88874 INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND KINGDOM OF LESOTHO Joint Bank-Fund Debt Sustainability Analysis Update Prepared jointly by the staffs of the International Development Association and the International Monetary Fund Approved By Marcelo Giugale and Jeffrey D. Lewis (IDA) and Anne-Marie Gulde-Wolf and Chris Lane (IMF) May 19, 2014 This debt sustainability analysis (DSA) updates the joint IDA/IMF DSA from September 2013. It incorporates macroeconomic projections consistent with the government budget for 2014/15, which was recently approved by parliament, and employs the 5 percent discount rate that is now standard for present value calculations. Results indicate that Lesotho remains at moderate risk of external debt distress. 1 However, these results are sensitive to the assumptions concerning the financing of the hydropower plant under the second phase of the Lesotho Highlands Water Project and projections of government’s annual financing needs. Given the low level of domestic public debt, the debt indicator for total public debt remains well below its relevant benchmark. 1 The low-income country debt sustainability framework (LIC DSF) recognizes that better policies and institutions allow countries to manage higher levels of debt, and thus the threshold levels are policy- dependent. Lesotho’s policies and institutions, as measured by the World Bank’s Country Policy and Institutional Assessment (CPIA), place it as a “medium performer”, with an average rating of 3.45 during 2010-12. The relevant indicative thresholds for this category are: 40 percent for the present value (PV) of debt-to-GDP ratio, 150 percent for the PV of debt-to-exports ratio, 250 percent for the PV of debt-to-revenue ratio, 20 percent for the debt service-to-exports ratio, and 20 percent for the debt service-to-revenue ratio. These thresholds are applicable to public and publicly guaranteed external debt. 2 I. UNDERLYING ASSUMPTIONS 1. Based on recent revisions to historical national accounts data and revised assumptions concerning the timeline for construction of the water and hydropower components of the second phase of the Lesotho Highlands Water Project (LHWP-2), real GDP growth is projected to dip in 2014 before picking up over the medium term. On average, growth rates are slightly higher in 2015– 17, compared with projections for the previous DSA. Over the long term, the average annual growth rate was revised downwards from 4.8 percent to 4.5 percent, mainly reflecting a lower share of capital spending in the government’s budget. For imports, the underlying long-term trend anticipates a slight import substitution effect with growth, while over the medium term increases in imports would outpace GDP growth because of imported inputs for LHWP-2 construction. Export growth over the medium term is largely determined by expected developments in the mining and manufacturing sectors. Over the long term exports would receive a boost from the completion of LHWP-2. Macroeconomic Assumptions, 2012-2033 2012 2013 2014 2015 2016 2017 2018 2019-33 Average Act. Est. Projections Real GDP Growth (percent) 6.7 5.4 4.0 4.9 5.0 5.5 5.5 4.7 GDP deflator in U.S. dollar terms (change, in percent) -11.6 -4.9 2.9 3.2 1.8 1.5 1.2 1.9 Effective interest rate (percent) 1.2 1.3 1.8 2.3 2.7 2.4 2.4 1.7 Growth of exports of goods and services (U.S. dollar terms, percent -9.2 -6.9 7.8 4.5 12.1 9.6 6.5 7.0 Growth of imports of goods and services (U.S. dollar terms, percent -2.9 -5.9 4.9 10.8 6.3 4.9 6.8 6.2 Grant element of new public sector borrowing (percent) ... 0.0 40.4 34.0 33.7 28.9 26.1 37.7 Government revenue (excluding grants, percent of GDP) 57.5 53.6 56.2 54.4 51.5 50.8 50.2 48.3 Government expenditure (percent of GDP) Primary (noninterest) expenditure 60.3 59.5 61.5 58.4 57.1 57.1 56.7 56.1 Interest payments Aid flows (millions of U.S. dollars) 942 928 855 824 800 780 758 520 of which: Grants 199 124 105 102 104 113 121 207 Concessioanl loans 744 804 750 721 695 668 637 313 Grant equivalent financing (percent of GDP) ... 5.3 6.5 5.9 5.5 5.6 5.7 5.6 Grant equivalent financing (percent of external financing) ... 