1 The Financial Cost of Lesothos Foreign and Domestic Public Debt

The Financial Cost of Lesotho’s Foreign and Domestic Public Debt
By Selloane Khoabane1
Abstract
THE FINANCIAL cost of external public debt could have increased due to the recent
depreciation of the Loti against major currencies, which could strengthen the case for
increasing domestic debt. Thus this paper carries out a comparative assessment of the financial
costs of external and domestic debt. The theoretical advantages and disadvantages of these
two types of debt as identified in the literature are also reviewed. The findings of the study
reveal that foreign debt remained financially cheaper than domestic debt despite the recent
depreciation of the Loti against the currencies in which the bulk of Lesotho’s foreign public
debt was held and serviced. This was attributed to the highly concessional nature of Lesotho’s
external public debt. Consequently, the major recommendation of the paper is that highly
concessional foreign public debt should continue to be preferred more than domestic debt so
as to maintain the burden of debt on government budgetary operations at sustainable levels.
Nonetheless, domestic debt should be gradually increased when the fiscal space allows so as
to develop the domestic capital market as an insurance against the disadvantages of foreign
debt. A conducive environment should be created to minimize the possible costs and risks of
foreign and domestic debt.
Keywords: Debt Financing, Domestic Debt, Foreign Debt

JEL classification: G12, H63, H68, H74
1
Selloane Khoabane, Principal Economist – Studies and Analysis Division, Department of Research,
Central Bank of Lesotho, email: [email protected], Tel: (+266) 2223 2062
i CENTRAL BANK OF LESOTHO DECEMBER 2017 RESEARCHBULLETIN
Corner of Airport and Moshoeshoe Roads, Maseru Central Phone: (+266) 22 314281 www.centralbank.org.ls
The Financial Cost of Lesotho’s
Foreign and Domestic Public Debt
Selloane Khoabane
1 INTRODUCTION
THE GOVERNMENT of Lesotho (GoL), like other governments around the world resorts to
the debt market for financing of fiscal deficits. In Lesotho, public debt comprises both external
and domestic debt with the latter accounting for the bulk of total debt. As depicted in Table
1 below, foreign debt accounted for 89.0 per cent of total debt on average from 2008 to
2015. Domestic debt is wholly denominated in the domestic currency, while foreign debt is
denominated in various foreign currencies.
Table 1 Domestic and Foreign Debt (Percentage of Total Debt)

