The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper analyses a large public investment in a construction of a hydropower plant in
Lesotho and its implications on the growth and debt sustainability. The paper employs an
open economy dynamic general equilibrium model to assess the benefits of a large public
investment through growth-enhancing increase in domestic energy supply and receipts from
selling electricity abroad to ease the fiscal burden, which is often associated with big
investment projects. During the transition (construction stage), various financing options are
explored: increase in the public debt, increase in domestic revenue (fiscal adjustment), and
combination. The calibration matches Lesotho's data and it captures the project's main
challenges regarding the project costs. Moreover,the key remaining issue is the agreement
with South Africa to purchase sufficient amount of electricity to allow the potential plant to
run at a high capacity. We find that, the project can lead to sizable macroeconomic benefits
as long as costs are relatively low and demand from South Africa is sufficiently high.
However, the risks for the viability of the project are high, if these assumptions are violated.