Kingdom of Lesotho: Request for a Three-Year Arrangement Under the Extended Credit Facility—Informational Annex

Lesotho’s fiscal and external balances have deteriorated as a result of the global economic downturn and a surge in spending. Undertaking key fiscal adjustments to restore macroeconomic stability is necessary for raising Lesotho’s growth potential. Executive Directors commend the measures taken in the budget to reduce expenditure. Further strengthening of debt management and accelerating structural reforms is crucial for raising Lesotho’s growth potential. Strengthening the institutional and regulatory framework for banks and non-bank financial institutions (NBFIs) will help to support financial sector health and stability.

Abstract

Lesotho’s fiscal and external balances have deteriorated as a result of the global economic downturn and a surge in spending. Undertaking key fiscal adjustments to restore macroeconomic stability is necessary for raising Lesotho’s growth potential. Executive Directors commend the measures taken in the budget to reduce expenditure. Further strengthening of debt management and accelerating structural reforms is crucial for raising Lesotho’s growth potential. Strengthening the institutional and regulatory framework for banks and non-bank financial institutions (NBFIs) will help to support financial sector health and stability.

I. Lesotho: Relations with the Fund

(As of March 31, 2010)

I. Membership status: Joined 07/25/1968; accepted the obligations of Article VIII, Sections 2, 3, and 4: 03/05/1997.

II. General resources account:

article image

III. SDR Department:

article image

IV. Outstanding purchases and loans:

article image

V. Financial arrangements:

article image

VI. Projected obligations to fund (SDR million; based on existing use of resources and present holdings of SDRs):

article image

VII. Under the Fund’s safeguards assessment policy, the CBL was subject to a safeguards assessment with respect to ECF1 arrangement approved on March 09, 2001. The assessment, completed on July 24, 2003, found that while the bank has made notable progress in strengthening its safeguards since the off-site assessment in July 2001, vulnerabilities remain, in particular in the areas of internal audit and internal controls.

VIII. Exchange arrangement:

Lesotho’s currency, the loti (plural maloti), is pegged to the South African rand at par. Both the loti and rand are legal tenders. As of May 5, 2010, the maloti rate per U.S. dollar was M 7.64.

IX. Article IV consultation:

The 2009 Article IV consultation was concluded by the Executive Board on February 22, 2010. Lesotho is on the standard 12-month Article IV consultation cycle.

IX. Technical assistance missions:

article image
article image

II. Lesotho: The JMAP Bank-Fund Matrix

(As of April 6, 2010)

article image

III. Lesotho: Statistical Issues

The statistical database is adequate for surveillance, although there are some deficiencies in core surveillance data, including government finance and balance of payments statistics that are currently being addressed by the authorities.

As one of 22 countries participating in the GDDS Project for Anglophone African Countries (funded by the U.K. Department for International Development (DFID)), Lesotho has undertaken the GDDS as framework for the development of its national statistical system and a depository of metadata for main macroeconomic aggregates. GDDS metadata have been posted on the Fund’s Dissemination Standards Bulletin Board since August 2003. Pending metadata updates in GDDS include those referring to recent/prospective revisions of the national accounts, government finance, and balance of payments statistics.

National accounts

Revised national accounts were released in November 2008 by the Bureau of Statistics of Lesotho (BSL). Technical assistance from the EU and DFID supported the data revision and the rebasing of the GDP data from 1981 to 2007. Important new sources of data include the use of VAT records and consumer spending information from the 2002/03 household budget survey. Annual GDP estimates in current prices and volume terms from the production, expenditure, and income sides are currently being produced and published by the BLS, albeit with different time lags. Other macroeconomic indicators, such as high-frequency industrial production/trade indices, are used to monitor developments during the year.

There is a need to further improve the source data used for compiling national accounts. Pending challenges include, inter alia, robust data on intermediate consumption for key economic activities, intra-SACU exports and imports, and gross fixed capital formation in machinery and equipment, and formal and informal construction activities. Private consumption and gross fixed capital formation are now estimated within the framework of a supply and use table. However, it has not been possible to balance supply and use completely, hence the remaining discrepancy between the tables on GDP by activity and expenditure.

Prices

The consumer price index (CPI) is estimated on a monthly basis by the Bureau of Statistics (BOS). The CPI is designated to show changes in the cost of buying a fixed bundle of consumer goods and services as determined for the base period (January 2004) using spending weights from the 2002/03 Household Budget Survey (HBS). Prices are collected every month in twelve urban towns and forty five selected rural areas of Lesotho by personal visits to outlets.

