January 2004
PROGRESS ON 2003
REFORMS
The
introduction of a revenue authority has already boosted government
revenue; the public is gradually taking steps to benefit from the
limited relaxation of capital account controls; while the
development fund and deposit insurance scheme are still on the
preparatory stage…
Lesotho
Revenue Authority
Declining customs revenue and weaknesses in tax collection
structures prompted the Government to review tax structure and
administration. The new Lesotho Revenue Authority (LRA) was
launched in January 2003. The Authority replaced three revenue
departments (Customs and Excise, Income Tax and Sales
Tax) operating within the civil service. The main
functions of Customs and Excise Department were gathering imports
and exports data and enforcing restrictions. The import data was
used to determine Lesotho’s share in the SACU revenue pool, which
is shared with Botswana, Namibia, South Africa and Swaziland. The
Income Tax Department was responsible for collecting personal
income tax, company taxes, withholding tax, fringe benefits tax
and the gaming levy. The Sales Tax Department handled collection
of sales tax at five main border posts and from registered
vendors. The set-up of the three departments
impeded co-ordination, was administratively burdensome and was
lacking in the area of taxpayers’ audits and law enforcement on
tax evaders.
The
Government identified the establishment of an autonomous national
revenue authority as the best way to improve revenue collection
and tax administration. The Authority was expected to improve
revenue administration through enhanced autonomy, acquisition of
skilled staff, increased integrity and effective use of automated
systems. The Authority would introduce private sector-style
management practices to administration of revenue, competitive
staff remuneration, securing of quality staff and introduction of
a code of conduct that guards against
corruption. In addition, the Authority would work closely with
South African Revenue Service (SARS) in collection of Value Added
Tax (VAT). All these measure were expected to result in
increased collection of revenue, as experienced in countries such
as South Africa, Zambia and Singapore. The Government noted that
there are costs associated with establishing the revenue
authority. Revenue authority would be paid a commission based on
revenue collected.
The
LRA has succeeded in improving revenue collection during the short
time of its operations. The authority introduced measures that
made tax payment easier; provided public tax education and
established a tax advice centre. Harmonisation of the VAT with
South Africa (at 14%) and capacity building at border posts helped
remove long queues and encouraged more buyers to declare their
transactions. The Authority also intensified efforts to enforce
tax compliance by seizing goods of those who try to evade tax. Tax
audits were also undertaken on those suspected to under-declaring
their profits or the sources of their incomes. This resulted in an
estimated 11.9 per cent rise in income tax collections for the
fiscal year 2003/04, according to the
2004/05 government budget.
Value Added Tax
Another reform in the area of revenue administration was the
introduction of VAT in July 2003. VAT was introduced at 14% (for
most goods) to replace General Sales Tax (GST), which was charged
at 10%. The higher tax rate was adopted to compensate for higher
administration costs and the lower coverage that could arise under
VAT as a result of the complex nature of the VAT system. VAT is a
tax that is levied at each stage of production where value is
added. VAT is a consumption tax, hence the provision of a
mechanism enabling producers to offset the tax they have paid on
their inputs against that charged on their sales of goods and
services. This provision is sometimes referred to as input tax
credits. The main difference between VAT and sales tax is that
sales tax attempts to collect tax at just one stage in the process
of production and distribution of goods and services to final
consumers, whereas VAT collects the tax at every stage in the
production/distribution chain.
It
is generally accepted that VAT is a more efficient tax than GST.
The coverage of sales tax could be limited if tax on certain goods
is evaded at the distribution level. At each intermediate stage
credit will be given for taxes paid on purchases to set against
taxes due on sales. VAT is also a fairer tax than sales tax as it
minimises or eliminates the problem of tax cascading, which often
occurs with sales tax. Tax cascading refers to the possibility
that some items of final consumption will bear more than the
nominal rate of tax, as prices on these items would include tax
charged at the final stage as well as that charged on intermediate
goods used. Sales tax is often applied again to the sales tax
element of the cost, thus there is a problem of tax on tax. The
other strength of VAT over GST is that existence of an audit trail
that is used to verify VAT amounts declared under the VAT system
ensures greater administrative efficiency relative to the sales
tax system. This audit trail is compiled by checking outputs
declared by suppliers against inputs declared by their buyers.