100.0 66.0 59.1 59.8 53.8 50.0 62.2 2. On the fiscal side, the government revenue (excluding grants) was revised upward on average by 2 percent of GDP a year over the long run, largely reflecting higher revenue projections from the Southern African Customs Union (SACU) – compared with projections in the previous DSA. Primary (noninterest) expenditure projections have also been increased to reflect the latest projections in the authorities’ medium-term fiscal framework, resulting in an average primary deficit of 4.3 percent of GDP per annum, which is assumed to be financed mostly through external concessional borrowing. 3. The assumptions regarding the hydropower component of LHWP-2 remain broadly the same as those in the previous DSA with respect to costs ($500 million) and financing terms and conditions (80 percent commercial, 20 percent grants). Only the timeline has been pushed back to 2019–26, in light of recent delays.2 However, these assumptions are tentative as the project’s 2 As before, construction under the water component is expected to begin in 2014-15 and would run through 2021/22. The total cost of this component (US$900 million) will be financed by grants from South Africa. 3 feasibility study is still underway (expected to be completed by end-2014). The actual size of the project could be larger and the terms of the financing could differ. 4. In line with the current policy, this update also uses a discount rate of 5 percent. II. EXTERNAL DEBT SUSTAINABILITY A. Baseline 5. All external debt sustainability indicators remain below their corresponding thresholds in the baseline scenario (Table 1a). For example, the present value (PV) of external debt to GDP ratio is expected to fall to below 30 percent in 2016, after which time it is expected to rise to 39 percent in 2022, before subsiding to 34 percent in the early 2030s. The temporary rise in the debt ratio is driven by the construction of a hydropower plant under LHWP-2 and related financing needs. Moreover, in the long run the looser fiscal outlook (higher primary deficits) raises the PV of external debt to GDP ratio by more than 10 percent of GDP, compared with the previous DSA. 6. These results are sensitive to the assumptions concerning the amount and concessionality of LHWP-2 financing, the future of SACU revenues, and the concessionality of external borrowing in general. The temporary increase in PV of external debt to GDP ratio is driven entirely by higher nonconcessional borrowing for the LHWP-2. The increased borrowing during the construction of the power plant does make Lesotho temporarily more vulnerable to external shocks. The authorities are currently undertaking a feasibility study, results of which would provide a better idea about the financing options. While the baseline assumes that the government revenue would gradually decline from 56 percent of GDP in 2014 to 48 percent of GDP in 2023 and onwards, largely due to a decline in SACU revenue, a more abrupt and permanent decline of these revenues—as discussed in the risk assessment matrix in the staff report for Lesotho’s Article IV consultation (EBS/14/[ ])—would require a major fiscal adjustment to maintain macroeconomic stability rather than additional borrowing. B. Sensitivity Analysis 7. Stress tests show that Lesotho’s external debt vulnerabilities would increase significantly, in particular in the event of a worsening of borrowing terms, a major exchange rate depreciation, or if the export growth turned out to be lower than the historical average. (Table 1b). A 200 basis point increase in interest rates for new public sector loans in 2013–33 (A2) would increase the PV of external debt-to-GDP ratio to 55 percent in 2024 and beyond. Similarly, in the event of a one-time 30 percent depreciation of the nominal exchange rate (B6) in 2014, the PV of external debt-to-GDP ratio would increase to 55 percent by 2021/22, gradually falling thereafter to 50 percent by 2028 and staying at about 48 percent thereafter. In both of these stress tests, the 40-percent threshold would be breached throughout the projection period. In a scenario where export value grows (B2) at one standard deviation lower than the historical average, the PV of external debt-to-export ratio would rise from 2018 and peak in 2021 at 142 percent, before easing to 100 percent in 2030s. In a scenario in which the key variables