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Government of the Kingdom of

Lesotho

Ministry of Finance

2016/17 Annual Public Debt

Bulletin

The Head of Department With Support from

Public Debt and Aid Management Department

Ministry of Finance

New Government Complex

P.O Box 395

Maseru 100

November 2017

The European Union

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Contents ACKNOWLEDGEMENTS ................................................................................................................. v LIST OF ABBREVIATIONS ............................................................................................................. vi EXECUTIVE SUMMARY ................................................................................................................ vii 1. INTRODUCTION ............................................................................................................................. 1

1.1 Background.................................................................................................................................. 1 2. MACROECONOMIC CONTEXT ................................................................................................. 2

2.1 Global Economic Developments and Outlook .......................................................................... 2 2.2 Domestic Economic Development and Prospects ..................................................................... 8

2.2.1 GDP Growth .......................................................................................................................... 8 2.2.2 External Sector ....................................................................................................................... 9 2.2.3 Fiscal Sector ......................................................................................................................... 11 2.2.4 Monetary Sector ................................................................................................................... 11

3. PUBLICE DEBT PERFORMANCE AND MANAGEMENT .................................................... 15 3.1 Overview .................................................................................................................................... 15 3.2 Legal and Regulatory Arrangements for Debt Management ............................................... 15 3.3 Institutional Arrangements for Debt Management ............................................................... 15 3.4 Financing of the 2016/17 Budget Deficit ................................................................................. 17

3.4.1 Overall Fiscal Balance ......................................................................................................... 17 3.4.2 Financing of the Budget Deficit ........................................................................................... 17

3.5 Aggregate Debt Portfolio in 2016/17 ....................................................................................... 19 3.5.1 New Borrowings .................................................................................................................. 19 3.5.2 New Grants .......................................................................................................................... 20 3.5.3 Disbursements of External Loans (in Maloti) ...................................................................... 20 3.5.4 Disbursed Outstanding Debt ................................................................................................ 21 3.5.5 Total Debt Service Payments ............................................................................................... 23

3.6 Cost/Risk Characteristics of Public Debt ................................................................................ 25 3.6.1 Interest Rate Cost ................................................................................................................. 25 3.6.2 Average Time to Maturity and Refinancing Risks .............................................................. 25 3.6.3 Debt Redemption Profile ..................................................................................................... 27 3.6.4 Foreign Exchange Risk ........................................................................................................ 27 3.6.5 Interest Rate Risk ................................................................................................................. 28

4. DOMESTC DEBT PERFORMANCE AND MANAGEMENT ................................................. 31 4.1 Overview .................................................................................................................................... 31 4.2 Total Domestic Debt .................................................................................................................. 31 4.3 Issuance of Government Securities .......................................................................................... 32

4.3.1 Issuance Ratio Performance ................................................................................................. 35 4.4 Holding of Government Securities .......................................................................................... 36

4.4.1 Stock of Treasury Bills ........................................................................................................ 37 4.4.2 Stock of Treasury Bonds ...................................................................................................... 38

5. EXTERNAL DEBT PERFORMANCE AND MANAGEMENT ............................................... 40 5.1 Overview .................................................................................................................................... 40 5.2 Changes in Average Terms of Loans and Commitments ...................................................... 40 5.3 Disbursements of External Loans ............................................................................................ 41 5.4 Evolution of External Debt ....................................................................................................... 44 5.5 Total External Debt .................................................................................................................. 44 5.6 The Structure of External Debt ............................................................................................... 45

5.6.1 External Debt by Creditor Category .................................................................................... 45 5.6.2 External Debt by Maturities ................................................................................................. 47 5.6.3 External Debt by Currency Composition ............................................................................. 48 5.6.4 Debt by Economic Sector .................................................................................................... 49

5.7 External Debt Service ............................................................................................................... 50

2016/17 Annual Public Debt Bulletin-November 2017 ii

6. CONTIGENT LIABILITY MANAGEMENT ............................................................................. 53 6.1 Publicly Guaranteed Debt ........................................................................................................ 53 6.2 On-Lending Arrangements ...................................................................................................... 53

6.2.1 Stock of On-Lent Loans ....................................................................................................... 53 7. DEBT STRATEGY AND DEBT SUSTAINABILITY ................................................................ 55

7.1 Medium-Term Debt Strategy ................................................................................................... 55 7.2 Debt Sustainability .................................................................................................................... 57

7.2.1 Overview .............................................................................................................................. 57 7.2.2 Outcomes of the 2016/17 Debt Sustainability Analysis....................................................... 58

8. REFORMS IN PUBLIC DEBT MANAGEMENT ...................................................................... 63 8.1 Overview .................................................................................................................................... 63 8.2 Progress on Key Reforms ......................................................................................................... 63 8.3 Next Steps in Reforming Public Debt Management .............................................................. 63

9. CONCLUSION AND KEY RECOMMENDATIONS ................................................................ 64 10. REFERENCES .............................................................................................................................. 66 ANNEXURES ...................................................................................................................................... 69

Annexure 1: List of Guarantees by 2016/17 ................................................................................. 69 Annexure 2: Interest Rate Movements 2014-2017 ....................................................................... 71

List of Tables

Table 1: Overview of World Economic Outlook Projections ................................................................. 2 Table 2: Selected Real Sector Economic Indicators 2013/14 – 2019/20 ................................................ 9 Table 3: Mid-Market Exchange Rates .................................................................................................. 13 Table 4: Gross Borrowings of Government in Maloti (2016/17).......................................................... 18 Table 5: New Loans Contracted in 2016/17 ......................................................................................... 19 Table 6: Average Terms of New Loans ................................................................................................ 19 Table 7: New Grants Secured in 2016/17 ............................................................................................. 20 Table 8: Disbursements of External Loans ........................................................................................... 20 Table 9: Government Outstanding Debt (Maloti Million) .................................................................... 21 Table 10: Total Debt Service 2012/13-2016/17 .................................................................................... 24 Table 11: Cost and Risks of existing Debt Portfolio by 2016/17 ......................................................... 30 Table 12: Stock of Government Securities (Millions of Maloti) .......................................................... 31 Table 13: Net Issuance of Government Securities (Millions of Maloti) ............................................... 33 Table 14: Proportion of Holding of Government Securities by Sectors ............................................... 36 Table 15: Outstanding Treasury Bonds by Sector ................................................................................ 39 Table 16: Average Terms of New Loans Contracted in 2016/17 ......................................................... 41 Table 17: New Grants Contracted during 2016/17 ............................................................................... 41 Table 18: Total Disbursements on External Loans ............................................................................... 41 Table 19: Disbursements on External Loans by Creditors (US$ Million) ............................................ 43 Table 20: Disbursements on External Loans by Creditors (Millions of Maloti) .................................. 43 Table 21: External Debt Stock (US$ Million and Maloti Million) ....................................................... 44 Table 22: Disaggregation of External Debt Stock (Millions of Maloti) ............................................... 45 Table 23: Evolution of External Debt by Creditor Category ................................................................ 45 Table 24: External Debt Service Payments by Creditor Category (US$ Million) ................................ 50 Table 25: Table Principal Repayments on External Debt by Creditors (US$ Million) ........................ 51 Table 26: Interest Payments on External Debt by Creditors (US$ Million) ......................................... 52 Table 27: On-lending Arrangements as at March 2017 ........................................................................ 54 Table 28: Proposed Borrowing Mix (2017/2018 to 2021/2022) ........................................................... 56 Table 29: CPIA and Debt Burden Indicators ........................................................................................ 58 Table 30: Debt Burden Indicators and Thresholds (2012/13 to 2016/17) ............................................. 62

2016/17 Annual Public Debt Bulletin-November 2017 iii

List of Figures

Figure 1: World Economic Growth (1983-2018).................................................................................... 3 Figure 2: Updated World Economic Growth (2009-2016) ..................................................................... 3 Figure 3: Global Inflation ....................................................................................................................... 4 Figure 4: Yields on Ten Year Government Bonds in Advanced Economies.......................................... 5 Figure 5: GDP Growth in the Advanced and EMDEs ............................................................................ 6 Figure 6: Yields on 10 Year Government Bonds in EMEs ..................................................................... 7 Figure 7: Exchange Rate Movements of Major Currencies (Percent change/ US$) ............................... 7 Figure 8: Sectoral Real GDP Analysis (Percent of Growth Rates) ......................................................... 8 Figure 9: Lesotho's Current Account Evolution ................................................................................... 10 Figure 10: Evolution of the Fiscal Balance (2014-2020) ...................................................................... 11 Figure 11: Lesotho's Annual Inflation Rate .......................................................................................... 12 Figure 12: Lesotho and South Africa's Inflation ................................................................................... 12 Figure 13: Exchange Rate Movements (2014/15-2016/17) .................................................................. 14 Figure 14: Nominal Exchange Rate of Loti against Major Trading Currencies ................................... 14 Figure 15: Structure of Public Debt ...................................................................................................... 16 Figure 16: Overall Fiscal Balance as a Share of GDP .......................................................................... 17 Figure 17: Gross Financing Requirement (as a Share of GDP) ............................................................ 18 Figure 18: Public Debt Performance for 2016/17 ................................................................................. 21 Figure 19: Public Debt Stock during 2012/13-2016/17 ........................................................................ 22 Figure 20: Aggregate Debt Stock as a Share of GDP ........................................................................... 22 Figure 21: External Debt Performance by Components 2016/17 ......................................................... 22 Figure 22: Outstanding External Debt by Maturities 2012/13-2016/17 ............................................... 23 Figure 23: Government Debt Service Ratio .......................................................................................... 24 Figure 24: Average Time to Maturity on Government Debt Portfolio (Yrs) ........................................ 26 Figure 25: Share of Short-Term Debt to Total Debt by Remaining Maturity ....................................... 26 Figure 26: Redemption Profile of Government Debt Portfolio (Maloti Million) ................................. 27 Figure 27: Currency Composition of Debt Portfolio (as a % of Total Debt) ........................................ 28 Figure 28: Average Time to Refixing on Government Debt Portfolio (Yrs) ........................................ 29 Figure 29: Proportion of Instruments in Total Domestic Debt ............................................................. 32 Figure 30: Gross Issuance of Government Securities (Millions of Maloti) .......................................... 33 Figure 31: Net Issuance of Govt. Securities (2013/14-2016/17) .......................................................... 34 Figure 32: Treasury Bonds vs. Treasury Bills ...................................................................................... 34 Figure 33: Weighted Average Yield on Issuances in Govt. Securities (Percent) ................................. 35 Figure 34: Bid-Offer Ratios on Issuances of Government Securities (2016/17) .................................. 35 Figure 35: Proportion of Holding of Government Securities by Sectors .............................................. 36 Figure 36: Outstanding T-Bills by Sector (Millions of Maloti) ............................................................ 37 Figure 37: Holding of T-Bills by Participants ...................................................................................... 38 Figure 38: Treasury Bonds by Tenor as at March 2017 ........................................................................ 38 Figure 39: Outstanding Stock of T-Bonds by Sector (Millions of Maloti) ........................................... 39 Figure 40: Outstanding Stock of T-Bonds by Sector (% of Total Stock of T-Bonds) .......................... 40 Figure 41: Total Disbursements on External Loans (US$ million) ...................................................... 42 Figure 42: Composition of Disbursements by Major Creditors (2016-17) ........................................... 42 Figure 43: Evolution of External Debt .................................................................................................. 44 Figure 44: External Debt by Creditor Category (2014/15) ................................................................... 46 Figure 45: External Debt by Creditor Category (2016/17) ................................................................... 46 Figure 46: Outstanding External Debt by Major Creditors (2016/17) .................................................. 47 Figure 47: External Debt by Maturities ................................................................................................ 47 Figure 48: External Debt by Currency Composition (2013/14) ............................................................ 48 Figure 49: External Debt by Currency Composition (2016/17) ............................................................ 49

2016/17 Annual Public Debt Bulletin-November 2017 iv

Figure 50: External Debt by Economic Sector (2016/17) ..................................................................... 49 Figure 51: Debt Burden Indicators as at March 2017 ........................................................................... 61 Figure 52: Trends in CPIA Rating for Lesotho ..................................................................................... 61

2016/17 Annual Public Debt Bulletin-November 2017 v

ACKNOWLEDGEMENTS

This 2016/17 Annual Debt Bulletin has been prepared by the Public Debt and Aid

Management Department (PDAMD) of the Ministry of Finance (MoF) under the excellent

leadership of the Minister of Finance— Honourable Dr. Moeketsi Majoro, M.P, and with

technical support of the European Union (EU) funded component II of the Public Financial

Management Reform Project (PFMRP) which intends to achieve transparency and

effectiveness of policy measures reflected in the Annual Budget.

In particular, the Department wish to specifically acknowledge the tremendous amount of

technical support provided by the Key Expert II—Mr. McCarthy Phiri of the EU funded

components of the PFMRP especially in providing all the necessary technical guidance and

hands-on support to the PDAMD staff all throughout the analytical and report compilation

process.

The Department also wish to register its sincere gratitude to PFMRP Secretariat for rendering

all the necessary coordination support to this reform initiative.

Finally, the Department wish to specially thank for and acknowledge the tremendous efforts,

team work and strong dedication that its staff has demonstrated all throughout the process.

2016/17 Annual Public Debt Bulletin-November 2017 vi

LIST OF ABBREVIATIONS

ADF African Development Fund

BOP Balance of Payments

CBL Central Bank of Lesotho

CDS Central Depository System

CMA Common Monetary Area

CPI Consumer Price Index

DOD Disbursed Outstanding Debt

DSA Debt Sustainability Analysis

EMBI Emerging Market Bond Index

EMDE Emerging Markets and Developing Economies (EMDEs)

EU European Union

EUD European Union Delegation

FDI Foreign Direct Investment

FSDS Financial Sector Development Strategy

GDP Gross Domestic Product

GoL Government of Lesotho

IDA International Development Association

IMF International Monetary Fund

MEFMI Macroeconomic and Financial Management Institute of Eastern and

Southern Africa

MPMD Macroeconomic Policy and Management Department

MoDP Ministry of Development Planning

MoF Ministry of Finance

MTDS Medium-Term Debt Strategy

NIR Net International Reserve

NPV Net Present Value

MTFF Medium-Term Fiscal Framework

NSDP National Strategic Development Plan

PDAMD Public Debt and Aid Management Department

SADC Southern Africa Development Community

SACU Southern African Customs Union

SDR Special Drawing Rights

SOE State-Owned Enterprises

SSA Sub-Saharan Africa

UK United Kingdom

USA United States of America

VAT Value Added Tax

WB World Bank

WEO World Economic Outlook

2016/17 Annual Public Debt Bulletin-November 2017 vii

EXECUTIVE SUMMARY

Background

Like other developing countries, Lesotho faces numerous economic challenges emanating

from the recent global slowdown in economic activity which has mostly manifested in

prolonged budget and current account deficits, as well as rapid accumulation of public debt.

Consequently, comprehensive public debt management has emerged an important focus area

for policymakers particularly in terms of fiscal policy to curb vulnerabilities that could

worsen economic and fiscal conditions in the outlook. It is against this background that the

Public Debt and Aid Management Department (PDAMD) in compliance with the Public Debt

Loans and Guarantees Act No.15 of 1967, as amended by Act No.14 of 1975 and No.1 of

1976 and the Local Loans Act of 2001 and consistent with good international practice

presents its 2nd annual debt bulletin to provide an assessment of the current public debt status.

The ultimate objective of Lesotho’s public debt management is to meet the Central

Government’s financing requirements at the minimum cost with a prudent degree of risk,

while the secondary objective is to facilitate Government’s access to financial markets and

support development of a well-functioning vibrant domestic debt market. In this regard, the

Government of Lesotho (GoL) through the Ministry of Finance (MoF) and the Central Bank

of Lesotho (CBL) is committed to pursuing prudent debt management strategies aimed at

ensuring that public debt remains within sustainability thresholds consistent with good

international practices. The GoL’s strategy is currently outlined in the 2016/17 Medium Term

Debt Strategy (MTDS) which is subject to annual updates. The medium term strategy is to

lower the level of public and publicly guaranteed debt to less than 45 percent of GDP and this

entails adherence to prudent debt management and a reduction in the overall fiscal deficit

from the current level of over 6 percent to below 3 percent of GDP.

Macroeconomic Context

In 2016/17, global economic activity slowed registering the weakest growth of 3.2 percent

since the global financial crisis. This was particularly more evident in advanced economies

largely attributed to shocks such as United Kingdom (UK)’s Brexit, rebalancing in China,

inventory adjustment and weak investment in the United States of America (USA) and

among commodity exporters. The slow and even global and regional recovery continues to

have negative effects on Lesotho’s export potential. In particular, persistent economic

slowdown in South Africa resulted into retrenchments and flat remittances of Basotho mine

workers’ income and a significant drop in exports and Southern African Customs Union

(SACU) revenues.

Consequently, and coupled with the setback of drought as well as low implementation of the

Government development budget, domestic economic output continued to decline to about

2.1 percent of GDP in 2016/17 although marginally up by 0.4 basis points from a 1.7 percent

growth in 2015/16. However, in 2017/18, real GDP growth is projected to recover to about

4.7 percent and expected to remain strong in 2018/19 through 2019/20, mainly reflecting a

rebound of strong growth in the mining, manufacturing and construction sectors. During the

period under review, annual inflation averaged 6.5 percent, but is set to moderate to around

4.4 percent over the medium term—in line with South Africa’s inflation projections. Interest

rates are also expected to follow the same trend due to the linked monetary policy. On

another hand, the prime lending rate has remained stable at 7 percent.

2016/17 Annual Public Debt Bulletin-November 2017 viii

However, the current account balance further deteriorated in 2016/17 to a deficit of 15.6

percent of GDP up from 8.6 percent of GDP in 2015/16 and is expected to worsen mainly

because of a significant drop in current transfers—notably SACU receipts as well as the

deteriorating income account and trade balance. Consequently, official international reserves

also deteriorated to 4.5 months from a high of 6.1 months observed in 2015/16. And from the

fiscal sector, the 2016/17 approved Budget marginally increased by 3.2 percent against the

backdrop of a significant drop in SACU receipts which culminated into a large deficit of and

financing requirement of 10.5 percent of GDP or M3, 144.6 Million.

