Lesotho: Selected Issues and Statistical Appendix

The Selected Issues paper provides an overview of trends, performance export growth, value added, and employment, account of the structure and evolution of Lesotho's textiles during the decade through 2002, and discusses future prospects and key issues. It analyzes the implications of the phasing-out of the African Growth and Opportunity Act and also reviews the HIV/AIDS situation in Lesotho. It discusses the current situation, the measures to enhance financial intermediation, and the Southern African Customs Union Arrangement and its effects on revenues. The paper also includes the summary of tax systems, July 2003, and the exchange trade system.

Abstract

The Selected Issues paper provides an overview of trends, performance export growth, value added, and employment, account of the structure and evolution of Lesotho's textiles during the decade through 2002, and discusses future prospects and key issues. It analyzes the implications of the phasing-out of the African Growth and Opportunity Act and also reviews the HIV/AIDS situation in Lesotho. It discusses the current situation, the measures to enhance financial intermediation, and the Southern African Customs Union Arrangement and its effects on revenues. The paper also includes the summary of tax systems, July 2003, and the exchange trade system.

IV. The New SACU Agreement and Its Effect on Revenues34

84. The new 2002 Southern African Customs Union (SACU) agreement is expected to be implemented over the next few years. The new agreement is more democratic than previous SACU agreements and is, therefore, likely to improve the foundation for regional cooperation and integration. The democratic gains do, however, come at a cost to Lesotho and other BLNS (Botswana, Lesotho, Namibia, and Swaziland) countries. The BLNS countries may lose significant fiscal revenue as a consequence of the new 2002 agreement, in combination with new tariff-reducing trade agreements.

A. The Institutional Framework

85. The SACU was launched in 1910, and it is the oldest existing customs union in the world. Current members are Botswana, Lesotho, Namibia, and Swaziland—the so-called BLNS countries—and South Africa.

86. Three agreements have been crucial for the development of SACU: (i) the initial 1910 Customs Union Arrangement, (ii) the 1969 agreement, and (iii) the 2002 agreement, which was signed in the fall of 2002 and is now pending ratification by the parliament of each member country. The agreement is expected to come into use in fiscal year 2005/06 (April-March).

87. According to the arrangement initially agreed in 1910, all member states applied the same rate of import duty, set by South Africa. The common customs revenue pool was administered by South Africa and distributed among members on the basis of fixed (i.e., not trade-related) percentage shares, which left South Africa with 98.7 percent of the revenue.

88. The attainment of independence of the three previous High Commission Territories-Bechuanaland, Basotholand, and Swaziland - necessitated the negotiation of the new 1969 agreement. South Africa was allowed to maintain most of the management of the customs union. For example, the South African tariff remained the common external tariff of SACU and the same arrangement applied to excise duties. The 1969 agreement does, however, contain special provisions with respect to infant industry protection to benefit the industrial growth of the smaller SACU members.

89. The 1969 agreement distributed the customs union revenue through a formula that calculates revenue shares for each BLNS country, with South Africa’s share as a residual. The formula is designed to allocate customs and excise duties to each BLNS country according to its share of total extra- and intra-SACU imports and excisable goods consumed within the customs union. The formula also contains an extra compensation that enhances each BLNS country’s revenue receipts by 42 percent. Revenues are distributed with a lag of two years. That is, revenue distributions in fiscal year 2003/04 are based on customs and excise duties collected in fiscal year 2001/02, as well as trade data for that fiscal year.

90. An important addition was made in 1977, when a so-called stabilized revenue rate was introduced, promising minimum receipts equal to 17 percent of the total value of SACU imports and excisable value to the BLNS countries as a group. The guarantee is binding, and, as a result, SACU revenue receipts are higher than they would have been otherwise. This is important, as SACU revenue is a significant fiscal resource for the BLNS countries. In the case of Lesotho, SACU revenue accounted for about half of total fiscal revenue and grants in the early 1990s, and the share is currently 39 percent.

B. The 2002 Agreement

91. The 2002 SACU Agreement introduces a structure with six new institutions: a Council of Ministers, Customs Union Commission, Secretariat, Tariff Board, Technical Liaison Committees, and a Tribunal:

  • The Council of Ministers is the highest decision-making authority. It is responsible for the overall policy direction and functioning of SACU institutions and the appointment of the Executive Secretary and the members of the Tariff Board.

  • The Customs Union Commission is responsible for implementing the agreement, overseeing the management of the common revenue pool, and supervising the work of the Secretariat. The commission consists of senior officials from each member state.

