February 12, 2001

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street NW
Washington, D.C. 20431

Dear Mr. Köhler:

Following the successful implementation of a staff-monitored program during the period January-September 2000, the Government of Lesotho and the staff of the International Monetary Fund have reached understandings on a three-year successor economic program for Lesotho. In support of its program, the Government hereby requests a three-year arrangement with the Fund under the Poverty Reduction and Growth Facility in a total amount equivalent to SDR 24.5 million.

The attached Memorandum on Economic and Financial Policies sets forth the government's economic objectives and policies for the three-year period and its action plan for the first year of the program. The Government has prepared and submitted to the IMF and the World Bank an Interim Poverty Reduction Strategy Paper, and has started to prepare a full PRSP.

The Government of Lesotho believes that the policies and measures set forth in the attached Memorandum are adequate to achieve the objectives of the program, but will take any further measures that may become necessary for this purpose. During the period of the arrangement, the Government will consult with the Fund on the adoption of any measures that may be appropriate, at the initiative of the Government or whenever the Managing Director of the Fund requests such a consultation. Moreover, after the period of this arrangement and while the Government has outstanding financial obligations to the Fund arising from loan disbursements under this arrangement, the Government will consult with the Fund from time to time, at the initiative of the Government or whenever the Managing Director of the Fund requests consultation on the Government's economic and financial policies. These consultations may include correspondence and visits of Fund officials to Lesotho, or visits of Lesotho officials to the Fund. The Government will provide the Fund with such information as the Fund requires to assess the Government's progress in implementing the economic and financial policies described in the Memorandum.

In collaboration with Fund staff, the Government will review the progress in implementing the program every six months. The first review is scheduled to be completed no later than July 31, 2001, and the second no later than January 31, 2002.

Sincerely yours,

/s/ Kelebone A. Maope Minister of Finance and of Development Planning

LESOTHO

Memorandum on Economic and Financial Policies

I.  Introduction

1.  This memorandum sets forth the Government of Lesotho's economic objectives and policies for the period October 2000–September 2003 and its economic program for the period October 2000–September 2001.

2.  Until the late 1990s, economic performance in Lesotho was favourable. Construction under Phase IA of the Lesotho Highlands Water Project (LHWP) and rapid expansion of manufacturing production and exports propelled economic activity, and real GDP growth averaged over 6 percent in the decade ending in 1997. Monetary and economic integration with South Africa resulted in relatively low inflation, and prudent fiscal management led to the accumulation of sizeable government deposits in the banking system and a comfortable net international reserve position.

3.  Economic performance began to deteriorate in the late 1990s with the winding down of activity in Phase IA of the LHWP, a slowdown of manufacturing growth as a result of the emergence of a shortage of factory space in the manufacturing sector, and declining miners' remittances from South Africa (where employment for Basotho workers has fallen with the ongoing rationalisation of mining production). Though phase IB of the LHWP started in 1998, it is smaller than Phase IA and its economic impact has been lower. The political disturbances of September 1998, which resulted from discontent with the results of the 1998 general elections and led to the intervention of Southern African Development Community (SADC) troops, also adversely affected economic activity. As a result, real GDP declined by almost 4 percent in fiscal year 1998/99 (April/March), and grew by only 2 percent in 1999/2000 (Table 1).

4.  The decline in foreign direct investment and in miners' remittances, the slowdown of manufacturing growth, and the emergence of fiscal pressures have led to a deterioration in the balance of payments. Gross international reserves fell from the equivalent of 8.7 months of imports of goods and services at end-1997/98 to 7.7 months at end-1999/2000. These fiscal pressures have stemmed from declining customs revenue relative to GDP, weak tax administration, costs associated with the closure of the Lesotho Agricultural Development Bank in September 1998 and the privatization of the Lesotho Bank in August 1999, debt service obligations and costs associated with the construction of the Muela hydroelectric power plant, and the need for new elections as part of the compromise reached by political parties following the civil disturbances of September 1998.

5.  Lesotho needs to diversify its production base by attracting investment in manufacturing and other non-traditional activities, such as tourism. Employment generation through economic growth is the linchpin of the government's efforts to reduce poverty. However, the government is aware of the need for prudent financial management to generate confidence in the economy and preserve macroeconomic stability. Though inflation is currently relatively low (6 percent in the 12 months ending October 2000), the recent deterioration in the balance of payments is a source of concern. This memorandum therefore elaborates a mix of policies that would simultaneously boost economic growth and improve the balance of payments.