2008 2009 2010 2011 2012 2013 2014 2015 2016
Domestic 6.47 8.16 12.93 14.33 14.33 11.66 10.58 8.76 2992
Foreign 93.53 91.84 87.07 85.67 85.67 88.34 89.42 91.24 -1539
Source Ministry of Finance and Central Bank of Lesotho
Foreign currency denominated public debt exposes government to high costs of servicing such
debt during periods of high depreciation of the domestic currency against the foreign currencies
in which the debt is held and repaid. Between 2000 and 2015, there were 3 episodes of
the Loti depreciation against Lesotho’s major external public debt currencies. It depreciated
quite substantially in 2001 and 2002 after which it appreciated for 3 successive years and then
depreciated marginally in the next two years. The Loti depreciated significantly again in 2008.
The last episode of depreciation started in 2011 and persisted to 2015. The depreciation is
expected to have resulted in an escalation in the costs of external debt to the GoL.
1 CENTRAL BANK OF LESOTHO DECEMBER 2017 RESEARCHBULLETIN
Selloane Khoabane
Figure 1 Exchange Rates of Major Foreign Debt Currencies
50.00
40.00
30.00
20.00
10.00
0.00
-10.0
-20.0
. Euro . SDR
. UK Pound . US Dollar
-30.0
-40.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Bloomberg
It is on the basis of the aforementioned that the objective of this paper is to evaluate the
financial costs of foreign and domestic debt to the GoL. While the financial cost is important, it is
not the only factor that should be looked at when choosing between foreign and domestic debt.
The theoretical issues that underpin the choice between foreign and domestic debt, specifically
their advantages and disadvantages are also reviewed with the objective of strengthening the
conclusion and recommendations of the paper.
The rest of the paper is structured as follows: Section 2 discusses the trend and structure of
Lesotho’s public debt. Section 3 provides the literature review the covers the advantages and
disadvantages of foreign and domestic debt. Section 4 elaborates the analytical framework and
methodology for assessing the financial costs of foreign and domestic debt and the description
of the data used in this study. Section 5 discussed the empirical results while Section 6 concludes
the paper and provides recommendations.
2 AN OVERVIEW OF LESOTHO’S PUBLIC DEBT – THE TREND AND STRUCTURE
The stock of public debt as a share of GDP declined steadily from 115.5 per cent in 2001 to
a trough of 36.8 per cent in 2010 after which it increased from year to year and reached 58.7
per cent in 2015. The decline was due to a lower increase in the stock of debt in Maloti terms
compared with a higher rise in GDP. External debt, which accounted for an average of 89.1 per
cent of total debt over the period 2008 to 2015 was the main contributor to the movements
in the total stock of debt, while domestic debt increased sluggishly with minor fluctuations.
Domestic debt is comprised of Treasury bills (T-bills) of 4 tenors, 91, 182, 273, and 364 days,
Treasury bonds (T-bonds) of 3, 5, 7 and 10 years tenors and the Central Bank of Lesotho’s
on-lending to GoL of funds obtained under the IMF’s extended credit facility loan for balance
of payments support2. The T-bills, which accounted for 26.0 per cent of domestic debt in 2015
are monetary policy instruments through which the Central Bank of Lesotho mops up excess
liquidity and injects liquidity into the economy for purposes of maintenance of price stability.
The size of the issuance of T-bills is determined on the basis of the liquidity conditions as
estimated by the liquidity forecasting team of the CBL. The T-bonds were introduced in 2010
with the main objective of catalyzing the development of Lesotho’s capital market.The issuances
of T-bonds are intended to raise funds for public infrastructure development and to create
alternative avenues for saving and investment in Lesotho. The Ministry of Finance determines
the amount to be issued as part of the financing needs of the GoL each fiscal year, taking the
GoL’s capacity to repay the debt into account. The stock of T-bonds has increased from 19.4
per cent of total domestic debt in 2010 to 27.1 per cent in 2015. On average, GoL paid market
rates of 8.0 to 10.0 per cent on domestic debt from 2008 to 2015.
2
In 2010, Lesotho entered into an ECF arrangement with the IMF to restore balance of payments
and fiscal sustainability, which were threatened by the slump in SACU revenue.
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Figure 2 Public debt
140.0 16000.0
120.0 14000.0
100.0 12000.0
10000.0
80.0
8000.0
60.0
6000.0
40.0
4000.0
20.0 2000.0
0.0 0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
. Total Debt as a share of GDP . External Debt/GDP

. Domestic Debt/GDP . Total Debt Stock - million Maloti
Source: Ministry of Finance and the Central Bank of Lesotho
GoL’s foreign debt comprises both concessional and non-concessional debt. The bulk of
Lesotho’s concessional foreign debt has an interest rate of 0.75 per cent (including service
charges), a debt service period of 35 years or more years, a grace period of 10 years and a
grant element. As shown in Table A8, in the Appendix, concessional debt accounted for the
largest share of total external debt at 88.0 per cent on average over the 2008 to 2015 period.
Concessional debt as a share of total external public debt of above 90.0 per cent was recorded
year after year from 2008 to 2011 after which it consistently went on a downward trend to
reach 78.6 per cent in 2015.
3 LITERATURE REVIEW – ADVANTAGES AND DISADVANTAGES