Sales tax collections are expected to grow by 28.9 per cent by the
end of the fiscal year, following the introduction of VAT. The
strong growth was influenced partly by the new policy of tax
payment by the Government. Government suppliers were exempted from
sales tax in the past, and this system was sometimes abused.
Capital Account Liberalisation
Lesotho introduced limited liberalisation of the capital account
in 2003 (see Economic Review for July 2003). This was made
possible by the improvement of the macroeconomic and political
environment. The improvement was driven by reforms which
strengthened the financial sector; stronger economic conditions
following the 1998 unrest; as well as more stable political
situation after a change to a more representative electoral model
and peaceful 2002 elections. In addition, other CMA members had
moved ahead with limited liberalisation and this left Lesotho in a
less competitive position.
Therefore, the changes on the exchange controls were designed to
give maximum benefit to the economy while enjoying the most
important advantages of controls. The advantages of the exchange
controls are:
·
to
preserve the level of foreign currency reserves, which are
important for the maintenance of the fixed exchange rate system.
·
guard
against sudden and unexpectedly large swings in capital outflows
which may adversely affect confidence in the country’s ability to
honour its foreign currency obligations.
·
to
facilitate domestic savings and investments by encouraging those
with excess funds to invest domestically. This also enables the
authorities to have access to such funds for use in settling
short-term balance of payments shortfalls.
·
to
harmonise Lesotho’s exchange control regime with that prevailing
in the rest of the Common Monetary Area (CMA).
The
new changes have been designed to minimise capital outflows that
would result from the reforms and other potential hazards. In
addition, measures to further enhance the benefits of these
reforms, and others to mitigate against
the risk of liberalisation have been identified. The selected
areas centred on allowing residents/citizens to invest in non-CMA
countries and to hold foreign currency accounts. The relaxation
also included the hiking of limits on capital transfers and
foreign investments outside the CMA. The changes did not cover
foreign investors as existing controls specifically target
residents/citizens while foreigners enjoy a relatively liberal
capital account environment in CMA countries. The purpose of
limited liberalisation was to boost confidence of foreign
investors on the economy. It is generally accepted that controls
could be a deterrent to foreign investments as some investors are
apprehensive of investing in countries where controls exist, even
if such controls affect citizens only. This is driven by the
thinking that such countries have a potential to change to more
stringent exchange controls in times of economic instability. As
mentioned earlier, relaxing controls was also expected to improve
Lesotho’s competitiveness in line with other CMA members. In
addition, the relaxation of controls would improve the ability of
residents to hedge against local currency depreciation or
political risk by holding foreign currency (non-CMA) accounts or
investing outside the CMA.
It
was estimated that these reforms would result in a net capital
outflow worth $20.0 million by the end of the 2003/2004 fiscal
year. However, the actual outflow of capital was estimated at
around M21.0 million, which is roughly $3.0 million using the
M6.9634 per US dollar average exchange rate for January. This
could imply that the public has been slower than expected in
reaping the benefits of this policy.
Development Fund
·
The
Development Finance (DF) Division was created in the Central Bank
of Lesotho (CBL) with a view to encourage the development of the
private sector through provision of finance and other forms of
assistance to viable projects. The Fund will provide credit to
indigenous citizens who wish to set up or acquire existing
businesses, or acquire shares in associations or companies will be
eligible for financial assistance under the Fund. Businesses where
Basotho hold majority shareholding (at least 51%) will be eligible
to apply for credit to expand their businesses provided that these
citizens will remain majority shareholders throughout the life of
the loan. This is intended to ensure that the DF benefits
indigenous people fully. Most types of businesses, including
agricultural projects, will be allowed to apply for credit from
the fund. The minimum limit will restrict participation to medium
and large size projects while the maximum limit will ensure that
the Fund does not benefit few large borrowers only. Small
borrowers will be targeted under separate schemes. A maximum grace
period of twelve months will be allowed on the loans, which will
be repaid within a period not exceeding ten years.
·
Logistical preparations for the establishment of the DF were
completed and Cabinet decision is awaited. It was decided that
amounts borrowed would be disbursed by participating commercial
banks, which will contribute 20% of the amount borrowed and claim
the 80% from the Fund. Interest paid on the loans will be shared
equally between the Fund and participation institutions. This will
allow the institutions to cover costs of administering the loans
and give them a profit incentive to continue their participation.
