The economy showed signs of recovery in 2017/18, with real GDP growth estimated at 0.9% following a 2.3% contraction in 2016/17. Growth was constrained by the slow recovery of South Africa’s economy and a 27% decline in receipts from the Southern African Customs Union (SACU) in 2016/17, which have not yet fully recovered.
The fiscal deficit improved to an estimated 3.7% in 2017/18 from 4.0% in 2016/17, due to fiscal consolidation. Recurring fiscal deficits largely reflect declining SACU revenue (which constitute 50% of Lesotho’s total revenue) and a huge wage bill (about 24% of GDP— three times the Sub-Saharan average) that crowds out capital spending and spending on goods and services. To diversify revenue sources, the government has introduced a simplified tax regime and simplified procedures for small taxpayers. With external debt estimated at 39.3% of GDP in 2018, Lesotho has moderate risk of debt distress.
Lesotho maintains parity between its currency, the loti, and the South African rand. Since July 2018, the central bank policy rate has been set at 6.5%, compared with 7% in the second half of 2017. Inflation has fallen from its peak of 6.8% in 2015/16 to an estimated 4.8% in 2017/18, despite high energy prices.
The current account deficit reached an estimated 2.8% in 2017/18, down from 6.5% in 2016/17, owing mostly to increased diamond exports in response to favorable international prices. The government’s international reserves currently cover almost 3.1 months of imports.
Tailwinds and headwinds
Real GDP is projected to grow by 0.9% in 2018/19 and 1.2% in 2019/20, supported largely by increased diamond exports and a strong rebound in construction of the Lesotho Highland Water Project Phase II. Growth will also benefit from emerging opportunities for the textile and clothing industry created by the South African market.
Government structural reforms include a subsidy for agricultural mechanization and a program that facilitates rehabilitating irrigation schemes, controlling the spread of livestock diseases, constructing greenhouses and shade nets, and constructing woolsheds to boost wool and mohair production. Lesotho is also integrating climate change into agricultural policies and strategies. The initiatives are consistent with the “Feed Africa” and “Improve the Quality of Life for the People of Africa” priorities among the African Development Bank’s High 5s. For “Industrialize Africa,” another of the High 5s, the government is constructing a geoscience laboratory to facilitate diversification of the mineral industry. In parallel, the government introduced a strategy to increase access to financial services in the rural areas. A public– private dialogue platform was launched for tourism, manufacturing, and commercial agriculture to accelerate job creation and poverty reduction. Finally, the government is empowering small and medium enterprises by establishing cooperatives.
The business and investment climate faces political uncertainties due to a fragile coalition government. Slow recovery of the South African economy threatens Lesotho’s worker remittances and SACU revenues.
- The government securities yield curve extended to 10 years with three benchmark points along the curve (5-7 and 10 years).
- The issuance strategy is based on the government’s budgetary needs and the development of the domestic debt market.
- Lesotho is 30th in the ABMDI 2017 Ranking Report.
The issuance strategy is to finance government budgetary needs and to develop the domestic debt market.
In order to facilitate pricing and valuation of capital market securities, the government issues debt instruments, although not in a satisfactory manner as there are currently no long-dated maturities, which defeats the purpose of lengthening the maturity profile of government domestic debt. There are few benchmark points to construct the yield curve that could be used for pricing of other financial instruments. There are 3 benchmarks maturities: 5-7 and 10 years. By the auction method, the government issues new instruments and also re-opens existing bonds.
Yield curve calculation models
There is no yield curve in Lesotho even though the government issuance strategy refers to building the government benchmark yield curve. The “bootstrapping” model has been approved and the yield curve will be constructed once a month. The yield curve will be based on primary market activities.
There is no yield curve in Lesotho.
Yield curve managed by
If constructed, the yield curves will be built by the Central Bank of Lesotho.
The yield curve will be on the Bank's website first, and later on both Bloomberg and Reuters.
Challenges in building an efficient yield curve
- Illiquid bonds and limited secondary market: there is no vibrant secondary market because activity is minimal. Holders do not sell but hold securities to maturity as they view them as a form of savings.
- Lack of transparency in pricing: due to inactivity in the secondary market, there is lack of transparency and knowledge in terms of pricing of securities.
- Narrow investor base
Guide to Buying Bonds
Procedures for market participation
To participate in the auction, an investor must have a Central Securities Deposit (CDS) account at the Central Bank of Lesotho (CBL) and a bank account with one of the commercial banks.
The investor can then choose to participate in a competitive bid or a non-competitive bid. Competitive bidders can submit up to 4 bids and non-competitive bidders only one. Bid forms must be submitted to the Central Bank at 3:00 PM the day preceding the auction day.
Participations to the 91-d & 182-d T-bills are distinct: bids for the 91-d can only be competitive, with minimum bid amount of 250,000 maloti. Bids for the 182-d can either be competitive and non-competitive: minimum participation amount must be respectively 250,000 maloti (multiple bids allowed for competitive bids) and 5,000 maloti.
Investors may gain further details on auction participation rules in the Government Treasury Securities Trading Regulations of 2009.
Withholding Tax is payable on interest income earned from investment in treasury securities. The rates are 10% and 15% for residents and non-residents respectively.
The tax rate on capital gains is 25%.
The settlement takes place the same day as the auction (T+0).
Openness to foreign investors
There are almost no restrictions on foreign investment and foreign investors are allowed to participate in the purchase and sale of Treasury securities (which are available only in the local currency).
Non-residents of the Common Monetary Area (CMA) zone are subject to exchange rate restrictions.
Profits and dividends from investments in Lesotho should be registered at the CBL as well as inflows of capital. Local companies can invest outside the CMA, but foreign exchange earnings must be repatriated.
Foreign exchange restrictions and profit repatriation
With some restrictions, residents and non-residents may hold foreign exchange accounts. However, CBL must approve all flows of capital and dividends outside of the CMA zone. Some payments and transfers are subject to prior government approval and limitations, and many capital transactions face restrictions or quantitative limits.
Fitch has rated Lesotho BB- in May 2014 and gave it a stable outlook.
List of Primary Dealers
There are no primary dealers in Lesotho.
Documents & Resources
Documents - Ministry of Finance
- Lesotho-Draft_Speech_by_Honorable_Min_Finance-June_2014.pdf (37 kB)
- Lesotho_Nat.Strat_Dvpt_Plan-2013-17.pdf (1.29 MB)
- Lesotho_Nat.Strat_Dvpt_Plan-Concept_Note-2012-17.pdf (325 kB)
Documents - Central Bank
- CBL-AR_2013.pdf (3.16 MB)
- CBL-Qtrly_review-June_2014.pdf (1.12 MB)
- Intro_of_an_OTC_trading_mechan-_Lesotho_-_Jan_2014.docx (91 kB)
- Legal_Notice-Gov_Lesotho_T-Sec-Regu_2009.pdf (211 kB)