Kingdom of Lesotho: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the Kingdom of Lesotho

KEY ISSUESSetting: Lesotho achieved strong economic growth in recent years, with only moderateinflation. International reserves have largely been rebuilt, thanks to a sustained period offiscal restraint and recovery in revenues from the Southern African Customs Union(SACU). However, unemployment remains high and poverty is widespread, especially inrural areas. Since 2012, Lesotho has been led by a coalition government with a slimmajority.Outlook and risks: Growth is expected to be robust over the medium term—led bymining, construction, and services—but there are risks, mainly arising from Lesotho'sheavy dependence on volatile SACU revenues. A loosening of the fiscal stance in therecently approved budget for 2014/15 threatens to erode official international reserves.The budget also indicates that recurrent expenditures—most notably the governmentwage bill—will remain elevated over the medium term.Policy mix: Staff recommends a more moderate easing in the fiscal stance than thebudget's and curbing recurrent expenditures to allow greater investment for inclusivegrowth. Preserving international reserves—to ensure a secure exchange rate peg—anddebt sustainability are critical for macroeconomic stability. Over time a rules-based fiscalframework could strengthen stability.Financial sector: Overall, indicators point to a sound banking system. Implementing theFinancial Sector Development Strategy would improve access to financial services andsupport private sector development.Structural agenda: An ambitious reform effort, particularly in the fiscal area, is neededto achieve a more efficient public sector and enable private sector-led growth.