Report NO.6671-LSO Lesotho Country Economic Memorandum May 28, 1987 Country Programs I Eastern and Southern Africa Region FOROFFICIAL USE ONLY D6cument ofthe World tank This document hasa resticted distributon and may be used by recipients ony inthe performance oftheir officdal duties. Its conternts may nototherwise -be disckbsed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Report NO.6671-LSO
LesothoCountry Economic MemorandumMay 28, 1987
Country Programs IEastern and Southern Africa Region
FOR OFFICIAL USE ONLY
D6cument of the World tank
This document hasa resticted distributon and may be used by recipientsony in the performance of their officdal duties. Its conternts may not otherwise-be disckbsed without World Bank authorization.
BEDCO - Basotho Enterprises Development CorporationcMA - Common (formerly Rand) Mbnetary AreaCPDO - Central Planning and Development OfficeESCOM - Electricity Supply Commission (RSA)LEC - Lesotho Electricity COrporationLERCOOP - Lower Income Housing CooperativeLHC - Lesotho Housing CorporationLNDC - Lesotho National Development CorporationMPEA - Ministry of Planning and Economic AffairsRSA - Republic of South AfricaSACU - South African Customs UniontSADB - Southern Africa Development Bank
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LESOTHO
COUNTRY ECONOMIC MEMORANDUM
Table of Contents
page No.
Executive Summary v
Section I
Development Strategy: Overview and Recommendations 1
Policy Options and Outlook .................... 23The Budgetary Outlook *................................. 27Revenues ....................................... 29Cost Recovery ........... ...................... 30Monetary Policy ................ ................ 33External Borrowing Strategy ............................ 34
Section III
The Challenge of Employment Creation 35
Perspective ........................................ 35Labor Force Growth ....0000@000 .................... 36Structure of Employment ............................... 36Employment Opportunities in South Africa ..... ,......... 37Formal Sector Employment .................. ..... 41
Industry .......................... *............ 42Lesotho National Development Corporation ............... 44Cooperatives .......... 0..0....................*o. 46Support for Small-Scale Enterprises .................... 46Informal Sector Employment and Services ............... 47Employment in Public Works ............................. 49
Wages and Skills .......... ............................. 50
This document has a restrcted distibution and may be used by recipients only in the perfomanceof their offcial dutis Its contents may not otherwise be disclosed without World Bank autholution.
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Section IV
Agriculture Development . .. ........ e....o 53
Introduction 53Background 53
Land Management Issues 55Commercialization .... 56Grazing Fees 57
Planning and Budgeting Processes 63Reorganization 66Staffing and Skills *........................ .69
Civil Service Reform .... 70
The mission to prepare this review was undertaken in August 1986. Thereport was prepared by Christopher Hall (EAI), principal author,Roger Grawe (EAI), Peter Dittus (YP) and John Evans (OPD). Discussionswith the government on a previous version of this report were held inApril 1987.
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LIST OF TEXT TABLES AND GRAPHS
Tables Pge No.
2.1 GDP by Origin ...................... 142.2 Economic Growth . 162.3 Macroeconomic Balances . 162.4 Government Budgetary Operations .. 182.5 Direction of Trade * * 192.6 Balance of Payments .... 222.7 Incentive Indicators . 242.8 National Accounts - Growth Rate Projections 252.9 Balance of Payments Projections ..................... 262.10 Cost Recovery in Water Supply ....................... 323.1 Net Annual Additions to the Labor Force 363.2 Migrant Mine Labor Statistics 393.3 Mine Bmployment in South Africa 393.4 Novice Basotho Gold Miners 403.5 Projected Employment in the Formal Sector 413.6 Employment Generation for LNDC and BEDCO 453.7 Households' Sources of Subsistence 483.8 Returns to Labor 514.i Agricultural Production Indexes 544.2 Access to Agricultural Resources 615.1 Staffing Breakdown in Planning Units 655.2 Staffing of Ministerial Planning Units ....... 69
Annex 2.1 Functional Classification of Recurrent andCapital Expenditure 71
Annex 2.2 GDP by Industrial Origin (in current prices) ooo...... 72Annex 2.3 GDP by Industrial Origin (in constant prices) ........ 73Annex 3.1 Population and Labor Force Projections .............. 74Annex 4.1 Production of Grain Crops 75Annex 5.1 MPEA - Current Organization Structure 76Annex 5.2 MPEA - Proposed Organization Structure 77
Graphs
2.1 Internal and External Balances ............................. 203.1 Migrant Mine Labor 383.2 Structure of Labor Force ......................... 42
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LESOTHO - COUNTRY ECONOMIC MEMORANDUM
Executive Summary
i. The Lesotho economy operates under a number of resource and institutionalconstraints, many of which are related to Its peculiar situation vis-&-vis theRepublic of South Africa. Despite these limitations there are possibilities foreconomic development if the country were to make more effective use of the physicaland human resources it does possess and develop new opportunities on that basis.Economic development in Lesotho, however, will not reach its potential unless it issupported by an apptopriate economic policy framework. This report focuses on keyelements of that strategic framework, particularly the industrial and agriculturalsectors, which would contribute over the long run to economic growth. Governmentmust also strengthen planning administration and maintain a commitment to soundallocative principles to improve the effectiveness of its expenditure programs.Other required elements of the strategy, relating to human resource development andreducing the rate of population growth, have not been dealt with as extensively inthis report but are nonetheless critical to the successful development of the Lesothoeconomy.
ii. The government will face increasing financial problems over the comingyears. Customs union revenue will not grow as in the past since the RSA is placingincreasing emphasis on indirect taxation instead of tariffs and is also studyingways to reduce the compensatory element of SACU reimbursements. Lesotho's balance ofpayments position is also projected to deteriorate. While the trade and currentaccount deficits are sustainable over the medium term, tighter management of thedomestic economy will become necessary in order to restrain consumption and importgrowth to levels consistent with internal and external balance. Given limitations oneconomic policy instruments in Lesotho, the most effective means to influenceetonomic activity is through fiscal policy. In the future the overall level ofgovernment expenditure must be scaled in accordance with financial and implementationcapacity. Priorities for government spending must be determined, and individualprograms justified on economic criteria in accordance with agreed goals andobjectives. For required external resources, government should only borrow fromconcessional sources. To increase effectiveness of expenditure programs, thegovernment must fund fully capital and recurrent expenditures for its priorityactivities rather than spreading resources thinly over a wider range of programs. Asa means of determining expenditure priorities, government needs to devise a coreexpenditure program which would safeguard basic human services and provide foroperation and maintenance of critical programs if it were necessary to cut governmentspending. An immediate requirement is a civil service reform study which would haveas its objective rationalization of services and a lower government wage bill.
iii. The grvernment may also need to augment its resources through variousrevenue-raising measures. In the near term, greater attention needs to be given tothe issue of cost recovery. Recent efforts have fallen short and need to bestrengthened by raising tariffs and fees to levels which cover full economic costs.This is particularly important for electricity, water supply, health and education..In addition, sales tax collections and reporting procedures, particularly at theborder, could be strengthened. As a longer term objective the government needs togain the cooperation of the RSA mining companies so as to implement the income taxwith respect to mineworkers. Direct taxes on remittances should be avoided.
iv. The creation of greater job opportunities for Basotho is an overridingconcern of development strategy in Lesotho. This strategy must be based on
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sustaining the comparative advantage that Basotho workers have in South Africa anddeveloping comparative advantage for new industrial and processing activities inLesotho itself. Over the long run Lesotho's education and training programs must bestructured so that its labor force capitalizes on better basic education and higherskills than in the surrounding countries. This will require a sound long-termstrategy for human resource development, something that has yet to take hold as aguide for resource allocation. In the shorter term, since Lesotho cannot match fullythe Industrial incentives offered in neighboring areas, Lesotho must base itsincentives programs on the principle of transparency and automaticity so thatpotential investors are faced with few uncertainties. The licensing system formanufacturing and service industries should not be used to select 'appropriate'investments since, as experience in other countries has shown, this can easily leadto an uncompetitive, high cost industrial structure. The primary source of foreigninvestment in Lesotho, as well as market for its exports, is South Africa. Thegovernment and LNDC should realistically focus their promotional efforts in thismarket. An investment promotion function should be created in LNDC or government tocoordinate with consulting and market research firms and thereby identify bettertarget markets and potential investors.
v. A primary objective for government policy must be to limit the pervasivesoil erosion and land degradation. Since overstocking is a primary cause of theseproblems, this will necessarily require a reduction in livestock numbers. For thisto occur, individual livestock holders will need to perceive the social costsassociated with current grazing practices and be able to benefit from individualdecisions to destock. Lesotho must move toward a system of local grazingassociations which are responsible for land management and grazing control withindefined boundaries. Grazing fees will also have to be instituted as a means ofequilibrating private and social costs to holding livestock. Movement toward greatercommercialization w?ould also be assisted by encouraging competition in livestockmarketing by local and RSA buyers. An additional objective for the government is toincrease labor productivity on the land. The incipient development of an informalland leasing market is evidence that demand for land exists by individuals who couldbe more productive than current allottees of the land. As landlessness increases,this problem will become more acute as it will not be assured that traditionalallottees will use the land most productively. The Land Act of 1979 provides a basisfor a rural land market, and its provisions on lease registration should beimplemented. To promote greater horticultural crop production, government and LNDCneed to identify potential investors interested in establishing new horticulturalfood processing facilities, particularly outside the Maseru region.
vi. Lesotho's brightest investment opportunity, the proposed Highlands Waterscheme, also represents the major development challenge to the country. In order forall Basotho to benefit, revenues from the scheme must be channelled into developmentactivities across a range of sectors. The water royalties should not be consideredas ordinary government income to be spent in the same manner as SACU revenues arecurrently. Plans should be made to treat them as a development trust reserved fordevelopmentally-oriented purposes. However, by not prioritizing among developmentand expenditure objectives, Lesotho is already in danger of mortgaging water royaltyreceipts on projects which would not necessarily have the greatest developmentalimpact. Particularly problematic would be investments in large, low-return projects(e.g., power generation component of Highlands Water, Oxbow) which could not befinanced without borrowing against future royalties and could not be justifiedwithout additional large investments in power transmission and distribution. Thegovernment should delay commitments to such major investments until their economic.and financial viability is well established and more discussions are held onalternative uses of the water royalties.
LESOTHO
COUNTRY ECONOMIC MEMORANDUM
DEVELOPMENT STRATEGY: OVERVIEW AND RECOMMENDATIONS
Introduction
1.1 Lesotho's circumstances are unique, physically surrounded andeconomically dominated by the Republic of South Africa (RSA). Beyond itspeople, rugged land and its water, Lesotho possesses relatively few naturalresources upon which to build its development effort. Nevertheless, thereis potential in Lesotho for economic development and growth despite itsdifficult circumstances if Lesotho were to make more effective use of theresources which it does have and to davelop new opportunities. In thisreport we examine the policy constraints to these growth possibilities andset forth a number of options for the Lesotho government and people toconsider over the coming years in their efforts to achieve a higher growthpath with an equitable distribution of opportunity.
1.2 Lesotho's medium-term development path will most likely involvegreater production of relatively labor-intensive high value horticulturalcrops primarily for export to the RSA and more distant markets but alsoserving a growing domestic market; increased productivity of land devotedto food crops now under subsistence farming; greater commercialization ofthe livestock subsector; and the more rapid development of small and mediumscale manufacturing industry, primarily serving local, RSA and regionalmarkets but with 'outside' export potential, using locally availableresources or serving as assembly line operations using importedintermediate inputs. Over the medium to longer run and to the extentLesotho offers a relatively skilled and professional work force, the RSAlabor market should continue to be a significant source of employmentopportunity.
1.3 The government must encourage these developments throughprovision of appropriate incentives, social and physical infrastructure, aneffective development administration and legal system, and other services.Of immediate importance is the need to take actions which could lead to alower rate of population growth. With the population growth rate not onlyhigh but increasing, population will soon exceed the country's ability tomaintain and expand required services. Human resource development mustalso receive consistent emphasis for Lesotho to produce a skilled laborforce which can compete effectively in the region. In this regard publicadministration, including the planning function within government, takes onadded significance since it becomes imperative that government order itsprogram and expenditure priorities, relating long-term goals to medium-termobjectives and actions; second, undertake only those activities whicheffectively serve the set objectives; third, be prepared to fund fullycapital and recurrent expenditures for these activities; and fourth, scalesuch activities in accordance with anticipated financial resources andimplementational capabilities.
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Current situation
1.4 Lesotho's economic performance in recent years has not reflectedits potential. During the 1970s, both real GDP and GNP increased by aboutseven percent. Since 1980/81, however, domestic economic growth hasstagnated. As a result of closure of the diamond mine, sluggishmanufacturing and stagnation and decline in real agricultural value added,due in part to the drought but more fundamentally to the low relativereturns to agriculture, real GDP in this decade has increased by only 0.5percent per annum (1980-85). With population growing each year at 2.6percent, this has meant a significant drop in per capita domestic output.GNP growth has also slowed since the 1970s, but has, nevertheless, remainedat four percent per annum over the same period, reflecting substantial realincreases in mine wage income for the Basotho workers in the RSA gold andcoal mines.
1.5 Lesotho's current account balance has been in slight surplusover the past two years, a change from early in the decade when both thegovernment budget and the overall balance of payments were in substantialdeficit. Lesotho's commodity trade remains highly unbalanced, with importsfar exceeding exports. Imports have grown substantially in recent yearswhile merchandise exports remained stagnant. With the recent decline inthe value of the rand, hence loti, imports have increased in dollar termsby 40 percent since 1979 while the dollar value of exports declined by 50percent. Imports currently stand at levels 15 times greater than exports.This imbalance is offset by the export of factor services in the form of118,000 mine laborers and approximately 20,000 other workers to jobs inSouth Africa. Commodity imports of these magnitudes only take placebecause of demand generated by the large scale remittances. Mineworkerremittances totalled M 600 million in 1985, up from M 225 million in 1981.Migrant labor remittances currently represent over 50 percent of total GNP.
Problems
1.6 The obstacles to Lesotho's future development are many. Whilethere is a small amount of relatively good agricultural land, Lesotho isprimarily mountainous with most land (88 percent) suitable only for grazingby the country's overly large livestock population (the range isoverstocked by as much as 300 percent). On the 12 percent of the landwhich is arable, agricultural production and yields, as in other areas ofAfrica, have declined in recent years to levels much lower than just 10years ago. The high risks and low returns associated with crop farming,and the existence of more remunerative employment opportunities in SouthAfrica contribute to the agriculture sector's low productivity. Soilerosion and degradation are major problems throughout the country.Exacerbating the natural erosion resulting from the particular soilstructures and climate is the overstocking of the range coupled withinadequate livestock management and control mechanisms. Erosion anddegradation in turn contribute to deteriorating quantity and quality of alltypes of agricultural production. In other areas of the economy,industrial production has been limited by the scarcity of skilled manpower(including entrepreneurial talent), the small size of the domestic market,the distance from Lesotho to markets outside the RSA, and the difficulties
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of competing against South African companies, particularly those located inthe 'homelands', both within the local market and in the RSA. The servicessector must also compete against the more developed and aggressivemarketing activities of the RSA.
1.7 The 2.6 percent annual population growth rate revealed by the1986 census represents a rise from the previous decade (2.3 percent) and isa further complication facing Lesotho over the coming years. While lowerthan in most other African countries, continued population growth at thisrate will overburden the capacity of the country to provi4e adequateeducation, health and other services. In addition, this rate translatesinto a swiftly growing labor force, few of whom can realistically expect tofind employment in the domestic formal sector. Whereas in the past thismattered little because many young men found employment in RSA gold andcoal mines, the future aggregate level of minework employment wili at bestremain stable or more likely conLinue the slight declines experienced inrecent years, in either case resulting in fewer opportunities for newrecruits. The number of mineworkers could decline further if economicsanctions against South Africa result in lower demand for RSA gold, and toa lesser extent coal, if retributive sanctions are emplaced by the RSA onLesotho, or if increasing violence at the mines deters experienced Basothofrom renewing their contracts. Even under normal conditions, otheropportunities in the domestic formal sector, though substantial incomparison to the previous record, are limited so that only up to 6,000 ofthe 20,000 annual entrants into the available labor torce will be able tofind work outside the informal and agricultural sectors.
1.8 The scarcity of productive employment opportunities in therural/agricultural sector has contributed to growing rural-urban populationdrift which will require greater attention in the government's futureplans. A substantial number of those who have moved to the urban areasremain unemployed. Maseru's official population has doubled over the pastdecade to approximately 110,000 in 1986. This growth rate (7 percent),which was nearly equalled in the other urban centers, will most likelycontinue, meaning a doubling of urban populations every 10 years.Currently, this urban growth is taking place in an unplanned fashion whichmakes provision of infrastructural and other services more difficult andexpensive. Haphazard peri-urban sprawl has encroached upon some of therelatively better agricultural lands to the detriment of total domesticproduction. The government must plan for urban growth in ways which allowefficient delivery of urban services but which also minimize the loss toagriculture of good lands. Urban and peri-urban residents should beencouraged to use their land productively through production of marketablesurpluses of high value horticultural crops, poultry or livestock.
1.9 The Lesotho government will face increasing financial problemsover the coming years. Tariff revenue from the South African Customs Union(SACU) now constitutes about 70 percent of total Lesotho governmentreceipts, but recent shifts in South African policy, placiag relativelygreater emphasis on domestic indirect taxes, will depress Lesotho's SACUrevenues. In addition, the RSA is considering various alternatives toreduce its compensatory payments to other SACU members. Implementation ofthese would reduce further Lesotho's SACU receipts. Finally, to the extent
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that economic sanctions on the RSA reduce South African imports and shouldthe RSA reduce external tariffs to offset increased costs of importing dueto economic sanctions or otherwise, this will also adversely affectLesotho's SACU revenue.
1.10 Lesotho's brightest investment opportunity, the proposedHighlands Water scheme, also represents the major development challenge tothe country. Assuming construction takes place on the basis of currentschedules, which may well be quite optimistic, the scheme will yieldrevenues beginning in 1996 which total US$15 million initially rising toUS$50 million (in 1985 dollars) after the second and third constructionphases. In order for the country as a whole to benefit, these revenuesmust then be channelled into developmental activities across a range ofsectors. The water royalties should not be considered as ordinarygovernment income to be spent in tae same manner as, for example, SACUrevenues are currently. Plans should be made to treat them as adevelopment trust and used for developmentally-oriented purposes. However,by not prioritizing among development and expenditure objectives, Lesothois already In danger of mortgaging potential revenues from the proposedHighlands Water scheme on projects which may not necessarily have thegreatest developmental impact for the people of Lesotho. Currentgovernment thinking, as embodied in the draft Plan, envisions some large,low-return projects (e.g., hydro component of Highlands Water, Oxbow) whichcould not be financed without borrowing against future receipts of waterroyalties, Certainly, the government should delay comitments to thesemajor investments until their economic and financial viability isestablished and more discussion is held on alternative uses of theseresources.
1.11 Ultimately the outlook for Lesotho is clouded by manyuncertainties. Its particular geo-political situation means that eventsbeyond the direct control of Lesotho policymakers may play a major role inshaping Lesotho's economic environment and actual outcomes. Perhaps mostproblematic is the indirect impact on Lesotho of possible sanctions on theSouth African economy and the economic relations among the SACU and the CMAcountries. Another source of uncertainty is the responsiveness of the keyeconomic agents in Lesotho - farmers, entrepreneurs, investors. Theirreaction to the strategy set forth here will perhaps be the major factor inits success or failure. Even under the best of circumstances that reactionwould be uncertain in an economy of Lesotho's size and poverty - in thecurrent southern African context such problems are greatly compounded. Atthis point, it would not appear productive to speculate on the impact ofalternative scenarios. Instead, this report focusses on key medium- tolong-term development issues that Lesotho must face regardless of theexternal environm-int. Nevertheless, it would also be desirable for Lesothoto prepare contingency plans to deal with revenue shortfalls, foodshortages or other adverse shocks. Such plans should focus on expenditurepriorities and distribution measures that would cushion the impact of suchshocks on the most vulnerable groups.
