Lesotho continued to use the South African rand as its currency but added its own currency from 1980 (with both having legal tender status). It had no independent monetary policy but acquired over time some limited ability to control the allocation of credit and some scope for non-monetary financing of fluctuating fiscal deficits.

YearsTargets and attainmentClassification
1974-79small open economy entirely surrounded by South Africa (SA) and with very strong economic links to it including common membership of the Southern African Customs Union (SACU) and long tradition of Basotho workers in SA mines; long-standing use of SA rand as only currency, before and since independence in 1966, formalised in Rand Monetary Area agreement 1974; SA makes annual payments to compensate Lesotho for income forgone from use of rand instead of own currency, on basis of estimates of notes and coin in circulation; three commercial banks (two foreign-owned, one acting as banker to government), some other financial institutions; financial regulation by commissioner in Ministry of Finance from 1974, including liquid asset and capital ratios; no monetary authority or monetary policy initially but 1979 Lesotho Monetary Authority (LMA) set up; statistical data pooruse of another sovereign’s currency UASC
1980-2017January 1980 new currency loti issued at par with rand, and sharing legal tender status within Lesotho with rand; over time loti comes to make up a large part of notes and coin in circulation (no reliable data on rand in circulation within Lesotho); Lesotho commits to 100% backing of loti by deposits at South Africa Reserve Bank, has minimal input into SA Reserve Bank decisions and no control over its exchange rate with the rest of the world, and applies SA exchange controls, but SA still compensates Lesotho for seigniorage forgone by use of rand;  June 1980 LMA places treasury bills with banks; LMA initially operates like currency board but gradually takes on wider functions, including setting liquidity and reserve ratios and minimum local assets ratio (designed to concentrate foreign assets in the central bank), setting key interest rates, holding banks’ deposits and operating clearing system, and is renamed Central Bank of Lesotho 1982; 1980s  and 1990s fiscal deficits affected by fluctuations in SACU receipts as well as government spending, with large deficits financed in part by banking system, periodic stabilisation efforts with varying but rising effectiveness; 1986 military coup; 1986 Rand Monetary Area replaced by Common Monetary Area (CMA), with limited effects for Lesotho; from 1986 major SA-funded investment in Lesotho Highlands Water Project (LHWP); 1987 first government bond issue; monetary authorities favour growth but policy highly constrained by CMA membership, though allocation of credit can be affected; central bank becomes sole banker to government 1990, within slowly developing financial system; 1993 introduction of regular treasury bill auctions, with nonbank participation; 1993 democratic elections won by previous opposition party but more or less acute political tensions of different kinds continue, leading to widespread looting, military intervention by SA 1998-9 and major economic damage; 1994 central bank starts issuing own securities; 1995 SA abolishes financial rand, Lesotho follows suit; 1998-9 one large distressed local bank closed, another restructured and then privatised; late 1990s, phase 1A of LHWP winding down (but second starting up), fewer Basotho miners working in SA, and high prevalence of HIV/AIDS; 2001 large issue of treasury bills, designed to replace deposits at central bank and lead to development of secondary market; 2000s fiscal policy affected by weak public financial management and fluctuating SACU revenues; adverse effects on economic activity from GFC; rising emphasis on financial supervision, especially with respect to nonbank financial institutions and coordination with SA supervisors given SA banks’ dominant role in Lesotho banking system; rising usage of mobile money from 2014; policy disrupted and reforms delayed by attempted military coup 2014 and continued political fragility and tensions (head of army assassinated late 2017); statistical data initially poor but slowly improvedaugmented exchange rate fix AERF

Selected IMF references: The Rand Monetary Area and the Monetary Systems of Botswana, Lesotho and Swaziland, 1976, pp1-7, 12-16; RED 1975 pp33, 36-9; RED 1980 pp38-9; RED 1982 pp28-30; The Rand Monetary Area, 1983, pp10-11; RED 1983 p51; RED 1984 pp26-8, 30-2; RED 1985 pp43-5; SR 1986 pp10-11, 20; SR 1988 pp11-12; RED 1990 pp34, 36, 38-40; RED 1992 pp24, 26, 31; SR 1993 p15; SR 1995 p8; RED 1996 pp19-21; SR 1996 p4; REDSI 1999 pp24-9; SR 2001 pp14-15, 19-20; SR 2002 pp7-8; SISA 2004 pp32-4; SR 2004 pp8, 9, 16; SISA 2005 pp5-10; SR 2012 p15; SR 2016 p14; SI 2018 pp2-12. Other references: Wolf et al. (2008, p46); Masson and Pattillo (2005, pp24-6, 65-6); Central Bank of Lesotho (n.d.). 

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