Lesotho: Lesotho Finance Profile

A small landlocked country in Southern Africa, Lesotho is a constitutional monarchy with limited natural resources and a narrow production base. The country is amongst the world’s poorest, with GDP per capita reaching about half of the African average; HIV/AIDS prevalence rates are part the highest in the globe and are projected to reach 40 % of the people by 2015.

While the economy is well diversified, textile manufacturing, agriculture, and diamond mining predominate output. Imports amount to about 90 % of GDP, and remittances to 28 % as of 2008, while receipts from the Southern African Customs Union (SACU) dominate public revenues. Despite a marked increase in development spending, Lesotho recorded its fifth consecutive fiscal surplus in 2008 at 10.3 % of GDP.

Lesotho’s economy is small and closely tied to South Africa through the Common Monetary Sector(CMA) and through a peg of the loti to the South African rand, which resulted in Lesotho suffering from the negative repercussions of the financial crisis despite its relative isolation from the world capital markets. After years at over 5 %, GDP increase declined to 3.5 % in 2009. Increase is however expected to pick up again in 2010, and the macroeconomic outlook remains positive: fiscal indicators are strong, with declining public debt, and currency reserves are high.

Despite the crisis, the three major, South-African-owned commercial banks, with total assets equivalent to about 42 % of GDP, continue to be well capitalized, liquid and profitable. Generally, banks are heavily invested in government bonds; however, as of 2007, credits to the government decreased by about 52 %, while credit to the rest of the economy increased by 10 %.

With the exception of the treasury-bill market, issued for the purposed of liquidity management with maturities extending to year, capital market activities are not well developed in Lesotho. Treasury bills are traded competitively and auctions are dominated by commercial banks and large companies, with an average of bidders per auction.

While no stock exchange has been established in the country, companies are able to inventory their shares of the Johannesburg Stock Exchange.

Non bank financial institutions, with assets equivalent to 21 % of GDP, comprise money lenders, insurance companies, private pension funds, unit trusts, and SACCOs.

The Lesothan insurance sector in Lesotho is relatively small, with gross written premiums accounting to 5 % of GDP as of 2006. The Central Bank supervises the industry. As of March 2008 insurance companies, mostly South African, and twelve insurance brokers operated in the country. The government has recently established a defined-contribution pension fund for government employees aged 40 years or less.

Based on a 2009 survey, 307 out of 1000 adults hold a bank account in Lesotho, a relatively high ratio for the region. Efforts are ongoing to strengthen the national-owned Lesotho Postbank, which provides bank-type services to the unbanked people and micro, small, and medium enterprises, but does not provide loan products.

The last few years have seen a rapid increase of Savings and Credits Cooperatives (SACCOs). While SACCOs are allowed to take deposits by non-members, oversight of their operation is carried out by the Ministry of Trade with no involvement by the Central Bank, thus limiting the extent of supervision. The authorities are considering converting large SACCOs into commercial banks and placing them under the supervision of the Central Bank.

A number of unlicensed deposit‐taking entities as well operate in Lesotho. These vehicles attracted sizable deposits from the public by offering above-market interest rates, thus raising concerns amongst the authorities on whether these institutions will be able to meet their growing liabilities – currently amounting to about 8 % of GDP.

Lesotho, along with Namibia and Swaziland, is a member of the Common Market Arrangement (CMA) of Southern Africa, which entirely integrates these nations’ financial and capital markets with those of South Africa.

Remittances play a major role in the Lesothan economy. 2008 estimates indicate that annual remittances totaled 443 million USD or the equivalent of 27.7 % of GDP. The weakening South African economy and the contraction of the mining sector could, however, lead to a reduction in flows.

Private Sector Development

The Lesotho government recognises that sustainable increase needs a vibrant private sector. In 2009, Lesotho was classified as the least business friendly country in the southern African region, ranking 130 out of 181 in the World Bank Doing Business survey. The SACU average ranking was 65 and South Africa was 34th. The poor investment climate has deteriorated. Lesotho’s laws and regulations are time consuming and expensive for businesses. In 2009, Lesotho ranked 155th for granting permits and facilitating title deeds, core elements for promoting the private sector. It would take about 40 days to start a new business and 101 days to register a property. It takes close to years to enforce contracts in courts and resolve business license issues. Businesses spend additional than 300 hours, additional than 40 working, paying taxes.

To improve the investment climate, the government initiated a strategy for 2010-2012, which once approved will be run by the Private Sector Development Division under the ministry of finance.

The reform envisages changing business policies and bringing in procedures to promote entrepreneurship, savings and investment. The strategy focuses on reforming the legal framework for business, establishing a stop business facilitation centre, reducing time-consuming tax payment procedures, and proposing solutions to unblock government reforms. The strategy as well seeks ways to encourage small scale enterprises. According to a survey completed in 2009, close to 65% of small scale enterprises are in retail and services activities. Encouraging them to participate in additional productive sectors, such as manufacturing, agro-processing and commercial farms is an objective of the strategy, which as well seeks to put the focus on skill development for small scale enterprises, market access and finance.

Lesotho has commercial banks, three of which are owned by South African banks. The are in a strong financial position despite the world financial crisis. Amount meet the prudential requirements of bank supervision. In 2009, Post-bank was issued a full licence to engage in normal banking activities. This could improve credit extension to the private sector, which has been low at around 30% of private sector deposits since the privatisation and closure of national owned banks 10 years ago.

The economy faces several challenges, such as a lack of competition. The margin between lending and deposit rates (about 9%) is quite high by regional standards, mainly because of difficulties entering the banking business. The banking sector faces structural bottlenecks that have to be addressed. Efforts are underway to revise the 1998 Financial Investment Act. Reforms are expected on licences for new banks, improving the collection of credit histories of potential borrowers through a Credit Bureau (where a borrower’s history can be centralised for easy access by amount banks), streamlining title deeds that are often used to guarantee loans, improving bank supervision procedures and automating several banking activities. Debates on transaction costs charged by commercial banks continue in the region. Studies undertaken in Lesotho showed that transactions costs charged by banks in Lesotho subsidised the poor, with charges on services used mostly by small depositors relatively low compared with charges on additional sophisticated services. Generally, charges in Lesotho were not found to be significantly higher than in South Africa and other nations in the region. However, a 2009 study on banking charges in South Africa concluded that charges were high compared to international levels, implying that high banking costs are a regional problem.

Notable developments expected to take place in 2010 include broadening the securities market where the central bank plans to introduce multiple treasury bill products and a new bond market for long term investment. To further enhance private participation in the financial market, regulatory frameworks and supervision guidelines are being developed to introduce secondary security markets.

A large illicit pyramid scheme wiped out the savings of thousands of people in 2009. The central bank is seeking the liquidation of the scheme and distribution of remaining funds and assets to investors. In December 2009, the central bank distributed to investors funds held by a closed institution which was taking deposits without a proper licence. Investors would only receive a part of the funds they originally put in the institution.