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Recommendations
1.12 The sectoral and macroeconomic recommendations of this report aregeared to accelerate employment-intensive development of the productivesectors and provide for more efficient resource utilization. Specifically,the focus is on the following four key objectives:
1) increasing domestic employment opportunities in theindustrial/manufacturing sector;
2) increasing employment and production in the agriculture sectorwith emphasis on preserving the resource base;
3) improving the planning/budgeting process to identify a coreexpenditure program and encourage greater links betweendevelopment objectives and expenditure patterns;
4) implementing macroeconomic policies to achieve theseobjectives within projected resource constraints.
The government is already considering a number of these main issues. Theseefforts are commendable and deserve support, but there are several areaswhere additional steps should be considered. The background to theseproposals is discussed in the main body of the report. The recommendedpolicies to achieve the above objectives are summarised below.
1.13 Macroeconomic Policies. Lesotho's balance of payments positionhas improved from the early 1980s, when large-scale short-term borrowingswere undertaken to help offset sizeable current account deficits. As of1985, with expanding remittances Lesotho's current account had returned tosurplus, and the short-term debt incurred earlier had been repaid. Overthe medium term, Lesotho's balance of payments position is projected todeteriorate with continued large deficits in the trade balance and growingcurrent account deficits. While these are sustainable in the medium termgiven reasonable assumptions regarding the level of developmental aid frommultilateral and bilateral sources, in the coming years tighter managementof the domestic economy will become necessary in order to restrainconsumption growth, thus import demand, to reasonable levels. Givenconstraints placed on Lesotho's trade and monetary policies, the remainingmacroeconomic tool at Lesotho's disposal Is fiscal policy, and thegovernment will need both to reduce government spending and generateadditional revenues. Appropriate pricing policies for government servicesand public enterprises should be a major focus of these efforts.
1.14 Lesotho's exchange rate is tied to that of the RSA. While thegovernment should continue to study options regarding the links between theloti and the rand, the monetary relationship with the RSA has generallybenefitted Lesotho with its stability and the policy discipline itenforces. Given the predominant weight of the RSA in Lesotho's tradebasket, the real effective exchange rate of the loti has depreciated onlyslightly over the past two years of substantial nominal depreciation. Withmost of Lesotho's debt denominated in non-rand currencies, however, thisnominal depreciation has meant a substantial increase in debt servicing
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requirements. Total debt servicing as a percent of exports of goods andservices (including workers' remittances) stood at approximately 3 percentin 1986* Debt service relative to exports of goods and non-factor servicesat 26 percent presents a different picture. Given the uncertaintiesresulting from current economic and political instability in the RSA,Lesotho's external borrowing capability is fragile, at best. With theexception of borrowings to construct the water transfer component of theHighlands Water scheme, which will be guaranteed and repaid by the RSA,official borrowings by Lesotho should be limited to concessional terms.
1.15 Medium-term budget projections show that customs revenue fromSACU will not rise in real terms as in the past. Thus additional sourcesof public revenue need to be found to finance even current levels ofgovernment expenditure programs. Most importantly, the government musttake steps to increase the cost-effectiveness of its expenditure program.The prioritization of national and sectoral objectives and development ofexpenditure programs based on these priorities consistent with expectedresource availabilities is an important step in achieving greaterefficiency. While a full-scale review of expenditure programs andpriorities will be the subject of a World Bank public expenditure review tobe undertaken later in 1987, there are obvious areas needing greaterattention by government. High priority should be given to basic health andeducation which in combination with ensured availability of family planningservices should contribute to reversing the increase in Lesotho'spopulation growth rate. Strengthened basic education derives additionalimportance from the need to create a skilled labor force that could sustainLesotho's comparative advantage in the supply of labor to South Africa, anddevelop a comparative advantage for domestic industry. Agricultural andother services to enhance Lesotho's domestic production base are anotherhigh priority. Finally, because construction of the Highlands Water schemewill draw physical and financial resources away from other sectors and taxthe capacities of government, Lesotho will have to exercise restraint inits other physical infrastructure investments. There are also a number ofprocedural steps which could be taken to increase the efficiency of theexpenditure program. Altering the budget and longer-term planningprocesses so that resources are allocated to line ministries prior to theirbudget submissions and holding line ministries responsible for stayingwithin budget allocations would encourage ministries to propose programsconsistent with resources. Finally, the government needs to define a coreexpenditure program for the 4th plan period, which would provide foroperation and maintenance of existing programs and safeguard basic humanservices provided by government if government revenues fell from presentlyprojected levels.
1.16 There are, in addition, actions which would augment resourcesavailable to the government. Recent changes have increased sales tax ratesand increased the efficiency of sales tax collections by concentrating onwholesalers and the major retailers. However, smaller retailers in Lesothowho buy directly from RSA wholesalers can bypass sales tax collections. Bystrengthening reporting and collections procedures at the border, perhapsincluding the posting of sales tax personnel, a significant amount ofcurrently foregone revenue could be collected. Income tax provisions forexclusions and exemptions are currently rather complicated and expensive to
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administer. A radical simplification (e.g., allowing only a standardexemption against income irrespective of the number of dependents, as hasjust been undertaken in Botswana) including modifications of rates wouldfacilitate both higher compliance and broader coverage of the system.
1.17 Proposals mooted in the past to raise revenues have included thepossibilities of implementing the income tax with respect to mineworkerincomes or instituting a formal tax on mineworker remittances.Implementation of one of these alternatives will be important if fiscalpolicy is to be an effective tool of demand management. Mineworkerremittances now constitute over 50 percent of total Lesotho GNP, andmineworkers are among the highest paid members of the labor force, butcurrently pay no tax on their incomes to Lesotho. The remittance tax wouldappear to present the greater implementation problems and would bedisadvantageous since it would serve as a disincentive to remit. Thus thebetter alternative would be for mine wages to be taxed under the Lesothoincome tax system. Mine wages are taxable under current legislation, butthis has not been enforced in practice. With the simplifications as notedabove, more effort could be devoted to administration of a system whichincluded the mineworkers. Implementation would have to be phased in theinterest of compliance and political feasibility. Withholding at sourcewould be the most efficient option and should be pursued, though to datethe mining companies in South Africa have been unwilling to cooperate withthe Lesotho authorities. Agreement with South African authorities wouldalso be necessary to prevent taxation by both countries.
1.18 In the past the Lesotho government has not paid sufficientattention to the issue of cost recovery for government and publicenterprise services, and it is here where government's primary efforts inthe near term should be made. Cost recovery in the social services (e.g.,health, education) is minimal, as it is in the infrastructure sectors ofwater, electricity, transportation, and housing. For the most part, ratesare based only on the recurrent budget costs of operation and maintenance,and in some sectors the level of resource generation does not even reachthis target. As a general principle the government should aim to price itsservices to cover full economic cost in order to improve the efficiency oftheir use. If necessary, low income consumers could then be targetted forspecific forms of subsidy on an ability to pay criterion. Operationally,government and parastatal pricing and subsidy policies should be detailedin the 4th Plan with indications of the timeframe for improvements. Insome sectors (health, power) Bank/government studies are planned toindicate more appropriate pricing levels and how to achieve them. Thegovernment should institute similar studies for other sectors. Prior tothe completion of these studies, the government should begin to implementselective tariff increases where prices are obviously understated.
1.19 Employment and Industry. Lesotho's industrial base is verysmall, representing less than four percent of GNP in 1985 and accountingfor approximately 8,700 of the 65,000 jobs in the domestic formal sector.Industrial development and creation of greater job opportunities in thissector will continue to be a slow process of developing an indigenousentrepreneurial base, ensuring credit for deserving enterprises, andattracting foreign investment capital. As the draft 4th Five Year Plan
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states, given the small size of Lesotho s domestic market, the country mustview exports as an integral part of its industrial development. Theseindustries will either be based on domestic inputs such as wool, mohair,meat or horticultural crops, or will consist of assembly operations usingintermediate inputs produced elsewhere (primarily in South Africa).Exports would for the most part be directed to the South African market,but there is also some potential for exports directed outside the regionalmarket.
1.20 Lesotho cannot expect to match the industrial incentivescurrently offered in the 'homelands of the RSA. Nevertheless, it offersinvestors two distinct advantages which should be better exploited, namelya low-cost and relatively productive and reliable labor force, and alocation with political access to foreign markets. Given the currentregional situation, the latter is of special interest to South Africanfirms trying to protect their export markets. While Lesotho cannot allowIts situation to be exploited for relabeling, genuine opportunities forlocal manufacturing should be pursued even if there is a risk that firmsmay move again in the future. Lesotho should, therefore, continue todirect its major promotional efforts for investment and trade towards theRSA. Other opportunities do exist for attracting investment from outsideAfrica, but given the distances involved, high returns to 'outsidepromotional efforts should not be expected.
1*21 The driving force behind industrial development in Lesotho willbe private sector investment. Medium scale manufacturing enterprises willresult primarily from foreign investment, brought to Lesotho mainly throughthe auspices of the Lesotho National Development Corporation. Theincentive program sponsored by LNDC and government should primarilycomprise transparent "if-then' rules to reduce uncertainty concerning thetype, level, and duration of incentives. LNDC could be strengthened byinstitutionalizing and placing greater emphasis on foreign investmentpromotion. One alternative would bt, to create an investment promotionunit to establish tie-ups with consulting and market research firms andthereby to identify better target markets and potential investors. Asecond alternative would be to assign this function to the existingorganizational setup. Another option would be to place this responsibilitywithin the Ministry of Trade and Industry. In the future, LNDC shouldconcentrate on attracting new firms, recognizing that some will fail.Propping up non-profitable firms, while perhaps preserving employment inthe short run, will deter efficient industrial growth in the ionger term.
1.22 In Lesotho's drive to create greater employment opportunities, itis important for the government not to use the manufacturing licensingsystem to select 'appropriate' investments. Experience in many countrieshas shown that ex ante restrictions on investment tend to work poorly andinefficiently. Similarly, the remission of profits by foreign investorsmust be viewed in the light of foreign firms' role in creating employment,providing valuable training for the workforce, and contributing value addedto the economy. Finally, all efforts to attract foreign investment neednot necessarily be channelled through LNDC since some firms may wish toinvest in Lesotho without dealing with LNDC. Procedures should thus allowproductive foreign enterprises direct access to land in appropriately zonedareas as well as to all other services and incentifes.
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1.23 Presently domestic savings contribute to the build-up of netforeign assets to the extent that these funds are transferred as short-termcapital to institutions in the RSA. Recognizing this to be partly a resultof limited entrepreneurial experience in the economy, the Lesothogovernment should develop policies which would spur better utilization ofthese resources for domestic investment and which would contribute tobuilding up small scale manufacturing and service enterprises. First thepossibility of the Basotho Enterrtise Development Corporation (BEDCO)collaborating with the Lesotho Benk and other commercial banks should beexplored. BEDCO could redirect its activities toward identification ofentrepreneurial abilities and interests, training and counseling, start-uptechnical support, and supervision. Its lending operations could bereplaced by a loan-guarantee scheme, thereby reducing commercial banks'risks and costs of extending and administering credit to small scaleenterprises. Other policy action could also be taken to support domesticindustry and especially SSEs. Setting voluntary procurement goals forgovernment agencies from domestic suppliers could prove beneficial to theextent it would break entrenched habits of automatically ordering from RSAsuppliers and would encourage greater concern for procurement of locallymanufactured items.
1.24 Infrastructure investment has considerable potential foremployment creation using labor-intensive methods. To support ongoingefforts by the Labor Construction Unit (LCU), current and potentialemployees need more meaningful career opportunities. One step could be tobring some of the daily and weekly paid technical staff into theestablishment, with career paths. Also it should be possible in the nearfuture to localize senior management (at present LCU is run by a consultingfirm). It could prove very helpful if LCU were allowed to subcontract inthe private sector, not only as a means of generating greater employment,but also as an example of the profitability of labor-intensive methods.
1.25 Agriculture. The foundation of agricultural development inLesotho needs to be a) the preservation of the resource (land) base and b)raising the productivity of the land base and the capacity of agricultureto absorb more labor. The Bank's recently completed Agricultural SectorReview dealt with soil conservation, reducing soil erosion and degradationthrough destocking, and better land management practices. The report notedthat government planning and policy action need to go further than atpresent on the issue of how to reduce stocking levels and overgrazing.Broader coverage of grazing associations, with strengthened power toenforce grazing regulations, is required for all areas of the country.Current efforts to increase commercialization of the livestock subsector(e.g., utilization of the abattoir and feedlot) will encourage greaterofftake and the development of a local industry by providing a marketingoutlet. The government should not, however, restrict private livestockmarketing activities since commercially-oriented government enterprisesshould compete on equal terms with the private sector in order to promoteefficiency. The government in particular should encourage RSA buyers toattend livestock auctions. Further efforts are needed as well to promotemeat exports. Lesotho needs to pursue the possibility of gaining a quotafor meat exports to the EEC under the Lom6 Convention, something which mayrequire a strengthened veterinary capability. However, increased access to
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marketing and abattoir facilities, unless offset by other factors, couldalso increase the incentive to own cattle, and thereby increase stockingrates which are already too high. Price differentiation between differentgrades of meat, as currently practiced by the government's abattoir, willgive correct signals in terms of promoting higher quality offtake.However, the government may need to consider additional means to reducestocking levels. One option is the imposition of a national grazing feefor cattle and other livestock which could be instituted through thegrazing associations. The recent increase in livestock trespass fines andimpoundment fees are important steps toward strengthening ongoing landmanagement efforts.
1.26 Arable agriculture in future years will be extremely important asa means of providing additional employment opportunities for thegrowing labor force. The future of arable agriculture in Lesotho should beoriented toward relatively labor intensive production of high valuehorticultural crops as well as continued production of the staple graincrops. However, with increasing numbers of Basotho who do not have accessto land and without an established land market, it is not assured thatthose currently on the land, i.e. the traditional allottees, will be themost productive users of the land. As a long range means of increasingagricultural production and the productivity of the land, it would beprudent for Basotho society to begin discussing the means to ensure accessby those who would make more productive use of the land. As a step in thisdirection, the government should consider recognizing and legalizing theongoing but currently limited practice of land leasing and promote its usemuch more widely. The implementation and active promotion of the 1979 LandAct provisions on lease registration should also be undertaken as thislegislation provides a good basis for a rural land market.
1.27 The best agricultural land is also the area of greatestpopulation growth and density. Efforts need to be made to ensure thatencroachment by urban areas onto the areas of the best soils is minimizedthrough more effective land use planning and allocation procedures. Giventhat urbanization will continue in any event, it is important that lsndallocation for urban or peri-urban households results in higher densitiesor that people allocated lands close to urban settings where infrastructureis available (roads, marketing facilities) are encouraged to allocateresources to the production of marketable surpluses of horticultural andother crops. More analysis is necessary to identify costs and benefits tothe various alternatives, and to determine the most appropriate alternativein terms of national income.
1.28 Lesotho government policy must also encourage private and foreigninvestment opportunities which would make more productive use of thelimited agricultural resources which the country does possess. Currentgovernment efforts are often uncoordinated and inconsistent in thisregard. For example, promotion of asparagus and other high valuehorticultural crops takes place only in areas surrounding Maseru, i.e. thevicinity of the Basotho Cannery. Potential investors interested in settingup similar operations in other areas have been discouraged by inconsistentsignals received from government. Government policy should encourageproduction in other suitable areas of Lesotho by seeking investors willing
- ii
to locate in these other areas and to undertake the research, extension andmanagement role that the Basotho Cannery has executed well. Governmentshould not create monopoly marketing institutions but rather should focusits efforts on collecting and disseminating market information and continueto rely on private sector traders and firms for horticultural marketing.
1.29 Planning and Administration. Upgrading the efficiency of publicadministration and in particular the planning function in Lesotho will takeon added importance over the coming years. In a situation of constrainedbudgetary resources, the planning and budgeting process must establishpriorities, translate government policies into strategies, and translatethese into an expenditure program which is financeable given expectedresources. A strengthened planning function is also essential to effectivedonor coordination. By setting priorities and then developing programswith donors directed toward those priorities, the government can ensurethat external assistance meets the country's objectives, rather than theother way around.
1.30 One of the planning weaknesses repeatedly identified in Lesothois the tenuous link between investment planning and fiscal budgeting, andbetween the capital and recurrent budgets. Historically, the size andcomposition of the capital budget, which is the responsibility of thePlanning Ministry, has been essentially determined by the extent of donorassistance. The Finance Ministry determines the recurrent budget, andwhile there are institutional mechanisms on the books to promotecompatibility between the two budgets, in practice coordination has beenweak to non-existent. As a means of forcing greater compatibility betweeninvestment planning and recurrent budgeting, the government should notundertake investments without ensuring that required recurrent resourceswill be available for those purposes and be consistent with expectedresources over the medium term. Line ministries should be given budgetaryceilings which would force them to identify priority expenditures andprograms of lesser priority. In addition, consideration should be given tomerging the Ministry of Finance with Planning and Economic Affairs so thatcoordination between capital and recurrent budgets would be theresponsibility of one ministry. If the current ministerial arrangementsare kept, the government could raise the level of representation on theinter-ministerial project review committee and delegate to it greaterresponsibility for approving recurrent and investment expenditures to thatno investment would go forward without the agreement of both ministries.Certainly no government borrowings for investment purposes should takeplace without the concurrence of the two ministries.
1.31 The 1986 study of Public Administration and Management TrainingNeeds addressed a number of areas where better training could improve theefficiency of the civil service and public management. In addition, theoptimum size, composition and skills mix of the civil service needs to beidentified through a comprehensive review. Over the past years thegovernment has at times imposed limitations on the official establisbmentin order to stem increases in the government wage bill. While attractiveduring times of fiscal stringency (though it must be noted that these ruleshave been circumvented through employment of daily workers, consultants,etc.), these limitations must be viewed as only short-term measures which
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need to be replaced by a manpower planning exercise to identify how todeploy the civil service more productively. The government should alsoreview the rationale for seventeen ministries, a number more suited to amuch larger country, to determine which ministries might be merged (asrecently undertaken in the move of cooperatives to Agriculture and ruraldevelopment to Interior).
1.32 In conjunction with provision of more appropriate training forexisting civil servants, the government needs to review the possibilitiesof reducing the number of expatriates in staff and line positions. Thismove, which admittedly could have short-term costs, would need to becoordinated with staff development programs and with a shift of mostexpatriate staff into well-defined training or advisory roles as a means ofensuring longer-terms gains to the Basotho people. Finally, implementationof the planners' cadre needs to take place. The creation of the cadre wasannounced in 1986 to improve the career prospects of government plannersand thus, it is hoped, the,ability to attract and retain qualified stafffor these positions. Care should be taken to ensure that the cadre doesnot become just a new bureaacratic process for moving staff between CPDOand planning units in the various ministries rather than developing soundcareer paths based on both training and development assignments.
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II. Macroeconomic Developments and Outlook
2.1 Overview. Many of the key determinants of macroeconomicdevelopments in Lesotho are strongly influenced by the economic situationand policies in the much larger neighboring economy of South Africa (RSA).The ties responsible for this are the monetary union and pegged exchangerate with South Africa, membership, in the Southern Africa Customs Union(SACU), the heavy dependence of the Lesotho government on customs revenuesfrom SACU, and the large volume of workers' remittances from South Africa,which constitute half of Lesotho's GNP. While these benefit Lesotho on thewhole, in Lesotho's small, open economy they also limit the scope forindependent macroeconomic policies. The virtual free flow of goods andcapital between Lesotho and the RSA - labor movement is controlled by theRSA - means that there Is 1ittle scope for the independent use of monetaryinstruments to contribute to the management of the economy. South Africanrand circulate freely in Lesotho, domestic prices and interest rates mustfollow closely those in South Africa, and inflation In Lesotho correspondsto that in South Africa. While Lesotho does issue a limited amount of itsown currency, loti notes must be fully backed thiough equal governmentdeposits of rand or other foreign exchange, and while there is some scopefor expansion of Central Bank credit, for example, this would generally beineffective in influencing the Lesotho macroeconomy since it wouldessentially lead to a corresponding capital outflow and a decline inforeign exchange reserves. Similarly, except in rare instances, protectivetrade policies cannot be used either to promote domestic production ofparticular items or to raise revenue for government.