OF FOREIGN AND DOMESTIC DEBT

Debt can either be foreign or domestic and each of these two types has its advantages and
disadvantages. Woo and Gray (2000) indicate that one important benefit of external debt
financing of budget deficits is that it is less costly compared with domestic debt. Christensen
(2004) points out that most Sub-Saharan African (SSA) countries have access to external debt
at favourable conditions including very low interest rates (lower than market interest rates),
very long maturity and a grant element. The other advantages of foreign debt are that it
provides foreign exchange (Christensen, 2004) and it has lesser crowding-out effects on private
investment (Mlachila et al, 2002). However, as pointed out by Mlachila et al (2002) external
debt increases economies’ exposure to external conditions. This leads to high debt service
costs during a depreciation of the exchange rate (Woo and Gray: 2000) and during periods
of higher interest rates in the case of debt contracted at a floating rate (Mlachila et al: 2002).
Mlachila et al (2002) found that the cheapest way to finance budget deficits in developing
countries is through highly concessional foreign borrowing, which usually remains attractive
despite depreciation of the domestic currency.
Villar et al (2012) are of the view that emerging market economies have increased their
domestic funding vis-à-vis foreign currency funding and this has contributed immensely in the
development of their domestic bond markets and contributed to increased domestic savings.
Domestic debt reduces the currency risk as it is usually denominated in domestic currency and
its service does not require foreign exchange (Christensen, 2004). Mlachila et al (2002) also
point out that it reduces inflationary pressures and the risk of external debt crises. Nonetheless,
there are some concerns regarding accumulation of domestic debt. As outlined in Christensen
et al (2007) these may include crowding-out private investment and increasing the fiscal debt
burden because of the high domestic interest rates. However, Presbitero (2012) is of the
view that the prerequisites of a well-functioning economy such as a stable macroeconomic
environment, an efficient money market, a broader investor participation and the presence of
a sound legal, regulatory and supervisory framework are essential for achieving the balance
between the benefits and costs of domestic debt. Christensen et al (2007) contend that strong
debt management practices and fiscal discipline could minimize the costs and risks of domestic
debt.
Selloane Khoabane
4 THE FINANCIAL COSTS OF FOREIGN AND DOMESTIC DEBT
4.1 The Analytical Framework
The paper measures the cost of debt as the cost of servicing public debt. According to the IMF
(2009) the cost of servicing debt comprises interest payments and capital gains/losses due to
the effects of exchange rate movements on foreign currency denominated debt. Thus the IMF
(2009) proposes an indicator of interest cost adjusted for capital gains/losses as

1
Where Ct is the total nominal interest cost adjusted for capital gains/losses at time t , ejt is the
jth exchange rate between the domestic currency and foreign currency j , I FX
jt
represents interest
payments denominated in foreign currency j , and It is the local currency interest payments and
FX
is the capital gain/loss arising from exchange rate changes associated with outstanding foreign
exchange debt at time t - 1.
Another indicator of the cost of debt is the interest payments per unit of debt, calculated as the
nominal interest payment relative to the outstanding stock of debt (IMF: 2009). This measure
gives the unweighted average interest rate;

2
Where and are the outstanding domestic currency and foreign currency
debt respectively.
4.2 The Analytical Methodology
This paper conducts a comparative analysis of the cost of foreign debt versus the cost of
domestic debt. Adopting the analytical framework described above, the cost of foreign debt is
measured as;

3
The capital gains and/or losses are estimated as

4
Where, Pt,j is the principal repayment in foreign currency j at time t, Δet,j is the change in
the nominal exchange rate of currency j at time t and all the other variables are as previously
defined. And the cost of domestic debt is measured as

5
The unweighted average interest rate on the foreign debt, measured as the interest cost of
foreign debt as a ratio of the total stock of foreign debt, is calculated as

6
The unweighted average exchange rate on foreign debt, measured as the ratio of the capital
gains and/or loss due to exchange rate fluctuations as a ratio of the total stock of foreign debt
is given by

7
The total cost of foreign debt as a ratio of the total stock of foreign debt is given by
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The unweighted average interest rate on domestic debt is given by the total interest cost of
domestic debt as a ratio of total stock of domestic debt

9
4.3 Data
The data on all external debt variables covering the period 1966 to 2015 was obtained from
the Ministry of Finance while the data on domestic debt (Treasury bills and bonds) for the
period 2008 to 2015 was obtained from the Central Bank of Lesotho. Exchange rate data going
as far back as 1966 was sourced online from http://www.Fatop.com to supplement data from
the Central Bank of Lesotho. The use of data on a loan by loan basis facilitated incorporation
of the different terms of each loan in relation to grace period and maturity into the calculations.
It also ensured application of appropriate foreign currency exchange rates for calculation of
capital gains and/or losses due to exchange rate fluctuations.
Table 2 Debt Data Descriptions

