Almost 98 percent of household loans in Lesotho are used for personal and not business purposes, while credit to the private sector is three times smaller in Lesotho than in neighbouring countries due to higher lending rates.
This leaves businesses operating in Lesotho at a funding disadvantage compared to those in neighbouring countries.
Simply put, an investor would prefer to set up a business in neighbouring countries than in Lesotho because of the prohibitively high-interest rates in the country.
These are among a myriad of constraints to private sector development, that Lesotho must tackle to move away from a public sector-reliant economy.
Handing over economic activity to the private sector would help to promote inclusive growth and reduce the fiscal burden.
This is according to the International Monetary Fund (IMF) in its latest report following a periodic consultative visit to Lesotho in June this year.
â€œCredit to the private sector remains broadly flat at around 20 percent of gross domestic product (GDP) with banks primarily lending to households,â€ the IMF report said.
The report has also flagged the high-interest rates for obtaining business loans in Lesotho compared with its neighbours.
â€œAs a share of GDP, bank loans to the private sector have been three times smaller in Lesotho (20 percent) than in South Africa and Namibia (60 percent on average).
â€œWhere micro, small and medium enterprises (MSMEs) have been able to secure credit, borrowing costs are prohibitively high. Spreads between deposit and borrowing rates in Lesotho are the highest among SACU members, albeit below the sub-Saharan Africa average.
â€œWith most major banks operating across the border, this enormous difference in spreads between South Africa and Lesotho underscores that private investors on this side of the border are disadvantaged. Some business owners that operate in both countries find it is easier to borrow in South Africa and use it for investments in Lesotho.â€
REFORMS TO PROMOTE PRIVATE SECTOR GROWTH
The IMF has therefore strongly advised for efforts towards improving business lending in order to lighten the public sectorâ€™s burden of driving the economy.
â€œThe premium on undertaking reforms to address credit constraints, insolvency frameworks, consumer protection, and governance and corruption vulnerabilities as soon as possible to restore investor confidence, and create a growth-friendly environment, is higher than ever.â€
The report also suggested a number of policy issues to be tackled to support business sector development in Lesotho.
â€œA predictable and conducive business environment is critical to attract private investment. Lack of good governance, including rampant corruption, gaps in the legal framework, weak protection of property rights, differential treatment of domestic and foreign investors as well as the dominance of public sector, inhibits private investors from playing a leading role.â€
Revamping of the governance of state-owned enterprises (SOEs) and their role in private sector development has also been recommended to Lesotho.
â€œAt present, SOEs do not deliver value for taxpayersâ€™ money and are not fulfilling their economic and social policy mandates, as well as operating inefficiently and burdening the budget.
WHAT TO AVOID
The IMF said the government must avoid allocating scarce public resources in areas where intervention has been proven ineffective.
â€œSOE mandates and staff incentives need to be redefined, while the transparency of SOE activities is also critical to bolster accountability (IMF 2020).â€
Despite the countryâ€™s apparent business climate challenges, the IMF remains convinced that Lesotho has enormous potential for strong private sector participation in a number of sectors.
These sectors include agriculture, tourism, textiles and mining, as articulated in the 2020 World Bank report on unlocking the private sector’s potential.