CBL hints at Covid-19 economic recovery

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Central Bank of Lesotho Governor Dr. Retṧilisitsoe Matlanyane
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By Kefiloe Kajane

The Central Bank Lesotho (CBL) this week indicated that Covid-19 pandemic has continued to take its toll on the world, unleashing devastating human and economic suffering.

This was mentioned by CBL governor Retṧelisitsoe Matlanyane yesterday. She said while progress attained in November towards a vaccine bodes well for growth in the medium term, the global economic downturn in the wake of the virus remains severe and broad based across all economic sectors, affecting advanced, emerging as well as developing economies.

She warned that a return to pre-pandemic levels of economic growth is likely to take a number of years. The most recent global growth forecasts from the International Monetary Fund (IMF) expect global growth to contract by 4.4 per cent in 2020 compared to an earlier projection of 4.9 per cent in June 2020.

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“Similarly, growth in sub-Saharan Africa is expected to decline by 3.0 per cent in 2020 relative to June 2020 projection of 3.2 per cent. There are fears the pandemic will likely come in waves over time as is being observed in other countries, such as Europe, India and the United States (US). General consensus remains that a strong global economic recovery will partly depend on how soon a vaccine for the virus can be made widely available and how quickly and safely countries are able to resume economic activity.

“Global economic activity generally remained in contraction territory, following predominantly negative second quarter growth. Although the severity of the third quarter slowdown was generally observed across developed, emerging and developing economies, China maintained its positive growth momentum during this time. Recent macroeconomic data points to signs of a pick-up in global economic activity, albeit in a manner that is uneven between and within countries and at levels much lower than at the start of 2020.

This is despite unprecedented monetary and fiscal policy easing by countries including the US and China, as well as an easing of lockdown conditions in some countries around the world. Labour market developments show signs of slight improvement, although risks to economic outlook remain prominent and tilted to the downside, emanating mainly from the continued spread of the coronavirus, a continuation of trade and geopolitical tensions, and other country-specific factors. Inflationary pressures were a mixed bag in advanced economies in the third quarter of 2020,” she explained.

She further explained that in the United State, the rate of inflation increased. While it declined in the Euro Area and the UK. She said the monetary policy stance remained accommodative across advanced economies, with rates in the US, the Euro Area and UK kept close to the effective lower bound.

Matlanyane also said the data on economic activity in emerging market economies is expected to present mixed outcomes. China’s economic growth increased by 4.9 per cent in the third quarter of 2020, on account of industrial production, exports and consumer spending.

She indicated that the November 2020 forecast of South African growth by the South African Reserve Bank (SARB) is a contraction of 8.0 per cent in 2020, relative to the 8.2 per cent forecasted decline in September. Explaining that headline and core consumer price inflation are forecasted to average 3.2 and 3.3 per cent in 2020, respectively.

“In the domestic economy, the CBL acted timeously to mitigate the effects of the Covid-19 shock and maintain macroeconomic stability. The CBL has continued to emphasize that preserving adequate reserves to guarantee the peg is of paramount importance, given the fixed exchange rate’s role as the key anchor of macroeconomic stability.

“Within the constraints of the exchange rate peg, the bank has taken various measures to preserve favorable financing conditions for all sectors, thereby supporting the economy and safe guarding price and financial stability during this difficult time. The measures that included the lowering of the key policy rate by 275 basis points since March 2020, the negotiating of fee reductions with mobile network operators and the raising of prudential limits on mobile money transactions, have contributed to the resilience of households and firms.

“Domestic economic performance in the third quarter of 2020, as measured by the CBL’s Quarterly Indicator of Economic Activity (QIEA), increased by 9.4 per cent, relative to a revised 14.2 per cent contraction in the second quarter. The welcomed improvement was driven by a rebound in domestic demand and supply, albeit at levels still below those experienced prior to the pandemic. The domestic economy is projected to contract by a revised 6.0 per cent in 2020, due to the economic fallout of the COVID-19 pandemic. The output contraction is expected to be led by a decline in economic activity in the textiles and clothing industry, construction industry and mining industry,” Matlanyane explained.

She said having considered the Net International Reserve (NIR) developments and outlook, regional inflation and interest rate outlook, domestic economic conditions and the global economic outlook, the MPC decided to: increase the NIR target floor from US$540 million to US$635 million.

She further explained that the NIR target remains consistent with the maintenance of the exchange rate peg between the Loti and the South African rand.