Public Debt Performance in 2016/17

To successfully finance the deficit and meet the country’s development needs, during the

2016/17 fiscal year, the GoL continued to borrow mostly externally with new loans averaging

just below M 300 million while domestic borrowing averaged around M60 million over the

four fiscal years beginning 2013/14. The bulk of the loans were to finance various capital

projects while domestic liabilities were mostly securities to support monetary policy by CBL.

Despite an significant increase in borrowing requirements, the country’s aggregate public

debt portfolio decreased by 8.6 percent points from M 13,479 million to M 12,378 million

and 41.3 percent of GDP (Figures 18-20). The decrease is largely attributed to the

appreciation of Loti against other major currencies1 in the second and last quarter of the

period under review. As at the end of March 2017, total accumulated Government debt

amounted to about M 12.4 billion, of which external debt constituted 89.0 percent while

domestic debt the remaining 11.0 percent of total debt (Table 9).

As at the end of March 2017, the outstanding external debt valued at M 11.0 billion declined

by 14.0 percent due to the effect of exchange rate valuation although it increased marginally

in US dollar terms. However, it significantly peaked at M 12.8 billion at the end of March

2016 due to a sharp depreciation of Loti against major foreign currencies. During the

reporting period, at total of M 669 million of new disbursements and M 437 million of loan

redemptions were also made. Interestingly, the period registered a steady increase of

disbursements relative to a sharp increase of 75 percent over the same period in 2013/14 and

2014/15 mainly as a result of high disbursement rate of the Metolong Dam Water Supply

Project. Currently, most of Lesotho’s external debt portfolio is mainly owed to official

multilateral and bilateral creditors.

In contrast though, domestic debt increased moderately by 6.1 percent during the reporting

period. Consequently, since 2011/12, the debt stock has increased by almost 77 percent

resulting into more than double annual debt servicing costs (i.e. interest and commitment

charges, and principal repayments) from M 368 million to M 785 million. Currently, a large

proportion of domestic debt is held by commercial banks although the holdings by non-bank

investors such as pension funds and insurance companies continue to grow. A large

proportion of outstanding Treasury bonds will mature in the short to medium term horizon as

a result of issuance of short term non-benchmark bonds during the fiscal year.

Similarly, gross issuances of Government securities declined in nominal terms by 21.6

percent to M 1,115 million. The issuances were largely constituted by T-Bills at a gross value

of M 1,043 million representing 93.5 percent of the total issuance. There was also a marginal

1 The Loti appreciated against all major currencies like the US Dollar, the Euro, the Pound Sterling and baskets of currencies

like the AfDB Unit of Account and the Special Drawing Rights

2016/17 Annual Public Debt Bulletin-November 2017 ix

increase in the issuance of T-Bills increased by 7.2 percent during the period. However,

issuance of T-Bonds significantly declined by 84.0 percent to M 72.0 million, representing

6.5 percent of total issuance (Figure 30). Notwithstanding, the issuance ratio of T-Bills to T-

Bonds as at March 2017 largely indicate a relatively successful restructuring of the domestic

debt portfolio to minimize refinancing risk and promote development of the market, although

the structure needs further review and improvements.

On another note, the 2016/17 fiscal year registered a slight increase in the share of debt

maturing within one year to 8.9 percent of total portfolio as at the end of March 2017 relative

to 7.6 percent registered at the end of 2015/16 fiscal year. This simply indicates that the

current debt portfolio seem to be relatively more exposed to rollover risk compared to

previous fiscal year, although it still remains manageable and sustainable over the medium-

term. The deterioration of the refinancing risk metrics is particulary attributed to a larger

share of external debt maturing during 2018/19 fiscal year.

Furthermore, the period under review recorded decline in the debt service payments by 31

percent to M743.7 million relative to 2015/16 fiscal year, largely owing to the absence of any

redemption of T-Bonds (Table 10) during the period. Comparatively, this was a positive

development as debt service increased by 15 percent from M1, 467.4 in 2012/13 to M1, 693.9

in 2013/14 before stabilising in 2014/15 and then peaking up at an all-time high value of M

2,092.0 in 2015/16 since 2012/13. This increase was mainly attributed to debt service of non-

concessional loans and the appreciation of the Loti against major foreign currencies.

However, in nominal terms under the domestic debt component, there was slight increase in

debt service that was attributed to the high interest rates in the domestic market particularly

during the first half of the fiscal year emanating from inflationary pressures. Notwithstanding,

debt service payments measured as a proportion of government revenue (excluding grants),

also declined from 7.5 percent in 2015/16 to 5.6 percent in 2016/17.

However, considering the fact that significant proportion of Lesotho’s debt portfolio is made

up of external debt which is denominated in foreign currency, the country’s debt remains

very vulnerable to foreign exchange risks emanating from volatile changes in global

economic fundamentals. Consequently, interest payments and exchange rates constitute a

significant portion of the portfolio risk albeit higher interest rates accruing from domestic

since external debt is contracted on concessional terms. Notwithstanding, from a

sustainability perspective based on the results of the 2016 Debt Sustainability Analysis

(DSA), Lesotho’s debt burden indicators with the exception of Net Present Value (NPV) of

debt to GDP remain below the international thresholds thereby suggesting that the country’s

debt remains at a moderate risk of distress. However, based on the NPV ratio of 45.67

percent well above the Country Policy and Institutional Assessment (CPIA) Index (CPIA)

indicator of 40 percent, serious measures aimed at slowing down spending to gradually

narrow the deficit and subsequently limit future borrowing requirements are not an option.

In particular, there is an urgent need to: strengthen fiscal policy and implement serious fiscal

consideration measures aimed at reducing and reprioritising spending, and redirecting

recurrent allocations towards capital projects; develop and engage prudent public debt

strategies, and embrace best international practices in debt management in order to maintain

sustainable debt levels. Most importantly, the GoL must vigorously pursue its ongoing

reforms in public debt management particulary in developing domestic debt capital markets

and strengthening governance, legal and regulatory and institutional frameworks for public

debt management as well as staff capacity of the PDAMD in debt management operations.

1

1. INTRODUCTION

1.1 Background

With alarming levels of fiscal deficits and the corresponding increase in financing

requirements across many countries, and learning from the lessons of the 2008/9 global

financial crisis, prudent public debt management has therefore become an important notion to

maintain sustainable debt levels. Like other several low income countries, Lesotho is not an

exception to this notion. Consequently, GoL remains committed to achieving the ultimate

objectives of country’s public debt management—to meet the Central Government’s

financing requirements at the minimum cost with a prudent degree of risk, and facilitating

Government’s access to financial markets and supporting the development of a well-

functioning vibrant domestic debt market. In particular, this requires that the Government

pursue prudent debt management strategies aimed at ensuring that public debt remains within

sustainability thresholds consistent with good international practices.

In line with the above, the Government has recently developed its 2016/17 Medium Term

Debt Strategy (MTDS) which is subject to annual updates. In its proposed strategy the

Government intends to lower the level of public and publicly guaranteed debt to 45 percent of

GDP, adhere to prudent debt management and a reduce in the overall fiscal deficit from the

current level of over 6 percent to below 3 percent of GDP. Achieving these performance

benchmarks requires the support of regular and accurate debt analytical reporting and

sustainably analyses. It is also a good international practice to carry out routine debt

analytical exercises and produce periodical reports that are utilised to proactively mitigate

current and future challenges and risks of debt.

Therefore, consistent with good international practice and in compliance with the provisions

of the Public Debt Loans and Guarantees Act No.15 of 1967, as amended by Act No.14 of

1975 and No.1 of 1976 and the Local Loans Act of 2001 the Public Debt and Aid

Management Department (PDAMD) presents its 2nd annual debt bulletin covering the fiscal

period 2016/17 as one of the tools to provide an assessment of the current status of public

debt. This annual public debt bulletin herein is prepared with the purpose of analysing the

current status of Lesotho public debt in the context of the effects of the latest macroeconomic

developments for 2016/17.

This report is structured into nine main sections. The first and second sections provides an

introduction and sets the legal framework and institutional arrangements that underpin public

debt management in Lesotho. Sections 3-8 discusses the latest macroeconomic developments,

current status of external borrowing and disbursements as well as detailed portfolio analysis

of both domestic and external debt, including debt service, risks, liability management and

debt sustainability. The final section entails conclusion and recommendations.

2016/17 Annual Public Debt Bulletin-November 2017 2

2. MACROECONOMIC CONTEXT

2.1 Global Economic Developments and Outlook

The year 2016 witnessed the weakest growth of 3.2 percent of GDP (Table 1) in the world

economic activity since the global financial crisis, especially in advanced economies largely

attributed to shocks such as United Kingdom (UK)’s Brexit, rebalancing in China, inventory

adjustment and weak investment in the United States of America (USA) and among

commodity exporters; slow-moving trends in demographics and productivity growth as well

as noneconomic factors, such as geopolitical uncertainties. The decline in global growth

largely emanated from a slowing down of advanced economies and overall stalling of growth

in the emerging market and developing economies (EMDEs). Deceleration in growth of

advanced economies by 50 basis points in 2016 from its previous year mainly resulted from

lower growth in the USA by 140 basis points despite a marginal recovery in the Euro Area.

Despite the slow start of the year, the second half of 2016 saw some pick-up in economic

activity particularly in advanced economies mainly as a result of the gradual recovery in

infrastructure and real estate investment in China, lower commodity prices, firms growing

more confidence about future demand and the ending of the inventory cycles in the USA

which started making positive contributions to growth with projections being 2.3 percent and

2.5 percent in 2017 and 2018 respectively, as opposed to 1.6 percent in 2016 (Figures 1 and

2). Notwithstanding, global growth is projected to increase from an estimated 3.2 percent in

2016 to 3.5 percent in 2017 and 3.6 percent in 2018 slightly above the October 2016 (WEO)

forecasts mostly triggered by buoyant financial markets, cyclical recovery in investment,

manufacturing and trade.

Table 1: Overview of World Economic Outlook Projections

Actual Estimates Projections

2015 2016 2017 2018

World Output 3.4 3.2 3.5 3.6

Advanced Economies 2.1 1.7 2.0 2.0

United States 2.6 1.6 2.3 2.5

Euro-Area 2.0 1.7 1.7 1.6

United Kingdom 2.2 1.8 2.0 1.5

Emerging Market and Developing Economies 4.2 4.1 4.5 4.8

Russia -2.8 -0.2 1.4 1.4

China 6.9 6.7 6.6 6.2

India 7.9 6.8 7.2 7.7

Emerging and Developing Europe 4.7 3.0 3.0 3.3

Brazil -3.8 -3.6 0.2 1.7

Source: IMF World Economic Outlook Update April 2017


Figure 1: World Economic Growth (1983-2018)

Source: IMF WEO, July 2017

Figure 2: Updated World Economic Growth (2009-2016)


Global Inflation Movements

The period under review witnessed some slow recovery in global inflation mainly as a result

of the increase in commodity prices since August 2016 (Figure 3). The increase in global

producer price inflation has been particularly marked, implying both the greater weight of

commodities in producer price indices (PPIs) when compared with consumer price indices

(CPIs) and their related significance as intermediate inputs in production. Notably, China’s

producer prices emerged from deflation after four years, implying higher prices of raw

material, efforts to reduce excess industrial capacity and recovering real estate investment.

On another note, global CPI increased as the retail prices of gasoline and other energy related

products increased. The uptick was strongly evident in the advanced economies, where 12-


month CPI stood marginally above 2 percent (more than double the average annual inflation

rate of 0.8 percent at the beginning of 2016). By contrast, core inflation has increased much

less—if at all—and remains well below central bank targets in almost all advanced

economies. Notwithstanding, in emerging market economies, there was a revival in headline

consumer inflation, as the impact of higher fuel prices started outweighing the downward

pressure from the fading of earlier exchange rate depreciations. Moreover, near- and longer-

term inflation expectations also remain subdued.

Figure 3: Global Inflation


Advanced Economies

The outlook for advanced economies is also expected to marginally improve for 2017 and

2018 with an increase leading to 2.0 percent in both years up from 1.3 percent in 2016.

Overall GDP growth in advanced economies was projected to remain robust, rising by 0.4

percentage point from 1.8 percent in 2014 to 2.2 percent in 2015. In USA in particular, GDP

was estimated at 3.0 percent in 2015, up from 2.5 percent recorded in 2014. And, the Euro

zone’s overall growth was expected to strengthen from the 1.0 percent in 2014 to 1.7 percent

in 2015, driven by several factors, including exchange rate depreciation, increased housing

investment and consumption, lower commodity prices, and excessive monetary interventions.

In spite of changes being so marginal to the global growth forecast for 2017 and 2018 since

the release of October 2016 WEO, meaningful adjustments to forecasts for country groups

and individual countries have been made. Consequently, in line with stronger-than-expected

momentum in the second half of 2016, the forecast envisages a much stronger rebound in

advanced economies.

With tumbling commodity prices in the last quarter of 2016, headline inflation rates slightly

recovered in advanced economies but core inflation rates remained broadly unchanged and

generally below inflation targets, reflecting still-weak wage growth. Inflation developments

in other EMDEs have been heterogeneous, although it picked up moderately in China,

reflecting differing exchange rate movements and idiosyncratic factors, with lower oil prices

continuing to have a sobering impact on inflation. Inflation in the Southern African region,

including South Africa increased partly due to impact of drought conditions on food prices.


The period under review also witnessed a moderate increase in long term nominal and real

interest rates in the US following the November 2016 general elections and the increase in

short-term interest rate by the Federal Reserve in December 2016 implying a stance of less

gradual normalisation of monetary policy. Similarly in the Euro Zone, Brexit uncertainties

resulted into to sharp increase in long-term interest rates in the UK. By contrast however,

interest rates in Euro Zone and Japan continued to register a decline despite accommodative

monetary policy stance. Consequently, Euro Zone long-term yields increased suggesting

elevated political and banking sector uncertainties. By the end of 2016, yields on 10 year US

Treasury bonds increased by 18 basis points compared to a decline of 42 and 22 basis points

in the German and Japanese bonds during the same period (Figure 4).

Figure 4: Yields on Ten Year Government Bonds in Advanced Economies


Emerging and Developing Economies (EMDEs)

Economic activity is also projected to pick up markedly in the emerging market and

developing economies. In particular, growth is projected to remain strong in China and many

other commodity importers advanced economies. This pick up is mostly attributed to

expected gradual improvement of conditions in commodity exporters experiencing

macroeconomic strains, supported by the partial recovery in commodity prices and primarily

driven by higher projected growth in the USA, where activity was held back in 2016 by

inventory adjustment and weak investment.

In emerging market economies, financial conditions were heterogeneous but generally

loosened, with lower long-term interest rates on local-currency bonds, especially in emerging

Asia (excluding China) and Latin America (Figure 5). Yields on 10 year government bonds

in South Africa declined by 72 basis points to 8.95 percent at the end of 2016. In contrast,

yields hardened by 20 basis points on 10 year government bonds in China. Policy rate

changes since August 2016 also reflected this heterogeneity—with rate hikes in Mexico and

Turkey and cuts in Brazil, India, and Russia. Changes in EMBI (Emerging Market Bond


Index) spreads reflected a similar pattern with a tightening of spreads between 13 basis points

for China and 140 basis points for Latin America. Financial markets in most advanced

economies and EMDEs remained buoyant with higher asset valuations supported by

accommodative monetary policy and a low interest rate global environment.

Figure 5: GDP Growth in the Advanced and EMDEs

Source: IMF World Economic Outlook Update April 2017 (CPB Netherlands Bureau for Economic Policy Analysis; Haver Analytics;

Markit Economics; and IMF staff estimates)

Sub-Saharan Africa

In the Sub-Saharan Africa (SSA), a modest recovery is expected in 2017. In particular,

growth is projected to rise to 2.6 percent in 2017 and 3.5 percent in 2018 from a growth of

1.4 percent in 2016. The slow growth rate in 2016 was largely driven by specific factors in

the largest economies (such as Brexit), which faced challenging macroeconomic conditions.

Growth is expected to remain solid among non-resource-intensive countries. According to the

IMF Regional outlook 2017, CPIs are expected to decline from 11.5 percent in 2016/17 to -4

and -3.8 percent in 2017/18 and 2018/19 respectively.

Regional inflation is also set to gradually decelerate from its high level in 2016. The outlook

for the region, however, remains subdued: output growth is expected only moderately to

exceed population growth over the forecast horizon (2017/18 through to 2019/20), having

fallen short in 2016. Notwithstanding, growth in non-resource-intensive countries is expected

to remain robust, on the basis of infrastructure investment, resilient services sectors, and the

recovery of agricultural production

The period under review also saw heterogeneous financial conditions in the emerging market

economies (EMEs), although generally loosened, with lower long-term interest rates on local-

currency bonds, especially in emerging Asia (excluding China) and Latin America (Figure 6).

Yields on 10 year government bonds in South Africa declined by 72 basis points to 8.95

percent at the end of 2016. In contrast, yields hardened by 20 basis points on 10 year

government bonds in China (Figure 6). Policy rate changes since August 2016 also reflected

this heterogeneity—with rate hikes in Mexico and Turkey and cuts in Brazil, India, and

Russia. Changes in the Emerging Market Bond Index (EMBI) spreads also reflected a similar

pattern with a tightening of spreads between 13 basis points for China and 140 basis points


for Latin America. Furthermore, financial markets in most advanced economies and EMDEs

remained buoyant with higher asset valuations supported by accommodative monetary policy

and a low interest rate global environment.

Figure 6: Yields on 10 Year Government Bonds in EMEs


During 2016, with exception to Japanese Yen, the U.S. dollar appreciated against major

world currencies. The currencies of advanced commodity exporters also strengthened, as

commodity prices firmed up while the Euro and British pound weakened. Several EMDC

currencies depreciated substantially during the year in recent months—most notably the

Egyptian Pound, Nigerian Naira, Argentine Peso, Turkish lira and the Mexican peso as a

result of sharp non-resident portfolio outflows from emerging markets in the wake of the U.S.

election, following a few months of solid inflows. By contrast, currencies of the BRICS2

countries like Russian Rouble, Brazilian Lira and South African Rand appreciated

significantly recovering from their earlier downward fluctuations (Figure 7).

