IMF on economic outlook for Lesotho

The Kingdom of Lesotho faces significant economic challenges in the aftermath of the pandemic, according to the International Monetary Fund (IMF) after concluding the Article 4 consultation. Aqib Aslam, IMF Mission Chief for Lesotho, highlighted the key recommendations and highlights of the consultation during a recent interview. The IMF report emphasizes the need for fiscal consolidation, particularly focusing on expenditure to promote growth-friendly measures and shift towards a more private sector-centric framework. Lesotho's economy has been grappling with climate shocks, delays in infrastructure projects, high food and fuel prices, declining diamond prices, layoffs in the textiles sector, and weak regional and external demand, all contributing to economic strain. The country's fiscus is characterized by large and volatile external transfers, averaging around 50% of GDP in public expenditure. This has led to a boom-bust cycle with growing domestic arrears and financing gaps, while the economy has stagnated with real activity and per capita incomes shrinking by approximately 10% since 2016. The key theme highlighted in the IMF report is the importance of fiscal consolidation to ensure debt sustainability and maintain foreign exchange reserves over the medium term. The IMF's recommendations include reducing the public sector wage bill by reviewing the civil service size and setting clear employment and wage growth targets. The government has already initiated efforts to streamline the civil service and enhance recruitment transparency. Another area of focus is public investment, aiming to finance projects that promote climate-resilient growth and attract private sector investment. The IMF suggests identifying and minimizing unproductive capital projects, improving project appraisal and contract design, and targeting high value-added, growth-friendly investments aligned with development priorities. Furthermore, the report emphasizes the need for rationalizing and reprioritizing social spending programs to target the most vulnerable populations efficiently. It also stresses urgent reforms in public financial management to establish transparent budget processes, robust expenditure controls, and sound fiscal oversight of state-owned enterprises. As Lesotho works towards implementing these recommendations, the government faces a critical juncture in reshaping its economic framework to foster sustainable growth and resilience in the face of ongoing challenges. The IMF report serves as a roadmap for Lesotho to navigate the complexities of its economic landscape and build a more prosperous future for its citizens.