depreciation of the exchange rate and the additional take up of debt in near term as the deficit widens, the IMF states. Additionally, government finances have struggled to cope with the volatility of transfers from the Southern African Customs Union (SACU) that account for around half of total revenues. Notwithstanding a temporary windfall this year, several years of low SACU transfers have eroded Lesotho’s buffers.
This year’s SACU transfers, however, are increasing by 8 percent of GDP, which in the absence of the COVID-19 pandemic would have eased the government’s recent financing difficulties.
“Public debt is expected to rise slightly over the next two years, reflecting higher levels of domestic debt and concessional borrowing needed to partially offset the decline in SACU revenues, before falling gradually over the medium term as expenditure consolidation takes hold,” the IMF said in a recently published report.
Currently, according to the report, the country’s public debt seats at 61.4 percent of GDP, an increase from 54.4 in the 2019/20 financial year. For the next two years, public debt is projected to surge to 63.2 in 2021/22 and slightly drop to 63.0 in 2022/23. Of these findings, external debt, currently at 53.0 is expected to rise to 53.4 in the next financial year. Domestic debt will also rise from the current 8.5 percent to 9.8 percent of GDP in the next financial year.
Minister of Finance Thabo Sophonea has recently agreed that increased fiscal deficit will put pressure on the country’s foreign exchange reserves, which are critical in maintaining the exchange rate parity between the Loti and South African Rand.
“Lesotho’s economy was already facing challenges before the pandemic with low growth rates for several years and therefore increased fiscal deficit will put pressure on the country’s foreign exchange reserves,” Sofonea said.
The support on the other hand, he added will help reduce balance of payments pressure, as government spending on COVID-19 related measures increases. The public debt however, is expected to remain sustainable in the