An International Monetary Fund (IMF) executive board’s country report released recently has revealed that the Lesotho’s Gross Domestic Product (GDP) growth picked up modestly to 2.2 percent in the 12-month period ending March 2024, compared with 1.6 percent a year earlier.
IMF is an international organisation that works to achieve sustainable growth and prosperity for all of its 191 member countries. It does so by supporting economic policies that promote financial stability and monetary cooperation, which are essential to increase productivity, job creation, and economic well-being.
According to the report, the growth largely reflects accelerated construction from the Lesotho Highlands Water Project.
Nonetheless, unemployment remains high. Diamond and textile exports have been sluggish, and an exceptionally dry season increased food security concerns across the country.
Headline inflation reached 6.5 percent in June, up from 4.5 percent in July 2023, though down from a peak of 8.2 percent in January 2024. The increase in inflation was largely due to exogenous factors that will most likely fade going forward.
The IMF further stated that Lesotho registered a sizable fiscal surplus of 6.1 percent of GDP in during the Fiscal Year (FY) ending March 2024.
In a change from past practice, transitory South African Customs Union (SACU) transfers (10.4 percent of GDP higher than in FY22/23) were not accompanied by a parallel increase of the public wage bill. Instead, the authorities used the SACU proceeds to reduce arrears and rebuild deposits at the Central Bank.
“In support of the Loti’s peg to the Rand, the Central Bank of Lesotho has kept the policy rate steady at 7.75 percent since May 2023, in line with policy rates in South Africa,” the reported indicated.
It also noted that private sector credit growth picked up to 12.5 percent in FY23/24, mainly due to construction, while the nonperforming loans have eased to 3.8 percent of total loans as of 2023 Q4.
“Growth is projected to peak in the fiscal year ending in March 2025 (at 2.7 percent), while
inflation is expected to ease slowly. Another year of windfall SACU transfers (6 percentage
points of GDP above the 10-year average) will again bolster fiscal and external balances in
FY24/25. These transfers are projected to fall sharply starting in FY25/26, though higher water royalties will help fill the gap. As a result, the fiscal balance is projected at a surplus of around 1 percent of GDP over the medium term, with the current account deficit at a modest 2.6 percent,” the report added.
As a result of that, the authorities are encouraged to continue their prudent fiscal approach, ensuring that additional revenues are saved wisely and spent strategically, while also pushing ahead with reforms to support private sector-led growth.
The Board of Directors welcomed the recent pickup in growth but concurred that Lesotho’s economy faces substantial challenges, including high unemployment, widespread poverty, and sluggish growth.
They also noted the risks posed by global growth shocks, extreme weather events, uncertain transfers from the SACU, and commodity price volatility.
Against this background, the directors welcomed the government’s commitment to strengthening policy frameworks, supported by fund capacity development as needed.
“They emphasized the need for continued fiscal prudence to strengthen foreign exchange reserve coverage, safeguard the peg, and preserve medium-term debt sustainability. They agreed that containing the public wage bill, increasing spending efficiency, and prioritising social spending on the most vulnerable remain critical.
“Given increased water royalties, directors encouraged the authorities to establish a well-governed savings framework anchored by a credible fiscal rule to build buffers and support Lesotho’s long-term development objectives,” the report said adding that Public Financial Management (PFM) should be strengthened. The directors further encouraged passage of PFM-related legislation, improved budget processes, strengthened internal controls, and enhanced financial reporting.
They also underscored the importance of boosting public investment efficiency, through a prioritised capital project pipeline with enhanced project management capacity.
Monetary policy should focus on price stability and safeguarding the exchange rate peg.
“The directors noted the slowdown in inflation, but urged the authorities to monitor price dynamics closely and stand ready to adjust monetary policy if inflationary pressures reemerge. Directors encouraged the authorities to improve central bank governance and coordinate closely across institutions on fiscal and monetary policies.”
