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Lesotho—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

March 1, 2002

The following item is a Letter of Intent of the government of Lesotho, which describes the policies that Lesotho intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Lesotho, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

The Fund approved a three-year arrangement under the Poverty Reduction and Growth Facility for Lesotho in a total amount equivalent to SDR 24.5 million in March 2001. I request that the third disbursement, in the amount of SDR 3.5 million, be made available following the successful completion of the second review.

The attached memorandum on economic and financial policies reviews performance under the program and updates the government's economic objectives and policies for the period through March 2003. The memorandum also outlines the government's action plan for the financial-year 2002/03. The government has prepared and submitted to the IMF and the World Bank a preparation status report on the poverty reduction strategy paper, and is preparing a full PRSP.

The government requests a waiver for the nonobservance of the structural performance criterion on the Lesotho Revenue Authority's (LRA's) being operational by September 30, 2001. However, plans are now in place to have the LRA operational by December 2002, and the authorities will be receiving technical support on this issue from the IMF and other donors.

In collaboration with Fund staff, the government will review the progress in implementing the program every six months. The third review is scheduled to be completed no later than September 15, 2002 and the fourth review no later than January 31, 2003.

Sincerely yours,

/s/


Mohlabi K. Tsekoa
Minister of Finance and
of Development Planning
 

LESOTHO

Memorandum on Economic and Financial Policies

I. Introduction

1. This memorandum updates the government of Lesotho's memoranda on economic and financial policies (MEFP) dated February 12, 2001 and July 10, 2001. It reviews performance over the six months to September 2001 and outlines the economic program for the period January 2002-March 2003.

2. Medium-term economic objectives center on employment creation, infrastructure development, natural resource management, human development, and good governance. These are to be achieved through sound fiscal and monetary policies, structural measures to make their implementation more effective and consistent with government objectives, and development of the private sector. Thus, the government aims at economic growth sufficient to raise real per capita income by at least 1 percent a year. The strategy seeks to bolster confidence in the economy, promote domestic and foreign investment, stimulate export growth, and create an environment for the private sector to create jobs. This will be the main vehicle for meaningful poverty reduction in Lesotho.

II. Performance Under the Program

3. The program promotes macroeconomic stability by limiting the government's access to domestic financing, setting a floor on international reserves of the central bank, and prohibiting nonconcessional external financing of the central government. Monetary policy is determined by the pegged exchange rate regime. Structural measures focus on improving tax administration and expenditure control, but also include initiatives to improve the financial system and data collection.

4. Lesotho's economy has performed better than expected. GDP growth was about 3 percent in 2000, and available indicators suggest a similar rate of economic growth in 2001. Consumer price inflation averaged around 7 percent in the first nine months of 2001, and the external trade deficit was reduced by a surge in textile exports to the United States. Credit to the private sector, however, has remained stagnant.

5. All quantitative program targets for end-September 2001 were achieved. However, while many structural objectives were met, the Lesotho Revenue Authority (LRA) did not become operational on time (a performance criterion for end-September 2001), and the government's financial accounts for 2000/01 (April-March) were not presented for audit by end-October (a structural benchmark) on account of a subsequent change in approach necessitated by professional advice.

A. Fiscal Policies

6. The government's domestic financing requirement was below the program maximum for the first half of the financial year (through September) by approximately M 100 million (1½ percent of GDP). This overperformance reflected larger-than-programmed tax collections and below-program spending.

7. Current spending during the April-September 2001 period was about 38 percent of GDP, or about 1 percent above the program assumption in the budget, while spending on capital projects was 6 percent of GDP, or 3 percentage points below the program. Wage and salary costs were below budget because of an unexpectedly high number of vacancies, but spending on goods and services exceeded the budget by about M 60 million. Within this category, vehicle costs exceeded budget provisions by M 25 million. The below-target capital spending can be attributed to several factors, including delays in donor funding and in project implementation, especially for new projects, which could not get under way until the budget was made law, almost three months after the start of the financial year. The government's plans to address underlying weaknesses in both of these areas are summarized in Section III.

8. Revenue during the six months to September 2001 was about M 30 million (0.4 percent of GDP) above the budget target, largely due to buoyant income tax collections. Sales taxes were somewhat below target, and nontax revenue was more than M 50 million below the target level. Grants were M 55 million below the budget assumption, largely because of delays in signing agreements, in particular with regard to the European Union Poverty Reduction Support Grant.

