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Structural Adjustment Program: Lesotho’ s Experience in a Nutshell

Editor(s):
I. Patel
Published Date:
December 1992
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In 1988/89 the Government of Lesotho found it appropriate to engage in a Structural adjustment program in partnership with the International Monetary Fund (IMF) and the World Bank Group. A three-year program covering the period 1988/89—1990/91 was adopted. The program commenced in April 1988. As the program nears an end (March 1991), this brief paper seek to answer such questions as the following: Why did the Government of Lesotho decide to undertake a structural adjustment program? What were the aims and objectives of the program? What steps did the Government take to achieve those objectives? What has been the outcome of the program? What is the prognosis regarding economic performance?

Situation Before the Structural Adjustment Program

Lesotho’ s real gross domestic product (GDP) growth rate was a mere 0.2 percent in 1986 and 7.9 percent in 1987. Capital expenditure as a ratio to total government expenditure was 29.1 percent in 1986/87. In 1987/88, the fiscal deficit as a percentage of GDP was 20.3 and as a percentage of gross national product (GNP) was 10.5; gross national savings as a percentage of GNP dropped from 25.5 percent to 20.0 percent; and the current account stood at M 72.6 million. Fixed capital formation declined from 44.8 percent of GDP in 1986 to 43.9 in 1987; and from 22.9 percent of GNP in 1986 to 22.5 in 1987. Domestic credit was rising at an alarming rate; it rose by about 88 percent from 1985/86 to 1987/88. Net foreign assets dropped by 12.13 percent between 1985/86 and 1986/87 and declined further by 6.5 percent between 1986/87 and 1987/88. External indebtedness as a ratio to GNP rose from 31.1 percent in 1986/87 to 34.8 percent in 1987/88. Inflation, using the consumer price index (CPI) stood at 19.7 percent (year-on-year) in January 1986; it dropped to 10 percent in January 1987, but rebounded to 11.6 percent in January 1988—it was, however, still at a double digit level. Clearly, the economic situation was deteriorating. Resolute intervention was needed to put matters back on track.

The movements of these economic indicators are in actual fact related. There is a definite chain reaction. For instance, as the fiscal deficit rises, both domestic credit (i.e., borrowing) and external borrowing rise, in order to finance the deficit. Imports increase. The current account deficit worsens. Net foreign assets are then depleted. This is the economic situation that led the Government to undertake a structural adjustment program.

Aims and Objectives of a Structural Adjustment Program

The structural adjustment program undertaken by the Government aimed at stabilizing the economy while at the same time (1) improving allocation of resources by correcting distortions in the system, (2) removing obstacles to growth, and (3) nurturing activities that lead to sound and sustained growth. These aims were to be attained by pursuing the following specific objectives: (1) reducing the Government’s fiscal deficit to manageable levels; (2) narrowing the current account deficit (or preferably eliminating it altogether) in order to restore balance of payments viability; (3) striving for efficient allocation of resources; (4) curbing inflation; and (5) clearing the economy of structural impediments. These were considered guiding lights for specific measures to be adopted for achieving the intended end, the end being strong and sustainable growth under stable conditions.

Policy Measures Taken to Meet Objectives

Fiscal, monetary, incomes, and other policies were adopted as the means of meeting the set objectives. Fiscal policy aimed at reducing the fiscal deficit by raising revenue, containing recurrent expenditure, and encouraging well-planned capital expenditure. The raising of revenue was to involve an improved tax package and a strengthened revenue collection machinery. Increasing government expenditure was to be curbed by cutting from the budget dispensable items, instituting tighter controls, and monitoring the situation closely.

Tight monetary policy was pursued. Interest rates and domestic credit ceilings were preferred policy instruments. The Government’s domestic borrowing in particular was to be drastically cut. The residual credit allocation could then be directed to the productive activities in the economy. This would follow as the fiscal deficit diminished. Public sector external borrowing on noncessional terms was limited. A ceiling was set. The rationale behind this kind of monetary policy is that when credit is curbed, the means of payment will be dampened and imports will be contained, therefore, mutatis mutandis, the current account balance will improve. In addition, in a situation such as that of Lesotho where inflation is largely imported, it (inflation) is somewhat arrested by this action.