Figure 7: Exchange Rate Movements of Major Currencies (Percent change/ US$)

2 This an economic grouping of five emerging countries namely Brazil, Russia, India, China and South Africa.


The global tight and deteriorating economic growth conditions have exacerbated debt

accumulations across many countries3. According to April 2017 WEO the sub-Saharan

Africa region is no exception to the effects of global economic slowdown characterised by

high debt levels experienced largely accruing to high public spending, effects of drought, and

decline in commodity and oil prices. Lesotho like other low income countries (LICs) has also

been exposed to high debt levels for some of the reasons outlined above, but more

specifically to a decline in SACU receipts, huge wage bill, widening fiscal deficits, recalled

guarantees, and foreign exchange devaluations.

2.2 Domestic Economic Development and Prospects

2.2.1 GDP Growth

During 2016/17, real GDP growth marginally increased to 2.5 percent up from 1.7 percent in

2015/16. Notwithstanding the marginal improvement, this growth pattern remains below a

moderate growth of 3.1 percent that was registered in 2014/15 mainly because of reduced

output in both the secondary and the tertiary sectors (Figure 8). On the contrary however, the

primary sector registered a relatively stronger growth during the period under review.

In spite of the low output in the secondary and tertiary sectors, combined output growth was

estimated to have accelerated to 2.5 per cent in 2016/17 compared with a growth of 1.7 per

cent registered in 2015/16 (Table 2). This has had a positive effect on debt and debt ratios

since the increase in real GDP improves debt ratios which subsequently reflect the

Government’s repayment capacity. This acceleration was mainly as a result of improved

economic activity in both the secondary and tertiary sectors particulary in the last quarter of

the period under review, although the primary sector’s performance further deteriorated. The

fall in the primary sector was attributed to a contraction by the agriculture, forestry and

fishing resulting from the effects of prolonged drought. Some contraction was also registered

in the mining and quarrying subsectors.

Figure 8: Sectoral Real GDP Analysis (Percent of Growth Rates)

3 IMF World Economic Outlook, April 2017


Table 2: Selected Real Sector Economic Indicators 2013/14 – 2019/20

2.2.2 External Sector

Exports

Persistent economic slowdown in South Africa impacts negatively on the domestic economy.

In particular: the continuous loss of employment of Basotho mineworkers and thereby

reduction in remittances; reduction to the country’s exports destined for South African

markets as a result of low domestic demand; and the instability of SACU revenues. The

country’s export capacity continues to be adversely affected and limited by the slow and

uneven global and regional recovery. A decrease in export capacity and remittance income

has a serious adverse implication on the foreign exchange reserves and thereby the ability of

Government to smoothly repay its loans since most of external loans are denominated in

foreign currency.

Balance of Payments (BOP)

Lesotho’s external sector position continues to be characterized by persistent overall balance

deficit despite the various initiatives undertaken by the Government in its National Strategic

Development Plan (NSDP I) to grow and promote export base. The deepening of the overall

deficit is mainly attributed to the fact that Lesotho is a net importer of almost 80 percent of its

goods and services from South Africa.

The current account balance further deteriorated to a deficit of 15.6 percent as a share of GDP

up from 8.6 percent as a share of GDP in 2015/16, reflecting faster growth in merchandise


imports than exports. The persistent shortfall on the trade account was largely attributed to

increased domestic demand for foreign-produced intermediate and consumption goods. This

is coupled with the moderate/steady growth in exports value emanating from favourable

diamond prices after domestic currency depreciation.

The deficit is mainly caused by a combination of issues more particularly, a significant drop

in current transfers notably the SACU receipts as well as declining income account and the

deteriorating trade balance. The falling income account is driven by ever shrinking

employment opportunities for Lesotho’s migrant mineworkers in South Africa due to current

economic slowdown. However, instead of declining outright, the Miners’ total remittances to

the country are only stagnating (nominally) owing to compensating rewards from aggressive

unionised salary hikes that accrue to Miners who are still in jobs. Ultimately, diminishing

remittance income in real terms prompts Lesotho to find other sustainable foreign income

avenues in order to maintain balance of payments with the rest of the world.

From 2017/18 though the medium-term, the current account deficit is expected to continue to

worsen to an average of M4, 210.6 million or (-20% percent) as a share of GDP (Figure 9).

While SACU receipts are set to surpass expectations in 2017/18, they are not expected to

remain robust going forward due to bearish expectations of South Africa as well as Southern

African economic activities at large. However, textiles and diamond exports are expected to

slightly alleviate balance of payments distress, since their primary markets lie outside the

sub-region and usually benefit from weakening South African economy against other major

economies through currency depreciation.

Figure 9: Lesotho's Current Account Evolution

-10%-15%

-10% -8% -8% -10%

-21% -18% -21% -21% -22%

-56% -55%-62% -59% -62% -63% -66% -68% -66% -65% -62%

23%18% 16% 16% 16% 17% 15% 14% 13% 12% 11%

22% 22%

36% 35% 38% 36%29%

35% 32% 32% 29%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

FY10/11FY11/12FY12/13FY13/14FY14/15FY15/16FY16/17FY17/18FY18/19FY19/20FY20/21

Per

cen

t o

f G

DP

Lesotho's Current Account Evolution

Current Account Trade balance Income account Current Transfers


2.2.3 Fiscal Sector

Fiscal Balance

In 2016/17 the fiscal deficit as share of GDP widened to 7.8 percent exceeding the

sustainability dictates of less than 3 percent of GDP with a gap of 4.8 percent (M1400

million). Major fiscal imbalances leading to substantial deficits occur as a result: (a) Lower

than anticipated revenue collections; (b) SACU windfalls and/or shortfalls; (c) high pace of

maintaining expenditure to non-discretionary items (public service wage bill, Tsepong PPP,

and most recent short term hire of government fleet); and (d) Fictitious expectations on

budgetary allocations to capital expenditures that tend to undermine the fiscal balance

projections.

With expected recovery of SACU revenues in 2017/18, the deficit is projected to improve to

3.4 percent of GDP. However, the expected continuous dwindling of international reserves

recorded at 4.5 months in 2016/17 from a high of 6.1 months of imports cover observed in

2015/16, may push the deficit to consistently record in the danger zone through the medium

term averaging 4.8 percent of GDP (Figure 10).

Figure 10: Evolution of the Fiscal Balance (2014-2020)

3.4

-1.6

-7.8

-4.8 -5.0-4.5

-3.0 -3.0 -3.0 -3.0 -3.0 -3.0

2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

Fiscal Balance as % of GDP

Fiscal Balance Outturn Fiscal Balance Benchmark

2.2.4 Monetary Sector

Inflation

In 2016/17, inflation is expected to average 6.6 percent mainly due to increase in cost of food

and non-alcoholic beverages (Figure 11). The higher the rate of inflation forces interest rates

to rise hence increasing the Government’s cost of debt service. However, the trend is

projected to decline marginally in 2017/18 to 6.3 percent and an average of 4.4 percent

mainly due to a moderation in prices of food and non-alcoholic beverages as the effects of the

drought are expected to subside. In the medium term, inflation developments are expected to

mirror those in the region, especially in South Africa, as Lesotho imports a greater part of its

consumption goods from South Africa (Figure 12).


Figure 11: Lesotho's Annual Inflation Rate

Figure 12: Lesotho and South Africa's Inflation

Source: Statistics South Africa, Lesotho Bureau of Statistics

Interest Rates

Lesotho’s interest rates largely follow the same trend as those in South Africa. The prime

lending rate has remained stable at 7 percent. Commercial bank prime lending rate averaged

11.7 percent from June to December 2016. The 1-year deposit rate remained unchanged at

3.5 percent over the period under review. The 91-day Treasury-Bill slightly declined by 5

basis points between the 2nd and 3rd quarter of 2016/17. While the large margin between the

lending and the deposit rates imply low lending by commercial banks, despite high demand

for start-up and working capital, high interest rates on the other hand adversely affect debt

service as they tend to increase the cost which subsequently puts strain on the Government

budget.


Foreign Reserves

Official international foreign reserves in months of import cover were recorded at 6.1 months

in 2015/16, mostly influenced by high SACU revenues. They deteriorated to 4.5 months in

2016/17 as a result of a sharp decline in SACU revenues and a draw down in reserves to

finance the high deficit of 7.8 percent of GDP realized in the same year.

The deteriorated situation is likely to continue as reserves are projected to further dwindle to

an average of 3.6 months between 2017/18 and 2019/20, far much lower than the

Government’s desired policy benchmark. The underlying factor for this outlook is that the

CBL’s official reserve assets are directly influenced by Government deposits at CBL which

are in turn driven by fiscal performance, in particular SACU revenues. Consequently any

poor Government revenue performance especially SACU receipts have a significant adverse

effect on the CBL’s official reserve assets. Therefore, the Government’s failure to meet the

precautionary target of 5 months in 2016/17 portrays a very distressing outlook, making the

country more susceptible to fiscal and external shocks.

Exchange Rate Developments

During the period under review, the average Loti/US Dollar exchange rate was recorded at M

14.71. Loti depreciated against the US Dollar by an average of 19 percent between 2014/15

and 2015/16 fiscal years before a further decline of 7 percent in 2016/17 fiscal years (Table 3

and Figure 13). The main cause of the downward movement on the exchange rate was,

among others, low commodity prices, tighter external financial conditions including

normalization of USA monetary policy, rebalancing process in China and economic distress

related to geopolitical factors in a number of emerging markets and low income countries.

Notwithstanding, in the last quarter of the period under review, the Rand (Loti) registered a

slight appreciation against its major trading currencies relative to the third quarter of the

fiscal year. In particular, the Rand strengthened by 4.7 per cent against the US dollar, 5.5 per

cent against the Pound and 5.9 per cent against the Euro (Figure 14). The slight appreciation

was mostly supported by increased capital inflows into the Republic of South Africa as

investors continued to search for higher yields, more particularly from emerging market

economies which was coupled with the gradual narrowing of the South African current

account deficit, easing inflationary pressures and a rebound of commodity prices. The

forecast in the medium term is that the Loti exchange to the dollar will eventually stabilise.

Table 3: Mid-Market Exchange Rates


Figure 13: Exchange Rate Movements (2014/15-2016/17)

0

5

10

15

20

25

Exchange Rate Movements 2014-2016

2014 2015 2016

Figure 14: Nominal Exchange Rate of Loti against Major Trading Currencies


3. PUBLICE DEBT PERFORMANCE AND MANAGEMENT

3.1 Overview

The ultimate objective of public debt management of the GoL is to meet the government’s

financing needs at the possible minimum cost and an acceptable prudent degree of risk,

whilst supporting the development and deepening of the domestic financial markets. Like in

many other countries, public debt management policy and operations are guided and

managed by specific legal, regulatory and institutional arrangements established by the

Government. Therefore, this section briefly discusses these arrangements.

3.2 Legal and Regulatory Arrangements for Debt Management

Public debt management policy and operations are currently guided by the provisions of the

Public Debt Loans and Guarantees Act No. 15 of 1967 as amended by Act No. 14 of 1975

and No. 1 of 1976. The Act provides absolute authority to the Minister of Finance to

negotiate loans both externally and domestically and enter into loan agreements with

creditors on behalf of the government with the approval of cabinet. On external borrowing,

the law also establishes a clear ceiling within which borrowing is constrained. In particular,

the law provides that ‘the total sum outstanding at any time in respect of a loan shall not

exceed the audited total recurrent revenue for the last three years as recorded in the latest

available estimates of revenue presented to the National Assembly’.

And on domestic debt, the law provides that the sum of outstanding domestic debt shall not

exceed one third (1/3) of the audited total recurrent revenue for the last three years as

recorded in the latest available estimates of revenue presented to the National Assembly. The

Loans and Guarantees Act (LGA) of 1967 and its amendments have been reviewed and the

new law is currently being developed in line with modern debt management practices.

3.3 Institutional Arrangements for Debt Management

The management of public debt of the GoL is mandated to the Public Debt and Aid

Management Department (PDAMD)—one of the key Departments of the MoF. To

successfully deliver on this mandate the department is among other several functions

responsible for undertaking DSA and preparing the MTDS and a Borrowing plan on annual

basis. The department provides technical advisor support to the Minister through: leading all

the loan negotiations with creditors; analysing and advising the Minister accordingly

regarding costs and risks associated with any potential borrowing. It also regularly analyses

and monitors the country’s debt levels in order to ensure borrowing is always fiscally

sustainability in Lesotho.

The Department is currently organised into the Back Office, Middle Office and Front Office.

The back office is mainly responsible for the administration of the full life cycle of a contract/

instrument from the signature to its full payment. The middle office conducts the debt

analysis required for assisting the executive debt management levels in designing a debt

strategy and a framework for risk monitoring and control. The front office applies the

guidelines when negotiating new loans or issuing new instruments. Figure 15 below briefly

depicts the current structure of the Department.


Figure 15: Structure of Public Debt

The PDAMD is headed by the Director who is supported by three Debt Managers who are in

turn responsible for a Senior Debt Officer each. These are supervisors of three debt officers

who are supported by assistant debt officers.

The Department also collaborates and works very closely with other departments and

agencies. These mainly include the: Macroeconomic Policy and Management Department

(MPMD) of the MoF; Treasury Department; Budget Department; Legal Department;

Ministry of Development Planning (MoDP); Central Bank of Lesotho (CBL) and line

Ministries responsible for the implementation of government development projects.

In particular, the PDAMD works very closely with the MPMD and Budget Departments in

the determining the financing gap and fiscal sustainability of the current and future

borrowings. The Department also reports to Treasury on debt service and disbursements on a

monthly basis. The Treasury Department is responsible for opening all Government accounts

including the loan accounts managed by the implementing agencies as well as Government

expenditure which includes debt service.

Outside the MoF, the Department with the MoDP which is responsible for appraising and

approving project proposals to be funded in line with Government policy priorities and

spending objectives. In this regard, the PDAMD is thereafter mandated to source funding for

the approved projects. On the other hand, the Department works with the CBL which acts as

a fiscal agent for the Government by acquiring domestic debt. It achieves this by selling

through an auction, the treasury bills and bonds, as well as redeeming them. The CBL’s

principal objective is to achieve and maintain price stability, thus plays an important role in

debt management. In particular, the CBL issues treasury bills for monetary policy purposes

and bonds for market development purposes. To achieve this, the CBL uses an automated

system—Central Depository System (CDS) that records all transactions from domestic

market operations. The Bank also effects all debt service transactions and reports back to the

MoF.

Finally, after signing of loan agreements, the Department works with line ministries who are

directly responsible for implementing the new government projects and report on

disbursements, hence their relation with the Department.


3.4 Financing of the 2016/17 Budget Deficit

3.4.1 Overall Fiscal Balance

As mentioned under section 2 of the report, the 2016/17 Budget was from the onset, under

sustainability grounds, faced with tight fiscal restructuring and consolidation conditions as

the fiscal balance worsened from surplus in 2014/15 to a forecast giant deficit of 7.8 percent

of GDP in current prices 2016/17 (Figure 16). It dawned with an estimated 2016/17 fiscal

deficit exceeding the sustainability dictates of less than 3 percent of GDP with a gap of 4.8

percent (M1400 million). Moreover, it was projected to record consistently in the danger

zone through the medium run averaging 4.8 percent of GDP.

Figure 16: Overall Fiscal Balance as a Share of GDP

3.4

-1.6

-7.8

-4.8 -5.0-4.5

-3.0 -3.0 -3.0 -3.0 -3.0 -3.0

2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

Fiscal Balance as % of GDP

Fiscal Balance Outturn Fiscal Balance Benchmark

3.4.2 Financing of the Budget Deficit

During 2016-17 fiscal year, Lesotho’s fiscal deficit surged and the resultant gross

Government financing requirement more than doubled to about 10.5 percent of GDP or M3,

144.6 Million. Table illustrates the trend of the deficit and corresponding growth in the

financing requirement. While the aggregate debt levels reached almost 50 percent of GDP at

the end of March 2017, gross Government borrowings declined to M 689.5 million during

2016/17 fiscal year, meeting only up to 21.9 percent of the gross financing requirement

(Figure 17), mainly through external borrowings (Table 4). During the year, draw down of

government deposits covered the remaining 78.1 percent of the financing need, thereby

reducing significantly the balances accumulated during 2014-15 fiscal year.


Figure 17: Gross Financing Requirement (as a Share of GDP)

Table 4: Gross Borrowings of Government in Maloti (2016/17)

2013-14 2014-15 2015-16

2016-17

M’000 M’000 M’000 M’000

Fiscal Balance -604.2 850.9 -416.0 -2,706.6

Redemption 478.4 313.0 799.8 437.9

Gross Financing Requirement 1,082.6 -537.9 1,215.8 3,144.6

Gross Borrowing 749.1 1,382.7 1,108.7 689.5

External Borrowing 726.7 1,268.2 647.8 607.5

Domestic Borrowing 22.4 114.5 460.9 82.0

Other Net Financing 333.5 -1,920.7 107.1 2,455.1

Note:

(a) The redemptions the above table include only net redemptions on Treasury Bills. This is ideally meant to avoid

double counting on short-term debt obligations during any fiscal year.

(b) In Lesotho Treasury Bills are exclusively used for monetary policy purposes and not used for government

financing operations.

In 2016/17 the GoL made M2, 471.5 million drawdown of deposits at the CBL to finance a

deficit of M2914.9 million. The GoL also contracted new loans amounting to M 689.5

Million. Notwithstanding, the realised recovery of SACU receipts in 2017/18 coupled with

other newly found revenue sources, means fiscal deficit is expected to improve to 3.4 percent

of GDP which will require financing drawdown of M1, 176.2 at CBL. While depletion of

reserves is expected to continue, in the short to medium term, it can neither be sustained

without threatening the Rand /Loti peg nor exposing the country to external shocks.

The financial liabilities also increased by M443.4 million in 2016/17 relative to M303.6

2015/16. They are further expected to increase by M421.4 million by the end of 2017/18. The

trend is expected to break only in 2019/20 when the debt rollover becomes positive.


3.5 Aggregate Debt Portfolio in 2016/17

3.5.1 New Borrowings

The GoL continued to borrow mostly externally with new loans averaging just below M300

million while domestic borrowing averages around M60 million in the four years beginning

2015/16 (Table 4). The bulk of the loans were to finance various capital projects while

domestic liabilities were mostly securities to support monetary policy. Besides the continued

accumulation of liabilities (loans) the net worth of the government increased by an average of

M2, 158.6 million in the review period.

