IMF Executive Board Concludes 2022 Article IV Consultation with Kingdom of Lesotho

New Delhi :On June 1st, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Kingdom of Lesotho.

Since early 2020, Lesotho has been hit simultaneously by the pandemic, declining transfers from the Southern African Customs Union (SACU), climate shocks, and the impact of the war in Ukraine. Despite a swift response by the authorities, the fallout from the pandemic—including delays to large infrastructure projects, supply chain disruptions, layoffs in the textiles sector, and weak external demand—has weighed on social and economic development, amplifying legacy structural challenges. Growth has been revised down to 2.1 percent in FY21/22 after contracting by 6 percent in FY20/21, and is forecast by staff at 2.7 percent in FY22/23 and 1.4 percent on average thereafter. The war in Ukraine has hindered food imports, exacerbating agricultural disruptions due to floods and the pandemic. Global price increases in food and fuel, which account for over half of the consumer basket, are hurting the vulnerable, with inflation expected to reach 6.8 percent in FY22/23.

Fiscal performance was better than expected in FY20/21. However, public expenditure has continued to increase, with the recent decline in SACU transfers weakening the external position. Recent cases have highlighted gaps in public financial management and efforts to restrain expenditure have been undermined by growing domestic arrears, as spending pressures mount ahead of the autumn 2022 elections.

The current account deficit is projected to reach 7.4 percent of GDP in FY21/22, due to lower SACU transfers, higher capital imports, and costlier food and fuel imports. Exports and remittances fell by 26 and 12 percent, respectively, and the goods and services trade deficit widened by 8 percentage points of GDP in FY20/21. Despite a recovery in exports and remittances, the drop in SACU transfers widened the current account further over the first nine months of FY21/22. Foreign investment, including FDI, declined given the weak external environment and limited opportunities domestically.

The banking sector is characterized by substantial capital buffers, ample liquidity, and low non-performing loans. However, its contribution to growth remains limited. Private sector credit contracted by 1.6 percent in 2020:Q3, only rebounding to 7.4 percent as of FY21/22:Q4. With gross international reserves stable at 4.5 months of imports—excluding those associated with the second phase of the Lesotho Highlands Water Project—in FY21/22, net international reserves have remained above the central bank’s target for safeguarding the exchange rate peg, bolstered by the recent SDR allocation.

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