Incomes policy involved orderly upward revision of wages and salaries. In the public sector, there was direct control. In the private sector, control was through the setting of a minimum wage. A number of policies were also adopted that aimed at eliminating structural impediments in the system and supporting directly productive activities of the economy in various sectors. They covered the agricultural, industrial, and public sectors, among others. Successful pursuit of all these policies was expected to stop and reverse disturbing trends in the economy.

Experience During Implementation of Policies

At the beginning of the program, there were delays in implementing adopted policies, in observing guidelines, in shooting for targets, and in keeping within the set limits. As a result, there were slippages. The slow start could have been due to the fact that the structural adjustment program, which presented a joint endeavor of the Government, the IMF, and the World Bank, was a new phenomenon in Lesotho and the usual human tendency to resist change—old habits die hard. Also, the groundwork for implementation of the program had not been adequate. Key players (i.e., key officials) in the public and private sectors had not been sufficiently educated about the program. Nor were members of the public adequately informed. Much was taken for granted. Consequently, there was an element of hostility on the part of some officials owing to the then prevailing anti-IMF sentiment internationally; there was also an innocent inability to grasp fully what the expectations were and how to begin implementing policies on the part of other officials. Administrative machinery in government and in other key institutions was slow to adjust and adapt. This was the effect of one of the raison d’êtres for structural adjustment programs, that is, the need to reorganize and reinvigorate administrative machinery.

Delays in adhering strictly to the adopted policies had consequences. The fiscal deficit worsened from M 160.5 million in 1987/88 to M 181.1 million in 1988/89. A chain reaction occurred. Domestic credit, going mainly to government, and therefore crowding out the private sector, rose by 42.8 percent. External indebtedness as a percentage of GNP rose from 34.8 percent in 1987/88 to 36.5 percent in 1988/89. Imports increased, mutatis mutandis, and the current account deficit deteriorated further from M 72.6 million in 1987/88 to M 109.3 million in 1988/89. Inflation rose to 14.9 percent (based on the (CPI)) in January and further to 15.9 percent in April 1989. Of course, the economy itself takes time to turn around because of response lags in the system.

The first year of the program was a period of learning and adjusting. Lessons regarding consequences of noncompliance were also learned. Midway through the program, cooperation increased. Fuller understanding of what the structural adjustment program was all about spread among officials. Compliance improved drastically.

Because of the hurry in formulating and adopting policies, the Government ended up agreeing to certain long-term courses of action that could not possibly be fully accomplished within a three-year period. Entrenched customs and traditions and the sensitivity surrounding the issue made it impossible to complete the process within the specified period.

It was also of interest to observe the change in attitude, among partners in the program, toward social issues. The program increasingly assumed a “human face” at every review. All parties were keener to protect vulnerable social groups. Health, education, and welfare were accorded special treatment during reviews. For example, food items used mainly by the poor were exempted from the general sales tax. One wonders whether this apparent change of heart midway was the result of international pressure to heed the plight of the vulnerable social groups during the program.

Situation Toward the End of the Structural Adjustment Program

Positive results of the structural adjustment program began to show in 1989/90. Success was greater with respect to stabilization policies. The fiscal deficit dropped from 17.3 percent of GDP in 1988/89 to 7.8 percent in 1989/90 (Table 1). Projections suggest it may be in the neighborhood of 3 percent in 1990/91. As a percentage of GNP, it declined from 9.5 percent in 1988/89 to 4.4 percent in 1989/90, with a projection of only about 1.7 percent for 1990/91. Fixed capital formation as a percentage of GDP rose from 46.7 in 1988 to 52.0 in 1989. As a percentage of GNP, figures are 25.2 for 1988 and 28.8 for 1989. Domestic credit rose by a mere 3.6 percent. This was necessary to accommodate real growth of the economy. The current account deficit narrowed by 65.68 percent, from M 109.37 million to—M 37.54 million. Inflation was down to 12.1 percent by April 1990 (CPI and year-on-year) and down to 9.1 percent in October 1990. Net foreign assets were up by 121.14 percent by December 1990, from the figure of 1988/89. External indebtedness as a ratio to GNP was down from 36.5 percent in 1988/89 to 35.5 percent in 1989/90. Evidently, the program was beginning to bear fruit.

