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IMF Country Report No. 22/162

KINGDOM OF LESOTHO

SELECTED ISSUES

June 2022

This Selected Issues paper on Kingdom of Lesotho was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on May 16, 2022.

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Title Page

KINGDOM OF LESOTHO

SELECTED ISSUES

May 16, 2022

Approved By

African Department

Contents

• ADDRESSING LESOTHO’S CLIMATE AND ENVIRONMENTAL CHALLENGES

• A. Introduction

• B. Policies to Address Climate Challenges

• References

• FIGURES

• 1. Frequency and Impact of Natural Disasters

• IMPROVING FINANCIAL INCLUSION

• A. Progress and Challenges

• B. Policies to Increase Financial Inclusion

• FIGURES

• 1. Benchmarking Financial Development and Access

• 2. Businesses Reporting Access to Finance as Major Constraint

• 3. The Banking Sector in Lesotho

• ADDRESSING FISCAL PRESSURES

• A. Introduction

• B. Analyzing Spending

• C. Analyzing Revenues

• D. Analyzing the Overall Fiscal Balance

• E. Policy Recommendations

• References

• FIGURES

• 1. Recent Fiscal Development

• 2. The Evolution of Public Spending

• 3. Benchmarking Government Spending

• 4. Public Wages

• 5. Social Spending in Lesotho

• 6. Social Protection Spending Comparison

• 7. Capital Spending in Lesotho

• 8. Evolvement of Revenue Compositions

• 9. Fiscal Pressures Drive Financing Needs and Debt

• 10. Public Compensation Scenarios (Percent of GDP)

• 11. Social Spending

• 12. Growth and Recurrent Public

• TABLES

• 1. Social Protection Spending in Lesotho (FY20/21)

• 2. Simulation of Social Program Reforms

• EVALUATING FISCAL RULES FOR LESOTHO

• A. Introduction

• B. Revenue and Spending in Lesotho

• C. Fiscal Rules—Types and Practice Experience

• D. The Institutional Framework for Fiscal Rules

• E. A Fiscal Rule Framework for Lesotho

• References

• BOX

• 1. Some Examples of Correction Mechanisms

• FIGURES

• 1. Spending in Lesotho

• 2. Revenue Developments

• 3. SACU Transfers, Capital Spending, and Wages

• 4. Fiscal Balance and SACU Transfers

• 5. Lesotho: Debt Components

• 6. Fiscal Rules on the Rise: 1990–2021

• 7. Average Number of Rules per Country

• 8. Common Adoption of Multiple Fiscal Rules: A Snapshot in 2021

• 9. Differences regarding the Type of Fiscal Rules across Income Groups

• 10. Fiscal Rules Flexibility and Enforcement Characteristics, 1990–2021

• 11. Public Employees’ Compensation

• TABLES

• 1. Summary of Revenue Changes Contributions and Volatility

• 2. Existing Fiscal Principles and Targets in Lesotho

• 3. Performance of Existing Fiscal Principles and Targets

• 4. Types of Fiscal Rules

• 5. Suggested Fiscal Rule Framework

• THE IMPACT OF COVID-19 ON GENDER INEQUALITY

• References

• FIGURES

• 1. Growth Differential with ASEAN5 Countries

• 2. Labor Market

• 3. Employment and Growth Rates by Sector

• 4. Female Participation in Public Sector Employment

• 5. Reasons for Secondary School Dropouts in Rural Area

• 6. Global Gender Gap, 2020

• 7. HIV Prevalence Rate

• 8. Women, Business, and the Law, 2021

• 9. Registered Land Leases

• POLICY COORDINATION IN LESOTHO

• A. Introduction

• B. An Overview of the Economic Institutions and Arrangements in Lesotho

• C. A Short Primer on Macroeconomic Policies Under a Fixed Exchange Rate

• D. A Vital Role for Macro Policy Coordination in Lesotho

• E. A Macro Policy Framework in Context of Lesotho

• F. An Example of Policy Coordination: The 2021 SDR Allocation

• G. Conclusions

• References

• BOXES

• 1. Understanding the Interactions between Debt, Spending, and Reserves

• 2. Understanding the Impact of the SDR Allocation on Monetary Aggregates

• FIGURES

• 1. International Reserves and Government Deposits

• 2. Changes in SACU Revenues, Government Deposits, and NIR

• 3. Trade Offs Between Macro Policy Objectives

• 4. An Example of Key Layers of Interaction within Lesotho to Obtain Core Macroeconomic Objectives

• TABLE

• 1. Direct vs. Indirect Access

• TOWARD POVERTY AND INEQUALITY REDUCTION: THE ROLE OF SOCIAL PROGRAMS

• A. Poverty Decline Reversed by the Pandemic

• B. Persistent Inequality

• C. Impact of Social Programs

• References

• BOX

• 1. Summary of Social Programs

• FIGURES

• 1. Gains in Poverty Reduction Reversed during the Pandemic

• 2. Pockets of Poverty Persist

• 3. Despite Some Success in Containing Inequality, Lesotho Remains Highly Unequal

• 4. Subnational Inequality

• 5. Access to Formal Employment and Social Protection Supported the Decline in Inequality

• 6. Lesotho has Well-Targeted, High Impact Social Programs

• AN OVERVIEW OF TAXATION IN LESOTHO

• FIGURES

• 1. Breakdown of Domestic Tax Revenue by Source

• 2. Domestic Tax and Nontax Revenue

• 3. Royalties

• 4. SACU: Personal Income Tax Rates

• 5. SADC: Corporate Income Tax Top Rates, 2020

• 6. Value Added Tax Revenue

• 7. SADC: Value Added Tax Rates and C-efficiency

• TABLES

• 1. Personal Income Tax

• 2. Mining Sector: Revenue Sources

• LESOTHO’S TRADE: OVERVIEW AND RISKS

• A. Introduction

• B. Evaluating Lesotho’s Export Performance

• C. Implications for SACU after AfCFTA

• BOX

• 1. Lesotho’s Trade Arrangements and Tariff Regime

• FIGURES

• 1. Main Trade Partners

• 2. Product Composition of Imports and Exports

• 3. Exports to the US

• 5. Global Apparel Industry: Monthly Minimum Wage, 2018

• 4. Exports of Key products, 2010–2020

• 6. Evolution of Apparel Exports Post-Suspension

• 7. Trade Concentration Indices

• TABLES

• 1. Top 10 Products Exported to the US, 2021

• 2. SACU: External Tariff and Duties Collected