Economy contracts by 12.6 percent



Bereng Mpaki

LESOTHO’S economic performance slowed down by 12.6 percent in the second quarter of 2020 on the back of Covid-19 induced economic pressures.

The second quarter decline was a significant retraction from its first quarter performance where it had slipped by 2.4 percent.

This was revealed by the Central Bank of Lesotho (CBL) this week after its Monetary Policy Committee (MPC’s) meeting to determine policy action to ensure macroeconomic stability.

The bank has therefore, decreased the net international reserves (NIR) target floor from US$550 million to US$540 million to maintain the exchange rate between the loti and the South African rand. It has also maintained the CBL rate at 3.50 percent per annum.

CBL Governor Retselisitsoe Matlanyane projected that Lesotho’s economy would contract by a revised 6.4 percent in 2020 due to Covid-19 pressures.

She said economic recovery will depend on developments related to containment of Covid-19.

“Domestic economic performance in the second quarter of 2020, as measured by the CBL’s quarterly indicator of economic activity (QIEA), fell drastically by 12.6 percent, relative to a revised 2.4 percent decline in the first quarter,” Dr Matlanyane said.

“The domestic economy is projected to contract by a revised 6.4 percent in 2020 due to the Covid-19 pandemic. 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.”

The economy is however, projected to recover gradually and grow at an average rate of 4.6 percent from 2021 to 2022.  The growth recovery will depend on developments related to Covid-19 containment and is likely to come largely on the back of a strong rebound in the mining and construction industries.

“The domestic policy responses to the Covid-19 pandemic are also expected to boost the recovery.”

In the labour market, Dr Matlanyane said there were mixed signals as government employment increased marginally. On the other hand, employment declined in the manufacturing sector and among migrant mine workers.

“The inflation rate increased from 5.6 percent in July 2020 to 6 percent in August 2020. This was mainly due to an increase in the prices of food and non-alcoholic beverages and clothing and footwear.”

Money supply also increased by 1.1 percent in July 2020, following a decline of 1.7 percent in June 2020.

“The increase was due to a rise in net foreign assets, which was moderated by a softening in net domestic assets. Private sector credit improved marginally by 0.5 percent between June and July 2020, compared to a decrease of 4 percent in June 2020.”

Dr Matlanyane said the bank has responded to the demands of the Covid-19 economic fallout.

“The CBL has acted timeously to mitigate the effects of the Covid-19 shocks… The CBL has continued to emphasise that preserving adequate reserves to guarantee the peg is paramount given the fixed exchange rate’s role as the key anchor of macroeconomic stability,” Dr Matlanyane said.

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