On June 4, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Kingdom of Lesotho. 1
Since 2010, the economy performed well with the growth of real Gross Domestic Product averaging over 5 percent a year and inflation held to single-digit levels. International reserves have recovered to close to 5 months of import coverage after dipping to 3½ months of imports in 2012 in the wake of the balance of payments and fiscal crisis caused by the sharp drop in revenues from the Southern African Customs Union (SACU) in fiscal years 2010/11 and 2011/12. The recovery from the crisis was achieved with the help of a sustained fiscal adjustment effort supported by the IMF with a three-year arrangement under the Extended Credit Facility (ECF), which was successfully concluded in September 2013.
The economic outlook for Lesotho is positive with strong economic growth and low inflation. Economic activity is expected to be supported by large public investment projects, including the second phase of Lesotho Highland Water Project. The authorities are also taking steps to strengthen the role of the private sector. However, there are risks, most notably from the high volatility of SACU revenues.
Despite the recent strong growth, unemployment remains high and poverty is widespread, while some social indicators on primary and secondary education and HIV/AIDS highlight the future challenges.
In the near term, the authorities are faced with the issue of domestic tax performance. In 2013/14, the domestic tax revenue experienced a shortfall of 4 percent of GDP and resulted in the overall fiscal deficit of more than 1 percent of GDP, compared with a strong surplus the previous year. On the spending side, Lesotho is faced with an extraordinarily high government wage bill—the highest in sub-Saharan Africa (relative to GDP)—which to some extent crowds out public investment projects needed to promote inclusive growth under the National Strategic Development Plan (NSDP).
Executive Board Assessment2
Executive Directors commended Lesotho’s robust economic growth with moderate inflation, and welcomed the recovery of international reserves on the back of a period of fiscal adjustment. The outlook is positive, but the economy faces risks from the volatility of revenues from the Southern African Customs Union, while unemployment remains high and poverty widespread. A strengthening of fiscal policies and stepped up reform implementation will therefore be needed to enhance resilience and promote private sector-led inclusive growth.
Directors saw a need for a tighter fiscal stance consistent with maintaining an adequate level of international reserves and creating space for priority social and capital spending. They encouraged the authorities to improve revenue administration and tax policy, including in mining, and to contain recurrent expenditure, notably the wage bill. In this regard, Directors urged completion of the ongoing pilot payroll audits and extension of the exercise to the entire civil service while strengthening control over hirings. They also encouraged the authorities to step up public financial management reforms.
Directors noted that substantial financing will be needed for the second phase of the Lesotho Highlands Water Project, and encouraged the authorities to pursue a prudent debt policy to ensure sustainability. They recommended prompt submission of the new public debt management bill to parliament.
Directors observed that the loti’s peg to the South African rand has successfully anchored Lesotho’s macroeconomic stability. They encouraged the authorities to consider moving toward a transparent and predictable rules-based fiscal framework, which, in addition to maintaining a sufficient stock of international reserves to secure the peg, would further reduce risks.
Directors welcomed the soundness of the banking sector. They emphasized the need for financial sector deepening to enable private sector-led growth, and recommended further strengthening the regulatory and supervisory framework, including effective cross-border supervision with South Africa, and establishing a functional credit reference bureau. Implementation of the Financial Sector Development Strategy will be important in this regard.
Directors encouraged the authorities to step up implementation of the National Strategic Development Plan to improve the business climate, raise competitiveness, and promote broad-based growth and poverty reduction.
|(Percentage changes; unless otherwise indicated)|
|National account and prices|
|GDP at constant prices||6.0||3.8||6.7||5.4|
|GDP at market prices|
|Consumer prices (average)||3.4||6.0||5.6||5.0|
|Terms of trade (deterioration -)||4.0||9.1||−9.5||0.7|
|Average exchange rate|
|(Local currency per U.S. dollar)||7.2||7.4||8.6||9.6|
|Nominal effective exchange rate change (− = depreciation)2||4.0||−7.1||−14.4||−11.5|
|Real effective exchange rate (− = depreciation) 2||5.4||−3.6||−12.1||−9.3|
|Current account balance|
|(Including official transfers, percent of GDP)||−7.5||−9.0||−2.7||−1.0|
|(Excluding official transfers, percent of GDP)||−29.3||−29.0||−36.6||−32.7|
|Gross international reserves|
|(Months of imports) 3||4.0||3.6||4.6||4.8|
|(Percent of M1)||144||139||179||160|
|Money and credit|
|Domestic credit to the private sector||26.9||25.1||42.2||20.0|
|Interest rate (percent) 4||3.2||2.8||2.4||2.3|
|(Percent of GDP; unless otherwise indicated)|
|Savings and investment|
|Gross capital formation 5||29.0||34.9||35.6||33.3|
|External public debt||30.2||31.5||36.5||39.0|
|Central government fiscal operations|
|Non-SACU fiscal balance 6||−20.2||−23.5||−20.7||−23.4|
|Of which: grants||7.3||7.8||8.6||5.3|
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.