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© 2008 International Monetary Fund
April 2008
IMF Country Report No. 08/136
Kingdom of Lesotho: 2007 Article IV Consultation—Staff Report; Staff Supplement; 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 2007 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 2007 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on September 4, 2007 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 October 30, 2007. 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 supplement on the joint World Bank/IMF debt sustainability analysis.
a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its November 14, 2007 discussion of the staff report that concluded the Article IV consultation.
a statement by the Executive Director for the Kingdom of Lesotho.
The document(s) listed below have been or will be separately released.
Selected Issues and Statistical Appendix
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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INTERNATIONAL MONETARY FUND
KINGDOM OF LESOTHO
Staff Report for the 2007 Article IV Consultation
Prepared by the staff representatives for the 2007 consultation with the Kingdom of Lesotho
Approved by Robert Sharer and Anthony Boote
October 30, 2007
The 2007 Article IV consultation discussions were held in Maseru August 22–September 4, 2007. The mission met with Finance Minister Thahane, Central Bank Governor Senaoana, other senior officials, and representatives of the private sector and the donor community.
The staff team comprised Messrs. Cuevas (Head), Fontaine, Karangwa, and Yartey (all AFR), and Mr. Bartholomew (MCM). Mr. Nolan, Senior Resident Representative for South Africa and Lesotho, participated in some discussions. Ms. Lephoto (OED) attended the discussions.1
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. The Lesotho loti is pegged at par to the South African rand, which is also legal tender in the country.
Lesotho has participated in the Fund’s General Data Dissemination System since August 2003. Data provision is generally adequate for surveillance purposes, although there are some deficiencies in the quality of core surveillance data, including national accounts, balance of payments statistics, and socio-economic data required to monitor progress toward the MDGs.
Contents
Abbreviations and Acronyms
Executive Summary
I. Background
II. Recent Economic Developments
III. Policy Discussions
A. Economic Outlook
B. Fiscal Policy and Reforms
C. Achieving Broad-based and Sustainable Economic Growth
D. External Stability
E. Financial Sector Issues
F. PRS Process
IV. Staff Appraisal
Tables
1. Selected Economic and Financial Indicators, 2003–11
2. Central Government Operations, 2003/4–2011/12
3. Balance of Payments, 2003–11
4. Monetary Survey, 2003–07
5. Indicators of External Vulnerability, 2002–06
6. Millennium Development Goals
Figures
1. Income, HIV/AIDS, and External Dependence
2. Recent Macroeconomic Performance
3. Shocks and Growth Performance
Boxes
1. Response to Previous Recommendations
2. Private Sector Development Agenda
3. Assessing the Real Exchange Rate
Abbreviations and Acronyms
AGOA |
African Growth and Opportunity Act |
CBL |
Central Bank of Lesotho |
CGER |
Consultative Group on Exchange Rates |
CMA |
Common Monetary Area |
CPI |
Consumer price index |
DSA |
Debt sustainability analysis |
FDI |
Foreign direct investment |
GDP |
Gross domestic product |
GNI |
Gross national income |
GSP |
Growth Strategy Paper |
IFMIS |
Integrated Financial Management Information System |
LHDA |
Lesotho Highlands Development Authority |
LNDC |
Lesotho National Development Corporation |
LRA |
Lesotho Revenue Authority |
MCC |
Millennium Challenge Corporation |
MDGs |
Millennium Development Goals |
MTEF |
Medium-Term Expenditure Framework |
MTFF |
Medium-Term Fiscal Framework |
NFA |
Net foreign assets |
PEMFA |
Public Expenditure Management and Financial Accountability |
PRS |
Poverty Reduction Strategy |
SACU |
Southern African Customs Union |
SADC |
Southern African Development Community |
SMEs |
Small and medium enterprises |
UN |
United Nations |
WFP |
World Food Program |
Executive Summary
Background
Lesotho made further progress toward macroeconomic stability in 2006. After sluggish economic activity in earlier years, real economic growth surged, reflecting accelerated mining production and the recovery of the textile sector. High Southern African Customs Union (SACU) revenue in 2006 contributed to a fiscal surplus, improved external accounts, and a significant increase in international reserves. Inflation has increased in the last year, driven by rising food and energy prices. The outlook is positive, but subject to risks arising mostly from the external environment.
Key Policy Issues
Maintaining a strong medium-term fiscal position will be key for macroeconomic stability and growth, given the fixed exchange rate and Lesotho’s vulnerability to external shocks. Staff recommended prudent use of SACU revenues and urged the authorities to resist pressures for higher public expenditure across the board. The authorities concurred with the staff that the medium-term outlook is clouded by uncertainty about revenue sharing in SACU, global trade in textiles, and remittances from workers in South Africa. A slowdown in the U.S. poses short-term risks.
Sustained, rapid and broad-based growth is needed to reduce widespread poverty. Staff encouraged the authorities to implement vigorously their agenda to promote private sector development to unleash growth potential. Important measures include fostering financial intermediation, improving the legal and judicial environment, and improving infrastructure.
Macroeconomic policies are consistent with external and domestic stability, and there is no immediate threat to external stability.
Unlicensed deposit-taking entities pose risks to economic and social stability; the authorities expressed their intention to address this issue. The rapid growth of insufficiently regulated credit cooperatives gives cause for some concern; the authorities intend to strengthen the regulatory and supervisory framework of the financial sector.
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INTERNATIONAL MONETARY FUND
KINGDOM OF LESOTHO
Staff Report for the 2007 Article IV Consultation—Informational Annex
Prepared by the Staff Representatives for the 2007 Consultation with the Kingdom of Lesotho
Approved by Robert Sharer and Anthony Boote
October 30, 2007
Relations with the Fund. Summarizes the 2006 Board discussion on Lesotho, describes financial and technical assistance by the IMF, and provides information on the exchange rate system. Lesotho’s last Fund arrangement, a PRGF, expired in 2004.
Relations with the World Bank. Describes the World Bank group’s strategy and portfolio.
Statistical Issues. Assesses the quality of statistical data. Economic data are adequate for surveillance purposes, though some deficiencies remain. Lesotho subscribes to the GDDS.
Contents
I. Lesotho: Relations with the Fund
II. Lesotho: Relations with the World Bank
III. Lesotho: Statistical Issues
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INTERNATIONAL MONETARY FUND AND INTERNATIONAL DEVELOPMENT ASSOCIATION
KINGDOM OF LESOTHO
Joint World Bank/IMF Debt Sustainability Analysis
Prepared by the staffs of the International Monetary Fund and the International Development Association
Approved by Robert Sharer and Anthony Boote (IMF) and Brian Pinto and Sudhir Shetty (IDA)
October 30, 2007
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Public Information Notice (PIN) No. 08/38
FOR IMMEDIATE RELEASE
March 20, 2008
International Monetary Fund
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Washington, D.C. 20431 USA
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Fax 202-623-6772