Lesotho and the IMF |
Press Release: IMF Completes Review Under Lesotho's PRGF Arrangement and Approves US$4.98 Million Disbursement
June 17, 2003
Country's Policy Intentions Documents
of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum
Mr. Horst Köhler
Dear Mr. Köhler:
As you know, 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 fifth disbursement, in the amount of SDR 3.5 million, be made available following the successful completion of the fourth 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 2004. The memorandum also outlines the Government's action plan for the financial year 2003/04. The Government has prepared and submitted to the IMF and the World Bank a second preparation status report on the poverty reduction strategy paper, and is preparing a full PRSP.
Government requests a waiver for the nonobservance of the quantitative performance criterion on the ceiling on the domestic financing requirement for end-September 2002. It was not observed mainly because of spending overruns on vehicle leases and famine-related support to farmers.
Government also requests a waiver for the structural performance criterion related to the construction of government's balance sheet as of end-March 2002. It was completed on time, but Government did not consider this first draft to be of sufficient quality. The task is now largely completed.
In collaboration with Fund staff, Government will review progress in implementing the program every six months. The fifth review is scheduled to be completed no later than November 30, 2003, and the sixth review no later than May 31, 2004.
Minister of Finance and Development Planning
1. This memorandum updates the Government of Lesotho's memorandum on economic and financial policies (MEFP) dated September 5, 2002. It reviews performance through March 2003 and outlines the economic program for the period April 2003- March 2004.
2. Medium-term economic objectives center on poverty reduction through employment creation in the private sector, universal primary education and enhanced education quality at all levels, expanded access to health care, containing the spread of HIV infections and supporting AIDS sufferers and their families, improved efficiency, accountability, and transparency in government services, wider provision of public infrastructure, and improved Government procurement.
3. As in other countries, Lesotho's economic program supported by the IMF is based on several numeric, or quantitative targets such as a maximum level of government borrowing and a minimum level of international reserves. There are also objectives related to improvements in the economy's structure, for example establishment of the Lesotho Revenue Authority (LRA) and improvements in Treasury management. These targets are evaluated every six months and if met, or if deviations from target are explained by unforeseen circumstances such as unexpected demands for famine relief and if corrective actions have been taken, the program is considered to be meeting objectives.
4. Most program objectives were achieved for the period under review. Completion of the review was delayed by about three months to better align the program review dates with Lesotho's annual budget cycle.
II. Recent Developments and Performance Under the Program
5. Economic performance over the past two years has been bolstered by sustainable economic policies and free and fair parliamentary elections in May 2002. These develop-ments have raised confidence in the economy and have begun to attract foreign direct investment. Access to international textile and clothing markets, particularly under the U.S. African Growth Opportunity Act (AGOA), has allowed the manufacturing sector to add more than 10,000 jobs over the past 12 months, making this sector the largest employer in the economy. In addition, higher gold prices and the depreciation of the South African rand during 2001 has stabilized the downward trend in Basotho employed in South African mines. As a result, economic growth was 3.4 percent in 2001 and is estimated to have risen to 4.2 percent in 2002.
6. However, over the past 18 months, Lesotho and its neighboring countries have been buffeted by unusual weather conditions and other adverse factors affecting crop yields. Many Basotho were unable to grow enough food for their families, while at the same time a doubling of the regional price of maize since early 2001 greatly worsened the situation. In response to this emergency, Government and international donors have put in place a food assistance program to provide aid to more than 40 percent of Lesotho's population by June 2003, when the next summer crops are harvested. Reduced nutrition in rural areas may have worsened the HIV/AIDS crisis.
A. Food Emergency
7. Government declared a food emergency in April 2002. At that time, it was estimated that 900,000 Basotho would face severe food shortages because of poor crop production and sharply higher import prices for staples such as maize. Government then developed a plan that would provide free food to the most affected, including the elderly, young children, and the sick. In addition, the plan included a food-for-work program to assist able-bodied unemployed and a 20 percent subsidy for unsifted maize meal. To fund the program, M23 million was initially identified, compared with a cost estimate of M 373 million (US$45 million), and it was assumed that the international community would come forward to assist with most of the remaining cost. In the event, Government provided food to the most affected in June-July 2002, exhausting much of the funds that were first identified. Donor assistance, organized through the World Food Program (WFP), began to flow in early August and the WFP became the main distributor of free food in the most affected districts. Since August, Government has subsidized unsifted maize meal.
