IMF Executive Board Concludes 2022 Article IV Consultation with Kingdom of Lesotho
June 3, 2022
Washington, DC: On June 1st, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Kingdom of Lesotho.
Since early 2020, Lesotho has been hit simultaneously by the pandemic, declining transfers from the Southern African Customs Union (SACU), climate shocks, and the impact of the war in Ukraine. Despite a swift response by the authorities, the fallout from the pandemic—including delays to large infrastructure projects, supply chain disruptions, layoffs in the textiles sector, and weak external demand—has weighed on social and economic development, amplifying legacy structural challenges. Growth has been revised down to 2.1 percent in FY21/22 after contracting by 6 percent in FY20/21, and is forecast by staff at 2.7 percent in FY22/23 and 1.4 percent on average thereafter. The war in Ukraine has hindered food imports, exacerbating agricultural disruptions due to floods and the pandemic. Global price increases in food and fuel, which account for over half of the consumer basket, are hurting the vulnerable, with inflation expected to reach 6.8 percent in FY22/23.
Fiscal performance was better than expected in FY20/21. However, public expenditure has continued to increase, with the recent decline in SACU transfers weakening the external position. Recent cases have highlighted gaps in public financial management and efforts to restrain expenditure have been undermined by growing domestic arrears, as spending pressures mount ahead of the autumn 2022 elections.
The current account deficit is projected to reach 7.4 percent of GDP in FY21/22, due to lower SACU transfers, higher capital imports, and costlier food and fuel imports. Exports and remittances fell by 26 and 12 percent, respectively, and the goods and services trade deficit widened by 8 percentage points of GDP in FY20/21. Despite a recovery in exports and remittances, the drop in SACU transfers widened the current account further over the first nine months of FY21/22. Foreign investment, including FDI, declined given the weak external environment and limited opportunities domestically.
The banking sector is characterized by substantial capital buffers, ample liquidity, and low non-performing loans. However, its contribution to growth remains limited. Private sector credit contracted by 1.6 percent in 2020:Q3, only rebounding to 7.4 percent as of FY21/22:Q4. With gross international reserves stable at 4.5 months of imports—excluding those associated with the second phase of the Lesotho Highlands Water Project—in FY21/22, net international reserves have remained above the central bank’s target for safeguarding the exchange rate peg, bolstered by the recent SDR allocation.
Executive Board Assessment [2]
Directors welcomed the authorities’ timely policy response to the pandemic and strong vaccination efforts. Directors noted, however, that the pandemic, declining transfers from the Southern African Customs Union (SACU), climate vulnerabilities, and spillovers from the war in Ukraine, have exacerbated longstanding structural weaknesses and undermined the recovery. Directors called for a steady fiscal adjustment supported by structural reforms to secure macroeconomic stability and promote stronger, inclusive, and sustainable private sector-led growth.
Directors emphasized the need for a growth-friendly fiscal consolidation to reduce imbalances, rein in public debt, and rebuild policy space. They called for measures to contain current spending, including the public sector wage bill, reprioritize social spending to focus on the most vulnerable, and rationalize capital spending.
Directors agreed that fiscal adjustment should be complemented by reforms to public financial management (PFM) and revenue and tax administration. They encouraged the authorities to finalize and submit the Public Financial Management and Accountability bill to Parliament and implement regulations to improve the budget process and minimize arrears. A debt management strategy focused on concessional sources is also important. Directors also underscored the importance of enhancing fiscal governance and transparency including implementing governance commitments made under emergency financing arrangements.
Directors concurred that monetary policy should focus on price stability and maintaining adequate reserves to safeguard the exchange rate peg. They encouraged the authorities to strengthen central bank independence and coordinate closely across institutions on fiscal and monetary policies for credible and effective macroeconomic management.
Directors welcomed the financial sector’s resilience and encouraged the authorities to remain vigilant of risks, including in the nonbank financial sector. Broadening financial inclusion and strengthening financial sector development and supervision would also be important to support private sector growth.
Directors encouraged the authorities to implement ambitious and much-needed structural reforms. Continued efforts to improve the business climate and governance, diversify the economy, close gender gaps, and build climate resilience are also key to boost green, inclusive, job-rich, and sustainable growth.
