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Kingdom of Lesotho: Debt Sustainability Analysis Update

Author(s):
International Monetary Fund. African Dept.
Published Date:
July 2014
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Underlying Assumptions

1. Based on recent revisions to historical national accounts data and revised assumptions concerning the timeline for construction of the water and hydropower components of the second phase of the Lesotho Highlands Water Project (LHWP-2), real GDP growth is projected to dip in 2014 before picking up over the medium term. On average, growth rates are slightly higher in 2015–17, compared with projections for the previous DSA. Over the long term, the average annual growth rate was revised downwards from 4.8 percent to 4.5 percent, mainly reflecting a lower share of capital spending in the government’s budget. For imports, the underlying long-term trend anticipates a slight import substitution effect with growth, while over the medium term increases in imports would outpace GDP growth because of imported inputs for LHWP-2 construction. Export growth over the medium term is largely determined by expected developments in the mining and manufacturing sectors. Over the long term exports would receive a boost from the completion of LHWP-2.

Macroeconomic Assumptions, 2012-2033
20122013201420152016201720182019-33 Average
Act.Est.Projections
Real GDP Growth (percent)6.75.44.04.95.05.55.54.7
GDP deflator in U.S. dollar terms (change, in percent)−11.6−4.92.93.21.81.51.21.9
Effective interest rate (percent)1.21.31.82.32.72.42.41.7
Growth of exports of goods and services (U.S. dollar terms, percent−9.2−6.97.84.512.19.66.57.0
Growth of imports of goods and services (U.S. dollar terms, percent−2.9−5.94.910.86.34.96.86.2
Grant element of new public sector borrowing (percent)0.040.434.033.728.926.137.7
Government revenue (excluding grants, percent of GDP)57.553.656.254.451.550.850.248.3
Government expenditure (percent of GDP)
Primary (noninterest) expenditure60.359.561.558.457.157.156.756.1
Interest payments
Aid flows (millions of U.S. dollars)942928855824800780758520
of which:
Grants199124105102104113121207
Concessioanl loans744804750721695668637313
Grant equivalent financing (percent of GDP)5.36.55.95.55.65.75.6
Grant equivalent financing (percent of external financing)100.066.059.159.853.850.062.2

2. On the fiscal side, the government revenue (excluding grants) was revised upward on average by 2 percent of GDP a year over the long run, largely reflecting higher revenue projections from the Southern African Customs Union (SACU)–compared with projections in the previous DSA. Primary (noninterest) expenditure projections have also been increased to reflect the latest projections in the authorities’ medium-term fiscal framework, resulting in an average primary deficit of 4.3 percent of GDP per annum, which is assumed to be financed mostly through external concessional borrowing.

3. The assumptions regarding the hydropower component of LHWP-2 remain broadly the same as those in the previous DSA with respect to costs ($500 million) and financing terms and conditions (80 percent commercial, 20 percent grants). Only the timeline has been pushed back to 2019-26, in light of recent delays.2 However, these assumptions are tentative as the project’s feasibility study is still underway (expected to be completed by end-2014). The actual size of the project could be larger and the terms of the financing could differ.

4. In line with the current policy, this update also uses a discount rate of 5 percent.

External Debt Sustainability

A. Baseline

5. All external debt sustainability indicators remain below their corresponding thresholds in the baseline scenario (Table 1a). For example, the present value (PV) of external debt to GDP ratio is expected to fall to below 30 percent in 2016, after which time it is expected to rise to 39 percent in 2022, before subsiding to 34 percent in the early 2030s. The temporary rise in the debt ratio is driven by the construction of a hydropower plant under LHWP-2 and related financing needs. Moreover, in the long run the looser fiscal outlook (higher primary deficits) raises the PV of external debt to GDP ratio by more than 10 percent of GDP, compared with the previous DSA.

