IMF Executive Board Concludes 2023 Article IV Consultation with Kingdom of Lesotho
IMF News, July 20, 2023
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- Published: July 20, 2023
Major economic challenges and recent developments
- Lesotho’s economy faces multiple headwinds: climate shocks, delays to infrastructure projects, high food and fuel prices, declining diamond prices, layoffs in the textiles sector, and weak regional and external demand.
- High public expenditure continues to distort incentives and hinder private sector development.
- The government is prioritizing fiscal consolidation on the back of windfall transfers from the Southern African Customs Union (SACU), which have helped alleviate near-term pressures on financing and reserves.
Prices and monetary policy
- Headline inflation averaged 8.4 percent in FY22/23, two percentage points higher than the year before.
- Food inflation rose to 10.4 percent during the same period.
- The Central Bank of Lesotho has continued to track the policy rate changes of the South African Reserve Bank, raising rates by 425 basis points since November 2021 to anchor inflation expectations and support the exchange rate peg.
Fiscal position, public debt, and public financial management
- The fiscal deficit deteriorated to 7.7 percent in FY22/23 due to lower revenue and rigid expenditure.
- Public debt increased to almost 60 percent of GDP.
- Efforts to restrain expenditure have been hampered by persistent weaknesses in public financial management (PFM).
- Without stronger consolidation, the fiscal position is projected to deteriorate over the medium term because of lower SACU transfers, wage bill pressures, and recapitalization of the pension fund.
- Staff recommends upfront growth-friendly fiscal adjustment to ensure debt sustainability and safeguard the exchange rate peg.
- Fiscal policy measures highlighted:
- Reduce current spending, notably public sector wages.
- Rationalize public investment.
- Implement broad PFM reforms.
- Strengthen tax policy and revenue administration measures to improve near-term fiscal outcomes while minimizing the impact on growth.
External sector and reserves
- The current account deficit is projected to widen to 7.9 percent of GDP in FY22/23.
- As of end-March 2023, gross international reserves (excluding the second phase of the Lesotho Highlands Water Project) had declined to 3.8 months of imports.
- The gradual weakening in the external position in FY22/23 is assessed to be weaker than implied by fundamentals and desired policies, underscoring the fragility of the current economic model.
Financial sector and credit conditions
- Despite ample liquidity in the financial sector, credit growth increased only slightly to 8.7 percent year-on-year by the end of FY22/23 despite tighter financial conditions.
- Overall, credit to the private sector remains broadly flat at around 20 percent of GDP, with banks primarily lending to households.
- Staff encourages reforms to improve the business environment, strengthen financial stability, and enhance business lending, including addressing credit constraints, insolvency frameworks, consumer protection, and governance and corruption vulnerabilities.
Outlook and recommended reforms
- Real GDP is projected to grow at 2.1 percent in FY23/24 and average 2.1 percent over the medium term.
- Staff urges a well-paced sequence of reforms and capacity development to use the SACU windfall to build buffers and finance durable, growth-friendly fiscal consolidation.
- Broad-ranging structural reforms are recommended to support a transition from government-centric to private sector-led growth, aiming for durable, resilient, inclusive, job-rich, and sustainable growth.
- Staff strongly encourages:
- Increasing capacity and improving data quality.
- Closer coordination between fiscal and monetary authorities to balance objectives for spending, debt, and reserves and ensure consistency with the exchange rate regime.
- Undertaking a governance diagnostic building on commitments from the 2020 RCF/RFI.
- Staff recommends that the next Article IV consultation for Lesotho be held on the standard 12-month cycle.
Executive Board assessment (summary)
- Executive Directors endorsed the staff appraisal.
- Staff commends the new government on a bold reform agenda and the vision of a smaller and more efficient public sector that provides space for private sector growth.
- The fixed exchange rate implies adjustment must fall on fiscal policy and structural reforms; unchanged policies could result in abrupt adjustment with significant impacts on growth and inequality.
Key statistics (selected figures from Table 1)
- Population (thousands; 2021 est.): 2,281
- GNI per capita (US$; 2021 est.): 1,210
- Poverty rate at national poverty line (percent; 2017 est.): 49.7
- GDP at constant prices (including LHWP-II), percent change:
- 2019/20: -2.0
- 2020/21: -3.9
- 2021/22: 1.8
- 2022/23: 2.1
- 2023/24 (proj): 2.3
- 2024/25 (proj): 2.5
- 2025/26 (proj): 1.6
- GDP at market prices (Maloti billions), selected years:
- 2019/20: 35.1
- 2020/21: 34.9
- 2021/22: 37.8
- 2022/23: 41.8
- 2023/24: 45.5
- 2028/29: 64.4
- GDP at market prices (US$ billions):
- 2019/20: 2.4
- 2022/23: 2.8
- 2023/24: 2.9
- Consumer prices (average):
- 2019/20: 4.9
- 2021/22: 6.4
- 2022/23: 8.4
- 2023/24 (proj): 6.7
- 2024/25 (proj): 5.0
- Consumer prices (end of period):
- 2019/20: 4.0
- 2020/21: 6.5
- 2021/22: 7.2
- 2022/23: 7.9
- Current account balance (percent of GDP):
- 2019/20: -1.5
- 2020/21: -1.0
- 2021/22: -4.4
- 2022/23: -7.9
- 2023/24 (proj): -2.6
- Gross international reserves (excluding imports for LHWP-II, months of imports):
- 2019/20: 4.7
- 2020/21: 4.2
- 2021/22: 4.3
- 2022/23: 3.8
- 2023/24 (proj): 4.1
- Net international reserves (US$ millions):
- 2019/20: 670
- 2020/21: 718
- 2021/22: 846
- 2022/23: 663
- 2023/24 (proj): 756
- 2028/29 (proj): 693
- Domestic credit to the private sector (percent change):
- 2019/20: 12.9
- 2020/21: 8.3
- 2021/22: 7.8
- Public debt (percent of GDP):
- 2019/20: 57.0
- 2020/21: 53.6
- 2021/22: 55.7
- 2022/23: 59.8
- 2023/24 (proj): 60.7
- 2028/29 (proj): 62.3
- External public debt (percent of GDP):
- 2019/20: 45.4
- 2022/23: 43.9
- 2028/29 (proj): 44.9
- Domestic public debt (percent of GDP):
- 2019/20: 11.6
- 2021/22: 15.3
- 2022/23: 15.9
- Central Government Fiscal Operations (percent of GDP), selected:
- Revenue and grants:
- 2019/20: 46.8
- 2020/21: 53.4
- 2021/22: 41.5
- 2022/23: 51.4
- 2023/24 (proj): 46.1
- SACU transfers:
- 2019/20: 17.7
- 2020/21: 25.7
- 2021/22: 22.3
- 2022/23: 22.1
- Recurrent expenditure:
- 2019/20: 39.2
- 2021/22: 36.8
- 2022/23: 37.1
- Wages, including social contributions (percent of GDP):
- 2019/20: 16.9
- 2021/22: 16.2
- 2022/23: 16.6
- Capital expenditure (percent of GDP):
- 2019/20: 13.2
- 2020/21: 11.2
- 2021/22: 12.0
- Overall balance (percent of GDP):
- 2019/20: -5.6
- 2020/21: -5.1
- 2021/22: -7.7
- 2022/23: -0.4
- Primary balance and other fiscal indicators are reported in Table 1 with detailed year-by-year values.
IMF Communications Department, Press Release No. 23/269, July 20, 2023
