Public Information Notice: IMF Concludes Article IV Consultation with Lesotho

May 21, 2001

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.

On March 9, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Lesotho.1


Lesotho continues to face considerable economic challenges since the sharp downturn in growth in 1998/99 aggravated by political riots. Real GDP growth has recovered to above 2 percent, helped by a recovery in manufacturing. Still, growth remains constrained by structural changes such as the winding down of Phase I of the Lesotho Highlands Water Project and the decline in mining employment in South Africa. Unemployment, estimated at over 40 percent, and poverty are widespread and there is a serious HIV/AIDS problem. The fiscal and balance of payments situations have also deteriorated. However, inflation is relatively low and the external debt remains sustainable.

Declining revenue-to-GDP and one-off expenditures associated with the restructuring of a public enterprise and state banks caused the budget deficit in 1999/2000 to rise to 16 percent of GDP. The budget deficit should narrow in 2000/01, though unexpected expenditures such as the settlement of a tax dispute with South Africa continue to highlight fiscal pressures. While the current account deficit has narrowed, it remains large and inflows of official grants and foreign direct investment have become insufficient to finance it, leading to a fall in international reserves since 1999/2000.

Lesotho's one-to-one exchange rate peg between the loti and the rand has helped maintain monetary stability and relatively low inflation at 6 percent. The authorities have committed to maintain gross international reserves at six months of imports and contain the current account deficit. The exchange rate regime also limits monetary policy and so raises the importance of a healthy fiscal policy. The government has agreed to pursue a path of fiscal consolidation through increases in tax revenue, cuts in current expenditure, and public sector reforms. The central bank will also enhance its capacity to control liquidity through the establishment of a treasury bill market.

Lesotho has made good progress in implementing structural reforms. These include the start of a major tax reform aiming at introducing value-added tax and a National Revenue Authority, and a public sector reform project. Restructuring of the electricity company is underway with plans for privatization in 2002. Financial sector reform has also made significant advancement with the restructuring and privatization of the two state banks and major improvements in bank supervision.

The government aims to raise growth and boost employment through attracting foreign direct investment and enhancing export competitiveness, while continued privatization will fuel private sector development. Structural reforms to be implemented cover the areas of tax reform and tax administration, expenditure control and rationalization, public sector reform, financial sector reform, privatization and statistics strengthening.

Executive Board Assessment

Executive Directors noted that Lesotho is facing a downturn of economic growth, high unemployment and poverty, and fiscal and balance of payments pressures as a result of long-term structural changes affecting the economy. Correction of these problems will require bold and sustained action by the authorities over the medium term. Directors therefore commended the authorities for adopting a growth-oriented adjustment program in the context of a three-year PRGF arrangement aimed at restoring the economy to a path of high and sustained growth. In view of Lesotho's limited capacity to implement wide-ranging reforms, Directors welcomed the program's focus on a number of key areas in which progress is most needed. They also welcomed that the authorities have secured technical assistance from bilateral and multilateral agencies, including from the Fund, in undertaking the reforms in these areas.

Given recent budgetary pressures, Directors underlined the importance of the authorities' commitment to fiscal consolidation, to be achieved through a compression in current expenditure and an increase in noncustoms tax revenue. Directors drew attention to the need to lower and rationalize government expenditure over the medium term, taking note in particular of the need to contain growth in the wage bill, while preserving priority social and capital investment expenditures. They encouraged the authorities to complete the public expenditure review as early as possible and to speed up the public sector reform project. They saw these measures as supporting the budgeting process and improving the efficiency and transparency of government operations. Tax administration also needed to be strengthened.

Directors agreed that the current monetary regime with South Africa has served Lesotho well, and has helped keep inflation relatively low, but observed that the fixed exchange rate needed to be backed by financial discipline. Thus they welcomed the central bank's efforts to refine its policy instruments in the area of open market operations. Directors also supported the authorities' efforts to address the structural weaknesses that affect Lesotho's financial sector and contribute to the lack of savings mobilization and financial intermediation. They noted that, following closure of the two loss-making state-owned banks, the banking system is now in better health. They stressed the importance of reinforcing bank supervision and of continued efforts to ensure the enforcement of loan contracts, and welcomed recent steps to increase the competitiveness of the financial system.