2.2 Under present arrangements the policy tool which is available toLesotho and where the burden of economic management thus rests is fiscalpolicy. Even here, however, there are limitations. SACU revenue, whichrepresents two-thirds of the Lesotho budget receipts, is not directlycontrolled by the government. Thus most of the burden of fiscal policycurrently rests with the government's control of expenditure levels. Inaddition, the economy's limited supply responsiveness implies thatgovernment fiscal policy influences more the current account balance thandomestic output. As a result, the government's direct influence on thegrowth of the domestic economy is determined by the composition of itsexpenditure and investment program. Beyond this Lesotho must relyprimarily on indirect incentives to promote domestic growth by inducingappropriate private sector responses.
2.3 Over the coming years the primary objective of government'smacroeconomic policies and expenditure programs must be to balance thedesire to offset the adverse effects of external developments or shockswith the requirement of safeguarding sustainable internal and externalbalances. To this end, particularly given the bleak outlook for Lesotho'sprimary source of government income (SACU receipts), Lesotho needs to gaingreater discretion over other aspects of fiscal policy. In order to gainthat discretion, planning in Lesotho needs to ensure that the level offuture government expenditures is based on a thorough assessment ofgovernment's resource availabilities and financing capabilities. From an
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equity viewpoint and to provide greater fiscal discretion, governmentshould broaden the country's tax base and devote greater attention toappropriate pricing policies for government services.
2.4 Following a general description of the structure and growth ofLesotho's economy in recent years, the remainder of this section focuses onthe principal elements of Lesotho's macroeconomy and policies and suggestspolicies to make best use of Lesotho's economic potential within theconstraints it faces.
2.5 Structure of output. The structure of Lesotho's GNP has changedsubstantially over the last 10 years or so. In the mid-1970s net factorincome from abroad, primarily remittances of mine wages from workers in theRSA gold and coal mines, accounted for about 40 percent of total nationalincome. In 1984 this increased to over 51 percent of total GNP, beforefalling again to about 47 percent by 1986. The structure of domesticoutput also changed substantially over the same period. In 1975, agricul-ture and the non-government service sectors (including wholesale and retailtrade) comprised 33 percent and 39 percent of GDP, respectively (Table2.1). By 1986 agriculture's share in output had declined to 21 percent oftotal GDP and private services had declined to 34 percent. Government andnon-profit services (which encompass health and education activities) hadincreased from 14 percent to 19 percent, and building and construction hadincreased it share from 6 percent to 12 percent of total. Themanufacturing sector had grown relatively faster than GDP over the period,representing 6 percent of GDP in 1975 compared with 13 percent in 1986.
TABLE 2.1GDP by Origin
(as % of total GDP at factor cost)
1975 1980 1986
Agriculture 33 26 21Mining 1 8 -Manufacturing (including small scale) 6 5 13Electricity and Water 1 1 1Building & Construction 6 11 12Government & Non-profit 14 24 19Services
2.6 Growth of output. During the 1970s, Lesotho's GDP growth,spurred by both the private and public sectors, averaged 7 percent perannum. Investment and diamond production at the Letseng-la-Terai mineincreased sharply in 1978/79, but the mine closed down in the early 1980swhen diamond prices plummetted and remains uneconomic. The constructionindustry experienced growth of almost 20 percent per annum over the decadeand thus also contributed substantially to overall growth. Lesotho's ownresources were augmented by public and private aid inflows to governmentand non-profit associations which also contributed substantially to overallgrowth.
2.7 As noted above, factor income from abroad (primarily remittancesfrom workers in the South African gold and coal minesj representsapproximately half of total domestic output. During the 19709 mine wagesand mineworker remittances increased by almost 8 percent per annum in realterms, with the result that total GNP grew marginally faster than GDP at7.4 percent per annum.
2.8 This record of economic growth has not been maintained during thecurrent decade. The closure of the diamond mine in 1982, a sluggishmanufacturing sector in the early 19809 due to poor economic performance inSouth Africa, alhd stagnation in agricultural output due in part to thedrought but also to low relative returns to the sector, has resulted in anaverage annual GDP growth rate of 1.2 percent from 1980 through 1986. Withpopulation growing at 2.6 percent per annum, this reflects significantdrops in per capita domestic output. Particularly in the early years ofthe 1980s, this was offset somewhat by sizeable real increases inmineworker remittances. Annual GNP growth from 1980 to 1986 averaged about2.7 percent, resulting in constant per capita national income.
2.9 During the most recent years real domestic and national incomeshave continued to stagnate and fall in per capita terms, During 1985 GDPgrew by 3.5 percent but fell in 1986 by 0.1 percent. Over the same twoyear period GNP fell by 1.8 percent and 2.4 percent respectively,reflecting that mine wages and remittances have not kept pace with theheightened inflation in the RSA. Stagnant factor income from abroad hashampered domestic economic activity as well. Other causes of domesticsluggishness during these years were falling agricultural crop production(see section IV for a more detailed description of recent performance inagriculture) and a slowing down in the rate of expansion of themanufacturing sector. In manufacturing, particularly during the period1981-85, increased investment in Lesotho by South African firms resulted insubstantial production increases over a-small base. For the most part,these investments have taken place through the Lesotho National DevelopmentCorporation (LNDC) and are assembly operations using inputs imported fromthe RSA. Manufacturing activities which have recently begun operation inLesotho comprise garments, footwear, and furniture among others. Increasedproduction of these goods contributed to average annual increases inindustrial value added of almost 18 percent in real terms from 1981-85.The rate of growth began falling in 1985 (estimated at 13 percent) and isestimated to have fallen further to just under 4 percent growth in 1986.
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TABLE 2.2Economic Growth, 1970-1986
1970-80 1980-86 1985 a/ 1985 S/
GDP 7.0 1.2 3.5 -0.1
GNP 7.4 2.7 -1.8 -2.4
a/ Preliminary estimates.Sources: Bureau of Statistics; Central Bank of Lesotho
2.10 Total investment over the 1980s has fallen from 39 percent ofGDP at the beginning of the decade to 33-34 percent over the past threeyears. During the 1980s, private investment has represented just underhalf of total investment, averaging 16.7 percent of GDP. Aggregate publicinvestment declined from 20.9 percent of GDP in 1980 to 14.9 percent in1983, reflecting reductions in the real level of government's capitalexpenditures. Since 1984 public investment has increased somewhat andrepresented 17.6 percent of GDP in 1986.
Shra of gross daestlk nvesietfinwmd by foreip saings (1) 22.5t 35.7% 35.6% 15.61 -7.1 -3.11 13.4
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2.11 The high level of investment relative to recent GDP growthperformance has resulted from a number of factors. In Lesotho's openeconomy slow output growth reflects cyclical and external factors such asdrought, sluggishness in the South African economy, and the loss of diamondproduction. In addition, public sector investment includes majorexpenditures on roads, the new airport and other infrastructure, all areaswith relatively high investment prices. As might be expected in an economywhere about half of national income is earned beyond the nationalboundaries, private sector investment has tended to be in low productivityareas as well. Migrant remittances which are invested are used in largepart to construct new housing in rural areas and to invest in livestock.
2.12 Fiscal Trends. The Lesotho government's financial performanceover the past several years has been mixed (Table 2.4). The overallgovernment deficit has fluctuated from 18 percent of GDP in 1981/82 to 4percent in 1984/85 and has since risen substantially once again. Thesefluctuations largely correspond to variations in Lesotho's SACU receipts,which represent two-thirds of total government revenues. As a percent ofGDP, SACU receipts grew from 24 percent of GDP in 1980/81 to 32 percent in1984/85 before falling once again in 1985/86 and 1986/87 to 21 percent.During this period recurrent expenditures remained fairly stable except in1985/86 when government employees received salary increases of up to 40percent to compensate for real wage erosion during the preceding years.This stability in total recurrent outla;s, however, masks a shift in thecomposition of recurrent expenditure away from economic and socialservices (Annex Table 2.1). Recurrent expenditure on economic and socialservices as a percentage of total fell from 24 percent in 1980/81 to16 percent in 1985/86. Within economic services, agriculture and ruraldevelopment and transportation/communications accounted for most of thedecline. The other major category, roads, held its percentage allocation.The relative reallocation from economic services did not flow to socialservices (education and health) which also sustained a decline in itsrelative share from almost one-third to barely one-quarter of totalrecurrent expenditure. Detailed information was not collected by themission as to how these relative declines were accounted for within thevarious sectors; but data from the Health Ministry suggest significantcutbacks in operating expenses (other than drugs and travel) and modestreductions in salaries. The latter, however, were more than compensated byrelative increases in wages, the combination of these reflecting the freezeon the establishment with a consequent increase in the number of dailyworkers. This situation points to a need for a systematic review ofexpenditure policies. Arbitrary ceilings and across-the-board cutbacks inthe name of fiscal stability will over time significantly erode thecapacity of government to improve efficiency and deliver the serviced thatare essential to welfare and growth in Lesotho. The alternative must be aset of sector specific plans for reducing costs through better organizationand increased cost-effectiveness.
2.13 Capital expenditure in terms of GDP fell from 21 percent in1980/81 to 16 percent in 1984/85 and contributed to lessening the deficitover that time frame. Since that time capital expenditures have increasedto an average of 18 percent of GDP over that past two years. While
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budgetary outlays for roads and the new airport increased investment intransportation and communication over this period (from 31 percent to 62percent of total capital expenditure), government investment in all othereconomic and social services fell from 38 percent to 20 percent of total.The aggregate fall in capital expenditure while contributing to fiscalstability is not considered desirable given the need to accelerate GDPgrowth over the medium term. It also masks a pervasive problem ofoverplanning in capital budgeting. Each year's projected capitalexpenditures tend to exceed by a substantial margin amounts suggested bypast implementation experience. This problem which is considered ingreater detail in section V on Planning and Administration, argues for amore comprehensive review of the public investment program and its links tobetter capital and recurrent budgeting.
a/ breakdown not available; included in other revenue
b/ breakdown not available; included in other purchases
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2.14 The dependence of the central government budget on a single,externally-collected tax is a source of concern for Lesotho. Ik recentyears government savings have financed just over 20 percent of thegovernment's capital budget. Lesotho's record of locally-collectedrevenues, however, has been weak. With the present tax structure theprospects for lessening significantly the dependence on SACU receipts Isminimal. While taxes are collected on personal (though not on mine wageincome) and corporate incomes, the contribution of these collections tototal revenue has declined In recent years. A withholding tax on interestearned from savings was instituted in 1986; its potential remains to beseen. The major initiative in recent years has been the inauguration in1982 of a sales tax, which in 1985/86 represented 8 percent of governmentrevenues. Recent changes have increased sales tax rates and raised theefficiency of sales tax collections by restricting collection efforts towholesalers and major retallers. Because of the open borders with SouthAfrica, Lesotho's and the RSA's sales tax rates cannot differ to anysubstantial degree; both are currently 12 percent. Without new revenuemeasures (see paragraphs 2.33 to 2.41 for options to be considered), evensmall changes in SACU payments will continue to have a decisive influenceon the overall government deficit. With the two year lag between actualimports and receipt of the associated customs revenue, SACU payments toLesotho are known two years in advance, and to some extent the reduceduncertainty in total government revenue due to this arrangement maycompensate for the lack of government control over this revenue source.Proper planning of expenditure programs to ensure consistency with expectedrevenues and resisting expenditure growth given that declines in SACUpayments are already projected would reduce the destabilization associatedwith alternately expanding and contracting expenditure programs.
2.15 Balance of payments. Lesotho's balance of payments ischaracterized by large trade deficits financed primarily by inflows ofmigrant worker remittances and by current transfers (primarily SACUrevenues). Imports are around 14 times greater than exports and amount to60 percent of GNP and almost 115 percent of GDP. In 1986 imports totalledUS$343 million while exports were just under US$25 million. Most of thistrade is with the RSA. Imports from South Africa constitute 95 percent oftotal imports (Table 2.5). Data are not available regarding indirectimports from outside the SACU region. The country imports all its fuel andcapital goods. While there are some exports of foodgrains and otheragricultural products, Lesotho is a net food importer. Since 1980 importsvalued in maloti have grown by 15 percent per annum (approximately1 percent per annum in volume terms), corresponding to growth in workers'remittances of 20 percent per annum over the same period.
TABLE 2.5Direction of Trade(percent of total)
Trading Partner Exports Imports
SACU 85.0 95.0Other. Africa 5.0 -Europe 5.0 2.0North Africa 3.0 2.5Other 2.0 0.5
Source: Lesotho Bureau of Statistics, Statistical Bulletion, 1984.
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GRAPH 2.1
Internal and External Balance
-14 ~ ~ ~ ~ 18018
-2
zC 2 - _
*-4
0~~~~~~~
-8
~-7-7
-8 .r-9
-10 -
-1 I a I~- - I I ,
1980 1981 1982 1983 1984 1985 1986
o Current Account + Budget Deficit
2.16 Low exports reflect Lesotho's poor resource endowment, smalldomestic market, and distance from potential markets. Poor performance mayalso reflect to some extent the polarization of development whicn has takenplace within the customs union particularly as a result of attractivefinancial packages offered to investors in the RSA 'homelands'. Officialdirection of trade data show that most of Lesotho's current exports (85percent) go to or through the RSA (data do not distinguish re-exports fromthe RSA but these would be substantial for some products, e.g., wool andmohair); the other 15 percent are equally split between the EBC, otherAfrican countries and other regions. There is virtually no direct tradewith other SADCC countries. Thirty-eight percent of exports are wool andmohair; the remainder at present are a mixture of agricultural products andlight manufactures. Exports experienced a sharp fall in the early 1980s,due mainly to the closure of the diamond mine in 1982. Diamond exports,now almost nil, had reached US$32 million in 1980. Between 1980 and 1986total export volume fell by around 10 percent per year. This, however,masks growth in non-diamond exports over the period; such exports werestagnant at the beginning of the 1980s but since 1982 volume growth hasreached an average of almost 8 percent per annum. This is reflected in themarked change in the structure of exports. The share of manufactured goodsin total exports rose from 20 percent in 1980 to 32 percent in 1983,reflecting new production in various assembly-type operations, especiallyclothing and footwear enterprises. While recent disaggregated trade dataare not available, specific company data show continuing growth in thesenon-traditional exports.
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2.17 Workers' remittances from the estimated 140,000 Basotho workersin the RSA totalled US$274 million in 1986. While much of mine income isspent on imported consumer goods, remittances are also used to purchasedomestically produced foodstuffs and other items and to finance investmentparticularly In construction and livestock. Thus rising workers'remlttances have a positive impact on the current account. Whileconsideration of the trade account alone suggests a major imbalance, thecurrent account actually showed a surplus in 1984 and 1985, though it fellinto deficit during 1986. The high level of imports which is sustained byworkers' remittances and SACU revenues would rapidly diminish shouldremittances decline or should government expendlture decline as a result offalling SACU revenues.
2.18 Capital account. To finance large budgetary and currentaccount deficits in the early eighties, the government resorted to shortterm borrowing from foreign commercial banks, especially during 1981. Withits improving financial situation resulting from the combination ofincreasing inflows of SACU revenues and expenditure restraint, thegovernment repaid the commercial loans in 1984/85, covering its growingdeficit in 1985 and 1986 mainly from domestic bank borrowing. Thisborrowing sharply increased the country's debt burden. While in 1980 only3.8 percent of current government expenditures had to be spent on interestpayments, by 1986 this had increased to 10 percent. Total foreign debtservice as a percentage of government revenues reached 15 percent as wellin 1985. Debt service in 1985 represented 3 percent of GNP and 5.5 percentof exports of goods and services (including miners' remittances). Afterrepayment of the short-term dc-t was completed in 1985, these ratiosdeclined in 1986. Debt service as a percent of exports of goods andservices was approximately 4 percent. As a percentage of exports of goodsand non-factor services the ratio stood at 26 percent. Total foreign debtoutstanding and disbursed equalled approximately 35 percent of GNP at thebeginning of 1986. other sources which helped finance the balance ofpayments were foreign investment and aid receipts. Net foreign investmentinflows almost tripled in loti terms from 1980 to 1986. Grants on theother hand fell markedly from 1980 to 1986, due at least partly todeclining implementation of the government's capital budget. For similarreasons, disbursements of official lending also fell. Net foreign assets(including the position of domestic banks), which had eroded in 1980 and1981 due to large current account deficits, stabilized over recent years atbetween 3 and 4 months of imports.
2.19 Monetary policy. The scope for monetary policy in Lesotho isdetermined by the Trilateral Monetary Agreement among South Africa, Lesothoand Swaziland. This agreement superseded the Rand Monetary Agreement andbecame effective on April 1, 1986. The changes from the previous agreementaffecting Lesotho are small. Under the new agreement, Lesotho may hold upto 35 percent of its total foreign exchange in currencies other than rand;previously all foreign exchangt deposits were held in rand. The withdrawalnotice period was shortened from twelve to six months, and the definitionof reserve cover for loti issued now includes investments by the CentralBank of Lesotho in the South African Corporation for Public Deposits. Asunder the former agreement, loti issued by the Central Bank of Lesotho have
Notes: 1985 due.a are provisional1986 data are preliminary estimates
Source: Central Bank of Lesotho
to be backed by a 100 percent reserve cover, and the exchange rate remainsfixed with the rand. South African rand remain in circulation in theLesotho economy. Under the agreement the monetary union is now named the"Common Nonetary Area."
2.20 As a consequence of the open arrangements with the RSA,monetary and price development in Lesotho are basically a reflection of
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South African monetary policy. The Central Bank of Lesotho determinesminimum deposit rates and the prime lending rate for commercial banks.Generally interest rates set by the Central Bank are slightly lower than inthe RSA as a means of promoting domestic demand for credit. Other ratesare market-determined but are essentially in line with those in the RSA.With the same objective of stimulating domestic utilization of credit,minimum local asset requirements for the commercial banks have also beenestablished. Low domestic demand perhaps combined with inadequatecapability on the part of domestic banks to assess and supervise smallcredit operations have resulted in excess commercial bank liquidity.Excess funds under this arrangement are deposited with the Central Bankwhich in turn transfers the resources abroad. Through the pegged exchangerate and the free flow of goods, South African inflation is transmitteddirectly to Lesotho and reached almost 20 percent in 1985 and 18 percent in1986.
2.21 Real exchange rates. Since the Lesotho loti is pegged to theRSA rand, it has shared the rand's considerable depreciation vis-&-vis theUS dollar and other major currencies over the past several years ofpolitical and economic instability. From maloti 0.8 per US dollar in 1980,the rand and hence the loti depreciated to M 2.3/US dollar in 1986.Despite this substantial nominal depreciation, the predominant position ofthe RSA in Lesotho's trade basket produces a trade-weighted real exchangerate for the loti that has depreciated by less than 1 per cent per annumsince 1980 (Table 2.7). On the other hand, since 1980 South Africa's realexchange rate has depreciated on average over 8 percent per annum, withmost of the fall occurring in 1985 and 1986 as the nominal value of therand dropped more sharply than relative price movements would otherwisehave indicated. While relative to Lesotho's existing trade structure theloti's competitive status has remained constant, the value of the loti withrespect to other major currencies represents a gain in competitiveness forLesotho's exports outside South Africa which could be exploited. Aparticular disadvantage to the depreciated loti is that Lesotho's debt islargely denominated in currencies other than the rand. The aggregate 50percent real depreciation of the loti/rand thus has contributed to asubstantial increase in debt servicing requirements.
2.22 Policy options and outlook. Economic growth prospects forLesotho will continue to be limited over the coming years, and withoutgreater attention by government on tackling long-term structural issues inthe economy, Lesotho's development path will continue as at present: sloweconoric growth coupled with continued degradation of the resource base.In addition to the country's limited resource endowment and other factorsimpinging on its domestic productive capacity, Basotho employment and wageincome in the South African mines is expected to remain roughly constant.Thus half of Lesotho's GNP cannot be expected to grow in real terms for theforeseeable future. In this situation any future income and consumptiongrowth can only be achieved by expanding domestic output.