B. Monetary Policies

9. Net foreign and domestic assets of the Central Bank of Lesotho (CBL) were within their respective floor and ceiling targets in September 2001. An upward adjustment in interest rates paid on commercial bank deposits at the central bank in the first quarter of the financial year and the successful introduction of treasury bill auctions for monetary policy purposes contributed to this outcome. The lack of financial intermediation remains a serious problem: the ratio of commercial bank loans to deposits averaged less than 15 percent in 2000. However, commercial banks are beginning to introduce some new products targeted at small borrowers.

C. Structural Measures

10. The government successfully observed two structural performance criteria and most structural benchmarks scheduled for completion through October 2001. The introduction of treasury bill auctions for monetary policy purposes is noteworthy because it marks an important step in efforts to modernize Lesotho's financial system. Monthly reports on income and sales tax results are helping Ministry of Finance officials monitor these areas and are proving useful in the transition to the LRA.

11. One structural performance criterion and one benchmark were not observed. The LRA did not become operational in September largely because of unexpected delays in parliamentary approval of the necessary enabling legislation. The government has made progress in implementing the authority, including the appointment of a board of directors and decisions related to the organizational structure of the authority. The government was not able to present the 2000/01 public accounts for auditing by the end of October (a benchmark) because of a considered decision to first clear the backlog of unaudited accounts dating from 1995/96 rather than give priority to the most recent year, as the audits should be sequentially linked. The government remains dedicated to these important objectives, and steps to bring them back on track as quickly as possible are outlined below (para. 23).

III. The Economic Program for the Period September 2001–March 2003

12. Revisions to the 2001/02 budget reflect the government's emphasis on health care and physical infrastructure and were made in the context of significant underspending in the capital budget during the first half of the financial year. New structural measures reflect the government's commitment to improve operations through all facets of the Lesotho Public Sector Improvement and Reform Project. In addition, the government will make every effort to complete the structural measures that were not achieved earlier in the year.

A. Revisions to the 2001/02 Budget

13. Current estimates indicate that the 2001/02 fiscal outcome will differ somewhat from the financial plan adopted by parliament in July 2001. In general, recurrent spending will be higher, capital spending lower, and total tax revenue a bit lower. External financing and, therefore, related capital spending will fall significantly below initial targets. In consequence, the government's domestic financing is expected to exceed initial budget projections, but remain well below the borrowing requirements of past years.

14. Tax collections in the period ahead remain a concern. While income tax collections are now expected to be about M 50 million above estimates in the original budget, shortfalls in sales taxes and nontax revenue are largely offsetting. The tax departments at the Ministry of Finance have worked hard to bring in taxes due and reduce arrears, but staff shortages, especially at senior levels, staff diverted to the LRA and value-added tax (VAT) implementation teams, and uncertainties related to delays in the LRA are cutting into tax collections. Border posts are a particular problem.

15. The government has announced plans to increase spending by M 85 million (1¼ percent of GDP) during the remainder of the financial year. Approximately 75 percent of these additional funds will go to infrastructure development, and 20 percent to health infrastructure and health-related purchases. They are to be financed in large part by income generated by the Muela hydroelectric facility, which was transferred to the government from the Lesotho Highlands Development Authority. These funds are being collected on behalf of the government while the electric tariff pricing is being negotiated.

16. Government has set aside an additional M 50 million in the administrative contingency account. These funds will cover unexpected expenses, including the vehicle lease costs that were underestimated in the original budget (M 51 million), an unanticipated charge by the Lesotho Petroleum Fund Board (M 6 million), and health-related spending approved by cabinet in November (M 12 million). M 20 million will remain in the contingency account in case of an emergency during the last months of the year.

17. The government will continue to scrutinize vehicle lease costs, which represent the largest single source of spending overrun. The preliminary findings of a study by the Ministry of Finance's Privatization Unit indicate that the new leasing arrangement is less costly to the government than vehicle ownership, when all costs are considered. However, there appears to be room to improve efficiency, for example by encouraging ministries to use the least-cost vehicle for each need. To this end, the Minister of Finance has instructed all ministries to monitor their vehicle lease charges against their budget allocations through the end of the year and has notified them that, beginning with the 2002/03 financial year, these charges are to be kept within budget allocation. Fuel charges will be treated similarly. The government is also working with the leasing company to provide to each ministry more timely and accurate information on vehicle use and cost. In this way, Ministries can take responsibility for vehicle-related choices and costs.

18. Donor-financed capital spending is expected to fall below the levels envisaged in the original 2001/02 budget. Part of the underrun is due to Parliament's approval of the budget in July, three months after the start of the financial year. Spending is also below expectations because of delays in project implementation. To strengthen the planning and implementation process, the Ministries of Finance and Development Planning have introduced regular coordination meetings at the staff level. Looking forward, several aspects of the Lesotho Public Sector Improvement and Reform Project (PSIRP), including medium-term planning and procurement reform, will improve capital planning and utilization.

