Executive Summary

Rationale and Purpose

The Public Expenditure and Financial Accountability (PEFA) program provides a framework for assessing and reporting on he strengths and weaknesses of Public Financial Management (PFM) using quantitative indicators to measure performance. PEFA is a tool that helps governments achieve sustainable improvements in PFM practices by providing them with a means for measuring and monitoring their performance against a set of indicators across a range of important public financial management institutions, systems, and processes.

Following two PEFA Assessments in 2012 and 2017, and a participatory needs assessment carried out in March 2024 by the Ministry of Finance and Development Planning (MoFDP) and the EU Cooperation Facility Technical assistance (CF-TA) Project, it was concluded that an updated PEFA Assessment could streamline the Government of Lesotho (GoL) PFM Reforms Agenda and strengthen its PFM implementation capacity.

A major lesson learned from the two previous PEFA exercises was that Government ownership of the PEFA findings is crucial for stimulating the effective implementation of a Government-driven PFM Reforms Agenda. It was therefore decided that PEFA 2024 would be conducted as a PEFA Self-Assessment (SA), to systematically develop datasets in a participatory manner, mobilizing a critical mass of Government officials and counterparts to fully own “their” data sets, and allowing them to drive the Government’s PFM Reforms more effectively, advance financial governance practices, and better serve the citizens of Lesotho.

The objectives of the Government of Lesotho PEFA Self-Assessment (SA)n 2024 are (1) to use PEFA (SA) Methodology as entry point for providing updated evidence and analysis of the PEFA Pillars Assessment Scores that will more effectively trigger the PFM reforms, and (2) to institutionalize capacity and capability by involving and mobilizing a critical mass of GoL officials and developing a group of local economists as PEFA Experts who can take this methodology and the momentum of PFM Reform further. The institutionalization of capacity is included in the description of the Way Forward.

Methodology

The PEFA SA 2024 was based on the revised PEFA 2016 framework of 31 PEFA Indicators. The updated PEFA Pillar assessments were based on the completed fiscal years 2020/21, 2021/22 and 2022/23, and on the PFM reforms context of fiscal year (FY) 2023/24.

The exercise was led by the MoFDP Budget Department, supported by an EU CF TA Project local Non-Key Expert and seven local facilitators who were mobilized for this SA Exercise, as well as by a regional PEFA Expert who quality-controlled the PEFA SA process and results, and ensured that the principles of the PEFA Secretariat Guidelines and Standards were followed.

The assessment covers the budget of the Central Government (inclusive of deconcentrated government, education and healthcare), the Auditor General and Parliament. Sub-national governments have been included insofar as the Government has oversight of the fiscal risks arising from Local Government units.

During the years that were the subject of assessment, there were 38 Ministries and 6 Offices (including the Offices of His Majesty the King, the Prime Minister and the Auditor-General). At the sub-national level, there were 10 District Councils and Maseru City Council, plus 75 Community

Councils. Local Government units are not covered in this assessment, as they are not separate budget heads but are included in the expenditure of the Ministry of Local Government.

Public corporations/enterprises primarily concerned with water and electricity make up an important part of the economy. The Government has shareholdings in a number of commercial or semi- commercial enterprises, and has entered into some financial agreements involving public/private partnerships (PPP). The coverage includes the Government’s monitoring of government-owned or government-controlled corporations with respect to fiscal risks and possibly contingent liabilities related to their operations. At the level of the Government’s institutional entities, the focus is on PFM practices as evidence of Government performance rather than as a review of specific l entities.

Impact of PFM Performance on Budgetary and Fiscal Outcomes

As measured by the performance indicators, PFM performance affects three main fiscal and budgetary outcomes: aggregate fiscal discipline; the strategic allocation of resources; and the efficient use of resources for service delivery (see Figure 0.1 for a summary of the PEFA scores by indicator).

Aggregate Fiscal Discipline

Aggregate fiscal discipline requires that the budget be delivered as planned, with effective systems for ensuring financial compliance by all staff engaged in PFM activities. The PFM functions that are focused on compliance must work well as measured by relevant PFM performance indicators.

The strengths of the PFM system in supporting aggregate fiscal discipline are evident:

There is strong control over expenditures, with spending consistently remaining within the approved budget limits.

