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.
On April 9, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Lesotho.1
Background
Despite the unfavorable external environment (owing to a significant fall in revenues from the Southern African Customs Union (SACU) and floods in early 2011), Lesotho’s real gross domestic product (GDP) grew at 5¾ percent in 2010/11 and is projected to increase by 4¼ percent in 2011/12, mainly driven by the mining and construction sectors. Meanwhile, inflation steadily increased in 2011, reaching 7 percent in December, reflecting high international commodity prices and agricultural shortages following months of floods. The external balances remained under pressure from the fall in SACU revenues and the floods, as well as from recent high international commodity prices. The external current account deficit widened to 14¾ percent of GDP in 2010/11, while gross international reserves fell to about four months of imports by end-2011. A new five-year National Strategic Development Plan (covering 2012/13-2016/17)—with a view to achieving sustained growth and poverty reduction—was recently finalized.
In 2010/11-2011/12, significant fiscal consolidation efforts were made to address the drop in SACU revenues. Increased domestic revenue collections and cuts in recurrent spending improved the fiscal position. The core SACU fiscal balance—defined as the fiscal balance excluding the volatile component of SACU revenues and foreign-financed project loans—recorded a deficit of 5½ percent of GDP in 2010/11 and is projected at 7¾ percent in 2011/12, significantly below the 20 percent of GDP recorded in 2009/10. The authorities have committed to maintaining the fiscal consolidation efforts in 2012/13. The risk of debt distress remains moderate, despite an increase in public debt in 2011/12 on account of loans for large infrastructure projects.
Although the banking sector has been well regulated and supervised, nonbank financial institutions were generally not comprehensively supervised. The weakness in the regulatory and supervisory framework has been addressed through the adoption of the new Financial Institutions Act, which will guide all aspects of regulation and supervision of both bank and nonbank financial institutions.
Lesotho’s medium-term economic outlook is favorable though clouded by significant downside risks, given global economic uncertainties. Lesotho therefore faces the risk of unexpected fall in SACU revenues and in global demand for diamonds. In addition, medium-term growth prospects critically depend on ongoing reforms to improve the business environment and to upgrade the physical infrastructure, to support sustained economic growth and diversification.
Executive Board Assessment
Executive Directors commended the authorities for the strong implementation of the ECF-supported program, despite devastating floods and a difficult external environment. Directors welcomed the authorities’ plans to strengthen Lesotho’s fiscal and external positions, achieve broad-based growth for poverty reduction, and strengthen the supervisory and regulatory frameworks for the financial sector.
Directors commended the authorities for their commitment to fiscal prudence, and underscored the importance of continued fiscal consolidation to rebuild international reserves, support the exchange rate peg, and reduce reliance on revenues from the Southern African Customs Union. In this regard, greater revenues from the mining sector could be considered. Directors welcomed the 2012/13 fiscal framework target of an overall surplus, with the underlying measures to restrain recurrent outlays, while safeguarding critical social spending. More broadly, they looked forward to further steps to strengthen public financial management, improve the quality of public expenditure, and boost revenue mobilization. While Lesotho remains at a moderate risk of debt distress, Directors encouraged the authorities to limit non-concessional borrowing to safeguard debt sustainability.
Directors welcomed the progress in strengthening the supervisory and regulatory frameworks for banks and nonbanks, and encouraged further steps in this direction. They also commended the authorities for improvements in the anti-money-laundering framework and the steps underway to increase access to financial services, especially in the rural areas.
Directors stressed the need to accelerate structural reforms to improve the investment climate and competitiveness with a view to supporting private sector-led growth, economic diversification, and poverty reduction. In this regard, they welcomed the finalization of the National Strategic Development Plan.
Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
Lesotho: Selected Economic Indicators, 2009/10-12/13 1
The fiscal year runs from April 1 to March 31.
Values as in the first ECF review. Calendar year projections.
IMF Information Notice System trade-weighted; end of period.
12–month time deposits rate.
