Press Release No. 01/8

The International Monetary Fund (IMF) approved today a three-year loan for SDR 24.5 million (about US$32 million) under the Poverty Reduction and Growth Facility (PRGF)¹ to support Lesotho's efforts to foster macroeconomic stability, promote accelerated growth, improve social services, and reduce poverty. The IMF Executive Board decision will enable Lesotho to draw immediately up to SDR 3.5 million (about US$5 million).

Following the Executive Board discussion on Lesotho, Shigemitsu Sugisaki, Deputy Managing Director, said:

"The Fund commends the Lesotho authorities on having made a good start with their new three-year economic program. The program, which relies on fiscal restraint and structural reform, provides a framework to promote economic growth and reduce poverty. The fiscal strategy aims at short-term external stability and medium-term growth and poverty reduction, in particular, through the removal of key infrastructure bottlenecks and increased spending on health and education.

"On monetary policy, the central bank's efforts to develop its capacity to influence domestic liquidity conditions and, ultimately, the balance of payments are welcome steps.

"Structural reforms under the program focus on a limited number of key areas, including tax administration and tax policy, expenditure control and rationalization, public sector reforms, privatization, and financial sector reforms. The authorities should make every effort to overcome the constraints under which they operate and to adhere to the agreed implementation timetable. Technical assistance, including from the Fund, will play a crucial role in supporting the authorities with the implementation of their entire reform agenda.

"The benefits of certain key reforms and measures, such as the value added tax, privatization, and fiscal prudence, would need to be well publicized to mobilize support. Regular and effective monitoring of program implementation is crucial, and therefore, the authorities' commitment to improve the quality, timeliness, and frequency of reporting of key statistical data is vital. The authorities are also encouraged to make further progress aimed at securing effective expenditure management. The Fund endorses Lesotho's Interim Poverty Reduction Strategy Paper (IPRSP) and looks forward to the timely preparation of a full PRSP based on an effective consultation process," Mr. Sugisaki said.

ANNEX

Program Summary

Lesotho's real GDP growth has recovered to above 2 percent following the downturn in 1998/99, but remains constrained. Unemployment and poverty are widespread, and there is a serious HIV/AIDS problem. During January-September 2000 the government implemented an IMF staff-monitored economic program that was broadly satisfactory. Although economic growth is resuming, inflation declining, and the external debt remains sustainable, the fiscal and balance of payments positions have deteriorated.

Lesotho's economic program aims to raise economic growth and create employment in order to fight poverty, as outlined in the government's interim Poverty Reduction Strategy Paper (PRSP). The program aims to raise growth by attracting foreign direct investment and enhancing export competitiveness, while privatization will fuel private sector development.

The primary macroeconomic objective is to keep gross international reserves at the equivalent of at least six months' worth of imports of goods and services. In this, the authorities have taken into account Lesotho's extreme vulnerability to external developments and its fixed exchange rate system. The program also aims for economic growth of 2.4 percent in 2000/01 and inflation of about 6 percent, largely reflecting price developments in South Africa. Lesotho's monetary policy of a one-to-one exchange rate peg between the loti and the rand will help maintain monetary stability and relatively low inflation.

Other macroeconomic objectives of the program are to keep the external current account deficit to sustainable levels and keep external debt low and sustainable. The current account deficit, excluding official transfers, is projected to continue to decline over the medium term and will be fully financed by external grants, foreign direct investment, and net public sector borrowing, which is projected to become positive again from 2001/02 onward and be limited to concessional loans.

The government's fiscal targets involve balancing the medium-term growth and poverty objectives against the short-term balance of payments constraints. In 2000/01, the budget deficit after grants is targeted to fall to 3.9 percent of GDP, with the decline accounted for by lower expenditures. In 2001/02, the budget deficit after grants is targeted to shrink further to 0.8 percent of GDP, mostly through revenue increase. From 2002/03 onward, the budget balance after grants will continue to improve, turning to a surplus by 2003/04. A number of fiscal reforms are being implemented to improve budgetary performance, strengthen the civil service, and increase efficiency and transparency in the public sector.

Structural reforms in the program include tax reform and tax administration, expenditure control and rationalization, public sector reform, financial sector reform, privatization, and statistics strengthening. Particularly important will be efforts to reduce the scale of government to facilitate private sector development.

The program aims to have a positive impact on poverty reduction through economic growth, employment generation, and an increased emphasis on the social sectors in the budget. In 2001/02, the program targets an increase in the share of health and primary education in total current spending, and budgets for rural development projects through the Lesotho Fund for Community Development. In addition to universal free primary education, which is being phased in over several years, the government is trying to provide free emergency hospital care to some terminally ill AIDs patients.

Lesotho joined the IMF on July 25, 1968. Its quota² is SDR 34.90 million (about US$45), and its outstanding use of IMF credit currently totals SDR 7.9 million (about US$10 million).