Variable Description Data Used
ejt is the jth exchange rate between the Annual average nominal exchange rate3 of the Loti against
domestic currency and foreign currency j the foreign currency in which the interest payment or
principal repayment was effected.
I jtFX interest payments on foreign debt Interest payments on foreign debt on a loan by loan basis
denominated in foreign currency j denominated in the foreign currency in which the interest
payment was made.
I tDX interest payments on domestic loans The cost of domestic loans to Government in the form
of the discounted amount on 3, 5, 7 and 10 year Treasury
bonds and on 92, 182, 273 and 364 day Treasury bills.
D tjFX is the outstanding stock of foreign currency Outstanding stock of foreign debt denominated in foreign
debt denominated in foreign currency j currency in which the loan was contracted.
D tDX is the outstanding stock of domestic debt Outstanding stock of Treasury bills and bonds at time t.
P FX
t,j
Principal repayments of foreign currency Principal repayments on foreign debt on a loan by loan
debt at time t denominated in foreign basis, denominated in the foreign currency in which the
currency j repayment was made.
4.4 Empirical Results
The external and domestic public debts expose the Government to debt servicing costs. In the
case of foreign debt, the financial costs arise from interest payments, and financial gains and losses
resulting from exchange rate fluctuations as Lesotho’s foreign debt is denominated in foreign
currencies. With regard to domestic debt, the financial costs arise from interest payments only
as it is denominated in domestic currency.
3
The relevant exchange rate of the day of the transaction was the most ideal rate to use for increased
accuracy of the estimates. However, the high number of transactions (31 000) on disbursements, interest
payments and principal repayments and time constraints made it impossible if not impractical to compile
the daily rates hence the use of annual average exchange rates.
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Table 3 The Cost of Servicing External debt (Per cent of GDP)

