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1.
Monetary Policy Stance
At its 7th
meeting held on the 01st August 2006, the
Central Bank of Lesotho Monetary Policy Committee (MPC)
decided to keep the target range for Central Bank of
Lesotho Net International Reserves (NIR) unchanged for
the period June to September 2006 at (United States)
$400 to $450 million.
The Committee is satisfied
that at this range, the target level of NIR is
sufficient to cope with the demands of the economy.
This, in turn, will allow the Central Bank to continue
to maintain the fixed exchange rate arrangement between
the local currency, loti, and the South African
currency, the rand. The fixed exchange rate arrangement
allows Lesotho to benefit from lower South African
imported inflation, which is targeted at between 3 and 6
per cent.
However, the Committee
noted that there was sufficient evidence of inflationary
pressures building up in the economy in line with the
price developments in South Africa (SA). The observed
price developments are in part due to continued
increases in the international oil prices.
2. Inflation Developments During the Second quarter of 2006
The
Committee examined inflation developments during the
second quarter of 2006. Inflation as measured by the
changes in the Consumer Price Index (CPI) stood at 6.7
per cent in May 2006 compared with 5.1 per cent at the
end of the first quarter of 2006. The increase emanated
largely from the ‘food and non-alcoholic beverages’
index, as it carries the largest weight in the CPI
basket. This index increased by 9.7 per cent compared
with 5.6 per cent at the end of March 2006. The
Committee noted that there was evidence of inflationary
pressures building up in the economy emanating from
imports. Lesotho imports about 85 per cent of
merchandise goods from SA. Thus there is a considerable
level of imported inflation.
Uncertainties in the international oil prices continued
during the first six months of the year. The price of
crude oil began the year at $51.73 per barrel. The price
of crude oil rose from $60.64 per barrel at the end of
March 2006 to $67.29 per barrel at the end of June 2006.
During the same period, the rand exchange rate
depreciated from R6.25 to R6.99. The movement in the
exchange rate was influenced mainly by interest rate
hikes in the developed countries particularly the United
States (US).
On the
demand side of the economy, real economic output is
projected to grow by 1.7 per cent and 2.3 per cent in
2006 and 2007 respectively. The Committee observed that
on an annual basis, nominal money supply rose by 9.3 per
cent in May 2006 compared with 4.7 per cent at the end
of the first quarter of 2006. The annualised month to
month increase in broad money was indicative of
inflationary pressures in the economy.
3.
Prospects for the Maintenance of the Fixed Exchange Rate
Arrangement
The
present fixed exchange rate regime has served Lesotho
well by allowing the country to benefit from the
low-inflation environment in SA. The rate of growth of
CPI-X in SA remained within the target range of 3 to 6
per cent at 4.1 per cent in May 2006. However, continued
increases in international oil prices are expected to
exert pressure on inflation. Impeding inflationary
pressure in SA has resulted in the upward adjustment of
the repo rate by 50 basis points.
a.
Balance
of Payments (BOP) Developments
The
Committee once again reiterated concern on the effect of
the loss of competitiveness in the garment industry on
the long term current account balance (CAB). The latter
is expected to deteriorate from a deficit of 5 to 6 per
cent of GDP if corrective measures are not implemented
on a sustainable basis. In this regard, the
establishment of a new factory in Maputsoe in March 2006
is of significant importance. The factory is expected to
employ around 3000 employees after six months and its
production would improve the CAB.
The
Committee then looked at the BOP developments during the
first quarter of 2006. The BOP position in this period
recorded the overall surplus equivalent to M43 million.
This was driven by the developments in the CAB. The CAB
registered a surplus equivalent to 2.62 per cent of GDP.
The improvement in the current account was driven by
strong current transfers namely rand compensation and
SACU revenue received during the quarter.
b.
Fiscal
Balance Outlook
Government budgetary operations
are an important component of the cyclical factors
affecting the balance of payments outlook. The
favourable fiscal position that prevailed in the
previous year is expected to continue into the 2006/07
fiscal year. The 2006/07 budget speech proposes an
overall surplus equivalent to 2.8 per cent of GDP, due
to the expected improvement in SACU
revenue. SACU revenue is expected to increase from 24.4
per cent to 30.8 per cent of GDP.
4.
The Monetary Policy Committee Decision
The
Committee concluded that the expected inflows of foreign
currency to the government have led to a situation where
the actual level of NIR has consistently been higher
than its target range of US $400 to $450 million. At the
end of June of 2006, the excess was $101.1 million.
Consequently, the Committee maintained the target range
for NIR at US$400 to US$450 million for the period July
to September 2006.
E.M.
Matekane
Governor
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