Table 5: New Loans Contracted in 2016/17

Project Name Agreement Date Amount Signed Creditor

1. Southern Africa TB and Health

System Support Program

26 July 2016 SDR 10,700,000.00 IDA

2. Social Assistance Program 15 June 2016 SDR 14,200,000.00 IDA

3. Public Sector Modernization 15 April 2016 SDR 7,300,000.00 IDA

4. Education Quality for Equity 10 June 2016 SDR 18,100,000.00 IDA

5. Additional Financing for Social

Assistance

01 January 2017 SDR 14,600,000.00 IDA

6. Lesotho Economic Diversification

Support Project

02 February 2017 BUA 5,000,000.00 ADF

7. Urban Distribution Rehabilitation

and Transmission Expansion

Project

17 February 2017 BUA 7,780,000.00 ADF

In the absence of a formal debt policy, the GoL currently borrows on concessional terms

bearing a minimum grant element of 35 percent. Table 6 below represents the average terms

of the new loans contracted during 2016/17.

Based on the five year record of average terms of new loans, it is apparent that interest rates

of new debt is gradually increasing because recent borrowings have been contracted on much

more stringent conditions (Table 6). For instance, the World Bank (WB) and ADF have re-

categorised Lesotho as a blended4 country. The grace period has declined due to the

unfavorable terms posed by the traditional creditors such as WB. Grant element has also

decreased by 33.6 percent from 54.8 percent in 2015/16 to 36.38 percent in 2016/17.

Table 6: Average Terms of New Loans

2012/13

2013/14

2014/15

2015/16

2016/17

Interest ( percent 2.2 0.6 1.2 1.2 1.14

Maturity (Yrs) 20.9 37.3 28.3 25.1 25.43

Grace Period (Yrs) 5.8 10.0 7.1 6.3 5.23

Grant Element ( percent) 30.0 57.1 45.3 54.8 36.38

4 Interest rates revised from 0.75 percent to 1.25 percent, Grace period from 10years to 5 years and maturity

from 40 years to 25 years. Service fee of 0.75 has been introduced.


3.5.2 New Grants

While the Government preference lies with the grants, access to WB and International

Monetary Fund (IMF) grants is aligned to the credit risk ratings. Lesotho is currently

classified as a country at moderate risk of debt distress therefore entitled to 50 percent grants

allocation. The overall grant element for the entire public debt portfolio is around 40 percent

(Table 7). Although the MoF does not maintain records of all grants provided to GoL, the

PDAMD only maintains the grants records that are tied to project loans. Table 5 below

reflects the grants that were singed during the year 2016/17.

Table 7: New Grants Secured in 2016/17

Project Name Amount Signed Creditor

Scaling Renewable Energy Investment Plan Project US$ 300,000.00 IDA

Small Holder Agricultural Productivity Project SDR 4,330,000.00 IFAD

Lesotho Economic Diversification Support Project BUA 2,200,000.00 ADF

Emergency Humanitarian Relief Assistance to Drought

Affected Populations

US$ 1,000,000.00 ADF

Drought Relief Assistance RMB 18,000,000.00 China

3.5.3 Disbursements of External Loans (in Maloti)

In 2016/17 new disbursements of M 669 million and loan redemptions of M 437 million were

made. Disbursements increased steadily over the period in review compared to a sharp

increase of 75 percent over the same period in 2013/14 and 2014/15. The increase in

disbursements reported is largely associated with high disbursement rate of the Metolong

Dam Water Supply Project. However, the trend was reversed in the following financial year

2015/16 when the rate sharply decreased from M1, 270.2 to M590.2 in 2016/17, which was

also as a result of the same project being phased out.

On the other hand, the year under review also saw a steady increase in the principal

repayments from the base year compared to sharp hike of 43 percent from M312.9 in 2014/15

to M448.6 in 2015/16. The interest payments also followed the same pattern of the principal

repayments as they also increased steadily from another sharp increase of 48 percent in the

same year of 2014/15. Table 8 below depicts disbursements of external loans, principal

repayments, interest and other payments over the period under review.

Table 8: Disbursements of External Loans

2012/13

2013/14

2014/15

2015/16

2016/17

Disbursements 643.4 725.4 1,270.2 651.1 590.2

Principal Repayments 247.5 312.4 312.9 448.6 435.4

Interest Payments 84.8 109.6 130.1 192.2 209.9

Other Payments 0.7 1.2 7.8 1.3 1.5


3.5.4 Disbursed Outstanding Debt

During the 2016/17 fiscal year, the aggregate public debt decreased by 8.6 percent from M

13,479 million to M 12,378 million and 41.3 percent of GDP (Figures 18-20). The decrease

was mainly attributed to the appreciation of Loti against other major currencies5. As at the

end of March 2017, total accumulated Government debt amounted to about M 12.4 billion,

with external debt representing 89.0 percent of total debt while domestic debt constituting the

remaining 11.0 percent (Table 9).

The outstanding external debt valued in local currency at the end of March 2017 at M 11.0

billion declined by 14.0 percent due to exchange rate valuation effect although it increased

marginally in US dollar terms. It peaked at M 12.8 billion at the end of March 2016 due to a

sharp depreciation of Loti against major foreign currencies. By contrast, domestic debt

increased moderately by 6.1 percent during 2016-17. Consequently, since 2011/12, the debt

stock has increased by almost 77 percent. Correspondingly, over the same period the annual

debt servicing costs (i.e. interest and commitment charges, and principal repayments) has

more than doubled from M 368 million to M 785 million.

Table 9: Government Outstanding Debt (Maloti Million)

Debt Category

March

2013

March

2014

March

2015

March

2016

March

2017

M’000 M’000 M’000 M’000 M’000

Government Debt 8,456.8 9,866.0 11,199.3 14,104.3 12,386.2

External Debt 7266.0 8818.5 10,031.8 12829.5 11032.6

Domestic Debt 1190.8 1047.5 1167.5 1274.8 1353.6

Figure 18: Public Debt Performance for 2016/17

5 The Loti appreciated against all major currencies like the US Dollar, the Euro, the Pound Sterling and baskets of currencies

like the AfDB Unit of Account and the Special Drawing Rights


Figure 19: Public Debt Stock during 2012/13-2016/17

0,000.0

5,000.0

10,000.0

15,000.0

2012/13 2013/14 2014/15 2015/16 2016/17

Public debt 2012/13-2016/17

External debt Domestic debt Total

Figure 20: Aggregate Debt Stock as a Share of GDP

Figure 21: External Debt Performance by Components 2016/17


As illustrated in the figure 22 below, 2016/17 reflects 88.2 percent of debt maturing over 10

years. Debt maturing within 3 years is 0.3 percent. During the years 2012/13 to 2015/16 there

was an average increase of 21 percent over the years because of increase in debt stock levels.

Conversely, between 2015/16 and 2016/17 over ten year maturities decreased by 12.90

percent triggered by Loti appreciation against other currencies. However, maturities of less

than 3 years decreased by 0.25 percent on average from 2012/13 to 2013/14. In the

subsequent years there was a further decline of 50 percent because of retirements of

commercial loans.

Figure 22: Outstanding External Debt by Maturities 2012/13-2016/17

00.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

2012/13 2013/14 2014/15 2015/16 2016/17

External Debt Outstanding by Maturities 2012/13 - 2016/17

Less than 3years 5 to 10 years Over 10 years

3.5.5 Total Debt Service Payments

The period under review saw debt service payments declining by 31 percent to M743.7

million relative 2015/16 fiscal year, thanks to the absence of any redemption of Treasury

Bonds (Table 10). Comparatively, this was a positive development as debt service increased

by 15 percent from M1,467.4 in 2012/13 to M1,693.9 in 2013/14 before stabilising in

2014/15 and then peaking up at an all-time high value of M 2,092.0 in 2015/16 since

2012/13. This increase was attributed to debt service of non-concessional loans. On a positive

note however, the total debt service payments declined by 25 percent to M1,578.5 in 2016/17

due to the appreciation of the Loti against major foreign currencies.

Similarly, debt service payments measured as a proportion of government revenue (excluding

grants), also declined from 7.5 percent in 2015/16 to 5.6 percent in 2016/17. It actually

stabilised after a peak-up in 2015/16 at an all-time high, mainly as a result of significant

depreciation. The period also witnessed a slight improvement in the external debt service as a

percentage of exports of goods and services, declining from 5.1 percent in 2015/16 to a 4.3

percent in 2016/17.


Figure 23: Government Debt Service Ratio

Table 10: Total Debt Service 2012/13-2016/17

2012/13

2013/14

2014/15

2015/16

2016/17

External debt M’000 M’000 M’000 M’000 M’000



Total External Debt

Service

332.3 422.0 443.0 640.7 645.3

Domestic debt

Principal Repayments 1,031.1 1,172.0 951.3 1,352.8 835.5


Total Domestic Debt

Service

1,135.0 1,271.8 1,040.9 1,451.2 933.1

Total Principal 1,278.6 1,484.4 1,264.2 1,801.4 1,270.9

Total Interest 188.8 209.5 219.7 290.6 307.6

Total Debt Service 1,467.4 1,693.9 1,483.9 2,092.0 1,578.5

Note: Redemptions on Treasury Bills during any specific fiscal year are reported on a net basis to avoid double

counting issues.


3.6 Cost/Risk Characteristics of Public Debt

Public debt cost simply refers to the annual interest payments and the impact of changes in

exchange rates. Debt risk constitutes the changes in future cost as a result of unexpected

macroeconomic conditions, and their impact on the budget. These may include refinancing

risk, exchange rate risk, interest rate risks, contingent liabilities, guarantees, and operational

risks. It is therefore one of the key objectives of debt management to consistently identify and

manage both costs and risks. The following subsections, tables and charts demonstrate the

refinancing risks and market risks (currency and interest rate risks) on the existing debt

portfolio.

3.6.1 Interest Rate Cost

Arising from the current Government external debt strategy of contracting external loans on

highly concessional terms to minimise interest rate cost, the current total weighted average

interest rates of total debt is 2.1 percent largely because of low external debt interest rates

which constitute 1.9 percent of the entire portfolio. The domestic debt interest rates are higher

than the external debt interest rates at 8.1 percent. This implies that even though domestic

debt constitutes about 10 percent of the entire debt portfolio it carries the highest interest cost

to the Government. As illustrated in table 11 at the end of March 2017, the total weighted

average interest rate of total debt increased to 2.4 percent from 2.1 percent mainly as a result

of the hardening of interest rates on both external and domestic debt.

While interest rates on external debt currently at 1.8 percent is significantly lower than the

average domestic interest rate of 7.5 percent, the overall increase in both external and

domestic interest rates, coupled with a rising share of domestic debt is slowly driving the

average interest rate cost on the total debt portfolio upwards.

3.6.2 Average Time to Maturity and Refinancing Risks

The average time to maturity (ATM) of the entire portfolio has slightly declined by 0.5 years

to 10.1 years as at the end of the reporting period relative to the previous year. This simply

means that on average, it takes about 10 years before the Government debt matures. The

decline in the ATM is mainly as a result of the tightening of lending terms by the traditional

creditors such as WB, ADF and IMF.

On the other hand, domestic debt portfolio presents the shortest average time to maturity of

3.2 years, and therefore is exposed to rollover risk. This then brings down the overall average

maturity of the Government debt portfolio to about 10.2 years. Additionally, domestic debt

falling due within one year seems to be very high thereby making it more risky.

To the slight contrary through, external debt which constitutes 89 percent of the entire debt

portfolio is largely contracted on fixed interest terms, while only 5.2 percent of it is on

variable terms and is due to be refixed within one year. Domestic debt is all contracted on

fixed interest terms, and the only time it susceptible to interest refixing is when 40.1 percent

that is due within 1 year is subject to refinancing.


Figure 24: Average Time to Maturity on Government Debt Portfolio (Yrs)

The period under review also witnessed a slight increase in the share of debt maturing within

one year to 8.9 percent of total portfolio as at the end of March 2017 relative to 7.6 percent

registered at the end of 2015/16 fiscal year. This simply implies that the current debt portfolio

seem to be relatively more exposed to rollover risk compared to previous fiscal year,

although it still remains manageable and sustainable over the medium-term. The deterioration

of the refinancing risk metrics is mostly attributed to a larger share of external debt maturing

during 2018/19 fiscal year. This seems to be compounded by the high share of Treasury Bills

in the domestic debt portfolio which has kept the debt falling due within one year on a rising

trend in recent years. Notwithstanding, the volume of debt maturing within one year during

2018-19 when measured as a share of GDP constitutes 3.7 percent during 2017/18, which is

relatively better than the previous year’s higher growth in terms of GDP.

Figure 25: Share of Short-Term Debt to Total Debt by Remaining Maturity

Short term debt 9%

Long term debt91%

Proportion of Short-Term to Total Debt (2016/17)

Short term Long term


3.6.3 Debt Redemption Profile

Lesotho faces more budgetary pressures in the year 2017/18 mainly because a significant

proportion of the country’s debt is due for repayment, with a 7-year domestic bond expected

to be redeemed in by the end of the fiscal year. Notwithstanding, the current debt portfolio

redemption profile indicates a well spread out maturity of the debt obligations extending till

2057/58 mainly owing to the concessional loans from IDA and ADF.

However, the redemption profile indicates some peak-up of repayments during 2021/22 and

2022/23 fiscal years. It is therefore advisable that the Government exercise extra caution in

taking decisions about future borrowings particulary to avoid such maturity periods to

attenuate potential future refinancing risks. Figure 26 demonstrates the debt repayment over

its maturity in the medium to long-term.

Figure 26: Redemption Profile of Government Debt Portfolio (Maloti Million)

0

200

400

600

800

1,000

1,200

201

8

202

0

202

2

202

4

202

6

202

8

203

0

203

2

203

4

203

6

203

8

204

0

204

2

204

4

204

6

204

8

205

0

205

2

205

4

Redemption profile of total debt

External Domestic

3.6.4 Foreign Exchange Risk As at the end of the period under review, the Lesotho’s public debt portfolio seem to be more

exposed to foreign exchange risk given that it is largely foreign currency denominated debt

which constitutes almost 89.0 percent of the total debt. While there was a slight improvement

in the share of local currency debt to 11.0 from 10.9 percent of total debt as at the end of

March 2016, the foreign currency denominated debt remains high and so is the level of

foreign exchange risk.

Currently, Special Drawing Rights (SDR) represents the largest exposure at 39.1 percent,

followed by the US Dollar at 15.0 percent, Chinese Yuan at 5.2 percent, Euro at 4.9 percent

and Japanese Yen at 3.8 percent of the total debt. Other currencies mainly from the Middle

Eastern countries like the Kuwait Dinar, Saudi Riyals and UAE Dirhams make up 8.5 percent


of the debt portfolio (Figure 27).

Figure 27: Currency Composition of Debt Portfolio (as a % of Total Debt)

Consequently, with the current pegged exchange rate regime with the South African rand

under the Common Monetary Arrangement (CMA), the share of the neutral currency

(including Loti and Rand) debt in the total government debt constituted 23.5 percent of the as

at the end of March 2017. This means that almost 76.5 percent of the total debt portfolio

remains exposed to foreign exchange risk. Therefore, it is high time the Government consider

using the various available debt instruments such as renegotiation, conversion and currency

swaps to limit and mitigate the current and possible future negative impact of foreign

exchange risk.

Notwithstanding, at the end of the period under review, the coverage of foreign exchange

reserves for the external debt maturing during 2017/18 fiscal improved to 4.6 from 3.4

months of import cover in the previous fiscal year.

3.6.5 Interest Rate Risk

The period under review also saw a slight increase in the share of fixed rate debt by 0.1

percentage points to 99.4 percent of the total government debt from its previous year with a

larger part of the increase being domestic debt. However, the dominant share of Treasury

Bills within the domestic debt portfolio resulted in 9.4 percent of the debt portfolio to be

exposed to interest rate risks within the next one year (Table 11).

Consequently, the risk metrics deteriorated compared to 8.2 percent of debt refixing in a year

at the end of March 2016— reflecting a rather moderate deterioration in the average time to

maturity in the external debt portfolio. During the period, the average time to refixing of the

total government debt portfolio also deteriorated. This indicates that on an average it would

take 10.2 years for the entire debt portfolio to assume new interest rates, which declined from

10.7 years in March 2016. Figure 28 below illustrates the average time to refixing on

Government Debt Portfolio in number of years.


Figure 28: Average Time to Refixing on Government Debt Portfolio (Yrs)

30

Table 11: Cost and Risks of existing Debt Portfolio by 2016/17

Debt Risk Indicators

External debt Domestic debt Total debt Mar-2016

Mar-2017 Mar-2016

Mar-2017 Mar-2016

Mar-2017

Amount (in millions of M) 12,829.5 11,032.6 1,274.8 1,353.6 14,104.3 12,386.2

Amount (in millions of USD) 844.6 852.6 83.9 104.6 928.5 957.2

Nominal debt as percent GDP 45.4 36.8 4.5 4.5 49.9 41.3

PV as percent of GDP

Cost of Debt

Interest payment ( percent of

GDP) 0.87

0.95

0.39

0.43

1.26

1.38

Weighted Av. IR ( percent) 1.66 1.79 7.32 7.53 2.1 2.4

Refinancing Risk

ATM (years) 11.4 11.1 3.7 3.2 10.7 10.2

Debt maturing in 1yr ( percent

of total) 3.7

4.5

46.5

44.5

7.6

8.9

Debt maturing in 1yr ( percent

of GDP) 1.7

1.7

2.1

2.0

3.8

3.7

Interest Rate Risk

ATR (years) 11.4 11.0 3.7 3.2 10.7 10.2

Debt refixing in 1yr ( percent

of total) 4.4

5.1

46.5

44.5

8.2

9.4

Fixed rate debt ( percent of

total) 99.3

99.3

100.0

100.0

99.3

99.4

Foreign Exchange

(FX) Risk

FX debt ( percent of total

debt) 1.0

1.1

100.0

100.0

91.0

89.1

ST FX debt ( percent of

reserves) 3.4

4.6

31

4. DOMESTC DEBT PERFORMANCE AND MANAGEMENT

4.1 Overview

Domestic debt simply refers to the amount of money raised by the Government in local

currency from its own citizens and residents. In the context of GoL, domestic debt consists of

two types of securities —Treasury Bills and Bonds with Treasury bills (T- Bills) having 4

tenors (91 days, 182 days, 273 days and 364 days) and Bonds having 2 tenors (7 years and 10

years). Currently, the issuance of T- bills is exclusively done for liquidity management

purpose with the proceeds from the issuance placed in blocked accounts maintained at CBL.

