Sacu-lesotho wt/tpr/S/aaaa Page Annex 2 kingdom of lesotho contents

(2) Recent Economic Developments

5. 
   Lesotho's development strategy has resulted in a positive economic performance in the past few years, with recent high GDP growth, relatively low inflation, and surpluses in both its overall fiscal position and external current account. After growing sluggishly in earlier years, real GDP grew by 8% in 2006 and 5.1% in 2007 (compared with an annual average of 4% during 1990-99), mainly driven by booming diamond production and a recovery of the textiles and clothing industry (Chapter IV(3)(i) and (4)), and despite the negative contribution of agriculture due to the severe drought in 2007 (Chapter IV(2)).¹⁵ Real GDP growth rates of 3.5% and 0.6% are estimated for 2008 and 2009, respectively, partly due to moderate growth in mining and manufacturing.¹⁶
   
6. 
   The annual average inflation rate in Lesotho, as measured by the consumer price index (CPI), was 6.9% during 2000-07 (down from 11.1% over 1990-99). However, inflation rose to 8% in 2007 owing to rapidly increasing food and energy prices (Table I.2), and an inflation rate of 10.8% is estimated for 2008.¹⁷ Given Lesotho's participation in the CMA, its inflation, exchange rate, and interest rates closely track those in South Africa (Main Report, Chapter I(2)). The Central Bank of Lesotho (CBL) was first established as the Lesotho Monetary Authority in 1978. In August 2000, the CBL Act of 2000 entered into force, conferring the CBL more autonomy.¹⁸ The main goal of monetary policy is price stability and maintaining the peg of the loti, the national currency, against the South African rand.¹⁹
   
7. 
   Since 2004, Lesotho has achieved an important turnaround in its fiscal position, mainly because SACU receipts jumped from 23.2% of GDP in 2004/05 to around 40% in 2008/09, and the limited execution of capital expenditure projects. The overall public sector balance (including grants), as a percentage of GDP, improved from a surplus of 0.8% in 2003 to 9.1% in 2007 (Table I.2). This fiscal progress was the result of, inter alia, improved domestic revenue collection mainly due to the establishment of an independent Lesotho Revenue Authority (operational since 2003), and the introduction of VAT in Lesotho on 1 July 2003, replacing the general sales tax (GST) (Chapter III(2)(i)).²⁰ Nevertheless, a fiscal deficit of 0.1% of GDP is estimated for 2008 partly because Lesotho's wage bill (13.4% of GDP) is one of the highest in Africa and consumes 27% of total domestic expenditure. Overall Lesotho, like other BLNS members, has to plan for the real threat of a decline in SACU import duty revenue, which currently accounts for over 50% of budget revenue (section (4) below).²¹
   
8. 
   SACU receipts increased from US$143 million in 2003 to US$494 million in 2008, after peaking at US$605 million in 2007. Part of this revenue windfall has been used to retire non-concessional debt.²² As a result, Lesotho's debt sustainability indicators improved significantly, with ratios of external debt to GDP and debt service to exports of goods and non-factor services falling, respectively, from 56.4% and 5.8% in 2003 to 49.9% and 3.9% in 2008 (Table I.2). Similarly, gross official reserves reached the highest level in Lesotho's history, i.e. US$1 billion in 2007 (7.1 months of imports) from US$501.6 million in 2003 (5.6 months of imports).
   

a Estimates.

b End of period 91-day treasury bill rate.

c The appreciation of the loti had a significant impact on the debt to GDP ratio in 2003.

d As percentage of goods and non-factor services.

e End of period; a minus sign indicates depreciation.