Exchange rate, drought drive up inflation

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Central Bank of Lesotho (CBL) Governor Dr Retšelisitsoe Matlanyane
Central Bank of Lesotho (CBL) Governor Dr Retšelisitsoe Matlanyane

Bereng Mpaki

LESOTHO’S year-on-year consumer inflation rate rose from 6.6 percent in February to 7.5 percent in March 2016, with the outlook pointing towards an upward trajectory for the rest of year.

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

She said the MPC decided to keep the CBL rate at seven percent and increase the Net International Reserves (NIR) target floor from US$600 million to US$690 million to ensure an exchange of one loti for one rand and maintain macroeconomic stability.

Central banks revise benchmark interest rates regularly to ensure price stability and help governments achieve economic growth targets. The CBL rate is the benchmark interest rate which, among others, determines the cost of borrowing from commercial banks.

Dr Matlanyane said Lesotho’s economic growth was set to pick up in 2016 after dipping in 2015.

“The revised projections indicate that domestic output growth slowed down in 2015,” she said.

“Real GDP (gross domestic product) is projected to have increased by 2.9 percent in 2015 compared with 3.6 percent in 2014. In terms of the outlook, economic growth is expected to increase by 3.1 percent in 2016 attributable to good performance in the mining and querying sub-sector and services sector.”

However, the CBL chief noted that inflation was continuing to rise owing to the weaker exchange rate and the effects of the El Niño-induced drought. The current depreciation of the rand, to which Lesotho’s maloti currency is pegged, against other major currencies, made imports more expensive.

On the other hand, the drought has adversely affected the food security of South Africa, which is the main source of food imports for Lesotho.

“Domestic inflationary pressures are continuing to build up, with the year-on-year consumer inflation rate rising from 6.6 percent in February to 7.5 percent in March 2016,” said Dr Matlanyane.

“This was attributable to accelerating food prices due to weaker exchange rate and effects of the drought. In terms of the outlook, inflation is expected to continue on an upward trajectory in 2016.”

Other developments the MPC considered were money supply and the current account.

“The broad measure of money supply contracted by 3.0 percent during the quarter of 2016 due to a decline in demand and call deposits with the commercial banks,” she said.

“Current account deficit narrowed to 11.4 percent of GDP in the first quarter of 2016, compared with a deficit of 15.7 percent in the previous quarter. The improvement was due to lower trade account deficit, improvement in the income account and increase in current transfers.”

Dr Matlanyane said gross official reserves rose by seven percent in the first quarter of 2016, higher than an increase of four percent in the previous quarter.

“In months of import cover, reserves improved from 5.5 months in the quarter ending in December 2015 to 6.1 months in the first quarter of 2016,” she said.

However, Dr Matlanyane said at the end of March 2016, the government budget deficit widened to 1.6 percent from 0.1 percent of GDP during the quarter ending in December 2015.

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