B. The 2002/03 Budget

19. The 2002/03 budget was approved by Cabinet and presented to Parliament on January 25, 2002. The budget clarifies the government's focus on poverty reduction through employment creation, industrialization, and development of water, road, and tourist-service infrastructure. It also contains conservation initiatives to address Lesotho's serious soil erosion problem. Other priorities include good governance, human development through relevant education, and health, including HIV/AIDS.

20. The government's policy priorities will be implemented in an environment of limited financial resources. Overall tax revenue is projected to decline as a share of GDP because of a fall in Southern African Customs Union (SACU) revenue and an expected decline in nontax revenue. There is also a risk that tax collections could fall short of projections because of (a) the possibility of an economic slowdown in Lesotho linked to the downturn in the global economy, and (b) the uncertainties related to delays in LRA and VAT implementation.

21. Total expenditure, excluding net lending, is expected to rise by 1¼ percent of GDP to 45¾ percent in 2002/03, almost entirely due to a 70 percent increase in externally financed capital spending. Current spending is budgeted to grow in line with GDP. Reflecting government priorities, defense spending has been reduced to make room for the already-planned expansion of free primary education and a rise in government pensions that stems from the strict enforcement of existing retirement rules in 2001. In addition, public employees will be given an 8 percent pay increase. The need for this adjustment is demonstrated by growing vacancies in key positions and wage increases over the past two years that did not keep pace with inflation. By holding down the number of new positions, the wage bill is projected to be 14.3 percent of GDP, a level that is high compared with most other developing countries. The government intends to reduce this ratio in the future through more efficient government and private sector development. The government also plans to introduce performance-related pay increases next year as part of its effort to improve the civil service.

22. The fiscal stance for 2002/03 will be slightly contractionary. The domestic balance, which measures the government's absorption of local resources and, therefore, excludes externally financed projects with a high import content, external interest payments, and exceptional factors, is projected to rise by ½ of 1 percent of GDP to a surplus of 2 percent. The domestic borrowing requirement would increase to about ½ of 1 percent of GDP, an acceptable level in view of the low level of government domestic debt. Looking ahead, drawing on resources of the banking system and the nonbank public will be kept to a minimum so that credit is available for private sector development. This constraint will become increasingly important as financial markets are modernized.

C. Structural Measures Supporting Fiscal Policy

23. The government is working to make the LRA operational as soon as possible. Enabling legislation is in place, the board of directors has been appointed, and an organizational plan is being drawn up. In addition, the government has exchanged letters with the United Kingdom Department for International Development (DFID) committing the DFID to assist with implementation, including support for an experienced Commissioner General. By mid-February, the government had contracted with Crown Agents to recruit the Commissioner General. In addition, a DFID evaluation team visited Maseru to advise on the implementation strategy. It is intended that the new Commissioner General be in place by the end of July 2002, and the LRA be operational by the end of December 2002. These are considered practical target dates that would allow for the recruitment of a well-qualified candidate, who would then have sufficient time to put in place senior staff and, if necessary, amend the implementation plan. Before then, the government will work to bolster morale within the tax departments by announcing the intention to help those employees who do not transfer to the new authority. The government has enlisted Crown Agents to assist in enhancing border control for revenue purposes. VAT implementation has necessarily been postponed and is planned to follow implementation of the LRA by about six months. The government requests that an operational LRA by end-December 2002 become a condition for the fifth disbursement.

24. The government is pursuing options to clear the backlog of unaudited public accounts. After the extensive efforts made by the government using domestic resources, it is apparent that outside assistance is necessary. Accordingly, the Minister of Finance has requested help from the IMF; a technical assistance team is now expected to be in Lesotho in March 2002.

25. The government acknowledges the need to strengthen financial management to avoid a future backlog of unaudited accounts and also to improve the information available for expenditure management and budgeting. Plans in this area have been part of the PSIRP, which is currently on hold pending further discussions with the World Bank and other donors. Consequently, the government has taken a series of steps in order to make progress during the interim period before the PSIRP begins. The government has already made a formal request for donor assistance to strengthen the Account General's office in the near term with training and operations support. The government has also asked, and is receiving, help in recruiting an experienced Accountant General. In addition, the government will soon request assistance, including project management, to put in place a new treasury financial information system. When complete, government information systems will be linked so that the managers will have the timely information necessary to administer government operations efficiently.

