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Economy sinks before rebound

Central Bank of Lesotho governor Dr Retšelisitsoe Matlanyane

Nov. 26, 2020 3 min read

3 min read

MASERU - The textile and mining industries - the two pillars of the domestic economy, are the main reasons behind the 6.0 per cent economic slump as projected by the Central Bank of Lesotho (CBL) for the 2020 fiscal year.

• Textile, mining sink economy

• Lesotho’s economy sink by 6 per cent before it is expected to rebound in 2021-2022 by just 4.33 per cent

The two industries are among some of the primary contributors to the country’s economy with mining, which is dominated by diamonds, accounting for 5.7 per cent of GDP in 2019.

The textile and clothing industry on the other hand is the largest private-sector employer, with more than 40 000 people employed in the industry as of the first quarter of 2019.

Both industries have been hard hit by the COVID-19 pandemic, which led to a significant drop in production. Dreams were shattered and poverty rose to new standards as thousands of people lost jobs in the textile and mining industries.

On November 24, the CBL Monetary Policy Committee (MPC) warned that domestic economy is projected to contract by a revised 6.0 per cent in the last part 2020, due to the economic fallout of the COVID-19 pandemic.

“The output contraction is expected to be led by a decline in economic activity in the textile and clothing industry, construction, as well as the mining industry,” CBL governor Dr Retšelisitsoe Matlanyane, said when announcing the MPC statement.

In the medium term, the CBL governor allayed fears, revealing that the economy is projected to recover gradually and grow at an average rate of 4.33 per cent over the period 2021-2022.

While the recovery is conditional on developments related to the COVID-19 containment, Dr Matlanyane said it was likely to come largely at the back of a strong rebound in the mining and construction industries.

The rate of inflation, measured by year on the year percentage change in consumer price index (CPI), registered 5.6 per cent in October 2020, relative to 5.9 per cent in September, the same period.

“This was mainly due to an increase in food and non-alcoholic beverages as well as clothing and footwear,” Dr Matlanyane added. In terms of the outlook, the revised annual inflation rate is projected to register a revised 5.0 per cent this year before increasing to 5.2 per cent and 5.3 per cent in 2021 and 2022 respectively.

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Money supply, as measured by M2, increased by 4.3 per cent in the third quarter, following a decline of 0.7 per cent in the second quarter. The increase, according to the CBL, was due to a rise in net foreign assets and net domestic assets.

Private sector credit improved by 2.1 per cent in the quarter ending September 2020, compared to a decrease of 6.1 per cent in the quarter ending June 2020.

Moreover, the current account balance worsened in the third quarter, with government budgetary operations also registering a fiscal deficit of 4.3 per cent of GDP during the second fiscal quarter ending September 2020. This is relative to a revised surplus of 13.8 per cent in the first quarter of the fiscal year ending June 2020.

“The current account balance worsened on account of an increased deficit on the goods account as imports rose faster than exports. Consequently, the gross international reserves as measured in months of import cover declined to 4.1 months from a revised 5.9 months in the previous quarter despite a moderate increase in official reserves,” the governor further showed.

Having considered the Net International Reserve (NIR) developments and outlook, regional inflation and interest rate outlook, domestic economic conditions and the global economic outlook, the MPC decided to increase the NIR target floor from US$540 million to US$ 635 million.

The NIR target remains consistent with the maintenance of the exchange rate peg between the loti and the South African rand. The committee further decided to maintain the CBL rate at a rate of 3.50 per cent per annum. The rate, set at this level, will ensure that the domestic cost of funds remains aligned with the rest of the region.

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