6.  In December 1999 the Government of Lesotho launched a nine-month economic program that was monitored informally by the staff of the International Monetary Fund. This was the first step in the design of a medium-term economic program to tackle Lesotho's economic problems, which are largely structural in nature. The staff-monitored program emphasized growth-oriented policies as well as fiscal restraint and core reforms in tax policy and tax administration, privatisation, financial sector reform, bank restructuring and supervision, and institution strengthening. The policies set out below are a continuation of those implemented during that program.

7.  The government has prepared an Interim Poverty Reduction Strategy Paper (I-PRSP), and is in the process of producing a full PRSP. The full PRSP will eventually serve as a guide to future revisions of the government's macroeconomic strategy. The economic objectives and policies described below are consistent with those that are expected to emerge from the PRSP when it is completed in about a year's time.

II.  Medium-Term Economic Objectives And Policies

8.  The government will target an economic growth rate of at least 4 percent a year in the medium term, sufficient to increase real per capita GDP by at least one percent a year, and gross international reserves at the equivalent of at least 6 months of imports of goods and services. Inflation, which is largely imported from South Africa, is projected to fall to about 5 percent a year on an end-period basis by the end of 2002/03, in line with trends projected for South Africa.

9.  Given Lesotho's small size, limited natural resource endowment, and low domestic savings, policies to attract foreign direct investment and enhance export competitiveness will play a crucial role. Foreign investment will be boosted in both traditional industries (agriculture, garments, and electronics) and nontraditional ones (other manufacturing and tourism) through macroeconomic and political stability, enhancements in the efficiency of public utilities, maintenance of competitive tax rates, flexible labour market policies, removal of legal and administrative barriers to investment, improvement of the system of economic justice, and expansion of the infrastructure. All areas of the economy will be opened to foreign investment.

10.  Private sector development will also be encouraged through privatisation of state-owned enterprises. The government's policy is to privatise all commercially viable enterprises, and to liquidate nonviable ones. Current privatisation efforts are focused on the banking, insurance, and utilities sectors. Central government operations will also be privatised where possible, and the vehicle fleet has already been privatised.

11.  The expansion of exports will be the primary means of boosting economic growth and strengthening the balance of payments. To this end, the government will continue to encourage and take advantage of regional trading initiatives, and will help firms maximise their access to the SADC and other foreign markets by gathering and disseminating information about potential market opportunities. It will also keep the trading system free of quantitative restrictions on imports. The existing limits on imports of beer and other products will be reviewed with the objective of abolishing them.

12.  On the macroeconomic front, Lesotho will continue its membership in the Common Monetary Area (CMA), and will maintain the fixed, one-to-one parity between the loti and the rand. While CMA membership, the fixed exchange rate, and the joint circulation of the loti and the rand within the country have limited Lesotho's capacity to conduct independent monetary policy, these arrangements have contributed to monetary stability and helped keep inflation relatively low.

13.  Given the limitations on the use of monetary policy, fiscal prudence is crucial. The government's medium-term objective will be to limit the budget deficit to levels that will serve to contain aggregate demand, and that can be financed by external grants and concessional loans. This will require efforts to mobilise revenue and contain expenditure. Tax administration is being strengthened through the establishment of a National Revenue Authority (NRA), and a value added tax (VAT) is being introduced to increase tax efficiency and equity and widen the tax base. The government will adjust specific taxes and fees regularly in line with inflation to prevent an erosion of the real revenue base.

14.  Expenditure control will focus on current expenditure, but only capital projects that are economically viable and are consistent with the government's development priorities will be included in the public sector investment program. A wide-ranging and long-term Public Sector Reform and Improvement Project is being implemented. One component of the first phase is financial management improvement, which will focus on expenditure control and the budgeting process. Right-sizing of the civil service is also an important objective. The intention is to lower the central government wage bill to about 13.5 percent of GDP over the medium-term through natural attrition and elimination of "ghost" workers. Civil service reform will also include the revision of the compensation system, decompression of wages and salaries, and introduction of incentives and a performance appraisal system. Expenditure priorities will increasingly reflect emphasis on the social sectors and on poverty-reduction strategies. In particular, with the support of international donors, the government is taking steps to control the high incidence of HIV infection in Lesotho.