Table 1a.Lesotho: External Debt Sustainability Framework, Baseline Scenario, 2011–33 1(In percent of GDP, unless otherwise indicated)
ActualHistorical Average 6/Standard Deviation 6/Projections
201120122013201420152016201720182013-18 Average202320332019-33 Average
External debt (nominal) 1/31.536.538.937.838.339.141.043.853.249.4
of which: public and publicly guaranteed (PPG)31.536.538.937.838.339.141.043.853.249.4
Change in external debt31.55.02.5−1.10.50.81.92.80.2−0.4
Identified net debt-creating flows4.3−1.2−0.77.08.36.27.74.1−1.4
Non-interest current account deficit8.62.40.6−9.313.50.48.29.57.79.35.92.24.7
Deficit in balance of goods and services61.166.062.560.163.961.458.358.553.649.4
Exports46.344.541.441.740.342.343.243.141.845.0
Imports107.4110.5103.9101.8104.2103.7101.5101.695.394.4
Net current transfers (negative = inflow)−27.2−40.7−38.7−38.67.1−38.3−35.8−32.7−33.2−32.6−32.5−34.4−33.2
of which: official−20.0−33.8−31.7−32.1−30.1−26.8−27.2−26.7−26.5−27.9
Other current account flows (negative = net inflow)−25.3−22.9−23.2−21.4−19.9−19.3−17.5−16.5−15.1−12.8
Net FDI (negative = inflow)−0.4−0.4−0.3−2.21.6−0.3−0.3−0.3−0.4−0.4−0.7−2.0−1.1
Endogenous debt dynamics 2/2.3−1.5−0.8−0.9−0.8−1.1−1.2−1.1−1.6
Contribution from nominal interest rate0.40.50.60.81.00.90.91.10.5
Contribution from real GDP growth0.0−2.2−2.0−1.4−1.7−1.8−2.0−2.1−2.2−2.1
Contribution from price and exchange rate changes0.04.1
Residual (3-4) 3/0.71.80.7−5.3−6.8−3.7−4.4−2.82.0
of which: exceptional financing0.00.00.00.00.00.00.00.00.0
PV of external debt 4/33.432.730.629.929.630.532.338.134.2
In percent of exports75.179.173.274.270.070.574.991.376.1
PV of PPG external debt33.432.730.629.929.630.532.338.134.2
In percent of exports75.179.173.274.270.070.574.991.376.1
In percent of government revenues58.161.154.354.957.460.064.379.171.0
Debt service-to-exports ratio (in percent)3.33.24.24.25.55.04.64.89.05.6
PPG debt service-to-exports ratio (in percent)3.33.24.24.25.55.04.64.89.05.6
PPG debt service-to-revenue ratio (in percent)3.42.53.33.14.14.13.94.17.85.2
Total gross financing need (Billions of U.S. dollars)241804747272323287361413237
Non-interest current account deficit that stabilizes debt ratio−22.8−2.6−1.91.67.78.65.86.65.72.6
Key macroeconomic assumptions
Real GDP growth (in percent)3.86.75.44.51.34.04.95.05.55.54.54.54.54.7
GDP deflator in US dollar terms (change in percent)3.7−11.6−4.99.718.32.93.21.81.51.24.22.02.01.9
Effective interest rate (percent) 5/1.21.31.21.82.32.72.42.42.02.31.11.7
Growth of exports of G&S (US dollar terms, in percent)15.3−9.2−6.910.115.57.84.512.19.66.57.45.67.07.0
Growth of imports of G&S (US dollar terms, in percent)6.5−2.9−5.911.115.14.910.86.34.96.86.72.77.06.2
Grant element of new public sector borrowing (in percent)40.434.033.728.926.132.638.542.337.7
Government revenues (excluding grants, in percent of GDP)44.657.553.656.254.451.550.850.248.248.248.3
Aid flows (in Billions of US dollars) 7/893942928855824800780758594368520
of which: Grants193199124105102104113121165312207
of which: Concessional loans70074480475072169566863742956313
Grant-equivalent financing (in percent of GDP) 8/5.36.55.95.55.65.75.95.65.6
Grant-equivalent financing (in percent of external financing)100.066.059.159.853.850.061.167.262.2
Memorandum items:
Nominal GDP (Billions of US dollars)2,4612,3212,3252,4862,6922,8773,081 3,2894,620 8,747
Nominal dollar GDP growth7.6−5.70.26.98.36.97.16.86.06.66.66.7
PV of PPG external debt (in Billions of US dollars)7317217608048519391,0621,762 2,993
(PVt-PVt-1)/GDPt-1 (in percent)−0.41.71.81.73.14.02.01.92.02.6
Gross workers’ remittances (Billions of US dollars)298260240227203185170160283583
PV of PPG external debt (in percent of GDP + remittances)30.129.728.027.827.828.930.835.932.1
PV of PPG external debt (in percent of exports + remittance60.063.360.162.560.862.667.379.666.3
Debt service of PPG external debt (in percent of exports + r2.53.43.54.74.34.14.37.94.8
Sources: Country authorities; and staff estimates and projections.

