April 8, 2019

Abstract

April 8, 2019

Contents

April 8, 2019

Key Issues

Context: A four-party coalition government took office in June 2017 and, with support from a regional peacekeeping force, has brought peace and stability. However, with SACU revenues below historical averages and government expenditures remaining high, the fiscal situation has deteriorated, leading to the emergence of government payment arrears. While international reserves are at adequate levels and banks remain well-capitalized, domestic arrears are beginning to impact the broader economy, exacerbating growth challenges posed by structural impediments. Unemployment, particularly among the young, is a major concern.

Outlook and challenges: The recently-passed FY2019/20 budget envisages an ambitious consolidation that could begin to lay the groundwork for a transition to private-sector driven growth. Construction related to the second phase of the Lesotho Highlands Water Project will support medium-term growth, and the diamond and textile industries have positive prospects. Political uncertainty, PFM weaknesses, and continued dependence on uncertain rainfall present downside risks, while attaining a stronger domestic consensus on reforms to strengthen governance and accountability could reap significant rewards.

Macroeconomic policies: Fiscal adjustment is needed to address government arrears, buttress debt sustainability, and safeguard the link to the rand. Given Lesotho’s relatively strong revenue collections, measures should be focused on expenditures, in particular bringing down the high public-sector wage bill over the medium term, while maintaining critical safety nets. Monetary and financial sector policies should focus on maintaining reserve adequacy and safeguarding stability while improving the legal framework to encourage private sector lending.

Structural Reforms: Generating strong and inclusive growth will require improved public service delivery and the private sector to become the primary engine of job creation. Better targeting of the government’s resources, PFM reforms, and reorienting both expenditures and the role of government in the economy will be critical to achieve these goals. Policy certainty and ensuring a level playing field will also be key.

Approved By The team for the January 24–February 5 mission comprised Mr.

David Robinson (AFR) Thornton (head), Messrs. Alonso and Massara (all AFR), Ms. Kostroch and Nathan Porter (STA) and Mr. Habib (ICD). Mr. Ntema (local economist) also

(SPR) participated in the mission, which was joined by Ms. Nainda (OED).

This report was prepared with research support by Ms. Wang, and administrative support by Ms. Prado de Guzman at headquarters and Ms. Mphatsoe in Maseru.

Contents

  • CONTEXT

  • RECENT ECONOMIC DEVELOPMENTS

  • OUTLOOK AND RISKS

  • POLICY DISCUSSIONS

  • A. Restoring Fiscal Discipline

  • B. Advancing Private Sector Growth and Human Capital Development

  • C. Increasing Financial Sector Stability and Inclusion

  • OTHER SURVEILLANCE ISSUES

  • STAFF APPRAISAL

  • BOXES

  • 1. The Lesotho Highlands Water Project

  • 2. The FY 2019/20 Budget

  • 3. Developing the Domestic Debt Market

  • 4. Wool and Mohair Licensing Regulations

  • FIGURES

  • 1. Recent Economic Developments

  • 2. External Imbalances

  • 3. Inefficient Expenditure Explains Weak Educational Outcomes

  • 4. Inefficient Expenditure Explains Weak Health Outcomes

  • TABLES

  • 1. Selected Economic Indicators, 2015/16–2023/24

  • 2a. Fiscal Operations of the Central Government, 2015/26–2023/24 (In millions of Maloti)

  • 2b. Fiscal Operations of the Central Government, 2015/16–2023/24 (Percent of GDP)

  • 3. Monetary Accounts, 2015/16–2020/21

  • 4. Balance of Payments, 2015/16–2023/24

  • 5. Financial Soundness Indicators 2013–2018

  • 6. Sustainable Development Goals

  • ANNEXES

  • I. External Sector Assessment

  • II. Risk Assessment Matrix

  • III. Debt Sustainability Analysis

  • IV. Growth Impact of Structural Reforms

  • V. Leveraging Lesotho’s Financial System

  • VI. Capacity Development Strategy

  • VII. Implementation of Recommendations from 2017 Article IV Consultation

Context

1. A four-party political coalition came to power in 2017 with a mandate to cement peace and entrench reform. Patronage-driven politics and military interference have resulted in decades of instability in Lesotho, while politicization of the civil service has compromised effective public service delivery. The coalition has been supported by a regional peace-keeping force, and a dialogue between the government and opposition parties began on reforms recommended by the Southern African Development Community (SADC) to depoliticize the civil service, increase Parliamentary oversight of the military, and amend the constitution to reduce chronic political instability.

Real GDP per Capita

(Percent of South Africa’s GDP per capita)

Citation: IMF Staff Country Reports 2019, 113; 10.5089/9781498312370.002.A002

Source: Penn World Tables, IMF World Economic Outlook

2. Lesotho’s growth model has run into difficulties. Despite a high degree of economic integration, Lesotho’s standard of living remains far below that of the other Southern African Customs Union (SACU) members. Growth has recently been driven by capital-intensive industries such as mining and finance, with little impact on job creation. The textile industry, which expanded rapidly in the late 90s and early 2000s thanks to preferential access to US markets through the African Growth and Opportunity Act, has since stagnated. Political instability, low human capital, and unstable and burdensome regulations combine to constrain private sector development (Annex IV). Access to credit is also an issue in the context of a financial sector which is liquid and profitable but plays a limited role in intermediating credit to local entrepreneurs. With unemployment at around 25 percent, over half of the population living under the $1.90 poverty line, and one of the highest rates of HIV infection in the world, social indicators suggest the depth of the development challenge ahead (Table 6).

Table 1.

Lesotho: Selected Economic Indicators, 2015/16–2023/241

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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 2a.

Lesotho: Fiscal Operations of the Central Government, 2015/26–2023/241,2

(In 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.

Data for 17/18 and 18/19 are presented on a modified cash basis to correctly reflect current year expenses.

Other taxes are not shown in the table.

Table 2b.

Lesotho: Fiscal Operations of the Central Government, 2015/16–2023/241,2

(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.

Data for 17/18 and 18/19 are presented on a modified cash basis to correctly reflect current year expenses.

Other taxes are not shown in the table.

Table 3.

Lesotho: Monetary Accounts, 2015/16–2020/211,2

(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 4.

Lesotho: Balance of Payments, 2015/16–2023/241

(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.

Table 5.

Lesotho: Financial Soundness Indicators 2013–2018

(End of period, percent)

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Source: IMF Financial Soundness Indicators.
Table 6.

Lesotho: Sustainable Development Goals

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Source: World Development Indicators