15.  Other components of the Public Sector Reform and Improvement Project involve governance (including improvement of the effectiveness of Cabinet and the decision-making process), human resource management (including civil service reform), administration of justice (reform of the legal and judicial system), restructuring and reorganization of the government machinery, improvement in the delivery of basic services, and decentralization of government. An Anti-Corruption Act has been passed and an Anti-Corruption Office will be created shortly.

16.  In recent years the government has increased its borrowing on nonconcessional terms, which has contributed to the recent fiscal problems. To contain the fiscal burden and keep the external debt within manageable limits, the government will hereafter restrict its external financing to grants and concessional loans.

17.  Domestic petroleum prices are now being reviewed monthly and adjusted automatically in accordance with a formula to allow for a full passthrough of international oil price changes. This policy will continue in the future. In addition, power to adjust petroleum prices has been vested in a Petroleum Board, which will become operational at the end of January 2001.

18.  The Central Bank of Lesotho will try to strengthen its capacity to influence domestic liquidity conditions and thereby ease balance of payments pressures. To this end it is moving to develop a treasury bill market and introduce other indirect instruments of liquidity management. The central bank will also continue its efforts to enforce prudential regulations, modernize the payments system, encourage competition in the banking system, revise legislation regulating insurance companies, and improve the production of the monetary statistics. Interest rates will continue to be market-determined.

19.  Currently, except for very limited controls on commercial banks, there are no exchange controls on capital movements within the CMA. The central bank is considering the possibility of abolishing all capital controls applying to commercial banks within the CMA and to all countries outside the CMA, thereby completely liberalizing the capital account. Discussions have already started with South Africa on this issue. By promoting free movement of capital, the government hopes to make Lesotho more attractive to private investors.

III.  The Economic Program for the Period October 2000–September 2001

20.  During the first year of the three-year economic program, October 2000–September 2001, the government will begin to take specific actions consistent with the medium-term economic objectives and policies outlined above. International reserves are projected to fall by US$87 million in the second half of 2000/01, reflecting in part exceptional outlays by the government to settle a tax claim by South Africa concerning the LHWP, but to begin a gradual recovery thereafter.

21.  The government will target a budget deficit after grants of 3.9 percent of GDP in 2000/01 and 0.7 percent of GDP in 2001/02. When exceptional revenue and expenditure items are excluded, the budget balance shifts from a deficit of 4.3 percent of GDP in 2000/01 to a surplus of 0.6 percent of GDP in 2001/02 (exceptional items relate to payment of arrears to SACU, a one-time collection of dividends from a privatised enterprise, and revenue from the sale of the vehicle fleet in 2000/01; and to the costs of restructuring the Lesotho Electricity Corporation in 2001/02).

22.  The NRA is expected to start operating on September 30, 2001. Until then, the government will continue to take short-term measures to improve sales and income tax administrations based on the recommendations of the IMF tax advisor stationed in Maseru. The revenue gains already being realised from these measures are expected to be further boosted when the NRA becomes operational. Noncustoms tax revenue are therefore expected to increase slightly in 2000/01 and by 1.7 percentage points of GDP in 2000/01. Preparations are also ongoing for the introduction of the VAT, which is planned for April 1, 2002. Administrative fees and charges for public services will be adjusted to keep them growing at least in line with inflation.

23.  The government has already taken several steps to contain expenditure in the second half of 2000/01. These include a cut of 10 percent in non-wage, non-interest current expenditure and a freeze of special expenditures. As a result, current expenditure will fall by 1.7 percentage points of GDP in this fiscal year. Expenditure restraint will continue to be exercised in 2001/2, when current expenditure is targeted to fall by a further 2.6 percentage points of GDP. The decline will be achieved partly through amortization of debt, and hence lower interest payments. More importantly, non-interest, nonwage current expenditure will be held just below its levels of 2000/01 in absolute terms, despite one-time costs (amounting to 1 percent of GDP) associated with the establishment of the National Revenue Authority. This will be possible because certain expenditures that took place in 2000/01 will not recur in 2001/02. In support of economic growth, the government is budgeting a rise in capital spending from 8.9 percent of GDP in 2000/01 to 11.1 percent of GDP in 2001/02. This increase will be used mainly for the restructuring and privatisation of the Lesotho Electricity Corporation, the further strengthening of infrastructure in the manufacturing sector, and the expansion of primary education.