are set at their average of the past 10 years, Lesotho’s external debt ratios actually fall relative to the baseline, reflecting an average fiscal surplus over the past years 4 thanks to the large SACU revenue in 2006–09. However, given the structural break, the historical scenario could be considered less relevant for the analysis. C. Including Remittances3 8. When remittances are included in the analysis, a key external debt indicator would be briefly breached, albeit by a small margin. (Figure 2). The PV of external debt to GDP plus remittances ratio is expected to fall to 28 percent by 2017, after which time it is expected to rise, reaching nearly 36½ percent in 2021–23 (the relevant threshold is 36 percent), and then fall to 32 percent by the end of the projection period. Other indicators behave similarly to the analysis excluding remittances. III. PUBLIC SECTOR DEBT SUSTAINABILITY 9. Public debt indicators largely mirror those of external debt, because domestic debt remains low throughout the projection period (2–4 percent of GDP). Domestic debt is projected to fall to about 2 percent of GDP by 2018/19, and thereafter to gradually increase to about 4 percent of GDP in 2032/33. The PV of public sector debt stood at 37 percent in 2012/13. 10. The standard sensitivity tests for public debt distress point to higher degree of vulnerability of public debt to lower long-run GDP growth (Table 2b). In the case of permanently lower GDP growth (A3) the PV of debt to GDP ratio would increase permanently throughout the projection period to 56 percent. The permanently-lower-GDP-growth test has a similar effect on the PV of debt-to-revenue and debt service-to-revenue ratios. IV. CONCLUSION 11. Lesotho remains at moderate risk of external debt distress. All external debt and debt service indicators for the base case remain below their respective thresholds. However, there is a permanent breach in the sensitivity tests. Compared with the previous DSA, the primary fiscal deficit has deteriorated throughout the projection period by an average of about 4 percent of GDP a year, increasing the PV of external debt to GDP ratio by 12 percentage points at the end of the projection period. The risks appear manageable, provided that the fiscal stance does not deteriorate further and that government’s external borrowing is largely on concessional terms. Uncertainty about the parameters of the LHWP-2 project and its financing could also create some risk to debt sustainability. For the next DSA, these parameters should be updated based on the conclusions of the project’s feasibility study currently underway. 12. The authorities broadly agreed with the assessment of moderate risk of external debt distress. They appreciated that the PV of external debt ratio rises owing to the construction of the 3 Presenting the analysis including remittances is mainly for illustrative purposes. With declining migrant employment in South Africa’s mining sector, Lesotho’s dependence on remittances continues to diminish. In the long term, the ratio of remittances to GDP is expected to fall well below 10 percent. 5 LHWP-2 and agreed that care would be needed to ensure that the financing arrangements do not increase the risk of external debt distress. 6 Table 1a .Lesotho: External Debt Sustainability Framework, Baseline Scenario, 2011–33 1 (In percent of GDP, unless otherwise indicated) Actual Historical 6/ Standard 6/ Projections Average Deviation 2013-18 2019-33 2011 2012 2013 2014 2015 2016 2017 2018 Average 2023 2033 Average External debt (nominal) 1/ 31.5 36.5 38.9 37.8 38.3 39.1 41.0 43.8 53.2 49.4 of which: public and publicly guaranteed (PPG) 31.5 36.5 38.9 37.8 38.3 39.1 41.0 43.8 53.2 49.4 Change in external debt 31.5 5.0 2.5 -1.1 0.5 0.8 1.9 2.8 0.2 -0.4 Identified net debt-creating flows ... 4.3 -1.2 -0.7 7.0 8.3 6.2 7.7 4.1 -1.4 Non-interest current account deficit 8.6 2.4 0.6 -9.3 13.5 0.4 8.2 9.5 7.7 9.3 5.9 2.2 4.7 Deficit in balance of goods and services 61.1 66.0 62.5 60.1 63.9 61.4 58.3 58.5 53.6 49.4 Exports 46.3 44.5 41.4 41.7 40.3 42.3 43.2 43.1 41.8 45.0 Imports 107.4 110.5 103.9 101.8 104.2 103.7 101.5 101.6 95.3 94.4 Net current transfers (negative = inflow) -27.2 -40.7 -38.7 -38.6 7.1 -38.3 -35.8 -32.7 -33.2 -32.6 -32.5 -34.4 -33.2 of which: official -20.0 -33.8 -31.7 -32.1 -30.1 -26.8 -27.2 -26.7 -26.5 -27.9 Other current account flows (negative = net inflow) -25.3 -22.9 -23.2 -21.4 -19.9 -19.3 -17.5 -16.5 -15.1 -12.8 Net FDI (negative = inflow) -0.4 -0.4 -0.3 -2.2 1.6 -0.3 -0.3 -0.3 -0.4 -0.4 -0.7 -2.0 -1.1 Endogenous debt dynamics 2/ ... 