Press Release No. 04/8

Press Release: IMF Completes Fifth Review Under Lesotho's PRGF Arrangement and Approves US$5.2 Million Disbursement

January 21, 2004

The Executive Board of the International Monetary Fund (IMF) has completed the fifth review of Lesotho's economic performance under an SDR 24.5 million (about US$36.3 million) Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 01/8). This opens the way for release of a further SDR 3.5 million (about US$5.2 million), bringing the total amount drawn under the arrangement to SDR 21 million (about US$31.1 million).

The Board also granted a waiver of nonobservance of the end-June 2003 performance criterion on the domestic financing requirement of the central bank and for five structural performance criteria.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in the Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. 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.

In commenting on the Board's discussion on Lesotho, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chair, stated:

"Lesotho has made commendable progress under the PRGF-supported program. Economic growth has remained satisfactory, benefiting from strong textiles exports to the United States under the U.S. African Growth Opportunity Act (AGOA). Consumer price inflation has declined, in line with developments in South Africa. Nevertheless, Lesotho faces many serious challenges in the years ahead, including falling agricultural productivity, the potential loss of trade preferences, and the high incidence of HIV/AIDS.

"The authorities have recently taken spending and revenue measures to contain excessive levels of domestic borrowing and reduce the fiscal deficit. They now expect to reduce domestic borrowing for 2003/04 to a level below that in the original program.

"The authorities have made progress in strengthening tax policy and administration. Although revenue collection has lagged program targets, the introduction of the value added tax and establishment of the Lesotho Revenue Authority (LRA) should improve the tax structure and lead to improved tax administration performance.

"The authorities are cutting nonpriority expenditures to ensure that program targets are met, but need to support these measures with further reallocation of resources to human capital and infrastructure development. A critical part of the program is to improve public expenditure management. Recent initiatives include restarting the auditing of public accounts, improving forecasting, budgeting, and accounting within the public sector, and developing institutions to improve governance.

"The authorities have begun removing structural impediments to financial development, including through partial capital account liberalization, and deregulation and privatization in the financial sector. They need to deepen reforms to foster competition in the financial system, strengthen property rights and the judiciary, and improve credit for small and medium-sized businesses.

"Lesotho's Poverty Reduction Strategy Paper (PRSP), which has been prepared through a broad-based participatory process, is expected to be finalized in early 2004," stated Mr. Sugisaki.