All government securities’ issuances are done by the CBL as its fiscal agent through an

auction process including its debt servicing payments and record keeping. Therefore,

Government domestic debt consists of stock of Government securities.

While the primarily purpose of the issuance of Government securities for fiscal policy

implementation, it also supports the effective monetary policy operations in terms of liquidity

management through regular mopping up of excess liquidity in the financial system as well as

support the development of domestic financial markets.

4.2 Total Domestic Debt

By the end of 2016/17 fiscal year, the aggregate domestic debt marginally increased by 6.2

percent to M1,353.6 million from M1,274.8 recorded by the end of 2015/16 fiscal year. In

particular, the stock of T-Bills slightly increased by 1.5 percent mainly owing to a significant

increase in the amount issued. However, the volume of T-Bills for different tenors remained

relatively stable during the period under review and over the last three years the stock has

constantly been maintained at around M 600 million mainly for monetary policy operations

of the CBL. Notwithstanding, the volume of T-Bonds seem to be gradually rising over recent

years with a moderate increase of 10.2 percent during 2016-17. However, the proportion of

T-Bills registered a marginal decline of about 2 percentage points to 44.5 percent of total

domestic debt, while the share of T-Bonds increased by the same extent to 55.5 percent.

Table 12 below and Figure 29 illustrate the distribution of the T-Bills and T-Bonds as a share

of the aggregate Government domestic debt by the end of the period under review.

Table 12: Stock of Government Securities (Millions of Maloti)

Type of

Government

Security

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

M’000

M’000 M’000 M’000 M’000 M’000

Total Domestic

1,176.0 1,190.8 1,047.5 1,167.5 1,274.8 1,353.6

T Bills

588.0 571.7 543.0 594.4 592.6 601.7

91 T Bill 104.0 95.0 77.3 78.0 75.0 76.4

182 T Bill 156.4 144.7 126.1 153.0 162.4 160.0

273 T Bill 141.0 137.9 140.0 154.0 154.9 157.8

364 T Bill 186.6 194.1 199.6 209.4 200.2 207.6

T Bonds

588.0 619.1 504.5 573.2 682.2 751.9


Figure 29: Proportion of Instruments in Total Domestic Debt

4.3 Issuance of Government Securities

During the period under review, gross issuances of government securities declined by 21.6

percent to M 1,115 million. Of this, T-bills amounting to M 1,043 million accounted for 93.5

percent of gross issuance. Issuance of T-bills increased by 7.2 during this period. In contrast,

issuance of T-bonds declined by 84.0 percent to M 72.0 million, representing 6.5 percent of

total issuance (Figure 30). On another note, the period under review recorded an even

distribution issuance of T-Bills between 91-day and 182-day T Bills constituting 30 percent

of total issuances, while issuance of 273-day and 364-day T bills accounted for 20 percent of

total issuances.

On another note, as at the end of 2016/17 fiscal year, the proportion of total issued T-Bonds

in total domestic debt slightly decreased by a percent in the proportion held by commercial

banks to 45 percent from 46 percent over the same period in 2015/16. By contrast, the

proportion of Treasury Bills in total domestic debt increased to 55 percent from 54 percent in

2015/16 due to increased proportion held by commercial banks. Furthermore, the issuance of

T-Bonds was made through re-openings in two existing securities (LS000A1GR838 maturing

in 2021 and LS000A1GZ7WO maturing in 2019) for M 40 million and M 32 million

respectively.

Notwithstanding the increasing bid-offer ratios for T-Bonds, it still remained below that of T-

Bills during the year under review. Figure 30 illustrates the proportion of both treasury bills

and treasury bonds to total domestic debt for the year 2015/16 and 2016/17. And given the

frequent redemption of the Government T-Bills, its rollover ratio reached almost a 100

percent during fiscal year, resulting into a net issuance of M3.0 million. Notwithstanding, due

to non-redemptions of T-Bonds during the fiscal year and with some moderate issuances, its

issuances only amounted to M72 million.


Figure 30: Gross Issuance of Government Securities (Millions of Maloti)

Table 13: Net Issuance of Government Securities (Millions of Maloti)

Issuances

2013/14

2014/15

2015/16

2016/17

T Bills Net Issuance: 6.6 61.5 -34.3 3.0

Gross Issuance 1,032.8 1,029.0 973.0 1,043.0

Gross Redemption 1,026.2 967.5 1,007.3 1,040.0

T Bonds Net Issuance: -114.5 68.4 109.1 72.0

Gross Issuance 15.5 68.4 449.1 72.0

Gross Redemption 130.0 0.0 340.0 0.0


Figure 31: Net Issuance of Govt. Securities (2013/14-2016/17)

Figure 32: Treasury Bonds vs. Treasury Bills

T.Bills55%

T.Bonds45%

T.Bonds vs T.Bills

2016/17

Another positive development during 2016/17 fiscal year relates to the issuance of both T-

Bills and T-Bonds which were made at relatively higher yields compared to the issuances of

2015/16 fiscal year. This is clearly evident in the weighted average yield for T Bills issued

which ranged between 6.78-7.84 percent in 2016-17 as compared to a range of 6.60–7.25

percent during the previous year. The T-Bonds, registered a weighted average yield of 9.41

percent relative to 8.48 percent in the previous fiscal year, all thanks to the subsiding inflation

rate beginning last quarter of 2016. Figure 33 below illustrates the trend in the weighted

average yield on issuances of Government securities between the period 2013/14 and

2016/17.

T.Bills54%

T.Bonds46%

T.Bonds vs T.Bills

2015/16


Figure 33: Weighted Average Yield on Issuances in Govt. Securities (Percent)

4.3.1 Issuance Ratio Performance

Another important development during the 2016/17 fiscal year with regarding to Government

securities issuance programme worth highlighting is that T-Bonds received a relatively better

response from investors as compared to T-Bills. In particular, the bid offer ratio for T-bonds

doubled to 1.6 times in 2016-17 while the bid-offer ratio for all types of T-Bills declined to a

range of 2.05–2.44 compared to a range of 2.31–2.71 in the previous fiscal year. T-Bonds

were issued in two tenors of 7yrs and 10yrs.

On another hand, within T-Bills, the registered bid-offer ratio was higher for longer tenors,

thereby reflecting a market preference for longer-term than shorter term securities.

Notwithstanding the increasing bid-offer ratios for T-Bonds, it was still below that of T-Bills

during the fiscal year.

Figure 34: Bid-Offer Ratios on Issuances of Government Securities (2016/17)


4.4 Holding of Government Securities

As per the data in table 14 below, in the year 2016/17, the commercial banks held the largest

proportion at 62 percent of the total outstanding GoL debt securities. The remaining 38

percent was shared amongst the non-bank sector in which individual persons held the largest

proportion of 26 percent. This was followed by insurance companies and CBL with 6 percent

less than a percent respectively. Table 14 and figure 35 below provide a summary of the

distribution of the holding of the government securities by sector.

Table 14: Proportion of Holding of Government Securities by Sectors

Sector

2012/13

2013/14

2014/15

2015/16

2016/17

percent

percent percent percent percent

Banking

Commercial Banks 71.4 69.1 63.6 68.0 62.3

Central Bank of Lesotho

0.0

0.0 0.0 0.0 0.0

Non-Banking

Insurance Company 11.6 8.8 11.3 9.0 12.4

NBFI 0.4 0.0 0.0 0.0 0.0

Parastatal Organisation 1.9 2.2 2.0 5.0 4.4

Individual 7.9 11.8 14.0 14.9 17.2

Private Organisation 6.1 7.2 7.4 2.2 2.4

Society 0.6 0.9 1.7 0.9 1.2

Total 100.0 100.0 100.0 100.0 100.0

Figure 35: Proportion of Holding of Government Securities by Sectors


4.4.1 Stock of Treasury Bills

Outstanding T-Bills by Sector

In Lesotho market participants or investors in domestic debt generally consist of two

categories which are the banking sector and non-banking sector. The banking sector mainly

comprise commercial banks and CBL6 while the non-banking sector constitutes of insurance

companies, parastatals, individual citizens and residents, private organisations, society and

other non-bank financial institutions.

In general, from 2012/13 – 2016/17 there has been an increase in the volume of issuance of

T-Bills. Treasury Bills issued to the banking system declined from M 430 million to M373

million. The Non-bank sector increased from M120 million to M231 million. Currently, the

banking sector holds the larger of share of the T-Bills. Figure 36 below illustrates the holding

structure of Treasury Bills in nominal terms (Millions of Maloti) by sector for the financial

years 2012/13 to 2016/17

Figure 36: Outstanding T-Bills by Sector (Millions of Maloti)

429.17

390.06406.33 394.7

372.64

120.87 130.94

187.93 197.78231.24

550.04521

594.26 592.48 603.88

0

100

200

300

400

500

600

700

2012/13 2013/14 2014/15 2015/16 2016/17

Banking System Non-Bank Sector Total

Outstanding T-Bills by Participant

As at the end of 2016/17, the banks held the largest proportion of the outstanding government

T-Bills at 62 percent of the total stock. The remaining percentage of 38 percent is shared

within the non-bank sector, with the individual private investors holding the largest

proportion of 26 percent. This is followed by insurance companies with 6 percent, parastatals

and private organisations with 3 percent each and CBL with less than a percent. Figure 37

6 The central bank holding of government securities results from the early redemption option provided to securities when any

specific security reaches three-fourth of its maturity.


below illustrates the distribution of the holding of T-Bills by participant category by the end

of the period under review.

Figure 37: Holding of T-Bills by Participants

62%

0%0%

6%0%

26%

3% 3%

Holding of T-Bills by Participants (2016/17)

Commercial Banks

CBL

NonBnk Financial Institution

Insurance Companies

Parastatals

Persons

Private Orgs

Society

4.4.2 Stock of Treasury Bonds

Outstanding T-Bonds by Tenor

Treasury bonds have been issued in two tenors of 7yrs and 10yrs benchmark bonds (Figure

38). The bigger share was held in 10yrs bond with 52 percent, and 7yr bond constituted 48

percent. The 7yrs bonds mature in two phases in 2019 and 2022, while the 10yr bond matures

in 2021 and 2025. Another important point to highlight is that the composition of the stock of

T-Bonds by tenor as at the end of March 2017 is classified into four series with one

representing 20.2 percent of the stock maturing in two years; another 30.3 percent maturing

in five years; 27.5 percent maturing in six years and; 20.1 percent maturing in nine years.

Figure 38: Treasury Bonds by Tenor as at March 2017

52%48%

Treasury Bonds by Tenor - 2016/17

7yr Bond

10yr Bond


Outstanding T-Bonds by Sector

The banking system held more Treasury bonds as opposed to the non-bank system. Table 15

below shows holding of T-Bonds in Millions of Maloti for the fiscal years 2012/13 to

2016/17.

Table 15: Outstanding Treasury Bonds by Sector

Sector 2012/13 2016/17 Change

Amount Amount percent

Banking System 404.99 471.29 16.4 percent

Non-Bank Sector 213.6 281.2 31.6 percent

Conversely, the holding composition of T-Bonds increased in both banking and non-banking

sectors (Figures 39 and 40). From 2012/13 to 2016/17 the bonds held by banking sector

increased by 16 percent, while non-banking sector by 32 percent. On aggregate, T-Bonds

increased by 22 percent.

Figure 39: Outstanding Stock of T-Bonds by Sector (Millions of Maloti)

404.99

317.87 336.47

471.7 471.29

213.6186.2

236.3210.1

281.2

618.59

504.07

572.77

681.8

752.49

0

100

200

300

400

500

600

700

800

2012/13 2013/14 2014/15 2015/16 2016/17

Banking System Non-Bank Sector Total


Figure 40: Outstanding Stock of T-Bonds by Sector (% of Total Stock of T-Bonds)

5. EXTERNAL DEBT PERFORMANCE AND MANAGEMENT

5.1 Overview

The GoL predominantly relies on foreign sources, including from multilateral institutions to

finance its budget deficit. In particular, multilateral investment banks have traditionally been

and will continue to be strategic creditors. They offer loans on concessional and semi-

concessional terms, usually to fund specific investment projects and also, in the form of

budget support.

Among foreign sources of financing, the GoL has recently extended its focus on bilateral

creditors who are becoming increasingly important to Lesotho mostly because they offer

semi-concessional loans, almost invariably on a project-linked basis. In the absence of a

formal debt management policy7 to guide its operations, the GoL continues to borrow on

concessional terms bearing a minimum grant element of 35 percent. The overall grant

element for the entire public debt portfolio is about 38 percent (table 17).

5.2 Changes in Average Terms of Loans and Commitments

The period under review saw a marginal increase in the average interest rate of new loans by

0.1 percent to 1.1 percent relative to the previous reporting period. Historical trends of the

last five fiscal years also indicate that the average interest rate of new debt is gradually

increasing mainly owing to recent stringent borrowings conditions placed by the major

7 The GoL is currently in the process of developing a new debt management policy to guide its borrowing operations.


lenders—World Bank and AfDB particulary with their re-categorisation of Lesotho as a

blended country.

Consequently, the grace period continues to decline to 5.2 years albeit a marginal

improvement in the maturity period to about 25.4 years during 2016/17 fiscal year which

subsequently decreased the grant element of the borrowings during 206/17 by 33.6 percent

from 54.8 percent in 2015/16.

Table 16: Average Terms of New Loans Contracted in 2016/17

2012/13

2013/14

2014/15

2015/16

2016/17

Interest ( percent 2.2 0.6 1.2 1.2 1.14

Maturity (# of Yrs) 20.9 37.3 28.3 25.1 25.43

Grace Period (# of Yrs) 5.8 10.0 7.1 6.3 5.23

Grant Element ( percent) 30.0 57.1 45.3 54.8 36.38

Table 17: New Grants Contracted during 2016/17

Ref:

Project Name

Amount Signed

Creditor

1 Scaling Renewable Energy Investment Plan Project US$ 300,000.00 IDA

2 Small Holder Agricultural Productivity Project SDR 4,330,000.00 IFAD

3 Lesotho Economic Diversification Support Project BUA 2,200,000.00 ADF

5.3 Disbursements of External Loans

During the 2016/17 fiscal year, the rate of disbursements on external loans declined by

US$6.5 million (M40.3 million). In general, historical data in table 18 below clearly suggests

a continued trend of a decline in total disbursements of eternal loans over the last fiscal years.

Despite a moderate increase in the disbursements from multilateral loans primarily driven by

the International Development Association (IDA), the decline occurred largely as a result of

higher contraction in the provision of bilateral loans from the Middle Eastern countries which

was also compounded by lack of inflows on export credit as anticipated. Figure 41 below

illustrates the total disbursement of external loans by creditor category.

Table 18: Total Disbursements on External Loans

2012/13

2013/14

2014/15

2015/16

2016/17

US$‘000 US$‘000 US$‘000 US$‘000 US$‘000

Bilateral 9.1 15.3 24.0 9.3 0.7

Export Credit 0.0 6.6 15.9 2.3 0.0

Multilateral 70.0 49.9 72.9 37.2 41.6

Total 79.1 71.8 112.8 48.8 42.3

(In Maloti million) (M’000) (US$ Million) (US$ Million) (US$ Million) (US$ Million)

Total 643.3 726.8 1268.2 647.8 607.5


Figure 41: Total Disbursements on External Loans (US$ million)

Traditionally, multilateral creditors have always provided more disbursements compared to

other creditors with 98.3 percent of total disbursements in 2016/17, up from 76.2 percent in

2015/16 fiscal year. Of the total disbursements from multilateral creditors, the IDA

constituted the highest proportion with 52 percent of total disbursements, followed by

European Investment Bank (EIB) and Arab Bank for Economic Development in Africa

(BADEA) with 39 percent and 4 percent respectively (Figure 42). Tables 19 and 20 below

indicate all disbursements received by creditor in both US Dollars and Maloti.

Figure 42: Composition of Disbursements by Major Creditors (2016-17)


Table 19: Disbursements on External Loans by Creditors (US$ Million)

Creditors

2012/13

2013/14

2014/15

2015/16

2016/17

US$’000 US$’000 US$’000 US$’000 US$’000

Bilateral 9.1 15.3 24.0 9.3 0.7

Abu Dhabi Fund For Economic Development 0.0 3.4 6.8 6.3 0.7

Kuwait Fund for Arab Economic Dev. 4.6 5.5 7.4 1.9 0.0

People's Republic Of China 0.0 0.0 0.2 0.0 0.0

The Saudi Fund For Development 4.5 6.4 9.6 1.1 0.0

Export Credit 0.0 6.6 15.9 2.3 0.0

Export Import Bank of China 0.0 3.0 15.8 2.2 0.0

Import Export Bank of India 0.0 3.6 0.1 0.1 0.0

Multilateral 70.0 49.9 72.9 37.2 41.6

African Development Fund 3.6 0.2 0.5 0.0 0.7

Arab Bank For Economic Dev in Africa 3.4 5.2 5.8 1.9 1.8

European Investment Bank 18.3 20.4 48.9 16.4 16.3

International Development Association 1.5 1.9 11.4 16.8 22.0

International Fund For Agricultural Dev 1.0 0.4 0.8 0.5 0.8

International Monetary Fund 39.8 16.6 0.0 0.0 0.0

The Opec Fund For International Dev. 2.4 5.2 5.5 1.6 0.0

Total Disbursements 79.1 71.8 112.8 48.8 42.3

Table 20: Disbursements on External Loans by Creditors (Millions of Maloti)

Creditors

2012/13

2013/14

2014/15

2015/16

2016/17

(M’000) (M’000) (M’000) (M’000) (M’000)

Bilateral 76 159 263 127 10

Abu Dhabi Fund For Economic

Development 0 37 75 89 10

Kuwait Fund for Arab Economic

Developent

39.0 56.1 80.6 23.7 00.0



Export Credit 0 65 193 28 0



Multilateral 567 502 812 493 598


Arab Bank For Economic Development

in Africa

28.5 53.2 63.9 24.6 25.4

European Investment Bank 150 205 546 207 245


International Fund For Agricultural

Development

8 4 8 8 11


The Opec Fund For International

Development.

