Press Release No. 17/445

IMF Staff Completes 2017 Article IV Visit to the Kingdom of Lesotho

November 20, 2017

• The sharp decline in SACU revenues due to sluggish growth in South Africa is a severe shock to Lesotho’s public sector.
• Economic growth has been shielded from this shock by the government’s decision to run large fiscal deficits.
• With fiscal buffers shrinking, the government needs to adjust to restore fiscal sustainability and reduce pressure on international reserves.

An International Monetary Fund (IMF) staff team led by Ms. Christine Dieterich visited Maseru from November 2-15, 2017, to conduct the 2017 Article IV Consultation discussions with the Kingdom of Lesotho.

At the conclusion of the visit, Ms. Dieterich made the following statement:

“Lesotho’s new government faces difficult challenges due to external shocks compounded by a fragile political situation. A sharp drop of Southern African Customs Union (SACU) revenues and slim prospects for a quick recovery put severe pressure on the fiscal accounts.

“Economic growth is expected to exceed 3 percent this fiscal year, shielded against the SACU revenue shock by the government’s decision to run large fiscal deficits. Looking at the sectoral contributions, the mining sector and the recovery of agriculture after two years of drought are expected to be major contributors to growth. The implementation of SADC recommendations to stabilize the political situation has reduced the risk for the textile sector to lose access to the U.S. market under AGOA.

“After two consecutive years of fiscal deficits exceeding 6 percent of GDP, financed by drawing down government deposits at the central bank, these buffers have been dwindling. The fiscal situation has been compounded by shortfalls of domestic revenues. While SACU revenues have been difficult to predict in the past, prospects for a quick recovery are very slim, given the slow economic growth in South Africa.

“The unsustainable fiscal position is mirrored in the external accounts. The current account deficit remains high due to the significant import share of aggregate demand. The trade balance is expected to further deteriorate as construction of the second phase of the Lesotho Highlands Development Project is scheduled to begin early next year.

“The government is committed to addressing this challenge and has initiated processes to improve domestic revenue performance, control spending this fiscal year, and substantially reduce the fiscal deficit for the FY 2018/19 budget.

“In an environment with high income inequality and unemployment, the challenge for the government will be to identify high-quality fiscal adjustment measures, aimed at improving spending efficiency while limiting the negative impact on poverty and growth. The government already initiated measures to strengthen Public Financial Management and procurement. In view of the large adjustment need, evaluating the efficiency of existing spending programs to identify room for cuts should be a priority.

“To remove obstacles for private sector development and enhance job creation, reducing red tape will be an important short-term measure. Over the medium-term, improving human capital formation is critical as stubbornly high HIV/AIDS rates, especially for women, and little progress in education standards have taken a toll on labor productivity.

“The banking system continues to be stable and profitable, but banks are exposed to risks from some segments of the household sector that appear overburdened by debt. While there is scope for the non-bank financial sector to play a larger role in facilitating access to credit, mobile banking has been the main driver in this area.

“The team met with Minister of Finance, Moeketsi Majoro, Central Bank of Lesotho Governor, Adelaide Matlanyane, other senior officials, and financial market, business, and trade union representatives. The team would like to express its gratitude to the authorities and their staff for their hospitality and the productive discussions.”