2.3 -1.5 -0.8 -0.9 -0.8 -1.1 -1.2 -1.1 -1.6 Contribution from nominal interest rate ... 0.4 0.5 0.6 0.8 1.0 0.9 0.9 1.1 0.5 Contribution from real GDP growth 0.0 -2.2 -2.0 -1.4 -1.7 -1.8 -2.0 -2.1 -2.2 -2.1 Contribution from price and exchange rate changes 0.0 4.1 … … … … … … … … Residual (3-4) 3/ ... 0.7 1.8 0.7 -5.3 -6.8 -3.7 -4.4 -2.8 2.0 of which: exceptional financing ... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 PV of external debt 4/ ... 33.4 32.7 30.6 29.9 29.6 30.5 32.3 38.1 34.2 In percent of exports ... 75.1 79.1 73.2 74.2 70.0 70.5 74.9 91.3 76.1 PV of PPG external debt ... 33.4 32.7 30.6 29.9 29.6 30.5 32.3 38.1 34.2 In percent of exports ... 75.1 79.1 73.2 74.2 70.0 70.5 74.9 91.3 76.1 In percent of government revenues ... 58.1 61.1 54.3 54.9 57.4 60.0 64.3 79.1 71.0 Debt service-to-exports ratio (in percent) 3.3 3.2 4.2 4.2 5.5 5.0 4.6 4.8 9.0 5.6 PPG debt service-to-exports ratio (in percent) 3.3 3.2 4.2 4.2 5.5 5.0 4.6 4.8 9.0 5.6 PPG debt service-to-revenue ratio (in percent) 3.4 2.5 3.3 3.1 4.1 4.1 3.9 4.1 7.8 5.2 Total gross financing need (Billions of U.S. dollars) 241 80 47 47 272 323 287 361 413 237 Non-interest current account deficit that stabilizes debt ratio -22.8 -2.6 -1.9 1.6 7.7 8.6 5.8 6.6 5.7 2.6 Key macroeconomic assumptions Real GDP growth (in percent) 3.8 6.7 5.4 4.5 1.3 4.0 4.9 5.0 5.5 5.5 4.5 4.5 4.5 4.7 GDP deflator in US dollar terms (change in percent) 3.7 -11.6 -4.9 9.7 18.3 2.9 3.2 1.8 1.5 1.2 4.2 2.0 2.0 1.9 Effective interest rate (percent) 5/ ... 1.2 1.3 1.2 … 1.8 2.3 2.7 2.4 2.4 2.0 2.3 1.1 1.7 Growth of exports of G&S (US dollar terms, in percent) 15.3 -9.2 -6.9 10.1 15.5 7.8 4.5 12.1 9.6 6.5 7.4 5.6 7.0 7.0 Growth of imports of G&S (US dollar terms, in percent) 6.5 -2.9 -5.9 11.1 15.1 4.9 10.8 6.3 4.9 6.8 6.7 2.7 7.0 6.2 Grant element of new public sector borrowing (in percent) ... ... ... ... ... 40.4 34.0 33.7 28.9 26.1 32.6 38.5 42.3 37.7 Government revenues (excluding grants, in percent of GDP) 44.6 57.5 53.6 56.2 54.4 51.5 50.8 50.2 48.2 48.2 48.3 Aid flows (in Billions of US dollars) 7/ 893 942 928 855 824 800 780 758 594 368 520 of which: Grants 193 199 124 105 102 104 113 121 165 312 207 of which: Concessional loans 700 744 804 750 721 695 668 637 429 56 313 Grant-equivalent financing (in percent of GDP) 8/ ... ... 5.3 6.5 5.9 5.5 5.6 5.7 5.9 5.6 5.6 Grant-equivalent financing (in percent of external financing) ... ... 100.0 66.0 59.1 59.8 53.8 50.0 61.1 67.2 62.2 Memorandum items: Nominal GDP (Billions of US dollars) 2,461 2,321 2,325 2,486 2,692 2,877 3,081 3,289 4,620 8,747 Nominal dollar GDP growth 7.6 -5.7 0.2 6.9 8.3 6.9 7.1 6.8 6.0 6.6 6.6 6.7 PV of PPG external debt (in Billions of US dollars) 731 721 760 804 851 939 1,062 1,762 2,993 (PVt-PVt-1)/GDPt-1 (in percent) -0.4 1.7 1.8 1.7 3.1 4.0 2.0 1.9 2.0 2.6 Gross workers' remittances (Billions of US dollars) 298 260 240 227 203 185 170 160 283 583 PV of PPG external debt (in percent of GDP + remittances) ... 30.1 29.7 28.0 27.8 27.8 28.9 30.8 35.9 32.1 PV of PPG external debt (in percent of exports + remittance ... 60.0 63.3 60.1 62.5 60.8 62.6 67.3 79.6 66.3 Debt service of PPG external debt (in percent of exports + r ... 2.5 3.4 3.5 4.7 4.3 4.1 4.3 7.9 4.8 Sources: Country authorities; and staff estimates and projections. 0 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Assumes that PV of private sector debt is equivalent to its face value. 5/ Current-year interest payments divided by previous period debt stock. 6/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 7/ Defined as grants, concessional loans, and debt relief. 