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1.
Monetary
Policy Stance
At its
meeting held on the 29th November 2005, the
Central Bank of Lesotho Monetary Policy Committee (MPC)
decided to keep a target range for Central Bank of
Lesotho Net International Reserves (NIR) for the period
October to December 2005 of (United States) $400.0 and
$450 million.
This target range still reflects better than
expected macroeconomic outturn particularly government
budgetary operations. 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,
currently targeted at between 3 and 6 per cent.
Regarding domestically generated inflation, particularly
inflation generated from the demand-side of the economy,
the Committee noted that there were no immediate
threats. Accordingly, no measures were taken in this
regard.
2.
Inflation Developments During the third
quarter of 2005
The
Committee noted that the inflation rate remained low
during the third quarter of 2005. It closed the quarter
at 3.2 per cent up from 3.1 percent in June. Continued
low price increases for imported food items and other
household equipment ensured that the inflation rate
remained at low levels.
Uncertainties in relation to international prices of oil
pose a significant risk to the inflation outlook. The
price of oil has increased significantly since the last
meeting of the Committee. During the second quarter of
2005, the price of crude oil averaged $49.33 per barrel.
It has since increased by 14.3 per cent to $56.39 at the
end of the third quarter. Due to pressure from rising
global oil prices, upwards revisions in prices of fuel
were effected in August and in September.
The
Committee then turned its attention to
assessing inflation pressures emanating from the demand
side of the economy. On the one hand, real economic
growth in Lesotho is anticipated to be 0.9 per cent in
2005. On the other hand, real money supply as measured
by M2 declined by 0.4 per cent during the third quarter
of 2005. On the basis of these developments, the
Committee concluded that there were no immediate
inflation pressures from the demand side of 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 South Africa. The rate of
growth of CPI-X, in SA remained within the target range
of 3 to 6 per cent. However, it increased from 3.5 per
cent at the end of the second quarter to 4.7 per cent at
the end of the third quarter. The Committee’s stance
remained unchanged. Maintenance of the fixed exchange
rate between the loti and the rand is crucial to ensure
that Lesotho continues to benefit from the low SA
inflation environment.
In this
regard, balance of payments (BOP) developments are a
critical factor in the fixed exchange rate arrangement.
Accordingly, the Committee turned its attention to BOP
developments and outlook.
a.
Balance of Payments
Developments
The
long-term current account deficit during the period 1998
to 2004 has remained at around 5 per cent of GDP if one
excludes Lesotho Highlands Water Project (LHWP)
activities, which are deemed transitory. However, from
2005 onwards, the long-term current account deficit is
expected to widen to around 6 per cent of GDP, as a
result of Lesotho’s loss of competitiveness in the
garments markets following the expiry of the system of
quotas at the beginning of the year. Consequently,
measures are required to address the long-term balance
of payments outlook.
However,
there are signs that the impact of the phasing out of
the quota system on Lesotho’s export sector may not be
as severe as initially anticipated. In fact,
circumstantial evidence suggests that a turnaround may
be eminent. Two reasons could be advanced for this
development. The first is that the retailers in the
United States, where about 64 per cent of Lesotho’s
exports are destined, have retained exports from Lesotho
presumably in order to maintain a diversified supplier
base. Secondly, a weaker rand has helped to improve the
competitiveness of Lesotho’s exports.
b.
Fiscal Balance Outlook
Government budgetary operations are an important
component of the cyclical factors affecting the balance
of payments outlook. The favourable fiscal situation is
expected to continue into the current fiscal year of
2005/06. Central Bank projections indicate that as a
result of larger that expected Southern African Customs
Union (SACU) revenues, the second tranche of which was
received in September 2005; the fiscal balance is
expected to register a surplus of about 1.5 per cent of
GDP compared with a budgeted deficit of 2.6 per cent.
The
Committee noted that the better than expected fiscal
outlook has in fact led to a situation where the actual
level of NIR has consistently been higher than its
target range of (United States) $400 to $450 million.
During the second quarter of 2005, the actual level of
NIR exceeded the target range by at least $100 million.
During the third quarter of 2005, the excess decreased
to at least $25 million. Consequently, the Committee
maintained a target range for NIR of US$400 to US$450
million for the period October to December 2005.
E.M. Matekane
Governor
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