20.2 54.3 59.5 21.0 0.2

Total External Debt 643.3 726.8 1268.2 647.8 607.5


5.4 Evolution of External Debt During 2016/17 fiscal year, external debt increased by 0.9 percent to US$ 852.5 million over

the previous year. In local currency, external debt grew at an average rate of 21 percent

between 2012/13 and 2015/16. This increase can partially be attributed to new projects

contracted and to the depreciation of the Loti against major foreign currencies. From 2015/16

to 2016/17 the decline of about 14 percent from M 13,000 to M11, 021.5 respectively was

registered mainly as a result of the appreciation of the Loti against other foreign currencies.

Table 21 and figure 43 below, provide an illustration of external debt evolution between

2012/13 and 2015/16.

Table 21: External Debt Stock (US$ Million and Maloti Million)

Debt Category

2012/13

2013/14

2014/15

2015/16

2016/17

US$’000 US$’000 US$’000 US$’000 US$’000 Bilateral 40.7 53.3 69.4 74.8 69.9

Commercial Bank 06.8 05.6 04.5 00.0 00.0

Export Credit 46.1 49.8 63.2 60.5 55.7

Multilateral 692.4 724.0 691.9 709.4 726.9

Total 786.0 832.7 829.0 844.7 852.5

Debt in Maloti Million) (M’000) (M’000) (M’000) (M’000) (M’000)

Total 7,265.9 8,818.5 10,031.8 12,829.5 11,032.6

Figure 43: Evolution of External Debt

M 11,021.5

0,000.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0

2012/13 2013/14 2014/15 2015/16 2016/17

Mil

lion

s o

f M

alo

ti

External debt evolution 2012/13-2016/17

5.5 Total External Debt External debt has over the past five fiscal years increased by over 65 percent from M7,226

million in 2012/13 to M11,021 million in 2016/. Although the disbursed outstanding debt

(DOD) has declined in the financial year 2016/17, there has also been an increase in the

interest payments as they have more than doubled over the period. Continuous increase of

interest payments is mainly attributed to increased DOD. Table 22 below shows the increase

and total external debt stock in external debt over past five fiscal years.


Table 22: Disaggregation of External Debt Stock (Millions of Maloti)

2012/13

2013/14

2014/15

2015/16

2016/17

Elements of Debt M’000 M’000 M’000 M’000 M’000 DOD 7,266.0 8,817.2 10,032.5 12,834.2 11,021.5



Total Debt Service 332.3 422.0 443.0 640.7 645.3

Disbursements 643.4 725.4 1,270.2 651.1 590.2

5.6 The Structure of External Debt

5.6.1 External Debt by Creditor Category

In the period under review and over decades, multilateral creditors constitute the major

lenders to Lesotho representing 85.3 percent of the entire external debt stock increasing its

share by 1.3 percentage points over the previous fiscal year. Of the 85.3 percent multilateral

composition, the IDA and ADF constituted 41 percent and 22 percent respectively in

2016/17. The IDA and ADF constitute 26 percent and 15 percent respectively of the total

external debt stock in 2016/17. Table 23 below illustrates the DOD for external debt by

creditor category—bilateral, multilateral, export credits and commercial banks.

Table 23: Evolution of External Debt by Creditor Category

Category

2012/13

2013/14

2014/15

2015/16

2016/17

(M’000) (M’000) (M’000) (M’000) (M’000) Bilateral 376.4 565.1 840.4 1,134.8 905.5

Multilateral 6,400.6 7,665.4 8,372.7 10,779.4 9,394.0

Export Credit 425.8 527.2 765.1 919.3 721.4

Commercial Bank 63.3 59.6 54.3 0.6 0.6

Bilateral debt grew by over 200 percent from 2012/13 to 2015/16 as a result of increased

borrowing for the Metolong Dam Project which was under construction during the period.

However, it marginally declined by 20 percent between 2015/16 to 2016/17 largely due to the

appreciation of the Loti. Notwithstanding, the reported proportions are likely to increase in

the coming financial years due to the anticipated upgrading of the Moshoeshoe 1

International Airport that is to be jointly funded by BADEA, OPEC, KUWAIT Fund and Abu

Dhabi8.

On the other hand, export credits increased by almost 2 percent while Commercial bank

8 Note that the commercial bank debt from the DBSA was extinguished with the maturing of the Muela Hydro Power Project


borrowing which consists of only the Development Bank of Southern Africa (DBSA)

remained well below a percent in 2016/17 mainly due to the fact that commercial borrowing

was acquired for the Muela Hydro Power Project which is maturing this year (Figure 44).

Figure 44: External Debt by Creditor Category (2014/15)

8%1%

8%

83%

External Debt by Creditor Category

2014/15

Bilateral

Commercial Bank

Export Credit

Multilateral

The structure of debt by creditor category has not significantly changed over the years as

multilateral borrowing is still dominant though it increased by 2 percent from 83 percent in

2014/15 then to 85 percent in 2016/17. Export Credits increased by a percent, while

commercial bank borrowing decreased by a percent. On the other hand, bilateral borrowing

remained stable at 8 percent (Figure 45).

Figure 45: External Debt by Creditor Category (2016/17)

8%

85%

7%

0%

External Debt by Creditor Category

2016/17

Bilateral

Multilateral

Export Credit

Commercial

Bank


During the period under review, IDA remained the largest creditor with a share of 34.6

percent of total external debt. This was followed by ADF, EIB, IMF and Export Import Bank

of China (EIBC) at 18.6 percent, 14.9 percent, 7.6 percent and 5.9 percent respectively.

Figure 46 below illustrates the outstanding external debt by the major creditors.

Figure 46: Outstanding External Debt by Major Creditors (2016/17)

5.6.2 External Debt by Maturities

As at the end of March 17, the over 10 year’s maturities were dominant because traditional

creditors tend to give longer debt maturities. However, the 10 year maturity loans have

marginally declined in 2016/17 by 2 percent from 2015/16 as traditional creditors changed

their lending terms. A maturity of external debt is one key factor under scrutiny for proper

debt management. Consequently, globally, most Governments would prefer longer maturities

which would give enough time to prepare for debt service. Figure 47 below illustrates the

maturity profile of external debt.

Figure 47: External Debt by Maturities

00.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

2012/13 2013/14 2014/15 2015/16 2016/17

Oustanding External Debt by Maturities (2012/13-2016/17)

Less than 3years 5 to 10 years Over 10 years


5.6.3 External Debt by Currency Composition

Lesotho debt is mainly denominated in foreign currency—thus acquired debt comes in the

form of different currencies which exposes the country’s debt to the adverse effects of the

foreign exchange movements, which has often times raised the country’s aggregate debt

beyond unsustainable levels. Commitment currencies for most of the loans were made in

SDRs which constituted 44 percent of the entire debt portfolio. It is however imperative to

note that the commitment currency is not always the same as the repayment currency. The

‘other’ currencies not specifically mentioned in the chart comprise BUA, Yen, KWD, GBP

and SAR, to mention a few.

This therefore requires the appropriate mix of currencies to be made when contracting debt so

as to be in a position to minimize such risk. A diversified currency structure in debt is an

important element for hedging against exchange rate risks on the country’s external debt.

Figure 48 below shows the currency composition of the external debt as at the end of

2013/14.

Figure 48: External Debt by Currency Composition (2013/14)

EUR19%

US$23%

ZAR2%

SDR34%

YUAN7%

OTHER15%

External Debt by Currency Composition 2013/14

Figure 49 below illustrates the current currency composition of the entire external debt as at

March 2016/17 in comparison to the same status for the same period in 2013/14 to

demonstrate how overall external debt has evolved by currency composition and movements

over the period under review.


Figure 49: External Debt by Currency Composition (2016/17)

44%

17%

13%

6%

5%

15%

External Debt by Currency Composition

2016/17

SDR

US$

ZAR

YUAN

EUR

OTHERS

5.6.4 Debt by Economic Sector

Debt by economic sector shows the purpose for which a loan is taken and the sector in which

those funds are expected to be used. In 2016/17 water sector constituted the highest portion of

funds—29 percent of the total funds. This sector includes projects such as the Metolong Dam,

the Lesotho Highlands Water Supply Project and others. This was followed by the ground

transport sector with 15 percent and Education and training with 10 percent. The sector

named ‘other’ includes sectors that have rather small proportions allocated to it such as

budget support, industrial development, private sector development, rural development and

others. Figure 50 below illustrates the composition of debt by economic sector.

Figure 50: External Debt by Economic Sector (2016/17)

15%

10%

29%8%

8%

6%

6%

6%

12%

External Debt by Economic Sector 2016/17

Ground Transport

Education & Training

Water Supply

Health

Balance of Payments

Agriculture

Telecommunications

Environment

Others


5.7 External Debt Service During the period under review, there was a marginal decline 1.5 percent in terms of US

Dollar in the external debt service payments mainly owing to a decline in principal payments

which more than outweighed the increase in interest payments. Although, the overall debt

service payments in US Dollar terms declined marginally, it also increased marginally in

local currency by 0.6 percent as a result of cross currency movements during the period albeit

the strengthening of Loti against the major foreign currencies mainly the US Dollar.

On another hand, principal payments during fiscal year constituted the largest share of 66.8

percent of total debt service payments while interest payments represented the remaining 33.2

percent of the total debt service payments. It is also important to point out that the reduction

in principal payments was mainly as a result of the maturity of commercial debt in 2015/16

fiscal year.

Although principal payments in US Dollar terms seem to have maintained an uneven

distribution over the last five fiscal years ranging between US$28.1–32.6 million, interest

payments continue to depict a rising trend, increasing by 9.4 percent mainly owing to

unfavorable terms of concessional loans. Table 24 below illustrates the aggregate eternal debt

service payments by major creditor category during the period.

Table 24: External Debt Service Payments by Creditor Category (US$ Million)

Debt Service Payments

2012/13

2013/14

2014/15

2015/16

2016/17

US$’000 US$’000 US$’000 US$’000 US$’000

Principal Repayments

Bilateral 3.3 3.6 3.8 5.2 5.0

Commercial Bank 0.5 0.5 0.5 4.1 0.0

Export Credit 0.5 2.8 2.7 2.7 1.6

Multilateral 24.6 23.5 21.1 20.6 24.0

Total 28.9 30.4 28.1 32.6 30.6

Interest Payments

Bilateral 0.7 0.7 0.9 1.7 1.7


Export Credit 1.0 0.9 0.9 1.2 0.7

Multilateral 7.4 8.1 8.9 10.4 12.8

Total 10.2 10.6 11.5 13.9 15.2

Debt Service Payments

Bilateral 4.0 4.3 4.7 6.9 6.7


Export Credit 1.5 3.7 3.6 3.9 2.3

Multilateral 32.0 31.6 30.0 31.0 36.8

Total 39.1 41.0 39.6 46.5 45.8

(Total in US$ million)



Debt Service Payments 332.4 422.0 443.0 640.8 644.9


As at the end of March 2017, like the structure of external debt dictate, principal repayments

from multilateral creditors constituted the largest proportion with 78.4 percent of total

repayments. Based on the data in table 22, above this was followed by bilateral creditors and

export credit agencies at 16.3 percent and 5.2 percent respectively. Based on the multilateral

creditor perspective, IDA maintained the highest proportion with 31.7 percent of total

principal repayments during the reporting period, followed by ADF, IMF, EIB and OPEC at

18.0 percent, 9.2 percent, 6.2 percent and 5.2 percent respectively (Table 25). The remaining

proportion of debt service payments was shared between the bilateral creditors—Abu Dhabi

and Kuwait which contributed 5.9 percent each of total principal payments.

Table 25: Table Principal Repayments on External Debt by Creditors (US$ Million)

Creditor Category

2012/13

2013/14

2014/15

2015/16

2016/17

US$’000 US$’000 US$’000 US$’000 US$’000

Bilateral 3.3 3.6 3.8 5.2 5.0

Abu Dhabi Fund For Economic Development 0.0 0.0 0.0 1.8 1.8

Kuwait Fund for Arab Economic Development 1.4 1.4 1.7 1.8 1.8

Natexis South Africa 1.7 1.7 1.6 1.1 0.9




The Development Bank of South Africa 0.5 0.5 0.5 0.1 0.0

The Public Investment Commissioners 0.0 0.0 0.0 4.0 0.0

Export Credit 0.5 2.8 2.7 2.7 1.6



Multilateral 24.6 23.5 21.1 20.6 24.0


Arab Bank For Economic Dev in Africa 1.0 1.0 1.4 1.1 1.4



International Fund For Agricultural Dev 0.9 0.9 1.0 1.1 1.1


Nigeria Trust Fund 0.0 0.0 0.0 0.0 0.0

The Opec Fund For International Development. 0.8 0.8 0.8 1.2 1.6


Following the dictates of the principal payments above, multilateral creditors constituted the

largest share of the interest payments during the period with 84.2 percent. This was followed

by bilateral creditors and export credit agencies at 11.2 percent and 4.6 percent respectively.

Notwithstanding, within multilateral creditors, interest payments to EIB comprised the largest

share at 52.6 percent, followed by IDA at 14.5 percent and ADF at 7.9 percent of total

interest payments made during the fiscal year. Within bilateral creditors, Abu Dhabi and

Kuwait contributed 3.9 percent each of total interest payments. Tables 24, 25 and 26 and

provides principal payments, interest payments and total debt service payments in US Dollar


terms by different creditors.

Table 26: Interest Payments on External Debt by Creditors (US$ Million)

Creditor Category

2012/13

2013/14

2014/15

2015/16

2016/17

US$’000 US$’000 US$’000 US$’000 US$’000

Bilateral 0.7 0.7 0.9 1.7 1.7

Abu Dhabi Fund For Economic

Development 0.0 0.0 0.2 0.4 0.6

Kuwait Fund for Arab Economic

Development

0.4 0.4 0.5 0.6 0.6

Natexis South Africa 0.2 0.1 0.1 0.1 0.0




The Development Bank of South

Africa (DBSA) 0.2 0.1 0.1 0.0 0.0

The Public Investment Commissioners 0.9 0.8 0.7 0.6 0.0

Export Credit 1.0 0.9 0.9 1.2 0.7



Multilateral 7.4 8.1 8.9 10.4 12.8


Arab Bank For Economic

Development in Africa

0.5 0.5 0.6 0.6 0.6


International Development

Association

2.3 2.3 2.3 2.0 2.2

International Fund For Agricultural

Development

0.3 0.3 0.3 0.3 0.3


Nigeria Trust Fund 0.0 0.0 0.0 0.0 0.0

The Opec Fund For International

Development

0.2 0.2 0.4 0.5 0.5



6. CONTIGENT LIABILITY MANAGEMENT

6.1 Publicly Guaranteed Debt

Stock of Publicly Guaranteed Debt Government guarantees are loans whereby GoL is liable to

the debt obligation of the borrower should the borrower default. GoL provides loan

guarantees to several parastatals, textile companies as well as members of parliament and

other statutory bodies. These include the Lesotho National Development Corporation

(LNDC), Water and Sewage Company Lesotho (WASCO), Lugy’s Manufacturing (Pty) Ltd,

Tlotliso Holdings, and others, as presented in Annexure 1.

In 2016/17 a total of government guarantees amounted to M703.6 Million. Of this amount,

disbursed outstanding debt is M73, 471 Million and M35, 271 Million has been repaid by the

beneficiaries. Called guarantees, the money that GoL has paid due to failure of the borrower

to pay their debt is equal to M 197.3 Million.

6.2 On-Lending Arrangements The arrangement where a Central Government through the Ministry of Finance contracts

loans from external or domestic sources or uses tax revenue and lends it to public enterprises

is referred to as Government on-lending.

The basis for this lending arrangement is as follows:

(a) The object of a public enterprise is strategic and hence requires funding by

Government;

(b) In the case of a social welfare project that would be efficiently executed by a public

enterprise on behalf of the Government;

(c) The public enterprise has a weak balance sheet and cannot attract competitive funding

from external or domestic sources.

In recording on-lending transactions, the Central Government recognizes a liability and a

corresponding asset in its portfolio depending on the source of borrowing. Substantial default

by the borrowers of on-lent loans severely constrains efficient debt management, ultimately

impacting on debt sustainability. Such default calls for establishment of better institutional

processes and enhancement of transparency in on-lending operations as well as monitoring of

contingent liabilities to promote efficient management of costs and risks in government debt

portfolio

The Government lends or on-lends loans to state-owned-enterprises (SOEs) and other entities

for specific purposes consistent with its development policy objectives. The borrower is

obliged to pay interest and repay principal sums to government in accordance with the terms

and conditions agreed between the parties.

6.2.1 Stock of On-Lent Loans

During the period under review, the outstanding on-lent loans excluding arrears and interest

declined by around M 16,0 million from M 1,061 million to M 1,045 million. This was

mainly as a result of a reduction on new transactions. The table 27 below summarizes the

transactions and status by the end of the 2016/17 fiscal year.


