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Introduction
- Lesotho has had almost continuous involvement with Fund programs since 1988, with the exception of the period 1997-2000 (Table 1). This included a Structural Adjustment Facility (SAF) (1988-91), which aimed at addressing rising fiscal and external imbalances; an Enhanced Structural Adjustment Facility (ESAF) (1991-94), which aimed at consolidating macroeconomic stability, further strengthening the external position, and
carrying out the first phase of structural reforms to diversify the production and export base. These two arrangements were followed by three precautionary Stand-by Arrangements (SBAs) (1994-95; 1995-96; and 1996-97) to keep the reform momentum and maintain investor and donor confidence. Finally, following three years of interruption, Lesotho embarked on a program supported by a Poverty Reduction and Growth Facility (PRGF) (2001-2004), with a view to consolidating the macroeconomic gains achieved so far, continuing the structural agenda, and laying the foundations for sustained growth, job creation, and poverty reduction2.
- This paper reviews the experience of the Fund’s engagement in Lesotho during the period 1991-20043. Section II briefly presents economic developments prior to these arrangements. Section III reviews performance under Fund-supported programs and analyses the main factors accounting for that performance. Section IV draws lessons from these program experiences and Section V considers the main challenges facing Lesotho. Finally, Section VI discusses the role the Fund can play in helping the authorities to meet those challenges.
Background and rationale for fund engagement
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Lesotho’s economic and financial situation weakened significantly during the
1980s. Real GDP growth slowed from an average of 7 percent a year in the 1970s to less
than 5 percent in the 1980s, while the fiscal deficit and the external position deteriorated.
This reflected slower growth of agricultural output because of unfavorable weather and
lack of adequate incentives, and stagnating remittances from Basotho workers in South
African mines. The adverse effect of these exogenous shocks were exacerbated by
institutional deficiencies and weaknesses in policy formulation and implementation,
particularly as fiscal expenditure continued to expand as before despite slower revenue
growth.
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To restore and sustain a reasonable real GDP growth and increase
employment opportunities, while maintaining domestic and external financial
stability, the government embarked on a comprehensive adjustment program
supported by the SAF. Under this arrangement, Lesotho made substantial progress in
correcting the most serious macroeconomic imbalances inherited from the late 1980s:
inflation was gradually reduced, but was still high; the overall fiscal deficit (including
grants)—which exceeded 10 percent of GDP in 1988/89—was down to just about 1 percent
of GDP by 1991/92; and the external position strengthened.
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Despite these gains, economic prospects remained constrained by a fragile and
non-diversified domestic production base; weak capacity in core areas of
macroeconomic policies; inadequate public expenditure management and loss-making
parastatals; extreme vulnerability of fiscal and external outcomes to exogenous
shocks; and an underdeveloped financial system. Addressing these issues took more
time than expected. In addition, the 1998 political crisis interrupted the reform effort and
reversed some of the previous gains.4 All these factors played a role in the prolonged Fund
involvement in supporting the authorities’ structural adjustment program and reform.
Footnotes:
- The team comprised E. Kpodar (head), L. Engstrцm, I. Masha, A. Jayaratnam (Research Assistant) (all AFR), A. Fedelino (FAD), and L. Moers (PDR).
- This was preceded by a nine-month track record staff-monitored program (SMP) in 2000.
- The ex post assessment does not cover the SAF. However, including it would not alter its main conclusions.
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- 241Kb ~ 1 min (35 pages)