26. The government is committed to the Lesotho Public Sector Improvement and Reform Project, but it will need the support of development partners to move forward in a coherent, coordinated way. The government hopes that observable progress can be achieved as soon as possible, especially in building-block areas such as financial management (as noted above), human resource management, governance, and justice. At the same time, the government is becoming increasingly concerned about the debt and debt-service obligations of the project as currently envisaged and is considering ways to increase grant funding of the project. This concern reflects recent developments, such as the depreciation of the South African rand, which has increased debt-service costs and the medium-term risk of a sharp decline in customs revenue due to the combined effects of (a) the new SACU agreement and the downward trend in tariff rates worldwide; (b) the South African Trade, Development, and Cooperation Agreement; and (c) the Southern African Development Community (SADC) Trade Protocol.

D. Monetary Policy and Related Structural Measures

27. Monetary policy will continue to reflect the objectives of price stability through Lesotho's membership in the Common Monetary Area (CMA) and financial market development. Over the next six months, the Central Bank of Lesotho will fine-tune the auction system and move ahead with the strategy of increasing private saving and investment through financial market development. Emphasis during the period will be on designing an integrated strategy to strengthen competition and provide the public with the tools and environment to save and invest with reasonable assurance that can profit from its efforts.

28. Performance criteria for net international reserves and domestic assets of the central bank have been set according to the Central Bank's target for reserve money and consistent with the 2001/02 government budget and expected balance of payments flows. In particular, foreign reserves are programmed to remain above 7 months of imports through September 2002. This level implies that central bank reserves will be more than three times greater than narrow money.

29. The Central Bank of Lesotho will build on the introduction of the treasury bill auction by refining internal procedures and improving communications with the Ministry of Finance and the public. The Central Bank will make monetary policy implementation more transparent by publishing auction information on a regular basis and by continuing to work with the public on the modalities of repurchase operations. The Bank has already taken steps to strengthen coordination with the Ministry of Finance, including regular meetings at the staff level to coordinate financing and debt-related issues.

30. To develop an integrated financial strategy, the CBL will complete studies on impediments to the functioning of the financial market. These will include how best to modernize the legal framework pertaining to financial markets, and to undertake reforms in the capital account. It will also look at ways to promote bank lending and competition in the money market. A key objective in this context will be to strengthen the transmission of monetary policy to the private sector. The bank will seek technical assistance from the IMF and other development partners as necessary.

31. The Central Bank and Ministry of Finance have started discussions on implementation of the Central Bank Act 2000, which among, other things, stipulates that the central bank will not pay interest on government deposits. These were an important revenue source reflecting the government's high level of deposits at the Central Bank. Further discussions will focus on making up this revenue loss through dividend payments. The discussions will also take into account the fact that central bank independence is a proven contributor to good macroeconomic performance and additionally the importance of a transparent operating budget at the Central Bank.

E. The PRSP

32. The poverty reduction strategy paper (PRSP) process is moving ahead and gaining speed after a slow start. The government now expects first drafts of the paper to be reviewed by the cabinet in June 2002. A progress report was submitted to the IMF and World Bank Executive Boards in January 2002.

IV. Program Monitoring

33. To monitor policy implementation under the program, quantitative and structural performance criteria and benchmarks are set out in Tables 1 and 2 of this memorandum. Quantitative performance criteria for end-September 2002 will be conditions for the fourth disbursement. Structural performance criteria in Table 2 will also be conditions for the fourth disbursement, with the exception of the LRA's becoming operational. This performance criterion will be a condition of the fifth disbursement.

34. The government of Lesotho will keep the IMF informed of the progress in the implementation of the program. In particular, the government will continue to send to the IMF fiscal and monetary data on a monthly basis, as well as balance of payments and health and education spending data at least on a quarterly basis. It will send domestic debt (by holder and instrument) and external debt data on a monthly basis and information on monthly treasury bill auctions.

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

Table 1. Lesotho: Quantitative Benchmarks and Performance Criteria,
December 2001–September 2002

    2001
Dec.
Prel.
  2002
Mar.1
Prog.
June
Prog.
Sep.1
Prog.

Ceiling on the domestic financing requirement of the central government2   124   -7 7 -64
             

Ceiling on the stock of net domestic assets of the Central Bank of Lesotho

  -3,631   -3,499 -3489 -3488
             

Floor on the stock of net international reserves of the Central Bank of Lesotho3

  372   363 363 363
             
Ceiling on the amount of new non-concessional external debt contracted or guaranteed by the public sector (cumulative from end-November 2000)4,5,6            
   Maturity of less than one year7   0   0 0 0
   Maturity of one year or more   0   0 0 0
             