8/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7 Table 1b. Lesotho: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2014–33 (In percent) Projections 2014 2015 2016 2017 2018 2023 2033 PV of debt-to GDP ratio Baseline 31 30 30 30 32 38 34 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 21 7 -7 -17 -27 -63 -56 A2. New public sector loans on less favorable terms in 2013-2033 2 30 32 33 36 40 55 54 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 31 31 30 31 33 39 35 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 34 39 38 39 40 45 35 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 34 38 38 39 41 48 43 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 35 37 36 37 39 43 35 B5. Combination of B1-B4 using one-half standard deviation shocks 35 39 38 39 41 46 37 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 43 42 42 43 46 54 48 PV of debt-to-exports ratio Baseline 73 74 70 71 75 91 76 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 50 16 -17 -40 -62 -150 -123 A2. New public sector loans on less favorable terms in 2013-2033 2 73 79 79 84 93 132 121 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 73 74 70 70 75 91 76 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 93 121 114 113 118 136 97 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 73 74 70 70 75 91 76 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 84 91 86 86 90 104 77 B5. Combination of B1-B4 using one-half standard deviation shocks 86 97 91 91 96 111 83 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 73 74 70 70 75 91 76 PV of debt-to-revenue ratio Baseline 54 55 57 60 64 79 71 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 37 12 -14 -34 -53 -130 -115 A2. New public sector loans on less favorable terms in 2013-2033 2 54 59 65 71 80 115 112 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 55 56 59 61 66 81 73 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 60 71 74 77 81 94 72 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 61 70 73 76 82 101 90 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 62 68 70 73 77 90 72 B5. Combination of B1-B4 using one-half standard deviation shocks 62 71 74 76 81 95 76 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 77 78 81 85 91 112 100 Sources: Country authorities; and staff estimates and projections. 1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline. 3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels). 4/ Includes official and private transfers and FDI. 5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent. 6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2. 8 Table 1b. Lesotho: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2014-33 (concluded) (In percent) Debt service-to-exports ratio Baseline 4 6 5 5 5 9 6 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 4 4 3 2 2 0 -8 A2. New public sector loans on less favorable terms in 2013-2033 2 4 6 5 5 5 9 10 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 4 6 5 5 5 9 6 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 5 7 7 6 6 13 8 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 4 6 5 5 5 9 6 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 4 6 5 5 5 10 6 B5. Combination of B1-B4 using one-half standard deviation shocks 4 6 6 5 5 11 6 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 4 6 5 5 5 9 6 Debt service-to-revenue ratio Baseline 3 4 4 4 4 8 5 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 3 3 3 2 1 0 -8 A2. New public sector loans on less favorable terms in 2013-2033 2 3 4 4 4 5 8 9 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 3 4 4 4 4 8 5 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 3 4 4 4 4 9 6 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 4 5 5 5 5 10 7 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 3 4 4 4 4 9 6 B5. Combination of B1-B4 using one-half standard deviation shocks 3 4 5 4 5 9 6 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 4 6 6 6 6 11 7 Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 33 33 33 33 33 33 33 Sources: Country authorities; and staff estimates and projections. 1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline. 3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels). 4/ Includes official and private transfers and FDI. 5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent. 6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2. 