CENTRAL Bank of Lesotho (CBL) governor, Maluke Letete, has advised Basotho to try and live within their means as the economy faces severe economic headwinds due to the depressed domestic and global economic outlook.
Dr Letete made his exhortation as he this week announced an increase in the bank’s repo rate by 25 basis points from 7.00 percent to 7.25 percent per annum. The repo rate is the rate at which the central bank lends to commercial banks in the event of a shortfall in their funds.
The decision to hike the rate automatically means an increase in debt servicing costs over a wide array of items including mortgages, vehicle finance and bank loans thus piling the pressure on already strained consumers. Prices of basic consumer goods are also likely to spike upwards.
Many economies around the world are grappling with a severe cost of living crisis partly spawned by the ongoing war between Russia and Ukraine which has caused a severe spike in oil and gas prices.
IMF Managing Director Kristalina Georgieva has predicted that one-third of the world’s economies will slip into recession in 2023, with the biggest impact being felt in emerging and developing economies.
Lesotho’s small and badly underperforming economy is particularly vulnerable.
The domestic economy has continued to underperform on account of what Dr Letete described as structural rigidities and policy uncertainty. Economic activity in Lesotho contracted by 2.0 per cent in November 2022 following a 0,8 per cent decline in the preceding month, exemplifying weakened production and aggregate demand.
Domestic inflation had moderated due to the decline in the non-food component. The inflation rate had declined from 8.1 percent in November to 8.0 percent in December 2022. Despite that slowdown , inflation was expected to remain high in the medium term due to, amongst others, high food inflation and protracted supply chain disruptions, the CBL warned.
The level of the CBL’s net international reserves (NIR) had improved between November 2022 and January 2023. The NIR remained above the target floor of US$650 million, adequate to support the loti-rand exchange rate peg. The NIR was however expected to decrease in the first quarter of 2023 before recovering markedly in the second quarter of this year. Even at a revised target floor of US$640 million, it would still be adequate to support the loti-rand peg.
In deciding on a 25 basis point increase, the CBL’s Monetary Policy Committee (MPC) had taken into consideration the current global, regional and domestic financial markets developments.
“The committee will continue to closely assess the global economic developments and their impact on the domestic economy especially the Net International Reserves(NIR) and respond accordingly,’’ Dr Letete said.
But he also warned that prices of food and services would continue to rise due to domestic inflation pressures.
“Although domestic inflation declined from 8.1 per cent in November to 8.0 per cent in December 2022 , inflation is expected to remain high in the medium -term due to , amongst others , high food inflation and protracted supply chain disruptions ”
He thus urged Basotho to spend wisely and live within their means as the domestic economy was expected to deteriorate further amid weaker global growth prospects and the elevated inflationary pressures.
On his part, Mr Leonard Nyambuya, an economist for the Maseru Stock Market, said the CBL’s decision to raise interest rates was wholly understandable
“The committee (MPC) is reacting to the global inflation shock which can be attributed to higher oil prices, higher food prices resulting from the war in Ukraine and dislocated global supply chains,” said Mr Nyambuya.
“Interests rates are one of the instruments in the committee’s toolkit to manage inflation….. ,” he said.
He said difficult times required tough decisions and not populist measures. Higher interest rates would curtail consumption and speculative borrowing to contain inflation.