In a context of policy uncertainty, the weak regional environment has depressed growth below the levels needed to reduce poverty and unemployment; High government spending should be refocused on areas that can have the biggest impact on delivering vital services, protecting the vulnerable, and supporting private sector growth; Reforms should focus on improving the business environment, including through governance enhancements to ensure sound use of public resources.

An International Monetary Fund (IMF) staff team, led by Joseph Thornton, visited Maseru from January 29 – February 11, 2020, to conduct the 2019 Article IV Consultation discussions with the Kingdom of Lesotho.

At the conclusion of the visit, Mr. Thornton made the following statement:

“The economy remains sluggish, as policy uncertainty, weak regional growth, and recurring drought continue to weigh on growth and depress investment and job creation. While work on the Second Lesotho Highlands Water Project is keeping growth positive, prospects for exports and remittances are unpromising given continued subdued growth in South Africa and depressed prices for key exports. Government finances have also eroded after several years of relatively low inflows from the Southern African Customs Union, with the government incurring new domestic arrears.

“The IMF mission discussed policy options with the government that could reignite private sector investment and address Lesotho’s long-standing challenges. Measures should focus on improving governance to ensure transparency and accountability in the use of public funds, which should in turn enhance the quality of public service delivery—both infrastructure and services—to the population. A strengthened policy environment could be attained through greater consultation with the private sector. The mission welcomed the authorities’ efforts to improve the business environment through streamlining regulations, including through on-line company registration and licensing.

“Efforts to encourage greater financial inclusion and access to finance are beginning to bear fruit, and the banking sector is stable, while its regulatory framework continues to improve. The mission welcomed efforts to increase deepen financial markets, including through greater use of collateral and credit scoring. Further efforts are needed to enhance access to finance, including to small and medium enterprises, if the private sector is to play its necessary role as the engine of growth. Measures to that end should focus on making it easier for lenders to assess risk and use collateral, while ensuring that the private sector continues to play the lead role in project selection.

“The mission discussed budgetary priorities with the authorities, noting that while SACU revenues may show a brief uptick next year, over the long term the trend is downward. Control of current spending will therefore be essential to avoid a reoccurrence of government spending arrears. In this context, IMF staff noted that the only sustainable basis for higher public sector wages over the long run would be a stronger and more vibrant private sector, which could provide the necessary tax base. Further increases in wages and other perquisites of government workers – already among the highest in the world compared to the size of the economy – risk crowding out essential programs over the short term. Ensuring the ability to provide an adequate response to protect the poorest in the event of drought, for example, will require rebuilding adequate buffers, while avoiding the incurrence of large liabilities with dubious benefits in terms of growth or poverty alleviation.

“The team met with Minister of Finance, Dr. Majoro, Central Bank of Lesotho Governor, Dr. Matlanyane, Minister of Public Service Hon. Au, other senior officials, and financial market, business, and trade union representatives, as well as multilateral development partners. The IMF mission wishes to express its gratitude to the Basotho authorities for the constructive discussions and warm hospitality during its visit to Lesotho. The mission will prepare a report of the Article IV consultation which will be discussed by the IMF’s Executive Board in the next quarter.”