2.23 Accordingly, the main medium-term economic objective of thegovernment should be to restore and sustain domestic economic growth with aview to creating sufficient employment opportunities and improving living
a/ an increase in the index denotes depreciation of the local currency againsttrade,-weighted partners
b/ estimate based on partial year data
standards, while strengthening the country's fiscal and external paymentsposition. To promote growth and development of the Lesotho economy, thepublic sector's role should mainly be supportive, concentrating on thedevelopment of social and physical infrastructure and the policy frameworkneeded to support the private sector. As discussed in more detail insubsequent sections of this report, government programs in this regardshould focus on improving current investment incentives by moving from adiscretionary incentives system to a more stable system based on automaticgranting of incentives when certain criteria are met; improving support forexport promotion and marketing activities; promoting diversification ofagricultural production into horticultural and other non-traditional crops;stemming the erosion and degradation of the land through appropriate landmanagement; strengthening education and training efforts to increase thecompetitiveness of Basotho labor within the region; reversing the increasein the population growth rate through greater emphasis on family planningand health education; and other policy measures discussed in this report.The long-term success of many of these measures depends to a great extenton private sector response within Lesotho and the responsiveness of foreigninvestment to changes in investment incentives and other policy measures,and on the economic and political situation in South Africa, all of which
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are uncertain. However, implementation of a stable incentives framework,which is primarily aimed at increasing the productive capacity of thedomestic economy, institution of more effective population control programsand more effective education efforts are essential for Lesotho regardlessof these uncertainties.
2.24 Even with the uncertainties in the southern Africa region andthe country's poor resource base, given an appropriate policy frameworkLesotho can achieve domestic output growth which is positive in per capitaterms. Over the medium term GDP growth is projected to average between 3and 3.5 percent, just over projected population growth of 2.6 percent peryear (Table 2.8). The primary driving force will be growth inmanufacturing of 5 percent, pulled by continued growth of exports andgreater government policy support for small scale enterprises. Increasedproduction of horticultural products, more efficient land use and betterrange management are projected to result in agricultural growth of about 3percent. Services growth is projected to be quite slow (2 percent),reflecting a continuation of growth in private services in tandem with therelative strength of industry balanced by little or no growth in publicsector employment. The combination of these factors with no growth inmineworker remittances yields annual GNP growth averaging 1.5 percent. Percapita national income is thus projected to fall by an average 1 percentper annum. Should remittances grow more rapidly, this would allow highergrowth in income and consumption, but for a realistic assessment ofLesotho's prospects the assumptions made here are appropriate for planningpurposes since Lesotho must at some date adjust to a level of absorptionmore in line with domestic resource availability.
Total Consumption 1.7 1.9Total Investment 2.7 3.2Exports of Goods and NFS 4.8 5.4Imports of Goods and NFS 1.6 1.8
2.25 Projected GDP growth will require imports of capital andintermediate goods and petroleum to grow at slightly above 3.5 percent peryear (an import elasticity of approximately 1.1 for these goods). Thislevel is feasible &iven that growth of consumption imports will be small,reflecting no real growth in remittances. Total import growth is projectedto average only 1-2 percent. Import growth beyond this level, unless itoccurs as a result of higher than projected migrant remittances, could notbe sustained over the medium to longer-term. Exports are expected to grow
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in volume terms by 5 percent annually over the medium term. Thisprojection is based on Lesotho's recent successes in attractingexport-oriented, assembly enterprises as well as new investment in alreadyexisting enterprises. Much of this investment represents regionaldiversification on the part of RSA firms; the resulting production is soldwithin RSA and in outside markets. In addition, as the domestic productionbase is enlarged, increased horticultural exports are expected. Wool andmohair production will continue to be exported in bulk though investment indomestic processing may take place. The target of 5 percent growth isfeasible even with slow economic growth in the RSA, as part of theproduction is directed outside the RSA.
2.26 The balance of payments scenario consistent with theseassumptions is presented in Table 2.9. The projected current accountdeficit is sustainable over the medium-term given reasonable assumptionsfor the level of concessional and grant aid from multilateral and bilateralsources and the absorptive capacity of project aid in Lesotho. Thisscenario assumes all medium- and long-term debt will borrowed onconcessional terms. However, this medium-term outlook is subject toseveral uncertainties pertaining to economic and political developments inSouth Africa. These include the level of South African investment inLesotho, RSA demand for Lesotho's exports, possible changes in the SACUrevenue distribution formula, and the level of mineworkers remittances.Given the importance of SACU receipts in the budget and migrant remittancesfor the current account balance, even small deviations from these projected
TABLE 2.9Balance of Payments Projections
(US$ millions)
1987 1988 1989 1990 1994 1997
Exports of Goods & Services 357 365 373 380 450 517of which remittances 281 284 287 290 332 369
Imports of Goods & Services 414 430 446 459 560 654Net Current Transfers 46 48 50 51 67 81
Current Account Balance -11 -17 -24 -28 -43 -56
Grants 6 6 6 6 7 8Net Foreign Investment 5 5 6 6 9 12Net Loans and Other Capital 22 22 21 18 17 45Change in Reserves (--increase) -21 -16 -9 -2 10 -9
Reserves as months of imports 4 4 4 4 3 3Debt Service as percent of:
goods and services 3 3 3 3 4 4goods and non-factor services 24 23 20 19 17 18
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levels would alter the growth prospects of the Lesotho economyconsiderably. To lessen the impact of adverse shocks, Lesotho shouldprepare contingency plans. In the past, efforts in this direction havebeen directed mainly at devising employment programs for returning minersand at lessening the dependence on South Africa, e.g., in the power ortransport sector. Given that about 50 percent of Lesotho's foodconsumption is imported, developing contingency plans, in cooperation withWFP and CRS, for food aid would seem appropriate, e8pecially since food aidat present is hampered by distributional problems.
2.27 Even under optimistic assumptions regarding theseuncertainties, during the 1990s tighter fiscal management of the economymay become necessary in order to restrain consumption and import demand.Government can reduce the likelihood that drastic actions would need to betaken in the future by ensuring that it follows consistent and prudentfiscal policies in the near term. A large part of this would be theavoidance of additional borrowing on non-concessional terms. Governmentshould work to lower present budgetary deficits through stricterexpenditure control and by appropriate pricing of government and parastatalservices. Over the medium term, as specified below the basis must be laidfor broadening the domestic tax base. In addition, particularly given theuncertainty aspect of the level of SACU revenues, government must begin todevelop a core expenditure program which identifies the essentialpriorities for future government spending so that processes for making anyrequired expenditure cuts are in place and undesirable across-the-boardcuts, resulting in underfunded programs, would be avoided.
2.28 The budgetary outlook. The government deficit in 1986/87 isestimated to be 15 percent of GDP, jumping from the 4 percent and 13percent levels in the two previous years. The primary cause of this hasbeen the reduction in SACU payments, which fell from M 161 million in1985/86 to M 144 million in 1986/87. 'SACU receipts in the two succeedingyears will only rise marginally in nominal terms as well. A furthercomplication is that the South African government is currently consideringways to reduce its budgetary burden resulting from the present SACUrevenue-sharing and compensatory payment formula. One option underconsideration by the RSA is to channel the compensatory element of the SACUpayment through project lending by a special institutional arrangement(such as the SADB). The compensatory element, presently a direct transfer,represents approximately one-third of the total SACU payment and isintended to offset the polarization of development and price-raisingeffects of Lesotho's membership in the customs union. But at present SACUrevenues are generally used for recurrent expenditure. The prospect ofchanges in the SACU formula or in the way it is applied makes even moreimperative the need to initiate and sustain a program of expenditurerestraint consistent with the maintenance of long-term macroeconomicbalance. However, the rationale for such a program goes beyond soundfiscal management. It derives equally from the need to match expendituresbetter with sectoral development objectives so as to achieve higher growthin the domestic economy and thereby maintain adequate welfare levels. Manypast practices which have held down government expenditure have notcontributed to development objectives. Across-the-board spending cuts and
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establishment and hiring freezes are not substitutes for setting capitaland recurrent expenditure priorities, ensuring that the links between thetwo are reflected in budget allocations, and giving line ministries greaterresponsibility in reconciling expenditure plans with resource availability.
2.29 One major area that will require a government-wide response is ageneral reform of the civil service that will curtail the inefficient anddisruptive practice of using consultants and daily workers to circumventfreezes on creating new positions. The result of this has been that manynew programs and new technologies (e.g., computerization) have been imple-mented largely with "temporary" staff. Any program of phased reduction insuch staff, however desirable from the fiscal perspective, will need to bepart of a broader effort to integrate staffing and expenditure reforms.
2.30 A comprehensive assessment of sectoral priorities and suggestionsfor a core expenditure program could not be undertaken within the scope ofthis report; these will beAthe subject of a World Bank public expenditurereview to be undertaken later in 1987. However, it is clear that there aremany measures which can be undertaken to improve the efficiency of govern-ment expenditure. In the education sector, these were laid out in theWorld Bank report on Cost-Effectiveness in Education in Lesotho (1985)which emphasized particularly the measures that could be undertaken toimprove both quality and throughput in the system. In post-secondaryeducation, there are significant opportunities for improved managementwhich could reduce unit costs through program rationalization, largerclasses, better staff discipline, and (at least in the case of traininginstitutions such as Lesotho's Agriculture College and LesothoPolytechnic) curriculum reform better geared to the private sector. Insecondary and primary education unit costs are generally low in comparisonto regional averages due to a relatively high degree of student andcommunity support. At the secondary level larger classes, replacement feesfor science and other equipment, and training for headmasters are measuresbeing planned or already undertaken by the government. Suggested measuresto improve quality in primary education include teacher upgrading,examination reform and headmaster training.
2.31 Ultimately the most significant opportunity for improvinginfrastructure requirements in primary education is through lowerpopulation growth which could stabilize enrolments and release resourcesfor much needed quality improvements. Lower population growth would have asimilar positive impact on other basic services in health and water supplyand in the longer term on labor force growth and infrastructurerequirements. This argues for a longer-term perspective regarding publicexpenditure on health, sanitation, and water supply as well as education.By mid-1987 family planning services should be available in every maternaland child health clinic; but much more needs to be done in terms of generalpromotion and education to enhance awareness and acceptability. Otherissues in health, such as adding AIDS education to ongoing health programsdealing with sexually-transmitted diseases, need greater emphasis, alongwith family planning.
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2.32 For other sectors as well, limitations on resource availabilityand absorptive capacity mandate that government increase thecost-effectiveness of its investment and expenditure programs. Forexample, in the roads sector government needs to ensure funds are adequateto maintain particularly those roads which will begin to experience greatertraffic as a result of Highlands water construction. While project aid tobuild Highlands Water access roads may cover part of these costs, thegovernment will need to supplement these funds. To increase efficiency ofresource use in the housing sector, government emphasis should be on sitesand servicing activities, leaving residential construction activity to theprivate sector. To facilitate this the operations of housing sectorinstitutions (LHC, LEHCOOP) need to be restructured so that the cost ofsites and servicing are recovered from housing purchasers through feeswhich could be financed under housing loans. A revolving fund would thusfully finance the cost of providing these services. Financing which isrequired from government should be directed toward providing funds for homeownership rather than constructing government-owned rental housing. As afurther step to reduce dependence on government provision of housingfinance, the operations of the Lesotho Building Finance Corporation, thehousing sector financial intermediary, should be placed on a commercialbasis so as to attract private financing. The national housing plan, whichis currently being developed, should recommend specific steps to achievethese objectives. Finally, if government were to undertake construction ofa large-scale hydroelectric power plant - either at Oxbow or as part of theHighlands Water scheme, both of which are problematic since they have yetto be proven economically or financially viable - significant expansion inthe power transmission and distribution network would also have to beundertaken in order to promote the high demand growth necessary to justifythe original investment in power production. This would require aninvestment of approximately US$100 million over the next 10 years inaddition to the US$350-400 million for construction of the power generationfacilities. Particularly if the Highlands Water royalties are viewed asthe source of financing, the Lesotho government needs to consider carefullythe opportunity costs to using these funds prior to planning theseinvestments. In essence, the government should not view the prospectivewater royalties as ordinary income to be consumed or used for uneconomicinvestments. Plans should be made to treat them as a development trust tobe used for developmentally-oriented purposes. Specific suggestionsregarding institutional arrangements for planning and utilizing the waterroyalties will be a subject of the public expenditure review.
2.33 Revenues. Actions to augment government's resource positionare also important, and there are various options in this regard. Onepossibility is to make sales tax collection efforts more efficient. Anadministrative simplification which should benefit collections was therestriction of sales tax liability to wholesalers and major retailers.However, smaller retailers in Lesotho who buy directly from RSA wholesalersare currently able to bypass any sales tax collections. By strengtheningreporting and collections procedures at the border, perhaps including theposting of sales tax personnel, a significant amount of currently foregonerevenue could be collected. The government could also explore thepossibility of raising sales tax rates somewhat above the present 12
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percent, though generally Lesotho could not sustain much higher rates thanthose in South Africa given the open border. Another option to beconsidered is the strengthening of the income tax system in Lesotho.Recent changes to the income tax system in Botswana suggest the directionsuch reforms might take. In Lesotho, income tax provisions for exclusionsand exemptions are currently complicated and expensive to administer. Aradical simplification (as in Botswana) allowing only a standard exemptionagainst income irrespective of the number of dependents while lowering taxrates would reduce administrative costs and should facilitate both highercollection rates and broader coverage. While this might appear to havenegative distribution effects, even single taxpayers generally supportextended families in rural Lesotho. Simplifications should still thereforemaintain an acceptable degree of horizontal equity. These changes wouldallow income tax administrators, currently overburdened with recomputationsof inaccurate returns, to tap income sources and recipients which currentlyescape the tax net. A further means of increasing the efficiency of taxcollection efforts could be to bring sales and income tax collection undera common administration so as to encourage record-sharing.
2.34 Various proposals have been raised in the past regarding thepossibility of implementing the income tax with respect to mineworkerincomes or instituting a formal tax on mineworker remittances. Mineworkerremittances now constitute approximately half of total Lesotho GNP andrepresent an even greater percentage of Lesotho's wage economy. Eventhough mineworkers are among the highest paid members of the labor force,mine wage income is not currently taxed either by Lesotho or, effectively,the RSA. While both the remittance and income tax would be politicallyunpopular, a special remittance tax would present even greater problemssince it would serve as a direct disincentive to remit. This should beavoided since there are numerous ways to circumvent the legal requirementthat 60 percent of all mineworker salaries should be channelled from themine companies directly to the Bank of Lesotho. The better alternativewould, therefore, be for taxes to be imposed on mine wage income under theLesotho income tax system. Legally, mine wages are taxable under Lesotho'scurrent system, but this has not proven feasible to implement in practice.They are also taxable by the RSA though only higher income miners currentlyexceed the minimum threshold and actually pay taxes. With a simplifiedincome tax system within Lesotho as described above, more effort could bedevoted to administration of a system which included mineworkers.Withholding at source would be the most efficient option and should bepursued through discussions with the mining companies, but to date themining companies in South Africa have been unwilling to cooperate with theLesotho authorities. Nevertheless, the Lesotho government needs to pursuethis since taxation of migrant miners' incomes represents the mostpromising way to diversify revenue sources considerably. The Lesothoand RSA governments should also ensure that double taxation of mine wagesdoes not occur.
2.35 Cost recovery. Efficiency of resource use and equitabledistribution of government services could be improved by gradually phasingout or limiting explicit and implicit budgetary subsidies to parastatalsand other areas of government service provision. Instituting greater cost
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recovery measures could also be a means of mobilizing additionalfinancing. In general, the distributional impact of strengthened costrecovery in infrastructural and social sectors would be beneficial s,.ncethe primary users of government economic and social services are in thehigher income urban areas. Recovering a larger proportion of costs fromthese users would reduce the policy bias favoring urban over ruraldevelopment and provide financial resources to enlarge access to basicservices, thus benefiting a wider range of the population. Currently,pricing policy by the major government utilities (water and electricity)allows tariffs to be set at levels which do not cover current operatingcosts. A major proportion of capital costs are borne directly by thegovernment budget and these costs are not always passed on to the publicenterprise. As a result price-setting does not adequately take capitalcosts into account nor adequately reflect the financial or economic costsof supplying these services. Other government services should also bepriced at levels more clearly related to cost of provision. While steps toimprove educational quality are regarded as high priority, the governmentis aware of the need to undertake such measures in a cost-effective way, asfor example in the establishment of revolving textbook and material fundsfinanced by book rental fees. At the secondary level most schools inLesotho continue to be managed by church groups which must recover mosteconomic costs with the exception of teachers salaries which, to the extentof approximately 90 percent, are paid by government. The main issue arisesin post-secondary education. In the case of the National University, thestudent loan scheme could be an effective and equitable means of coveringcosts; but ineffective loan administration has in effect turned loans intoscholarships at considerable and continuing cost to the government. TheWorld Bank's study of Cost-Effectiveness of Education in Lesotho containedseveral suggestions for rectifying this situation. Similar arrangementsneed to be applied to other post-secondary institutions. Cost recovery inthe health sector averages about 10 percent ranging district-wise from 7percent in Qacha's Nek to 18 percent in Butha-Buthe. The Health Ministryis undertaking a study during 1987 to identify appropriate administrativeand collection procedures as a step toward bettering this performance.This should result in a set of options for the government to consider inraising fees.
2.36 Urban water and sewerage service is one area where greater costrecovery could readily free resources for alternative uses. The currentcharge per cubic meter of water covers only 38 percent of the total(current and capital) cost per water unit. 1/ Cost recovery for sewerageis an even smaller proportion of the total cost (31 percent). Servicecharges also do not cover operating costs for either water or sewerage.For water, tariffs cover 78 percent of current operating costs while forsewerage, charges cover 37 percent. Stated government policy is for allcurrent costs to be covered by current revenue. The tariff analysis in theTransformation Study did note that average operating costs would declineover the long term (15-20 years). However, in the near term, withoutaction to raise tariffs even this minimal objective of covering currentcosts will not be met.
1/ 1986 Transformation Study of the Water Branch.
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2.37 Government should raise tariffs to recover a part of the capitalinvestment in water supply as well. Presently, the entire investmentprogram is undertaken through the government's capital budget, and as notedabove the costs are not reflected in the tariffs charged. Prior to thisaction, a comprehensive tariff study needs to be undertaken to determine anappropriate tariff structure which would balance the pace of investment,financial and economic requirements, affordability concerns, and socialobjectives of the government. Adjusting tariffs upward, particularly forthose receiving direct connection and presumably most able to pay wouldprovide greater resources to cross-subsidize, as necessary, the lowerincome population and reduce the requirement for direct budgetary support.
TABLE 2.10Cost Recovery in Water Supply, 1986
Water cost Sewerage Cost(per cubic meter) (cost per connection per annum)
Cost per unitOperating costs 89c M 293Interest charges 8c M 3Depreciation 65c M 53
162c M 349
Current charge per unit 69c M 108
Source: Water and Sewerage Branch Transformation Study, 1986
2.38 Operating and investment costs of the Lesotho ElectricityCorporation (LEC), which is responsible for providing electricity serviceto all consumers in Lesotho, are also not fully recovered. As a result thegovernment's capital budget carries a large, and growing, part of Lesotho'spower sector investment costs. Improving cost recovery performance in thissector by passing along all capital costs to LEC and adjusting tariffs tocover investment and financing charges, could yield substantial budgetaryresources.
2.39 LEC purchases in bulk virtually all of Lesotho's power supplyfrom South Africa's Electricity Supply Commission (ESCOM). Therefore LECtariff policy must reflect this cost structure in setting local electricitytariffs. In recent years LEC and government have been reluctant to raisetariffs in line with the ESCOM price increases, despite stated policy tomake such adjustments in full. LEC did increase tariffs by 15 percent ineach 1984 and 1985, but this did not cover the ESCOM increases whichaveraged over 20 percent per year. As a result in both years LECexperienced substantial financial losses. Again in January and July 1986,ESCOM raised its tariifs by 10 percent. These adjustments have justslightly increased electricity tariffs in real terms given inflation ofabout 18 percent in 1986. Comparable action had not been taken by LEC byAugust 1986. Procedurally, LEC is not required to obtain government's
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approval to pass along ESCOM increases. Government should reemphasize theimportance of adjusting electricity tariffs in line with supply cost byencouraging LEC to pass along ESCOM increases immediately.
2.40 In the longer term, LEC tariffs will need to be set at levelsallowing sufficient revenues to cover all operating expenses, to meet aportion of required investment through internal cash generation and toensure adequate debt service coverage for remaining investment costs.Particularly if Lesotho plans to undertake major transmission anddistribution investments, which will increase the economic cost structureof electricity provision, tariffs must also be raised in the near term toreflect these cost increases. Under the Lesotho Highlands Water project adevelopment planning and tariff study will be carried out with the purposeof recommending tariff levels which would be in line with these andmarginal cost pricing objectives. In addition, the study will recommend atransmission and distribution investment program which would be consistentwith the recommended tariff levels, affordability criteria and projecteddemand.
