The Central Bank of Lesotho (CBL) has warned that the world is headed for a possible economic recession, and therefore strong coordination on fiscal and monetary authorities is critical to protect the local economy.
The CBL is Lesotho’s monetary policy authority, while the Ministry of Finance is the fiscal policy authority.
Fiscal policy is concerned with the usage of government spending and taxation to influence the economy, while monetary policy is the manipulation of interest rates to manage money supply in the economy.
While it is not clear how and when the recession will hit, CBL governor Dr Maluke Letete, said it was important to prepare for such an eventuality.
Dr Letete was addressing journalists this week following the apex bank’s Monetary Policy Committee (MPC) meeting.
During the meeting, the MPC increased the CBL rate from 6.25 per cent per annum to 7.00 per cent per annum and revised down the net international reserves (NIR) target floor of US$730 million to US$650 million.
Dr Letete said these were done in an attempt to fight inflation, which slowed down to 8.5 percent in October this year.
“Please note that the world is headed for a recession, and we do not know how it is going to manifest, but we are going to try to do our best from where we are seated,” Dr Letete said.
“This calls for very clear coordination between the monetary authorities and the fiscal authorities so that they can be able to propel the economy in the right direction,” he said.
Recession refers to a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in employment, industrial production and wholesale-retail sales among others.
Dr Letete said the government needs to cut down unnecessary spending to support the monetary policy decisions taken by the CBL.
“This important is because, in times of a crisis, the fiscal consolidation side must try to cut unnecessary spending so that it avoids putting too much pressure on the monetary side and as a way of getting prepared for that we to collaborate more during this time of a crisis.”
Global economic activity remains weak due to the lingering effects of Covid-19 and continuing Russia-Ukraine war and is projected to slow down to 2.7 in 2023 from 3.2 projected for 2022.
“The latest World Economic Outlook (WEO), released by the IMF in October 2022, has further revised downwards the projected world output from 6.0 percent in 2021 to 3.2 percent in 2022 and a further slowdown to 2.7 percent in 2023. In addition, the cost-of-living crisis has weakened prospects of economic recovery for most economies.”
In Lesotho, economic activity declined during the third quarter of 2022.
“On the domestic front, the indicator of economic activity pointed to a further decline in economic performance. Economic activity is estimated to have contracted by 3.9 percent following a 0.9 percent decline in the quarter ending in June 2022. Elevated inflationary pressures and supply side bottlenecks continued to weigh down on overall economic activity.”
Inflation, on the other hand, remains elevated owing to the Russian-Ukraine war and is projected to average seven percent going forward.
“Inflationary pressures eased to 8.5 percent in October from 9.2 percent in September 2022. This was attributable to a mild contraction in energy and food inflation. Although the inflation rate has been declining in recent months, it is expected to remain high and average around 7.0 percent in the medium term.”
Dr Letete said the MPC would continue to closely assess the global economic developments and their impact on the domestic economy especially the Net International Reserves (NIR) and respond accordingly.
“In summary, economic activity generally slowed for most economies. The WEO has projected further weakening of the global economic activity as many economies remain weak due to the lingering effects of COVID-19 and continuing Russia-Ukraine war.
“High inflationary pressures continue to weigh negatively on aggregate demand. Uncertainties around the global financial markets remain elevated. The domestic economy remains weak as reflected by the decline in the indicator of economic activity. Heightened inflationary pressures continue to prevail.”