Table 27: On-lending Arrangements as at March 2017

SOE/MDA/Project

Balance (M)

1st April 2016

Payments in 2016/17 (M)

Balance (M)

31 Mar 2017 Principal Interest

M’000 M’000 M’000 M’000

ODA 2nd Line of Credit 1,485,343 723,716 0 761,627

IDA Infrastructure 5,460,946 1,680,290 0 3,780,666

EIB M/S Printing 137,420 137,420 0 0

ADB Line of Credit 7,229,611 5,290,437 0 1,939,174

Basotho Cannery 905,013 905,013 0 0

Thetsane (Nieng Hsing) 260,000 260,000 0 0

Tikoe Factory Shells 51,000,000 0 0 51,000,000

CGM 21,000,000 6,000,000 0 15,000,000

Tikoe Phase 2 Factory Shells 202,789,827 0 0 202,789,827

Telecom National Network Phase

II

222,726,839 0 15,660,405 222,726,839

Telecom National Network Phase I 205,986,835 7,373,161 5,406,576 205,986,835

BADEA 132 Maseru Water Supply

I

63,023,315 0 0 63,023,315

BADEA 133 Maseru Water Supply

II

78,097,438 0 0 78,097,438

OFID 134 Maseru Supply II 85,500,487 0 0 85,500,487

IDA 2400 Infrastructure

Engineering

18,119,448 0 0 18,119,448

IDA 3995 Water Improvement

roject

48,814,092 0 0 48,814,092

Lesotho Electricity Supply Project 48,617,899 972,358 437,561 47,645,541

Total 1,061,154,513 23,342,395 21,504,542 1,045,185,289


7. DEBT STRATEGY AND DEBT SUSTAINABILITY

7.1 Medium-Term Debt Strategy

The GoL recently developed its Medium-Term Debt Strategy (MTDS) after several years,

without a well informed and properly documented debt management strategy. In 2016/17, the

Government continued with its implicit strategy of a status quo financing mix which largely

concentrated on externally highly concessional and semi-concessional instruments, with 60

percent from multilateral sources and 40 percent from bilateral sources. The GoL also

continued to resort to its domestic capital market although it remains a limited source of

financing given the limited size of the investor base for its treasury securities.

Notwithstanding, the Government expects that the over the medium to long term the market

will gradually grow. In particular, the GoL believes there is room to diversify investor base

by increasing the share of foreign investors looking for higher returns (due to Lesotho credit)

with an exposure to South African Rand currency risk (Loti is pegged to ZAR).

Consequently, the Government is currently evaluating market appetite for a 15-years T-Bond

which could be launched for the first time in the next three years.

However, with support from the IMF and World Bank, the Government prepared its first ever

the MTDS for 2016/179 to be updated every fiscal year which outlines the Government’s

future borrowing policy by evaluating the cost and risk characteristics of both the existing

public debt portfolio and alterative borrowing mix. In addition, the strategy incorporates

initiatives to develop a vibrant domestic debt market, it is yet to be updated for the 2017/18

fiscal year due to multiple technical reasons. In its MTDS, the GoL has proposed four

different debt management strategies which are analyzed in detail in the MTDS document

particularly to assess their impact on the cost and risk characteristics of the government’s

future debt portfolio. Basically, the proposed strategies represent the possible alternative

means of financing each year’s Government’s gross borrowing requirements. In addition, the

strategies are intended to illustrate the relative effect of different policy choices made by the

Government.

In the 2016/17 MTDS four borrowing strategies have been proposed by the Government as

follows:

(a) The first strategy (S1) reflects a “status quo” financing mix. This follows the broad

parameters of the financing mix in the fiscal year 2016/17. In this strategy the GoL

expects the external sources to satisfy 50 percent of the gross borrowing requirement

with all external borrowing achieved through concessional and semi-concessional

instruments, of which 60 percent would be from multilateral sources and 40 percent

from bilateral sources. However, it is worth noting that the financing mix from

external sources may change considerably one year from another. Thus, the

breakdown of the external borrowing instruments is rather based on what authorities

think would be the upcoming financing mix in the next years. This strategy envisages

the remaining 50 percent of the borrowing requirement to be satisfied through

domestic market securities. In this case a 90/10-percent split between Treasury Bills

and Treasury Bonds has been considered.

9 Lesotho’s MTDS Report, 2016/17


(b) The second strategy (S2) considers a shift towards more commercial external

borrowing, without increasing the total amount of external borrowing. However, the

division between external and domestic borrowing is the same as under strategy S1—

50 percent external and 50 percent domestic. In this scenario, within the external

borrowing mix, 30 percent is through multilateral loans and 40 percent through semi-

concessional borrowing, with the remaining 30 percent split into 3 commercial

borrowing instruments denominated in ZAR, EUR and USD. Notwithstanding, the

domestic borrowing mix remains the same as under S1. In particular, and worth

highlighting, this strategy S2 aims at simulating what could happen if government has

to finance part of the upcoming projects through commercial borrowing, considering

that the country will have a limited access to concessional borrowing due to its status

of low middle-income country.

(c) The third strategy (S3) seeks to increase the share of domestic borrowing to 70

percent of the total financing mix. However, the split between external borrowing

instruments remains the same as under S1, as well as the split between domestic

borrowing instruments. S3 responds to government desire of financing a larger part of

its deficit through domestic sources in the case of the market has limited appetite for

longer dated securities.

(d) The fourth strategy (S4) seeks to increase the share of domestic borrowing and

extends the maturity profile of domestic issuance. In this strategy, domestic borrowing

represents 70 percent of total borrowing like under S3. However, the split between

external borrowing instruments remains the same as under S1. Nonetheless, the

increase in the volume of domestic borrowing is accommodated through more

issuance of longer dated securities. As a result, within the domestic borrowing mix, 60

percent is achieved through Treasury Bills, 20 percent through 5-years Treasury

Bonds, 10 percent through 10-years Treasury Bonds and the remaining 10 percent

through a new 15-years Treasury Bonds, a tenor government has never issued yet.

Table 28 below illustrates the proposed borrowing mix during the 2017/18 to 2021/22

period.

Table 28: Proposed Borrowing Mix (2017/2018 to 2021/2022)


Notwithstanding the merits and benefits of all the four proposed strategies, the GoL has

chosen to focus more on the fourth strategy so as to mitigate and curb the exchange rate

vulnerabilities while developing its domestic capital markets in the process.

7.2 Debt Sustainability

7.2.1 Overview

The GoL through its PDAMD conducted a debt sustainability analysis (DSA) between

November and December 2016. This was made possible with joint technical support from the

Macroeconomic and Financial Management Institute (MEFMI) of East and Southern Africa,

Word Bank and International Monetary Fund (IMF). The DSA was conducted consistent with

the current public debt management regulatory requirements which stipulates the need for an

annual DSA.

The main objective of the DSA was to evaluate the expediency of the new financing relative

to the previous financing maintained by the Government. Specifically, the analysis was meant

to assess the sustainability of Lesotho’s existing debt stock and the Government’s capacity to

sustain the envisaged increase in non-concessional borrowing, as well as obligations arising

from pension funds arrears. In addition, the assessment was meant to identify and analyse: the

key drivers of public debt accumulation in Lesotho, including the size of the unexplained

variations in the stock of public debt; the risks associated with different sources of financing

and; the structure of debt mostly in terms of currency and maturity of the existing and the

potential new financing. The analysis also compared the results obtained in the 2014 DSA

with the current DSA with an intention of analysing the impact of new developments on debt

indicators.

The results of the DSA were published in March 2017. In particular, the results the DSA

informed the Government on the amount and terms of financing that are consistent with long-

term debt sustainability and progress towards achieving the country’s development

objectives. The results from the current DSA also provided a platform or a basis for

developing a medium-term debt management strategy (MTDS) for 2017/18, to address the

country’s uncovered vulnerabilities. Basically, the DSA compares debt burden indicators to

indicative thresholds over a 20-year projection period. A debt-burden indicator that exceeds

its indicative threshold suggests a risk of experiencing some form of debt distress.

There are four ratings for the risk of external debt distress:

(a) Low risk - when all the debt burden indicators are well below the thresholds;

(b) Moderate risk - when debt burden indicators are below the thresholds in the baseline

scenario, but stress tests indicate that thresholds could be breached if there are

external shocks or abrupt changes in macroeconomic policies;

(c) High risk - when the baseline scenario and stress tests indicate a protracted breach of

debt or debt-service thresholds, but the country does not currently face any repayment

difficulties; or

(d) In debt distress - when the country is already having repayment difficulties.

Countries are classified into one of three policy performance categories (strong, medium, and

poor) using the World Bank’s Country Policy and Institutional Assessment (CPIA) index,

which uses different indicative thresholds for debt burdens depending on the quality of a

country’s policies and institutions.


In 2005, the World Bank in conjunction with IMF developed the critical debt burden

thresholds. These indicators measure debt against major economic factors to assess the

country’s ability to meet debt obligations both in the short and long term. Table 29 below

outlines the Country Policy and Institutional Assessment (CPIA) Index and the debt burden

indicators. CPIA is an index used by the World Bank and IMF to assess the countries’ policy

strength, whereby the country with strong policies is able to shoulder more debt. Lesotho is

classified as the medium performer and therefore the relevant indicators against which debt is

assessed are those captured under the medium performer column. Lesotho is rated a medium

policy country and as such it is subject to the following thresholds (Table 29).

Table 29: CPIA and Debt Burden Indicators

Debt Indicators/ benchmarks Weak

performer

Medium performer Strong

performer

CPIA≤ 3.25 3.25<CPIA≤3.75 CPIA≥3.75

PV of debt to Exports 100 150 200

PV of debt to GDP 30 40 50

PV of debt to revenue 200 250 300

Debt service to exports 15 20 25

Debt service to revenue 18 20 22

Public debt to GDP 49 62 75

NPV of debt to GDP 38 56 74

Source: World Bank

7.2.2 Outcomes of the 2016/17 Debt Sustainability Analysis

Based on the IMF/World Bank Debt Sustainability Framework (DSF) for Low Income

Countries (LICs), the 2016 DSA results indicate that Lesotho’s debt is still sustainable but

with limited space for more future borrowing. In particular, the DSA concluded that the

country’s public debt remains sustainable both under baseline and alternative scenarios, but

the country’s vulnerability to exchange rate and growth shocks remains high. On another

note, the results of the 2016 DSA, compare favorably with the previous DSA conducted in

2014 and the IMF DSA results.

Most importantly to note from the DSA comparative analysis is that most of the debt burden

indicators under baseline scenario have remained comfortably below their indicative

thresholds except the present value (PV) of external debt to GDP which depicts a temporary

breach. It is against this background that Lesotho is mechanically classified at medium risk of

external debt distress. Therefore this rating require close monitoring and consideration of

serious debt reduction efforts by the Government.

Risk of External Debt Distress

Notwithstanding the limited space for future borrowing, the overall results clearly indicate

that Lesotho remains at moderate risk of debt distress, with most ratios remaining

comfortably within their indicative thresholds under the baseline scenario. Lesotho is

classified as the “medium” performer based on the Country Policy and Institutional


Assessment (CPIA) Index of the World Bank. As a “medium” performer, a set of critical debt

burden thresholds applies for Lesotho. These indicators measure debt against major economic

factors to assess the country’s ability to meet debt obligations both in the short and long term.

However, the results indicate that Lesotho is vulnerable to exogenous shock particularly

changes in the nominal exchange rate. In order to reduce such risk of debt distress, some of

the options would be to limit the rate of new borrowing; and also possibly to increase the

share of domestic debt; provided the higher interest rates from domestic debt does not lead to

new sustainability pressures. More important, the results underscore the need for the GoL to

continue with fiscal consolidation efforts and strong exchange rate management policies to

mitigate the potential debt distress from exchange rate depreciation. The results also

emphasise on the critical need to contain and realign public spending within its sustainable

levels consistent with the projected long-run level of SACU revenues, while gradually

pursuing necessary structural reforms to boost productivity and competitiveness to accelerate

medium-term economic growth.

Therefore, based on the results of the DSA, it is clearly evident that Lesotho remains at

moderate risk of debt distress and the PV of external debt as a ratio of GDP is projected to

remain below the indicative threshold of 40 percent in the baseline scenario. As evident in

Table 30, Lesotho is within the debt burden indicators for all of them except NPV of debt to

GDP which breached the threshold throughout the review period. As a medium “performer”

country, a benchmark of 62 percent of GDP applies against which debt to GDP can be

assessed. During the period 2012/13 to 2016/17, the ratio was below the threshold, implying

that it does not necessarily pose any risks to the entire government debt portfolio. The

country’s debt performance against key debt burden indicators is briefly discussed below.

PV of external debt to GDP

During 2016/17, although the ratio of PV of external debt to GDP ratio at 45.67 percent,

improved by 2 percent from that of 2015/16, it remained above the threshold of 40 percent.

The high PV is mainly attributed to adverse movement in exchange rate in the currency

market as well as increased borrowing. Over the entire review period, the indicative threshold

of 40 percent was breached. From 2012/13 to 2015/16, on average the ratios breached by 9.34

percent. However in 2016/17 the threshold was breached by 5.67 percent therefore resulting

in decrease of 2.3 percent to the breach in 2015/16. This largely accrues to new debt

contracted and a less percentage economic growth. Considered in isolation, this breach could

reflect a high risk of difficulty to meet debt repayments in the long run.

Therefore, in order to reduce such risk, some of the options would be to limit the rate of new

borrowing; increase the share of domestic debt in relation to external debt; restructure

Lesotho debt portfolio etc. On another hand, the high PV of debt vis-a-vis nominal debt for

the earlier years of the review period can be attributed to the acquisition of less concessional

debt such as the Abu Dhabi and European Investment Bank (EIB) funded Metolong Dam

Projects. These are loans with lower grant element characterized by shorter maturities, shorter

grace periods and higher interest rates.

Notwithstanding, the PV ratio is projected to decline thereafter because the fiscal balance is

broadly maintained over the projection period. Nonetheless, it is expected that by the end of

the projection period in 2036/37, the PV ratio will lie below the indicative threshold for debt

distress. However, the risk of debt distress is magnified as stress tests result in significant


breaches of indicative thresholds. In fact, it increases significantly in the event of adverse

shocks to exports or significant exchange rate depreciation.

PV of debt to Exports

PV of debt to export is a solvency ratio which measures external debt in relation to the

country’s export base capacity. Countries with high exports are more likely to shoulder the

foreign debt commitments. Although Lesotho is regarded as a less exporting country, table 28

below shows that in 2016/17 the ratio was 76 percent Compared to the ratio of 90 percent in

2015/16 as a result of improvement in exports. Throughout the entire period under review,

the indicator was not breached therefore not posing any risk.

PV of debt to Revenue

PV of debt to revenue also falls under the solvency ratios and it assesses external debt against

the revenue raised by the government. Recently government revenue has posed serious

challenges with a drastic decline in the SACU revenue which used to finance about 50

percent of recurrent expenditure. Despite the challenge, PV of debt to revenue remained

below the indicator with a ratio of 81 percent in 2016/17. There is no risk posed by this

indicator for debt repayment in the long term.

Liquidity Ratios

Liquidity ratios measure the government’s ability to meet its short-term debt obligations.

Examples of liquidity indicators are external debt service to revenues and external debt

service to exports. As outlined in table 30 below, the ratios have remained below the

indicative thresholds for the whole period under review. In 2016/17 the ratios stood at 4.66

percent and 7.69 percent for external debt service to revenue and external debt service to

exports respectively. In comparison, external debt service to revenue ratio reflects a marginal

increase from 4.19 percent in 2015/16 to 4.66 percent in 2016/17. Similarly, the external debt

service to exports ratios marginally increased from 7.63 percent in 2015/16 to 7.69 percent in

2016/17 due to appreciation of the Loti and increase in exports. Low liquidity ratios imply

that Lesotho does not face difficulty in meeting its debt commitments in the short period

(Figures 51 and 52).

Consequently, the results of the DSA analysis underscore the critical need to maintain the

current fiscal adjustment efforts, while keeping fiscal space for key infrastructure projects

and social spending and moving forward with structural reforms to boost productivity and

competitiveness to accelerate medium-term growth. In addition, the results depicted the same

pattern although with a slight improvement when remittances where taken into consideration.

This indicates the strong influence of remittance flows in overall debt sustainability.

It is also worth noting however, that the results of the 2016 DSA were based on an ambitious

macroeconomic framework that projects high sustained real GDP growth rates stabilizing at 4

percent in the medium to long term in line with historical growth potential for Lesotho.

However, over the medium to long-term, the overall fiscal deficit is projected to remain

around 3 percent of GDP, in line with the Southern African Development Community

(SADC) regional integration agenda.


Financing terms were assumed less favorable to reflect changing development financing

landscape and the expected transition to a middle income country, implying a gradual shift to

the non-concessional financing window. Foreign Direct Investments (FDI) flows were

assumed to average 1 percent during the projection period, reflecting the increased role that

the private sector is expected to play in spearheading the country’s infrastructure

development.

Figure 51: Debt Burden Indicators as at March 2017

Figure 52: Trends in CPIA Rating for Lesotho

3.2

3.25

3.3

3.35

3.4

3.45

3.5

2010 2011 2012 2013 2014 2015 2013-15

2010 2011 2012 2013 2014 2015 2013-15

62

Table 30: Debt Burden Indicators and Thresholds (2012/13 to 2016/17)

Debt Burden Indicators and Thresholds

Debt Burden Indicators

2012/13

2013/14

2014/15

2015/16

2016/17

Thresholds

Gross Central Debt 8,562.65 10,101.05 11,158.09 14,158.25 12377.93

External Debt 7,394.0 9,076.0 9,991.1 13,081.7 11,021.5

PV of External Debt 11,045.5 11,363.3 11,440.8 11,445.8 11, 214.0

PV of External Debt to GDP ( percent) 49.96 % 50.23 % 49.19 % 47.97 % 45.67 % 40 %

PV of External Debt to Exports ( percent) 132 % 135 % 118 % 90 % 76 % 150 %

PV of External Debt to Revenue 84 % 86 % 78 % 75 % 81 % 250 %

External Debt Service to Revenue ( percent) 2.53 % 3.18 % 3.04 % 4.19 % 4.66 % 20 %

External Debt Service to Exports ( percent)

3.96 %

5.03 %

5.28 %

7.63 %

7.69 %

20 %

TDS to Revenue ( percent) 11.16 % 12.76 % 10.18 % 13.67 % 11.40 %

TDS to Exports ( percent) 17.48 % 20.18 % 17.68 % 24.92 % 18.81 %

Total Debt to GDP 38.73 % 44.65 % 47.97 % 60.16 % 50.40 % 62 %

PV of Total debt to GDP 55.25 % 54.76 % 54.21 % 53.33 % 51.19 % 56 %

63

8. REFORMS IN PUBLIC DEBT MANAGEMENT

8.1 Overview

With technical and financial support from the European Union (EU) under the multi-donor

funded public financial management (PFM) reform project and bilateral technical support

from the IMF, WB and MEFMI, the GoL through its MoF is currently pursuing a number of

reforms to improve debt management in line with good international practices. Among the

most critical areas, the PDAMD is working towards strengthening the legal and regulatory

framework for debt management; improving the institutional operational arrangements and

developing the necessary staff capacity in debt management processes.

