MASERU – The Central Bank of Lesotho (CBL) has decided to increase the Net International Reserves (NIR) target from US$745 million (about M10.4 billion) to US$765 million in order to protect the parity between the Loti and the Rand.
The bank was, however, quick to emphasize that this is not the amount of reserves they hold but the minimum that they can hold.
In its Monetary Policy Committee (MPC) sitting on Monday this week, CBL revealed that the domestic currency displayed mixed performance against the major currencies during the recent review period, divulging further that the exchange rate is expected to continue posing upside risks to the inflation outlook.
As a result, the committee decided to increase the NIR target to protect the value of the domestic currency.
“We are doing this because we have to protect the value of our currency so that it is not below the rand in order to remain stable,” CBL governor Dr Rets’elisitsoe Matlanyane said while presenting the MPC statement on Monday.
Lesotho’s fixed exchange rate system under the Common Monetary Area (CMA) requires a healthy fiscal position to support maintenance of the exchange rate parity.
Risks to the outlook include exposure to global economic developments, subdued domestic consumer demand, low production capacity and prudent management of the fiscus.
“We cannot overemphasize this point. It is crucial that fiscal management is prudent for us to be able to keep sufficient reserves. So if we can look out for these risks and be able to manage them, then our economy would do much better,” the CBL governor said.
Furthermore, the committee disclosed that money supply, as measured by M2, declined by 4.2 percent in January 2019 in contrast to a 2.2 percent growth in December 2018 and this was as a result of a fall in both net domestic claims and net foreign assets.
Private sector credit, on the other hand, continued on an upward trend, although it continued to decelerate in January 2019.
“What is worrying in this is that it is the credit to the households that grows more than credit to the private sector which would influence growth. So consumer credit seems to be increasing at the higher rate,” Matlanyane expresses concerns.
On the domestic front the economic is still far from reaching a satisfactory performance, according to the CBL, this is despite the fact that the activity slightly increased in January 2019 relative to the previous month.
The CBL measure of economic activity indicated that output increased by 0.9 percent in January, compared to an increase of 0.7 percent in December last year.
“The slight economic activity was mainly supported by higher domestic demand, while production weakened. But, generally our economy is still subdued,” the CBL governor emphasised.
While employment by the LNDC assisted firms declined by 2.2 percent on an annual basis in the fourth quarter of 2018, the external sector position, on the other hand, improved in the same quarter, boosted by surpluses in the capital and financial accounts that outweighed the effect of the widening current account deficit.
Consequently, gross international reserves rose to 4.5 months of import cover from 4.2 months in the third quarter.
Government budgetary operations culminated in a surplus of 5.7 percent of GDP in January 2019 following a smaller surplus of 0.9 percent in December last year, as revenue increase, boosted by SACU receipts.
The MPC also decided to maintain the CBL rate at 6.75 percent per annum.