Lesotho: Selected Economic Indicators, 2009/10-12/13 1
| 2009/10 | 2010/11 | 2011/12 | 2012/13 | |||||
|---|---|---|---|---|---|---|---|---|
| Act. | EBS/11/44 2 | Est. | EBS/11/44 2 | Proj. | Proj. | |||
| (Percentage changes; unless otherwise indicated) | ||||||||
| National account and prices | ||||||||
| GDP at constant prices | 3.6 | 2.4 | 5.7 | 3.1 | 4.2 | 5.2 | ||
| GDP deflator | 4.8 | 4.4 | 3.8 | 8.3 | 6.7 | 7.8 | ||
| GDP at market prices | ||||||||
| (Maloti millions) | 14,865 | 15,590 | 16,310 | 17,411 | 18,136 | 20,559 | ||
| Consumer prices (average) | 5.9 | 3.8 | 3.4 | 5.4 | 5.6 | 5.2 | ||
| External sector | ||||||||
| Terms of trade (deterioration -) | −4.4 | 6.9 | 4.1 | 0.4 | −2.5 | 1.3 | ||
| Average exchange rate | ||||||||
| (local currency per U.S. dollar) | 7.8 | … | 7.2 | … | … | … | ||
| Nominal effective exchange rate change (- = | 12.7 | 12.9 | 5.4 | … | … | … | ||
| Real effective exchange rate (- = depreciation) 3 | 13.2 | 14.7 | 5.1 | … | … | … | ||
| Current account balance | ||||||||
| (including official transfers, in percent of GDP) | −3.2 | −16.1 | −14.8 | −23.4 | −16.6 | −11.2 | ||
| (excluding official transfers, in percent of GDP) | −37.5 | … | −36.9 | … | −36.2 | −45.2 | ||
| Gross international reserves | ||||||||
| (months of imports) | 5.3 | 4.2 | 3.9 | 2.7 | 3.0 | 3.5 | ||
| (percent of M1) | 176.0 | 144.0 | 144.4 | 84.0 | 116.3 | 130.7 | ||
| Money and credit | ||||||||
| Domestic credit to the private sector | 20.7 | 5.9 | 26.9 | 1.6 | 21.9 | … | ||
| Broad money | 11.9 | 14.5 | 1.1 | 24.3 | 12.3 | … | ||
| Interest rate (percent) 4 | 4.5 | 6.2 | 3.2 | … | … | … | ||
| (Percent of GDP) | ||||||||
| Savings and investment | ||||||||
| Gross capital formation | 28.0 | 37.5 | 30.2 | 39.1 | 36.9 | 46.1 | ||
| Government | 11.8 | 21.0 | 13.1 | 22.1 | 18.6 | 23.7 | ||
| Private | 16.3 | 16.5 | 15.6 | 17.0 | 18.1 | 22.3 | ||
| National savings | 24.9 | 21.4 | 15.3 | 15.8 | 20.3 | 35.0 | ||
| Government | 11.3 | 14.0 | 6.4 | 8.6 | 8.8 | 23.4 | ||
| Private | 13.6 | 7.4 | 8.9 | 7.2 | 11.5 | 11.5 | ||
| Public debt | 38.2 | 37.8 | 35.2 | 41.6 | 39.6 | 42.2 | ||
| External public debt | 34.7 | 33.9 | 30.4 | 35.9 | 33.7 | 35.9 | ||
| Domestic debt | 3.5 | 3.9 | 4.8 | 5.8 | 6.0 | 6.3 | ||
| Central government fiscal operations | ||||||||
| Net lending/borrowing | −3.9 | −8.2 | −5.0 | −15.0 | −10.5 | 0.2 | ||
| (excluding grants) | −6.9 | −17.6 | −12.4 | −24.6 | −19.0 | −8.8 | ||
| Revenue | 62.8 | 56.0 | 52.5 | 51.8 | 51.6 | 65.5 | ||
| Of which: grants | 3.0 | 9.4 | 7.4 | 9.6 | 8.5 | 9.0 | ||
| Expenses | 55.8 | 52.0 | 45.7 | 54.9 | 47.7 | 47.3 | ||
| Nonfinancial assets | 10.9 | 12.2 | 11.8 | 11.9 | 14.4 | 18.0 | ||
The fiscal year runs from April 1 to March 31.
Values as in the first ECF review. Calendar year projections.
IMF Information Notice System trade-weighted; end of period.
12–month time deposits rate.