  • The Secretariat is responsible for the day-to-day administration of the agreement and keeps record of all transactions into and out of the common revenue pool. The Secretariat will be based in Namibia, where the headquarters of SACU will be established. So far, South Africa has been the sole custodian of the common revenue pool, in accordance with the 1969 agreement.

  • The Tariff Board is responsible for recommending tariff changes to the Council of Ministers. The Tariff Board is an independent institution, consisting of experts drawn from member states.

  • Four Technical Liaison Committees advise and assist the commission in its work on matters related to agriculture, customs, trade and industry, and transport. The Council of Ministers has the authority to determine the precise formation of each committee.

  • The Tribunal passes a judgment on any issue concerning the application or interpretation of the agreement, at the request of the Council of Ministers. The determination of the Tribunal is final and binding. The parties to a dispute choose the members of the Tribunal from among a pool of names approved by the Council of Ministers.

92. The 2002 agreement includes a new formula for sharing custom and excise duties. The new revenue-sharing formula consists of three parts:

  • The customs component. Total customs duties collected in all member countries will be distributed to each country in proportion to its share of intra-SACU imports, that is, the share of imports by SACU countries from other members of the customs union.

  • The excise component Of total excise duties collected in all member countries, 85 percent will be distributed to each country in proportion to its share of SACU GDP. In 1998/99, the shares were as follows: South Africa, 92.6 percent; Botswana, 3.4 percent; Lesotho, 0.6 percent; Namibia, 2.4 percent; and Swaziland, 0.9 percent.

  • The development component. Of total excise duties collected in all member countries, 15 percent will be set aside for redistribution of revenue. In the first step of the calculation, each member country will be allocated 20 percent of the development component. In the next step, each share will be adjusted for differences in per capita GDP, in order to make an additional redistribution from high to low-income members. The net effect of the second-step redistribution is, however, tiny. The difference in per capita GDP between South Africa and Lesotho is large, as Lesotho’s per capita GDP is less than 15 percent of South Africa’s. Despite this major inequality, Lesotho’s share of the component will be raised from 20 percent to 22 percent only, while South Africa’s share will be reduced from 20 percent to 19 percent.

93. Each year, approximately in October or November, the SACU governments and the SACU Secretariat will hold a joint meeting deciding (i) the size of the total revenue pool that will be allocated over the following fiscal year - starting on April 1 - and (ii) the share of each member country:

  • The size of the revenue pool will be based on projections. All later deviations of total revenue collections from the projected size of the pool will be adjusted during the second fiscal year after the actual allocations. For example, if actual revenue collected were to exceed the projections for 2005/06, then the extra collections would be distributed in 2007/08.

  • The actual proportion received by each member country will be based on the three components described above and macroeconomic data on intra-SACU imports, national GDP, and per capita GDP in the five member countries. In order to reduce the risk of preliminary and inaccurate numbers’ muddling the distribution, data will be lagged about three years. For example, the proportion allocated in 2005/06 will probably be based on macroeconomic data for 2002/03. The proportion is fixed once it has been determined, that is, a country that has been allocated a proportion of x percent would not get an upward adjustment, even if later revisions of intra-SACU imports, GDP, and per capita GDP were to indicate that the country had received a proportion that was too small.

94. The new 2002 agreement is more democratic than the previous 1969 agreement. All member countries will now take part in the management of the customs union and have a voice in the discussion of new customs tariffs, whereas this was previously an issue for South Africa’s Board on Tariffs and Trade. The decisions of all SACU institutions except the Tribunal will be made by consensus. This should improve the foundation for regional cooperation and integration. However, the actual trade regime remains basically unchanged.

C. New Trade Agreements

95. The SACU countries are beginning a long process of multiple trade negotiations that will determine the future extent and volume of trade between SACU and its trading partners:

  • The European Union (EU) and South Africa signed the so-called Trade and Development Cooperation Agreement (TDCA) in 1999. One consequence is the creation of a free trade area that will reduce duties on industrial and agricultural products traded between the EU and South Africa over the next ten years. Although the BLNS countries have not signed the agreement, the 1969 SACU Agreement requires that they concur with the terms of the TDCA.

  • SACU has commenced negotiations with the United States toward an extensive free trade agreement, which is scheduled to be concluded before the end of 2005.

  • Discussions with MERCOSUR (the Common Market of the South) are also under way, and South Africa has expressed a willingness to lead SACU into bilateral trade agreements with Nigeria, China, and India.