8. Food assistance needs mounted in December-January as more families exhausted their own resources in the months before the harvest. In response, the WFP increased its support, widening coverage to eight of Lesotho's ten districts, and providing food to those 55 years and older (from 65 years). The cost of famine relief to Government in 2002/03 is now expected to be much less than initial estimates mainly because donors have provided assistance directly to those in need. As a result, Government's contribution to food aid is now expected to be M 23 million, including about M 4 million for subsidizing unsifted maize meal.
9. Government also responded to the emerging crisis by subsidizing inputs for the summer and winter 2003 crops. Plowing, seed, and fertilizer were being provided to farmers at no cost, with an expectation that they would repay 50 percent of the cost when the crops are harvested. However, shortages of seed and fertilizer in the region slowed the process. In past years, Government had subsidized up to 30 percent of inputs, but decided that greater intervention was needed in the current serious situation. To finance this effort, Government instructed ministries to reduce their spending and transfer unspent votes to the Ministry of Agriculture and committed a further M 150 million from government deposits. As of end-February, approximately M 34 million had been revoted. Current estimates, however, indicate that a total amount of about M 110 million will be spent. Thus, Government now expects that famine relief plus support to agriculture will total M 109 million in the 2002/03 financial year.
10. Government's famine relief and agricultural support programs will end as planned in August 2003. Government will review the situation then, but anticipates that any food shortfalls after the 2003 harvest will again be met through generous donor assistance. In view of the budgetary constraints facing Lesotho, Government expects that the Ministry of Agriculture will provide ongoing services to farmers and meet any emergency needs within its budget allocation, and will draw on lessons learned during 2002/03 to improve the response to emergency food situations. Restructuring of this ministry will also be completed within this budget so that it can address Lesotho's trend decline in agricultural production and ensure that Basotho are getting value for money in this area.
11. Government recognizes that HIV/AIDS has become a driving social and economic force. According to UNAIDS estimates, Lesotho faces an infection rate of 30 percent of the adult population, and about 20 percent of children under five are orphans. While foremost a human tragedy, the impact on Lesotho's economy could be especially severe because of the country's mainly rural population. The disease creates a vicious cycle in which farmers are unable to tend their crops because of illness while the resulting lack of food makes them more susceptible to disease.
12. The HIV/AIDS tragedy will not be solved overnight or by the Basotho alone. H.M. King Letsie III and Government at the highest levels are leading the battle on HIV/AIDS that includes prevention and support to those living with the virus and to orphans. In 2002/03, Government directed Ministries to allocate 2 percent of their budgets to HIV/AIDS and also set up the Lesotho AIDS Prevention and Control Authority (LAPCA). The Executive Director's Office of LAPCA functions directly under the Prime Minister's Office, with an eye towards enabling it to conduct its operations with minimal administrative delays. More needs to be done, however, including strengthening coordination of HIV/AIDS programs within government and with the donor community. In this direction, Government has organized a conference of SADC heads of state to formulate a regional response to the HIV/AIDS scourge.
C. Performance under the Program
13. Government was unable to observe some of its quantitative benchmarks for September and December 2002 and March 2003, but did observe most of the structural benchmarks through February 2003. As outlined below, overspending, some of which was related to unplanned agricultural support, caused overshooting of the targets for domestic financing of the government. The targets for net foreign and domestic assets of the central bank were not met in March 2003 when the Central Bank did not fully offset the monetary impact of the deficit.
14. The end-September 2002 and end-March 2003 quantitative performance criteria on domestic financing of the government were exceeded because of above budget spending in several areas including, vehicle leases, pensions and scholarships, agricultural support, and spending that has not yet been classified.1 Pension costs were initially underestimated because the impact of the large number of government officers leaving service in July-August 2002 was not anticipated when the budget was approved. In response to the overall overspending, Government initiated a high-level study of the vehicle lease and its implementation, reduced spending on international travel and special purchases, and pushed ahead with efforts to improve expenditure monitoring. In addition, Government launched reviews of the main scholarship program and agricultural support , which by March, had added around M 70 million to spending, taking into account nearly M 35 million in reduced expenditures elsewhere. In view of these actions, Government requests a waiver of the September 2002 performance criterion on domestic financing.