Plans are in place at the BOS to develop producer and export price indices. In the meantime, the national accounts rely heavily on the South African producer price index (PPI), which is used as a deflator for imports from SACU member countries. South Africa’s import price indices are used as deflators for imports from non-SACU countries.

Government finance statistics

Data on government finance statistics are provided by the Ministry of Finance and Development Planning (MoFDP) to AFR periodically, and the timeliness and quality of the data have improved. Technical assistance from STA and DIMMOL supported migration of data from GFSM 1986 to the GFSM 2001 framework. AFR has been provided with monthly, quarterly and annual disaggregated central government data (on a cash basis) for the period 1991/92-2008/09, using the GFSM 2001 framework. These statistics were compiled from the GOLFIS, supplemented with data from the Lesotho Revenue Authority (LRA), other government departments and units and the banking system.

The Integrated Financial Management Information System (IFMIS), introduced in April 2009, and which has modules consistent with the GFSM 2001 framework, is now the main source of government finance statistics. However, as a result of teething problems experienced with the new IFMIS, there has been inadequate data capture of revenues and budget execution data for 2009/10, and therefore shortcomings to the data to prepare the 2010/11 budget. To ensure timely reconciliation of and monitoring of budget execution, the IFMIS implementation issues need to be addressed urgently, including ensuring proper reconciliation and adequate quality check of data from line ministries and government units. The authorities have integrated the government payroll system (Unique, implemented in September 2009) with the IFMIS and are working to integrate the CS-DRMS - the public debt recording and management system and the LRA system – the VIPS. There are also plans to interface IFMIS with the CBL.

The MFDP also provides annual data to STA on the operations of the general government for publication in the Government Finance Statistics Yearbook. No high frequency data are reported for publication in the International Financial Statistics. The MFDP disseminates government finance statistics, including government debt, to the public through its website and the website of the Bureau of Statistics.

Monetary and financial statistics

Since December 2004, Lesotho has been compiling monetary statistics based on the Standardized Report Forms (SRFs), which allow for an improved classification and sectorization of accounts. Monthly data using SRFs are currently disseminated in the International Finance Statistics Supplement.

Despite the progress achieved, the authorities need to expand the institutional coverage of the other depository corporations sector. A monetary and financial statistics mission in September 2007 found that work had started on the inventory of all financial corporations (deposit-taking and others), and that it was expected that credit cooperatives would be fully covered in the other depository corporations survey in the last quarter of 2008. The compilation of the other financial corporations’ survey had been targeted for 2009.

Balance of payments and external debt

The CBL compiles quarterly balance of payments statistics, usually with a lag of three months. However, a number of methodological and data classification issues with current practices will need to be addressed to make the national presentation consistent with the standard presentation recommended in the IMF’s Balance of Payments Manual, fifth edition (BPM5).

Balance of payments missions from the IMF Statistics department have been advising the authorities on methodological and data issues since 2002. A STA mission in mid-2002 found that the methodology underlying the balance of payments compilation used outdated benchmark surveys, had an incomplete coverage of main economic activities (e.g., commodity exports and imports, services, and direct investment statistics), and depended on data sources that were not produced on a timely basis.

A follow-up STA mission in July/August 2008 made further recommendations on data improvements. The mission welcomed the CBL efforts tox implement some new data surveys—on private capital flows, road transportation, telecommunications, postal and courier services, and remittances—which extended the data coverage and established benchmarks in data compilation. However, the quality of the balance of payments still has inadequacies, in large part due to undercoverage and the erroneous treatment of some transactions. With the full support of the compilers, the mission reviewed the sources and methods employed in compiling the balance of payments and the International Investment Position (IIP) and found a number of ways to strengthen them, especially in the area of coverage. The mission emphasized the need to continue conducting the private capital flows survey each year, with a particular focus on increasing the coverage of foreign direct investment enterprises and the survey’s response rate. On dissemination practices, the mission urged the authorities to post the balance of payments and IIP data at the CBL website on a quarterly basis.

The authorities are currently implementing the technical assistance recommendations provided by the IMF. The first step has been to implement methodological changes that do not require data sources, but would ensure correct and consistent use of data classifications along the BPM5. Subsequent steps will include, notably, improved estimates of imports of goods and services.

Data on public sector external debt is provided by the MFDP. The MoFDP maintains a comprehensive database of outstanding loans, with information on currency composition, debt service and amortization, as well as scheduled future disbursements.

Lesotho: Table of Common Indicators Required for Surveillance

(As of April 16, 2010)

article image

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates; money market rates; and rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I); and not available.

1

Formerly PRGF