CBL assesses economic risks amid rising global trade tensions
THABISO NTAOTE
MASERU – At its 113th meeting held this week, the Central Bank of Lesotho (CBL) addressed the escalating global trade tensions, significantly impacted by tariffs imposed by United States (US) president, Donald Trump, in early April.
The Monetary Policy Committee reviewed recent economic developments globally, regionally, and domestically, alongside fiscal issues reflecting mixed economic performances in 2025.
President Trump’s initial 10 percent tariffs on various countries took effect on April 5. Subsequently, Lesotho faced an additional 50 percent tariff on all exports to the US, attributed by the US administration to trade imbalances between the two nations.
CBL Governor, Dr Maluke Letete, characterized the situation as a “huge economic challenge” facing the global economy. He stated that the Committee heavily considered financial market developments to guide its policy decisions.
“During discussions, the Committee noted that global economic performance was mixed in the first quarter of 2025,” Governor Letete reported. “While major economies grew, momentum was uneven. The United States and the United Kingdom experienced slowing growth, weighed down by weaker consumer and government spending.”
“In contrast,” Letete continued, “the Euro area remained steady, buoyed by domestic demand, while the Japanese economy was lifted by strong exports. The Chinese economy benefited from targeted stimulus measures, and India’s growth was driven by manufacturing and construction.”
The Committee noted that growth in neighbouring South Africa is expected to remain subdued, hampered by weak domestic demand and global trade uncertainty. Labour markets, however, remained broadly stable in selected economies as of April.
Citing the International Monetary Fund, Governor Letete highlighted a downgrade in the global growth forecast for 2025.
“Global growth is now projected at 2.8 percent in 2025, a downgrade from the earlier projection of around 3.3 percent. This revision results from rising trade tensions and deepening protectionism, which are dampening investment and confidence. This dimmer outlook reflects mounting trade barriers that are beginning to choke investment flows and business confidence.”
Governor Letete emphasized the challenging environment for Lesotho, citing risks such as volatile financial markets, unclear policy directions globally, slow productivity growth, and escalating geopolitical tensions.
On inflation trends, the Governor noted divergent patterns across major economies. Inflation remained steady in the Euro area but rose in Japan and the UK, primarily due to higher food, energy, and household costs.
“In China, inflation was driven largely by weak domestic demand and trade tensions,” Letete explained, “while India experienced easing inflation due to lower food prices.” Regarding South Africa, the Committee observed a modest inflation increase attributed to food and transport costs.
“In response to recent economic developments, most central banks have cut interest rates to stimulate growth but remain highly cautious due to persistent inflationary risks and global trade uncertainties, particularly those linked to US tariffs.
The committee noted that Lesotho’s economy contracted by 5.3 percent in the first quarter of 2025, driven by weak consumption, reduced government spending, and underperformance in the transport and construction sectors. However, some resilience was observed in manufacturing and financial services, supported by textile exports and credit growth – though overall economic momentum remains fragile.”
The outlook is further clouded by rising tariffs affecting the textile industry and the withdrawal of key support from the US and other development partners, including funding previously channeled through the Millennium Challenge Corporation. Additionally, continued weakness in the diamond market has added to economic pressures.
In April this year, Lesotho’s inflation rate eased slightly to 4 percent, down from 4.2 percent the previous month. This moderation, coupled with a stronger Loti against the US Dollar, helped reduce fuel costs, contributing to lower inflation.
On the fiscal front, Lesotho maintained a disciplined and supportive stance in the first quarter of 2025, posting a 12.9 percent budget surplus despite softer Value Added Tax collections due to compliance challenges. Increased government spending on infrastructure and social support helped propel the economy, while public debt declined to 53.8 percent of GDP, aided by bond redemptions and external debt repayments.
The private sector remains crucial to Lesotho’s economy, and fiscal prudence has created room for private-sector activity, particularly in credit extension. However, Lesotho’s current account surplus narrowed to 0.7 percent of GDP in the first quarter, reflecting weaker exports to key markets, including the US.
Strong Southern African Customs Union receipts, prudent reserve management, and fiscal discipline continue to bolster confidence in the country’s external position. The CBL reported that NIR increased by approximately $40.3 million to $1.069 billion as of May 21, driven by water royalties and SACU receipts. The NIR position is expected to improve in the near to medium term.
Global growth remains fragile due to trade tensions, barriers, elevated uncertainty, and geopolitical conflicts. Domestically, growth is expected to stay subdued, reflecting the impact of adverse trade tariffs – Lesotho initially faced a 50 percent tariff, later reduced to 10 percent, with negotiations still ongoing within a 90-day review period.
This has undermined exports, highlighting the need to explore alternative regional markets for greater resilience.
The committee made two key decisions:
1. Revised the NIR target floor from $840 million to $830 million to maintain sufficient reserves and sustain the 1:1 peg between the Loti and the South African Rand.
2. Cut the CBL rate from 7.25 percent to 7.0 percent per annum, aligning with domestic conditions and broader regional monetary policies.
This reduction is expected to stimulate growth, provide relief to households and businesses, and support the economy during these challenging times. The CBL will continue to monitor global developments closely and adjust policies as needed.
Amid ongoing economic tensions, the Lesotho government is drafting a strategic response to address current crises. The CBL also noted the withdrawal of $91 million in US foreign aid (equivalent to M1.7 billion), which previously supported health, education, and agriculture sectors.
Additionally, the central bank aims to implement a revised monetary policy framework later this year, ensuring adaptability in a volatile global economy.
