Economy slows down in 2017

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. . . as inflation rate decelerates to 4%

Bereng Mpaki

LESOTHO’S economic activity declined in the first quarter of 2017, with the contraction emanating from the manufacturing, construction, services and government sub-sectors.

The same period has also seen a deceleration of the year-on-year consumer inflation rate from 5.3 percent in December 2016 to four per cent in April 2017, due to moderation in food and non-alcoholic prices in the region and domestically.

Central banks revise benchmark interest rates regularly to ensure price stability and help governments achieve economic growth targets. The CBL rate is the benchmark interest rate which, among others, determines the cost of borrowing from commercial banks.

Addressing a news conference on Tuesday following a meeting by the apex bank’s Monetary Policy Committee (MPC), Central Bank of Lesotho (CBL) Governor Retšelisitsoe Matlanyane also revealed that the apex bank revised Net International Reserves (NIR) target floor from US$600 million to US$630 million in response to recent adverse global and domestic economic developments.

The CBL has, however, left its benchmark interest rate (CBL Rate) unchanged at seven percent.

Dr Matlanyane said global economic activity recovered moderately in the first quarter of 2017.

“The positive performance in advanced economies came mainly from Japan and United Kingdom, while the economic activity from the Euro Area and the United States (US) remained subdued,” she said.

“Growth from the Emerging Market Economies (EMEs) was spurred by positive economic developments in China.”

However, economic activity in Lesotho’s neighbour and largest trading partner, South Africa, deteriorated during the first quarter.

Dr Matlanyane said the anticipated impact of South Africa’s sovereign credit ratings downgrade was a slump in investment, consumer and business sentiments.

Standard & Poor’s and Fitch rating agencies last month downgraded South Africa’s foreign and local currency ratings to sub investment grade, or junk status.

The agencies said the country’s long-term ratings downgrade followed recent political events, including the Cabinet reshuffle, which Fitch believes would weaken standards of governance and public finances.

The CBL chief said domestic economic activity was estimated to have further declined during the period to March 2017.

“The contraction in quarterly economic activity emanated from both the secondary and tertiary sectors.

In particular, contractions were observed in the manufacturing, construction, other services as well as the government sub-sectors.”

On a positive note, the year-on-year consumer inflation rate decelerated from 5.3 percent in December 2016 to four percent in April 2017.

“This was largely due to the moderation in prices of food and non-alcoholic beverages both in the region and domestically,” Dr Matlanyane said.

However, the slowdown in the inflation rate may be short-lived with the ending in May 2017 of a 30 percent government subsidy of locally-produced maize meal, beans and peas effected in June last year.

The subsidy was bankrolled by M162.7 million the government had set aside to mitigate the effects of skyrocketing food prices in the aftermath of the 2015/16 El Niño-induced drought.

She also indicated that the broad measure of money supply (M2) expanded by 10.9 percent in March 2017 compared with a decline of 4.2 percent in December 2016 due to a rise in domestic credit and fall in central bank liabilities to central government.

“The current account deficit narrowed to 6.5 percent of GDP in the first quarter, from a revised deficit of 10.4 percent in the previous quarter.  This was driven by improvement in the income account balance.

“Measured in months of import cover, official reserves are estimated at 4.9 months in the quarter ending in March 2017 compared to 5.3 months recorded in the previous quarter. In terms of gross official reserves this represents a decline of 8.9 per cent in the first quarter.”

Also, she said the government budget balance was estimated to have registered a deficit of 10.2 percent of GDP compared to a revised deficit of six percent in December 2016 at the end of March 2017.

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