Economic recession could render Lesotho insolvent — IMF

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Bereng Mpaki

LESOTHO’S recurrent financial challenges since 2017 could soon lead to insolvency if the situation is not urgently addressed, the International Monetary Fund (IMF) has said.

This could also lead to depletion of the country’s international reserves if the government does not take concrete measures.

The IMF highlighted this after its latest mission in Lesotho from 7 September to 15 October 2021. Discussions during the virtual engagements centred on Lesotho’s economic and financial programmes and its financial support request from the IMF.

In its engagements, the mission spoke to Prime Minister Moeketsi Majoro, Finance Minister Thabo Sophonea, the Central Bank of Lesotho Governor Retšelisitsoe Matlanyane, and other senior government officials. The team also met with representatives of the diplomatic community, private sector, civil society, and multilateral development partners.

Although the IMF said Lesotho’s situation could lead to insolvency, the country has been failing to pay its debtors for several years. As of December 2018, the government owed its debtors in excess of M1, 1 billion.

In his end of mission report, the IMF’s head of the mission, Aqib Aslam, said Lesotho has been struggling with the economic fallout from the Covid-19 pandemic and a sharp decline in revenues from the Southern African Customs Union (SACU).

“Lesotho has been experiencing twin economic shocks resulting from the pandemic and a decline in revenues from SACU that have proved to be highly volatile,” Mr Aslam said.

Lesotho’s public expenditure has been increasing in recent years but there has been no attempt to adapt to its declining SACU revenues with limited growth in other revenue sources compounding the situation, Mr Aslam said.

“The economy has been in recession since 2017. The resulting fiscal and external imbalances, if left unaddressed, would continue to put pressure on international reserves and lead to government payment arrears.”

Mr Aslam said his team held productive discussions on policies that could be supportive to the post-pandemic recovery of the country.

“Discussions emphasised the need to support a robust and inclusive post-pandemic recovery. To this end, the mission discussed with the authorities a number of options for containing the fiscal deficit to a level that is sustainable and can be fully financed.

“The team noted that the adjustment should be focused on expenditure measures while boosting poverty-reducing social spending to protect the most vulnerable. Complementary actions include efforts to broaden financial access and inclusion; strengthen financial supervision; modernise the legal frameworks for bank lending, business rescue, and restructuring, and digitalise payment systems.”

He added that the government must make efforts to address the public sector wage bill, which is one of the largest in the world compared to the small size of the economy. The government must also cut down on public sector and officials’ allowances while targeting education loans, streamlining the capital budget and initiating gender-responsive budgeting.

“Discussions also considered measures to modernise tax policy and improve domestic revenue mobilisation. The mission noted the need to address long-standing public finance management issues to ensure the provision of reliable fiscal data, the integrity of government systems, and the sound use of public resources.

“The authorities and the mission held productive discussions on policies that could be supported by the IMF under a financial arrangement. The programme under discussion would aim to support a durable post-pandemic recovery, restore fiscal sustainability, strengthen public financial management, and ensure the protection of the most vulnerable.

“Other key structural reforms to be implemented include strengthening governance and fostering private sector investment to spur inclusive growth and employment over the medium term.”

He said they also deliberated on the proposed financial support which Lesotho intends to request from the IMF. Cabinet in July this year decided to request for financial assistance from the IMF. However, the request is still being drafted. It is not yet known how much Lesotho will request from the IMF.

Mr Aslam said more discussions would on the possibility of the IMF financing Lesotho’s programmes would continue in the future.

“If agreement is reached on policy measures in support of the reform programme, an arrangement to support Lesotho’s economic programme would be proposed for the IMF executive board’s consideration,” Mr Aslam said.

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