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Table 1. Lesotho: Selected Economic Indicators, 2018/19–27/281 |
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|
Population (thousands; 2020 est.): |
2,142 |
||||||||||
|
GNI per capita (US$; 2020 est.): |
1,100 |
||||||||||
|
Poverty rate at national poverty line (percent; 2017 est.): |
49.7 |
||||||||||
|
2018/19 |
2019/20 |
2020/21 |
2021/22 |
2022/23 |
2023/24 |
2024/25 |
2025/26 |
2026/27 |
2027/28 |
||
|
Act. |
Act. |
Act. |
Est. |
Projections |
|||||||
|
(12-month percent change, unless otherwise indicated) |
|||||||||||
|
National account and prices |
|||||||||||
|
GDP at constant prices (incl. LHWP-II project) |
-0.3 |
0.0 |
-6.0 |
2.1 |
2.7 |
1.6 |
2.1 |
2.3 |
0.7 |
0.1 |
|
|
GDP at constant prices (excl. LHWP-II project) |
-0.3 |
0.0 |
-6.3 |
2.0 |
1.9 |
1.8 |
1.5 |
1.5 |
1.5 |
1.5 |
|
|
GDP at market prices (Maloti billions) |
32.2 |
34.0 |
33.7 |
36.7 |
40.0 |
42.9 |
45.8 |
49.0 |
51.8 |
54.5 |
|
|
GDP at market prices (US$ billions) |
2.3 |
2.3 |
2.1 |
2.5 |
2.6 |
2.7 |
2.9 |
3.1 |
3.3 |
3.5 |
|
|
Consumer prices (average) |
4.7 |
4.9 |
5.4 |
6.4 |
6.8 |
5.5 |
4.9 |
4.9 |
4.9 |
4.9 |
|
|
Consumer prices (eop) |
5.2 |
4.0 |
6.5 |
5.9 |
6.0 |
4.9 |
4.9 |
4.9 |
4.9 |
4.9 |
|
|
GDP deflator |
5.5 |
5.5 |
5.5 |
6.5 |
6.4 |
5.4 |
4.7 |
4.6 |
4.9 |
5.0 |
|
|
External sector |
|||||||||||
|
Terms of trade (– = deterioration) |
-0.4 |
2.0 |
4.1 |
-2.3 |
-2.7 |
2.2 |
1.7 |
1.8 |
1.3 |
0.7 |
|
|
Average exchange rate |
|||||||||||
|
(Local currency per US$) |
13.8 |
14.8 |
16.4 |
... |
... |
... |
... |
... |
... |
... |
|
|
Nominal effective exchange rate change (– = depreciation) 2 |
-0.1 |
-5.6 |
-10.4 |
... |
... |
... |
... |
... |
... |
... |
|
|
Real effective exchange rate (– = depreciation) 2 |
2.1 |
-2.8 |
-7.4 |
... |
... |
... |
... |
... |
... |
... |
|
|
Current account balance (CA) (percent of GDP) |
-1.4 |
-2.1 |
-2.0 |
-7.4 |
-14.4 |
-9.6 |
-10.5 |
-10.0 |
-8.6 |
-5.4 |
|
|
CA excl. LHWP-II imports (percent of GDP) |
-0.2 |
0.8 |
3.1 |
-4.8 |
-7.4 |
-4.5 |
-4.1 |
-4.0 |
-3.2 |
-2.8 |
|
|
Gross international reserves |
|||||||||||
|
(Months of imports, excluding imports for LHWP-II) |
4.0 |
4.5 |
4.5 |
4.5 |
4.0 |
3.6 |
3.3 |
3.2 |
3.2 |
3.1 |
|
|
Money and credit |
|||||||||||
|
Net international reserves |
|||||||||||
|
(US$ millions) |
687 |
608 |
739 |
809 |
745 |
712 |
705 |
729 |
771 |
813 |
|
|
(Percent of M1 Plus) |
116 |
135 |
112 |
127 |
115 |
104 |
97 |
93 |
92 |
92 |
|
|
(US$ millions, CBL calculation) |
742 |
605 |
776 |
786 |
... |
... |
... |
... |
… |