Table 3. Lesotho: Selected Economic and Financial Indicators, 1997/98-2003/04 1/   1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04       Act. Prog. Prog. Prog. Prog.   (Annual percentage change, unless otherwise specified) National income and prices               Real GDP 4.6 -3.6 2.1 2.4 2.8 4.0 4.0 Real GNP 3.4 -6.6 1.1 0.7 1.7 4.2 3.3 Consumer price index (end of period) 7.3 8.9 6.3 6.0 5.7 4.9 4.9 Nominal GDP (in millions of maloti) 4,764.2 5,078.8 5,730.9 6,197.1 6,762.4 7,352.2 7,968.8 Nominal GNP (in millions of maloti) 6,305.4 6,488.9 7,246.5 7,706.4 8,318.6 9,070.7 9,779.6                 External sector 2/               Exports, f.o.b. 8.7 19.5 4.3 25.2 15.1 10.3 9.7 Imports, f.o.b. 8.4 -5.6 8.1 1.9 6.6 8.8 7.2 Net labor income 11.4 -7.7 8.8 0.3 0.6 5.5 4.5 Real effective exchange rate 3/ -2.9 -12.6 0.7 ... ... ... ...                 Government budget               Revenue (excluding grants) 10.4 -3.3 6.4 8.3 14.9 7.9 8.7 Total expenditure and net lending 14.1 4.1 38.3 -12.3 8.4 6.9 5.6 Current expenditure 25.0 31.8 19.3 3.7 2.2 6.2 5.6 Capital expenditure and net lending -0.6 -42.9 -3.2 15.5 35.4 9.3 5.5                                 Money and credit 4/ 5/               Net foreign assets 61.9 22.1 -8.2 -10.7 20.2 14.6 14.8 Net domestic assets -44.6 -10.3 6.5 10.1 -11.4 -6.9 -7.2 Credit to the government -38.5 10.8 56.2 29.5 -1.4 -5.8 -12.4 Credit to the rest of the economy -0.6 10.3 -4.0 0.2 7.4 7.7 7.2 Broad money 17.3 11.8 -1.7 -0.6 8.8 7.7 7.6 Velocity (GDP/average broad money) 4.1 3.7 4.3 4.6 4.5 4.6 4.6                   (In percent of GDP, unless otherwise specified) Investment and saving               Investment 52.2 36.8 27.7 26.3 24.4 25.9 26.8 Public 18.2 9.8 8.4 8.9 9.8 9.9 10.2 Private 6.6 5.1 6.6 7.4 8.1 9.4 10.2 LHWP 27.4 21.9 12.8 10.0 6.6 6.5 6.4 Gross national savings (including remittances) 21.3 11.8 5.3 7.9 10.6 11.6 12.8 Public 16.2 4.5 -0.1 2.4 7.1 7.7 8.6 Private 5.0 7.2 5.4 5.4 3.5 3.9 4.2                 Government budget               Revenue 47.2 42.8 40.4 40.4 42.6 42.2 42.4 Total grants 3.8 2.4 2.3 3.4 4.1 4.1 4.1 Total expenditure and net lending 49.2 48.0 61.6 47.7 47.4 46.6 45.4 Overall balance (before grants) -2.0 -5.2 -18.5 -7.3 -4.8 -4.4 -3.0 Overall balance (after grants) 1.8 -2.9 -16.2 -3.9 -0.8 -0.2 1.0 Primary balance (excluding grants) -0.1 -2.7 -15.3 -3.1 -1.7 -1.4 -0.3 Government domestic debt 4.6 4.4 13.6 13.4 12.0 9.5 5.7                 External sector               Current account balance (excluding official transfers) -50.7 -40.7 -36.0 -33.1 -31.4 -30.8 -30.3 Current account balance (including official transfers) -31.0 -25.0 -22.4 -18.4 -13.9 -14.3 -14.0 Stock of external debt 69.4 84.8 76.7 67.2 63.6 61.1 59.2 Debt-service ratio 6/ 4.0 6.6 8.1 14.7 8.8 8.3 7.6                   (In millions of U.S. dollars, unless otherwise specified)                 Overall balance of payments 153.6 63.6 -52.0 -22.8 37.3 26.5 27.0 Gross official reserves (end of period) 606.3 552.9 471.1 358.9 382.7 403.1 429.4 Gross official reserves (in months of imports of goods and services) 8.7 7.9 7.7 6.3 6.3 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 1997/98-1998/99 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 On November 22, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was renamed the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It is intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a poverty reduction strategy paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. At this time for Lesotho, pending the completion of a PRSP, a preliminary framework has been set out in an interim PRSP, and a participatory process is underway. It is understood that all policy undertakings in the interim PRSP beyond the first year are subject to reexamination and modification in line with the strategy that is to be elaborated in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and the World Bank, the PRSP will provide the policy framework for future reviews under the PRGF arrangement. PRGF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years with a 5 ½ year grace period on principal payments. 2 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.