Kingdom of Lesotho
2008 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

This 2008 Article IV Consultation discusses that Lesotho has made significant progress in macroeconomic performance, but the pace of implementation of key structural reforms has been slow. After a decade of low growth, economic activity surged above historic trends, averaging 6.6 percent during 2006–07, driven by the mining, textile, and construction sectors. However, poverty has seen only a modest decline. Executive Directors have commended the authorities for their prudent macroeconomic management, which has contributed to the recent strong economic performance and a continued build-up of international reserves.

Abstract

This 2008 Article IV Consultation discusses that Lesotho has made significant progress in macroeconomic performance, but the pace of implementation of key structural reforms has been slow. After a decade of low growth, economic activity surged above historic trends, averaging 6.6 percent during 2006–07, driven by the mining, textile, and construction sectors. However, poverty has seen only a modest decline. Executive Directors have commended the authorities for their prudent macroeconomic management, which has contributed to the recent strong economic performance and a continued build-up of international reserves.

I. Background

1. Lesotho is a small, highly open, landlocked country, with limited natural resources, and a narrow production and export base. It has close economic ties with South Africa and its currency, the loti, is pegged to the rand. Aside from subsistence agriculture which employs a majority of the population, the garment sector, transfers from the SACU,1 workers’ remittances and lately the diamond sector also play an important role in employment, output, and exports (Figure 1). Lesotho is a member of the Common Monetary Area (CMA)2 and the Southern African Development Community (SADC).

Figure 1.
Figure 1.

Openness and External Dependence

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

Source: Lesotho authorities.

2. Economic growth has been erratic and social progress has been limited (Figure 2). Growth in per capita income averaged about 1½ percent a year during the period of 1997–2007, well below Lesotho’s regional and international comparators. Poverty has declined modestly from 67 percent of households in 1994–95 to 57 percent in 2002–03, and income distribution is highly unequal. In May of this year and in response to the high food prices, the World Food Program began delivering food assistance to the population. It aims to distribute food to 155,000 vulnerable people in Lesotho each year until 2010. The HIV/AIDS epidemic continues to impact negatively on the economy, public service delivery and social development and threatens the achievement of the Millennium Development Goals (MDGs). Already, the country’s ranking on the United Nations Human Development Index has deteriorated, falling from the bottom 33 percent of all countries in the early 1990s to the bottom 13 percent in 2007–08.

Figure 2.
Figure 2.

Growth, Income, and HIV/AIDS

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

Sources: Lesotho authorities; and the World Bank.

II. Recent Economic Developments

3. Lesotho has made significant progress in macroeconomic performance (Figure 3). After a decade of low growth, economic activities surged above historical trends in the last two years, driven by mining, textile and construction sectors. The external current account registered sizable surpluses, reflecting high SACU revenues, workers’ remittances, and exports of textiles and diamonds. As a result, gross international reserves was almost US$1 billion at end-2007 (equivalent to 6.7 months of imports), the highest level in Lesotho’s history. Growth in broad monetary aggregates remains high, reflecting the continued accumulation of net foreign assets. The prime lending rate has increased in line with increases in South Africa.

Figure 3.
Figure 3.

Recent Macroeconomic Performance

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

Sources: Lesotho authorities; and IMF staff estimates.
uA01fig01

Private Sector Credit and Interest Rates (Jan. 2004–Oct. 2008)

(In Percent)

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

Sources: Lesotho authorities; and International Financial Statistics.

4. As elsewhere, food and fuel prices have surged in Lesotho, driving the overall inflation up from 6.4 percent at end-2006 to 11.8 percent at end-November 2008. Lesotho has generally passed-through international fuel and food prices to retail prices, and on April 1, 2008, tariffs for electricity, and public transportation were increased, in line with higher international energy prices and the increase in the price of electricity imported from South Africa. However, in order to boost food production, the 2008/09 budget provides guarantees of (M 105 million) to farmers, to be used for the purchase of inputs, leasing of machinery, and ploughing. The government plans to establish an Agricultural Development Fund over time for continued assistance to farmers. A supplementary budget provides funding (M 40 million) for a well-targeted cash-for-work program that reclaims land due to soil erosion.

uA01fig02

Measures of Inflation, January 2003–October 2008

(In percent, y-o-y)

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

Source: Lesotho authorities.

