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© 2006 International Monetary Fund

November 2006

IMF Country Report No. 06/404

Kingdom of Lesotho: 2006 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Kingdom of Lesotho

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2006 Article IV consultation with the Kingdom of Lesotho, the following documents have been released and are included in this package:

  • the staff report for the 2006 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on July 12, 2006 with the officials of the Kingdom of Lesotho on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on September 20, 2006. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF;

  • a staff statement of October 6, 2006 updating information on recent developments;

  • a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its October 6, 2006 discussion of the staff report that concluded the Article IV consultation; and

  • a statement by the Executive Director for the Kingdom of Lesotho.

The document listed below has been or will be separately released.

  • Statistical Appendix

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

700 19th Street, N.W. • Washington, D.C. 20431

Telephone: (202) 623-7430 • Telefax: (202) 623-7201

E-mail: publications@imf.org • Internet: http://www.imf.org

Price: $18.00 a copy

International Monetary Fund

Washington, D.C.

Front Matter Page

INTERNATIONAL MONETARY FUND

KINGDOM OF LESOTHO

Staff Report for the 2006 Article IV Consultation

Prepared by the Staff Representatives for the 2006 Consultation with Lesotho

Approved by Jean Clément and Mark Plant

September 18, 2006

  • The Article IV consultation discussions were held in Maseru during June 28–July 12, 2006. The mission met with Finance Minister Thahane, Central Bank of Lesotho Governor Matekane, other senior officials, and representatives of the private sector and donor community.

  • The staff team comprised Messrs. Wang (Head), Gons, and Haacker, and Ms. Masha (all AFR). Mr. Burgess, Deputy Resident Representative for South Africa and Lesotho, participated in the concluding discussions. Ms. Lephoto (OED) attended most meetings.

  • At the conclusion of the 2005 Article consultation on September 19, 2005, Executive Directors considered finding the bases for consistent high growth over the medium term as the primary policy challenge for Lesotho. While urging the authorities to implement structural reforms to restore competitiveness and foster private sector development, Directors emphasized the importance of continued fiscal prudence in coping with future shocks and achieving sustained growth.

  • Lesotho has accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Articles of Agreement and maintains an exchange system free of restrictions on payments and transfers for current international transactions.

  • Lesotho has participated in the Fund’s General Data Dissemination System since August 2003. Data provision is generally adequate for surveillance purposes, although weaknesses remain in national accounts and balance of payments statistics.

Contents

  • Abbreviations and Acronyms

  • Executive Summary

  • I. Background

  • II. Recent Developments

  • III. Policy Discussions

    • A. Economic Outlook and Key Challenges

    • B. Strengthening the Medium-Term Fiscal Position

    • C. Facilitating Adjustment to Shocks Under the CMA

    • D. Promoting Private Sector-Led Growth

  • IV. Staff Appraisal

  • Tables

  • 1. Selected Economic and Financial Indicators, 2002/03-2009/10

  • 2. Central Government Operations, 2003/04-2010/11

  • 3. Balance of Payments, 2003/04 - 2009/10

  • 4. Monetary Survey, March 2003-March 2007

  • 5. Commercial Banks’ Quarterly Performance Ratios, 2004-06

  • 6. Medium-Term Scenarios, 2005/06-2010/11

  • 7. Indicators of External Vulnerability, 2001/02-June 2006

  • Figures

  • 1. Income, HIV/AIDS, and External Dependence

  • 2. Recent Gains Towards Macroeconomic Stability

  • 3. Shocks and Growth Performance

  • 4. Fiscal Developments

  • Boxes

  • 1. Are Recent Increases in SACU Receipts Permanent?

  • 2. Key Structural Measures

  • Appendices

  • I. Relations with the Fund

  • II: Relations with the World Bank Group

  • III: Statistical Issues

  • IV. External Debt Sustainability Analysis

  • V. Social and Demographic Indicators

Abbreviations and Acronyms

AGOA

African Growth and Opportunity Act

CBL

Central Bank of Lesotho

CMA

Common Monetary Area

CPI

Consumer price index

DSA

Debt sustainability analysis

ESAAMLG

Eastern and Southern Africa Anti-Money Laundering Group

FDI

Foreign direct investment

GDP

Gross domestic product

GNI

Gross national income

IFMIS

Integrated Financial Management Information System

LHDA

Lesotho Highlands Development Authority

LNDC

Lesotho National Development Corporation

LRA

Lesotho Revenue Authority

MDGs

Millennium Development Goals

MTFF

Medium-Term Fiscal Framework

PRS

Poverty Reduction Strategy

SACU

Southern African Customs Union

SADC

Southern African Development Community

UN

United Nations

WFP

World Food Program

Executive Summary

Background

In recent years, Lesotho has made good progress toward macroeconomic stability. Its fiscal and external positions have improved markedly. However, economic activity has remained sluggish and poverty is widespread. With an anticipated large increase in receipts from the South African Customs Union, public expenditure is projected to rise sharply in 2006/07. Lesotho’s medium-term outlook is clouded by several downside risks, including a further loss of trade preferences for the export sector and a decline in SACU receipts relative to GDP.

Key Policy Issues

Discussions focused on the key policy challenges facing Lesotho:

  • Achieving more rapid and broad-based economic growth to reduce poverty, through acceleration of structural reforms. Lesotho also needs to strengthen its trade and investment links with the regional market;

  • Strengthening the medium-term fiscal position to maintain macroeconomic stability, given the uncertainty about future SACU inflows and Lesotho’s vulnerability to exogenous shocks.

Surveillance and Technical Assistance

The authorities appreciated the Fund’s role in providing policy advice through surveillance. They intend to continue strengthening institutions and policy implementation capacity and noted that the international community, including the Fund, can make important contributions through timely provision of technical assistance and capacity building support.

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October 6, 2006

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Public Information Notice (PIN) No. 06/112

FOR IMMEDIATE RELEASE

October 12, 2006

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

Telephone 202-623-7100

Fax 202-623-6772

www.imf.org

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October 6, 2006

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