8.2 Progress on Key Reforms

During the period, PDAMD made good progress in the following areas;

(a) The department extensively revised the Public Debt and Aid Management Bill which

incorporates several new good international practices paving the way for new and

modern legal framework for debt management in Lesotho. However, the draft revised

Bill is yet to be validated and sent to Cabinet and Parliament.

(b) The department undertook its first ever DSA in 2016 which is currently being updated

for the subsequent fiscal years to inform the revision of the MTDS.

(c) The PDAMD developed its new MTDS for 2016/17 to be updated for the subsequent

fiscal years.

(d) The PDAMD also engaged a short term expert to support the development and

strengthening of staff capacity in various debt management operations. Work is

expected to begin in the 2017/18 fiscal year.

8.3 Next Steps in Reforming Public Debt Management

To further strengthen public debt management, in the next fiscal year, the MoF through

PDAMD plans to focus following reforms:

(a) To finalise and submit the Public Debt and Aid Management Bill to Parliament for

enactment;

(b) To full reorganize the PDAMD and clarify roles of various departments involved in

various debt management related functions;

(c) To develop and further strengthen the capacity and competence of the PDAMD staff

and equip them with new skills in areas such as, DSA, development of MTDS,

Annual borrowing plans, evaluation of risks in guarantees and contingent liabilities

and debt analytical reporting;

(d) Develop a debt management policy; and

(e) Prepare of new management regulations to implement the new law once enacted.


9. CONCLUSION AND KEY RECOMMENDATIONS

Based on the analysis presented in previous sections mainly on the portfolio review together

with costs and inherent risks, three main issues have emerged that poses key challenges to

public debt management. In particular, it is absolutely clear that debt stock levels have been

rising over the period mainly due to depreciation of the Loti against the major foreign

currencies and because of new borrowings. Under the review period, huge currency

depreciation occurred in 2015/16.

Consequently this leads to high debt service which negatively impact on the budget and

exacerbates the need for more borrowing. The large share of foreign debt to the local debt as

shown during 2016/17 also exposes the country to more foreign exchange risks. As a

remedial effort, domestic borrowing could be enhanced to a point whereby private sector is

not crowded out. Another constraint associated with foreign currency denominated debt is

that exacerbates Lesotho’s risk of external debt distress given the country’s overreliance on

external debt. Another major issue requiring Government’s urgent attention relates to the

terms of concessional borrowing for Lesotho which are increasingly hardening thereby

gradually crowding out the Lesotho’s access opportunities to deep concessional loans in the

long term future.

Therefore, addressing these issues and mitigating potential future risks will require an array

of concerted efforts by the Government and its key stakeholders. First, the Government

should consider focusing on developing its domestic debt capital markets to prudently

increase domestic borrowing as part of efforts to lower borrowing costs. However, this must

be done with caution so that the issuances are within and consistent with international debt

sustainability thresholds and benchmarks and debt ceiling as provided for in the current legal

framework. Second, it is absolutely imperative that in the context of existing liquidity

constraints and against the backdrop of an ever rising fiscal deficit borrowing should be

strictly for projects with high economic returns such as infrastructure and energy.

It is therefore evident that managing debt in accordance with the best international practices

would also require that debt strategy formulation and debt sustainability analysis are fully

integrated into the debt management framework. In particular, an as part of other efforts

mentioned above, addressing debt sustainability issues would also to a larger extent involve

tightening of the Government fiscal policy through serious fiscal consolidation measures as

part of the overall macroeconomic policy framework. This could not only result into lower

and better borrowing requirements, but have a salutary impact on the inflation, which could

gradually push down interest rates for the real economy, as long as the private sector is not

crowded out in the process.

However, achieving such ambitious objectives will require that the Government vigorously

undertake necessary reforms aimed at strengthening of public debt management. In

particular, the development of a debt management policy framework, enactment of the new

law on debt management and implementation of standard operating procedures (SOP) as part

of efforts of strengthening the governance, legal, regulatory and institutional framework to

guide and promote prudent borrowing and responsible public debt management within the

ambit of sound fiscal policy will be absolutely necessary and must be prioritised. This should

be anchored and implemented through fully institutionalised MTDS that would appropriately

assess the cost-risk trade-off for the government as well as regular DSAs. It is worth noting


that the GoL is already working towards updating its MTDS for 2018/19 fiscal year and

beyond based on the 2016/16 MTDS.

Furthermore, it is absolutely imperative that the reforms also focus on the strengthening of

functions within the PDAMD along with institutional re-organisation that promotes

efficiency and accountability and continuous development of staff capacity in modern public

debt management practices and processes. These efforts are ongoing with support from

development partners including the EU which is supporting efforts towards the strengthening

of public debt management capacity.


10. REFERENCES

Central Bank of Lesotho, Annual Report, 2016.

Central Bank of Lesotho, Quarterly Review Report, March 2017.

Government of Lesotho, Budget Strategy Paper, 2016/17.

Government of Lesotho, Budget Strategy Paper, 2017/18.

Government of Lesotho, Budget Policy Statements, 2016/17 and 2017/18.

Government of Lesotho, Debt Sustainability Analysis Report, 2016/17.

Government of Lesotho, Medium-Term Debt Strategy, 2016/17.

International Monetary Fund, Sub- Saharan Africa Restarting the Engine,2017. Washington

D.C.

International Monetary Fund, World Economic Outlook 2017. Washington DC.

Lesotho Bureau of Statistics, National Accounts Dataset, 2016

International Monetary Fund, Multi-Country Assessment-Individual Economy Assessments

2017.

South African Reserve Bank, Annual Report, 2016.

Statistics South Africa, National Accounts Dataset, 2016


GLOSSARY

Terminology Definition/Meaning

Bond Conversion

This is a strategy where the outstanding volume of the bond is redeemed

or converted into another or a new one with longer maturity provided

the holders of such a portion are agreeable.

Bond Reopening

This involves opening up or offering the same paper to the primary

market on a date other than its original issue date with a view to

increasing its outstanding amounts and or expanding the original offer

amounts.

Bond Switching

This a strategy in which a portion an existing bond is switched through

an auction process into another existing bond preferably of longer

maturity or a new one to build the volume of the benchmark issue.

Buy back

This is the sale of securities, usually Treasury Bonds, with an agreement

from the seller to buy back the security at a later date.

Concessionality

A measure of the softness of a credit reflecting the benefit to the

borrower compared to a loan at market rate. Technically, it is calculated

as the difference between the nominal value and the present value of the

debt service as of the date of disbursement, calculated at a discount rate

applicable to the currency of the transaction and expressed as a

percentage of the nominal value.

Debt Rescheduling

A form of debt re-organization in which payments of principal and/or

interest previously due at a specified time are deferred for repayment on

a new schedule following negotiations between the creditor and debtor.

Debt Service

The amount of funds necessary for or used in the payment of interest or

amortization charges of a debt.

Debt Sustainability

Sustainable debt is the level of debt which allows a debtor country to

meet its current and future debt service obligations in full, without

recourse to further debt relief or rescheduling, avoiding accumulation of

arrears, while allowing an acceptable level of economic growth.

Debt Sustainability

Analysis

This was conducted in the context of medium-term scenarios. These

scenarios are numerical evaluations that take account of expectations of

the behaviour of economic variables and other factors to determine the

conditions under which debt and other indicators would stabilize at rea-

sonable levels, the major risks to the economy, and the need and scope

for policy adjustment. In these analysis, macroeconomic uncertainties,

such as the outlook for the current account, and policy uncertainties,

such as for fiscal policy, tend to dominate the medium term outlook.

Disbursement

The actual international transfer of financial resources or of goods or

services by the lender to the borrower.

Domestic Borrowing

Government borrowing through issuance of Government securities and

direct borrowing from the Central Bank.

Export Credit

Loans for the purpose of trade and which are not represented by a

negotiable instrument. They may be extended by the official or the

private sector. If extended by the private sector, they may be supported

by official guarantees.

External Borrowing

Government borrowing from both official (Government or Government

agencies) and private institutions domiciled outside the country.


Government

Securities

Financial instruments used by the Government to raise funds from the

primary market.

Grant Element It measures the concessionality of a loan, in the form of the present

value of an interest rate below the market rate over the life of a loan.

Monetary Policy

The management of money supply by the Central Bank in an economy

to achieve desired economic conditions such as the overall level of

prices.

Present Value

The present value (PV) of debt is a measure that takes into account the

degree of concessionality. It is defined as the sum of all future debt-

service obligations (interest and principal) on existing debt, discounted

at the appropriate market rate. Whenever the interest rate on a loan is

lower than the market rate, the resulting PV of debt is smaller than its

face value.

Primary Market

A market in which initial issue of financial instruments is made.

Public Debt

Outstanding financial liabilities of the Government arising from past

borrowing. It includes Government guaranteed debts to State

Corporations and Local Authorities.

Public Domestic

Debt

Part of the overall debt owed by the Government to creditors domiciled

in the economy. The debt includes money owed to commercial banks,

non-bank financial institutions and individuals.

Public External

Debt

Part of the overall debt owed by the Government to creditors domiciled

outside the economy. The debt includes money owed to private

commercial banks, other governments, or international financial

institutions such as the IMF and World Bank.

Secondary Market

A market for already issued financial instruments.

Suppliers’ Credit

An arrangement under which a supplier or exporter agrees to allow the

customer to defer payment under a sales contract

Treasury Bills

Short term debt instruments currently with maturities of 91, 182, 273

and 364 days issued by the Government. In Lesotho, this instrument is

issued by the Ministry of Finance through the CBL.

Treasury Bonds Medium to long-term term debt instruments issued by the Government.

In Lesotho, this instrument is issued by the Ministry of Finance through

the CBL.

Yield Curve Relationship between the interest rate and maturity of securities. A

rising yield curve, that is, where interest rated for short-term securities

are lower than interest rates for long-term securities, is called normal. A

falling yield curve is described as inverted

69

ANNEXURES

Annexure 1: List of Guarantees by 2016/17

Bank Guaranteed

Amount

Disbursed

Outstanding

Debt

Total Repaid by

Beneficiaries

Called Guarantee Remarks

1.WASCO (PTY) LTD

Minister of Finance approval : 01.12.2010

Expiry date : 01.12.2020

Nedbank 20,000,000 15,340,379.81 4,659,620.19 0.00 Still on-going.

2. Partial Credit Guarantee Fund

(PCGF)

Cabinet approval: 25.10.2011

50,000,000

About 30,000,000

utilised by private

companies.

3.WASA

EIB EURO 14.3m

equivalent to M136m

GOL will recover

costs.

1. Government Secretary, Local

Government & Teaching Service

Commission


Each officer is

entitled to interest

free loan of M

500,000

2. Members of Parliament and

Statutory positions

8th Parliament

Each member is

entitled interest free

loan of

M 500,000

32, 229,284.92

LRA claimed

21,486,189.95

as fringe benefit tax.

Guarantee recalled

and GOL paid

32,229,284.92 &

21,486,189.95

3. Members of 9th Parliament Nedbank 72,599,200.00 43,547,948.49 29,051,251.51 43,547,948.49

(Principal and interest)

GOL paid

43,547,948.49 and

to pay LRA fringe

benefit tax

30,500,000.00

4. PSs and Statutory Positions Nedbank 9,050,000.00 7,490,104.28 1,559,895.72 0.00

GOL will only pay

interest charges

estimated at

61,349.48

5. PSs and Statutory Bodies Std Lesotho 1,284,341.59


Bank

6. Maseru –E- Textile


Expiry date: Oct 2020

Standard

Lesotho

Bank

USD 1,200,000

M 0.00

Still on-going.

7. CGM/Presitex Industry (PTY)

LTD

Minister of Finance approval date :

19.12.2014

Expiry date:

Standard

Lesotho

Bank

USD 8,000,000 CGM

M

24,000,000.00

USD

4,500,000.00

=

GOL has paid half

of the amount

recalled

Presitex

M

18,000,000.00

M

61,650,000.00

was paid by GOL

Loan is performing

well.

8. TZICC


11.12.2014

Expiry date:

Standard

Lesotho

Bank

USD 8,000,000

USD

4,675,000.00

USD

1,050,000.00

=

M

28,085,000.00

was paid by GOL

Half of recalled

guaranteed paid by

GOL.

Loan is performing

well.

9. Eclat Evergood textiles


19.12.2014

Expiry date:

Standard

Lesotho

Bank

USD 4,300,000

M 0.00

Still on-going.

10. Tlotliso Holdings Ltd


Expiry date:

Standard

Lesotho

Bank

M 9,000,000 M 0.00 M 0.00 M 9,000,000

11. AFRI-EXPO Textiles


Expiry date: 21.02.2022

Standard

Lesotho

Bank

M 10,000,000

not yet disbursed

12. LUQY’S Manufacturing


Expiry date: 24.05.2019

FNB

M 27,000,000.00

M

9,000,000.00

M 0.00

M 0.00

71

Annexure 2: Interest Rate Movements 2014-2017

MONTH DISCOUNT

RATE (END

OF PERIOD)

TREASURY

BILL RATE

MAXIMUM

LENDING

RATE

PRIME

LENDING

RATE

SAVINGS

RATE

SAVINGS

DEPOSIT

RATE (MAX.)

TIME DEPOSIT

RATE (MAXIMUM

FOR 88 DAYS)

DEPOSIT

RATE 31

DAYS

DEPOSIT

RATE 1

YEAR

CALL

MONEY

RATE

Jan 2014 9.13 5.13 20.50 10.25 0.95 2.35 2.35 1.14 2.85 1.03

Feb 2014 9.13 5.13 20.50 10.25 0.95 2.35 2.35 1.14 2.85 1.03

Mar 2014 10.01 6.01 20.50 10.25 0.95 2.35 2.35 1.14 2.85 1.03

Apr 2014 10.06 6.06 20.33 10.25 0.80 1.75 2.85 1.11 2.89 1.03

May 2014 10.20 6.20 20.33 10.25 0.80 1.75 2.85 1.11 2.89 1.03

Jun 2014 10.11 6.11 20.31 10.25 0.80 1.75 2.85 1.14 2.89 1.03

Jul 2014 10.11 6.11 20.38 10.42 0.86 1.75 2.85 1.23 2.95 1.11

Aug 2014 10.24 6.24 20.56 10.42 0.99 1.75 2.85 1.31 3.21 1.16

Sep 2014 10.20 6.20 20.63 10.42 0.86 1.75 2.85 1.23 3.21 0.99

Oct 2014 10.23 6.23 20.63 10.44 0.86 1.75 2.85 1.23 3.21 0.99

Nov 2014 10.25 6.25 20.61 10.44 0.86 1.75 2.85 1.23 3.21 0.99

Dec 2014 10.25 6.25 20.61 10.44 0.86 1.75 2.85 1.23 3.21 0.99

Jan 2015 10.15 6.15 20.61 10.44 0.86 1.75 2.85 1.23 3.21 0.99

Feb 2015 10.25 6.25 20.61 10.44 0.86 1.75 2.85 1.23 3.21 0.99

Mar 2015 10.25 6.25 24.50 10.44 0.86 1.75 2.85 1.23 3.21 0.99

Apr 2015 10.25 6.25 24.50 10.44 0.86 1.75 2.85 1.23 3.21 0.99

May 2015 10.24 6.24 24.50 10.44 0.86 1.75 2.85 1.23 3.21 0.99

Jun 2015 10.24 6.24 24.50 10.44 0.86 1.75 2.85 1.23 3.21 0.99

Jul 2015 10.23 6.23 24.50 10.50 0.86 1.75 2.85 1.23 3.21 0.99

Aug 2015 10.35 6.35 24.56 10.69 0.70 1.75 2.85 1.16 3.28 0.99

Sep 2015 10.25 6.25 24.56 10.69 0.61 0.75 2.13 0.83 3.11 0.85

Oct 2015 10.25 6.25 24.63 10.69 0.50 0.75 1.02 0.47 3.22 0.93

Nov 2015 11.25 6.49 24.63 10.69 0.50 0.75 1.02 0.47 3.23 1.02

Dec 2015 10.49 6.49 26.19 10.94 0.51 0.80 1.04 0.48 3.26 1.03

Jan 2016 12.25 6.56 26.19 10.94 0.51 0.80 1.04 0.48 3.26 1.03

Feb 2016 10.82 6.82 30.75 11.44 0.52 0.84 1.09 0.41 3.43 1.74

Mar 2016 10.86 6.86 30.75 11.44 0.55 0.95 1.09 0.41 3.43 1.74

Apr 2016 10.86 6.86 30.81 11.63 0.56 1.00 1.12 0.44 3.52 1.82

May 2016 10.74 6.74 30.81 11.63 0.56 1.00 1.12 0.44 3.52 1.82

Jun 2016 10.69 6.69 30.81 11.69 0.56 1.00 1.12 0.44 3.52 1.82

Jul 2016 10.69 6.69 30.88 11.69 0.56 1.00 1.12 0.44 3.52 1.82

Aug 2016 10.74 6.74 30.81 11.69 0.56 0.99 1.11 0.44 3.52 1.19

Sep 2016 10.64 6.64 30.81 11.69 0.56 0.99 1.11 0.44 3.52 1.19

Oct 2016 10.59 6.59 30.81 11.69 0.56 1.00 1.12 0.44 3.52 1.19

Nov 2016 10.64 6.64 30.81 11.69 0.56 1.00 1.12 0.44 3.52 1.19

Dec 2016 10.58 6.58 30.81 11.69 0.56 0.99 1.12 0.44 3.52 1.19

Jan 2017 10.59 6.59 30.81 11.69 0.56 0.99 1.12 0.44 3.52 1.19

Feb 2017 10.58 6.58 30.81 11.69 0.56 0.99 1.12 0.44 3.52 1.19

Mar 2017 10.57 6.57 30.81 11.69 0.56 0.99 1.12 0.44 3.52 1.19


For All Enquires contact:

The Director

Public Debt and Aid Management Department

Ministry of Finance

New Government Complex

P.O Box 395

E-Mail: [email protected]

Website: www.finance.gov.ls

mailto:[email protected]

http://www.finance.gov.ls/

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