would have to instantly cut its expenditures, which would have knock-on effects on the rest of the economy. Figure 1 Fiscal Balance as a Percentage of GDP 20.00 15.00 10.00 5.00 0.00 -5.00 -10.00 fiscal balance -15.00 fiscal balance (% of GDP) The structure of revenues bears testimony to the fact that customs revenues account for the largest share of total revenue. It had also been increasing quite rapidly over the years 2003/04 to 2009/10. The non-customs revenue had also been on an upward trajectory since 2003 following some major fiscal reforms including the establishment of the Lesotho Revenue Authority (LRA), an autonomous body charged with overseeing tax collections in Lesotho. 2 Figure 2: Revenue Structure 2000-2012 (Million Maloti) 16,000.00 14,000.00 12,000.00 10,000.00 8,000.00 6,000.00 4,000.00 2,000.00 0.00 Customs Income Taxes Taxes on Goods and Services Other Taxes Non-tax revenue Grants Expenditures also depict a similar trend to the revenues. Since the 2005/06 fiscal year, they have also assumed an upward trend, with the largest component over the period being compensation of employees. The expansion in compensation for employees largely reflected the growth in the public sector over time. Another major contributory factor to the growth in expenditures was a constant increase in expenditures on goods and services up until 2010/11. Capital expenditures, which have remained quite mediocre between the fiscal year 2000/01 and 2006/07, have also increasing since 2007/08 fiscal year. This reflected Government efforts to channel resources towards sectors that have a potential to accelerate economic growth. Capital expenditure allocations were directed towards; construction of roads in the rural and urban areas, building of bridges and footbridges in the lowlands and highlands, and erection of school buildings. 3 Figure 3: Expenditure Structure 2000-2012 (Million Maloti) 14000.00 12000.00 10000.00 8000.00 6000.00 4000.00 2000.00 0.00 Personnel Emoluments Goods & Services Interest payments External Domestic Subsidies & Transfers Capital expenditure 1.3 Sustainability of Lesotho’s Fiscal Policy Having discussed the evolution of fiscal policy in Lesotho, as well as the structure of revenues vis-à-vis expenditures, the next relevant question is whether Lesotho’s fiscal policy is sustainable in light of its economic performance in recent years and the likely performance going forward. Fiscal policy is said to be sustainable if the ratio of public debt to GDP is stable and declining over time. Figure 4 below shows that the public debt as a percentage of GDP has been declining overtime and remains below the 60 percent sustainability threshold. Although the public debt to GDP ratio has been on a decline, it is important to identify the determinants of changes in the debt to GDP ratio in order to assess the likely risks to fiscal sustainability. The following determinants of changes in the debt to GDP ratio are analyzed with a view to gauge the sustainability of Lesotho’s fiscal policy; the primary balance, the differential between the interest payments and the economic growth and the stock-flow adjustments. 4 Figure 4: Public Debt to GDP Ratio 90.00% 80.00% 70.00% 60% Public Debt 60.00% Threshold 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Primary Balance As explained above, the primary balance refers to the overall deficit excluding interest payments and is a major determinant of fiscal sustainability. As can be observed in figure 5 below, the primary balance has been in surplus between the fiscal years 2003/04 and 2009/10.
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