5. Despite a marked increase in development spending, Lesotho recorded its fifth consecutive fiscal surplus in 2007/08 of 10.3 percent of GDP (the highest in the SACU countries) compared with a budgeted deficit of 2.8 percent of GDP. This performance reflected higher-than-budgeted SACU receipts, bolstered by buoyant growth in value-added tax and double digit growth in income taxes, and underspending of both recurrent and development expenditure.

uA01fig03

Fiscal surplus and SACU revenues in BNLS countries, 2007/08

(In percent of GDP)

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

Sources: Lesotho authorities; and IMF staff estimates.

6. Financial sector (Box 1) vulnerabilities stem from the weakly supervised NBFIs, and the emergence of Ponzi schemes. The largest Ponzi scheme (MKM), has been closed but the final resolution of its identified liabilities remains an outstanding policy issue.3 On September 23, 2008, the CBL provided to the public a summary of a confidential audit report that indicated that the MKM group is insolvent, with identified assets falling short of investors’ original contributions by M300 million (2.7 percent of GDP).4 There are so far no discernible effects on financial intermediation from the collapse of the Ponzi scheme, but many poor individuals have suffered financial losses.

Lesotho’s Financial Sector

Lesotho’s financial system comprises three South African-majority controlled commercial banks, with total assets equivalent to about 42 percent of GDP. NBFIs, with assets equivalent to 21 percent of GDP, comprise money lenders, insurance companies, private pension funds, unit trusts, and SACCOs. The state-owned Postal Bank provides bank-type services to the unbanked population and micro, small, and medium enterprises, but it is not authorized to make loans. Recently the government established a defined-contribution pension fund for government employees aged 40 years or less.

Assets of the Financial System

article image

In addition, there are 16 insurance brokers.

There are 1,206 cooperatives, of which 941 are dormant and only 247 are active.

III. Outlook and Risks

7. The global financial crisis has adversely affected Lesotho’s near-term prospects (Box 2). Real GDP growth is projected to slow down from 5.1 percent in 2007 to 3.9 percent and 2.1 percent in 2008 and 2009, respectively, owing to lower output in mining and textiles. However, as the global economy recovers, growth is expected to increase to a range of 4–5 percent in the medium term. The external current account deficit is expected to widen significantly to 8.5 percent of GDP in 2009 owing to reduced diamond and textile exports, remittances, and SACU revenues but then narrow to 5 percent in 2013 in line with the global recovery. Foreign direct investments are also anticipated to decline in 2009, resulting in an overall balance of payments deficit and a reduction in international reserves to 6-7 months of import cover. Balance of payments surpluses are projected beginning 2011, and international reserves are expected to stabilize at about 5½ months of import cover in the medium term.

Impact of the Global Financial Crisis and Downturn on Lesotho

Lesotho depends heavily on trade with South Africa and the United States that accounts for 69 percent and 19 percent of its total trade, respectively. The main transmission channels of the crisis include:

SACU Revenues: Slower growth in South Africa’s economy reduces import demand, and thus customs duty, excise taxes and the amount of revenues transferred to Lesotho. Following the recent downward revision in South Africa’s growth prospects, the projected SACU common revenue pool (CRP) was reduced by 6 percent in 2009, and by 15 percent in 2010–11. This has led to a significant revision of Lesotho’s medium-term fiscal framework.

Textiles. With the slow-down in the U.S. economy, export volumes from Lesotho have declined. In addition, as most of the garment factories are owned by firms in Asia, some of them are facing difficulties obtaining trade credit for input financing from their Asian banks, which have been affected by the global credit crunch.

Diamonds. Weak prices for diamonds and the global credit crunch have resulted in reduced production and exports of diamonds. Already one mining company, Liqhobong, has suspended production and is reassessing its operations, and another, Kao, which is just beginning production, is looking for potential investors—a task that is difficult in the current environment.

uA01fig04

Lesotho’s Export Price of Diamond

(U.S. dollar per carat)

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

Source: Lesotho authorities; Data for 2008 refer to January–September.

Worker remittances. Remittances from migrant workers, mainly from South Africa, account for about 20 percent of GDP. Already retrenchments in South Africa’s mining industry in response to the global credit crunch may put over 9,000 jobs at risk, thus potentially affecting some 50,000 Basothos who work in South Africa’s mines. A decline in remittances would reduce private consumption, lower growth and increase poverty.

Lesotho: Medium-Term Scenario, 2006-2013

article image
Sources: Lesotho authorities; and IMF staff estimates and projections.