96. New free trade agreements will have significant fiscal effects for the SACU member countries. Average import tariffs will gradually decline, and this is estimated to reduce the size of the customs pool significantly over the medium term.

D. Projections of Revenue

97. We have compared previous revenue allocations with the new formula, that is, we have simulated what each member country would have received if the formula had been implemented earlier. There is, however, a significant margin of uncertainty because of the lack and weak quality of trade data. The new formula allocates the customs pool in proportion to the member countries’ share of intra-SACU imports. To simulate the hypothetical distribution of the historical customs pool, ideally we would need five time series with historical data on intra-SACU imports in each member country. Unfortunately, these series do not exist. Instead, we used the 1998/99 shares of intra-SACU imports as reported in Kirk and Stern (2003), who derived their estimates from Customs Union Commission reports. The shares of intra-SACU imports are assumed to be as follows: South Africa, 20 percent; Botswana, 27 percent; Lesotho, 13 percent; Namibia, 25 percent; and Swaziland, 15 percent. However, there are no official and agreed numbers on intra-SACU imports and analysts used different assumptions for the calculations made in preparation of the 2002 arrangement. For example, some calculations assumed that Lesotho’s share of intra-SACU imports was less than 10 percent in 1998/99.

98. The simulations indicate that the BLNS countries would have gained financially, if the new formula had been implemented earlier (Figure IV.1). About R 10,000 million would have been reallocated from South Africa to the BLNS countries over the 11 years from 1993/94 to 2003/04. This would have raised fiscal revenue in the BLNS countries by about 1 ½ percent of GDP a year.

Figure IV.1.
Figure IV.1.

SACU: Actual and Simulated Revenues, 1993-2008

Citation: IMF Staff Country Reports 2004, 023; 10.5089/9781451823752.002.A004

Source: Fund staff estimates and projections.1/ BLNS countries = Botswana, Lesotho, Namibia, and Swaziland.

99. However, the simulations give an overly favorable projection of future SACU revenues in the BLNS countries. New tariff-reducing trade agreements are expected to shrink the size of the customs pool, which generates about 80 percent of the SACU revenues received by the BLNS countries at current tariff rates. The BLNS countries would have been insured against this negative fiscal effect if they had preserved the old 1969 agreement. The stabilized revenue rate promised the BLNS countries as a group minimum receipts equal to 17 percent of the tax base; that is, the total value of SACU imports and excisable value. This promise has now come to an end, together with the old 1969 agreement.

100. In order to illustrate the potential effects of new tariff-reducing agreements, we have made an ad hoc simulation and assumed that tariff cuts would reduce the size of the customs pool by 40 percent, starting in 2005/06.35 As a result, South Africa would lose revenue of about 0.1 percent of GDP each year, while the BLNS countries as a group would lose revenue of about 3 percent of their GDP each year. We have also broken down the simulations for each BLNS country (Figure IV.2). If the customs pool is cut by 40 percent, Lesotho would lose fiscal revenue equal to almost 6 percent of GDP each year, while Swaziland would lose about 4½ percent of GDP. Botswana and Namibia would both lose revenue of about 2¾ percent of their GDP each year. It is obvious that South Africa is fiscally better protected than other SACU members. At current tariff rates, the customs component generates only about 20 percent of South Africa’s total SACU revenues.

Figure IV.2.
Figure IV.2.

BLNS Countries: Actual and Simulated SACU Revenues, 1993-2008 1/

Citation: IMF Staff Country Reports 2004, 023; 10.5089/9781451823752.002.A004

Source: Fund staff estimates.1/ BLNS countries = Botswana, Lesotho, Namibia, and Swaziland.

101. To support the financially weaker countries, all SACU members could agree to reallocate revenues in the event of new tariff-reducing trade agreements. A clear-cut solution would be to reallocate excise duties from the excise component to the development component. Such reallocations are envisaged in the 2002 agreement. However, South Africa is the only expected net contributor to the development component, and all member countries must give their consent before any reallocation. It is unclear how amenable South Africa would be to requests to raise the share of the development component.

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STATISTICAL APPENDIX

Table 1.

Lesotho: Gross Domestic Product by Sector (At constant 1995 prices), 1996/97-2002/03 1/2/

(In millions of maloti)

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Sources: Lesotho Bureau of Statistics; Central Bank of Lesotho; Lesotho Highlands Development Authority; and staff estimates.

Fiscal year begins April 1.

Fiscal year estimates based on sectoral calendar-year data compiled by the Bureau of Statistics.

Lesotho Highlands Water Project (LHWP).