2.41 In addition to the education, health, water and electricitysectors discussed above, government also needs to review pricing principlesand the level of budgetary support to its communications, transportation,trading and other enterprises. In particular, the operations of theTrading Corporation of Lesotho need to be reviewed to determine whetherreliance on private traders might prove less costly and more economicallyefficient. In 1985 the government restructured the Food Self-SufficiencyProgram to increase farmers' financial and physical contribution to theproduction packages and to reduce the government subsidy. Efforts shouldcontinue to be made to recover the full costs of this program from theparticipants and to refrain from future subsidy increases. Additionally,government should consider means of recovering a greater proportion of itsassociated costs in the transport sector from domestic and foreign trafficthrough user charges. License fees and vehicle taxes are currently nominaland have not been adjusted for inflation in recent years. Taking intoaccount the increased traffic and demand on transport resources due toHighlands Water construction, consideration should be given to the mostappropriate way of structuring these and other alternative user charges(e.g., tolls) so as to enhance cost recovery without imposing inconvenienceor delay. Finally, local governments which are being instituted in Maseruand other urban areas should possess the requisite taxing authority andability to price their services to recover costs associated with provisionof infrastructure and local services. This would reduce the burden to thecentral government budget of providing these services as well as lowergovernment subsidization of urban residents. The existence of subsidies onurban services tends to create a bias against the rural/agriculturalsectors and encourages the rapid urbanization which Lesotho has experiencedin recent years. Thus ensuring that urban residents pay full economicprices for services received would not only be a very useful fiscal tool,but would also promote more balanced economic growth and development.
2.42 Monetary policy. A major problem in Lesotho has been theexistence of excess liquidity in the banking industry while credit to the
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productive enterprises has been very low. While this is partly due to lackof profitable investment opportunities, there are also other factors whichinhibit bank lending to the private sector. These include risk aversion bybanks and the lack of acceptable collateral. As discussed in more detailin section III, the introduction of a loan guarantee scheme by BEDCO couldrepresent a first step in removing these constraints. The Lesotho Bank,which is exempted from paying company income tax in exchange for itssupport in developing domestic entrepreneurial capacity, should take thelead in a more active lending policy towards small-scale enterprises. Theprovision of a rediscount facility for export bills by the Central Bank ofLesotho and provision of export financing with risks shared by commercialbanks, LNDC or BEDCO, and the Central Bank, as are being considered bygovernment and the Central Bank, would lower the costs to the commercialbanks in extending credit to export-oriented enterprises, and should thusencourage increased lending.
2.43 External borrowing strategy. On the basis of past andpresently projected commitments and given the assumptions for export growthand mineworker remittances, the debt service ratio is projected to maintaincurrent levels in the range of 3-4 percent throughout the period to themid- to _ate-1990s (Table 2.9). However, in relation to the exports ofgoods and non-factor services this will amount to around 18 percentpercent. Perhaps even more relevant to Lesotho is the growing percentageof government expenditure that will be required to service this debt.Currently debt service as a percent of total government expenditures standsat around 9 percent. As debt already incurred begins to come due, thisratio is likely to increase toward 15 percent by 1997. These numbersunderscore the fragility of Lesotho's situation. While a drop in foreignexchange factor income could be expected to lead directly to lower importdemand, this is not the case with debt service. Any substantial increasein debt service obligations beyond those currently outstanding couldseriously constrain macroeconomic management in Lesotho. To illustratethis, if Lesotho were to continue accumulating non-concessional debt at therate of just US$6 million per year as over the past few years, this wouldincrease the debt service burden by around 50 percent by 1997; by thatyear, debt service as a percentage of exports of goods and services wouldreach 6 percent; debt service relative to exports of goods andnon-factors services would equal about 26 percent; and debt service as apercentage of total government expenditure would be around 22 percent.Lesotho's modest growth prospects are as much a function of limitedinvestment opportunities and structural constraints as inadequateresources. Under such circumstances Lesotho should accumulate medium andlong term debt only on concessional terms and should avoid short-termborrowing. This is the case even in relation to projects which ex antewould appear to have acceptable economic and financial rates of return.Borrowing to construct the water transfer component of the Highlands Waterscheme would not fall under these strictures, being in effect an enclaveoperation which will be guaranteed and repaid by South Africa.
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III. The Challenge of Employment Creation
3.1 Perspective. The labor market in Lesotho is characterized by alabor force which is larger than existing employment opportunities. In thepast, much of this excess supply has been absorbed by work opportunities inSouth African gold and coal mines, and earnings by the 137,000 or sominers1/ represent over half of Lesotho's GNP. Under regulations strictlyenforced by the RSA, this emigration is not permanent, with the minersrequired to return to Lesotho upon completion of their work contract.Because there exist only limited prospects for future growth in minework,alternative sources of employment growth in the domestic economy must befound. However, despite considerable growth in recent years, the domesticformal sector has in the past provided only a limited number of jobs,currently employing 13 percent of the domestic workforce. As a result ofthis and the limited potential for agricultural development, there nowexists open unemployment in urban areas in addition to the under-employmentevident in rural Lesotho.
3.2 Growth of Lesotho's economy and its ability to generateemployment has not been impeded by restrictions or other labor marketrigidities apart from minimum wages applicable in the formal sector. Amore serious constraint to growth is the lack of human capital, aggravatedby the exodus of those with specialized skills to the "homelands" of theRSA, where wages are higher. Unskilled labor, on the other hand, isabundant. Rapid labor force growth within Lesotho coupled with thediminishing opportunities for unskilled miners will make this situationworse over the next decade.
3.3 The challenge facing Lesotho is to create as much productiveemployment as possible through growth in the domestic economy. Becauseresources at the government's disposal will be restrained if not actuallydiminished over the coming years, Lesotho must rely heavily on privateinvestment as the source of growth and employment. Government's role is toencourage private investment by creating confidence through a stableeconomic and political framework, by providing necessary infrastructure,nnd establishing appropriate incentives. Lesotho must avoid policiesleading to structural rigidities, which would brake growth and employmentcreation, and must exploit the comparative advantages it does have, namelyits disciplined and easily trainable labor force and its location withpolitical access to export markets. Government can enhance the long-termemployment creation capability of its economy by preserving the openness ofits economy and refraining from using government controls to reducecompetition. Additional employment opportunities could be generated byencouraging the use of appropriate labor-intensive methods. Many importantpolicies in this respects are already in place. The following sectionanalyzes the labor market situation and sets forth some conclusions andoptions to be considered concerning how the employment creation capacity ofthe economy could be strengthened further.
I/ Number of actual Jobs is 118,000. The higher figure takes into accountmineworkers resting between contracts.
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3.4 Labor force growth. Population growth has accelerated from 2.3percent between 1966 and 1976 to 2.6 percent in the last ten years.According to the 1986 census Lesotho's total population stands at 1.58million, of which 52 percent are male and 48 percent female. Thepopulation aged 15-64, constituting the potential labor force, is estimatedat 832,000, or 54 percent of total population. Labor force participationrates are estimated by government to be 85.2 percent for males and 76.7percent for females, which translates into an actual labor force of 672,000in 1986. Over the coming years annual labor force growth will average2.8 percent, resulting in a labor force of 983,000 in the year 2000. Thisgrowth constitutes a major challenge for the employment creation capacityof the economy as it means that the net annual increases in the labor forcewill range between 20-25,000 people. (Detailed projections can be found inAnnex Table 3.1)
TABLE 3.1Net annual additions to the labor force, 1986 - 2000
Period 1986-1990 1990-1995 1995-2000
Number of labormarket entrants 20,500 20,200 25,600per year
Source: World Bank estimates
3.5 Structure of employment. In 1986, 40 percent of the male laborforce were employed in South Africa (59 percent of males aged 20-44, and 20percent of total labor force), mainly as migrant workers in gold and coalmines. In 1986, the modern sector employed only 65,000 people, or justover 9.5 percent of the total labor force. Government jobs, includingeducation and security, represented 48 percent of total modern sectoremployment. The other important employers were wholesale trade (19percent), manufacturing (13 percent) and construction (10 percent). (Adetailed breakdown by subsectors is given in table 3.5.) In 1986 theresidual labor force for the agricultural and informal sector was 450,000,or 70 percent of total labor force. Assuming minework employment declinesof 2 percent per annum and formal sector increases of 3.7 percent, theresidual labor force will grow to 77 percent of total by 2000. Given thelimited capacity of the agricultural sector, this shows a worsening labormarket situation, and points to the urgent need to create an environmentmore conducive to employment creation.
3.6 Lesotho is best described as a two-tier labor market, withskilled labor in relatively short supply while unskilled labor isrelatively more abundant. The scarcity of skilled labor is partially dueto the proximity to the RSA. Attractive salaries and other incentives forskilled labor have induced many Basotho with specialized skills (e.g.,teachers) to accept jobs in the "homelands." While the possibility for
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temporary or permanent emigration presents profitable employmentopportunities for skilled Basotho, the limited supply of skilled laborwithin Lesotho is a significant bottleneck to expanding the absorptivecapacity of the domestic economy. Unskilled labor, on the other hand, ismore abundant, but it is difficult to determine actual employment inagriculture since there is no official breakdown of total employment bysector (including the formal and non-formal sectors) other than the 1976census. More recent estimates by researchers vary greatly, most likely dueto the fact that agriculture often is not the primary source of householdincome, but a secondary or supplemental source. Recent micro studies havefound that, on average, income from agricultural activities represents only7 to 17 percent of total household income in rural areas (though thesepercentages increase markedly as income levels decline or if the householdis headed by a female). A reasonable estimate of employment in agricultureis around 180,000 full-time job equivalents in 1986. The Ministry of Laborand Manpower Development estimates informal sector employment at 6 percentof the economically active population, equivalent to about 50,000 jobs.The gap between these numbers which total approximately 230,000 and the450,000 residual labor force indicate in rough terms the extent ofunderutilization of the existing labor even before the challenge of newentrants is confronted. That 2 out of every 3 of this "residual" are womenilluminates both the nature and difficulty of the problem but may alsopoint to more effective strategies than have yet been devised.
3.7 Employment Opportunities in South Africa. After peaking in 1977,the number of migrant Basotho miners employed in RSA mines has declined atan annual rate of 1.3 percent, reaching 116,000 in 1985. However, theyear-to-year movement in employment has been rather erratic, and figuresfor the first half of 1986 showed a rise in employment over the previousyear of 147 percent. The fall in overall mine employment since 1977 hasmainly been the result of shrinking employment in coal mines, where thenumber of Basotho miners declined from 33,600 in 1977 to 15,400 in 1985.This is largely due to increased mechanization of these mines. Employmentin gold mines, on the other hand, has actually increased from 95,300 in1977 to 106,400 in 1986 (see Table 3.2). It should also be noted that theabove figures understate the total number of Basotho who can be classifiedas mineworkers. Until recently mineworkers have had contracts lasting anaverage 14.8 months, after which a rest period of 2.35 months was taken,with the rest period not covered by the contract. Therefore, the actualnumber of people who can be considered employed by the mines is 16 percenthigher than shown in the official contract statistics. Beginning in late1986, the maximum contract length has been limited to 12 months. Alongwith the increased gold mine employment this has contributed to increasednumbers of recruits (Table 3.2).
3.8 Despite the fall in RSA mine employment for Basotho workers beingmuch less pronounced during the 1980s than had been feared and actualgrowth of gold mine employment over the last two years, there is reason tobelieve that in the future Basotho migrants will not take part in anygeneral growth in employment in RSA mines. Between 1970 and 1983 employ-ment in RSA mines rose by 20 percent, while the share of RSA citizens inthe total mine workforce rose from 24 percent to 60 percent. The Basotho
share rose marginally from 17.7 percent to 21.3 percent, due mainly to thevirtual total withdrawal of Mozambican and Malawian migrant labor from theRSA (see Table 3.3). Basotho migrant workers will most likely not share inmine employment increases in the future because a combination of highlabor force growth and slow economic growth in South Africa will result inincreasing competition with South African labor. In recent years thesocial pressure to increase real wages paid to black labor has already ledto increased competition from South African labor. In addition,mechanization in coal mines will continue, limiting growth opportunitiesthere and making a further fall In coal mine employment likely.
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TABLE 3.2Migrant Mine Labor Statistics by Year 1975 - 1985
Year Number of Of which in Number Of which inEmployees gold mines Recruited gold mines
Source: Bureau of Statistics, Annual Statistical Bulletin 1984and TEBA. Number of employees are averages of monthly figures (000)Payment figures in million Maloti.
TABLE 3.3Mine Employment in South Africa (Chamber of Mines)
Lesotho Migrant Mine Workers
1970 1983
Total Employmentin CoM Mines 401.2 (100%) 482.4 (100%)- of which
Basotho 71.1 (17.7%) 102.8 (21.3%)- of which
RSA 96.9 (24.2%) 289.5 (60.0%)
Source: Fion de Vletter, Recent Trends and Prospects of Black Migrationto South Africa, ILO, International Migration for EmploymentWorking Paper, January 1985.
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3.9 While the political threat exists, a massive repatriation ofminers does not seem likely in the near future. Basotho workers might,however, voluntarily give up jobs if increasing violence at mine sites isdirected toward Basotho, but this also would not be in the interests of themine companies. Especially in the gold mines, where 87 percent of Basothominers are employed, the mine companies' investment in human capital isconsiderable. Every novice mineworker undergoes three months of training,and it is estimated that he attains full productivity only after 2 to 3years. These learning costs have induced the mines to pay more attentionto retention of employees and to cut their intake of novices, which fellfrom 11 percent of total labor hired in 1975-80, to 5 percent during1980-85 (see Table 3.4). While the argument that mines prefer to diversifytheir workforce regionally is seldom voiced today, this is another benefitto employing Basotho workers. The threat of contract non-renewal acts asan effective break on political activities of Basotho mineworkers in SouthAfrica. Nevertheless, in the medium term, when the present generation ofBasotho career miners retire in the 1990s, it can be expected that theywill gradually be replaced by South Africans. Employment opportunities inRSA mines for Basotho, are, therefore, expected to shrink signiticantly,especially in the '90s. Since miners' remittances constitute more thanhalf of Lesotho's GNP, this will have considerable repercussions onnational income, and, with it, Lesotho's capacity to sustain the currentlevel of imports.
TABLE 3.4Lesotho - Novice Basotho Gold Miners, 1975 -1985Annual Number and as Percentage of Total Recruits
3.10 Due to the porous borders between Lesotho and South Africa,non-mine migrant employment of Basotho in South Africa is difficult tomeasure. According to the 1986 census, 18,000 Basotho work as non-minemigrant workers in RSA. However, other estimates vary widely between20,000 and 40,000. These workers have found employment as domestics and inagriculture. Higher-skilled workers have obtained employment in the'homelands' in industry, as teachers and in various services.
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3.11 Formal Sector Employment. The wage sector in Lesotho is rapidlygrowing, albeit from a small base. In 1985 it employed 65,000 people or12.6 percent of the domestic labor force, while contributing a considerable80 percent of GDP. Important subsectors were government, wholesale trade,manufacturing and construction. Growth between 1980 and 1985 averaged 9percent per annum, due mainly to strong growth in manufacturing, whereemployment increased from 3,910 in 1980 to 8,380 in 1985 at an annual rateof 16 percent. At the same time the contribution of the manufacturingsubsector to GDP rose from about 5 percent at the beginning of the decadeto an estimated 8 percent in 1985, with especially strong growth in 1984and 1985. Much of this growth came from export-oriented enterprises, whichincreased their share of value-added in manufacturing from 8.2 percent in1983 to 20 percent in 1985. While contributing to employment, their valueadded per unit is small reflecting the high import content characteristicof Lesotho's formal sector. Important also to overall employment growth inthe formal sector was the rise in government employment on a daily orweekly basis outside the establishment, which is put by governmentofficials at 7,000 (see Table 3.5). Given the difficult budgetary
Sces: N!tlmu Mlpmr 1me1opint Sevey projectios for 1985 x the besisof 1980 data;Wbrld Uwk estimates.
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situation ahead, further expansion of government employment is not afeasible option to respond to the employment creation challenge during thenext years. Lesotho must look for growth and employment in the privatesector, especially in industry and services.
GRAPH 3.2
Structure of Labor ForceProjections 1986-2000
700 -
600
a400 -
0
200-
100 -
01986 1990 1995 2000
Residual = Formal Sector M RSA employment
3.12 Industry. Lesotho's industrial base is very small, representingabout 8 percent of GNP in 1985 and accounting for approximately 8,700 ofthe 65,000 jobs in the domestic formal sector. Mirroring the level ofeconomic activity in the RSA, industrial growth was generally sluggish overthe early 1980s. In 1984, investment and production activity picked up
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substantially, a result of RSA firms looking to invest. Industrial growthfrom 1980-86 averaged 15 percent per annum. On average, approximately400-500 jobs per year have been added to the industrial sectorestablishment during the 1980s.
3.13 Industrial development and creation of more job opportunities inthis sector will continue to be a slow process of developing an indigenousentrepreneurial base, improving access to credit for indigenousenterprises, and attracting foreign investment capital. Each of theseelements will require institutional support and policy guidance from thegovernment. In addition the government must make clear through publicpronouncement and administrative action that, as the draft 4th Five YearPlan states, exports must become an integral part of its industrialdevelopment. These will either be based on domestic inputs such as wool,mohair, meat or horticultural crops, or will consist of assembly operationsusing intermediate inputs produced elsewhere (primarily in South Africa).Exports would for the most part be directed to the South African market,but there is also some potential for exports directed outside the regionalmarket.
3.14 The driving force behind industrial development in Lesotho willbe private sector investment, resulting mainly from direct foreigninvestment. Because of Lesotho's financial position, the governmentcan never expect to match the industrial incentives currently offered inthe 'homelands' of. the RSA. The government should, however, periodicallyanalyze whether the resources it puts into its incentive package areemployed in the most efficient way, or whether changes seem warranted inview of a changing environment. Notwithstanding Lesotho's smallerincentive package, the country does offer investors a relatively low-cost,productive and reliable labor force, and a location with political accessto export markets. Given the current regional situation, the latter is ofspecial interest to South African firms trying to protect their exportmarkets. While Lesotho cannot allow its situation to be exploited forrelabeling, genuine opportunities for local manufacturing should be pursuedeven if there is a risk that firms may move again in the future (e.g.relatively mobile firms such as clothing manufactures), and even if thesefirms do not necessarily plan to reinvest all their profits in Lesotho.Rather than view such investors unfavorably, Lesotho should take advantageof the employment creation, provision of valuable training for theworkforce, and the contribution of value added to the economy. Lesothoshould, therefore, continue to direct its major promotional efforts forinvestment and trade towards the RSA. Limited opportunities do exist forattracting investment from outside Africa; however, given the lack ofmarket knowledge and experience and the physical distances involved, highreturns to 'outside' promotional efforts should not be expected unlessintensive follow-up efforts are put into place. Otherwise the costs to thepromotional efforts will far outweigh possible gains.
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3.15 While the government of Lesotho cannot afford to offer generouscash Incentives to induce firms to locate in Lesotho, cash incentives likethe ones offered in the 'homelands" are only one of several criteriapotential in:estors take into account in deciding on location. At least asimportant as financial incentives are social and physical infrastructure(e.g., communications), an effective developmental administrative and legalsystem, and a stable economic and political framework. Communicationswithin Lesotho and to other countries have Improved considerably over thelast years. However, not all firms are already connected to the new lines,and repairs often take too long for effective business dealings. Thegovernment needs to explore seriously, as well, the possibility of settingup an industrial area near the new airport as a way of making use of thesetransportation facilities. The administration of the incentives systemcould also be improved. The Lesotho government offers investors a taxholiday or generous tax allowances, training grants, and cheap loans.Presently, these incentives are administered slowly, and the rules are farfrom clear to potential investors. The present system of bargaining overindividual cases is time-consuming and makes it difficult for investors toassess ex ante the benefits and support they will receive. This systemshould, therefore, be replaced by clear-cut "if-then" rules which wouldmake the incentives system much more transparent. In this context it isimportant for the Lesotho government not to use the manufacturing licensingsystem as a selective device through which only 'appropriate' investmentsare allowed. Experience in other countries has shown that investment isless likely to take place at its full potential as more bureaucraticimpediments are put Into place. To exploit best Lesotho's potential,reliance on foreign entrepreneurs Is Inevitable, in view of the scarceindigenous managerial resources. Granting work, permits to foreigners,therefore, should be a smooth and straightforward process. Finally,Lesotho should set clear priorities for foreign private investment,indicating the sectors in which foreign investors are particularly sought,and the sectors, if any, or the manner in which Basotho investors wouldreceive preferential treatment. Although these are all admittedly smallsteps towards providing an intelligible and stable framework conducive toinvestment, their aggregate importance should not be underestimated.