6. These results are sensitive to the assumptions concerning the amount and concessionality of LHWP-2 financing, the future of SACU revenues, and the concessionality of external borrowing in general. The temporary increase in PV of external debt to GDP ratio is driven entirely by higher nonconcessional borrowing for the LHWP-2. The increased borrowing during the construction of the power plant does make Lesotho temporarily more vulnerable to external shocks. The authorities are currently undertaking a feasibility study, results of which would provide a better idea about the financing options. While the baseline assumes that the government revenue would gradually decline from 56 percent of GDP in 2014 to 48 percent of GDP in 2023 and onwards, largely due to a decline in SACU revenue, a more abrupt and permanent decline of these revenues—as discussed in the risk assessment matrix in the staff report for Lesotho’s Article IV consultation (EBS/14/[ ])—would require a major fiscal adjustment to maintain macroeconomic stability rather than additional borrowing.

B. Sensitivity Analysis

7. Stress tests show that Lesotho’s external debt vulnerabilities would increase significantly, in particular in the event of a worsening of borrowing terms, a major exchange rate depreciation, or if the export growth turned out to be lower than the historical average. (Table 1b). A 200 basis point increase in interest rates for new public sector loans in 2013–33 (A2) would increase the PV of external debt-to-GDP ratio to 55 percent in 2024 and beyond. Similarly, in the event of a one-time 30 percent depreciation of the nominal exchange rate (B6) in 2014, the PV of external debt-to-GDP ratio would increase to 55 percent by 2021/22, gradually falling thereafter to 50 percent by 2028 and staying at about 48 percent thereafter. In both of these stress tests, the 40-percent threshold would be breached throughout the projection period. In a scenario where export value grows (B2) at one standard deviation lower than the historical average, the PV of external debt-to-export ratio would rise from 2018 and peak in 2021 at 142 percent, before easing to 100 percent in 2030s. In a scenario in which the key variables are set at their average of the past 10 years, Lesotho’s external debt ratios actually fall relative to the baseline, reflecting an average fiscal surplus over the past years thanks to the large SACU revenue in 2006–09. However, given the structural break, the historical scenario could be considered less relevant for the analysis.

Table 1b.Lesotho: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2014–33(In percent)
Projections
2014201520162017201820232033
PV of debt-to GDP ratio
Baseline31303030323834
A. Alternative Scenarios
A1. Key variables at their historical averages in 2013-2033 1/217−7−17−27−63−56
A2. New public sector loans on less favorable terms in 2013-2033 230323336405554
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2014-201531313031333935
B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/34393839404535
B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-201534383839414843
B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/35373637394335
B5. Combination of B1-B4 using one-half standard deviation shocks35393839414637
B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/43424243465448
PV of debt-to-exports ratio
Baseline73747071759176
A. Alternative Scenarios
A1. Key variables at their historical averages in 2013-2033 1/5016−17−40−62−150−123
A2. New public sector loans on less favorable terms in 2013-2033 27379798493132121
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2014-201573747070759176
B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/9312111411311813697
B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-201573747070759176
B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/849186869010477
B5. Combination of B1-B4 using one-half standard deviation shocks869791919611183
B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/73747070759176
PV of debt-to-revenue ratio
Baseline54555760647971
A. Alternative Scenarios
A1. Key variables at their historical averages in 2013-2033 1/3712−14−34−53−130−115
A2. New public sector loans on less favorable terms in 2013-2033 25459657180115112
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2014-201555565961668173
B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/60717477819472
B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015617073768210190
B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/62687073779072
B5. Combination of B1-B4 using one-half standard deviation shocks62717476819576
B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/7778818591112100
Debt service-to-exports ratio
Baseline4655596
A. Alternative Scenarios
A1. Key variables at their historical averages in 2013-2033 1/443220−8
A2. New public sector loans on less favorable terms in 2013-2033 246555910
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2014-20154655596
B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/57766138
B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-20154655596
B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/46555106
B5. Combination of B1-B4 using one-half standard deviation shocks46655116
B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/4655596
Debt service-to-revenue ratio
Baseline3444485
A. Alternative Scenarios
A1. Key variables at their historical averages in 2013-2033 1/333210−8
A2. New public sector loans on less favorable terms in 2013-2033 23444589
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2014-20153444485
B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/3444496
B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-201545555107
B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/3444496
B5. Combination of B1-B4 using one-half standard deviation shocks3454596
B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/46666117
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/33333333333333
Sources: Country authorities; and staff estimates and projections.

