CENTRAL Bank of Lesotho (CBL) Governor Dr Retšelitsoe Matlanyane says the latest South African political and economic developments could have far-reaching consequences on the South African Customs union revenue collections, which account for over 40 percent of Lesotho’s Gross Domestic Product (GDP).
Last week, the Rand sharply depreciated against other powerful world currencies following the sacking of South African Finance Minister Pravin Gordham in a major cabinet reshuffle that also saw ten ministers reshuffled.
The Rand depreciated by more than 5 percent against world currencies as a result. On Monday this week rating agencies Moody’s Investors Service and Fitch all downgraded South Africa’s credit rating with Standard & Poor giving it a junk status. The downgrade has further fueled more weakening of the Rand ever since.
Responding to questions from the Lesotho Times during the Monetary Policy Statement media briefing on Tuesday, Dr Matlanyane said it was hard to tell what is likely to happen to Lesotho’s economy as South Africa’s market reactions could stabilise before major changes take places.
Dr Matlanyane said while it was too early to ascertain the full extent on Lesotho, the fact that the Loti was pegged to the South African Rand equal footing meant that Lesotho was in danger of suffering from the negative ramifications expected to be experienced in the South African economy following the latest developments.
She said while it was understandable that the Rand depreciated when investors pulled out their investments following the sacking of the minister of finance, the depreciation of the Rand could result in inflation.
“The reaction of the market could have been a spur of the moment thing that the economy will settle and when it settles you may find that nothing happens, but then again it is difficult to say,” she said.
“There is likely to be capital outflows that will hamper the Rand. Secondly, it means therefore that if the Rand depreciates, the commodities that come into the South Africa market will become more expensive to the South Africans.
“So imports will likely fall, and when they do so, the SACU revenue pool will shrink, and that is where we will be most affected,” she added.
She further indicated there was a possibility of inflation being experienced as a result of weakening of the Rand.
“There are other implications; depreciation usually comes with inflation. Certainly inflation is coming on, and that is why I said in the MPC statement that despite the fact that food inflation seems to be low….. depreciation of the Rand is one factor that could bring about inflation.”
Meanwhile, the CBL rate has been maintained at 7 percent while the Net International Reserves (NIR) target floor has been reduced to US$600 million to cushion the economy against international shocks.
Dr Matlanyane said the two decisions were part of Lesotho’s reaction to cushion its economy against such international shocks.