15. Government revenue collections were mostly in line with program objectives for 2002/03. Overall revenue was slightly above target due to higher than anticipated nontax income, while income tax collections were below target because of ongoing staff shortages, particularly at higher levels, uncertainty in the transition to the LRA, and the closure or downsizing of several large businesses, particularly those associated with the Lesotho Highlands Water Project. Initial budget projections for tax collections may also have been too high. Grants were far below expectations because the majority of donor support for famine relief was channeled through the WFP and therefore not captured in Government accounts as originally envisaged. Spending on famine relief was correspondingly lower. Government income through March 2003 was near program estimates, but there was be a shortfall in budget support grants because the European Union grant was delayed.
16. The Central Bank fully sterilized the liquidity impact of the fiscal slippages through December 2002 and, in consequence, both the monetary and international reserve targets were met. However, for technical reasons, the Central Bank did not fully sterilize the liquidity impact at the end of the financial year, and these targets were missed by a narrow margin in March 2003.
17. Government has made good progress in fulfilling the structural performance criteria for the fifth disbursement, but two criteria were missed. In particular, the LRA (a performance criterion for end 2002) was made operational in December, and its new tax commissioners and staff are pressing ahead to apply tax law fairly and justly. There has also been considerable progress in strengthening treasury management. A new Accountant General was appointed in December, well ahead of schedule. Expenditure management and tracking have been improved, and the backlog of unpaid vouchers has been cleared, nearly all payments are backed by vouchers, and voucher and tracking information are entered into computerized systems with little or no delay (a performance criterion for end-November). Government recognizes, however, that reporting accuracy could be improved. These improvements and the action plan already completed (a performance criterion for end-October) will lay the basis for further management reforms outlined below.
18. Lesotho has had recent success in reducing corruption and fraud. In 2002, the High Court imposed significant penalties on a foreign company found guilty of bribing former officials of the Lesotho Highlands Water project, who were found guilty and sentenced to jail. Government has also uncovered several schemes to misappropriate public funds. Government sees its anticorruption as a central aspect of improving financial management and promoting foreign investment.
19. There has been notable progress in modernizing the financial sector. The Central Bank of Lesotho now publishes its macroeconomic forecasts (a benchmark for end-January 2003) in an effort to raise the public's awareness in these issues. The bank also made progress in promoting a private sector credit bureau (a benchmark for end-January 2003), and has identified the next steps Government can take to bring this source of credit information to Lesotho. Finally, the Bank has completed plans to allow foreign currency deposits, a move that will facilitate business operations and help attract foreign investors.
20. Government retained a private accounting firm to prepare the 2001/02 accounts for audit and to construct a balance sheet or "statement of affairs" listing all government financial assets and liabilities as of end-March 2002 (a performance criterion for end-December 2002). However, Government was not satisfied with the coverage and accuracy of the work and asked for a second, more comprehensive report, which was completed in February 2003. This second report presented the 2001/02 accounts, including some qualifying notes, and listed many financial assets and liabilities. In their qualifying notes, the report's authors observed that loans to parastatals, some accounts held by spending ministries, and the balances of a number of below the line accounts were not captured. In consequence, an accurate listing of financial assets and liabilities for March 2002 was not completed. However, in restarting the audit process and identifying areas for further work, the report went a long way toward the objective of greater transparency and accountability in government accounts. In addition, Government has already started to correct some of the shortcomings that became apparent in this process (see below). Government therefore requests a waiver for this performance criterion.
21. Restructuring the top management of the Treasury Department (a performance criterion for February 28, 2003 and the sixth disbursement) has been delayed. At the time this performance criterion was written, Government did not expect to have a new Accountant General in place until at least June 2003, and in the meantime it wanted to push ahead with restructuring of the Treasury. Because the position of Accountant General was filled well ahead of plan, it is now preferable to allow the new Accountant General time to restructure the department himself, perhaps within six months. Government will request a waiver of this performance criterion during the sixth review.
III. The Economic Program for April 2003-March 2004
22. The 2003/04 budget aims at providing a starting point for sustainable fiscal policies that will allow Lesotho to address the urgent policies of poverty reduction. Monetary policies will seek to maintain the pegged exchange rate arrangement. Supporting structural measures will center on improving Treasury management, tax administration, and financial intermediation.
A. The 2003/04 Budget
23. The 2003/04 budget, which was approved by parliament on March 28, is based on priorities emerging from the consultative process and emphasizes service to the public. These priorities include: education and health; building a network of roads to link the country internally and externally, development of tourism; access to clean water, sanitation, electricity, telephones, and credit; development of agro-industries, protection of the environment through controlled grazing, deforestation, and construction of gullies to stop soil erosion.