Table 2.

Lesotho: Gross Domestic Product by Sector (At current prices), 1996/97-2001/02 1/2/

(In millions of maloti)

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Sources: Lesotho Bureau of Statistics; Central Bank of Lesotho; Lesotho Highlands Development Authority; and staff estimates.

Fiscal year begins April 1.

Fiscal year estimates based on sectoral calendar-year data compiled by the Bureau of Statistics.

Lesotho Highlands Water Project (LHWP).

Table 3.

Lesotho: Gross Domestic Product by Expenditure, 1996/97-2002/03 1/2/

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Sources: Lesotho authorities; and staff estimates.

Fiscal year beginning in April.

Fiscal year estimates based on calendar-year estimates compiled by the Bureau of Statistics.

Gross national product plus unrequited transfers.

Gross national disposable income less consumption.

Government revenues plus grants less government current expenditures (excluding interest payments).

Estimated as a residual.

Lesotho Highlands Water Project (LHWP).

Equivalent to the external current account balance.

Table 4.

Lesotho: Consumer Price Indices, April 1997 - April 2003

(April 1997 = 100, unless otherwise indicated)

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Source: Lesotho Bureau of Statistics.

Covers all households in six lowland towns, including Maseru.

Since January 1994, rent has been excluded from CPI calculations because of data collection problems.

Table 5.

Lesotho: Basic Monthly Minimum Wages, 1996-2003 1/

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Source: Ministry of Labor.

Based on legal notices issued in July 1995, October 1996, September 1997, December 1998, October 1999, October 2000, September 2001, October 2002, and October 2003.

Rate of increase for all categories unless specified as exception.

Table 6.

Lesotho: Public Service Employment, 1996/97-2002/03 1/

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Source: Ministry of Public Service.

Fiscal year is April-March.

The established civil service posts exclude teachers, members of armed forces, and daily-paid workers, but include chiefs, parliamentarians, senators, and statutory workers.

Apply in 2002/03 and onward.

Table 7.

Lesotho: Central Government Operations, 1996/97-2002/03 1/

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Sources: Ministry of Finance; and staff estimates.

Fiscal year is April-March.

Table 8:

Lesotho Government Revenue and Grants, 1996/97-2002/03 1/

(In millions of maloti)

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Sources: Ministry of Finance; and staff estimates.

Fiscal year is April-March.

Table 9.

Lesotho: Southern African Customs Union (SACU) Operations, 1996/97-2002/03

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Sources: Department of Customs and Excise; and staff estimates.

Fiscal year (April-March) in which indicated revenue payments are received.

Fiscal year of data on which calculations are based (rates and dutiable base).

Customs and excise revenues as percent of dutiable base (imports and excisable production, and duties) for Southern African Customs Union as a whole (data year).

Basic rate multiplied by 1.42, as initial compensation for disadvantages to smaller members.

One-half of difference between 20 percent and revenue (compensation) rate.

Revenue (compensation) rate plus stabilization factor.

At least 17.0 percent and no more than 23.0 percent; the calculated stabilized rate applies if it falls between 17 percent and 23 percent. In recent years, the lower limit of 17.0 percent has been the operative rate applied to the dutiable base.

Lesotho’s imports (c.i.f. and duty paid, adjusted to include electricity, estimated border shopping, etc.), excisable goods produced and consumed, and duties collected in the data year.

Stabilized rate (actual) times dutiable base. Referred to as “accrued receipts” of data year.

Stabilized rate (actual) times increase in dutiable base from two years earlier (as allowance for growth in dutiable base to revenue year).

Minor adjustments made to account for revisions in base data, usually of previous data year, Calculated here as a residual.

As reported in government revenue data.

Table 10.

Lesotho: Economic Classification of Government Expenditure, 1996/97-2002/03 1/

(In millions of maloti)

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Sources: Ministry of Finance; and staff estimates.

Fiscal year is April-March.

Table 11.

Lesotho: Functional Classification of Government Expenditure, 1996/97-2002/03 1/

(In millions of maloti)

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Sources: Ministry of Finance; and staff estimates.

Fiscal year is April-March.

Calculated as a residual.

Table 12.

Lesotho: Outstanding Government Domestic Debt by Instrument and Holder, 1996-2003

(In millions of maloti)

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Source: Central Bank of Lesotho.

Data differ slightly in coverage from banking statistics and may not fully reflect revisions made there.

The nonbank sector includes insurance, bank pension schemes, public servants’ promissory notes and compulsory savings, and public enterprises, as well as the general public.