High indebtedness of households worries IMF

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Herbert Moyo

THE International Monetary Fund has expressed concern over the high levels of indebtedness of households in Lesotho, saying this could “affect the whole economy” by curtailing private sector spending and reducing tax revenue.

The IMF is also worried about the payroll data which indicates that in recent years more than 20 percent of civil servants have been taking took home less than half of their salaries as the other half is being deducted for debt and insurance repayments.

The multi-lateral lending institution said these high levels of indebtedness are a clear indicator of the “significant financial vulnerability of households”.

It said in its recent report that the indebtedness which stemmed in part from the banks’ appetite to lend to private households rather than business enterprises left the banks “significantly exposed to the financial health of private households”.

“Bank lending is concentrated toward private resident households and uncollateralised personal loans and mortgages make up 50 percent and 17 percent of the lending portfolio, respectively,” the IMF notes in its latest report titled ‘Kingdom of Lesotho- Selected Issues’.

“Only one third of loans are directed to business enterprises. Banks are therefore significantly exposed to the financial health of private households.”

Of concern is the fact that while banks are significantly exposed to private households, the financial position of households is vulnerable as many households borrow from multiple formal and informal sources which they have to repay.

In the case of breadwinners like civil servants, the IMF notes a disturbing trend where they took home only half of their salaries as the rest was deducted for debt and insurance payments.

“Payroll data indicates that in 2016 more than 20 percent of civil servants took home less than 50 percent of their pay, the remainder being deducted at the source for debt and insurance payments.

“This indicates significant financial vulnerability of households. While banks may have significant buffers to face external and fiscal shocks, households do not. As a consequence, second-round effects of shocks affecting households could reverberate quite intensely through the financial system, the real sector and public finances.

“Since households have little buffers to withstand the shock, their financial predicament would reverberate across the whole economy, including the real sector.

“This would be quickly translated into the private business sector, a large part of which is dependent not only on household spending but also on government contracts. The financial crunch would be exacerbated by public sector payment arrears which in turn would sharply curtail investment and private sector spending, erode banks’ profitability, drive down tax revenue and force further fiscal spending or payments cuts.”

The IMF warned that if the if these dynamics continued for an extended time, the financial system’s buffers might be exhausted, forcing a bank bailout that would drive up public debt.

The IMF prescribed “an orderly fiscal adjustment to… stabilise the financial sector” and this should also include the introduction of caps to consumer lending to help households to better cope with income shocks.

The IMF findings are consistent with those of the Central Bank of Lesotho whose Second Deputy Governor, ‘Mathabo Makenete, is on record saying that 40 percent of the incomes of Basotho were being channeled towards loan repayments.

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