Moderate Inflation Increase

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LESOTHO
ECONOMIC OUTLOOK

RiSK SummaRY
POLITICAL RISK

Fiscal Deficit In 2009
The Ministry of Education and Training has signed a Memorandum of Understanding (MOU) with Microsoft in a bid to ensure greater use of information technology in the country’s schools. The MOU will see Microsoft assist with the development of teachers’ IT skills as well as supporting infrastructure at education institutions. Insufficient resources have prevented the government from providing adequate facilities for the country’s students, leading to a high drop-out rate from primary and secondary schools. Given the authorities’ limited resources, external assistance is necessary to address this. Our short-term political risk rating is 68.1.

Moderate Inflation Increase
BMI View: Inflation is likely to be nearing a bottom at 4.2% y-o-y for October, and price growth is set to tick higher. We think, however, that the increase in inflation will be moderate and that there is little likelihood that prices will spiral out of control. We believe that the 4.2% y-o-y headline inflation figure recorded in October is close to the bottom of the cycle and while we may see one or two more months of disinflation (year-onyear) moving into the end of 2009, headline price growth rate will start to increase in 2010. That said, we do not believe that the headline number will move significantly higher and the threat of high inflation is remote. For the year, we forecast the headline number to average 5.3% in year-on-year terms. The food component of the basket, which comprises 39.8%, led the decline in the headline figure, coming in at 3.9% y-o-y, while the non-food component grew by 4.7%. Headline inflation is likely to start moving higher from this point for two reasons. Firstly, the Lesotho economy is inextricably linked to that of South Africa, with the loti being pegged to the rand and almost all imports coming from its neighbour. If we assume that prices move in line with those in South...
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