Lesotho loses over RM164m to illicit financial flows

…external debt increased to 74%

Mpesi Harvester

According to the African Development Bank’s 2024 Country Focus Report, the Lesotho government has lost more than RM164 million due to illicit financial flows.

The report, titled “Driving Lesotho’s Transformation: Reforming the Global Financial Architecture”, showed that the country lost about US$9.537 million (RM164 million) to these illicit financial flows between 1980 and 2019.?

Illicit Financial Flows (IFF) involve the illegal transfer of money or capital from one country to another. Examples of IFF include drug cartels using trade to launder money, importers using false trade invoices to evade taxes, corrupt government officials using anonymous shell companies to move illicit funds, human traffickers carrying cash across borders, or terrorist organizations making international remittances.

The African Development Bank Group’s 2024 Focus Report, released last week, said 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 system.

“Reform the existing global financial architecture to make it more responsive to the financing needs of African countries: Lesotho faces a $718 million financing gap to achieve the Sustainable Development Goals by 2023.”

“The current state of the global financial architecture has limited Lesotho’s ability to bridge this gap. Lesotho is in a disadvantaged position in accessing funds from the global financial architecture. This requires Lesotho to overhaul the aid architecture.

“Lesotho can benefit from this reform to avoid global tax evasion and illicit financial flows (IFF) by multinational corporations. IFF includes trade misinvoicing, transfer pricing, contraband, corruption, money laundering, and human and drug trafficking. Lesotho lost $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 states that Lesotho’s external debt accounts for 74% of its total public debt, mainly 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% of the total, with China being the largest bilateral creditor, accounting for 70% of the total debt.

Debt projections indicate a growing debt burden, reaching 59.80% and 60.4% by 2024 and 2025, respectively. The government is implementing measures such as fiscal consolidation, improving capital expenditure efficiency, building buffers for future shocks, preventing private sector credit crowding out, addressing contingent liability risks, and deepening domestic capital markets.

“External debt accounts for 74% of total public debt, mainly 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 International Monetary Fund. Debts owed to bilateral creditors account for less than 15% of total external debt. Of this, China accounts for 70%.

“Debt projections indicate that the debt burden will increase, reaching 59.80% and 60.4% by 2024 and 2025 respectively. The Government of Lesotho is taking the following measures to control debt, including fiscal consolidation, improving the efficiency of capital expenditure, building buffers to cope with future shocks, preventing credit from flowing to the private sector, addressing contingent liability risks, and deepening domestic capital markets.”

The present value (PV) of the public and publicly guaranteed (PPG) external debt to GDP ratio was close to the 40% threshold in FY2020/21, about 10 percentage points higher than in the Debt Sustainability Analysis (DSA) in 2019. Due to the impact of exchange rate valuation on external debt and the increase in domestic debt issuance, the public debt to GDP ratio increased by 4.1 percentage points to 59.8% of GDP in FY22/23. Nevertheless, external debt sustainability remains below the threshold and the overall risk of public debt distress is considered medium.

Revenue from the Southern African Customs Union (SACU) is expected to increase from 4.7% in 2023 to 5.3% in 2024 and 2025. However, this increase is likely to be offset by an increase in government spending.

The report highlights current debt drivers, including lower transfers from the Southern African Customs Union, higher public spending, new borrowing and higher contingent liabilities, which increase debt sustainability risks. Lesotho’s debt indicators are expected to deteriorate in the short term but improve in the medium term, supported by the resumption of transfers from the Southern African Customs Union and slower growth in public spending relative to GDP.

The African Development Bank Group highlights report recommends that the government avoid crowding out private sector credit, address contingent liability risks (mainly from underfunded pension funds), and reduce debt burdens and strengthen debt management capacity through governance reforms. The report recommends adopting a debt strategy with clear fiscal rules to prevent excessive spending and control debt levels. In addition, it is recommended to diversify debt sources and avoid commercial debt as much as possible.

“The government should adopt a debt strategy with clear fiscal rules. This will avoid overspending and keep debt under control. The government should also diversify its debt sources and avoid commercial debt as much as possible,” the report said.

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