December 2017

December 2017 (4)

UNDERSTANDING FIRM firm size distribution is critical for informing policy intervention for sustainable job creation. The focus of the Government of Lesotho industrial policy has been to create jobs through growth of the manufacturing sector. To date, this has produced desirable results as witnessed by the surge in the production of textile and clothing resulting in manufacturing sector being the largest formal employer in the country. Using the unique dataset covering companies that are assisted by Lesotho National Development Corporation (LNDC) during the period 2004 2015, the paper evaluates the company survival patterns, investigate the evolution of firm size distribution in the manufacturing sector. The methodology employed takes into account the possible impact of the global financial crisis on the sector which presented a major shift in the global economic developments. The results show that the size distribution of the Lesotho manufacturing sector is dominated by the companies in the middle sized and large sized categories and they possess high survival rate. It is further found that majority of the companies in the sector remain in their size classes suggesting little growth by the sector. Smaller companies in the sector seem to be the ones registering faster growth. There is plethora of reasons underneath the differing survival patterns between the large and small firms and therefore different policy interventions should be explored for each category. The arising policy implications is that, for job creation effort should be put in place to increase the number of large companies and also support should be extended to the lower sized companies to increase their survival.

SACU REVENUE revenue has been the major source of government revenue averaging about 26.0 per cent of GDP between 2000 and 2015. However, it has been characterized by a lot of volatility though tilted more on a downward trajectory. The future trend in SACU revenue is expected to be downwards in line with global trends on customs revenue as a result of trade liberalization. Other sources of revenue, particularly tax revenue have also been sluggish. These have raised the need for alternative sources of revenue for the Government of Lesotho (GoL). Thus this paper identifies possible additional domestic revenue mobilization avenues for Lesotho. This is achieved by comparing Lesotho’s tax rates and rates on non-tax revenue sources with those of other SACU member countries and other selected African countries. The areas identified include increasing tax rates on petrol and diesel, mobile telecommunication services. New taxes could also be introduced on alcohol and tobacco, sugar sweetened beverages and plastic bags. Contracts with diamond mining companies could be renegotiated to raise more revenue from the sector. Implementation of revenue raising measures that were proposed to GoL before also needs to be expedited. Other existing taxes such as the gaming levy, which have not been reviewed in a long time, should also be considered. While out of line with the scope of this paper, improvements in government spending efficiency, containing and streamlining public spending and implementation of policies and strategies for enhancing private sector growth could maximize the benefits of the proposed tax revisions.

THE CREDIT-TO-GDP gap is used as a tool for macroprudential policy making. However, in Lesotho GDP data is only available on an annual basis. Therefore, the purpose of this study is to find an appropriate proxy for the credit-to-GDP gap. The study follows Karfakis (2013) and utilizes three methods to reach its aim, namely; cross-correlations, in-sample Granger causality, and the VAR model. The study uses annual bank credit to private sector, M2 and trade-deficit as a percentage of GDP data covering the period from 1973 to 2013. The study examines the relationship between the credit cycle and credit-to-GDP gap and discovers that the credit cycle is synchronous with the credit-to-GDP gap in Lesotho. In addition, the relationship between the M2 cycle and credit-to-GDP gap is explored and it is established that the M2 cycle leads the credit-to-GDP gap by one (1) year and can suitably be used as a proxy for the credit-to-GDP gap. In addition, there is a bi-directional causality between M2 cycle and credit-to-GDP gap. The study recommends the use of the credit cycle as a proxy for creditto-GDP gap in line with empirical evidence found, and also recommends the use of M2 cycle on the basis of empirical evidence found in this study.

THE FINANCIAL cost of external public debt could have increased due to the recent depreciation of the Loti against major currencies, which could strengthen the case for increasing domestic debt. Thus this paper carries out a comparative assessment of the financial costs of external and domestic debt. The theoretical advantages and disadvantages of these two types of debt as identified in the literature are also reviewed. The findings of the study reveal that foreign debt remained financially cheaper than domestic debt despite the recent depreciation of the Loti against the currencies in which the bulk of Lesotho’s foreign public debt was held and serviced. This was attributed to the highly concessional nature of Lesotho’s external public debt. Consequently, the major recommendation of the paper is that highly concessional foreign public debt should continue to be preferred more than domestic debt so as to maintain the burden of debt on government budgetary operations at sustainable levels. Nonetheless, domestic debt should be gradually increased when the fiscal space allows so as to develop the domestic capital market as an insurance against the disadvantages of foreign debt. A conducive environment should be created to minimize the possible costs and risks of foreign and domestic debt.