2008 2009 2010 2011 2012 2013 2014 2015
Total Cost of Foreign Debt 3.85 0.42 0.13 0.31 0.42 0.53 0.54 0.73
Interest Payments 3.35 0.43 0.33 0.29 0.32 0.34 0.41 0.5
Exc* Rate Cost (Principal+) 0.5 -0.01 -0.2 0.02 0.1 0.19 0.13 0.23
Total Exc Rate Cost 0.59 -0.01 -0.24 0.02 0.13 0.23 0.16 0.3
Exc Rate Cost (Principal+) 0.5 -0.01 -0.2 0.02 0.1 0.19 0.13 0.23
Exc Rate Cost (Interest) 0.09 0.00 -0.04 0.00 0.03 0.04 0.03 0.07
Exc Rate Cost/ Total Cost 15.32 -2.38 -184.62 6.45 30.95 43.40 29.63 41.10
*Exchange
Looking at the period 2008 to 2015, the financial costs of Lesotho’s foreign debt was marginal,
despite increasing exponentially since 2011. It rose from 0.13 per cent of GDP in 2010 to 0.73
per cent of GDP in 2015. Interest payments accounted for the bulk of the costs. With regards
to the exchange rate component of the financial costs the Government realized some savings
in 2009 and 2010 followed by losses up to 2015. The financial losses increased during periods
of higher depreciation and vice versa. On the one hand, the financial gains realized in 2009 and
2010 were due to the appreciation of the Loti against the Euro, Special Drawing Rights and
the UK Pound in 2009 and 2010. This was complemented by the minimal depreciation of the
Loti against the US Dollar in 2009 and its appreciation in 2010. On the other hand, the financial
losses from 2011 to 2015 were a result of the depreciation of these currencies during that
period. As depicted in Tables A3 and A4 in the Appendix, the bulk of the principal repayments
and interest payments on foreign debt were effected in these currencies. As shown in Table
A1 in the Appendix, the cumulative loss on account of the depreciation of the Loti against the
foreign currencies in which GoL’s foreign debt was denominated amounted to M196.2 million
over the 2011 to 2015 period. As depicted in Table 4, this cumulative loss accounted for 41.1
per cent of the total cost of foreign debt. This was a lot of money given the level of Lesotho’s
economic development.
Table 4 Interest Payments on Domestic and Foreign Debt (Per cent of GDP)
2008 2009 2010 2011 2012 2013 2014 2015
Domestic Debt 0.27 0.30 0.25 0.33 0.39 0.38 0.34 0.36
Foreign Debt 3.35 0.43 0.33 0.29 0.32 0.34 0.41 0.50
Interest payments on domestic debt have also been on an upward trend with minor fluctuations.
The difference between interest payments on domestic and foreign debt was marginal. Worth
noting is the fact that interest payments on domestic debt rose above interest payments on
foreign debt for three successive years from 2011 to 2013. This is interesting given that domestic
debt accounted for 10.9 per cent of total debt on average from 2008 to 2015.
Figure 2 The Cost of Domestic Debt Vis-a vis the Cost of External Debt
100.0
90.0
80.0
70.0
60.0
50.0
5.2% on average
40.0 from 2008 to 2015
30.0
20.0
10.0
0.0
2008 2009 2010 2011 2012 2013 2014 2015
. Total Cost of Domestic Debt . Total Cost of Foreign Debt
Source: Ministry of Finance and the Central Bank of Lesotho
The graphical representation of the unweighted average interest rate on domestic debt (total
costs arising from domestic debt as a ratio of the outstanding stock of domestic debt) and the
unweighted average interest rate on foreign debt (the total costs of foreign debt as a ratio of
the outstanding stock of foreign debt) shows that domestic debt is more costly to the GoL than
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foreign debt. The costs of domestic debt exceeded that of foreign debt by an average of 5.2 per
cent from 2008 to 2015. This is explained by the highly concessional nature of Lesotho’s foreign
debt as shown in Table A7 in the Appendix. As explained earlier, 88.0 per cent of public foreign
debt was concessional in 2008 to 2015 and the interest rate on the bulk of this was 0.75 per
cent, including service charges while the interest rate on domestic debt ranged between 8.0 and
10.0 per cent during the same period.
3 CONCLUSION AND RECOMMENDATIONS
The depreciation of the Loti against the currencies in which Lesotho’s foreign debt was held and
serviced has resulted in an increase in the financial costs of foreign debt to the GoL. It culminated
in a cumulative loss of M196.2 million over the 2011 to 2015 period, which translates into 41.1
per cent of the total cost of foreign debt as a percentage of GDP. Nonetheless, domestic debt
was financially more costly to the GoL than external debt despite the financial losses on foreign
debt due to the depreciation of the Loti against the foreign currencies in which the bulk of
Lesotho’s public debt was held and serviced. These findings were in line with the findings of
Mlachila et al (2002) who concluded that “financial costs of highly concessional loans are likely
to be smaller over the long run, in spite of the risks inherent to foreign currency borrowing”.
This notwithstanding, both domestic and foreign debt have their advantages and disadvantages.
It is on the basis of these two points that the following recommendations are made:
• Highly concessional foreign debt should continue to be the most preferred form of fiscal
deficit financing over domestic debt to maintain the burden of debt on the fiscal operations
at sustainable levels.
• A gradual increase in domestic debt should be pursued in times of fiscal surpluses with the
objective of developing the domestic capital market. A developed domestic capital market
will provide an avenue for supplementing where concessional foreign resources may not
adequately meet the need for financial resources and also provide a cheaper alternative in
the event that the Loti depreciates beyond the optimum level and raises the financial cost
of foreign debt above that of domestic debt.
REFERENCES
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The Case of Lesotho, IMF Working Paper WP/16/115.
Christensen (2004), Domestic Debt Markets in Sub-Saharan Africa, IMF Working Paper WP/04/46.
Christensen Jacob and Abbas S.M. Ali (2007), The Role of Domestic Debt Markets in Economic
Growth: An Empirical Investigation for Low-income Countries and Emerging Markets, IMF Working
Paper WP/07/127.
Croce Della Rafaele and Gatti Stefano (2014), Financing Infrastructure – International Trends,
OECD Journal: financial Market Trends Volume 2014/1.
IMF (2009), Developing a Medium-Term Debt Management Strategy (MTDS) – Guidance Note for
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IMF (2016), 2015 Article IV Consultation – Press Release; Staff Report, IMF Country Report No.
16/33.
Mlachila Montfort, Loko Boileau and Beaugrand Philippe (2002), The Choice Between External
and Domestic Debt in Financing Budget Deficits: The Case of Central and West African Countries,
IMF Working Paper WP/02/79.
National Strategic Development Plan 2012/13 to 2016/17 (NSDP), Towards an Accelerated and
Sustainable Economic and Social Transformation, Government of Lesotho.
Platz Daniel (2009), Infrastructure Financing in Developing Countries – The Potential of Sub-sovereign
Bonds, DESA Working Paper No. 76.
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Plaza Sonia, Mohapatra Sanket and Ratha Dilip (2008), Beyond Aid: New Sources and Innovative
Mechanisms for Financing Development in Sub-Saharan Africa, World Bank Policy Research
Working Paper No. WPS4609.
Presbitero (2012), Domestic Debt in Low Income Countries, Economics Bulletin, Vo. 32, Issue 2.
Villar Agustin, Miyajima Ken and Mehrotra Aaron (2012), Developments of domestic Government
Bond Markets in EMEs and their Implications, BIS Papers No.67.
Woo David and Gray Simon (2000), Reconsidering External Financing of Domestic Budget Deficits:
Debunking Some Received Wisdom, IMF Policy Discussion Paper PDP/00/8.
World Bank/ IMF (2012), Debt Sustainability Analysis, IMF and IDA.
APPENDIX
Appendix A1 Exchange Rates of Major Foreign Debt Currencies

