Chapter four: Economic governance and management 416. Macroeconomic projections and forecasts are performed by a team of officials from the CBL, the MoFDP and BOS. The projections often prove to be reliable in terms of low discrepancies between forecasts and actual outcomes. However, actual performance was generally higher than predicted in the last five years. The discrepancy between forecasts and actual values stems mainly from exchange rate movements, changes in the SACU revenue-sharing formulae, changes in government policy responses to exogenous events, volatility in the manufacturing industry, and the phasing out of AGOA I. Thus, the need for flexibility in policy, in response to changing circumstances, is essential. 417. Low absorptive capacity is a major concern in Lesotho, especially in capital investment. Of the total allocations for government capital expenditure from both domestic and external sources (M1,343 million in 2006/2007), only 68.4 per cent of the total allocation and 50 per cent of the donor money of M737,000 was actually spent. Further, only about half of the funds received for AIDS in that year were actually spent. 418. Lesotho is in the process of developing a medium-term growth strategy, as a framework for coordinating budget proposals by line ministries, with a clear growth target. This strategy will lay the foundations for growth led by the private sector. It will be assisted by appropriate government interventions and policies, including reforms to improve the business environment, diversify the economy and create jobs in line with the PRSP, Vision 2020 and the commitment to achieve the MDGs. ii. Findings of the CRM 419. There are limited policy initiatives in Lesotho and government does not pay enough attention to policy making and implementation. For instance, the budget speeches do not include policy discussion. This needs changing, because, despite the strong linkages, Lesotho needs to analyse the policies adopted in South Africa and indicate how they might affect the economy of Lesotho. The government also needs to assess what measures the country should implement to maximise gains and mitigate the adverse effects of the policy environment on the economy of Lesotho. Lesotho also needs strategic sectoral policies and targeted investment strategies to promote fast and sustained growth in order to reduce poverty. This is particularly important in the context of long-term development, efficient resource allocation and the need to attract increased capital inflows, both public and private. Currently, Lesotho has no clear strategy for mobilising resources, especially domestic savings. This calls for the effective implementation of existing development strategies – the PRS, Vision 2020 and the growth strategy – in order to secure a framework for the efficient utilisation of revenue from water and diamonds as a basis for diversifying the economy. It would also help the country to attract and absorb increased donor support. 420. Lesotho lacks credible policies to address market failures that result in high uncertainty for investors. In this regard, both businesses and consumers pointed out that energy prices are inflexible despite huge fluctuations in global energy prices. For example, fuel prices rise with higher world oil prices but do not decrease when world oil prices do. This calls for government attention to address inefficiencies in the domestic energy market. However, Lesotho’s development partners have noted that, even when policies and laws are adopted, implementation usually lags 117