C. Including Remittances3

8. When remittances are included in the analysis, a key external debt indicator would be briefly breached, albeit by a small margin. (Figure 2). The PV of external debt to GDP plus remittances ratio is expected to fall to 28 percent by 2017, after which time it is expected to rise, reaching nearly 36½ percent in 2021–23 (the relevant threshold is 36 percent), and then fall to 32 percent by the end of the projection period. Other indicators behave similarly to the analysis excluding remittances.

Figure 1a.Lesotho: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2013-2033 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2023. In figure b. it corresponds to a Terms shock; in c. to a Exports shock; in d. to a Terms shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock.

Figure 1b.Lesotho: Indicators of Public Debt Under Alternative Scenarios, 2013–33 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2023.

2/ Revenues are defined inclusive of grants.

Figure 2.Lesotho: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios (including remittances), 2013–33 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2023. In figure b. it corresponds to a Terms shock; in c. to a Exports shock; in d. to a Terms shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock.

Public Sector Debt Sustainability

9. Public debt indicators largely mirror those of external debt, because domestic debt remains low throughout the projection period (2–4 percent of GDP). Domestic debt is projected to fall to about 2 percent of GDP by 2018/19, and thereafter to gradually increase to about 4 percent of GDP in 2032/33. The PV of public sector debt stood at 37 percent in 2012/13.

10. The standard sensitivity tests for public debt distress point to higher degree of vulnerability of public debt to lower long-run GDP growth (Table 2b). In the case of permanently lower GDP growth (A3) the PV of debt to GDP ratio would increase permanently throughout the projection period to 56 percent. The permanently-lower-GDP-growth test has a similar effect on the PV of debt-to-revenue and debt service-to-revenue ratios.