• Fiscal reliability is further reinforced by consistent revenue performance, where actual revenue collections align closely with forecasts, providing stability and enhancing the credibility of the budget.
• The system’s transparency is enhanced by minimal off-budget operations, which limits fiscal risks.
• Comprehensive management of both domestic and foreign debt ensures fiscal stability by maintaining accurate records of obligations.
• Long-term fiscal planning is supported by a clear and well-defined fiscal strategy and a robust Medium-Term Expenditure Framework. This guides the allocation of resources over several years, ensuring consistency and discipline.
• Adherence to established rules for budget amendments strengthens fiscal stability by ensuring that any adjustments to the budget are made within a controlled and predictable framework.

However, there are notable weaknesses:

• Weak fiscal risk reporting, particularly from local councils and state-owned enterprises, undermines the system’s ability to fully monitor and control fiscal risks.
• Although expenditure arrears are relatively low at less than 6 percent of total expenditures, their presence signals occasional fiscal strain, indicating that fiscal stress can arise during certain periods.
• Reporting of in-year budget performance is also weak, which hampers timely interventions when spending deviates from the budget.
• The tracking and management of public assets remain ineffective, with incomplete records hindering overall fiscal control.
• Weaknesses in non-salary expenditure controls leave room for inefficiencies, affecting budget execution and fiscal discipline.

Strategic Allocation of Resources

Strategic allocation of resources requires planning and executing the budget to be in line with Government priorities aimed at achieving policy objectives.

The strengths of the PFM system in the strategic allocation of resources lie in:

• The robust budgeting process, with clear documentation and detailed planning that help to ensure that resources are allocated efficiently.
• Comprehensive budget documents that provide clear information for decision-makers, facilitating informed choices about how resources are distributed.
• Strong revenue administration, which ensures that the Government collects the necessary funds to support its expenditures, reinforcing the strategic allocation of resources.

Despite these strengths, there are several challenges:

• Allocations to sub-national governments are often made without clear rules, leading to inefficiencies and a lack of predictability in the distribution of resources.
• Legislative scrutiny of the budget is also weak, with insufficient oversight to ensure that the allocations align with broader policy objectives.
• Frequent reallocations of the budget during the fiscal year undermine the original allocation, diverting resources from priority areas.
• The management of public assets is also weak, with incomplete records and ineffective tracking systems hindering the efficient use of resources.

Strengthening the rule-based allocation of funds, enhancing legislative oversight, and improving asset management are necessary to ensure that resources are allocated more effectively and in line with the strategic priorities.

Efficient Use of Resources for Service Delivery

Efficient service delivery requires that the actual spending matches the budget allocation of the resources available for service delivery as planned, and that the costs are minimised. Non- compliance with the budget may lead to a shift across expenditure categories.

For service delivery to be efficient, it has to be supported by transparent systems that allow the public to access critical fiscal information, thereby fostering accountability and trust. Several weaknesses in Lesotho’s PFM system are impeding service delivery:

• Lack of published performance information reduces transparency and makes it difficult to assess whether the services are being delivered effectively.
• Delayed scrutiny of audit reports by the Legislature hampers the ability to address issues in a timely manner, preventing necessary corrective actions from being implemented.
• Misalignment between the physical progress on projects and the associated financial data impacts the ability to accurately assess whether the resources are being used effectively for meeting the service delivery goals.
• Inefficiencies in procurement reporting undermine the overall effectiveness of public spending.

Addressing these challenges by improving performance reporting, ensuring timely audits, and better aligning physical progress with financial data will be crucial to improving the efficiency and effectiveness of service delivery.

Overall, the PFM system is generally supported by strong fiscal discipline and the strategic allocation of resources. The Aggregate Fiscal Discipline Indicators reveal sound performance, particularly in areas such as aggregate expenditure outturn, as well as medium-term perspectives in expenditure budgeting and revenue outturn, which are all rated highly. Similarly, the Strategic Allocation of Resources Indicators reflect commendable results in accounting for revenues and the budget preparation process, which are essential for prioritizing resources efficiently. However, service delivery is one of the areas that needs immediate improvement to realize the full benefits of a well- behaved PFM system. Indicators under Efficient Service Delivery exhibit relatively weak outcomes, with most indicators, such as payroll controls, internal audit, and financial data integrity receiving low ratings. Moreover, critical areas like external auditing and the legislative scrutiny of audit reports also require significant strengthening to ensure transparency and accountability in service delivery. Addressing the gaps in service delivery while maintaining the strengths in fiscal discipline and strategic resource allocation will be pivotal for enhancing overall PFM effectiveness.