8. Considerable downside risks remain to the baseline outlook. Staff considered the possible impact of a more protracted global financial crisis and economic downturn on Lesotho’s economy by assuming a sustained reduction in the production of diamonds and textiles (Figure 4).5 The results suggest a need for continuing vigilance on the macroeconomic front, and acceleration of structural reforms to ensure external sustainability.6

Figure 4.
Figure 4.

Economic Impact of Lower Diamond and Textile Output

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

Sources: Lesotho authorities; and IMF staff estimates.

IV. Policy Discussions

9. Against the background of the global financial crisis, the discussions focused on policies to:

  • achieve sustained, broad based growth for poverty reduction;

  • preserve fiscal sustainability and improve fiscal management;

  • pursue external stability; and

  • ensure financial stability and development.

Implementation of Previous Fund Policy Advice

Fund staff and authorities have generally agreed on Lesotho’s main economic challenges. In the past, staff recommended containing recurrent expenditure in light of uncertain SACU revenues, vigorously implementing structural reforms, and taking prompt action to deal with the Ponzi schemes. The authorities’ containment of recurrent spending contributed to a substantial surplus in 2007–08, and they closed down the operations of the largest Ponzi scheme. However, the pace of structural reforms has generally been slow mainly due to capacity constraints.

A. Achieving Sustained and Broad-Based Growth

10. Staff and authorities agreed that accelerating broad-based sustainable economic growth is needed to reduce poverty and inequality, and move toward achieving the MDGs. The recent sharp declines, owing to drought and high cost of inputs, in agricultural production—the source of income for the 70 percent of the rural population—may have exacerbated poverty and worsened income distribution. Staff welcomed, therefore, the government’s intention to increase agriculture productivity with the support of the World Bank, and to devise a long-term strategy to boost food production. Measures to address the HIV/AIDS pandemic, such as awareness campaigns and increased anti-retroviral therapies, are critical in supporting the development of human capital and increasing productivity in all sectors.

11. Staff welcomed the focus in the authorities’ draft Growth Strategy Paper (GSP) of identifying binding constraints on growth and improving the investment climate. The GSP rightly emphasizes the importance of prudent macro-fiscal policies, an improved investment climate, enhanced property rights, land reforms, and better infrastructure as linchpins for accelerating pro-poor growth. Staff and the authorities agreed, that for Lesotho to become competitive, it will be critical to expedite the reforms being supported by the World Bank and the Millennium Challenge Corporation (MCC) in such areas as (i) improving the legal, judicial, and regulatory reforms; (ii) raising productivity through improvements in education and health; and (iii) enhancing access to financial services. Staff also noted that Lesotho could take advantage of its proximity to South Africa by deepening regional integration. The recent efforts to establish and operationalize the one-stop-shop are welcomed but closer integration with the relevant ministries is also needed for greater effectiveness.

12. The implementation of projects supported by the MCC and the second phase of Lesotho Highland Water Project (LHWP) should support growth over the next five to ten years. The MCC approved a grant of US$362.6 million (22 percent of 2007 GDP) under its compact program to assist Lesotho reduce poverty through sustained economic growth. The grant, which came into force in September 2008, has to be utilized within the next five years or Lesotho will lose the balance. The funds will be used to finance projects for provision of water, renovation of health facilities, and development of the private sector. The grant has an administration component for monitoring and evaluation, compact management, and oversight. The second phase of LHWP (62 percent of 2007 GDP) is expected to start in 2012/13 and provides water and electricity to South Africa and Lesotho.

uA01fig05

Distribution of MCC grant

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

13. The current land tenure system unduly constrains development of agriculture, the financial sector, tourism, and manufacturing. Lack of collaterization of land and clarification of land ownership rights weakens linkages between the agriculture and financial sector while restrictions on foreign ownership and long-term leasing of land reduce incentives for foreign investors to promote tourism and expand factory shells. While agreeing that land reform is important, the authorities noted that progress is likely to be time consuming as it requires consensus-building at the national level.

B. Preserving Fiscal Sustainability and Improving Fiscal Management

14. The authorities agreed that Lesotho’s public finances are vulnerable to downside risks to SACU revenues, which account for about two-thirds of its tax revenues. Notwithstanding the recent downward revision in the CRP by South Africa, further reduction cannot be ruled out in the event of (i) a potential change in the SACU revenue-sharing formula; (ii) a further slow down in South Africa’s economic growth; (iii) a reduction in the common external tariff rates due to trade liberalization; and (iv) the creation of a SADC customs union in 2010, which may change Lesotho’s share of SACU revenues.

