Chapter four: Economic governance and management Over the years, various laws have been enacted to improve the efficiency of revenue collection and to develop zero tolerance towards tax evasion. Recent efforts in this regard include two pieces of legislation – the Value-Added Tax (VAT) Act of 2002 and the Lesotho Revenue Authority (LRA) Act of 2001. The latter established the semiautonomous LRA, which merged the functions of the departments of Customs, Income Tax and Sales Tax. It is responsible for the efficient collection of tax and its management. 376. Partly because of these efforts, total fiscal revenue and grants increased from M3,137.6 million in 2002/2003 to M7,164.8 million in 2007/2008. This shows that the proportion of government revenue to GDP is about 43 per cent, a high figure by African standards. It should be noted that the bulk of this revenue (more than 50 per cent) is derived from SACU receipts. SACU revenue is not only a significant source of government income. It is also a major measure of aggregate income. As a result, the heavy reliance on SACU receipts makes Lesotho vulnerable to developments in the region. 377. In order to improve fiscal efficiency, public expenditure allocations are based on the need to address market failures, to promote growth and to reduce poverty. The government has a large amount of discretionary influence on the pattern of public spending because of its few statutory obligations. Its statutory obligations (for debt service, pensions and gratuities) account for less than 15 per cent of total expenditure. The remaining 85 per cent is subject to the discretionary spending priorities of the government. The proportion of public expenditure reveals gaps between national goals and expenditure choices. About 30 per cent of current expenditure, for example, is spent on government bureaucracy, while the share spent on economic services, which include water, energy and mining – priority areas to boost growth – has been declining, except for 2002/2003 when the level of agricultural spending was raised for activities related to relieving famine. 378. The CSAR discusses the various policies that the authorities have introduced to improve financial stability and intermediation and to mobilise savings. These include policies for new entrants into the market, for improved prudential regulation, for strengthening the legal and regulatory framework, and for the Rural Finance Project (RFP) and the Enterprise Support Project (ESP). The last two are aimed at supporting rural financial intermediation. Under the RFP and ESP, the Credit Guaranteed Fund, the rural savings and credit schemes and the Lesotho Post Bank have been established. The CSAR notes, however, that important challenges (such as unregulated pyramid banking and MKM savings schemes) could undermine the stability of the financial system. 379. The effectiveness of the policies described above can be ascertained by the performance of the economy. To manage price stability, the CBL maintains an adequate level of reserves. These underwrite the fixed exchange rate system and reduce domestically generated inflation. Lesotho’s inflation fell from 12.6 per cent in 2002 to about 3.5 per cent in 2005. However, it then rose to 6 per cent in 2006. The growth in real GDP averaged 3.96 per cent per annum between 2002 and 2006, with 2006 recording a rate of 7.2 per cent. This performance is attributed to mining and quarrying, especially exports from diamonds. 380. Fiscal deficit, as a percentage of GDP (excluding grants), averaged -1.4 per cent between 2002 and 2006, whereas the ratio after grants was 1.16 per cent. In 2002, external debt, as a percentage of GDP, which had been 96.6 per cent, declined to 49.9 per cent in 2006. The current account deficit has remained largely negative throughout the years. 107