Currency 2008 2009 2010 2011 2012 2013 2014 2015
Loti per Unit of Foreign Currency (Annual Averages)
Euro 12.07 11.69 9.71 10.10 10.55 12.83 14.39 15.51
Special Drawing Rights 13.02 12.96 11.17 11.45 12.58 14.62 16.48 19.41
UK Pound 15.11 13.10 11.32 11.63 13.02 15.10 17.88 21.27
US Dollar 8.27 8.42 7.32 7.26 8.21 9.65 10.88 13.99
Depreciation/ Appreciation Rates
Euro 41.50 -3.14 -16.94 3.97 4.51 21.58 12.15 7.81
Special Drawing Rights 30.32 -0.45 -13.86 2.59 9.81 16.21 12.74 17.80
UK Pound 18.94 -13.27 -13.63 2.79 11.89 15.98 18.40 19.01
US Dollar 24.77 1.85 -13.06 -0.82 13.11 17.50 12.74 28.57
Appendix A2 External Public Debt by Currency (Percentage Shares)

Currency 2011 2012 2013 2014 2015
Canadian Dollars 0.12 0.10 0.09 0.08 0.07
Danish Kroner 0.24 0.21 0.21 0.18 0.15
Euro 10.32 9.20 8.78 7.22 6.31
European Currency Units 1.07 0.94 0.91 0.73 0.61
Kuwaiti Dinars 2.36 2.60 3.04 3.51 3.63
Maloti 1.51 1.29 0.98 0.85 1.17
Norwegian Krone 0.08 0.07 0.06 0.05 0.04
Pound Sterling 0.19 0.76 0.76 0.76 0.74
Rand 3.50 5.15 6.44 8.07 9.39
Saudi Riyals 0.34 0.90 1.18 2.39 2.69
Special Drawing Rights 48.17 48.32 48.54 45.94 44.84
Swedish Kronor 0.40 0.37 0.36 0.29 0.26
Swiss Francs 0.64 0.58 0.56 0.49 0.47
UAE Dirhams 0.00 0.00 0.00 1.02 1.67
US Dollars 19.33 17.91 17.68 18.96 18.77
Yen (000's) 7.43 6.32 4.96 4.40 4.22
Yuan Renminbi 4.32 5.27 5.45 5.06 4.95
Source Ministry of Finance and Author’s Calculations
Selloane Khoabane
APPENDIX
Appendix A3 Principal Repayments by Foreign Currency (Percentage Shares)