15. Under unchanged policies and taking into account the authorities’ projection for SACU revenues, the fiscal surplus will narrow from about 8½ percent of GDP in 2008–09—against a budgeted deficit of 3 percent of GDP—to a surplus of 1.8 percent of GDP in 2009–2010, but then rise as SACU revenues recover. The sharp increase in transfers in 2008–09 reflects full capitalization of the pension fund. In 2009-10 and beyond, non-SACU revenues are assumed to grow in line with nominal GDP. On the expenditure side, having already introduced a significant pension reform in the 2008–09 budget, which recognized the contingent liability (4½ percent of GDP) associated with the existing unfunded Defined Benefit Plan, the authorities do not intend to introduce any major expenditure policy changes. The wage bill, which is already one of the highest in sub-Saharan Africa, is expected to decline gradually in line with the implementation of the Public Sector Improvement and Reform Program (PSIRP). Over the medium term, the overall fiscal position is projected to remain in surplus, consistent with a stable non-SACU deficit (the overall fiscal balance excluding SACU revenues) of about 24–25 percent of GDP and a substantial reduction in the domestic debt-to-GDP ratio.

Lesotho: Fiscal Framework, 2007/08–2013/14

(In percent of GDP)

article image
Sources: Lesotho authorities; and Fund staff estimates.

16. Looking ahead, the fiscal policy challenge will be to respond effectively to a possible further deterioration in SACU revenues. To mitigate against that risk, the government needs to strengthen non-SACU revenues and contain overall expenditures while at the same time shifting the allocation of resources toward development outlays that support growth. Implementation of these measures would permit a lower non-SACU deficit than projected under the unchanged policy scenario. Staff urged the government to avoid a further general wage increase and limit future recruitment to high priority areas. The authorities agreed that the current wage policy may not be sustainable, and emphasized that full implementation of the PSIRP remains a government priority.

17. Staff noted the government’s intention to improve the public expenditure management (PEM) system and resuscitate the Project Appraisal Committee (PAC) to improve productivity of public investment. The staff and the authorities agreed that the persistent underspending of the budget (10 percent of GDP in 2007/08) reflects primarily the formulation of budget on the basis of the previous year’s budget appropriation rather than outturn. To address this problem, the authorities agreed to formulate future budgets, starting with the 2009/10 budget, on the basis of the expected outturn. They also intend to embark on staff training in order to remove capacity bottlenecks and fast-track the implementation of the new Integrated Financial Management Information System. A monitoring and reporting framework will also be considered with a view to enhancing accountability in the use of resources. The authorities are funding two investment projects under a Public-Private-Partnership (PPP). They are aware of the risks and challenges of PPPs and are monitoring their implementation in collaboration with the PAC. Staff urged that an appraisal framework be put in place to vet new PPP projects and thereby avoid assuming excessive contingent liabilities.

C. Pursuing External Stability

18. Economic policies have been consistent with external stability. The staff agreed with the authorities that the current exchange rate system should be maintained as it facilitates capital and current transactions with the country’s most important economic partner, South Africa. The main policy focus should be on fast-tracking the implementation of key structural reforms in order to enhance productivity and competitiveness.

19. The assessment of the level of the real exchange rate was based on three approaches, the purchasing power parity approach adjusted for productivity differentials, the external sustainability approach, and the macro balance approach.7 Based on information through September 2008, the approaches suggested an overvaluation in the range of 5–11 percent. However, this has largely been offset since then by the depreciation of the loti by 13 percent through end-2008. Caution should be exercised in reaching a conclusion given weaknesses in data and the period of assessment. However, Lesotho’s skewed trade pattern, with imports (mostly from South Africa) far exceeding exports (mainly to the United States), complicates the interpretation and usefulness of the standard real effective exchange rate for measuring competitiveness.

uA01fig06

Lesotho Exchange Rate, January 2001–October 2008

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

Sources: Lesotho authorities; and IMF staff estimates.
uA01fig07

CMA: Real Effective Exchange Rates, January 2001–October 2008

(2000=100)

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

Source: INS.

