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End of food subsidy fuels inflation

by Lesotho Times
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Bereng Mpaki

LESOTHO’S year-on-year consumer inflation rate rose from 4.4 percent in March 2017 to five percent in June 2017 largely due to increases in food prices following the end of a government subsidy on locally- produced maize meal in May 2017.

This was revealed by Central Bank of Lesotho (CBL) Governor Retšelisitsoe Matlanyane on Tuesday following a meeting by the apex bank’s Monetary Policy Committee (MPC).

She also revealed that the MPC decided to reduce the CBL rate by 25 basis points to 6.75 percent per annum in response to the South African Reserve Bank’s reduction of its repurchase rate to 6.75 percent per annum to spur growth.

The CBL rate is the benchmark interest rate which, among others, determines the cost of borrowing from commercial banks.

Central banks revise benchmark interest rates regularly to ensure price stability and help governments achieve economic growth targets.

Dr Matlanyane said reducing the CBL rate would minimize capital outflows to maintain the stability of the economy.

“We have reduced the CBL rate by 25 basis points to 6.75 percent per annum so that we are at par with the South African Reserve Bank’s rate,” she said.

“This will minimise capital inflows and debt outflows so that we try to stabilise the economy as much as possible.”

The committee also increased the Net International Reserves (NIR) target floor from US$630 million to US$635 million to ensure an exchange of one loti for one rand and maintain macroeconomic stability.

“We will increase the Net International Reserves target floor from US$630.00 million to US$ 635.00 million. This means that the target floor that we need to keep the loti pegged to the rand will increase to US$635.00 million.

“That does not mean that those are the reserves the central bank keeps. It means that is what we need to keep as the minimum for us to have the loti still equivalent to the rand.”

Dr Matlanyane also indicated that economic activity contracted during the first quarter of 2017.

“The contraction in quarterly economic activity emanated from both the secondary and tertiary sectors. However, recovery in the primary sector, as a result of the relatively higher grain harvest plus activities in diamond mining mitigated the contraction to some extent.”

She attributed the increase in the year-on-year consumer inflation to the ending of a 30 percent government subsidy on locally-produced maize meal, beans and peas.

The subsidy, which was effected on 1 June 2016, was bankrolled by M162.7 million the government had set aside to mitigate the effects of skyrocketing food prices in the aftermath of the 2015/16 El Niño-induced drought.

“This was largely due to increase in prices of food and non-alcoholic beverages, following an end of the government subsidy on locally produced maize meal in May 2017,” the CBL chief said.

On money supply, she stated that there was a 0.9 percent decrease in May 2017 in contrast with a 10.9 percent increase registered in March 2017.

“The decrease was attributable to a fall in the banking system net foreign assets, which more than offsets the rise in domestic claims. Private sector credit extension has increased by 3.4 percent for households and business enterprises, respectively.”

The official reserves coverage also fell from 5.3 months of import cover in December 2016 to 4.9 months in March 2017.

“Government budgetary operations were limited to essential and recurrent expenditure during the second quarter. The 2017/18 national budget proposes a lower fiscal deficit equivalent to 4.8 percent of GDP for the current fiscal year, compared to the actual deficit of 7.8 percent released in 2016/17.”

Dr Matlanyane said global economic activity continued to show signs of recovery during the period to July 2017.

“The positive performance in advanced economies emanated mainly from Japan and United Kingdom, while economic activity from the Euro Area and United States remained subdued,” she stated.

Touching on neighbouring South Africa, Dr Matlanyane indicated that it registered two successive quarters of negative growth of 0.3 percent and 0.7 percent in December 2016 and March 2017, respectively.

“Outlook has deteriorated with growth projections having been revised downwards from 1.0 percent to 0.5 per cent, and from 1.5 per cent to 1.2 for 2017 and 2018, respectively.

“The outlook is affected by heightened political and policy uncertainty, low consumer and investor confidence and the lurking possibility of further credit ratings downgrades,” she added.



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