LESOTHO’s economy displayed a positive performance in the third quarter of 2017 which was driven by increased output from the mining subsector, the Central Bank of Lesotho (CBL) has revealed.
The CBL however, said there was a decline in the manufacturing sector during the same period.
The first deputy governor for the CBL, Masilo Makhetha, this week made the revelations during a media briefing after the apex bank’s Monetary Policy Committee met in Maseru on Tuesday.
The committee analyses global, regional, domestic economic trends and the financial market conditions to determine monetary targets adequate to ensure the country’s macro-economic stability.
“The domestic economy displayed a positive performance during the third quarter of 2017 which was driven by increased output from the mining subsector,” Dr Makhetha said.
“However, the secondary sector’s performance showed mixed signals, with declines observed in manufacturing and water sub-sectors while there were improvements in the electricity and construction sub-sectors. Growth in the tertiary sector was estimated to have slowed -down during the period.”
He further indicated that government deficit increased from 1.6 percent in the second quarter to 7.1 percent of GDP in the third quarter of 2017.
Last week the International Monetary Fund (IMF) said it was concerned by Lesotho’s huge budget deficit.
Generally, an acceptable level of deficit is around 6 percent or below, while anything approaching 10 percent or more is considered large.
“After two consecutive years of fiscal deficits exceeding 6 percent of GDP, financed by drawing down government deposits at the central bank, these buffers have been dwindling. The fiscal situation has been compounded by shortfalls of domestic revenues,” the IMF said in a statement last week.
A budget deficit can cause the government to increase its reliance on borrowing from foreign sources. As this happens, future budgets can place more emphasis on loan repayments and less emphasis on savings and investment. This chain reaction, called the crowding-out effect, can eventually lead to a situation where the government allocates less money to investments, such as public education, health, agriculture and infrastructure development, placing more of a burden on state, county and local governments.
Dr Makhetha said the dangerous trend seems to be continuing.
“Government budgetary operations were estimated to have registered a deficit equivalent to 7.1 percent of GDP in the third quarter of 2017, in contrast to a 1.6 percent recorded in June. This was largely driven by payments of expenses related to general elections held in June, coupled with infrastructure related expenses, and domestic interest payments.”
He further showed the current account deficit narrowed down to 3.1 percent from 7.9 percent of Gross Domestic Product in the period under review.
“The external sector position improved during the period under review. The current account deficit narrowed to 3.1 percent of GDP in the third quarter from a revised 7.9 percent of GDP witness in the second quarter,” Dr Makhetha said.
He explained the improvement in the current account was largely due to an increase in exports during the quarter although a slowdown in the primary and secondary income offset the smaller current account deficit and slightly reduced the official reserves from 4.4 months of import cover released in June, to 4.3 months in September 2017.
On the outlook, he said economic growth was expected to recover over the period 2017- 2019, largely supported by moderate growth in the services sector and a rebound in the primary sector. Both the mining and construction industries are expected to drive the growth.
“The year on year consumer inflation rate was registered at 5.4 percent in October 2017. This compares with 5.6 percent recorded in September 2017. The deceleration in overall inflation follows the observed trend across the Southern African region.”
He further said money supply had increased by 8.5 percent in September 2017 compared to an increase in 0.7 in June 2017.
“The rise in money was due to a 13.3 percent surge in domestic claims, coupled with a 4.2 percent increase in net foreign assets. Credit to private sector grew by 3.8 percent during the third quarter of 2017 compared to a lower 1.3 percent recorded in the second quarter. This follows an improvement in credit extended to households that offset a fall in credit to business enterprises.”
Meanwhile, the central bank has increased the target floor of Net International Reserves (NIR) from US$700 million to US$745 million to cushion the economy against possible shocks.
It has however, maintained the central bank rate at 6.75 percent. Dr Makhetha said the two decisions were made based on the global trends reflecting positive growth in developed and emerging market economies, adding these were likely to consolidate strengthening of the domestic economy.