24.  The government will complete a public expenditure review by March 31, 2002, to facilitate expenditure rationalisation and control and help determine its spending priorities. For this purpose, a working group will be constituted and its terms of reference defined by May 15, 2001. Increased emphasis will be given to infrastructure and the social sectors in the budget for 2001/02. In line with this emphasis, the government will increase the share of health sector spending in total recurrent spending. The government will maintain the share of the education sector in total current spending at its current level of approximately 25 percent, but, within this sector, will increase the share of resources allocated to primary education.

25.  To help control bank liquidity and attain the programmed level of net international reserves, the Central Bank of Lesotho will target its net domestic assets at the levels determined in the monetary program. The Central Bank will therefore shortly begin to issue treasury bills solely for monetary control purposes. To facilitate monetary management, an automatic treasury bill auction mechanism is expected to be established by mid-2001. In addition, the government will provide a written authorisation to the Central Bank of Lesotho to issue up to M 500 million in treasury bills for monetary control purposes. The proceeds of any such sale of treasury bills will be put in a blocked account and will not be available to the central government to finance government operations.

26.  The Central Bank of Lesotho will reduce and eventually abolish the commercial bank minimum local assets requirement (currently 60 percent of deposit liabilities), and stop remunerating bank excess reserves, when the treasury bill auction mechanism is put into place. The liquidation of the nonperforming loans of the Lesotho Bank, which were not taken over by the new bank under the terms of the privatisation agreement, is expected to start in March 2001 and be completed by mid-2002. Bank supervision will continue to be strengthened, and a study on the modernization of the national payments system is expected to be completed by September 2001.

27.  The government will continue its efforts to restructure and privatise the utilities sector. The privatisation of the telecommunications company has been completed, and in early 2001 a private company will take over the management of the Lesotho Electricity Corporation (LEC). The management company will restructure the LEC and prepare the enterprise for privatisation in mid-2002. A study on the future of the Muela hydroelectric power plant will also be commissioned in 2001, with the objective of assessing the feasibility of privatising the plant. At a minimum, the Lesotho Highlands Development Authority, which administers both the electricity and the water transfer components of the LHWP, will be restructured to enable the power plant to operate as a commercial entity, with its own independent accounting records. The government is currently developing a policy regarding the water sector. It is focusing on privatising the non-core activities of the Water and Sewerage Authority (WASA), and will consider utilising a management contract for WASA similar to that of the LEC.

28.  The government will continue to push ahead with modernization of the legal and regulatory framework for private sector development. The commercial court that became functional in May 2000 will be strengthened, the labour court is being modernized and the judicial system is being strengthened. The public service law is being streamlined to make the civil service more accountable and professional. Also, additional staff is being recruited in the Fiscal Analysis and Policy Unit that was set up in the Ministry of Finance in mid-2000 as a key step in increasing capacity in the area of economic management.

29.  Consistent with the strengthened fiscal stance and improved external competitiveness, the external current account deficit, excluding official transfers, is projected to fall from 36 percent of GDP in 1999/2000 to 31.4 percent of GDP by 2001/02. The deficit is expected to be financed primarily by official transfers and non-debt-creating long-term capital inflows (mostly foreign direct investment), and is therefore considered sustainable. The domestic and external debt will remain relatively low and manageable.

30.  The program is fully financed. Gross external financing requirements amount to US$318 million in 2000/01 and US$320 million in 2001/02. One third of these will be met by private sector inflows, nearly all of it in the form of foreign direct investment, and the remainder by concessional bilateral and multilateral financing. On average over the two years, external grants account for 80 percent of concessional financing, bilateral loans for 15 percent, and multilateral loans for 5 percent.

IV. Program Monitoring

31.  To monitor the progress of policy implementation under the program, quantitative and structural benchmarks and performance criteria are set out in Tables 1 and 2.

32.  The Government will take steps to improve the statistical data base to facilitate program monitoring. The Bureau of Statistics is being strengthened. In addition, delays in the production of financial and fiscal data will be reduced. In particular, detailed monthly budget reports will be produced.

33.  The Government of Lesotho will keep the IMF informed of the progress in the implementation of its program. In particular, the government will send to the IMF fiscal and monetary data on a monthly basis, starting in January 2001, and balance of payments data at least on a quarterly basis.

34.  During the program period, the government does not intend to (i) impose or intensify any restrictions on payments and transfers for current international transactions; (ii) introduce or modify multiple currency practices; (iii) conclude bilateral payments agreements that are inconsistent with Article VIII of the Fund's Articles of Agreement; or, (iv) impose or intensify any restrictions on imports for balance of payments reasons.