3.16 Lesotho National Development Corporation. Medium-sizedmanufacturing enterprises will continue to be brought to Lesotho mainlythrough the auspices of the Lesotho National Development Corporation(LNDC). LNDC was established in 1967 to promote medium- and large-scaleinvestment in Lesotho, and to support the development of industry. To thisend, LNDC provides the government's incentive package, and offersindustrial sites for rent in Maseru, Thetsane and Maputsoe. Employmentcreation in industry under the present institutional arrangement is largelydependent upon LNDC's performance. According to the draft 4th DevelopmentPlan LNDC aims to create 1,128 jobs per year over the plan period. Thisgoal seems rather ambitious in light of past performance. While LNDCapproved projects leading to 1,126 jobs per year over the past five yearperiod, the actual yearly employment creation per year, after taking intoaccount cancellations, and liquidations and expansions of already existingenterprises, was 339. These figures suggest that alternative projections(Table 3.6) are more in line with past experience.
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-,.,
TABLE 3.6Employment Generation Projections for.LNDC and BEDCO
- Employment generation potentialestimated on basis of past 5 years(improvement assumed): 316 504 643 1463
Target figures for employment generation LNDC and BEDCO: 19152Projected actual employment generation potentials 9095
Source: Draft 4th Development Plan, and World Bank estimates.own estimates, based on improving employment generation capabilityof both LNDC and BEDCO at 5X p.a.
3.17 LNDC's potential could be improved by creating an investmentpromotion function within either LNDC or government. The best alternativewould be to create a promotion unit which could establish tie-ups withconsulting and market research firms and thus be better placed to identifytarget markets and firms for investment in Lesotho. While the main focusof these promotional activities would be the RSA,p!the unit could also makeoverseas contacts and thereby facilitate diversification of foreigninvestment in the country. AMother option would be to assign this functionto the existing organizational structure of LNDC or government, essentiallyplacing greater emphasis on this activity within existing structures,though this might tend to diffuse attention given to this matter. In thefuture, LNDC should concentrate on attracting new firms, recognizing thatsome will fail. Spoon-feeding non-profitable firms, while perhaps savingemployment in the short run, would tend to deter efficient industrialgrowth in the longer term. Finally, all efforts to attract foreigninvestment should not necessarily be channelled through LNDC. For example,some firms may wish to invest in Lesotho without dealing with LNDC.Procedures should thus allow foreign enterprises direct access to land inurban areas as well as to all other required services and government tax
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and other incentives. These measures would contribute to strengtheningLNDC's employment creation capacity, while at the same time addingflexibility with regard to foreign investment, and would thus enhanceLesotho's capability to create as much employment as possible over the nextdecade.
3.18 Cooperatives. To expand production and improve quality in thehandicrafts and agriculture sector, the draft 4th Development Plan proposesto build upon and strengthen the cooperative movement. This strategy isnot without problems. In agriculture, cooperatives often need considerableadministrative support from the Ministry of Agriculture; in thehandicrafts sector, there is one increasingly successful, but smallcooperative (LEHICU), while Lesotho Handspun Mohair, a bigger cooperative,is almost bankrupt. Before committing many resources to cooperatives, thegovernment may wish to analyze the factors responsible for failure andsuccess of different ventures in order to gain a better overview of whatcan or cannot be achieved by cooperatives. According to a recent UNDPstudy, one lesson seems clear: cooperatives tend to work best when theybenefit the individual directly and quickly (as in bulk buying andmarketing). d
3.19 Support for Small-Scale Enterprises. Presently domestic savingsare not adequately utilized within the domestic economy. Rather domesticsavings have contributed to the build-up of net foreign assets to theextent that these funds are transferred as short-term capital toinstitutions in the RSA. This is partly a result of limitedentrepreneurial experience in the economy and partly a result of the factthat the banks in Maseru are not particularly geared towards assessing andtaking risks in lending to business enterprises. If firms could easilyborrow from RSA banks, there would not be much reason for concern.However, only firms with RSA parents can borrow funds in the RSA. Thisleads to a distortion in the allocation of credit, which tends to be moreeasily accessible for firms with RSA ties, while Basotho-owned enterprisesfind it difficult to obtain credit. Lesotho government policy should bedirected toward spurring better utilization of domestic resources fordomestic investment. This should contribute to building up small scalemanufacturing and service enterprises, where much of Lesotho's industrialprospects lie.
3.20 To achieve this the possibility of the Basotho EnterpriseDevelopment Corporation (BEDCO) collaborating with the Bank of Lesotho andother commercial banks should be explored. BEDCO was created in 1975 topromote small-scale Basotho-owned business enterprises through theprovision of credit facilities and extension services. In addition toproviding small business management with counseling, training andinformation assistance, it also makes available low cost rental space intwo estates in Maseru and Mohale's Hoek, helps with the supply of rawmaterials, and rents various types of machinery. According to the draft4th Development Plan, BEDCO will assist in the creation of 240 jobs peryear over the plan period. This seems to be, as in the case of LNDC, arather ambitious goal when measured against past performance. BEDCO doesnot publish net employment creation figures; an estimate of 65 net
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additional jobs per year created over the last five years appearsreasonable. Thus, it is more realistic to expect BEDCO to create about 400new jobs over the plan period than the 1,200 envisaged in the plan. (Fordetailed projections see Table 3.6.)
3.21 During the coming years, BEDCO will continue to face the limitedresource picture that has characterized the last couple of years. Duringthis time, BEDCO's performance has improved markedly, mainly due to aneffective monitoring system that has led to improved repayments. Ratherthan seeing limited resources as a constraint on its activities andcapacities, it can be viewed as an opportunity to develop BEDCO into anefficient instrument for the better utilization of domestic resources forinvestment. Its lending operations could be replaced or supplemented by alimited loan guarantee scheme, thereby reducing commercial banks' risks andcosts of extending and administering credit to small scale enterprises.Monitoring costs would be reduced by utilizing commercial banks'comparative advantage in monitoring cash-flow through firms' bankingaccounts. BEDCO could redirect its activities toward identification ofentrepreneurial abilities and interests, training and counseling, start-uptechnical support, and supervision. The mechanics of such a scheme wouldhave to be explored through a more in-depth analysis of prospects and thenecessary institutional and funding arrangements. Over the medium tolonger term government should ensure that once expertise is built up riskswould be increasingly taken by those financing the activities.
3.22 There is scope, too, for improving cost effectiveness in trainingand counseling activities. At present, such services are provided free ofcharge, contributing to BEDCO's operating loss, which has to be covered bygovernment subsidies. Charging at least a token fee would begin torationalize demand for these services by providing valuable feedback aboutthe preferences of the customers, and thus permit a more effectivestructuring of the supply of services BEDCO is offering. To improvecommunications with and understanding of small businessmen, an internshipin a small business for BEDCO staff, who are recruited directly fromuniversity, would be helpful. Apart from efforts to strengthen BEDOO'spotential, other policy action could also be taken to support domesticindustry and especially SSEs. The establishment of reasonable procurementgoals for government agencies from domestic suppliers could provebeneficial to the extent it would encourage greater concern for procurementof locally manufactured items, though the government should not establishspecific requirements as this would impose unwarranted inefficiencies ongovernment procurement.
3.23 Informal Sector Employment and Services. Only very few data areavailable on the informal sector. This makes it difficult to assess andevaluate the present situation and to identify policy options. TheMinistry of Labor and Manpower Development estimates the informal sector at6 percent of total labor force, which translates into 50,000 jobs in 1986.However, recent microstudies suggest that this figure may underestimate theimportance of this sector, since many off-farm rural activities arepart-time and sporadic in nature, serve often to supplement agricultureand, therefore, may not be considered separately from employment in
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agriculture. Estimates on the basis of the Institute of Southern AfricanStudies (1984) report on rural non-farm employment show 50,500 personsengaged in non-farm rural employment as their principal source of income,and 140,400 as their subsidiary source of income. This means that 28percent of the total labor force are engaged In some kind of non-farm ruralactivities, not counting informal sector employment in urban areas.
3.24 The above figures highlight the importance of the informal sectorwith respect to employment. The sector's contribution to household incomeis illustrated by Table 3.7. If the ISAS flgures can be generalized,
TABLE 3.7Households' Main and Subsidiary Sources of Subsistence
Agri- Migrant Wages Local non-farmculture Labor RSA Lesotho employment
Z of households with1 or more membersreporting given 61.3 42.1 18.2 14.8principal sourceof subsistence
% of households with1 or more membersreporting given 35.7 6.1 3.7 42.8subsidiary sourceof subsistence
Source: M.P. Senaoana, S.D. Turner, and G.J. van Apelldorn, ISAS ResearchReport No.6, 1984 (Research on rural non-farm employment inLesotho: Results of a baseline study)
57.6 percent of the rural households consider non-farm rural employment ascontributing to their subsistence. This is all the more important sincemuch of the income generated in the informal sector sustains the very poor,least advantaged segments of society, including female-headed households.In the rural areas, 63 percent of the activities can be consideredprocessing of natural resources (e.g., brewing, grass weaving, woodwork,malt production, pottery). Knitting and sewing make up 14 percent, and 15percent is construction (e.g., quarrying, block making, building, roofing),the rest being rural services (e.g., shoe and metal repairs, cafes,traditional healing).
3.25 While the importance of the informal sector with respect toemployment and subsidiary Income generation can hardly be overemphasized,growth prospects in the rural areas are not very bright. Most enterprisesare characterized by low turn-over and low profitability, and seem barelycapable of sustaining the people involved. Most involve just one person,and growth comes more from the establishment of new enterprises than from
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expansion of existing ones. Since a large part of the demand for outputfrom this sector derives from workers' remittances, the stagnation ordecline of these remittances will further dampe'n already dim growthprospects. In urban areas, dynatic small scale enterprises exist; theregrowth is hampered, however, by limited access to credit, which in turn mayat least partly reflect the poor training of t'e entrepreneurs, of whichbetween 50 and 60 percent can neither read English nor keep accounts.Growth prospects seem best In modern sector activities, requiring modesttechnical and management skills, as in small-scale construction andpersonal services, retailing, and transport. Manufacturing is likely to belimited to simple products which can be produced very cheaply albeit oflower quality or non-standardized, custom-made products geared to specialniches in the market.
3.26 Experience suggests that such activities should be pulled bydemand, with the government in a facilitative rather than active role.Most important is a set of simple, unambiguous and stable regulations onthe establishment and operation of these types of enterprises. While theprovision of a transparent policy framework which leaves ample room forprivate initiative would be the strongest support for this sector, thereare other limited and inexpensive actions the government can take to helpthe development of this sector. An example of such an action would be thetranslation of the Improve-Your-Business (IYB) Manual into Sesotho, in viewof the limited English profliency of many potential entrepreneurs.Another direction to be pursued is the better linkage of training andcredit. BEDCO for example could provide classes based on the IYB-manual,(possibly in cooperation with the Lesotho Bank and/or other commercialbanks) leading to enhanced access to credit for those who successfullycomplete such training.
3.27 Employment in Public Works. More extensive use oflabor-intensive methods for the building of physical infrastructure inLesotho deserves serious consideration given the needs of the country andthe large supply of unskilled labor. However, it has to be recognized thatlabor-intensive methods are sometimes slower, especially if work is onlydone in the off-season. Also, the organizational problems of large-scalepublic works are formidable especially as labor-intensive works must beable to meet efficiency criteria. The promotion of labor-intensive methodstherefore needs adequate institutional support. The government of Lesothohas recognized this need, and established a Labor Construction Unit (LCU)within the Ministry of Works in 1977 to advance .the use of labor-intensivetechnology. Currently the LCU has about 150 staff at or above thetechnical assistant level with experience in labor intensive techniques,and can provide work for 5-6000 people. Generally, LCU is credited withrunning its operations efficiently and cost-effectively, comparing well toalternative capital-intensive techniques. The scale of employmentprovided, though, has not met expectations. This is partly due to thelevel of financial resources available and the lack of supervisors.Institutional arrangements play an important role, as well. LCU'spossibilities to attract and to retain qualified supervisors have beenlimited, and access to funds has been restricted mainly to donor-financedprojects.
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3.28 To support ongoing efforts by the LCU, it is neceesary to offermanagerial and technical staff career opportunities more comparable tothose they could expect in government or parastatals. One step could be tobring a number of the daily and weekly paid staff into the establishment sothat LCU could compete more successfully for good engineers andtechnicians who are currently inclined to accept LCU employment as a lastresort. Progress in ensuring retention of experienced personnel would be amajor boost to the further development of LCU. After having been run by anexpatriate consulting firm for almost ten years, the transfer ofadministrative and managerial skills has advanced to a stage wherelocalization of senior management should be possible in the near future.Whatever institutional arrangements result as a consequence oflocalization, care should be taken to maintain the independence andprofessionalism that distinguish LCU's operations from many other ruralworks employment generation schemes. At present the use of labor-intensivemethods is confined to LCU and food-for-work programs, contributing to lowprestige of labor-intensive work, and giving no impetus for privateentrepreneurs to consider using some of the methods employed by LCU. Tospread the use of labor-intensive methods, it could prove very helpful ifLCU were allowed to subcontract in the private sector, not only as a meansof generating greater employment, but also as an example of theprofitability of labor-intensive methods.
3.29 Many infrastructure projects by the Ministries of Agriculture andRural Development are financed by the World Food Program (WFP) and theCatholic Relief Services (CRS). WPP currently employs about 5,500 workers,mainly in roads (3,100), village woodlots (900) and the remaining workerson soil conservation and footbridge construction; CRS about 3,850, ofwhich 1,850 in road construction and 2,000 in soil conservation. Theworkers employed in these programs are much less productive than thoseworking for LCU. This is due to less technical and managerial know-how,but also to payment in food, which attracts mainly women (85-90 percent oftotal workers) and the elderly. Expansion of these programs is not onlyhindered by the lack of supervisory staff, but also by lack of enthusiasmon the part of the villagers, who are more interested in cash, with whichthey can buy consumer goods or pay school fees, than in food. The CRSrecently has begun to pay 50 percent in food, and the other 50 percent inagricultural inputs. In the predominantly cash economy of Lesotho,food-for-work programs have major difficulties in creating gainfulemployment, and may better be viewed as safety-net welfare programs. Theimportance of these for income supplementation during off-periods shouldnot be underestimated, however. Major expansion of these programs, even iffunds were available (WFP currently is not able to spend the allocatedresources), seem hardly feasible, due to lack of supervisory staff and theconsiderable amount of resources used to administer the distribution offood. In any event, as safety-net measures these programs should beself-limiting, and they do not offer employment opportunities which couldbe sustained without external help.
3.30 Wages and Skills. To a considerable extent wages in Lesotho aredetermined by market forces, both locally and in the broader South Africancontext. While there is no official wages policy, the governmentinfluences wages at the lower end of the scale through minimum wages set by
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categories of work, and through the salary structure of its ownadministration, which accounts for almost half the employment in the modernsector. The minimum wage for unskilled labor was Maloti 85 per month in1986. It was last raised in October 1984 and has since eroded by 24percent due to inflation. A considerable excess supply of unskilled laboris demonstrated, for example, by the long queues at the gates of LNDCcompanies, and by substantially lower wages for comparable skills in theinformal sector. In order to exploit its comparative advantage of a cheap,productive and trainable workforce, the government should continue to letminimum wages reflect market conditions, i.e. the government shouldcontinue to let the real level of minimum wages fall. The argument formaintaining relatively high minimum wage levels loses much of its forceonce it is realized tha at present minimum wages benefit only a smallminority of the workforce, and may discourage the use of unskilled labor inthe private formal sector. The degree of unionization in Lesotho is high(70 to 80 percent in LNDC companies); however, the unions serve more toimprove communication between workers and management than to advance claimsfor higher wages. This too is an appropriate accommodation to the realitiesof the labor market in Lesotho and should facilitate continued privateinvestment in labor-intensive activities.
TAKE 3.8Bottr to Labor in Vaioues plot Opportnities
-sotho LNC (npaLies Lsotho DC Parastatals iLsothl o Ral RS& al
Strtig Cleaner 134 tsddlled Average wa Starting WeSalary 85 Book- labor 150-200 for rural surface min 313Dpwienced keeper 399 wokar 50 Starting vageworker 13D Project unserground mln 341Lim &ipr- Officer 1061 Tecliician 1070visor 180 Average mineForsman 450 IlcCe 570
Source: ULNC compenies bad on emll smple by mission and information fr*m IlC. AU figures motbly,in Mbloti, for 1986. Figure for RSA fram TOE Lesoto rural: CPS. a includes in kind payent(e.g., housing, food mEdical care etc.) of an liptAd value of Mloti 120.
3.31 Wage differentials between sectors are pronounced, as isevidenced by Table 3.8. On average, an unskilled Masotho can gain M 50 amonth as a rural worker; he can double his income by working in the formalsector, and gain seven times more when working in an underground mine in
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RSA. Employment opportunities in higher paid occupations are few, however,and the intake of novices in the mines, which provide the highest payingand most sought after jobs for unskilled workers, has sharply declined;nevertheless, the differentials explain easily why many Basotho are willingto incur substantial 'queuing" costs, measured in time and income foregone,in job search for higher paying jobs. This wage structure appearsconsistent with the two-tier labor market and its implication ofsignificant shortages of skilled workers, especially those with supervisoryexperience or demonstrated capability. This split in the labor marketsuggests a wage strategy which aims at wage restraint for unskilled laborso as to encourage labor-intensity, while stopping the exodus of skilledlabor to the "homelands" by offering them competitive wages, especially inthe public sector. In view of anticipated budget constraints, thisstrategy implies a reduction in the number of low-skill, daily paidgovernment employees, particularly those outside the establishment, inorder to accommodate the higher salaries necessary to attract and retainskilled, experienced staff.
3.32 The wage differentials provide adequate incentives for privateinvestment decisions in education, as is demonstrated by the fact that theinstitutions which provide vocational training are not able to satisfy thedemand for their training. Supervisory skills, however, which are amongthe scarcest, cannot be learned in training institutions, but have to beacquired within firms. These, in turn, often find training difficult, dueto inadequate basic skills and poor preparation of workers, despite anofficial adult literacy rate of 59 percent, the second highest in Africa.This suggests that the government should emphasize the basic skills in theformal education system, while encouraging training in specific skills byfirms through grants, as is done in the case of LNDC companies. In thesecompanies, most of the training already is on-the-job, and represents anefficient way of developing more skilled workers for the Lesotho economy.
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IV. 4griculture Development
4.1 Introduction. The primary objectives for agricultural policyover the coming years need to be preservation of the resource (land) baseand raising agricultural productivity. These are important for a number ofreasons. With growing but still limited prospects in industrial andsmaller-scale manufacturing and service activities, it seems inevitablethat most new additions to the labor force over the coming years will haveto be absorbed by agriculture and rural Lesotho. In addition, greateragricultural production from activities where Lesotho has a comparativeadvantage would provide a greater proportion of consumption from domesticproduction while simultaneously lowering the country s net importrequirements for food. Halting ongoing soil erosion and degradation of theland is essential to enable productive use of the land in future years.
4.2 The sector's ability, however, to achieve these goals isseriously hampered by the numerous constraints which have long impededagricultural development and diversification in this country and which inrecent years have resulted in falling production. These constraintsInclude (i) a small arable land base currently fully utilized, where only12 percent of the total land area of the country is cultivable; (ii)degradation and erosion of arable and range lands caused in part by theprevailing system of land tenure which encourages overgrazing by livestock;(iii) the existence of alternative employment opportunities in the mines ofSouth Africa which provide a. higher return to labor; (iv) severe climaticconditions including the high risk of drought; and kv) encroachment byurban areas onto the best agricultural lands. Alleviating theseconstraints must form the basis for agricuttural policy over the comingyears.
