Lesotho - Joint World Bank-IMF Debt Sustainability Analysis

Overview & Synopsis

Lesotho’s risk of external and overall debt distress remains moderate, with a slight improvement in the debt path since the last DSA. A lower total debt stock for end FY2024/25, reflecting arrears clearance and higher domestic debt redemption, and an increase in the grant element in future borrowing terms, have placed debt on a more favorable trajectory, lowering the debt-to-GDP ratios in present value terms. However, risks remain elevated, including from persistent contingent liabilities and growing global uncertainties. A reversal of current fiscal discipline could also put upward pressure on future debt levels. The uncertainty surrounding the of U.S. trade policies poses a new downside risk to growth and external sector performance, further weighing on the macroeconomic outlook. While the debt path remains below key thresholds under the baseline, external and public debt indicators continue to breach thresholds under the most extreme shock scenarios, including growth and exchange rate depreciation scenarios, respectively, for public debt and external debt. The DSA highlights the importance of continued fiscal prudence to stabilize debt levels, building buffers against future volatility while directing fiscal space toward targeted support for those most affected by shocks, and also using the revenue windfalls, including from higher water royalties, to retire costly debt. Improving public investment efficiency, addressing contingent liabilities, and maintaining a conservative debt management strategy remain essential for safeguarding debt sustainability and supporting growth