Table 2a.Lesotho: Public Sector Debt Sustainability Framework, Baseline Scenario, 2011–33(In percent of GDP, unless otherwise indicated)
ActualProjections
201120122013Average 5/Standard Deviation 5/201420152016201720182013-18 Average202320332019-33 Average
Public sector debt 1/37.639.741.840.440.641.343.045.856.353.4
of which: foreign-currency denominated31.536.538.937.838.339.141.043.853.249.4
2.42.11.91.93.04.0
Change in public sector debt32.82.12.1−1.40.20.61.72.80.3−0.3
Identified debt-creating flows−2.50.6−2.9−1.90.40.81.02.11.7
Primary deficit9.9−5.80.6−3.47.51.00.32.02.62.81.74.34.34.2
Revenue and grants52.566.158.960.558.255.254.553.951.851.851.9
of which: grants7.88.65.34.23.83.63.73.73.63.6
Primary (noninterest) expenditure62.460.359.561.558.457.157.156.756.156.156.1
Automatic debt dynamics3.30.0−3.9−2.2−1.5−1.8−1.7−2.2−2.6
Contribution from interest rate/growth differential−2.1−2.1−1.4−1.6−1.5−1.9−2.1−2.2−2.6
of which: contribution from average real interest rat0.3−0.10.20.30.40.20.20.2−0.3
of which: contribution from real GDP growth−0.2−2.4−2.0−1.6−1.9−1.9−2.1−2.2−2.4−2.3
Contribution from real exchange rate depreciation5.32.1−2.5−0.6−0.10.20.3
Other identified debt-creating flows0.00.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)0.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes4.71.51.52.10.20.91.8−1.8−2.0
Other Sustainability Indicators
PV of public sector debt36.735.633.232.231.732.434.241.238.2
of which: foreign-currency denominated33.432.730.629.929.630.532.338.134.2
of which: external33.432.730.629.929.630.532.338.134.2
PV of contingent liabilities (not included in public sector
Gross financing need 2/12.5−3.62.93.22.94.44.95.18.77.6
PV of public sector debt-to-revenue and grants ratio (in percent)55.560.554.955.457.559.563.579.573.9
PV of public sector debt-to-revenue ratio (in percent)63.766.559.059.361.563.868.185.479.3
of which: external 3/58.161.154.354.957.460.064.379.171.0
Debt service-to-revenue and grants ratio (in percent) 4/4.93.23.93.74.64.44.34.48.56.3
Debt service-to-revenue ratio (in percent) 4/5.83.74.33.94.94.84.64.79.26.8
Primary deficit that stabilizes the debt-to-GDP ratio−22.9−7.9−1.52.40.11.40.90.04.04.6
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)3.86.75.44.51.34.04.95.05.55.54.54.54.54.7
Average nominal interest rate on forex debt (in percent)1.21.31.21.82.32.72.42.42.02.31.11.7
Average real interest rate on domestic debt (in percent)0.45.80.03.13.82.71.82.83.03.02.52.92.92.9
Real exchange rate depreciation (in percent, + indicates dep7.518.16.1−1.513.9
Inflation rate (GDP deflator, in percent)7.41.77.66.33.35.26.15.14.84.85.45.05.05.0
Growth of real primary spending (deflated by GDP deflator, i14.73.33.80.86.17.5−0.32.75.34.83.84.54.54.6
Grant element of new external borrowing (in percent)0.040.434.033.728.926.127.238.542.3
Sources: Country authorities; and staff estimates and projections.
Table 2b.Lesotho: Sensitivity Analysis for Key Indicators of Public Debt 2014–33(In percent)
Projections
2014201520162017201820232033
PV of Debt-to-GDP Ratio
Baseline33323232344138
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages30272320195−33
A2. Primary balance is unchanged from 20133332313031276
A3. Permanently lower GDP growth 1/33333334364756
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2014-2034343436384951
B2. Primary balance is at historical average minus one standard deviations in 2014-20135373637384540
B3. Combination of B1-B2 using one half standard deviation shocks33323233354444
B4. One-time 30 percent real depreciation in 201445424140414643
B5. 10 percent of GDP increase in other debt-creating flows in 201440393838404641
PV of Debt-to-Revenue Ratio 2/
Baseline55555860638074
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages50464237359−64
A2. Primary balance is unchanged from 201354555655575312
A3. Permanently lower GDP growth 1/555659626790108
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2014-2056596266719497
B2. Primary balance is at historical average minus one standard deviations in 2014-20158636667718778
B3. Combination of B1-B2 using one half standard deviation shocks54555861668584
B4. One-time 30 percent real depreciation in 201474737474778883
B5. 10 percent of GDP increase in other debt-creating flows in 201466676971748979
Debt Service-to-Revenue Ratio 2/
Baseline4544496
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages444437−3
A2. Primary balance is unchanged from 20134544483
A3. Permanently lower GDP growth 1/4554498
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2014-204555598
B2. Primary balance is at historical average minus one standard deviations in 2014-2014555597
B3. Combination of B1-B2 using one half standard deviation shocks4544497
B4. One-time 30 percent real depreciation in 2014466661210
B5. 10 percent of GDP increase in other debt-creating flows in 20144565597
Sources: Country authorities; and staff estimates and projections.

