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Market insight: Lesotho's 2004/2005 budget

African research

Jan Duvenage
Contact: Jan.Duvenage@standardbank.co.za

26 February 2004

Copyright: Standard Bank Economics Division: African research
Visit http://ed.standardbank.co.za to view the most recent research and access archives
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Background

Finance and National Planning Minister Timothy Thahane presented the 2004/2005 budget, entitled "Continuing to build Foundations for Sustainable Delivery of Services to the People", to the Lesotho Parliament on 16 February.

The 2003 general review

Although global economic conditions were disappointing, Lesotho managed to improve its international rating. During 2003 the country's sovereign credit rating outlook improved. Fitch Ratings upgraded Lesotho's long term foreign currency rating of B+ to a positive outlook in September. According to Fitch and quoted in the budget "Lesotho's reasonably sound macroeconomic environment, historically low net external debt, strong external liquidity and high fiscal revenues continue to offer support for the rating." Although this is an improved rating, B+ is classified as speculative grade, which is below investment grade. Lesotho's long-term local currency rating of BB was also revised to a positive outlook in September. The short-term foreign currency rating of B was unchanged. Lesotho is not rated by the other rating agencies, Moody's and Standard and Poor's.

The minister underlined the importance of improving the quality of life and the standard of living of all the country's people through effective service delivery; decentralisation of government functions; public private partnerships (PPPs); and fighting corruption.

To root out corruption specific companies were mentioned and the issue of money laundering was also raised. Overall, fiscal management has improved with the establishment of the Public Accounts Committee.

The country has gained positive returns from the US's African Growth and Opportunity Act (AGOA). The textiles and apparel sector has become the largest employer in Lesotho and its exports to the US have grown from US$216.7 million in 2001 to US$392.5 million in 2003. The sound export performance was produced in spite of the strength of the loti against the US dollar.

The minister stressed that the negative impact of the HIV/Aids pandemic in Lesotho could undo the economic advances it has achieved since independence.

The revision of the Southern African Customs Union (SACU) revenue-sharing formula is expected to reduce government revenue. It is for this reason that the government changed from a somewhat inefficient general sales tax (GST) of 10% to a value added tax (VAT) of 14% in July 2003.

The country remains in a state of famine after three consecutive years of crop failures, which were largely the result of the regional drought. The minister said that food insecurity was expected to continue into 2004/2005. Lesotho receives food assistance from various African and Asian countries.

According to the International Monetary Fund's (IMF) Article IV Consultation with Lesotho in January, the previous as well as the current budget was based on Lesotho's Poverty Reduction Strategy Paper (PRSP), despite its expected finalisation being only early this year.



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