Public Information Notice:IMF Executive Board Concludes 2008 Article IV Consultation with the Kingdom of Lesotho

December 10, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Public Information Notice (PIN) No. 09/132
December 10, 2009

On February 9, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Kingdom of Lesotho.1


Lesotho has made significant progress in macroeconomic performance but the pace of implementation of key structural reforms has been slow. After a decade of low growth, economic activity surged above historic trends, averaging 6.6 percent during 2006-07 driven by the mining, textile, and construction sectors. However, poverty has seen only a modest decline, and the HIV/AIDS epidemic continues to impact negatively on the economy, public service delivery, and social development, and threatens the achievement of the Millennium Development Goals (MDGs).

Large transfers from the Southern African Customs Union (SACU), together with workers’ remittances and exports of textiles and diamonds, contributed to a sizable build-up of international reserves equivalent to 6.7 months of imports at end-2007. Inflation has surged from 6.4 percent at end-2006 to 11.8 percent at end-November 2008 owing mainly to the rise in food and fuel prices. Growth in broad monetary aggregates remains high, reflecting the continued accumulation of net foreign assets.

In 2007/08, Lesotho recorded its fifth consecutive fiscal surplus reflecting buoyant SACU receipts, increases in value-added and income taxes as well as underspending of both recurrent and development expenditure. Debt indicators have also improved as the use of SACU receipts to retire nonconcessional debt contributed to a decline in the ratio of external debt-to-GDP to 36 percent at the end of 2007 from 85.5 percent in 2002.

Financial sector vulnerabilities stem from the weakly supervised nonbank financial institutions and the potential re-emergence of Ponzi schemes. The banking sector thus far appears not to have been seriously affected by the current global financial crisis.

The medium term economic outlook is somewhat clouded in the wake of the global financial crisis and economic downturn. Downside risks remain from a potential further decline in SACU revenues, and lower exports of textiles and minerals should the global economic downturn be protracted.

Executive Board Assessment

Executive Directors commended the authorities for their prudent macroeconomic management, which has contributed to the recent strong economic performance and a continued build-up of international reserves. Directors noted, however, that Lesotho continues to face the challenges of sustaining economic growth, tackling widespread poverty and the high incidence of HIV/AIDS, and achieving the Millennium Development Goals. Addressing these challenges has been further complicated by the on-going global economic and financial crisis, which could result in a reduction in Southern African Customs Union (SACU) revenues, remittances, and exports of textiles and minerals.

Against this background, Directors emphasized the need for continued vigilance on the macroeconomic front, with a view to preserving fiscal and external stability. They also considered it crucial to fast-track the implementation of structural reforms, aimed particularly at promoting broad-based growth. In this regard, Directors welcomed the authorities’ growth diagnostic study, which would guide the prioritization of efforts to remove constraints to growth. They stressed in particular the importance of land reform, which has the potential to reinvigorate the financial, tourism, and manufacturing sectors, critical for employment creation and sustained poverty reduction.

Directors called on the authorities to accelerate the pace of reforms, supported by the World Bank and the Millennium Challenge Corporation (MCC). Determined efforts to reduce the cost of doing business, improve the investment climate, and increase investment in human and physical capital would help consolidate the recent gains in growth performance and improve competitiveness. Directors welcomed the authorities’ intention to set up a high-level committee that will ensure rapid implementation of these reforms.

Directors encouraged the authorities to adopt a fiscal strategy to mitigate risks from potentially lower SACU revenues, while creating fiscal space for increased social spending and growth-enhancing investment. This includes strengthening non-SACU revenues and tax administration, and containing recurrent spending. Directors also saw the need to accelerate civil service reform and to contain the wage bill, including by linking future increases to performance and to qualified professionals within the health and education sectors.

Directors welcomed the authorities’ intention to improve the process of public expenditure management. They supported the plan to formulate future budgets on the basis of the expected outturn, noting that this would make the budget a more effective tool for public policy, while improving transparency, accountability, and effective use of resources. Directors also underscored the importance of prudent debt policy, including seeking loans on highly concessional terms.

Directors agreed that Lesotho’s monetary and exchange rate regime under the Common Monetary Area helps maintain price stability and facilitates capital and current transactions with the country’s most important economic partner, South Africa. They emphasized, however, that maintaining external sustainability will require enhanced productivity and competitiveness, and pursuit of a prudent fiscal policy.

Directors noted that, while the banking sector has weathered the global financial crisis relatively well, more needs to be done to improve regulatory oversight and increase access to financial services for small- and medium-scale enterprises and the underserved population. In this regard, they welcomed the efforts underway, supported by the MCC and the International Fund for Agricultural Development, to deepen and enhance efficiency of the financial sector.

Directors welcomed the authorities’ recent decision to close the largest Ponzi scheme, and looked forward to an early resolution. They urged that prompt action be taken to address vulnerabilities arising from the weakly supervised nonbank financial institutions, including by expeditiously amending the Financial Institution Act to strengthen the supervision and regulatory role of the central bank. Directors also supported the planned amendment of the Cooperative Societies Act, which would prohibit deposit mobilization from nonmembers of credit cooperatives. They welcomed the passage of the Anti-Money Laundering Law, and looked forward to the establishment of the Financial Intelligence Unit.

Lesotho: Selected Economic and Financial Indicators, 2004–08 1/

        Est. Proj.
  2004 2005 2006 2007 2008
  (Annual percent change; unless otherwise specified)


Real economy


Real GDO growth

4.6 0.7 8.1 5.1 3.9

GDP at current market prices (in millions of maloti)

8,332 8,750 10,269 11,778 13,418

Inflation (period average

5.0 3.4 6.1 8.0 12.0
  (In percent of GDP)

National accounts


Gross domestic investment

24.8 24.7 24.3 24.3 28.2

Gross national savings

19.1 17.2 28.6 37.0 24.4

Central government


Revenue and grants

50.5 52.6 58.7 64.8 62.7


47.8 50.4 57.6 63.5 60.7

Total grants

2.7 2.2 1.1 1.3 2.0

Total expenditure and net lending

44.7 47.6 45.9 48.3 53.9

Overall balance (excluding grants)

3.1 2.8 11.7 15.2 6.8

Overall balance

5.8 5.0 12.7 16.5 8.9
  (Annual percent change; unless otherwise specified)

Money and credit


Net domestic assets of the banking system 2/

-19.1 -3.3 -37.9 -49.7 -36.5

Money and quasi-money (M2)

3.4 9.1 35.3 16.4 16.2
  (In percent of GDP)

External sector


Current account balance


Excluding official transfers

-24.2 -28.6 -20.2 -24.8 -37.5

Including official transfers

-5.7 -7.5 4.3 12.7 -3.7

External public debt 3/

48.3 45.2 42.1 36.2 46.7

External debt-service ratio 4/

8.2 10.0 6.4 5.0 2.8

Gross official reserves (end of period)


In millions of U.S. dollars

458.2 501.4 692.6 957.7 981.9

In months of imports of goods and services

4.0 4.3 5.7 6.7 6.6

Sources: Lesotho authorities; and IMF staff estimates and projections.

1/ Fiscal year beginning in April. All fiscal data are reported on a calendar basis.

2/ Change in percent of M2 at the beginning of the period. Data for 2008 refer to end-September 2008.

3/ The depreciation of the loti had a significant effect on the debt-to-GDP ratio in 2008.

4/ In percent of exports of goods and services.

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. 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:


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