THE Central Bank of Lesotho (CBL) says the economy is showing signs of recovery with economic activity rising by 9, 4 percent in the third quarter of 2020.
Despite the positive signs, there remains risks of possible spread of Covid-19 and the effectiveness of the infection control measures, exposure to international economic developments, domestic structural rigidities and policy uncertainty.
CBL governor Retšelisitsoe Matlanyane on Tuesday said economic recovery would depend on the developments related to Covid-19 containment measures.
“Domestic economic performance in the third quarter of 2020, as measured by the CBL’s Quarterly Indicator of Economic Activity (QIEA), increased by 9, 4 percent, relative to a revised 14, 2 percent contraction in the second quarter,” Dr Matlanyane said.
“The welcomed improvement was driven by a rebound in domestic demand and supply, albeit at levels still below those experienced prior to the pandemic.”
She said the domestic economy is projected to contract by a revised six percent in 2020, due to the Covid-19-induced economic fallout.
The output contraction is expected to be led by a decline in economic activity in the textiles and clothing industry, construction industry and mining industry. In the medium term, the economy is projected to recover gradually and grow at an average rate of 4, 33 percent from 2021 to 2022.
While the recovery is dependent on developments related to Covid-19 containment, it is likely to be inspired by a strong rebound in the mining and construction industries as well as a broad-based recovery as the Covid-19 containment measures are gradually lifted. The domestic policy responses to the Covid-19 pandemic are also expected to boost the recovery, she said.
“The CBL acted timeously to mitigate the effects of the Covid-19 shock and maintain macroeconomic stability. The CBL has continued to emphasize that preserving adequate reserves to guarantee the peg is paramount, given the fixed exchange rate’s role as the key anchor of macroeconomic stability.
“Within the constraints of the exchange rate peg, the bank has taken various measures to preserve favourable financing conditions for all sectors, thereby supporting the economy and safe guarding price and financial stability during this difficult time.
“The measures that included the lowering of the key policy rate by 275 basis points since March 2020, the negotiating of fee reductions with mobile network operators and the raising of prudential limits on mobile money transactions, have contributed to the resilience of households and firms.”
She however, said employment figures declined during the period under review with drops in migrant mine workers, government employment and the manufacturing sector.
Inflation has also worsened, driven mainly by increases in food and non- alcoholic beverages and clothing.
“…Inflation, measured by year-on-year percentage change in consumer price index (CPI), registered 5, 6 percent in October 2020 relative to 5, 9 percent in September 2020. This was mainly due to an increase in food and non-alcoholic beverages as well as clothing and footwear. In terms of the outlook, the revised annual inflation rate is projected to register a revised 5 in 2020 before increasing to 5, 2 percent and 5, 3 percent in 2021 and 2022, respectively.”
Meanwhile, the CBL has increased the net international reserves (NIR) target floor to US$635 million from US$540 million. This was inspired by NIR developments and outlook, regional inflation and interest rate outlook, domestic economic conditions and the global economic outlook.
“The NIR target remains consistent with the maintenance of the exchange rate peg between the loti and the South African rand.
“The MPC has also decided to maintain the CBL rate at 3, 5 percent per annum. The rate, set at this level, will ensure that the domestic cost of funds remains aligned with the rest of the region,” Dr Matlanyane said.