…as external debt increases to 74 percent
Mohloai Mpesi
THE government of Lesotho is reported to have lost over M164 million due to illicit financial flows, according to the African Development Bank’s Country Focus Report 2024.
The report, titled “Driving Lesotho’s Transformation: The Reform of the Global Financial Architecture,” reveals that the country has lost approximately USD 9.537 million (M164 million) between?1980 and 2019 due to these illicit flows.?
Illicit financial flows (IFFs) involve the illegal movement of money or capital from one country to another. Examples of IFFs include a drug cartel using trade-based money laundering, an importer using trade misinvoicing to evade taxes, a corrupt public official using an anonymous shell company to transfer illicit funds, a human trafficker carrying cash across borders, or a terrorist organisation wiring money internationally.
The African Development Bank Group Focus Report 2024 released this past week states that Lesotho’s financial losses stem from trade misinvoicing, transfer pricing, corruption, money laundering, and human and drug trafficking. These issues have severely impacted the country’s ability to access funds from the global financial architecture.
“Reforming the current global financial architecture to make it more responsive to financing needs of African countries: Lesotho has a financing gap of USD 0.718 billion to achieve the SDGs by 20230.
“The current state of the global financial architecture constrains Lesotho to close this gap. Lesotho is disadvantaged in terms of accessing funds from the global financial architecture. This calls for the need to overhaul the aid architecture.
“Lesotho can benefit from this overhaul by avoiding global tax evasion by multinational corporations and illicit financial flows (IFFs). IFFs include trade misinvoicing, transfer pricing, contraband, corruption, money laundering, and human and drug trafficking. Lesotho lost USD 9.537 million between 1980 and 2019 (Africa Growth Initiative, Illicit Financial Flows in Africa: drivers, destinations and policy Options),” the report reads.
Public Debt
The report further indicates that Lesotho’s external debt accounts for 74 percent of its total public debt, primarily owed to multilateral partners. Major creditors include the International Development Association (IDA), the African Development Fund (AfDF), the European Investment Bank (EIB), and the International Monetary Fund (IMF). Bilateral debt accounts for less than 15 percent of the total, with China being the largest bilateral creditor, accounting for 70 percent of this debt.
Debt projections suggest an increasing burden, reaching 59.80 percent and 60.4 percent in 2024 and 2025, respectively. The government is implementing measures such as fiscal consolidation, improving capital spending efficiency, building buffers against future shocks, preventing the crowding out of private sector credit, addressing contingent liability risks, and deepening the domestic capital market.
“External debt accounts for 74% of total public debt and is predominantly owed to multilateral partners on concessional terms.
“The main creditor is the International Development Association (IDA), followed by the African Development Fund (AfDF), the European Investment Bank (EIB), and the IMF. Debt owed to bilateral creditors accounts for less than 15% of total external public debt. Of this, China accounts for 70%.
“Debt projections suggest an increase of the debt burden, which will reach 59.80% and 60.4% in 2024 and 2025, respectively. The Government of Lesotho is taking the following measures to contain the debt, including fiscal consolidation, improving the efficiency of capital spending, building buffers against future shocks, preventing the crowding out of credit to the private sector, addressing contingent liability risks and deepening the domestic capital market.”
The present value (PV) of the public and publicly guaranteed (PPG) external debt-to-GDP ratio neared the 40 percent threshold in FY 2020/21, approximately 10 percentage points higher than the 2019 Debt Sustainability Analysis (DSA). The gross public debt-to-GDP ratio increased by 4.1 percentage points to 59.8 percent of GDP in FY22/23 due to exchange rate valuation effects on external debt and rising domestic debt issuance. Despite this, external debt sustainability remains below the threshold, with the overall risk of public debt distress considered moderate.
Revenue from the Southern African Customs Union (SACU) is projected to increase from 4.7 percent in 2023 to 5.3 percent in 2024 and 2025. However, this increase is likely to be offset by rising government expenditure.
The report highlights current debt drivers, including declining SACU transfers, growing public expenditure, new borrowing, and rising contingent liabilities, which have increased debt sustainability risks. Lesotho’s debt indicators are expected to worsen in the near term but improve over the medium term, supported by recovering SACU transfers and slower growth in public expenditure relative to GDP.
The African Development Bank Group Focus Report recommends that the government avoid crowding out private sector credit, address contingent liability risks (mainly from underfunded pensions), and reduce the debt burden through governance reforms to strengthen debt management capacity. The report suggests adopting a debt strategy with clear fiscal rules to prevent overspending and control debt levels. Additionally, diversifying debt sources and avoiding commercial debt where possible are advised.
“The government should adopt a debt strategy with clearly defined fiscal rules. This will avoid overspending and keep debt under control. It should also diversify debt sources and avoid commercial debt as much as possible,” says the report.