9 Table 2a. Lesotho: Public Sector Debt Sustainability Framework, Baseline Scenario, 2011–33 (In percent of GDP, unless otherwise indicated) Actual Projections 5/ 5/ Standar 2019- Avera d 2013-18 33 ge Deviatio Average Avera 2011 2012 2013 n 2014 2015 2016 2017 2018 2023 2033 ge Public sector debt 1/ 37.6 39.7 41.8 40.4 40.6 41.3 43.0 45.8 56.3 53.4 of which: foreign-currency denominated 31.5 36.5 38.9 37.8 38.3 39.1 41.0 43.8 53.2 49.4 2.4 2.1 1.9 1.9 3.0 4.0 Change in public sector debt 32.8 2.1 2.1 -1.4 0.2 0.6 1.7 2.8 0.3 -0.3 Identified debt-creating flows ... -2.5 0.6 -2.9 -1.9 0.4 0.8 1.0 2.1 1.7 Primary deficit 9.9 -5.8 0.6 -3.4 7.5 1.0 0.3 2.0 2.6 2.8 1.7 4.3 4.3 4.2 Revenue and grants 52.5 66.1 58.9 60.5 58.2 55.2 54.5 53.9 51.8 51.8 51.9 of which: grants 7.8 8.6 5.3 4.2 3.8 3.6 3.7 3.7 3.6 3.6 Primary (noninterest) expenditure 62.4 60.3 59.5 61.5 58.4 57.1 57.1 56.7 56.1 56.1 56.1 Automatic debt dynamics ... 3.3 0.0 -3.9 -2.2 -1.5 -1.8 -1.7 -2.2 -2.6 Contribution from interest rate/growth differential ... -2.1 -2.1 -1.4 -1.6 -1.5 -1.9 -2.1 -2.2 -2.6 of which: contribution from average real interest rat ... 0.3 -0.1 0.2 0.3 0.4 0.2 0.2 0.2 -0.3 of which: contribution from real GDP growth -0.2 -2.4 -2.0 -1.6 -1.9 -1.9 -2.1 -2.2 -2.4 -2.3 Contribution from real exchange rate depreciation ... 5.3 2.1 -2.5 -0.6 -0.1 0.2 0.3 ... ... Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other (specify, e.g. bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Residual, including asset changes ... 4.7 1.5 1.5 2.1 0.2 0.9 1.8 -1.8 -2.0 Other Sustainability Indicators PV of public sector debt ... 36.7 35.6 33.2 32.2 31.7 32.4 34.2 41.2 38.2 of which: foreign-currency denominated ... 33.4 32.7 30.6 29.9 29.6 30.5 32.3 38.1 34.2 of which: external ... 33.4 32.7 30.6 29.9 29.6 30.5 32.3 38.1 34.2 PV of contingent liabilities (not included in public secto ... ... ... ... ... ... ... ... ... ... Gross financing need 2/ 12.5 -3.6 2.9 3.2 2.9 4.4 4.9 5.1 8.7 7.6 PV of public sector debt-to-revenue and grants ratio (in perc … 55.5 60.5 54.9 55.4 57.5 59.5 63.5 79.5 73.9 PV of public sector debt-to-revenue ratio (in percent) … 63.7 66.5 59.0 59.3 61.5 63.8 68.1 85.4 79.3 of which: external 3/ … 58.1 61.1 54.3 54.9 57.4 60.0 64.3 79.1 71.0 Debt service-to-revenue and grants ratio (in percent) 4/ 4.9 3.2 3.9 3.7 4.6 4.4 4.3 4.4 8.5 6.3 Debt service-to-revenue ratio (in percent) 4/ 5.8 3.7 4.3 3.9 4.9 4.8 4.6 4.7 9.2 6.8 Primary deficit that stabilizes the debt-to-GDP ratio -22.9 -7.9 -1.5 2.4 0.1 1.4 0.9 0.0 4.0 4.6 Key macroeconomic and fiscal assumptions Real GDP growth (in percent) 3.8 6.7 5.4 4.5 1.3 4.0 4.9 5.0 5.5 5.5 4.5 4.5 4.5 4.7 Average nominal interest rate on forex debt (in percent) ... 1.2 1.3 1.2 … 1.8 2.3 2.7 2.4 2.4 2.0 2.3 1.1 1.7 Average real interest rate on domestic debt (in percent) 0.4 5.8 0.0 3.1 3.8 2.7 1.8 2.8 3.0 3.0 2.5 2.9 2.9 2.9 Real exchange rate depreciation (in percent, + indicates dep 7.5 18.1 6.1 -1.5 13.9 ... ... ... ... ... ... ... ... ... Inflation rate (GDP deflator, in percent) 7.4 1.7 7.6 6.3 3.3 5.2 6.1 5.1 4.8 4.8 5.4 5.0 5.0 5.0 Growth of real primary spending (deflated by GDP deflator, i 14.7 3.3 3.8 0.8 6.1 7.5 -0.3 2.7 5.3 4.8 3.8 4.5 4.5 4.6 Grant element of new external borrowing (in percent) ... ... 0.0 … … 40.4 34.0 33.7 28.9 26.1 27.2 38.5 42.3 ... Sources: Country authorities; and staff estimates and projections. 1/ Gross debt is used. The public sector comprises the central government, the Central Bank of Lesotho, and all enterprises with majority state ownership. 2/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period. 3/ Revenues excluding grants. 4/ Debt service is defined as the sum of interest and amortization of medium and long-term debt. 5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 10 Table 2b. Lesotho: Sensitivity Analysis for Key Indicators of Public Debt 2014–33 (In percent) Projections 2014 2015 2016 2017 2018 2023 2033 PV of Debt-to-GDP Ratio Baseline 33 32 32 32 34 41 38 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 30 27 23 20 19 5 -33 A2. Primary balance is unchanged from 2013 33 32 31 30 31 27 6 A3. Permanently lower GDP growth 1/ 33 33 33 34 36 47 56 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2014-20 34 34 34 36 38 49 51 B2. Primary balance is at historical average minus one standard deviations in 2014-201 35 37 36 37 38 45 40 B3. Combination of B1-B2 using one half standard deviation shocks 33 32 32 33 35 44 44 B4. One-time 30 percent real depreciation in 2014 45 42 41 40 41 46 43 B5. 