News Brief No. 01/65

News Brief: IMF Completes Lesotho's Review Under PRGF and Approves US$4 Million Disbursement

July 20, 2001

The Executive Board of the International Monetary Fund (IMF) today completed the first review of Lesotho's arrangement under the Poverty Reduction and Growth Facility (PRGF).¹ As a result, Lesotho will be able to draw up to SDR 3.5 million (about US$4 million) under the arrangement immediately.

Lesotho's three-year PRGF arrangement was approved on March 9, 2001 (see Press Release No. 01/8), for SDR 24.5 million (about US$31 million). So far, Lesotho has drawn SDR 3.5 million (about US$4 million) under the arrangement.

After the Executive Board's discussion on Lesotho, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, made the following statement:

"The authorities have made a successful start in implementing Lesotho's three-year economic program supported by the PRGF. GDP growth has picked up somewhat, inflation is stable, and exports are expanding. These achievements have been underpinned by a strengthening of the fiscal position as a result of tighter spending limits and better tax administration. The central bank has bolstered bank supervision and begun to implement a more market-oriented approach to domestic credit control.

"Policies are geared to the ultimate goals of sustaining rapid economic growth, boosting employment opportunities, and reducing poverty, relying primarily on the private sector. The authorities aim progressively to improve the environment for private economic activity through limiting the role of the public sector and making it more efficient, continuing to improve governance and the judicial system, and maintaining financial stability. The cornerstone of the required financial policies is fiscal consolidation, to be achieved by a combination of expenditure and revenue measures.

"The authorities are committed in 2001/02 and beyond, to adhering to tight overall expenditure targets, while raising spending in priority areas such as health and education. Over the medium-term, the share of recurrent public sector spending in GDP is expected to fall in order to promote private sector development and employment creation. The government has already taken steps in this direction, for example by reducing wage costs through more accurate computerized payroll records in key ministries, and is developing a longer-term plan to strengthen public sector management with assistance from the World Bank.

"In the coming year, two initiatives will contribute to a more effective tax system. First, the Lesotho Revenue Authority, expected to become operational in September 2001, will be instrumental in further strengthening tax administration and making tax collections fairer and more transparent. Second, a VAT, to be introduced during the first half of 2002, will replace the current sales tax and is expected to boost revenues.

"The Central Bank of Lesotho will introduce a treasury bill auction in September 2001. The auction will be a valuable tool for absorbing excess liquidity and will help the central bank protect its international reserve position in the context of Lesotho's fixed exchange rate regime. The success of monetary policy in the future will, nevertheless, require sound fiscal policies.

"The authorities are encouraged to proceed as quickly as possible, and on the basis of broad-based consultations, in preparing a Poverty Reduction Strategy Paper," Mr. Sugisaki said.

¹ On November 22, 1999, the IMF's facility for low income countries, the Enhanced Structural Adjustment Facility (ESAF), was renamed 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. The Lesotho government has prepared an Interim PRSP, and is in the process of completing a full PRSP. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½ year grace period on principal payments.