Chapter four: Economic governance and management Box 4.1: The implications of overdependence on SACU revenue Domestic revenue averaged 52 per cent of GDP at market prices between 2002/2003 and 2007/2008. This has been buoyed by a considerable increase in customs receipts from the SACU revenue pool, which has recorded an annual growth of 22.8 per cent between 2002/2003 and 2007/2008. In the same period, SACU revenue accounted for an annual average of about 50 per cent of total revue, indicating a very strong and heavy dependence of government operations on these receipts. This makes economic fortunes in Lesotho highly vulnerable to events that may affect those receipts. A good illustration of this sudden change in fortune occurred between 2001/2002 and 2003/2004. SACU receipts increased from M1.4 billion to M2 billion as a result of a huge increase in the demand for intermediate inputs imported for use in the textile industry and when the new SACU revenuesharing formula came into effect in April 2005. This latter development increased Lesotho’s revenue between 2005/2006 and 2006/2007. This shows the extent to which SACU receipts are vulnerable to the vagaries of international trade and how the fortunes of the domestic economy could be changed abruptly by those vagaries. The slowdown in global economic activity in the USA has already led to a decline in imports of textiles from Lesotho. This is likely to reduce imports for raw materials for the textile industry and cause a similar reduction in the SACU revenue pool. A reduced SACU revenue pool is likely to lead to a reduction in the share of Lesotho from that pool. Similarly, it is feared that the global economic slowdown will reduce the imports of vehicles into the SACU region and also affect the SACU revenue pool. Again, this would affect Lesotho’s share of that pool. These possibilities underscore the vulnerability of the SACU revenue pool as the fulcrum on which to erect predictable development financing. It remains, at best, an unstable source of revenue and one on which sustained long-term development cannot be built. The imperative for Lesotho, therefore, is to diversify the sources of revenue in order to reduce its dependence on SACU receipts as a major source of revenue. The establishment of the LRA would assist in this, but, in a long-term context, the solution lies in resuming sustainable growth. This could widen the domestic tax base and bring more individuals and firms into the tax bracket. Source: Financial data from the MoFDP. 407. Lesotho’s debt is managed through a well-established legal framework and various laws and regulations that relate to the terms and limits on the stock of debt for the government. The country’s total debt, as a ratio of GDP, declined over the past five years from 110.6 per cent in 2001 to 49.9 per cent in 2006. External debt remained within the sustainability threshold of 60 per cent of GDP and the debt service ratio at 6.4 per cent in 2006. iii. Recommendations 408. The APR Panel recommends that: • 114 In order to reduce the vulnerability arising from declining SACU revenue, the government should take measures to improve growth, intensify its efforts to broaden the tax base and