IMF Staff completes 2019 Article IV visit to Lesotho

lesothoAn International Monetary Fund (IMF) staff team, led by Joseph Thornton, visited Maseru from 24 January– 5 February 2019, to conduct the 2019 Article IV Consultation discussions with the kingdom of Lesotho

At the conclusion of the visit, Thornton stated, “Economic growth is expected to slowly recover this fiscal year, driven by strong production in the diamond mines, higher textile exports, and the initiation of Phase 2 of Lesotho Highlands Water Project. Inflation is projected to remain subdued, reflecting weakened household demand. There are downside risks emerging from a possible El Nino-related drought.”

“The current account deficit widened in FY 2018/19 owing to a decline in SACU revenue and higher imports, which offset increased exports. External buffers have so far been maintained, but pressures will remain in the absence of stronger fiscal consolidation.”

“The banking system continues to be stable and profitable, but banks are exposed to risks from nonperforming loans stemming from government arrears and from segments of the household sector that have significant debt burdens. Enhanced supervision of both the bank and non-bank financial sector could facilitate higher levels of financial inclusion and increase the sector’s contribution to growth.

“Public consumption has been the traditional driver of growth in Lesotho in recent years. Fiscal policy has therefore been characterized by largely fixed expenditures, in particular, a very high public-sector wage bill. As a result, when SACU revenues fell to historically low levels, continued spending rapidly depleted government deposits. The government’s efforts to mobilize additional domestic revenues and constrain procurement of goods and services were not sufficient to avoid the emergence of payment arrears. Long-standing weaknesses in ministries’ public financial management further hamper effective budget planning and implementation.

“The government acknowledges the fiscal challenges as it prepares the new budget. Strong measures to control spending would close the financing gap and allow for the elimination of domestic arrears, thereby supporting private-sector growth. Efforts to rationalise expenditures must be accompanied by a strengthening of social safety nets and more efficient spending to strengthen human capital and align spending priorities with the objectives of growth and job creation.”

“Efforts to support the private sector should include improvements to the business climate. The authorities should refrain from introducing new red tape and reconsider the need for existing regulations. Greater policy certainty, enhancements to governance and anti-corruption efforts, and more intensive consultation with the business community will be critical to attract and sustain private sector investment.”

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