By Kefiloe Kajane
Labour market developments show signs of slight improvement, although risks to the economic outlook remain prominent and tilted to the downside, emanating mainly from the continued spread of the coronavirus, likely developments in trade and geo-political matters, and other country-specific factors.
This was revealed this week by Central Bank of Lesotho (CBL) governor Retṧelisitsoe Matlanyane, who added that inflationary pressures were a mixed bag in advanced economies. In the US and the Euro Area, the rate of inflation remained the same, while it declined in China and the United Kingdom.
She said the monetary policy stance remained accommodative across advanced economies, with rates in the US, the Euro Area and UK kept close to the effective lower bound.
She further said data on economic activity in emerging market economies is expected to present mixed outcomes. China’s economic growth increased by 6.5 per cent in the fourth quarter of 2020, on account of investment spending, manufacturing output, exports and consumer spending.
“The January 2021 forecast of South African growth by the South African Reserve Bank (SARB) is a contraction of 7.1 per cent in 2020, relative to the 8.0 per cent forecasted decline in November 2020.
“Headline and core consumer price inflation averaged 3.3 per cent in 2020, respectively. Global financial markets reflected mixed signs of volatility and market risk, with the risk appetite tilted to the upside. This came in light of stimulus talks in the US coupled with positive strides in rollouts of the Covid-19 vaccine.
“Yields in emerging markets, especially South Africa, barely changed and remained subdued on the short and long end. However, investors were net buyers of South African assets, this was despite the country’s precarious debt sustainability in the face of a widening fiscal deficit.
“The rand is expected to remain at relatively weak levels in the short term, with high downside risks and volatility. In the domestic economy, the CBL has continued to emphasize that preserving adequate reserves to guarantee the peg is of paramount importance, given the fixed exchange rate’s role as the key anchor of macroeconomic stability. Within the constraints of the exchange rate peg, the Bank has taken various measures to preserve favorable financing conditions for all sectors, thereby supporting the economy and safe-guarding price and financial stability during this difficult time,” she said.
She explained that the measures, such as the lowering of the key policy rate by 275 basis points since March 2020, have contributed to the resilience of households and firms. Domestic economic performance in November 2020, as measured by the CBL’s Monthly Indicator of Economic Activity (MIEA), increased by 7.1 per cent, relative to1.7 per cent increase in October.
She also explained that this welcomed improvement was driven by a rebound in domestic demand and supply, albeit at levels still below those experienced prior to the pandemic. The domestic economy is projected to contract by a revised 6.6 per cent in 2020, due to the economic fallout of the COVID-19 pandemic.
“In the labour market, all the three sectors that are monitored by the Bank experienced a decline in employment numbers in the quarter ending September 2020. The highest drop emanated from migrant mine workers, followed by Government employment and lastly, employment in the manufacturing sector.
“The rate of inflation, measured by year-on-year percentage change in consumer price index (CPI), registered 5.7 per cent in December 2020 relative to 5.6 per cent in November 2020. This was mainly due to an increase in Food and Non-Alcoholic Beverages as well as Alcohol and Tobacco. Headline inflation averaged 4.9 per cent in 2020. In terms of the outlook, inflation rate is projected to register 5.2 per cent and 5.4 per cent in 2021 and 2022, respectively.
“Government budgetary operations registered a fiscal deficit of 5.9 per cent of GDP in November 2020, relative to a surplus of 18.9 per cent in September. Indicators point to a dwindling share of capital expenditure in total expenditure relative to recurrent spending.
“In summary, global economic activity remained under pressure in the face of growing risks to the economic outlook that include the spread of the coronavirus as well as likely developments in geo-political and trade matters. Domestically, any prospects for growth have to be weighed against existing uncertainties. Risks to the domestic economic outlook include the possible spread of COVID-19 and the effectiveness of the infection control measures, exposure to international economic developments, domestic structural rigidities and policy uncertainty.” she explained.
She also indicated that having considered the Net International Reserve (NIR) developments and outlook, regional inflation and interest rate outlook, domestic economic conditions and the global economic outlook, the MPC decided to:
She indicated that the increase the NIR target floor from US$635million to US$670 million. The NIR target remains consistent with the maintenance of the exchange rate peg between the loti and the South African rand.
“Maintain the CBL rate at a rate of 3.50 percent per annum. The rate, set at this level, will ensure that the domestic cost of funds remains aligned with the rest of the region. “The Committee will continue to monitor the global developments and their likely impact on domestic macroeconomic conditions, especially the CBL net international reserves (NIR), with the aim of taking corrective action when needed,” she further said.