4.3 Background. In terms of total domestic output, agriculture inLesotho is a relatively small, and in recent years declining, economicsector. Over the past decade agricultural output has fallen significantly,primarily reflecting poor production performance of the major foodgraincrops. In 1986 agriculture accounted for 21 percent of GDP, down from 26percent in 1980 and from 33 percent in 1975. The overall index of foodproduction in Lesotho (encompassing the five major food crops: maize,sorghum, wheat, beans and peas) shows that from 1973174 to 1985/86,production of these crops declined on average by just under 5 percent perannum (Table 4.1). Most of this fall is attributable to reductions inyields, which have fallen by about 4 percent per annum. Yield declines canbe partially explained by the drought during the 1980s, but yields hadalready begun to fall from their peaks in the mid-1970s, most likelyreflecting the large increases in mine employment and wages beginning atthat time. There seems to be somewhat of a declining trend in areaplanted, though the data are not statistically significant; there are,bowever, identifiable areas where land has been taken out of production forsettlement purposes. With low, but appropriately timed rainfall, cropproduction in 1984/85 was significantly better than at any time since1980. In 1985/86 production fell once again to the approximate levels ofthe early 1980s. During these years domestic production as a percent of
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total consumption requirements has averaged 44 percent for maize, 22percent for wheat and 95 percent for sorghum. Over the same period, valueadded from livestock activities has remained fairly stable or actuallyrisen marginally as sales of wool and mohair have increased. Whereas inthe late 1970s livestock and arable production contributea equally to totalagricultural value added, livestock now represents almost three-quarters ofagricultural output.
13 year average 100.0 100.0 100.0 100.0 100.0 100.0Average of last 5 years 85.8 71.7 46.8 40.5 69.4 73.5
4.4 Despite the declining contribution to total domestic product, theagriculture sector continues to provide at least part-time employmentopportunities and contribute partially to income of between 60 and 70percent of Lesotho's tocal labor force, either through crop production orlivestock-holding. Currently 55 percent of all households in Lesotho ownlivestock. Among these livestock owners, the distribution is furtherskewed, with holdings concentrated among the more wealthy traditionalauthorities, businessmen and senior officials. On average only 17 percentof total household income in rural areas is derived from agriculture andlivestock, with miners remittances accounting for much of the remainder.However, those families for whom agriculture constitutes the major sourceof income are among Lesotho's poorest. Indeed while many families may relyon outside remittances to finance major periodic expenses such as schoolfees, agricultural productivity will have a major impact on day-to-dayliving standards. This gives added impetus to measures which improve theprospects for more rapid growth of crop production and sectorproductivity.
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4.5 Land Management Issues. Without greater eftorts to control soilerosion and reduce degradation of the land and vegetative cover Lesotho isin danger of permanently losing productive use of increasing amounts of itsrange and arable lands. This process has already'begun in many areas ofthe country. For example, throughout the mountains loss of grass or othervegetative cover has left only unpalatable species of shrubs or bare rock,and erosion in the southern lowlands, particularly, has resulted in thelarge donga (gully) formations. Overgrazing of the land contributesgreatly to this process. Currently there are approximately 1 millionstandard livestock units in Lesotho.l In 1983/84 this represented 0.5million cattle (SLU weight 0.8); 1.3 million sheep (0.2); 0.8 million goats(0.2); 0.1 million horses (0.7); and 0.1 million donkeys (0.5). Whilecarrying capacity and overstocking rates vary wideiy among regions withinthe country, recent studies by government have determined that on averageLesotho is overstocked by approximately 300 percent.
4.6 Traditional practice and current government policy, or the lackthereof, contribute to the overstocking problem, and without changes toboth, overstocking and the resultant erosion and degradation problems willremain. Researchers studying the livestock sector in Lesotho haveidentified a number of economic and sociological factors which help explainwhy Basotho hold cattle: e.g., as capital assets; draft power; for theirproducts; stores of wealth; prestige value; ceremonial slaughter;bride-price. Currently all Basotho have the right to graze their animalson communal rangelands (and on arable lands between growing seasons).Despite the existence of some legal and administrative measures, grazing islargely uncontrolled, with the result that social costs to owning andgrazing livestock (the resulting soil erosion and land degradation) aresubstantially greater than private costs. As research studies undertakenin Lesotho suggest, many Basotho do not see overgrazing and the consequentsoil erosion as problems affecting them individually or as problems whichthey can affect through individual actions. As a result, stockholders havetended to maximize their individual welfare with the result that morelivestock are held and grazed than the land can optimally handle. Recentresearch studies on livestock-holding in Lesotho have shown that thedivergence between private rates of return to holding stock and returns toother investments (e.g., savings in financial institutions) is at least 10percent per annum. Efforts to reduce overstocking and the resulting soilerosion - which will necessarily involve reducing numbers of livestock inthe country - will not be successful without (i) offering alternative meanswithin the livestock sector or in other sectors of producing returns whichapproach the returns to holding livestock and (ii) raising private costs toholding and grazing livestock.
4.7 The recently completed Agriculture Sector Review (1986) dealtwith soil conservation issues and recomended ways to reduce degradationthrough destocking and better land management practices. As it noted,enforcement of existing culling regulations and import restrictions areimportant factors which may help to limit livestock population growth.However, these measures will not be sufficient to reduce livestock numbersto levels consistent with actual carrying capacity. For significantreductions in total herd size to occur, individual livestock holders will
1/ A standard livestock unit is a common denominator fordifferently-weighted species of animals.
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need to perceive the costs associated with current grazing practices and beable to benefit from individual decisions to destock through improvedquality of the herd. Given the current land management system whichprecludes private control of land, Lesotho will need to move toward asystem which is acceptable to Basotho society. One option, which has beenadopted as government policy but toward which progress has only slowly beenmade, is the establishment of grazing associations covering all areas ofthe country. It is the intention of government that the experience of thegrazing association and management system in Sehlabe-Thebe be appliedelsewhere. To be successful the grazing associations would need membershipand cooperation of all local inhabitants and users of the land, would beresponsible for land management and grazing control within their definedboundaries and would have the necessary enforcement powers in terms ofculling, rotational grazing, and controlling trespassing. By not allowinglivestock to move from one grazing area to another, without agreement ofthe second grazing association, there would be more of a forced recognitionby livestock holders of the scarcity and high value of grazing land. Underthis system as well individuals would perceive the benefit of collectiveaction by the grazing associations to control grazing practices and limitnumbers of animals.
4.8 Commercialization. A complementary option available to Lesothowhich the government has begun to pursue is to encourage greater offtake ofthe livestock population and to promote livestock-holding as a commercialveature rather than primarily as a means of saving as at present. Thiswould offer livestock holders higher rates of return to compensate forhigher private costs associated with grazing control. This, however, is alonger term objective; the livestock sector in Lesotho is a long way fromfull commercialization. Cattle are generally in poor condition, a furtherconsequence of overgrazing. They are rarely sold for slaughter purposesbut are more often kept until their natural death and then slaughtered forhome consumption. The government estimates annual offtake of cattle to bein the range of 5 percent, of which 3 percent is for home consumption and 2percent marketed. In order to promote higher offtake and as a means ofdestocking the range, government has taken a number of needed steps to helpthe commercialization process. In late 1985 the government opened theabattoir and feedlot located near Maseru. These enterprises had been builtwith development assistance over the last few years but had stood unusedfor some time. To date most of the cattle held at the feedlot andslaughtered at the abattoir have been imported from the RSA. To increaseofftake from domestic sources, the abattoir is buying at government-sponsored auctions, and a growing number of cattle are now being boughtfrom Basotho. This practice should continue as potential sellers must beassured of a consistent market for their animals as a means of encouragingthem to view selling livestock as a commercial venture. In the short runthis may involve a degree of subsidization given that the abattoir willabsorb transportation costs from distant auction centers. In the longerrun the government and abattoir will need to reassess this practice. Theabattoir's price differentiation between grades of meat will also give thecorrect signals in terms of promoting higher quality offtake and should becontinued. Government should ensure that the price structure isdisseminated to rural livestock holders by government extension agents so
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that potential livestock sellers will come to understand the higher valueof higher quality stock. In addition, as a means of moving the sector morerapidly toward the objective of commercialisation, government shouldactively encourage competition in livestock marketing by both local and RSAtraders by ensuring that auction dates are announced far in advance andthat these are widely publicized.
4.9 Meat exports are a further means of promoting greatercommercialization of Lesotho's livestock sector. Government shouldencourage abattoir management to pursue marketing tie-ups towholesalers/retailers in the RSA. Even if in the short run mostanimals are imported from the RSA for slaughtering purposes, this wouldallow increases In the abattoir's capacity utilization (in August 1986 thefigure was approximately 25 percent) and would thus lower unit costs. Inthe longer run greater numbers of Lesotho stock could be used for thispurpose. The Lesotho government also needs to pursue the possibility ofgaining a quota for meat exports to the EEC under the Lome Convention.This possibility would most likely require a strengthened veterinarycapability and is thus an area for possible donor support.
4.10 Grazinx Fees. Government's efforts to date to reduce stockinglevels have primarily consisted of instituting "positive" incentives:increased access to marketing facilities to promote commercialization ofthe sector. To the extent that farmers will begin to sell more throughformal marketing channels as a means of culling unwanted animals, therewould be a net reduction in aggregate livestock numbers. However,increased access by Basotho livestock holders to marketing and abattoirfacilities, unless offset by other factors, could also increase theincentive to own cattle. This in turn would tend to increase further thestocking rates recognized by government as already being excessive. Thereis disagreement as to this conclusion, but even if this were not the case,given current policies and the positive economic reasons for owninglivestock, livestock numbers will not be reduced to carrying capacitysolely through these positive incentives. Given the over-riding importanceof reducing overgrazing and stemming the consequent soil erosion, theLesotho government must also consider measures to reduce the economicbenefit to holding cattle for other than commercial or draft powerpurposes. One option is for the government to institute a system ofgrazing fees which could be instituted through the grazing associations.The government has indicated that this is the policy direction it wishes topursue. This option is administratively superior to a livestock head taxbecause it would be compatible with "mafisa", the practice of loaningcattle to others to use and tend, which makes determination of ownershipgenerally impracticable. The grazing fee would be directed toward those inpossession of the cattle and could still be instituted in a progressivemanner to allow a minimum number of animals to be kept for draft purposesat a lesser cost. The actual mechanics of the grazing fees need to bedeveloped through further study. The primary objective of these fees wouldbe to impose a financial cost on livestock holders and thus to forcerecognition of the scarcity value of grazing land. These fees could alsobe used to recover the costs of providing veterinary and other livestockservices which do not lend themselves to direct user charges. However,
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until such time as the grazing fee is instituted, government should ensureevery effort is made to recover the costs of those livestock services thatcan be directly linked to users.
4.11 In the meantime, as well, the government needs to ensure thatlivestock trespass fines and impoundment fees remain set at levels whichstrengthen ongoing land management efforts. Until late-1986, these fineswere too low to act as a disincentive to trespassing activities, andimpoundment fees did not cover the costs incurred by the authorities.Recent changes have increased the fines and tees by five- to ten-fold.2
Government should ensure that the real levels of trespass fines are noteroded and that impoundment fees continue to cover associated costs. Inaddition, government should ensure that the financial return to investmentsother than cattle (e.g., savings rates) are at appropriate levels (are inline with comparable instruments in the RSA) and that rural residents haverelatively easy access to banking and savings facilities to encourage theiruse.
4.12 Arable agriculture. While in terms of value added cropproduction now contributes less to total income than livestock, most newemployment creation in agriculture in Lesotho will have to be accommodatedin the arable sub-sector. Estimates presented in Annex Table 3.1 show thatthe residual labor force available for work in the agricultural or informalsectors will grow from 450,000 in 1986 to 760,000 in 2000. Given the smalland eroding arable land base, which is currently fully utilized,government's efforts must be directed toward encouraging greater laborinput into agriculture and raising the productivity of existingagricultural lands. With limited budgetary resources, the government isnot in a position to provide employment directly or subsidize production toany great extent through the expenditure program. Rather the governmentmust promote private sector investment, labor-intensive employmentcreation, and increased production through an appropriate policy frameworkand provision of research, extension and other basic support services.
4.13 In addition to poor soils and severe climatic conditions,agricultural production in Lesotho is constrained by the existence of areservation wage phenomenon. Annual income from minework is substantiallyhigher than in most agricultural activities as currently undertaken (aratio of approximately 7:1), and minimum wages in the formal sector alsoexceed returns to agricultural labor. This creates a situation where maleworkers are generally unwilling to work at jobs in the agriculture orinformal sectors where the returns are much less than the workers wouldexpect to receive elsewhere. Over the medium to long run the phenomenonwith regard to mine work will become less important as relatively fewerworkers have access to mine income, lowering the "expected wage" forprospective workers. Government wage policy can assist this effort bycontinuing to allow the real level of minimum wages to decline and byrefraining from increasing significantly government wages for workers atthe lower end of the pay scale. Other urban sector subsidies should also
2/ The cattle trespass fine is now M 2.5 and the impoundment fee isM 1.0/day. Fines and fees for small stock are lower.
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be removed. Assuming that agricultural terms of trade will remain constantIn coming years, as they have in Lesotho and the RSA over the past decade,this should begin to increase the returns to agricultural labor relative toformal sector employment. For the present, however, the young male laborforce is either in South Africa or willing to wait for non-agriculturaljobs. This leaves full-time crop production (i) in the hands of a smallnumber of highly interested and productive farmers and (ii) in the care ofwomen, children and older men, who are generally less productive. Withproduction of foodgrain crops in Lesotho viewed as a high risk, low returnventure, other opportunities must be sought for Lesotho's agriculture.
4.14 One agricultural area offering higher potential is the productionof high value horticultural crops. Many Basotho already have familygardens which produce backyard crops requiring only part-time attention orrelatively small amounts of labor input, and while these should continue tobe encouraged, larger-scale commercial ventures provlding full-timeemployment opportunities are required. Research studies over a number ofyeats, as well as recent practical experience, have shown that Lesotho iscapable of producing greater quantities of more labor-intensive fruits andvegetables for domestic consumption as well as export purposes. Already anumber of crops (tomatoes, potatoes, onions, cabbages, peaches and otherfruits) are grown as cash crops and sold locally or in nearby Lesothotowns. There are also instances of a few Basotho entrepreneurs operatingvertically-integrated production/wholesale/retail ventures forhorticultural crops. These entrepreneurs have either contracted withlandholder farmers to buy their produce or have entered into informal landleasing arrangements under which the tradltional allottee of the landallows others to farm the land and in return receives an agreed-upon leasepayment. Under this system farming decisions and extension is undertakenby the entrepreneur, who then has a greater assurance of supply. In someinstances the traditional allottees also provide labor into the cultivationprocess. Given the labor intensity of this production process relative tofield crop production, additional employment opportunities are alsocreated. For example, 0.2 to 0.4 hectares of asparagus requires full-timeattention as compared to an average farm size for traditional crops of over2 hectares; returns to horticultural farmers from these activities can alsoapproach that of introductory wages in the mines.
4.15 To date government has wisely refrained from entering into directproduction and marketing activities but has primarily supported localproducers through policy measures. During harvest time for some of thesecrops (eg, cabbages) the Lesotho government has restricted imports as isallowed under SACU regulations. As a means of promoting greater productionof these crops, the Agriculture Sector Review recommended that governmentintensify its ongoing research into horticultural crop production, focushorticultural extension efforts on disseminating practical, technical andmarket information, and improve marketing information and services. As theLesotho market becomes more sophisticated and acquires marketing facilitiesfor grading of crops, government should promote marketing tie-ups withwholesalers in the RSA as an additional means of ensuring market outletsfor Lesotho's production. Particular attention needs to be paid toimproving collection of information on horticultural imports. This is
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required by the government in order to make informed decisions concerninghorticultural import controls and by producers who need this informationfor sound production decisions. In addition, with most of Lesotho'scurrently marketed production taking place in the lowlands, promotion ofhigh value crop production (e.g., lettuce, broccoli, cabbage) in thefoothills and higher valleys of the mountainous regions could result ingreater marketed surpluses of these crops. To the extent Basotho farmerscan take advantage of somewhat different growing seasons in these areas,studies have shown that Lesotho producers would have a price advantage andcould provide off-season produce to markets in the RSA and, perhaps,elsewhere. The government should thus direct increased attention to therequired research, extension and market information support required forthere activities, leaving other operations (e.g., marketing) to the privatesector which to date has operated fairly efficiently. Regulations shouldensure that government marketing agencies or enterprises, if they areestablished, compete in the market on an equal basis with private tradersor firms and receive no operating subsidy. Experience in other countries,particularly in Africa, has shown, contrary to intentions, that parastatalmonopoly marketing bodies have generally become significant obstacles toagricultural diversification and development.
4.16 In recent years government policy has been supportive of highvalue crop cultivation, particularly in the Maseru region. The BasothoCannery, a government-held corporation (through the Lesotho NationalDevelopment Corporation) has successfully entered the export market andestablished marketing tie-ups in the RSA and the Federal Republic ofGermany, particularly for the export of canned white asparagus, a cropwhich is well-suited for the Lesotho environment. This company alsooperates a vertically-integrated system: it contracts with allottees ofland previously under traditional crops to buy horticultural crops (whoprovide a maximum 0.2 hectares for this purpose), and provides inputsincluding extension and credit, creating additional employment as well.The company, which focusses its production efforts in and around the Maseruarea, is expanding its production by approximately 6 hectares each year.While this represents significant additions to the production base of thecompany and seems to be in line with existing managerial capacities, thereis great interest on the part of many farmers to devote land to additionalhorticultural crop production.
4.17 One option for consideration by the government would be acoordinated effort by LNDC and the ministries of Agriculture and Trade andIndustry, to attract investment, either domestic or foreign, in similaroperations outside the Maseru region. Interest in establishing such anoperation has been expressed occasionally by farmer/entrepreneurs in theRSA, but little has come of this possibly due to lack of coordination orseeming lack of interest on the part of the government. There are noobvious constraints in the German market for canned asparagus at present,and indeed officials of the Basotho Cannery feel any additional productioncould easily be marketed, but this investment decision would need to bemade after more careful market analysis. Current government policy,however, appears to be to wait until the Basotho Cannery can expand to thePeka or Leribe regions before promoting greater production of these crops
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in these areas. While this would entail practical difficulties (eg,transportation problems since freshly cut asparagus must reach cooling orcanning facilities quickly after being cut), the planned rate of expansionof the Basotho cannery will not allow such production to spread to theseareas for a number of years.
4.18 The limited quantity of arable land in Lesotho means that infuture years landlessness will become much more prevalent in rural areas ofthe country, and eventually holding of arable lands will be restricted to aminority of households. The high population growth rate has alreadyresulted in a marked increase in rural households without access toagricultural resources (Table 4.2). The number of rural households withrights to arable land has declined from 87 percent in 1970 to 75 percent in1986. The number of rural households without access to either land orlivestock has risen substantially over the same period, from 1 to 17percent. Farm land is currently allocated by traditiona: authorities underthe principle that every adult male should have equal access to the land.Under this land tenure system property rights are not owned and cannot betransferred; thus there is no formal land market. In the future, however,as the number of Basotho without access to land grows, the principle ofequal access cannot realistically apply. In addition, It will not beassured that those possessing or acquiring the rights to the land under thecurrent system will be the most productive users of the land. The questionis thus how to allocate farm land most efficiently and in a manner thatwould be acceptable to Basotho society.
TABLE 4.2Access to Agricultural Resources by Rural Households
(percent of total rural households)
HouseholdCategory 1970 1980 1986
With land and livestock 50 47 47With land, no livestock 37 32 28No land, with livestock 12 6 8No land, no livestock 1 15 17
Source: Bureau of Statistics, Agricultural OCnsus of 1970, 1980.Preliminary census data for 1986.