Directors observed that, given its size and geographical location, emphasis on outward-looking policies supported by private-sector development is the best option for Lesotho. They, therefore, welcomed the authorities' efforts to privatize state-owned enterprises. Directors also supported the stress on small and micro enterprise development, such as small-holder agriculture, to broaden the base of growth and maximize employment generation.

Directors stressed that Lesotho would need to take maximum advantage of the opportunities afforded by its close economic ties with South Africa and by regional trading arrangements, to attract foreign investment and diversify its production base. This would require appropriate policies to enhance external competitiveness and improve the business environment. In this context, Directors encouraged the authorities to eliminate the remaining non-tariff barriers.

Directors mentioned that, although the statistical database was adequate for purposes of the Article IV consultation, it still contains major weaknesses, especially in national accounts and the balance of payments. They, therefore, urged the authorities to improve the quality, timeliness and frequency of reporting of key statistical data.

Lesotho: Selected Economic Indicators 1/

  1998 1999 2000

(Annual percentage change, unless otherwise specified)
National income and prices        
Real GDP -3.6 2.1 2.4 2.8
Real GNP -6.6 1.1 0.7 1.7
Consumer price index (end of period) 8.9 6.3 6.0 5.7
Nominal GDP (in millions of maloti) 5,078.8 5,730.9 6,197.1 6,762.4
Nominal GNP (in millions of maloti) 6,488.9 7,246.5 7,706.4 8,318.6
External sector 2/        
Exports, f.o.b. 19.5 4.3 25.2 15.1
Imports, f.o.b. -5.6 8.1 1.9 6.6
Net labor income -7.7 8.8 0.3 0.6
Real effective exchange rate 3/ -12.6 0.7 . . . . . .
Government budget        
Revenue (excluding grants) -3.3 6.4 8.3 14.9
Total expenditure and net lending 4.1 38.3 -12.3 8.4
Current expenditure 31.8 19.3 3.7 2.2
Capital expenditure and net lending -42.9 -3.2 15.5 35.4
Money and credit 4/ 5/        
Net foreign assets 22.1 -8.2 -10.7 20.2
Net domestic assets -10.3 6.5 10.1 -11.4
Credit to the government 10.8 56.2 29.5 -1.4
Credit to the rest of the economy 10.3 -4.0 0.2 7.4
Broad money 11.8 -1.7 -0.6 8.8
Velocity (GDP/average broad money) 3.7 4.3 4.6 4.5
(In percent of GDP, unless otherwise specified)
Investment and saving        
Investment 36.8 27.7 26.3 24.4
Public 9.8 8.4 8.9 9.8
Private 5.1 6.6 7.4 8.1
LHWP 21.9 12.8 10.0 6.6
Gross national savings (including
11.8 5.3 7.9 10.6
Public 4.5 -0.1 2.4 7.1
Private 7.2 5.4 5.4 3.5
Government budget        
Revenue 42.8 40.4 40.4 42.6
Total grants 2.4 2.3 3.4 4.1
Total expenditure and net lending 48.0 61.6 47.7 47.4
Overall balance (before grants) -5.2 -18.5 -7.3 -4.8
Overall balance (after grants) -2.9 -16.2 -3.9 -0.8
Primary balance (excluding grants) -2.7 -15.3 -3.1 -1.7
Government domestic debt 4.4 13.6 13.4 12.0
External sector        
Current account balance (excluding official transfers) -40.7 -36.0 -33.1 -31.4
Current account balance (including official transfers) -25.0 -22.4 -18.4 -13.9
Stock of external debt 84.8 76.7 67.2 63.6
Debt-service ratio 6/ 6.6 8.1 14.7 8.8
(In millions of U.S. dollars, unless otherwise specified)
Overall balance of payments 63.6 -52.0 -22.8 37.3
Gross official reserves (end of period) 552.9 471.1 358.9 382.7
Gross official reserves (in months of imports of goods and services) 7.9 7.7 6.3 6.3

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

1/ Fiscal year beginning in April.
2/ In maloti.
3/ Based on partner country data (excluding South Africa).
4/ Change in percent of broad money at the beginning of the period.
5/ Monetary data for the period 1998 are very provisional as the Lesotho Bank.
published no regular accounts for the period from December 1996 to September 1998.
6/ In percent of exports of goods, services, and income.

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. This PIN summarizes the views of the Executive Board as expressed during the March 9, 2001 Executive Board discussion based on the staff report.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6278 Phone: 202-623-7100