24. Government recognizes that the medium-term fiscal strategy must achieve a sustainable budget deficit. To do otherwise could create conditions for a financial crisis in the future and lead to a debt level that has crippled several other countries in Africa. It would also deplete resources that may be needed in the future to fight HIV/AIDS, cushion against another drought situation, or help adjust to possible declines in SACU revenue. Thus, Government aims for a deficit of under 4 percent of GDP in 2003/04, with medium-term deficits declining to the neighborhood of 2 percent of GDP. Government is aware that this adjustment depends critically on instituting better revenue collection measures; stringent financial discipline; and a concerted improvement in financial management.
25. Formulating the 2003/04 budget within this strategy involved many difficult decisions mainly because of a drop in the SACU customs transfer. This transfer was determined in late in 2002 and shows a decline in Lesotho's allocation for technical reasons that were unrelated to policy. Nevertheless, Government has decided to act as if the decline foreshadows diminishing future transfers as the new SACU agreement comes into effect and as tariffs and other trade barriers are reduced. Nontax revenue is also projected to fall, but this reflects unusually high flows in the previous year including dividend payments from the central bank and payments from electrical generation at the Muella power station. Income taxes are expected to rise as the LRA begins operation and pushes up tax efficiency. Indirect tax collections (the VAT) are expected to increase based on recent improvements in border collections, but also the fact that VAT base will be broader than that of the sales tax. On the basis of current commitments, donor grants are expected to fall in real terms.
26. Government recognizes that tax collections will need to be raised by the equivalent of about 1 percent of GDP in 2003/04, above what can be expected by LRA efficiency gains. Specific measures are currently under review and will be presented to Cabinet and then Parliament in due course.
27. The outlook for financial resources dictates that spending in 2003/04 will be extremely tight. Capital spending funded by Government will be held slightly above 2002/03 levels, with the result that most new projects will be postponed. Purchases of goods and services other than for famine relief and agricultural support will rise on account of M 140 million allocated for local elections that will be held on December 2003. On the other hand, transfers and subsidies will rise owing to the Lesotho College of Education and the Lerotholi Technical Institute becoming autonomous, the establishment of the LRA, and higher student scholarships. Government anticipates that savings and efficiency gains, including those offered by better financial management and reporting, will allow government spending to be held within the framework without jeopardizing services to the public.
28. Within these constraints, Government has emphasized health and education. The resources devoted to overall social services are budgeted to rise by almost 15 percent, with much of this for the ongoing expansion of free primary education. Moreover, Government will be looking at ways of providing education more efficiently, for example by addressing administrative and staffing issues at the National Manpower Development Secretariat (NMDS), which oversees scholarships. The budget for defense has been lowered as a percent of GDP.
29. Government's need for financing will be significant, between M 320 and M 350 million in 2003/04. The budget framework assumes that this amount will be met almost entirely through domestic sources, with only almost no new net external financing available. Domestic financing of this magnitude would be feasible in the short run through a drawdown in government deposits at the central bank and some increase in government debt. However, there are costs to such an operation, including a greater burden on monetary policy and higher interest costs on treasury bills. Government feels that these costs are justified in the current circumstances of pressing need to rebuild public institutions and infrastructure that were neglected since the 1998 political unrest. Government recognizes that debt would become unsustainable unless fiscal savings are put in place in the medium term.
B. Supporting structural measures
30. Structural measures over the next several months will center on strengthening existing procedures and systems in the Treasury Department, developing the LRA, and introducing the VAT. These efforts, outlined below, have three objectives: (i) making Government accounts more transparent; (ii) reducing the possibility of spending beyond what has been authorized by Parliament; and (iii) improving revenue administration. Overall, reforms will allow Government to deliver services efficiently, ensure that all funds are used for the intended purpose, and collect taxes fairly.
31. Near-term reforms in the Treasury will address operational issues. To improve the accuracy of government records, Government will work to ensure that all transactions in bank accounts are entered into the Treasury general ledger and that all cash books are reconciled with bank balances monthly. Diplomatic mission accounts will be submitted to the Treasury timely and immediately captured in the general ledger. It will also move to enforce existing regulations and reassign financial responsibility for each ministry to the Principal Secretaries by emphasizing their roles as Chief Financial Officers.