Loan Currency Amount 2008 2009 2010 2011 2012 2013 2014 2015
ADB Units of Account 0.10 0.06 0.14 0.25 0.65 0.88 1.11 1.11
Canadian Dollars 0.10 0.06 0.13 0.13 0.13 0.13 0.12 0.08
Danish Kroner 0.24 0.16 0.39 0.29 0.28 0.29 0.29 0.19
Deutsche Mark 0.05 0.03 0.06 0.05 0.05 0.06 0.05 0.04
Euro 20.51 17.11 18.59 19.80 20.32 22.07 14.38 11.72
European Currency Units 1.66 1.53 1.52 0.00 0.00 0.00 0.00 9.67
Kuwaiti Dinars 2.31 2.75 2.93 3.77 4.92 4.84 6.08 4.99
Netherland Guilders 0.01 0.00 0.01 0.01 0.01 0.01 0.01 0.01
Norwegian Krone 1.28 0.73 0.83 0.09 0.08 0.08 0.08 0.05
Pound Sterling 1.09 0.12 0.23 0.18 0.19 0.22 0.24 0.18
Rand 1.90 1.65 1.31 1.88 1.95 1.64 1.71 12.04
Saudi Riyals 0.00 0.00 0.00 0.00 0.00 1.25 4.65 1.50
Special Drawing Rights 26.97 40.26 46.78 46.54 41.26 32.96 29.97 22.16
Swedish Kronor 1.59 1.58 0.43 0.44 0.44 0.22 0.17 0.11
Swiss Francs 0.33 0.25 0.53 0.60 0.62 0.66 0.68 0.54
US Dollars 41.85 33.70 26.12 25.96 29.10 34.68 40.45 35.62
Yen (000’s) 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00
TOTAL 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
APPENDIX
Appendix A4 Interest Payments by Foreign Currency (Percentage Shares)

Currency 2008 2009 2010 2011 2012 2013 2014 2015 2015
Canadian Dollars 0.02 0.01 0.02 0.02 0.02 0.02 0.01 0.01 1.11
Chinese Yuan 0.55 5.10 7.23 3.74 3.49 0.00 0.00 0.94 0.08
Danish Kroner 0.24 0.13 0.20 0.17 0.14 0.13 0.11 0.08 0.19
Euro 16.71 13.41 14.31 14.06 9.07 6.86 5.27 4.14 0.04
European Currency 0.63 0.64 0.51 0.00 0.00 0.00 0.00 0.00 11.72
Units
Kuwaiti Dinars 2.70 2.68 1.28 0.00 3.34 4.51 4.65 4.32 9.67
Norwegian Krone 0.73 0.23 0.15 0.05 0.05 0.04 0.03 0.02 0.18
Pound Sterling 0.44 0.08 0.46 0.34 0.49 0.47 0.38 0.57 12.04
Rand 0.00 0.00 1.00 3.88 7.36 5.76 3.91 3.51 1.50
Special Drawing Rights 54.25 26.50 22.94 27.54 27.49 32.08 41.68 45.16 22.16
Swedish Kronor 1.11 0.50 0.32 0.29 0.25 0.12 0.07 0.05 0.11
Swiss Francs 0.45 0.26 0.47 0.45 0.39 0.35 0.29 0.26 0.54
US Dollars 22.18 50.46 51.08 49.45 47.89 49.66 43.59 40.94 35.62
Yen (000's) 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00
Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Appendix A5 Domestic and Foreign Debt (Percentage of Total Debt)

2008 2009 2010 2011 2012 2013 2014 2015
Domestic 6.47 8.16 12.93 14.33 14.33 11.66 10.58 8.76
Foreign 93.53 91.84 87.07 85.67 85.67 88.34 89.42 91.24
Appendix A6 Concessional and Non-concessional Foreign Debt (Percentage of Total Foreign Debt)
2008 2009 2010 2011 2012 2013 2014 2015
Concessional 96.97 94.65 93.75 90.60 85.86 81.50 81.82 78.58
Non-concessional 3.03 5.35 6.25 9.40 14.14 18.50 18.18 21.42
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APPENDIX
Appendix A7 The Cost of Servicing External Debt (in Million Maloti)