10 percent of GDP increase in other debt-creating flows in 2014 40 39 38 38 40 46 41 PV of Debt-to-Revenue Ratio 2/ Baseline 55 55 58 60 63 80 74 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 50 46 42 37 35 9 -64 A2. Primary balance is unchanged from 2013 54 55 56 55 57 53 12 A3. Permanently lower GDP growth 1/ 55 56 59 62 67 90 108 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2014-20 56 59 62 66 71 94 97 B2. Primary balance is at historical average minus one standard deviations in 2014-201 58 63 66 67 71 87 78 B3. Combination of B1-B2 using one half standard deviation shocks 54 55 58 61 66 85 84 B4. One-time 30 percent real depreciation in 2014 74 73 74 74 77 88 83 B5. 10 percent of GDP increase in other debt-creating flows in 2014 66 67 69 71 74 89 79 Debt Service-to-Revenue Ratio 2/ Baseline 4 5 4 4 4 9 6 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 4 4 4 4 3 7 -3 A2. Primary balance is unchanged from 2013 4 5 4 4 4 8 3 A3. Permanently lower GDP growth 1/ 4 5 5 4 4 9 8 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2014-20 4 5 5 5 5 9 8 B2. Primary balance is at historical average minus one standard deviations in 2014-201 4 5 5 5 5 9 7 B3. Combination of B1-B2 using one half standard deviation shocks 4 5 4 4 4 9 7 B4. One-time 30 percent real depreciation in 2014 4 6 6 6 6 12 10 B5. 10 percent of GDP increase in other debt-creating flows in 2014 4 5 6 5 5 9 7 Sources: Country authorities; and staff estimates and projections. 1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period. 2/ Revenues are defined inclusive of grants. 11 Table 3a. Lesotho: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt (including remittances), 2014-33 (In percent) Projections 2014 2015 2016 2017 2018 2023 2033 PV of debt-to-GDP+remittances ratio Baseline 28 28 28 29 31 36 32 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 19 6 -7 -16 -26 -61 -55 A2. New public sector loans on less favorable terms in 2013-2033 2 28 30 31 34 38 52 51 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 28 28 28 30 31 37 33 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 31 36 36 37 39 42 33 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 31 35 35 36 39 45 40 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 32 34 34 35 37 41 32 B5. Combination of B1-B4 using one-half standard deviation shocks 32 36 36 37 39 43 34 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 38 38 38 40 43 50 44 PV of debt-to-exports+remittances ratio Baseline 60 62 61 63 67 80 66 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 41 14 -15 -36 -57 -139 -119 A2. New public sector loans on less favorable terms in 2013-2033 2 60 67 69 74 84 115 105 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 60 62 61 63 67 80 66 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 74 98 96 98 104 115 82 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 60 62 61 63 67 80 66 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 71 78 75 76 81 91 67 B5. Combination of B1-B4 using one-half standard deviation shocks 71 81 78 80 85 95 71 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 60 62 61 63 67 80 66 PV of debt-to-revenue ratio Baseline 54 55 57 60 64 79 71 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 37 12 -14 -34 -53 -130 -115 A2. New public sector loans on less favorable terms in 2013-2033 2 54 59 65 71 80 115 112 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 55 56 59 61 66 81 73 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 60 71 74 77 81 94 72 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 61 70 73 76 82 101 90 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 62 68 70 73 77 90 72 B5. Combination of B1-B4 using one-half standard deviation shocks 62 71 74 76 81 95 76 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 77 78 81 85 91 112 100 Sources: Country authorities; and staff estimates and projections. 1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline. 3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels). 4/ Includes official and private transfers and FDI. 5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent. 6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2. 