20. Lesotho scores poorly internationally and regionally on most measures of the cost of doing business that are critical to enhancing its competitiveness. Already the government has extended financial support to one large textile company to prevent layoffs and other problems are emerging within the textile sector (Box 3). The current account deficit will widen further to 8½ percent of GDP in 2009 from 3.7 percent of GDP in 2008; and exports of textiles will fall throughout the projection period. Given Lesotho’s real effective exchange rate is largely exogenous in light of the peg of the loti to the rand and with inflation closely tracking that of South Africa, the sustainability of the current account therefore depends crucially on pursuing competitiveness through rigorous implementation of structural reforms.

uA01fig08

Cost of Doing Business, 2008

(Percent of countries scoring better than Lesotho)

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

Source: World Bank’s Doing Business (2009).
uA01fig09

Ease of Doing Business, 2008

(Percent of countries scoring better than the country indicated)

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

21. The authorities agreed that a continued build-up of international reserves depends in large part on the pursuit of a prudent fiscal stance despite declining SACU transfers. This is particularly important given the falling level of exports (textiles and diamonds), and remittances. The authorities noted that their net international reserve, currently twice the target set by the CBL to support the exchange rate peg, is adequate, and that they would take appropriate measures, if needed, to ensure that objective is sustained.

Indicators of Reserve Adequacy at End-2007

(In percent unless otherwise indicated)

article image
Sources: World Economic Outlook; AFR’s Regional Outlook; and staff estimates.

22. With regard to external debt, the staff analysis shows that Lesotho’s public and publicly guaranteed debt is sustainable, although there is a moderate risk of debt distress (see the Debt Sustainability Analysis Annex). There is therefore a need to continue pursuing prudent debt policies, including seeking loans on highly concessional terms.

Challenges Facing the Textile Sector in Lesotho

Not since the expiration of the Multi Fiber Agreement on January 1, 2005 has there been so much pressure on the textile sector in Lesotho. With about two-thirds of its exports going to the United States, the industry has been hit hard by the recent downturn in the U.S. economy. Garment exports to the United States during the first 10 months of 2008 are down by 15 percent compared with the same period in 2007 and Lesotho’s share of the U.S. market has fallen.

Among the many other challenges facing the sector is the unavailability of credit from Asia and the pending expiration of the third-country provision for sourcing inputs under the African Growth and Opportunity Act (AGOA) by 2012. This is of particular importance considering that Lesotho has a limited number of fabric mills and will have difficulty sourcing inputs from within the region. The sector is also weighed down by high labor and shipping costs, a shortage of factory shells, and the lack of basic infrastructure, such as water, communications and electricity services.

Lesotho: Textile Exports and Employment 2002–08

article image
Sources: Central Bank of Lesotho; and Lesotho National Development Corporation.

Employment is for end-September 2008.

Responding to the challenges

Going forward, the challenge is to achieve international competitiveness in the face of strong expansion of Asian exports to their traditional export market in the United States, especially after 2008, when the bilateral agreements restricting Chinese exports expire. In spite of its relatively high unit labor costs compared to those of the Asian textile producing countries and longer turn-around time, trade preferences have helped Lesotho. However, there are no guarantees that the current benefits under the AGOA will last beyond 2012. Moreover, possible reductions in most-favored-nation tariffs in industrial countries under the current Doha Round of multilateral trade negotiations, could further reduce the preference margin for African exports, and adversely affect Lesotho’s garment sector. It is essential, therefore, that key structural reforms be implemented quickly if Lesotho is to become competitive.

D. Ensuring Financial Stability and Development

23. The banking sector seems to have weathered well the current global financial crisis thus far. The three largely South-African-owned commercial banks continue to be well capitalized, liquid and profitable. However, there has been a slight increase in nonperforming loans, although these are still moderate and are fully provisioned. Some vulnerability may remain as bank’s loan portfolios continue to be concentrated on a few borrowers. Staff welcomed the approval by Parliament of the Anti-Money Laundering legislation and urged that the necessary regulations be issued and the Financial Intelligence Unit be put in place as quickly as possible.

Lesotho: Commercial Banks’ Quarterly Performance Ratios, 2006–08

(In Percent)

article image
Source: Central Bank of Lesotho.

Since 2005, affected by the operations of two new banks.

