Cen. Bank cuts lending rate, ups import cover

MATHATISI SEBUSI

MASERU – The Central Bank of Lesotho has reduced its lending rate from 6.25 percent to 5.25 percent per annum, while increasing Net International Reserves (NIR) target floor from US$630 million (about M10.7 billion) to US$660 million to ease the tightening financial situation caused by COVID outbreak.

Governor of Central Bank of Lesotho Dr Rets’ilisitsoe Matlanyane told a media briefing held at Central Bank offices on Tuesday this week that in the banking sector, weak economic activity is likely to increase credit risk as borrowers struggle to meet loan payment schedules, and result in high non-performing loans.

Matlanyane said in the fourth quarter of 2019, the stock of foreign reserves registered 4.3 months of import cover, up from 4.2 months of import cover in September 2019 as a result of reduction in import bills during the period under review.

Against these developments, she added, domestic economic outlook is expected to remain fragile in the short to medium term and growth is expected to be lower than the Bank’s forecast of 2.2 percent and 4.1 percent in 2020 and 2021, respectively. Matlanyane said the fiscal position is expected to remain under pressure as government responds to the pandemic.

She said to ease the tightening financial conditions, major central banks have also started injecting liquidity into the financial sector, to prevent a possible credit crunch. “On the fiscal policy side, a number of governments have introduced stimulus packages to mitigate the impact of the shock on the affected households and business.

“The domestic economy is also likely to suffer a major blow from the epidemic. Among the sectors that are likely to be affected by the epidemic is the textiles and clothing sector. “On the supply side, the pandemic is likely to disrupt the supply of textiles and clothing inputs in China.

“Externally, the global economic slowdown induced by higher uncertainty and increased precautionary behaviour, especially in the US and SA, will impact negatively on the demand for textiles and clothing exports. “These developments are likely to have a negative impact on the industry leading to a fall in production,” she said.

She further noted that given the relative size of the textile and clothing sector in the economy, especially in terms of employment and its interlinkages with other sectors of the economy, these developments are likely to have adverse effects on the broader economy, especially wholesale and retail sectors, as well as transport and logistics. Matlanyane also said the travel and tourism sector is also likely to take a huge knock.

“Measures such as travel restrictions aimed at containing the spread of COVID-19 virus are likely to have negative effects on the sector by reducing the number of tourists coming to Lesotho,” she noted. She said inflation was recorded at 4.2 percent in February 2020, in contrast to 4.1 percent in January 2020, noting that upward pressures on inflation are likely to persist given negative supply shocks and a depreciating local currency despite some respite coming from a fall in the global price of oil due to a general decline in global economic activity.

She said Organisation for Economic Co-operation and Development (OECD) anticipates global economic growth to reach 1.5 percent in 2020, compared to an earlier projection of 2.4 percent because of the COVID-19 outbreak. This is due to firms that are forced to suspend their activities and workers staying at home to contain the spread of the virus noting that the rate of growth would be the lowest since 2009.

Matlanyane said advanced economies, including the United States (US) and the European Union (EU), are likely to contract in the short to medium term owing to a decline in trade and weak economic activity in industries such as air travel, hotels and restaurants. She said the travel industry has been severely affected, with airlines cutting flights and tourists cancelling business trips and holidays.

“Governments around the world have introduced travel bans in an effort to contain the spread of the virus. In China, economic growth is also likely to contract owing to the state of near lockdown that was imposed on many parts of the country. “In South Africa, economic growth is expected to decline by 0.2 percent in 2020, against the earlier projection of 1.2 percent,” she said. She noted that financial markets globally were characterized by heightened volatility and general risk of behaviour as measured by the global financial stress index.

She said yields in advanced economies declined whereas those of the emerging market economies, particularly in South Africa increased, adding that this is likely to result in exchange rate depreciation.