VZCZCXRO5968
RR RUEHBZ RUEHDU RUEHJO RUEHRN
DE RUEHMR #0414/01 3271503
ZNR UUUUU ZZH
R 231503Z NOV 09
FM AMEMBASSY MASERU
TO RUEHC/SECSTATE WASHDC 4486
INFO RUCNSAD/SADC COLLECTIVE
RUEHMR/AMEMBASSY MASERU 4920

UNCLAS SECTION 01 OF 02 MASERU 000414 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR AF/S AND INR 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EFIN LT
SUBJECT: DEVELOPMENT PARTNERS' CONSULTATIVE FORUM BRIEFED BY IMF 
MISSION 
 
MASERU 00000414  001.2 OF 002 
 
 
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Summary 
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¶1. (U) On Tuesday, November 17, the United Nations Development 
Programme (UNDP) hosted the Development Partners' Consultative 
Forum (DP CF) briefing by the International Monetary Fund (IMF) 
mission on Article IV consultations.  The IMF expects Lesotho's 
economic growth to be around 1.5% in 2009.  The mission reported 
that the inflation rate was down 7.3% in September compared to 
last year.  Productivity has declined in the Lesotho's leading 
economic sectors:  agriculture, textiles, and mining.  The IMF 
mission projects a large deficit in 2010/11 unless the 
government of Lesotho makes some policy changes regarding the 
budget. 
 
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Inflation and Growth down, textile sector expected to contract 
further 
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¶2. (U) The IMF reported that economic growth in 2008 was 4.5%. 
but in 2009, they expect the rate of growth to be around 1.5%, 
mainly due to the decline in global demand -- especially the 
demand for textile exports.  The mission reported that Lesotho's 
inflation rate declined from 12% in September 2008 to 4.7% in 
September 2009.  This decline has been driven mainly by lower 
food prices, which carry more weight in the Lesotho Consumer 
Price Index basket.  According to the IMF, the agriculture and 
textile sectors' percentage share of GDP has been steadily 
declining.  In addition to experiencing marked decline since 
2006, the textile sector's productivity is expected to contract 
by 10% in 2009.  The IMF advised the Government of Lesotho (GOL) 
that it needs to find ways to make this sector competitive in 
the world market, but they also recognize that the options are 
limited since Lesotho's textile sector pays higher wages than 
competitor countries such as Bangladesh.  Lesotho's 
comparatively high wages also make it difficult to attract new 
investors, negatively affecting the competiveness of the 
country's exports.  The IMF reported that Lets'eng mine 
production is still good despite the declining commodity prices 
and global demand.  However, Liqhobong and Kao mines have 
suspended their operations until world commodity prices improve. 
 Finally, the IMF recommended that GOL should diversify the 
country's production base into non-textile manufacturing. 
 
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Budget deficit unsustainable, entire budget needs an overhaul 
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¶3. (U) The IMF reported that Lesotho's 2009 budget, approved by 
Parliament in February, was highly expansionary, with a deficit 
of around 10% of GDP (Lesotho normally runs deficits around 3%, 
so this year's is quite high). The IMF had suggested earlier in 
the year that the Ministry reduce budget expenditures, since a 
deficit at that level is unsustainable.  With the reduction in 
expenditure resulting from the revised budget and the slowdown 
in spending caused by Integrated Financial Management 
Information System (IFMIS) problems during the first half of the 
year, the IMF expects this year's deficit to total around 1%. 
(Note:  IFMIS was introduced in 2009 and has had a number of 
technical problems since its introduction.  Complaints have been 
rampant in the local press.  Despite these initial problems, the 
system is expected to contribute to greater transparency and 
accountability in the management of public funds.  End Note.) 
Almost 60% of Lesotho's current budget comes from South African 
Custom's Union (SACU) revenue.  Lesotho received $657 million in 
SACU revenue in 2008/09.  The figures have since been revised, 
and therefore, Lesotho has to pay approximately $146 million of 
the $657 million back to the SACU common revenue pool (CRP) in 
2010/11.  Due to SACU repayment and declining SACU revenues, GOL 
revenue is expected to decline by 17% of GDP in the next year. 
The IMF added that if the GOL makes no budget policy changes, 
the GOL will have a very high deficit in 2010/11.  IMF did not 
predict how high the deficit might be. 
 
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IMF Changes and SACU repayment considered, $17.72 million 
shortfall expected 
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¶4. (SBU) The IMF mission made several recommendations to the 
GOL.  First, the GOL must reduce government expenditure.  Some 
 
MASERU 00000414  002.2 OF 002 
 
 
options are:  Reducing the wage bill (a large percentage of 
government expenditure) by freezing all new staff positions and 
hiring below attrition; reducing expenditure on goods and 
services; giving no general wage increase for civil servants in 
2010/11.  Second, the GOL should budget on an outturn basis 
instead of by appropriation.  Third, the GOL should negotiate a 
payment schedule for SACU revenue overpayments from 2008/09, 
allowing them to pay when the GOL's fiscal position has 
improved.  Finally, the GOL could use part of its foreign 
exchange reserves to help deal with the implications of the 
budget deficit.  When deciding the total amount of reserves that 
can be used, the GOL will have to ensure that the minimum 
international reserve requirement remains in the bank to keep 
the Lesotho loti pegged to the South African rand. 
Additionally, Lesotho is being required to make a M1.1bn (about 
$150m) repayment to the South African Customs Union (SACU) in 
¶2010.  Even if the GOL is able to make all these adjustments and 
meet this repayment, there wQld still to be a financing gap of 
approximately $17.7 million.  The IMF urged development partners 
to consider helping the government close this financing gap 
through budget support. 
 
(Comment: It is unlikely that GOL will be able to implement all 
the recommendations made by the IMF, especially the repayment of 
SACU revenue because that decision involves other countries. The 
$17.7 million financing gap is the best case scenario assuming 
all the recommendations can be implemented.  Post believes the 
financing gap would be well in excess of the $17.7 million.) 
 
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Future prospects 
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¶5.  (U) In the long term, among the challenges, the IMF foresees 
some bright prospects due to the construction of Metolong dam, 
which is expected to start in the middle of 2010.  Developments 
in phase II of the Lesotho Highlands Water Project, with 
construction of the Polihali Dam at Tlokoeng in Mokhotlong, are 
also expected to boost economic activity in future years. 
NOLAN