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Lesotho’s 2006 budget

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Jan Duvenage

Standard Bank Group Economics

23 February 2006

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The Minister of Finance and Development Planning Timothy Thahane delivered Lesotho’s 2006/07 budget speech to parliament on 8 February 2006. It was his third budget statement to parliament.

Changes to the tax incentives

The minister made important changes to Lesotho’s tax regime, particularly to stimulate textile and apparel exports. This industry, once the star export performer, is now struggling after the termination of the Agreement on Textiles and Clothing and its restrictions in January 2005. Not only did exports surge between 1999 and 2004, employment rose to a high of over 50 000. Rising employment helped to lower the high poverty levels as unemployment was estimated at about 45% in 2002. The new trade regime has impacted negatively on employment, which fell to 37 500 in 2005, as well as on economic growth, which declined from 3.1% in 2004 to 1.2% in 2005.

The minister proposed that the company tax rate be reduced to 25% from the current 35% as from 1 April. Furthermore, he proposed that the two-tier and preferential company tax rate of 15%, which applies to income from manufacturing and farming, be reduced to zero. The zero rate is also applicable to income from exporting manufactured goods to outside the Southern African Customs Union (SACU). The VAT refund scheme will also be extended. These changes are aimed at supporting the manufacturing sector and attracting new investment.

Revised budget estimates for 2005/06

Revised estimates show that revenue and grants are projected to be higher and expenditures lower than in the 2005/06 budget. A surplus, rather than the budgeted deficit, is therefore expected. SACU revenue, which accounts for about half of total revenue, is expected to be higher than anticipated. On the expenditure side, recurrent as well as capital expenditure is expected to be lower than budgeted. The main reason for the under spending is lower capital expenditure, which is projected to be lower by 28%, rather than recurrent expenditure, which is projected to fall short by 11%. The minister does not hold the view that Lesotho lacks absorptive capacity, but argues that projects funded externally are implemented slowly, whereas projects funded domestically are implemented rapidly. The projected budget surplus is now estimated at 4.2% of GDP in contrast to the budgeted deficit of 2.4%.

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