Deposit Insurance Scheme
The
CBL have been on a learning curve since the deposit insurance
workshop held in May 2003. Two study tours to Kenya and Tanzania
were undertaken, and a third to the Philippines is planned. A
deposit insurance scheme (DIS) would protect small, less informed
depositors against losing their savings in the event of failure of
a bank. Contributors to the scheme would typically be commercial
banks through lower profits, depositors (if the banks increase
charges or lower deposit rates to finance the premiums) and the
Government. The establishment of DIS could foster market
discipline in the banking industry. It would also raise confidence
of residents and foreigners on the stability of the domestic
banking system.
Table 2.
Monetary and Financial Indicators+
|
|
Nov |
Dec |
Jan 2004 |
|
1. Interest rates (Percent Per Annum) |
|
|
|
|
1.1 Prime Lending rate |
13.00 |
12.50 |
12.50 |
|
1.2 Prime Lending rate in
RSA |
12.00 |
12.00 |
11.5 |
|
1.3 Savings Deposit Rate |
2.55 |
2.48 |
2.41 |
|
1.4 Interest rate Margin( 1.1 – 1.3) |
10.45 |
10.02 |
10.09 |
|
1.5 Treasury Bill Yield (91-day) |
10.67 |
10.67 |
9.21 |
|
|
|
|
|
|
2. Monetary Indicators (Million Maloti) |
|
|
|
|
2.1 Broad Money (M2) |
2237.4 |
2297.9 |
2217.9 |
|
2.2 Net Claims on Government by the Banking System |
-267.4 |
-167.0 |
-386.4 |
|
2.3 Net Foreign Assets – Banking System |
3499.9 |
3460.7 |
3699.4 |
|
2.4 CBL Net Foreign Assets |
2767.6 |
2853.0 |
3188.1 |
|
2.5 Domestic Credit |
285.9 |
380.6 |
171.6 |
|
2.6 Reserve Money |
335.4 |
364.9 |
333.6 |
|
|
|
|
|
|
3. Spot Loti/US$ Exchange Rate (monthly average) |
6.757 |
6.500 |
6.963 |
|
|
|
|
|
|
4. External Sector (Million Maloti) |
2003
|
Q2
|
Q3
|
Q4
|
|
4.1 Current Account Balance |
-304.8 |
-300.6 |
-299.8 |
|
4.2 Capital and Financial Account Balance |
319.3 |
155.5 |
320.0 |
|
4.3 Reserves Assets |
-0.8 |
391.7 |
-156.6 |
Table 2.
Selected Economic Indicators
|
|
2000 |
2001 |
2002 |
2003* |
|
1. Output Growth( Percent) |
|
|
|
|
|
1.1 Gross Domestic Product – GDP |
1.3 |
3.2 |
3.8 |
3.3 |
|
1.2 Gross Domestic Product
Excluding LHWP |
0.0 |
3.5 |
3.3 |
3.2 |
|
1.3 Gross National Income –
GNI |
-3.2 |
0.6 |
2.0 |
2.7 |
|
1.4 Per capita –GNP |
-5.0 |
-1.7 |
1.5 |
2.2 |
|
|
|
|
|
|
|
2. Sectoral Growth Rates |
|
|
|
|
|
2.1 Agriculture |
2.9 |
0.6 |
-4.0 |
-0.4 |
|
2.2 Manufacturing |
4.4 |
7.9 |
6.9 |
5.0 |
|
2.3 Construction |
9.7 |
1.3 |
6.9 |
4.0 |
|
2.4 Services |
-0.9 |
2.2 |
3.3 |
3.6 |
|
|
|
|
|
|
|
3. External Sector – Percent of
GNP Excluding LHWP |
|
|
|
|
|
3.1 Imports of Goods |
71.9 |
74.9 |
89.6 |
82.7 |
|
3.2 Current Account |
-8.8 |
-2.9 |
-8.8 |
-8.0 |
|
3.3 Official Reserves ( Months of Imports) |
8.9 |
11.7 |
6.4 |
5.5 |
|
|
|
|
|
|
|
4. Government Budget Balance (Percent of GNP) |
-4.9 |
-1.0 |
-2.8 |
-2.6 |
*Preliminary Estimates +Projections