Conclusion

11. Lesotho remains at moderate risk of external debt distress. All external debt and debt service indicators for the base case remain below their respective thresholds. However, there is a permanent breach in the sensitivity tests. Compared with the previous DSA, the primary fiscal deficit has deteriorated throughout the projection period by an average of about 4 percent of GDP a year, increasing the PV of external debt to GDP ratio by 12 percentage points at the end of the projection period. The risks appear manageable, provided that the fiscal stance does not deteriorate further and that government’s external borrowing is largely on concessional terms. Uncertainty about the parameters of the LHWP-2 project and its financing could also create some risk to debt sustainability. For the next DSA, these parameters should be updated based on the conclusions of the project’s feasibility study currently underway.

12. The authorities broadly agreed with the assessment of moderate risk of external debt distress. They appreciated that the PV of external debt ratio rises owing to the construction of the LHWP-2 and agreed that care would be needed to ensure that the financing arrangements do not increase the risk of external debt distress.

Table 3a.Lesotho: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt (including remittances), 2014-33(In percent)
Projections
2014201520162017201820232033
PV of debt-to-GDP+remittances ratio
Baseline28282829313632
A. Alternative Scenarios
A1. Key variables at their historical averages in 2013-2033 1/196−7−16−26−61−55
A2. New public sector loans on less favorable terms in 2013-2033 228303134385251
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2014-201528282830313733
B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/31363637394233
B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-201531353536394540
B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/32343435374132
B5. Combination of B1-B4 using one-half standard deviation shocks32363637394334
B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/38383840435044
PV of debt-to-exports+remittances ratio
Baseline60626163678066
A. Alternative Scenarios
A1. Key variables at their historical averages in 2013-2033 1/4114−15−36−57−139−119
A2. New public sector loans on less favorable terms in 2013-2033 26067697484115105
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2014-201560626163678066
B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/7498969810411582
B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-201560626163678066
B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/71787576819167
B5. Combination of B1-B4 using one-half standard deviation shocks71817880859571
B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/60626163678066
PV of debt-to-revenue ratio
Baseline54555760647971
A. Alternative Scenarios
A1. Key variables at their historical averages in 2013-2033 1/3712−14−34−53−130−115
A2. New public sector loans on less favorable terms in 2013-2033 25459657180115112
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2014-201555565961668173
B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/60717477819472
B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015617073768210190
B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/62687073779072
B5. Combination of B1-B4 using one-half standard deviation shocks62717476819576
B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/7778818591112100
Debt service-to-exports+remittances ratio
Baseline3544485
A. Alternative Scenarios
A1. Key variables at their historical averages in 2013-2033 1/343210−8
A2. New public sector loans on less favorable terms in 2013-2033 23555589
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2014-20153544485
B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/46656117
B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-20153544485
B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/4554595
B5. Combination of B1-B4 using one-half standard deviation shocks4555596
B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/3544485
Debt service-to-revenue ratio
Baseline3444485
A. Alternative Scenarios
A1. Key variables at their historical averages in 2013-2033 1/333210−8
A2. New public sector loans on less favorable terms in 2013-2033 23444589
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2014-20153444485
B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/3444496
B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-201545555107
B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/3444496
B5. Combination of B1-B4 using one-half standard deviation shocks3454596
B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/46666117
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/33333333333333
Sources: Country authorities; and staff estimates and projections.

The low-income country debt sustainability framework (LIC DSF) recognizes that better policies and institutions allow countries to manage higher levels of debt, and thus the threshold levels are policy-dependent. Lesotho’s policies and institutions, as measured by the World Bank’s Country Policy and Institutional Assessment (CPIA), place it as a “medium performer”, with an average rating of 3.45 during 2010-12. The relevant indicative thresholds for this category are: 40 percent for the present value (PV) of debt-to-GDP ratio, 150 percent for the PV of debt-to-exports ratio, 250 percent for the PV of debt-to-revenue ratio, 20 percent for the debt service-to-exports ratio, and 20 percent for the debt service-to-revenue ratio. These thresholds are applicable to public and publicly guaranteed external debt.

As before, construction under the water component is expected to begin in 2014-15 and would run through 2021/22. The total cost of this component (US$900 million) will be financed by grants from South Africa.

Presenting the analysis including remittances is mainly for illustrative purposes. With declining migrant employment in South Africa’s mining sector, Lesotho’s dependence on remittances continues to diminish. In the long term, the ratio of remittances to GDP is expected to fall well below 10 percent.

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