24. There continues to be a need to increase access to financial services for a large proportion of the underserved population including for small and medium-term enterprises. Staff welcomed the efforts under way supported by the MCC and the International Fund for Agricultural Development (IFAD) under the Rural Financial Intermediation Program (RUFIP) to increase access to financial services, including by strengthening the institutional and operational framework of PostBank. Implementation of these reforms should deepen and enhance the efficiency of the financial sector.

uA01fig10

Private Sector Credit, 2007

(In percent of GDP)

Citation: IMF Staff Country Reports 2010, 005; 10.5089/9781451823899.002.A001

Sources: World Economic Outlook; and International Financial Statistics.

25. The extent of the operation of the SACCOs, which by law are permitted to take deposits from nonmembers, is not well known, and the quality of regulatory oversight, performed by the Ministry of Trade, is limited. The authorities intend to repeal Article 68 of the Cooperative Societies Act of 2000 that allows deposit mobilization from nonmembers and may consider converting large SACCOs into commercial banks and placing them under the supervision of the CBL. They are also reviewing the legislation on NBFIs under the IFAD’s RUFIP, and more broadly, intend to further strengthen the CBL’s supervisory and regulatory authority of the financial sector and prevent emergence of new Ponzi-type schemes.

V. Staff Appraisal

26. After two years of good performance, Lesotho’s economy now faces significant downside risks owing to the international financial crisis. Projections for SACU revenues have been revised downward significantly and demand for Lesotho’s garments has fallen, as has the price of diamonds. The authorities should therefore fast track structural reforms and safeguard fiscal sustainability over the medium term.

27. Broad-based growth will require prioritizing and implementing the reforms supported by the World Bank and the MCC. The government’s growth diagnostic study correctly recognizes a number of key constrains that hold growth in check, but it needs to prioritize and remove the key cross-cutting constraints. Of particular importance is land reform, which could help deepen the financial sector and serve as a catalyst for re-invigorating other sectors, such as tourism and manufacturing which are needed for sustaining growth and poverty reduction.

28. Structural reforms need to be accelerated. Consolidating the recent growth performance also requires determined effort to fast-track the implementation of other reforms to reduce the cost of doing business, improve the investment climate, and increase investment in human and physical capital. Implementing these reforms should also help diversify the economy, increase competitiveness and thereby help achieve external sustainability. To ensure implementation and close monitoring, staff recommends charging a high-level committee with the task of accelerating structural reforms, an approach that has worked in other countries.

29. An appropriate fiscal policy strategy to mitigate risks from lower SACU revenues should be put in place. It could include: (i) strengthening non-SACU revenues; (ii) containing recurrent spending by avoiding a general wage increase so as to create fiscal space for increased public investment; (iii) improving the entire process of selecting, monitoring, evaluating, and reporting progress on capital investment projects; (iv) making the budget a more effective tool for public policy by formulating it on an outturn basis rather than on unrealistic budget appropriations that do not advance transparency, accountability, and effective use of scarce resources; and (v) accelerating the civil service reform component of the PSIRP, including by linking wage increases to performance and to qualified professionals within the health and education sectors.

30. Staff commends the authorities on their recent decision to close the largest Ponzi scheme and notes that an early successful resolution would serve the country well. It would allow regulators to focus on their core task of ensuring an efficient functioning of the formal financial sector that enhances access to finance and mobilizes resources for productive investment.

31. Prompt action is needed to address vulnerabilities in NBFIs. The amendments to the FIA to strengthen the supervision and regulatory role of the CBL over NBFIs need to be expedited. Staff therefore welcomes the intention to repeal Article 68 of the Cooperative Societies Act of 2000 that allows deposit mobilization from nonmembers.

32. It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

Table 1.

Lesotho: Selected Economic and Financial Indicators, 2004–2013 1/

article image
Sources: Lesotho authorities; and IMF staff estimates and projections.

Fiscal year beginning in April. All fiscal data are reported on a calendar basis.

U.S. dollars.

Based on partner-country data, new trade weights from 2004; a minus sign indicates a depreciation.

Change in percent of broad money at the beginning of the period.

The average effective rate on three-month treasury bills.

Table 2.

Lesotho: Central Government Operations, 2005/06-2013/14 1/

(In millions of maloti)

article image
article image
Sources: Ministry of Finance, and Fund staff estimates and projections.

Fiscal year from April to March.

Adjustment receipts of M 330 million in 2005/06 included.

Overall balance excluding customs revenue (SACU)

Domestic balance excludes grants, foreign-financed capital spending, foreign interest payments, and exceptional factors.

On a fiscal year basis.