Ceiling on the stock of external payments arrears6   0   0 0 0

Sources: Ministry of Finance; Central Bank of Lesotho; and staff estimates.
1Performance criteria.
2December 2001 and March 2002 are cumulative from end-March 2001, and June and September 2002 are cumulative from end-March 2002. They exclude net lending by the government.
3At program exchange rates.
4This 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. A loan is concessional if its grant element is at least 35 percent, calculated using a discount rate based on the ten-year average of OECD commercial interest reference rates (CIRRs) for loans of maturity of greater than 15 years; for loans of maturity of 15 years or less, the discount rate is based on the six-month average of OECD CIRRs. To both the ten-year and six-month averages, the same margin for differing repayment periods would be added (0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more).
5Excludes borrowing for water transfer operations of the Lesotho Highlands Development Authority.
6Continuous performance criterion.
7Except for normal short-term import credits and nonresident holdings of treasury bills.

Table 2. Lesotho: Structural Benchmarks and Performance Criteria,
January 2002–December 2002

Action   Implementation Date

A. Lesotho Revenue Authority and Supporting Measures  
1. Appoint Commissioner General.*   July 31, 2002
2. LRA becomes operational.**   December 2002
     
B. Expenditure Control  
1. Prepare timed action plans (a) to strengthen the Accountant General's office and (b) to put in place a new financial management system.   June 30, 2002
2. Fill the position of Accountant General.*   July 31, 2002
3. Finalize and announce the plan to introduce performance-based pay for public sector employees.   July 31, 2002
 
C. Financial Sector Reform  
1. Introduce supervisory and regulatory guidelines for foreign exchange dealers.   April 30, 2002
2. Encourage commercial banks to bring delinquent accounts to the commercial court.   April 30, 2002
3. Develop an integrated financial strategy by first identifying impediments to a smooth-functioning financial market, including capital controls and inefficiencies in the transmission of monetary policy, and then developing a plan to address the so-identified problems.*   May 31, 2002
4. Establish and publicize regulations on ancillary financial markets including money lenders and transfer agents.   July 31, 2002

*Performance criterion for the fourth disbursement.
** Performance criterion for the fifth disbursement.


Government of Lesotho

Technical Memorandum of Understanding

March 1, 2002

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 three-year 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 remaining test date for assessing observance of the quantitative targets during the financial year April 2001-March 2002 will be end-March 2002. The test dates during the financial year April 2002-March 2003 will be end-June 2002, end-September 2002, end-December 2002, and end-March 2003. The end-March 2002 and end-September 2002 targets will constitute quantitative performance criteria, the end-June 2002, and end-December 2002 targets will constitute quantitative benchmarks. In addition, the ceilings on the stock of external payments arrears and new nonconcessional external debt are continuous performance criteria. The second review under the program is scheduled for completion by March 15, 2002. End-March 2003 quantitative performance criteria will be set at the third review.

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

3. Definition: The net 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 U.S. dollars using the agreed cross exchange rates.1

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. It will be adjusted for accounting practice changes implemented by the Central Bank of Lesotho that are recommended by the IMF's Statistics Department or are made in response to the IMF safeguard report.

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. Foreign assets and liabilities at the end of each quarter will be calculated in U.S. dollars using the agreed cross exchange rates in Table 1 and converted into maloti using the U.S. dollar-loti exchange rate. 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 end-March 2001 in fiscal year 2001/02 and as the cumulative change from end-March 2002 in fiscal year 2002/03, 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. Changes in government liabilities stemming from the issue or retirement of treasury bills and bonds due to the recapitalization of the Old Lesotho Bank 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: M359.6 million in each quarter in fiscal year 2001/02, and M367.5 million in fiscal year 2002/03. 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. External debt service, amortization, and disbursements will be calculated at program exchange rates.

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. The Ministry of Finance will provide monthly budget operations and tax reports.

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 and loans under the PRGF arrangement will be excluded from this performance criterion. The performance criterion will be evaluated on a continuous basis 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. Treasury bills issued for the purposes of monetary policy operations will also be excluded. Normal short-term import credits, will be excluded from this performance criterion. The performance criterion will be evaluated on a continuous basis as the cumulative change in the amount of new nonconcessional debt contracted or guaranteed from end-March 2001.

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 continually 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.


1Loti per U.S. dollar: 10.324; South African rand per U.S. dollar: 10.324; U.S. dollar per pound sterling: 1.426; U.S. dollar per SDR: 1.26608; U.S. dollar per Euro: 0.8898.

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