32. Looking ahead, the Ministry of Finance is currently formulating plans to modernize Treasury operations. These will be based on the recommendations of earlier expert reports and the private sector experience of the newly appointed Accountant General. Areas under review are:
• restructuring of the Treasury top management structure, including new posts for deputy accountants general;
• a strengthened internal audit function in the Treasury;
• a review of computer staffing and reporting responsibilities and hardware and software;
• measures to strengthen the accounting cadre in Government.
Specific plans and an implementation timetable have been delayed to allow the Accountant General time to become acquainted with the department, and a new plan is expected by June 2003.
33. Government remains committed to making its books accessible to Parliament and the public. To this end, it has submitted the 2001/02 accounts for audit and will prepare the 2002/03 accounts for audit by September 30, 2003. A report on below-the-line accounts will also be submitted for audit. Government has also begun to address the accounting and administrative weaknesses that were identified in its report to the Auditor General on the 2001/02 accounts. Already, Principle Secretaries have been reminded of their responsibilities in keeping accurate accounts. Government is also working to bring into its accounting system loans to parastatals, bank accounts of some spending ministries that are not captured in the system, and below-the-line accounts. Furthermore, Government is pursuing means of completing accounts from 1995/96, while recognizing that the audits of past years' accounts are likely to be qualified because of incomplete records and the use of below-the-line accounts. Nevertheless, Government will make all results public and strive to improve the quality of government financial information in the future.
34. Initiatives in the revenue area will build on the successful launch of the LRA in December 2002. Already the LRA has contributed to better tax compliance, and further improvements can be expected as the new organization gains experience. The next major hurdle in this area will be implementation of a Value Added Tax (VAT) on July 1, 2003. For efficiency, Government is considering harmonizing the VAT system with that in South Africa and coordinate collections and refunds with the South African Revenue System (SARS).
35. Government purchases will be subject to VAT when it is implemented. This will increase government spending by an estimated M 80 million in 2003/04, but also raise tax collections by the same amount. While there is clearly no direct impact of this arrangement from a deficit point of view, Government anticipates significant benefits. First, tax avoidance will be reduced. Under the current sales tax arrangement that exempts government purchases, some producers incorrectly claim exemptions for sales to government that in fact go to private consumers. This will not be possible under the VAT arrangement. Second, Government will face the same prices as others in the economy, thereby leveling the playing field.
36. Government does not envisage further significant changes in tax policy at this time. Rather, Government has developed terms of reference for a study of tax policies, including the impact of taxes on competitiveness within the region. Government will also prepare estimates of the budgetary implications of tax exemptions before they are granted. When complete, the studies will provide policymakers with a roadmap for updating Lesotho's tax system.
37. Government is taking steps to improve civil service efficiency including the training of human resource officers and the introduction of performance appraisals for some civil servants. In addition, Government is working with donors on a far-reaching plan to improve the public sector. Without measures that will reduce the cost of civil service, Government may be forced to freeze wages or otherwise slow their inflation adjustments.
C. Financial Market Development
38. One of the main impediments to faster economic growth in Lesotho is the lack of financial intermediation. The Central Bank of Lesotho, in conjunction with Government, is addressing institutional and structural weaknesses that hinder private credit growth through several channels. For example, it is assisting the private sector in developing a credit bureau that would provide payment histories and other information to creditors. Draft regulations for the bureau have been given to the Ministry of Trade, Industry, Cooperatives and Marketing, which governs licenses in this area. The Central Bank is also working with the legal professionals to make Lesotho's commercial court operate more efficiently. A credit bureau and a smooth-running commercial court would encourage lending by reducing risk and lowering the cost of recovering bad loans.
39. The Central Bank of Lesotho is committed to gradual liberalization of capital controls with a view toward better alignment of Lesotho's exchange controls with those of other countries in the Common Monetary Area. In the near term, it is likely that residents will be allowed to open foreign currency bank accounts to facilitate transactions, especially for the business community. Looking ahead, the Central Bank has prepared a blueprint for liberalization and is incorporating suggestions made by the IMF, in particular concerning the sequencing of reforms.
40. The Central Bank will be active is several other areas. First, it will complete a blueprint for modernizing the national payments system so that banking will be more efficient and services will be available to more people. Second, the Bank will review regulations pertaining to the insurance industry. Third, it will seek to bolster balance of payments data and analysis. Better data will be necessary to monitor developments as capital controls are relaxed, and also improve policy analysis. In this connection, the Central Bank plans to collect more information on foreign exchange exposure and also foreign direct investment.
