A team from the International Monetary Fund (IMF), led by David Dunn, visited Lesotho during January 14-27 for discussions on economic policies in the context of the 2014 Article IV consultation.1 The team met with the Honorable Ministers of Finance, Development Planning, and Trade, Industry, Cooperatives, and Marketing, the Governor of the Central Bank of Lesotho (CBL), Honorable Members of Parliament serving on the Public Accounts Committee and Economic Cluster, other senior government and CBL officials, as well as representatives of the financial sector, business community, a trade union, and development partners.
At the conclusion of the visit, Mr. Dunn issued the following statement:
"Lesotho's economy has performed well in recent years, despite a severe fiscal and balance of payments shock and adverse weather conditions for agriculture. Growth in real gross domestic product (GDP) averaged just over 5 percent a year between fiscal year 2010/11 and 2012/13 (April-March), while inflation remained moderate. Having a sufficient buffer of official international reserves was critical to this positive outturn. That is, when revenue from the Southern African Customs Union (SACU) dropped sharply in 2010/11 and 2011/12, Lesotho's international reserves ensured that the loti's hard peg against the South African rand remained firm. In addition, fiscal discipline was maintained so that when SACU revenues eventually recovered in 2012/13 and 2013/14, the authorities were able to successfully rebuild international reserves and fiscal buffers. The IMF supported Lesotho's recovery from the crisis with a three-year credit arrangement, which ended in September 2013. Real GDP growth has remained strong in 2013/14--at around 6 percent--while inflation has come down slightly (to 5.1 percent, year-on-year, in December 2013). However, although economic growth has been robust, unemployment remains high and poverty is still widespread, especially in rural areas. In addition there is grave concern about poor health and social indicators.
"The IMF team agrees with the Lesotho authorities that the time is right to strike a new balance between policies for economic stability and inclusive growth, as outlined in the National Strategic Development Plan. In particular, there is scope for a scaling up of public investment, while still maintaining adequate international reserves and a healthy fiscal balance. Reducing recurrent expenditures--most notably, the public sector wage bill, which is among the highest in the world (relative to GDP)--would be critical for increasing space for investment spending. The IMF team encourages the authorities to complete the public service payroll audit currently being piloted in three line ministries, while also strengthening management of the payroll. The team also welcomes the government's new policy to conduct a comprehensive appraisal for all investment projects before including them in the budget. This will help ensure that projects have high rates of return and support job-creating growth. However, the new appraisal process will likely lead to some delay in the scaling up of investment spending. To make sure that the resources are available when these projects are ready to go, the IMF team recommends generating savings now, by achieving a fiscal surplus this year and targeting a surplus in the 2014/15 budget.
"The mission welcomes the authorities' new Financial Sector Development Strategy (FSDS), which calls for the sound expansion and deepening of financial services. Implementing the FSDS would improve access to finance to private businesses, helping private sector development. The IMF stands ready to support the efficient implementation of the FSDS with technical assistance. We also encourage the authorities to continue to make progress with on-going reforms to improve the business environment and other measures to enhance Lesotho's international competitiveness, which will be critical for job creation. In particular, the IMF welcomes efforts to ease the business registration process, streamline the construction permit system, adopt regulations for the credit rating law, and modernize the insolvency proclamation, which would bolster collateralized lending.
"At the end of the mission, Ms. Antoinette Sayeh, Director of the African Department of the IMF, arrived in Maseru to participate in the National Economic Conference (NEC), which was co-hosted by the Ministry of Finance and the IMF. Ms. Sayeh also met with the Honorable Ministers of Finance and Development Planning, the Governor of the CBL, Honorable Members of Parliament serving on the Public Accounts Committee and Economic Cluster, and development partners. Ms Sayeh commended the authorities for the good economic performance in recent years and, going forward, encouraged them to make greater strides to reduce unemployment, inequality, and poverty. She appreciated the opportunity for the IMF to co-host the NEC and urged the authorities to take the lessons from this dialogue and redouble their efforts in the fight against poverty. In particular, Ms. Sayeh emphasized the importance of quickly gaining control over the government's payroll and steadfastly implementing public financial management reform, which is critical for effective public services and scaling up investment to support inclusive growth.
"The IMF team and Ms. Sayeh thank the authorities for candid and constructive discussions and express their appreciation for the excellent support and warm hospitality during its visit."
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.