Behind Lesotho’s Huge International Reserves

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What could be Lesotho’s motives for keeping relatively large international monetary reserves, which generally seem to be increasing over years? This question forms the gist of an interesting study carried at the National University of Lesotho (NUL) Department of Economics. “We noticed a number of peculiar things about Lesotho’s vast international reserves and we set out to investigate them”, says Mr Retselisitsoe Thamae, a lecturer in the Department of Economics and a co-author in the study.

Many of us recognize the importance of saving money and using it later when circumstances call for it. It is a prudent thing to do. So do countries worldwide. They do this in the form of reserves. Lesotho is not an exception. Basically, reserves can be defined as a particular country’s savings. Central Bank of Lesotho holds these reserves on behalf of the Government of Lesotho. They are held in the form of cash held by the bank (cash portfolio), investments in foreign assets including the US and South African Treasury Bills (investment portfolio) and investment in the IMF account. One major attribute of these reserves is that they are liquid. This means the government is able get hold of them within a short time when necessary.

So what peculiar things about Lesotho’s reserves got the attention of the NUL economists? First, Lesotho reserves are exceptionally huge as a percentage of the country’s income (Gross Domestic Product or GDP) in the Southern African Customs Union (SACU) region. For instance, take the situation of Lesotho and compare it with other countries in the year 2014. “In that year, the country had reserves that contributed to as much as about 51% of its GDP, second only to Botswana at 54%. Lesotho is followed by Swaziland at 19%, less than half of Lesotho’s, Namibia at 14% and South Africa at 12%. “The first obvious question is, what is Lesotho’s interest in holding such a large percentage of reserves in comparison to most of its counterparts in the SACU economic region?” Mr Thamae asked.

Another issue that raised interest is the fact that International Monetary Fund (IMF) recommends that countries may maintain reserves that can cover three months of imports given a hypothetical situation where there are no capital inflows or outflows or when there are no international receipts or payments. Yet since 1994, Lesotho has maintained reserves that go way beyond this minimum required by IMF. At times, Lesotho was holding reserves that could help it survive for 7 months or more on imports.

Indeed the country has signed an agreement with South Africa to keep the local currency Loti as equivalent to South African Rand. To maintain this peg, the country has to hold enough reserves. Nevertheless, Lesotho generally appears to hold reserves that are way beyond the satisfaction of this and other requirements. So what could be Lesotho’s motives over the years?

According to Mr Thamae the study showed that the country may be be fully aware of both internal and external threats and it may be taking precautionary measures by accumulating these reserves. “Over and above all possible motives, it appears the most prominent motive is that the country is taking precautionary measures to avoid default should there be internal or external threats to its financial well-being. This observation is supported by interesting trends. Over the decades, the country tends to accumulate reserves in times of stability. However, in times of troubles, the country uses these reserves extensively. For instance, following the 1998 political disturbances, Lesotho’s reserves were used extensively by the government. Also, after the worldwide financial crisis of 2009, Lesotho again relied on its reserves for survival,” Mr Thamae observed.

“It is, therefore, safe to conclude that Lesotho may be fully aware of great external threats such as its huge reliance on fluctuating SACU revenues and it is using its large reserves as a cushion in times of trouble. However, this situation begs a question. Given that some of these huge reserves, amounting to about M7.5 billion at present, could be invested in the country’s development projects that tackle unemployment and poverty, for how long will the country be held back in fear of unforeseen threats? This question is very critical when taking into consideration that such a fear may prevent the country from investing in projects which may, in the long run, reduce the very vulnerabilities the country finds itself in.”

“Two arguments may be proposed. On one hand, others may argue that indeed these vast reserves should be left as they are since they are necessary to help Lesotho survive better under extreme situations, particularly because past events have shown that we live in a very uncertain world. However, others may disagree. Consider this situation. Suppose the country spends just 0.01 percent of these massive reserves in supporting NUL’s recent innovative projects, leaving 99.99 percent, that money would translate to M750 000.”

“While this money will not leave so much as a dent on the country’s reserves, it would go a long way into boosting the country’s economy in the long run. This amount may be enough to support 5 small manufacturing start-up businesses that may create 50 jobs! Imagine what could happen if the money is multiplied and the funding is done every year! As the NUL contemplates establishment of its own Innovation Fund, the reserves would prove to be critical in assisting such and similar initiatives.”

 

This blog post was originally written by NUL Research and Innovations

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