4.19 In effect, the existence of the informal leasing arrangements,for land under horticultural crops (para. 4.14) as well as more traditionalfoodgrain crops, is evidence that demand for land exists from individualswho could be more productive than current users of the land and thatoverall agricultural productivity could be raised if this type of access toland were more prevalent. For traditional crops the leasing arrangementtakes much the same form as for horticultural areas: privately arrangedleases provide for access to land in exchange for monetary payment orsharing production resulting in greater productivity of the land. Because
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uncertainty regarding the legality of this process could be acting as adeterrent to more widespread utilization of leasing, the government shouldrecognize and promote further use of these arrangements. Indeed, anappropriate legislative basis and framework for a future land marketalready exists. Though not yet fully implemented for rural areas, the LandAct of 1979 provides for registration of traditional leases which wouldthen be freely transferable among Basotho. The 1979 Land Act provisionsfor rural lease registration should be implemented and promotion of leaseregistration undertaken by government.
4.20 Urban encroachment. Lesotho is currently facing an additionalsource of pressure on arable land through urban encroachment. The bestagricultural land, along the western arc to the north and south of Maseru,is also the area of greatest population growth and density. In the Maseruregion, for example, population growth over the past decade was the highestamong all districts in Lesotho (10 percent per annum as compared with 2.6percent for the country as a whole)* In the peri-urban areas of Maseru andother towns, town councils are ostensibly responsible for land allocation,but in practice it is well-known that traditional authorities continue toallocate land. The poor planning and procedures have resulted in haphazardsettlements with population densities too low for effective distribution ofurban services. In addition, the low population densities (for urbanareas) has meant the loss of even more good agricultural lands than wouldbe necessary if urbanization were properly planned.
4.21 In order to stem the loss of good agricultural lands to purelyurban uses or peri-urban settlement, land allocation procedures inLesotho's urban areas need to be strengthened. Government needs to ensurethat ongoing efforts to establish the municipal council for Maseru arecontinued and that land allocation in urban areas (including perl-urbansettlements) is in practice the sole responsibility of the municipalauthorities. As experience has shown, only in this way will urban servicesbe provided in a cost-effective manner. Reducing the unit costs of urbanservices through increasing population densities, coupled with strictenforcement of urban perimeters is one option facing the government.Alternatively, land allocation procedures could ensure that housing tractsare surrounded by amounts of land suitable for production of marketablesurpluses of horticultural or other crops, or land planning could set asidesizeable tracts of land to be divided into garden plots on an individualbasis. In each of these cases, the expanded urban area would mean greatercosts for urban services, but these would be offset to some extent by theagricultural production which could take advantage of more readilyavailable infrastructural services. In any case, more analysis isnecessary to identify costs and benefits to the various alternatives and todetermine the most appropriate alternative in terms of national income.
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V. Planning and Administration
5.1 The planning process in Lesotho has long been viewed as an areaneeding major improvements. The central problem is the lack of a cleardefinition of the role that the planning institution, and thus economicplanning itself, should play in setting priorities and reflecting these inexpenditure programs. Planners currently function more as bureaucraticprocessers rather than priority-setters or strategic thinkers. Planningprocesses in Lesotho have been driven primarily by donor aid programs andcommitments and government ministries trying to do too much with theconstrained financial resources available to the country. This haspromoted programs with dubious economic rationales. Lesotho has preparedlong-term development plans by aggregating individual ministries' plans,but these have not yet been used to prepare annual expenditure programs oras the basis for policy implementation. Nor have they been placed in anylong-term strategic framework. Resource allocation procedures havegenerally led to underfunding of all expenditure programs regardless ofrelative priorities. Major capital expenditures have been undertakenwithout adequate attention to economic justifications or, very importantly,to long-term capabilities to sustain project achievements. The objectivehas seemingly been maximization of donor assistance irrespective ofrecurrent cost or debt servicing implications. The result is a loss ofcontrol over inter-sectoral allocation of resources, reduced effectivenessof the entire expenditure program and an inability to relate developmentplans to the country's long-term development needs.
5.2 In a situation of constrained budgetary resources, as Lesothofaces over the coming years, strengthening public administration and, inparticular, the planning function within government takes on added andvital importance. In recognition of its resource-constrained position,Lesotho must begin to use its planning and budgeting process to establishpriorities for government attention, translate government goals andstrategies into specific policies, and define realistic expenditureprograms consistent not only with capital but also recurrent resources andrequirements. Strengthening government's planning and budgeting processeswould also provide an opportunity to make donor coordination efforts moreeffective by directing donor programs toward the government's establishedpriorities rather than just accepting the priorities and associated fundsfrom the perspective of bilateral and multilateral aid agencies.
5.3 Specifically, the government needs to (i) adopt new proceduresfor allocating its increasingly scarce resources, including bettercoordination between investment planning and budgeting (ie, closercooperation between the ministries of Planning and Finance); and (ii)reorganize the internal structure of the central planning institution toimprove efficiency.
5.4 Planning and Budgeting Processes. The Central Planning andDevelopment Office (CPDO) within the Ministry of Planning and EconomicAffairs (MPEA) has overall responsibility for coordinating (1) donorprograms in response to requests for capital investment and technical
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assistance by line ministries and (2) the preparation of the capitalinvestment budgets. Under the minister, principal secretary, director, anddeputy director, the planning office comprises seven planning sections:macroeconomics; financial resources and economic cooperation; economicinfrastructure; agriculture and rural development; social infrastructure;trade, industry and tourism; and manpower and employment (Table 5.1).These units currently undertake donor coordination, monitoring and to somelimited extent evaluation of proposed investment projects. Administra-tively separate from MPEA are planning units which have been established inthe sector ministries. These ministerial units are responsible forpreparation of investment projects and capital budget submissions.Budgetary requests prepared by the line ministries are routed to the HPEAplanning sections for appraisal and approval. Subsequently proposals areconsidered by a project review committee with representatives of Planning,Finance and Public Service ministries, who give final approval forinclusion in the expenditure program.
5.5 Due to a number of factors this process does not workeffectively. MPEA lacks an articulated strategy, and has not built up thesystems needed to manage and administer the planning function. Withoutthese systems MPEA staff have operated on an ad hoc basis, reacting torequests for capital investment approvals but often not dealing with thesein a consistent manner. Given the limited staffing and skill levels inMPEA's planning sections (see para. 5.16), the project requests from theline ministries generally receive only routine examination within MPEArather than full economic and financial appraisal, though recently this hasbegun to improve as staff undergo better-directed training courses.Lacking a strategic framework, projects are approved irrespective ofintersectoral priorities. Present reviews rarely question merits of therequests relative to investment alternatives or to the government'slong-term objectives, the assumption being that the technical ministryshould make this determination. Indeed the review has typically focusedonly on questions of procedure or form to be referred back to the lineministries. There are problems as well with the working of the projectreview committee. Lower than necessary levels representation and a lack offormal standing result in this committee being mainly a rubber stamp, andbecause many investment projects are prepared in cooperation with potentialdonors and funding is already ensured, this step is often bypassed.Particularly when donors have already been identified by the requestingline ministry, it is unclear whether MPEA or the review committee has theauthority to deny budgetary requests, even if necessary to affirm relativepriorities determined by the overall planning process.
5.6 In addition, the review process as currently practiced does notprovide an adequate basis for judging the Lesotho government's ability tofinance associated recurrent cost requirements of any investment program.MPEA does not now prepare medium- to long-range macro forecasts as aframework for investment planning. During the preparation of each annualbudget an effort is made to aggregate the budgetary impact of the manyproject proposals; but this is generally based on inadequate analysisparticularly for a multi-year framework. As a result, more capitalexpenditure tends to be undertaken than can be supported through presentrecurrent expenditure capabilities; investments once made cannot be
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Table 5.1Staffing Breakdown in Planning Units
(as of August 1986)
Ministry StaffingPlanning OfficersChief Senior - Specialist Advisor TotalPO PO P0
Planning & Economic Affairs a/Macroeconomic Unit 1 1 2 4Financial Resourcesand Economic Unit 1 3 4
Social Infrastructure 1 2 3Economic Infrastructure 1 1Manpower and
Agriculture 1 9 3 13Health 1 1 3 5Law b/ 1 1 2Public Service b/ 1 1Rural Development 2 4 2 8Education 1 2 1 4Transport 1 2 3Interior 1 2 3Water, Energy and Mining 1 1Works 1 1 2Trade and Industry 2 1 3Justice 1 1
Subtotal 3 9 26 8 46
Total 4 16 33 8 5 66_ _
a/ EKecutive Director and Deputy Director not shown.I/ Shown as separate ministries under the same minister.
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maintained or used to their full potential; and the effectiveness of theentire expenditure program is reduced.
5.7 Other government processes also contribute to the problem of poorplanning. Currently, line ministries are not constrained to proposecapital and the related recurrent budgets to within known resourceavailabilities. This is seen clearly in the annual recurrent budgetdocuments where the original budget request is shown alongside the smallerbudget actually given to the line ministries. Ministries compound thisproblem by 'over-bidding' in an attempt to get their desired allocation.As a result, rather than having line ministries identify relativeintra-sectoral priorities and expenditures and decide which lesser priorityprograms should not be funded, the Finance ministry, which is responsiblefor preparing the recurrent budget, and to some extent MPEA are put in aposition of having to make cuts on an ad hoc rather than a prioritizedbasis across the board. By default the economic ministries are thusdetermining intrasectoral priorities with inadequate data and absent astrategy.
5.8 In addition, Lesotho suffers from 'overplanning' of its capitalbudget. Over-estimation of the capital budget results in chronicimplementation shortfalls and delays in disbursements of foreignfinancing. Since project implementation rates vary across sectors,overplanning contributes to the government's failure to manage effectivelythe sectoral balance of expenditure and thus determine sectoral programpriorities. Achievements could more easily be judged against originalobjectives if 'overplanning' were not built into the system. Eliminatingoverplanning implies hard choices, but it will also allow the recurrentbudget to be planned more accurately and thus increase the eftectiveness ofthe entire expenditure program.
5.9 Reorganization. At the time this mission was in the field thegovernment expressed a desire to restructure the Planning and EconomicAffairs Ministry as a means of increasing efficiency of the centralplanning office. Reorganization will not be a panacea for increasing theeffectiveness of planning in Lesotho, but there are a number ofimprovements which could be made. It is important for the new organizationstructure to serve the goals and implementation strategy of the MPEA ratherthan be set up in isolation from the strategy which would then be adaptedto the structure. Therefore, before MPEA implements its reorganization,the government still needs to address a series of interlinked issuesregarding its planning mechanisms: (a) to determine what its strategy andmission are: (b) to determine the systems which will support implementationof the mission and the realization of its strategy; (c) to identify thestaffing level needs and the skills profiles of these staff so that thesystems established can be successfully managed and administered; and,finally rather than at first (d) to determine what organization structuremost sensibly reflects all the above factors.
5.10 The current structure is essentially an inverted "T" (see Annex5.1) with 7 units and the non-sectoral advisers reporting to one on onemanagerial relationships. This type of organization structure has
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generally been found to be ineffective in other organizations; the chain ofcommand is too long resulting in blurred or conflicting signals orpriorities from the top; unit chiefs are accountable to four managers;authority and responsibilities are unclear. With limited skill andexperience levels seven separate sections reacting to one manager stretchesmanagerial capabilities; and senior staff become excessively involved indetail as they try to resolve cross-sectoral and cross-runctional issues.
5.11 While ultimately any new structure will have to take account ofthe skills, styles and preferences of the senior managers, it is moreimportant for the key functions of the ministry to be built into thestructure and adequately staffed. If designed properly and adequatelystaffed, this would allow the senior MPEA staff to concentrate more time onstrategy determination rather than on project detail or attempts to attractdonor aid. Planning and budgeting would then represent a better balancebetween overall government priorities set by MPEA and the desires ofindividual sectoral ministries and donors. Annex 5.2 sets forth asuggested new structure which covers the primary functions of the Ministryof Planning in Lesotho. In this alternative MPEA would be organized intofour units: macroeconomic planning, donor coordination, sectoral planning,and monitoring and evaluation.l Taking advantage of the macroeconomicplanning expertise to be gained with the implementation of the next UNDPplanning project, the macroeconomic planning unit would have two primaryfunctions: developing a number of macroeconomic scenarios (growthprojections; budgetary forecasts; balance of payments analysis andprojections) and indicative resource allocation. As set forth earlier, thedevelopment of these two functions would allow the process of preparingfuture medium to long-term plans to be changed from one where lineministries bid for scarce resources to one based on priorities and onpreviously established resource allocations. Under these processes thegovernment would first determine intersectoral priorities and then indicatea realistic level of resources available to the individual ministries.While these indicative allocations would be based on the previousutilization record and would allow changes at the margin, the process wouldrequire line ministries to set intrasectoral priorities for investment andrecurrent expenditure according to available resources.
5.12 The donor coordination group would be responsible forcoordinating the investments of the multi- and bilateral donors. Thecurrent process, whereby the MPEA acts as the intermediary between the lineministry and the donor, introduces a limited level of control but it goesonly part of the way. Offers by donors to fund unsuitable, low priority,projects are difficult to refuse and the continued one-by-one projectapproach indicates a real need for a coordinated approach. Within thecontext of the reorganization, Lesotho has the opportunity to strengthenthe donor coordination effort by matching funding sources to itsprioritized development plans. Essentially the unit would attempt to matchdonor commitments, plans and programs to the government's overallstrategy. It would seek to identify the best sources of funding, to offeralternative investment opportunities and to divert and reallocate aid fundsto projects and programs reflecting the country's needs.
1/ The Central Statistical Office is also under MPEA but is not consideredhere.
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5.13 The current structure of seven planning units in MPEA coveringline ministries is costly and inefficient, spreading planning resources toothinly over activities which have widely divergent and fluctuating workloads. These units are an important liaison between the line ministriesand central decision-making bodies; rationalization of the structure andbetter use of the available resources are critical to fulfill thisfunction. Two options would be to integrate all line ministry relatedplanning units in MPEA or to establish two units, one covering the socialsectors and one, the infrastructure and production sectors. On balance,the first solution may be preferable In that project review would thus notbe fragmented and this function would mesh better with the donorcoordination unit. Unbalanced work loads, inflexibility and fixed staffinglevels are inappropriate uses of scarce resources; the integrated unitwould be better suited to review all projects.
5.14 Essential to any planning process is monitoring and evaluation.This function has had very limited resources and if the macroeconomic unitand the donor coordination unit are to be effective (as well as the sectorplanning unit and the individual planning units in the line ministries),there must be effective monitoring and evaluation of ongoing programs.Currently monitoring and evaluation is essentially the weakest function inthe ministry and needs major strengthening to ensure that aid onceallocated is used effectively. In a country with a very high aid input itis essential to ensure that plans translate into actions and thatcommitments receive disbursements.
5.15 As noted previously, the joint project review committee betweenPlanning and Finance has not been an effective means of planning consistentcapital and recurrent expenditure programs. Building a capability formacroeconomic forecasting is one step which will assist the ministry andthe committee in judging resource availabilities. In addition, there areseveral other steps which should be taken in this regard. One is to raisethe level of representation in the project review committee to more seniorstaff who would feel more able to question the relative merits of theproposals. Ultimately, a further step which could be considered would beto recombine the Planning and Finance ministries into one Ministry ofFinance and Development Planning. Of itself, this would not ensure theintegration of the two functions but it would be the first step inindicating the need for closer coordination between capital and recurrentbudgeting and to ensure that, ultimately, one minister would be responsiblefor coordinating the two key elements of the budget. Over a longer periodof time, a number of organizational scenarios are possible which wouldbring the budgeting processes much closer, integrate staff working onmacro-economic policy and fiscal/financial policy, issues and allocations,and establish a review process which would be carried out by programofficers with responsibility for examining both capital and recurrent costimplications of investment proposals. This approach could involve thedevelopment of longer-term budget scenarios than the conventional one-yearhorizon. Any decision to recombine these two ministries, however, shouldnot be rushed. A task force made up of staff of both ministries shouldundertake a systematic review perhaps drawing on outside expertise and/or
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an adviser who could arbitrate any issues where the task force did notagree. Such an adviser should also be responsible for developingnew planning systems.
5.16 Staffing and Skills. In recent years the government has madecommendable progress toward upgrading the planning sections in MPEA and theplanning units in the line ministries. Over the 12 month period prior toJuly 1986, the government established new planning units in three majorministries, so that a total of twelve now exist. Staffing levels haveincreased by almost 35 percent (Table 5.2). However, this growth hasentailed the recruitment of relatively inexperienced planners. Many arerecent university graduates who studied subjects related to their planningactivities but with little emphasis on the appraisal and evaluation ofcapital investment projects in a development environment nor were theytrained to develop recurrent cost financing programs for inclusion inconventional budgets. Nonetheless the planning cadre Is a highly qualifiedgroup in the Lesotho civil service which will develop over time into aneffective force; many in the planning cadre have already been identified aspotentially satisfactory for the Foreign Service, normally regarded as thecivil service elite.
Table 5.2
Growth in Staffing of Ministerial Planning Units
July 1985 a/ August 1986 b/
Agriculture 10 13Health 2 5Law and Public Service n/a 3Rural Development 5 8Education 3 4Transport 2 3Interior 3 3Water, Energy and Mining No Unit IWorks No Unit 2Trade and Industry 3 3Justice No Unit 1Prime Minister's Office 6 n/a
34 46
a/ Report by James Snipes under UNDP Project INT/85/706
b/ Review of UNDP Assistance to Planning and Education Projects in Africa.
5.17 A review of the qualifications of the planning cadre indicatesthat well over half the planners have degrees (BA or MA) in economics. Apreliminary training needs analysis prepared recently indicates that
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virtually all the planners, however, need or are undergoing furthertraining, primarily by adding graduate degrees or taking further coursework in development economics and planning. Skills development, however,is not merely the acquisition of academic qualifications. There are nouniversity courses which allow graduates to move directly into planningassignments without orientation and on-the-job training. No desirableskills profile has been determined for planners and hence no comprehensivetraining needs analysis has been done. It is important that whateveracademic courses are pursued are relevant to the needs of the planningcadre. An on-the-job orientation and training program needs to bedeveloped under the guidance of senior and experienced planning officers.Such a training program should be a mix of experience in MPEA, work in thesector ministry planning units, and some relevant academic inputs tosupport the practical lessons learned on the job. Observation ofdevelopment activities in the field perhaps under the monitoring andevaluation unit should be a requirement for all new staff. Finally,continued updating of skills and experience of senior staff should takeplace - by study visits to other developing countries, in-country trainingand by special projects designed as developmental assignments.Establishment and actual implementation of the planning cadre would be anadditional means of providing the framework for training of governmentplanners. The basic elements of the planning cadre would be to allowplanners to establish their own professional association, provide a forumfor training courses, and give members some say in their career paths andreassignments among the government ministries.
5.18 Civil Service Reform. The 1986 study of Public AdministrationManagement Training Needs addressed a number of areas where better trainingcould improve the overall efficiency of the civil service and publicmamagement. In addition, the optimum size, composition and skills mix ofthe civil service needs to be considered in the context of a comprehensivereview. Over the past years the government has at times imposedlimitations on the official establishment in order to stem increases in thegovernment wage bill. While perhaps necessary during times of fiscalstringency, these limitations must be viewed as at best emergency. Therules generally lead to circumvention through employment of daily workers,consultants, etc. They need to be replaced by an ongoing manpower planningcapability to identify how the civil service might be more productivelydeployed. As part of this, the government should review the rationale forhaving seventeen ministries, a number more suited to a much largercountry. Merging or clustering a number of ministries with relatedmandates, as recently undertaken by moving cooperatives to agriculture andrural development activities to interior, should be actively considered.In conjunction with provision of more appropriate training for existingcivil servants, the government needs to review the possibilities ofreducing the number of expatriates in staff and line positions. This move,which admittedly could have short-term costs, would need to be coordinatedwith staff development programs and with a shift of most expatriate staffinto well-defined training roles as a means of ensuring longer-term gainsto the Basotho people.
filHistty of Plamina *nd Economic Affairs - Currant OraIniaatIon Structur
Mieistor
PenauentISecretary
Central Planniam I nd DaveIom6.t O ffice I subre" oDirector Statistics
Deputy
Director
Mon-Swctoral IAdv
Oharo IC sn cfin. Resources SQCto *1 £oroic panlow ,r WA rcu r Tirmd, dInUnit S Economic Coop Infrastructure Infrastructure RuErploynt Rr l Dev. and| unit Unit Uni| __ _ __It
I Pblanner Ae dI V S
ANNEX 5.2
NPiistrv of Plamnina and Ecomirc Affairs - Prososed Orcwnization Structure
