Kingdom of Lesotho: Staff Report for the 2017 Article IV Consultation
Author: International Monetary Fund. African Dept.
Publication Date:
28 Feb 2018
eISBN:
9781484343289
Language:
English
Keywords:
ISCR; CR; government; development effort; credit growth; coalition government; wage bill; government car fleet expenses equivalent; government-funded credit lines; liquid government deposit; government deposit; Fiscal consolidation; Commercial banks; Africa
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2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Kingdom of Lesotho

Abstract

2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Kingdom of Lesotho

Context: High Vulnerabilities Amidst Political Fragility

1. Economic performance in Lesotho is subject to spillover-driven volatility. Customs revenues, which are pooled at the Southern African Customs Union (SACU) level, are dominated by South Africa’s import demand. Thus, Lesotho’s fiscal revenues are subject to considerable external volatility. In addition, South Africa’s economic conditions directly affect remittances. Lesotho’s exports are concentrated (diamonds, textiles, and water), further increasing volatility.

2. In addition to these economic vulnerabilities, Lesotho has been suffering for decades from political fragility and military interference in politics. In 2017, Lesotho elected a new, four party coalition government—the third government in five years. Ambitious political reforms initiated by the new government are guided by Southern African Development Community (SADC) reform recommendations after the 2014 attempted military coup. They aim at addressing human rights violations, but also to mitigate political instability through constitutional reforms. However, political fragility persists as evidenced in the recent killing of the army commander by officers. In response, several SADC member countries deployed military to Lesotho at the government’s request.

3. Political fragility has complicated much-needed reform efforts to make growth broad-based and inclusive. Strong growth of 4.1 percent on average over the past decade has not made inroads into unemployment, and poverty remains stubbornly high. At 23 percent, the HIV/AIDS rate is among the highest in the world (Figure 1).

Figure 1.
Figure 1.

Social Indicators

Citation: IMF Staff Country Reports 2018, 054; 10.5089/9781484343289.002.A001

Source: World Bank Development Indicators, IMF staff calculations

4. Authorities’ response to past policy advice has been mixed, reflecting the difficult political environment (Text Table 1).

Text Table 1.

Implementation of Fund Advice from the 2015 Article IV Consultation

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5. Expansionary fiscal policy shielded the economy from a large SACU revenue shortfall (around 7 percent of GDP compared to the FY 2014/15 peak), but with buffers dwindling quickly, severe vulnerabilities developed:

  • Real growth for the last three years averaged 3 percent, driven by textile manufacturing, which benefitted from the Rand/dollar depreciation, and more recently, by a strong recovery of agriculture after the severe droughts of 2015 and 2016 (Table 1 and Figure 2). Over the next three years, growth is expected to be driven by diamond mining and construction of the Lesotho Highlands Water Project Phase II (LHWP II).1

  • Inflation peaked at 6.2 percent in March 2017, mainly on higher food prices after the droughts.

  • The drop in SACU revenues, lower remittances, and weaker demand for Lesotho’s exports are responsible for the widening of the current account deficit to 7.4 percent of GDP in FY 2016/17 from under 5 percent of GDP the previous fiscal year. The international reserves to import coverage has been declining from its 6-month peak in March 2016 to around 4 months by March 2017, reflecting spillovers from South Africa, the depreciation of CBL’s Rand holdings, and the expansionary fiscal stance (Table 5 and Figure 3). The external position remains broadly in line with medium-term fundamentals and desirable policies (Annex IV).

  • The government responded to the SACU shortfall by allowing the fiscal deficit to increase (Tables 2 and 3 and Figure 4). Lower-than-expected domestic revenues in the first half of FY 2017/18 added to the revenue shortfall. The fiscal deficit of around 6 percent of GDP for two consecutive years was financed by drawing down sizable buffers in form of government deposits at the CBL, which has been mirrored in the loss of international reserves. Measures in the FY 2017/18 budget to contain the wage bill—one of the highest in the world (Annex II)— were broadly offset by higher recurrent spending to implement a campaign promise to raise old-age pension.

Figure 2.
Figure 2.

Recent Economic Developments

Citation: IMF Staff Country Reports 2018, 054; 10.5089/9781484343289.002.A001

Sources: Country authorities and IMF staff estimates
Figure 3.
Figure 3.

External Vulnerabilities

Citation: IMF Staff Country Reports 2018, 054; 10.5089/9781484343289.002.A001

Source: Country authorities and IMF staff calculations
Figure 4.
Figure 4.

Fiscal Imbalances

Citation: IMF Staff Country Reports 2018, 054; 10.5089/9781484343289.002.A001

Source: Country authorities and IMF staff calculations
Table 1.

Scenario 1: Lesotho: Selected Economic Indicators, 2013/14–2022/231

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Sources: Lesotho authorities, World Bank, and IMF staff estimates and projections.

The fiscal year runs from April 1 to March 31.

IMF Information Notice System trade-weighted; end of period.

12-month time deposits rate.

Table 2.

Scenario 1: Lesotho: Fiscal Operations of the Central Government 2013/14–2022/231

(Millions of Maloti)

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Sources: Lesotho authorities and IMF staff estimates and projections.

The fiscal year runs from April 1 to March 31.

Other taxes are not shown in the table.

Table 3.

Scenario 1: Lesotho: Fiscal Operations of the Central Government 2013/14–2022/231

(Percent of GDP)

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Sources: Lesotho authorities and IMF staff estimates and projections.

The fiscal year runs from April 1 to March 31.

Other taxes are not shown in the table.

Table 4.

Scenario 1: Lesotho: Monetary Accounts 2013/14–2019/201,2

(Maloti millions, unless otherwise indicated)

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Sources: Lesotho authorities and IMF staff estimates and projections.

The fiscal year runs from April 1 to March 31.

Including valuation changes.

Table 5.

Scenario 1: Lesotho: Balance of Payments 2013/14–2022/231

(US$ millions, unless otherwise indicated)

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Sources: Lesotho authorities and IMF staff estimates and projections.

The fiscal year runs from April 1 to March 31.

6. The banking system is generally sound and stable, but its impact on economic growth has been limited, and formal financial access remains low. 2 Non-performing loans (NPL) are fairly stable at low levels and profitability is high, although declining lately (Table 7 and Figure 5). The banking system is highly liquid, including by holding around 1/3 of deposits in form of short-term foreign assets with South African parent companies. The flipside is that the system is not showing any signs of financial deepening, with credit to the private sector growing barely in line with inflation in FY 2016/17.

Figure 5.
Figure 5.

Monetary and Financial Developments

Citation: IMF Staff Country Reports 2018, 054; 10.5089/9781484343289.002.A001

Source: Country authorities and IMF staff calculations
uA01fig01

Bank Loans by Type of Borrower

(as of October 2017)

Citation: IMF Staff Country Reports 2018, 054; 10.5089/9781484343289.002.A001

Sources: Country authorities and IMF staff estimates
Table 6.

Lesotho: Sustainable Development Goals

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Source: World Bank SUSTAINABIE Development Goals (SDGs Database)