Lesotho: Selected Economic Indicators, 2009/10-12/13 1
| 2009/10 | 2010/11 | 2011/12 | 2012/13 | |||||
|---|---|---|---|---|---|---|---|---|
| Act. | EBS/11/44 2 | Est. | EBS/11/44 2 | Proj. | Proj. | |||
| (Percentage changes; unless otherwise indicated) | ||||||||
| National account and prices | ||||||||
| GDP at constant prices | 3.6 | 2.4 | 5.7 | 3.1 | 4.2 | 5.2 | ||
| GDP deflator | 4.8 | 4.4 | 3.8 | 8.3 | 6.7 | 7.8 | ||
| GDP at market prices | ||||||||
| (Maloti millions) | 14,865 | 15,590 | 16,310 | 17,411 | 18,136 | 20,559 | ||
| Consumer prices (average) | 5.9 | 3.8 | 3.4 | 5.4 | 5.6 | 5.2 | ||
| External sector | ||||||||
| Terms of trade (deterioration -) | −4.4 | 6.9 | 4.1 | 0.4 | −2.5 | 1.3 | ||
| Average exchange rate | ||||||||
| (local currency per U.S. dollar) | 7.8 | … | 7.2 | … | … | … | ||
| Nominal effective exchange rate change (- = | 12.7 | 12.9 | 5.4 | … | … | … | ||
| Real effective exchange rate (- = depreciation) 3 | 13.2 | 14.7 | 5.1 | … | … | … | ||
| Current account balance | ||||||||
| (including official transfers, in percent of GDP) | −3.2 | −16.1 | −14.8 | −23.4 | −16.6 | −11.2 | ||
| (excluding official transfers, in percent of GDP) | −37.5 | … | −36.9 | … | −36.2 | −45.2 | ||
| Gross international reserves | ||||||||
| (months of imports) | 5.3 | 4.2 | 3.9 | 2.7 | 3.0 | 3.5 | ||
| (percent of M1) | 176.0 | 144.0 | 144.4 | 84.0 | 116.3 | 130.7 | ||
| Money and credit | ||||||||
| Domestic credit to the private sector | 20.7 | 5.9 | 26.9 | 1.6 | 21.9 | … | ||
| Broad money | 11.9 | 14.5 | 1.1 | 24.3 | 12.3 | … | ||
| Interest rate (percent) 4 | 4.5 | 6.2 | 3.2 | … | … | … | ||
| (Percent of GDP) | ||||||||
| Savings and investment | ||||||||
| Gross capital formation | 28.0 | 37.5 | 30.2 | 39.1 | 36.9 | 46.1 | ||
| Government | 11.8 | 21.0 | 13.1 | 22.1 | 18.6 | 23.7 | ||
| Private | 16.3 | 16.5 | 15.6 | 17.0 | 18.1 | 22.3 | ||
| National savings | 24.9 | 21.4 | 15.3 | 15.8 | 20.3 | 35.0 | ||
| Government | 11.3 | 14.0 | 6.4 | 8.6 | 8.8 | 23.4 | ||
| Private | 13.6 | 7.4 | 8.9 | 7.2 | 11.5 | 11.5 | ||
| Public debt | 38.2 | 37.8 | 35.2 | 41.6 | 39.6 | 42.2 | ||
| External public debt | 34.7 | 33.9 | 30.4 | 35.9 | 33.7 | 35.9 | ||
| Domestic debt | 3.5 | 3.9 | 4.8 | 5.8 | 6.0 | 6.3 | ||
| Central government fiscal operations | ||||||||
| Net lending/borrowing | −3.9 | −8.2 | −5.0 | −15.0 | −10.5 | 0.2 | ||
| (excluding grants) | −6.9 | −17.6 | −12.4 | −24.6 | −19.0 | −8.8 | ||
| Revenue | 62.8 | 56.0 | 52.5 | 51.8 | 51.6 | 65.5 | ||
| Of which: grants | 3.0 | 9.4 | 7.4 | 9.6 | 8.5 | 9.0 | ||
| Expenses | 55.8 | 52.0 | 45.7 | 54.9 | 47.7 | 47.3 | ||
| Nonfinancial assets | 10.9 | 12.2 | 11.8 | 11.9 | 14.4 | 18.0 | ||
The fiscal year runs from April 1 to March 31.
Values as in the first ECF review. Calendar year projections.
IMF Information Notice System trade-weighted; end of period.
12–month time deposits rate.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing up can be found here:http://www.imf.org/external/np/sec/misc/qualifiers.htm.