2008 2009 2010 2011 2012 2013 2014 2015 2011-2015
Total Cost of Foreign Debt 518.12 61.05 21.11 57.98 83.85 117.01 127.88 184.66 571.38
Interest Payments 451.31 62.76 53.48 53.8 63.76 75.62 96.15 125.39 414.72
Exc* Rate Cost (Principal+) 66.81 -1.71 -32.37 4.18 20.09 41.39 31.73 59.27 156.66
Total Exc Rate Cost 78.61 -1.73 -38.93 4.46 25.21 50.33 39.52 76.68 196.2
Exc Rate Cost (Principal+) 66.81 -1.71 -32.37 4.18 20.09 41.39 31.73 59.27 156.66
Exc Rate Cost (Interest) 11.8 -0.02 -6.56 0.28 5.12 8.94 7.79 17.41 39.54
Exc Rate Cost/ Total Cost 15.17 -2.83 -184.41 7.69 30.07 43.01 30.90 41.52 34.34
*Exchange, +Principal repayments
Appendix A8 Interest Payments on Domestic and Foreign Debt (Million Maloti)

2008 2009 2010 2011 2012 2013 2014 2015
Domestic Debt 36.93 43.46 40.74 61.18 77.76 84.17 79.66 91.72
Foreign Debt 451.31 62.76 53.48 53.80 63.76 75.62 96.15 125.39
Appendix A9 Cost of Domestic Debt Vis-à-vis the Cost of External Debt (Million Maloti except *)
2008 2009 2010 2011 2012 2013 2014 2015
Domestic Debt
Cost 36.93 43.46 40.74 61.18 77.76 84.17 79.66 91.72
Stock 446.84 456.85 735.48 1021.70 1171.34 1152.69 1133.63 1212.96
UIR* 8.26 9.51 5.54 5.99 6.64 7.30 7.03 7.56
External Debt
Cost 518.12 61.05 21.11 57.98 83.85 117.01 127.88 184.66
Stock 6457.10 5143.10 4951.40 6110.10 7001.50 8736.88 9583.24 12632.38
UIR* 8.02 1.19 0.43 0.95 1.20 1.34 1.33 1.46
*Unweighted Interest Rate (Total Cost of Debt as a Percentage of the Stock of Debt)

1 The Financial Cost of Lesothos Foreign and Domestic Public Debt

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1 The Financial Cost of Lesothos Foreign and Domestic Public Debt

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The Financial Cost of Lesotho’s Foreign and Domestic Public Debt

Keywords: Debt Financing, Domestic Debt, Foreign Debt

i CENTRAL BANK OF LESOTHO DECEMBER 2017 RESEARCHBULLETIN

Table 1 Domestic and Foreign Debt (Percentage of Total Debt)

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Figure 1 Exchange Rates of Major Foreign Debt Currencies

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2 AN OVERVIEW OF LESOTHO’S PUBLIC DEBT – THE TREND AND STRUCTURE

3 CENTRAL BANK OF LESOTHO DECEMBER 2017 RESEARCHBULLETIN

Figure 2 Public debt

. Total Debt as a share of GDP . External Debt/GDP

Source: Ministry of Finance and the Central Bank of Lesotho

3 LITERATURE REVIEW – ADVANTAGES AND DISADVANTAGES

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4 THE FINANCIAL COSTS OF FOREIGN AND DOMESTIC DEBT

4.1 The Analytical Framework

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4.2 The Analytical Methodology

The capital gains and/or losses are estimated as

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Table 2 Debt Data Descriptions

4.4 Empirical Results

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Table 3 The Cost of Servicing External debt (Per cent of GDP)

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2008 2009 2010 2011 2012 2013 2014 2015

. Total Cost of Domestic Debt . Total Cost of Foreign Debt

Source: Ministry of Finance and the Central Bank of Lesotho

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3 CONCLUSION AND RECOMMENDATIONS

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Appendix A1 Exchange Rates of Major Foreign Debt Currencies

Appendix A2 External Public Debt by Currency (Percentage Shares)

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Appendix A3 Principal Repayments by Foreign Currency (Percentage Shares)

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Appendix A4 Interest Payments by Foreign Currency (Percentage Shares)

Appendix A5 Domestic and Foreign Debt (Percentage of Total Debt)

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Appendix A7 The Cost of Servicing External Debt (in Million Maloti)

Appendix A8 Interest Payments on Domestic and Foreign Debt (Million Maloti)

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