The time was right for Lesotho to strike a new balance between policies for economic stability and inclusive growth, as were outlined in the country’s National Strategic Development Plan, International Monetary Fund (IMF) senior economist David Dunn said on Thursday, following a visit to Lesotho.

He stated that Lesotho’s economy had performed well in recent years, with real gross domestic product growth having averaged just over 5% a year between fiscal 2010/11 and 2012/13, while inflation remained moderate.

A sufficient buffer of official international reserves had been critical to this positive outturn, with the country’s international reserves ensuring that the loti’s hard peg against the South African rand remained firm when revenue from the Southern African Customs Union (Sacu) dropped sharply in 2010/11 and 2011/12, Dunn explained.

In addition, fiscal discipline was maintained so that when Sacu revenues eventually recovered in 2012/13 and 2013/14, the authorities were able to successfully rebuild international reserves and fiscal buffers.

“However, although economic growth has been robust, unemployment remains high and poverty is still widespread, especially in rural areas. In addition, there is grave concern about poor health and social indicators,” Dunn said.

He stated that, in particular, Lesotho had scope to scale up public investment, while still maintaining adequate international reserves and a healthy fiscal balance, adding that reducing recurrent expenditures – most notably, the public sector wage bill, which was among the highest in the world – would be critical for increasing space for investment spending.

“The IMF team encourages the authorities to complete the public service payroll audit currently being piloted in three line Ministries, while also strengthening management of the payroll,” Dunn said.

The IMF also welcomed the Lesotho government’s new policy to conduct a comprehensive appraisal for all investment projects before including them in the Budget.

Dunn said this would help ensure that projects had high rates of return and supported job-creating growth.

However, the new appraisal process would likely lead to some delay in the upscaling of investment spending.

Further, to ensure that the resources were available when these investment projects were ready to start, the IMF recommended generating savings now by achieving a fiscal surplus this year and targeting a surplus in the 2014/15 Budget.

“The IMF Lesotho mission welcomes the authorities’ new Financial Sector Development Strategy (FSDS), which calls for the sound expansion and deepening of financial services. Implementing the FSDS would improve access for finance to private businesses, helping private sector development,” Dunn said, adding that the IMF was ready to support the efficient implementation of the FSDS with technical assistance.
“We also encourage the authorities to continue to make progress with ongoing reforms to improve the business environment and other measures to enhance Lesotho’s international competitiveness, which will be critical for job creation.”

In particular, the IMF welcomed efforts to ease the business registration process, streamline the construction permit system, adopt regulations for the credit-rating law, and modernise the insolvency proclamation, which would bolster collateralised lending, Dunn explained.