Table 1.Financial and Economic Indicators
1983/841984/851985/861986/871987/881988/891989/901990/91
Fiscal deficit-26.0-19.0-67.3-87.8-160.5-181.1-103.2-48.71
Fiscal deficit as percent of GDP6.44.011.913.620.317.37.83.01
Fiscal deficit as percent of GNP3.12.06.16.910.59.54.41.71
Domestic credit127.7122.3172.6223.4324.4463.3480.1426.22
Net foreign assets126.3199.1216.9190.6178.2163.2222.0360.92
Current account balance-15.6813.05-16.4714.40-72.59-109.37-37.54
External debt as percent of GNP16.527.832.131.134.836.535.5
Source: Central Bank of Lesotho.

Projections.

December 1990.

Source: Central Bank of Lesotho.

Projections.

December 1990.

In the area of removal of structural obstacles and support of directly productive activities, although deadlines were not necessarily met in a number of cases, some progress was being made. It was slow, however. Perhaps it is because of the nature of items that had to be attended to. Entrenched structures are not easy to change. In any case, as pointed out earlier, there were delays in setting processes in motion at the beginning of the program. It could be said, therefore, that while stabilization policies achieved commendable results, the actual restructuring of the economy moved rather sluggishly. Extra effort and determination should yield results.

Prognosis

The structural adjustment program came to an end in March 1991. There is still much work to be done, especially in the real sector. The fundamentals of the economy are yet to be truly restructured. Work is incomplete in this facet of adjustment. There is also need to round off and consolidate stabilization endeavors. It is therefore prudent to go for a successor program (1991/92–1993/94).

The Government is currently drawing up a new five-year development plan. It is an opportunity to ensure that the plan and the new economic adjustment program are in total harmony. It will be important to educate key players and members of the public right at the beginning. This will enhance appreciation and consequently cooperation. Vulnerable social groups should continue to be protected. Emphasis should be placed on the removal of structural impediments and promotion of directly productive activities in the new program. That is, concentration should be on the expansion of productive capacity and on full utilization of that expanded capacity.

Real GDP growth in 1988 was 10.8 percent and 6.3 percent in 1989. Growth in 1989 could have been stronger were it not for the excessive rains at the wrong time of the season, a cutworm epidemic, and an early frost that impaired the performance of the agricultural sector.

In the near future, progress that has already been made could slow down because of four factors:

  • (1) The high oil prices resulting from the Gulf conflict will adversely affect the current account. Elimination of the current account deficit could be postponed. The downward trend of inflation can also be halted.
  • (2) The drought during the planting season (September—December 1991) meant a poor harvest, necessitating the import of cereals. Again, that means that progress already made in the current account will be dampened somewhat. Curbing of inflation will be retarded.
  • (3) The impending general salaries review, which had to be undertaken to contain the brain drain, will have the effect of postponing elimination of the fiscal deficit. Imports are likely to rise as a result. Again, both the current account and the inflation rate are likely to be adversely affected.
  • (4) The general global economic slowdown is likely to affect Lesotho as well. This could be in the form of reduced demand for Lesotho’ s exports. Inflow of assistance from Lesotho’ s partners in development may also slow down.

Competition among developing countries for limited financial resources, given new entrants in the area, such as Central and Eastern European countries, has become more intense. The effect on the inflow of financial assistance should not be discounted.

On the positive side, commencement of construction on the Lesotho Highland Water Project, should contribute handsomely to the real growth in GDP. The only question is whether the impact will be strong enough to more than offset the negative influence of the factors catalogued earlier.

In the medium term a sizable number of migrant workers in gold mining face repatriation. This is due mainly to the price of gold, which has been sticky downward, given rising production costs. Granted that migrant workers’ remittances contribute substantially to GNP and considering that it is by far the largest foreign exchange earning activity, consequences will be dire.

Prudent use of the proceeds from the Lesotho Highland Water Project should go some way in creating additional productive capacity that should absorb some of the workers. Retraining can also equip workers with skills still in demand.

Conclusion

The experience of Lesotho seems to indicate that the structural adjustment program does work. It shows that a happy combination of policies—fiscal, monetary, and incomes—tends to yield better results than when only one policy is burdened, usually the monetary policy. All pertinent economic policies should be brought into play in order to cope effectively with the rigors of the stabilization process.

While the structural adjustment program was to a reasonable degree successful with stabilization, progress in the removal of structural impediments and support for productive activities has been slower. The nature of some of the items falling in that category to effect meaningful change requires a longer period than the three years provided.

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