International Monetary Fund

Government Of Lesotho

Technical Memorandum of Understanding

February 12, 2001

1.  This memorandum sets forth the understandings between the Government of Lesotho and the IMF staff regarding the definitions of the quantitative performance criteria and benchmarks for the arrangement supported under the Poverty Reduction and Growth Facility (PRGF), as well as the respective reporting requirements. These performance criteria and benchmarks are reported in Table 1 of the government's Memorandum on Economic and Financial Policies (MEFP).

2.  The test dates for assessing observance of the quantitative targets in the first year of the program will be end-December 2000, end-March 2001, end-June 2001, and end-September 2001. The end-March 2001 and end-September 2001 quantitative targets will constitute performance criteria, and the end-June 2001 benchmarks will constitute indicative performance criteria. In addition, the ceiling on the stock of external payments arrears is a continuous performance criterion. The first review under the program is scheduled for completion by July 31, 2001, on the basis of the end-March 2001 performance criteria; the second review is scheduled for completion by January 31, 2002, on the basis of end-September 2001 performance criteria.

A.  Floor on the Stock of Net International Reserves of the Central Bank of Lesotho

3.  Definition: The international reserves (NIR) are defined as the Central Bank of Lesotho's liquid, convertible foreign assets minus its liquid, convertible foreign liabilities. Pledged or otherwise encumbered assets, including, but not limited to, assets used as collateral or as guarantee for third-party external liabilities are excluded from reserve assets. Reserve assets include cash and balances held with banks, bankers' acceptances, investments, foreign notes and coins held by the Central Bank of Lesotho, Lesotho's reserve position in the Fund, and SDR holdings. Reserve liabilities include nonresident deposits at the Central Bank of Lesotho, use of IMF credit, and any other liabilities of the central bank to non-residents. The stock of NIR at the end of each quarter will be calculated in United Stated dollars using agreed end-period program exchange rates (maloti per U.S. dollar).

4.  Adjustment clause: The program target for the NIR of the Central Bank of Lesotho in any quarter will be adjusted upward by the amount of any advance non-duty receipts from the Southern Africa Customs Union (SACU) in that quarter, where such advance receipts constitute amounts that would otherwise have been received in a subsequent quarter.

5.  Supporting material: The Central Bank of Lesotho will provide data on its NIR and on SACU non-duty receipts on a monthly basis within one week of the end of the month. The NIR data will be provided in a table showing the breakdown of the foreign assets and foreign liabilities of the Central Bank of Lesotho in maloti and in U.S. dollars.

B.  Ceiling on the Stock of Net Domestic Assets of the Central Bank of Lesotho

6.  Definition: The net domestic assets (NDA) of the Central Bank of Lesotho are defined as the difference between reserve money (currency issued plus total bank deposits at the central bank) and net foreign assets (calculated at program exchange rates as stipulated in paragraph 3). The net foreign assets are defined as foreign assets minus foreign liabilities, and include all foreign claims and liabilities of the Central Bank of Lesotho. The NDA thus include net claims by the Central Bank of Lesotho on the Government (loans and treasury bills purchased less government deposits), claims on banks, and other items net (other assets, other liabilities, and the capital account).

7.  Adjustment clause: The program target for the NDA of the Central Bank of Lesotho in any quarter will be adjusted downward by the amount of any advance non-duty receipts from the Southern Africa Customs Union (SACU) in that quarter, where such advance receipts constitute amounts that would otherwise have been received in a subsequent quarter.

8.  Supporting material: The Central Bank of Lesotho will provide detailed data on its balance sheet on a monthly basis within 21 days of the end of the month. The Central Bank will also provide on a weekly basis a table of selected monetary indicators covering the major elements of its balance sheet.

C.  Ceiling on the Domestic Financing Requirement of the Central Government

9.  Definition: The central government includes the central administration and all district administrations. The domestic financing requirement of the central government is defined as net credit to, and other claims on, the government from the banking system (Central Bank of Lesotho and the commercial banks), plus net credit to, and other claims on, the government from the non-bank sector. It will be calculated as the cumulative change from the end-September 2000 stock of net credit to, and other claims on, the government by the banking and nonbanking sectors. Changes in balances held in the privatization account or accounts into which the proceeds from the sale of public enterprises are deposited shall be included in the calculation of the domestic financing requirement, while changes in balances held in any account into which revenues collected by the customs department are held pending their transfer to the SACU revenue pool shall be excluded. The amounts of treasury bills issued or retired by the Central Bank of Lesotho for monetary control purposes, as well as the corresponding changes in the balance of the blocked government account that the Central Bank of Lesotho uses to manage the sale and retirement of treasury bills for monetary control purposes, will be included in net credit to the government.

