Kingdom of Lesotho: 2014 Article IV Consultation
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Summary:
KEY ISSUES Setting: Lesotho achieved strong economic growth in recent years, with only moderate inflation. International reserves have largely been rebuilt, thanks to a sustained period of fiscal restraint and recovery in revenues from the Southern African Customs Union (SACU). However, unemployment remains high and poverty is widespread, especially in rural areas. Since 2012, Lesotho has been led by a coalition government with a slim majority. Outlook and risks: Growth is expected to be robust over the medium term—led by mining, construction, and services—but there are risks, mainly arising from Lesotho’s heavy dependence on volatile SACU revenues. A loosening of the fiscal stance in the recently approved budget for 2014/15 threatens to erode official international reserves. The budget also indicates that recurrent expenditures—most notably the government wage bill—will remain elevated over the medium term. Policy mix: Staff recommends a more moderate easing in the fiscal stance than the budget’s and curbing recurrent expenditures to allow greater investment for inclusive growth. Preserving international reserves—to ensure a secure exchange rate peg—and debt sustainability are critical for macroeconomic stability. Over time a rules-based fiscal framework could strengthen stability. Financial sector: Overall, indicators point to a sound banking system. Implementing the Financial Sector Development Strategy would improve access to financial services and support private sector development. Structural agenda: An ambitious reform effort, particularly in the fiscal area, is needed to achieve a more efficient public sector and enable private sector-led growth.
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