… |
|
|
(Percent of M1 Plus, CBL calculation) |
120 |
122 |
124 |
121 |
... |
... |
... |
... |
… |
… |
|
|
Domestic credit to the private sector |
7.7 |
8.0 |
0.6 |
7.4 |
10.7 |
8.5 |
12.6 |
11.4 |
9.3 |
8.2 |
|
|
Reserve money |
-11.5 |
14.2 |
-0.1 |
1.2 |
6.4 |
5.9 |
-5.2 |
-1.8 |
-1.9 |
-1.9 |
|
|
Broad money |
5.5 |
7.2 |
17.2 |
0.0 |
5.0 |
5.1 |
7.0 |
7.9 |
6.0 |
5.5 |
|
|
Interest rate (percent) 3 |
4.3 |
3.9 |
3.5 |
2.8 |
... |
... |
... |
... |
... |
... |
|
|
(Percent of GDP, unless otherwise indicated) |
|||||||||||
|
Public debt |
50.9 |
58.8 |
57.4 |
59.2 |
60.7 |
62.4 |
63.7 |
64.2 |
64.4 |
64.1 |
|
|
External public debt |
40.2 |
46.9 |
43.6 |
43.6 |
44.3 |
46.1 |
47.7 |
48.4 |
48.5 |
48.1 |
|
|
Domestic public debt |
10.7 |
12.0 |
13.8 |
15.7 |
16.4 |
16.3 |
16.0 |
15.8 |
15.9 |
16.0 |
|
|
Central government fiscal operations |
|||||||||||
|
Revenue and grants |
50.0 |
48.4 |
55.3 |
46.2 |
47.0 |
47.0 |
47.8 |
46.6 |
46.5 |
46.3 |
|
|
Revenue excluding grants and SACU revenue |
28.6 |
26.3 |
25.5 |
25.7 |
|
27.9 |
27.9 |
27.8 |
27.7 |
27.9 |
27.8 |
|
SACU revenue |
17.2 |
18.3 |
26.6 |
16.4 |
|
13.5 |
16.3 |
17.0 |
16.0 |
16.0 |
16.0 |
|
Grants |
4.3 |
3.7 |
3.1 |
4.2 |
|
5.6 |
2.8 |
2.9 |
2.9 |
2.6 |
2.5 |
|
Recurrent expenditure |
40.8 |
39.9 |
43.4 |
39.5 |
40.1 |
40.7 |
40.0 |
38.3 |
38.2 |
38.2 |
|
|
Of which: wages, including social contributions |
18.8 |
17.4 |
17.9 |
17.4 |
19.7 |
20.3 |
19.7 |
18.9 |
18.8 |
18.8 |
|
|
Capital expenditure |
14.0 |
15.9 |
11.6 |
13.6 |
14.7 |
13.2 |
13.3 |
12.3 |
10.6 |
9.9 |
|
|
Overall balance |
-4.8 |
-7.5 |
0.3 |
-6.9 |
-7.8 |
-6.8 |
-5.5 |
-4.0 |
-2.3 |
-1.7 |
|
|
(Excluding SACU transfers and grants) |
-26.2 |
-29.5 |
-29.5 |
-27.4 |
|
-26.9 |
-26.0 |
-25.5 |
-22.8 |
-20.8 |
-20.2 |
|
Primary balance |
-3.3 |
-6.0 |
1.9 |
-5.0 |
-6.2 |
-4.8 |
-3.1 |
-1.6 |
0.1 |
0.7 |
|
|
(Excluding SACU transfers and grants) |
-24.8 |
-28.0 |
-27.8 |
-25.6 |
|
-25.3 |
-24.0 |
-23.0 |
-20.4 |
-18.5 |
-17.8 |
|
Statistical discrepancy |
2.0 |
0.0 |
0.1 |
-2.8 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
|
Sources: Lesotho authorities, World Bank, and IMF staff calculations. 1 The fiscal year runs from April 1 to March 31. 2 IMF Information Notice System trade-weighted; end of period. 3 12-month time deposits rate. |
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[1] 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.
[2] 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 summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
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