Policy Coordination in Lesotho: Kingdom of Lesotho

Selected Issues Papers, December 6, 2022

Source details

In Lesotho, high capital mobility and leakages abroad create an intertwined relationship between fiscal, monetary, and exchange rate policy, so that public spending and reserves are strongly linked.
The paper:
- Offers an overview of the economic institutions and arrangements in Lesotho.
- Discusses a short primer on macroeconomic policies under a fixed exchange rate.
- Stresses a vital role for macro policy coordination in Lesotho.
- Proposes a macro policy framework.
The analysis, while developed in the context of Lesotho, is presented as applicable to small open economies under the fixed exchange rate arrangement.

Fiscal, monetary, and exchange rate policies are tightly connected in Lesotho due to:
- High capital mobility.
- Leakages of funds abroad.
Public spending and international reserves are strongly linked, implying that fiscal choices have direct implications for reserve dynamics under the fixed exchange rate.
Macro policy coordination is characterized as vital for ensuring stability under the fixed exchange rate arrangement.

The paper proposes a macro policy framework designed for Lesotho’s context of:
- Fixed exchange rate arrangements.
- High capital mobility and external leakages.
Emphasis is placed on coordination across:
- Fiscal policy.
- Monetary policy.
- Exchange rate policy.
The framework is positioned as relevant for other small open economies operating under fixed exchange rate arrangements.

Provides an overview of Lesotho’s economic institutions and arrangements relevant to macro policy and coordination.
Includes a short primer on macroeconomic policies applicable under a fixed exchange rate.