An Evaluation of Lesotho’s Fiscal Policy Stance across the Business Cycle

Moeti Damane

doi:10.4236/me.2022.133016

Abstract

This paper calculates Lesotho’s cyclically adjusted primary budget balance (CAPB) and evaluates the country’s fiscal policy stance across the business cycle, between 2007Q1 to 2019Q4. The study identified four peaks and four troughs over the review period. The stance of fiscal policy was found to be generally pro-cyclical to neutral in the early periods of contraction, before turning counter-cyclical, albeit accompanied by relatively high levels of public debt and low levels of GDP growth. During recovery and expansion periods, the fiscal stance was broadly counter cyclical, with low levels of GDP growth and debt levels comparable to those in the contractionary periods.

Highlights

Counter-cyclical fiscal policy allows for an improvement of fiscal positions and buffers in times of economic recovery and expansion
The stance of fiscal policy was found to be generally pro-cyclical to neutral in the early periods of contraction, before turning counter-cyclical, albeit accompanied by relatively high levels of public debt and low levels of GDP growth
For the purpose of this study, and in the same way as Attinasi et al (2018) and Bornhorst et al (2011), the fiscal stance is defined as the change in the cyclically adjusted primary balance (CAPB)

Summary

Introduction

Counter-cyclical fiscal policy allows for an improvement of fiscal positions and buffers in times of economic recovery and expansion. The resultant fiscal space is essential to support the economy during contractions, in a way that does not jeopardise debt sustainability. This makes them less informative to policymakers and economic analysts that wish to use them as indicators of fiscal policy stance and/or fiscal sustainability. To characterise the effects of fiscal policy as either being expansionary, restrictive, pro-cyclical, or stabilising, one would have to control for cyclical and structural factors that would otherwise misinform the policy’s true nature (Cohen-Setton & Vallée, 2021; Batini et al, 2021; Attinasi et al, 2018; Bornhorst et al, 2011; Hlivnjak & Laco, 2018; Vladimirov & Neicheva, 2008; Turrini, 2008)

Objectives

Results

Conclusion