MASERU, 18 February 2011 (IRIN) - The Lesotho government has warned its citizens to prepare for a difficult year ahead as the tiny, land-locked country absorbs the effects of the global economic slowdown, including a sharp decline in crucial revenue from the Southern African Customs Union (SACU).

For years, Lesotho has depended on receipts from SACU - a 100-year-old customs union made up of Botswana, Namibia, South Africa, Swaziland and Lesotho - for up to 60 percent of its budget.

The global economic crisis saw Lesotho's share of SACU revenue decline by about 50 percent in the 2010-11 financial year and while those revenues are expected to recover somewhat this financial year, the amount entering the national coffers will continue to decrease as the government repays a deficit owed to the Union.

"The scenario is bad because the country is dependent to a great extent on external sources like SACU which is not very healthy," said Alka Bhatia, an economic adviser with the UN Development Programme in Lesotho.

In a budget speech on 14 February, Finance Minister Timothy Thahane summarized Lesotho's dire financial situation. Not only have government revenues declined, he said, but "Lesotho's economic growth has shrunk; unemployment, especially among the youth, has increased; our exports have contracted; and, Basotho mine workers in South Africa have been retrenched... This turmoil has placed Lesotho and its people between a rock and a hard place. We must make hard choices."

Analysts fear those choices may include cuts in social spending which would be particularly devastating for a country where about 60 percent of the population lives below the poverty line and 23 percent of adults are infected with HIV.

Speaking to IRIN just ahead of the budget speech, head of economic policy in the Ministry of Finance Motena Ts'olo said expenditure cuts would not include reductions in health and education budgets. Nor would public sector jobs be cut as they have in Swaziland, another country struggling to come to terms with its heavy reliance on SACU receipts.

"Obviously, when there's not enough revenue resources, you can't do things as quickly as you want to do them," said Ts'olo
She added that significant damage to crops and infrastructure resulting from recent heavy rains is likely to compound the country's financial problems over the coming year. The Disaster Management Authority has estimated the cost of responding to the flood damage at US$68.5 million.

In his budget speech, Thahane said the social protection budget would actually increase by 7 percent and public servants would receive a 5 percent salary increase, although there would be a freeze on all new public service posts.

Progress halted on MDGs

Thahane acknowledged that the lack of resources resulting from the global economic crisis had halted Lesotho's progress on some of the Millennium Development Goals, particularly those relating to reductions in child and maternal mortality, combating HIV and TB and eradicating extreme poverty and hunger.

Noting that this year's budget had been the most difficult the government had ever had to put together, he said: "The time has come when we must all learn to do more with less for the sake of our country."

Earlier this month, the government announced that it was about to begin the process of developing a National Strategic Development Plan that will come into effect in April 2012 and run for five years.

In part, the plan will aim to wake the country up from what Prime Minister Pakalitha Mosisili described as the "deep slumber" that SACU revenue had lulled it into.

"[We] need to move away from this dependency on the SACU revenue towards internally generated revenue," said Ts'olo.

She added that the country was also too dependent on the textile industry, which employed over 45,000 Basotho but had suffered significant losses in recent years due to the economic crisis and lowered demand from its sole market - the USA.

"We need to diversify away from textiles into other areas," she said, suggesting that tourism was one sector that could be expanded and the export of local products like sandstone was another.

Source: The Integrated Regional Information Networks (http://www.irinnews.org )