The Monetary Policy Committee has warned of risks ahead in the domestic economic outlook while the country is facing a number of challenges in the coming financial year – ranging from the slowing down global economic growth to dwindling domestic output, declining jobs as well as price increases in the months ahead.
“Lesotho’s fixed exchange rate system under the Common Monetary Area (CMA) requires a healthy fiscal position to support maintenance of the exchange rate parity,” the Central Bank of Lesotho Governor said in a statement on Monday this week.
The MPC reported that the annual inflation rate, as measured by the change in the consumer price index (CPI) for all items, remained unchanged at 5.0 percent between January and February 2019, adding that higher price increases in February than in January were observed in the “food and non-alcoholic beverages”, “clothing and footwear” and “transport” while the rest of the categories were moderate.
“While the Loti displayed mixed performance against the major currencies during the review period, the exchange rate is expected to continue posing upside risks to the inflation outlook,” the MPC statement added.
Despite the red flag warning, the MPC has, however, reported some positives on the domestic economy front, saying economic activity increased in January 2019 relative to the previous month.
The MPC states the CBL measure of economic activity indicated that output increased by 0.9 percent in January 2019, compared with an increase of 0.7 percent in December 2018.
“Economic activity was mainly supported by higher domestic demand, while production weakened. On the labour market front, employment by the LNDC-assisted firms declined by 2.2 percent on an annual basis, in the fourth quarter of 2018.
In addition, the number of Basotho migrant workers in the South African mining industry continued to decline.
The external sector position improved in the fourth quarter, boosted by surpluses in the capital and financial accounts that outweighed the effect of the widening current account deficit.
“Consequently, gross international reserves rose to 4.5 months of import cover from 4.2 months in the third quarter,” the MPC reported in its statement.
The Committee concluded that it will continue to monitor the global developments and their likely impact on domestic macroeconomic conditions, especially the CBL’s net international reserves (NIR), with the aim of taking corrective action when needed.
Having considered the above developments, the MPC decided to increase the NIR target floor from US$745 million (about M10.4 billion) to US$765 million and maintained the CBL rate at 6.75 percent per annum.