10.  Adjustment clause: The program assumes that customs revenue from the SACU revenue pool will be received as follows: M281.6 million in the last quarter of fiscal year 2000/01 and M359.6 million in each quarter in fiscal year 2001/02. The program target for the domestic financing requirement of the central government in any quarter will be adjusted downward by the amount of any excess of customs revenue received over the programmed amount in that quarter, where this excess constitutes advance receipts of amounts that would otherwise have been received in a subsequent quarter.

11.  Supporting material: The Central Bank of Lesotho will provide the monetary survey, as well as a table showing the details of all government financing operations from the nonbank public, on a monthly basis and within 30 days of the end of the month. The outstanding balances in the privatization account or accounts, and in the SACU revenue pool account mentioned in paragraph 9, will be separately identified in the monetary survey. The Central Bank will also provide tables showing the details of any monetary operations with treasury bills, including the changes in government deposits stemming from such operations.

D.  Ceiling on the Amount of New Non-Concessional External Debt Contracted or Guaranteed by the Public Sector, with Original Maturity of One Year or More

12.  Definition: The public sector comprises the central government, the Central Bank of Lesotho, and all enterprises with majority state ownership. A loan is concessional if its grant element is at least 35 percent of the value of the loan, calculated using a discount rate based on commercial interest reference rates (CIRRs) reported by the OECD. For loans of maturity greater than 15 years, the grant element will be based on the ten-year average of OECD CIRRs. For loans of maturity 15 years or less, the grant element will be based on the six-month average of OECD CIRRs. Margins for differing repayment periods would be added to the CIRRs: 0.75 percent for repayment periods of less than 15 years, 1 percent for repayment periods of 15 to 19 years, 1.15 percent for repayment periods of 20 to 29 years, and 1.25 percent for repayment periods of 30 years or more. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. Included in this performance criterion are all current liabilities that are created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and that require the public sector (obligor) to make one or more payments in the form of assets (including currency) at some future point(s) in time to discharge principal and/or interest liabilities incurred under the contract. In effect, all instruments that share the characteristics of debt as described above (including loans, suppliers' credits, and leases) will be subject to the ceiling. Borrowing for the water transport operations of the Lesotho Highlands Water Authority will be excluded from this performance criterion. The performance criterion will be evaluated as the cumulative change in the amount of new nonconcessional debt contracted or guaranteed from end-November 2000.

13.  Adjustment clause: None.

14.  Supporting material: Details of all new commitments and government guarantees for external borrowing, with detailed explanations, will be provided by the Ministry of Finance on a monthly basis within 30 days of the end of the month.

E.  Ceiling on the Amount of New External Debt Contracted or Guaranteed by the Public Sector, with Original Maturity of Less than One Year

15.  Definition: The public sector comprises the central government, the Central Bank of Lesotho, and all enterprises with majority state ownership. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. Included in this performance criterion are all current liabilities that are created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and that require the public sector (obligor) to make one or more payments in the form of assets (including currency) at some future point(s) in time to discharge principal and/or interest liabilities incurred under the contract. In effect, all instruments that share the characteristics of debt as described above (including loans, suppliers' credits, and leases) will be subject to the ceiling. Normal short-term import credits, will be excluded from this performance criterion. The performance criterion will be evaluated as the cumulative change in the amount of new nonconcessional debt contracted or guaranteed from end-September 2000.

16.  Adjustment clause: None.

17.  Supporting material: Details of all new commitments and government guarantees for external borrowing, with detailed explanations, will be provided by the Ministry of Finance on a monthly basis within 30 days of the end of the month.

F.  Ceiling on the Stock of External Payments Arrears

18.  Definition: During the period of the arrangement, the stock of external payments arrears of the public sector (central government, Central Bank of Lesotho, and all enterprises with majority state ownership) will remain zero. Arrears on external debt service obligations include any non-payment of interest and/or principal in full and on time falling due to all creditors, including the IMF and the World Bank.

19.  Adjustment clause: None.

20.  Supporting material: Details of arrears accumulated on interest and principal payments to creditors will be reported within one week from the date of the missed payment.