Kingdom of Lesotho: Staff Report for the 2012 Article IV Consultation and Second and Third Reviews Under the Three-Year Arrangement Under the Extended Credit Facility and a Request for Augmentation of Access Informational Annex

This staff report examines the Kingdom of Lesotho’s 2012 Article IV Consultation and second and third reviews under the three-year arrangement under the Extended Credit Facility. Real GDP growth for 2010/11 is estimated at 5¾ percent, and inflation rose gradually in 2011, driven by international commodity prices. Despite the sharp drop in Southern African Customs Union (SACU) revenues, fiscal performance in 2010/11 has been much better than programmed, reflecting higher domestic revenue collections and cuts in recurrent spending.

Abstract

This staff report examines the Kingdom of Lesotho’s 2012 Article IV Consultation and second and third reviews under the three-year arrangement under the Extended Credit Facility. Real GDP growth for 2010/11 is estimated at 5¾ percent, and inflation rose gradually in 2011, driven by international commodity prices. Despite the sharp drop in Southern African Customs Union (SACU) revenues, fiscal performance in 2010/11 has been much better than programmed, reflecting higher domestic revenue collections and cuts in recurrent spending.

I. Lesotho: Relations with the Fund

(As of February 29, 2012)

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:

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III. SDR Department:

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IV. Outstanding purchases and loans:

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V. Financial arrangements:

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

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VII. Safeguards Assessment

An updated safeguards assessment under the 2010 ECF arrangement was completed on December 27, 2010. The CBL has made good progress in implementing the recommendations of the safeguards assessment. Deloitte and Touche (South Africa) was appointed as the CBL’s external auditor in 2010. The audit of that year was completed within the statutory deadline and the audited financial statements were published in full on the bank’s external website in April 2011. Deloitte & Touche (South Africa) has been reappointed to conduct the 2011 external audit jointly with a local audit firm. Both firms will sign the audit opinion. It is expected that the audit will be completed by end-March 2012. As recommended by the assessment, the CBL has also introduced internal audits of the monetary data submitted for program monitoring purposes. The authorities are aware that in the event of an augmentation of the existing arrangement, an update assessment will need to be completed.

VIII. Exchange arrangement:

Lesotho is a member of the Common Monetary Area (CMA) and the Lesotho loti is both de facto and de jure pegged at par to the South African Rand, which is also legal tender in the country. 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 the making of payments and transfers for current international transactions. As of February 29, 2012, the maloti rate per U.S. dollar was M7.44.

IX. Article IV consultation:

The 2009 Article IV consultation was concluded by the Executive Board on February 22, 2010. Lesotho is on the standard 24-month Article IV consultation cycle.

X. Technical assistance missions:

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XI. Resident Representatives:

The IMF will open up a new resident representative office in Maseru soon. The newly-appointed Resident Representative, Mr. Michael Tharkur, is expected to take up his assignment in April 2012.

II. Lesotho: The JMAP Bank-Fund Matrix

(As of February 29, 2012)

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III. Lesotho: Statistical Issues

The statistical database is adequate for surveillance, although there are some deficiencies in core surveillance data, including government finance, monetary and financial statistic 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 and rebased national accounts were released in November 2008 by the Lesotho Bureau of Statistics of Lesotho (BOS). Technical assistance from the EU and DFID supported the data revision and the rebasing of the GDP data from 1981 to 2007. Additional revisions and modifications were made in 2009, some due to revisions in the balance of payments. Important new sources of data include the use of VAT records and the 2008 labor force 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) has been revised and the new base period is March 2010. The CPI is estimated on a monthly basis by the BOS and is designated to show changes in the cost of buying a fixed bundle of consumer goods and services as determined for the base period 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 the Development and Implementation of a Macroeconomic Model for Lesotho project (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) using the GFSM 2001 framework. These statistics were compiled from the Integrated Financial Management Information System (IFMIS), 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 GFSM2001 framework, is now the main source of government finance statistics. However, as a result of teething problems experienced with the IFMIS, there has been inadequate data capture of revenues and budget execution data, and therefore shortcomings to the data to prepare the budget. Steady progress has been made, with technical assistance from the EU and FAD, to improve the functionality of the IFMIS. To ensure timely reconciliation of and monitoring of budget execution, further improvements are needed, including improving revenue tracking and 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) and the CS-DRMS - the public debt recording and management system -with the IFMIS, and are working to integrate the LRA system – the VIPS. There are also plans to interface IFMIS with the CBL.

The MoFDP also provides annual data to STA on the operations of the general government for publication in the GovernmentFinanceStatisticsYearbook. No high frequency data are reported for publication in the International Financial Statistics. The MoFDP 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

Lesotho compiles and reports monetary statistics based on the Standardized Report Forms (SRFs). Monthly data using SRFs are disseminated in the IFS. Beginning in January 2011, data are based on improved sources which allow for better classification and sectorization of accounts closely aligned to the MFSM methodology.

The authorities need to expand the institutional coverage of MFS with respect to both full coverage of other depository corporations and expanding the coverage to include other financial corporations. A monetary and financial statistics mission in May 2011 found that the progress has been very slow in expanding the coverage of monetary statistics mainly because of weaknesses in or nonexistence of reporting frameworks for the financial institutions in question and lack of staff resources to devote to this task.

Balance of payments and external debt

In 2010, the CBL adopted a new balance of payments database, developed as part of a DIMMOL project to develop an integrated and consistent set of sector flow-of-funds accounts. The development of the external sector account, which began in 2008, benefited from technical assistance from STA. The new database addresses a number of data and methodological classification issues, including the treatment of SACU transfers. The new database provides an opportunity to improve the format of the quarterly and annual balance of payments statements published by the CBL.

Most of the recommendations made by the 2008 STA mission for improving the quality of balance of payments statistics have been implemented in the new database. A STA mission in April/May 2010 reviewed the balance of payments database and confirmed that it is consistent with the standard presentation recommended by the Balance of Payments Manual, fifth edition (BPM5) and that it meets the need of both the balance of payments and the external accounts. The mission welcomed the work of the DIMMOL, which enables access to other sector accounts, such as fiscal and national accounts, providing data sources that supplement data entered directly into the balance of payments database by the CBL. Following from the 2008 recommendations, private capital flows surveys have become an annual survey and the reports published. The 2008 recommendations for expanding the coverage of International Investment Position (IIP) statistics have not yet been implemented.

The mission emphasized the need for staff training to manage the new database; adoption of the new balance of payments database as the official source; and expansion of IIP coverage to reflect available data sources. On dissemination practices, the mission urged the authorities to publish balance of payments and IIP data consistent with BPM5 in the CBL’s Annual Report and Quarterly Review and post the balance of payments and IIP data at the CBL website on a quarterly basis.

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

Lesotho: Table of Common Indicators Required for Surveillance

(As of February 29, 2012)

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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 consist 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 N/A.

1

Formerly PRGF.

Kingdom of Lesotho: Staff Report for the 2012 Article IV Consultation and Second and Third Reviews Under the Three-Year Arrangement Under the Extended Credit Facility and a Request for Augmentation of Access: Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Kingdom of Lesotho.
Author: International Monetary Fund