12 Table 3a. Lesotho: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt (including remittances), 2014–33 (concluded) (In percent) Debt service-to-exports+remittances ratio Baseline 3 5 4 4 4 8 5 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 3 4 3 2 1 0 -8 A2. New public sector loans on less favorable terms in 2013-2033 2 3 5 5 5 5 8 9 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 3 5 4 4 4 8 5 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 4 6 6 5 6 11 7 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 3 5 4 4 4 8 5 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 4 5 5 4 5 9 5 B5. Combination of B1-B4 using one-half standard deviation shocks 4 5 5 5 5 9 6 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 3 5 4 4 4 8 5 Debt service-to-revenue ratio Baseline 3 4 4 4 4 8 5 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 3 3 3 2 1 0 -8 A2. New public sector loans on less favorable terms in 2013-2033 2 3 4 4 4 5 8 9 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 3 4 4 4 4 8 5 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 3 4 4 4 4 9 6 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 4 5 5 5 5 10 7 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 3 4 4 4 4 9 6 B5. Combination of B1-B4 using one-half standard deviation shocks 3 4 5 4 5 9 6 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 4 6 6 6 6 11 7 Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 33 33 33 33 33 33 33 Sources: Country authorities; and staff estimates and projections. 1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline. 3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels). 4/ Includes official and private transfers and FDI. 5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent. 6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2. 13 Figure 1a. Lesotho: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2013-2033 1/ a. Debt Accumulation b.PV of debt-to GDP ratio 7 45 60 6 40 50 5 35 30 4 40 25 3 20 30 2 15 1 10 20 0 5 2013 2018 2023 2028 2033 10 -1 0 0 Rate of Debt Accumulation 2013 2018 2023 2028 2033 Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale) c.PV of debt-to-exports ratio d.PV of debt-to-revenue ratio 160 300 140 250 120 200 100 80 150 60 100 40 50 20 0 0 2013 2018 2023 2028 2033 2013 2018 2023 2028 2033 e.Debt service-to-exports ratio f .Debt service-to-revenue ratio 25 25 20 20 15 15 10 10 5 5 0 0 2013 2018 2023 2028 2033 2013 2018 2023 2028 2033 Baseline Historical scenario Most extreme shock 1/ Threshold Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2023. In figure b. it corresponds to a Terms shock; in c. to a Exports shock; in d. to a Terms shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock. 14 Figure 1b.Lesotho: Indicators of Public Debt Under Alternative Scenarios, 2013–33 1/ Baseline Fix Primary Balance Most extreme shock 1/ Historical scenario Public debt benchmark 70 PV of Debt-to-GDP Ratio 60 50 40 30 20 10 0 -10 -20 -30 -40 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 120 PV of Debt-to-Revenue Ratio 2/ 100 80 60 40 20 0 -20 -40 -60 -80 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 14 Debt Service-to-Revenue Ratio 12 10 8 6 4 2 0 -2 -4 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2023. 2/ Revenues are defined inclusive of grants. 15 Figure 2. Lesotho: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios (including remittances), 2013–33 1/ a. Debt Accumulation b.PV of debt-to-GDP+remittances ratio 7 45 60 6 40 50 5 35 30 4 40 25 3 20 30 2 15 1 10 20 0 5 10 -1 2013 2018 2023 2028 2033 0 0 Rate of Debt Accumulation 2013 2018 2023 2028 2033 Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale) c.PV of debt-to-exports+remittances ratio d.PV of debt-to-revenue ratio 140 300 120 250 100 200 80 150 60 100 40 20 50 0 0 2013 2018 2023 2028 2033 2013 2018 2023 2028 2033 e.Debt service-to-exports+remittances ratio f .Debt service-to-revenue ratio 18 25 16 20 14 12 15 10 8 10 6 4 5 2 0 0 2013 2018 2023 2028 2033 2013 2018 2023 2028 2033 Baseline Historical scenario Most extreme shock 1/ Threshold Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2023. In figure b. it corresponds to a Terms shock; in c. to a Exports shock; in d. to a Terms shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock.