Public Information Notice No. 02/32

Public Information Notice: IMF Concludes 2001 Article IV Consultation with Lesotho

March 21, 2002

On March 18, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Lesotho.¹

Background

After the pick-up in economic growth since the 1998 disturbances, growth is expected to moderate somewhat to just under 3 percent in 2001/02. Adverse weather conditions will offset the stimulus provided by rising clothing exports. The global economic slowdown is expected to have a small impact on Lesotho because most of its traditional exports go to countries in the region that have been less affected by global events than the advanced economies.

Unemployment remains high at an estimated 40 percent because many of the miners previously employed in South Africa have not been absorbed into the formal sector. At least 40 percent of the population lives in poverty, aggravated by the serious HIV/AIDS problem. An estimated quarter of the adult population is HIV positive and life expectancy is declining.

The Lesotho loti, which is pegged to the South African rand, depreciated by 37 percent against the U.S. dollar during 2001. This decline is expected to raise inflation in 2002 by about 2 percentage points. The nominal and effective exchange rates, however, have been largely unaffected because most of Lesotho's trade is with South Africa and because their inflation rates have moved in tandem.

The current account deficit for 2000/01 is estimated to be 17 percent of GDP, underscoring Lesotho's longstanding trade imbalance. However, strong export growth of textiles under the U.S. Africa Growth and Opportunity Act and lower imports will help reduce this deficit to 7½ percent of GDP in 2001/02.

Lesotho's public sector imbalance has been reduced sharply with the overall budget deficit declining from 16 percent of GDP in 1999/00 to an estimated surplus of 2 percent in 2001/02. This has been aided by a fall in current spending from over 40 percent of GDP to 35 percent of GDP in 2001/02. Total government indebtedness is relatively low.

Structural measures are intended to strengthen medium-term fiscal sustainability and economic growth prospects. Measures related to fiscal policies include an operational Lesotho Revenue Authority, progress toward clearing the backlog of unaudited accounts, and initiating the financial management component of the Lesotho Public Sector Improvement and Reform Program. Following the successful introduction of treasury bills for monetary policy, the central bank will develop a strategy to boost financial intermediation. The government has continued to make progress with its privatization program with the sale of the telecommunications company in 2001.

Elections are scheduled for May 2002 following recent political and electoral reforms. The latter reduce the chance of post-election riots occurring as happened in 1998.

Executive Board Assessment

Executive Directors welcomed the improvement in the macroeconomic situation since the 1998-99 recession, with real GDP growth increasing to a moderate pace and inflation falling. They hoped that the slowdown in the global economy and possible price pressures emanating from the recent depreciation of the Lesotho loti, which is pegged to the South African rand, would not delay for long a more rapid and sustained economic growth. They were encouraged by the improvement in the external current account deficit, which reflects in part a surge in clothing and textile exports under the U.S. African Growth Opportunity Act.

Directors commended the authorities for their overall fiscal, monetary and structural policies that will improve Lesotho's medium-term economic performance. They noted that the government is committed to a stable macroeconomic environment, privatization, market-friendly policies, and public sector reform. Directors observed that this should help Lesotho deal with the economic challenges of high rates of unemployment, poverty and incidence of HIV/AIDS.

Directors welcomed the government's sustained commitment to fiscal consolidation, that has reduced, and possibly eliminated, the need for domestic borrowing in 2001/02. Some borrowing is envisaged in 2002/03, partly to finance higher spending in priority areas such as education and infrastructure, but this was not thought to endanger domestic debt sustainability or cause domestic overheating.

Directors encouraged the authorities to continue strengthening tax administration with the help of donors. Improving tax collection is all the more important with customs revenue declining relative to GDP. Directors expressed concerns about the delay in making the Lesotho Revenue Authority (LRA) operational by end-September 2001, and the consequent postponement in replacing sales tax with a value-added tax. They urged the authorities to adhere to their new timetable in these areas.

Directors welcomed the government's commitment to improving financial management and completing the privatization process. They commended progress already made in the budget process, such as the timely presentation of the 2002/03 budget to parliament. They supported plans to eliminate the backlog of unaudited accounts and build capacity at the Accountant General's office. Directors noted with satisfaction the government's continued progress with its privatization program, as illustrated by the sale of the telecommunications company in 2001. They welcomed the government's commitment to the Lesotho Public Sector Improvement and Reform Project. Directors noted that good progress was being made in finalizing the Poverty Reduction Strategy Paper, although the deadline of June 2002 for presentation to cabinet may slip a little given the authorities' efforts to assure quality.

Directors agreed that the current fixed monetary regime with South Africa has served Lesotho well and has kept inflation relatively low. Lesotho's exports should remain competitive, as long as most of the recent currency depreciation can be maintained in real terms. Monetary policy has been enhanced by the Central Bank of Lesotho's successful introduction in September 2001 of treasury bill auctions for liquidity management purposes. Directors welcomed the central bank's intention to develop an integrated strategy for strengthening Lesotho's financial markets. The authorities were encouraged to take further steps to combat money laundering and the financing of terrorism.

Directors noted that Lesotho's data are adequate for Article IV surveillance purposes, but weaknesses were still evident, especially in national accounts and balance of payments and their consistency. Thus, Directors commended the government's participation in the regional effort to strengthen data collection and eventually comply with the Fund's General Data Dissemination System. They welcomed efforts to improve data and information sharing across ministries and the central bank, and urged the authorities to improve the timeliness of reporting of key statistical data.