D. The PRSP
41. The poverty reduction strategy paper (PRSP) is now scheduled for final publication no later than November 2003. To date, village consultations throughout the country have been completed. These have led to an early draft of the PRSP that identified agriculture, housing, roads, water, employment, trade, and industry as the main areas needing government intervention.
42. Government has decided to merge the PRSP and National Vision 2020 Secretariats. A progress report was submitted to the IMF and World Bank in January 2003.
IV. Program Monitoring
43. Quantitative and structural performance criteria and benchmarks are set out in Tables 1 and 2 of the MEFP. The sixth disbursement will be based on end-June test dates, with the exception of the quantitative performance criteria for end-December 2003, which would be conditions for the seventh disbursement.
44. 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), external debt data on a monthly basis and information on monthly treasury bill auctions. A calendar for the provision of data appears in the Technical Memorandum of Understanding.
45. Government recognizes that there have been delays in providing data in the recent past. It is making every effort to rectify this situation.
46. 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.
1 Owing to the shortcomings in the government's accounting system, which are currently being addressed, domestic financing for program purposes is monitored through the monetary accounts. Therefore, it is difficult to identify specific areas of overspending.
* Performance criterion for the sixth disbursement.
INTERNATIONAL MONETARY FUND
Technical Memorandum of Understanding
May 15, 2003
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 test dates during the financial year April 2003-March 2004 will be end-June 2003, end-September 2003 and end-December 2003. The end-June 2003 and end-December 2003 targets will constitute quantitative performance criteria, and the end-September 2003 target will be a quantitative benchmark. In addition, the ceilings on the stock of external payments arrears and new nonconcessional external debt are continuous performance criteria. The fourth review under the program is scheduled for completion by June 16, 2003. End-June 2004 performance criteria for the financial year April 2004-March 2005, will be set at the fifth 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 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 is defined in U.S. dollars and will be calculated 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 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 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 currency breakdown of the reserve assets and reserve liabilities of the Central Bank of Lesotho and converted into U.S. dollars and in maloti at program exchange rates stipulated in paragraph 3.
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 in circulation 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 stipulated in paragraph 3 converted into maloti using the U.S. dollar-loti exchange rate (also stipulated in paragraph 3). 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 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 nonbank sector. It will be calculated as the cumulative change from end-March 2002 in fiscal year 2002/03 and as the cumulative change from end-March 2003 in fiscal year 2003/04, 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. External debt service, amortization, disburse-ments and external grants will be calculated at program exchange rates.
10. Adjustment clause: The program assumes that customs revenue from the SACU revenue pool will be received as follows: M367.5 million in each quarter in fiscal year 2002/03, and M355.4 million in each quarter in fiscal year 2003/04. 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.
11. Adjustment clause: The program assumes total European Union budget support grants of M0 in the first quarter of 2003/04, M29.7 million in the second quarter of 2003/04 and M0 million in the third quarter of fiscal year 2003/04. The program target for net domestic requirement of the central government will be adjusted downward (upward) by the amount of any early (late) payment of EU budget support grants.
12. Adjustment clause: The program assumes rand monetary compensation revenues of M44 million in the first quarter of 2003/04, M0 million in the second quarter of 2003/4 and M0 million in the third quarter of fiscal year 2003/04. The program target for net domestic requirement of the central government will be adjusted downward (upward) by the amount of any early (late) payment of rand monetary compensation.
13. Supporting material: The Central Bank of Lesotho will provide the monetary survey and other monthly monetary statistics, 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, as well as details of any monetary operations with treasury bills, including the changes in government deposits stemming from such operations will be separately identified as memorandum items in the monetary survey. The Central Bank will also provide a table showing the details of government debt by type and holder. The Ministry of Finance will provide detailed monthly budget operations and tax arrears 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
14. 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.
15. Adjustment clause: None.
16. 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
17. 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.
18. Adjustment clause: None.
19. 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
20. 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.
21. Adjustment clause: None.
22. 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.
1 Program cross exchange rates: South African rand per U.S. dollar: 7.920; U.S. dollar per pound sterling: 1.580; U.S. dollar per SDR: 1.374; U.S. dollar per Euro: 1.090; Swiss franc per U.S. dollar: 1.354; Swedish krona per U.S. dollar: 8.505; Botswanan pula per U.S. dollar: 5.153. Program loti per U.S. dollar exchange rate: 7.920.