Importance of Capital Market as an instrument of Economic

Development
In many countries, Capital market is an engine of economic growth and development..
are traded on a stock exchange include:
shares issued by companies, unit trusts,
derivatives, pooled investment products
and bonds. To be able to trade a
security on a certain stock exchange, it
has to be listed there.

Introduction
A capital market is a market for longterm debt and equity securities, where
business enterprises (companies) and
governments can raise funds for longterm investment. It is normally divided
into two broad categories - the stock
market and the bond market.

INSIDE:
2. Economic implications of developing

The stock market is the market where

equity securities such as stocks
representing ownership shares in
particular corporations issuing the
securities are traded. These
instruments are usually issued by big
corporations and promise a return (in
the form of dividends) based solely on
performance of the issuing corporation.
In addition, investors can gain from
appreciation of stock prices.

capital market in Lesotho.........4

3.Monetary Policy Operations Report
for August.7
4. Selected Monetary and Financial
Indicators..8
On the contrary, bond market comprise
of long-term borrowing or debt
instruments such as treasury notes and
bonds, corporate bonds, mortgages
securities etc. Most of these instruments
promise to pay either fixed streams of
income or a stream of income that is
determined according to a specific
formula over its entire life and return
face value upon maturity. As such, they
are usually called fixed-income capital
market instruments. Typical issuers of
bonds
include
government
and
government agencies as well as private
corporations.

The stock market securities are usually

listed and traded on stock exchanges corporations or mutual organizations
which provide trading facilities for stock
brokers and traders. Stock exchanges
provide facilities for issue and
redemption of securities as well as other
financial instruments and capital events
including payment of income and
dividends. They are sometimes referred
to as securities exchange to reflect
these broad functions. Securities that

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Capital market connects the monetary

sector with the real sector and therefore
facilitates growth in the real sector and
economic
development.
The
fundamental channels through which
capital market is connected to economic
growth and development can be
outlined as follows:

Money Market: a building block for

development of Capital Market
One of the building blocks for
development of capital market is
effectiveness and efficiency of money
market. Money markets are arguably a
precondition for development of sound
bond markets. The money market
facilitates smooth introduction of capital
market, particularly bond market. It links
capital market to the banking system,
(the ultimate provider of liquidity) and
helps anchor short-term end of yield
curve, which is an essential tool in the
pricing of debt securities. It also plays a
critical role in price discovery and in the
setting and transmission of interest
rates.

Capital market
increases
the
proportion
of
long-term
savings
(pensions, funeral covers, etc) that is
channeled to long-term investment.
Capital market enables contractual
savings industry (pension and provident
funds, insurance companies, medical
aid schemes, collective investment
schemes, etc) to mobilise long-term
savings from small individual household
and channel them into long-term
investments. It fulfils the transfer
function of current purchasing power, in
monetary form, from surplus sectors to
deficit sectors, in exchange for
reimbursing a greater purchasing power
in future. In this way, capital market
enables
corporations
to
raise
capital/funds to finance their investment
in real assets. The implication will be an
increase in productivity within the
economy leading to more employment,
increase in aggregate consumption and
hence growth and development. It also
helps in diffusing stresses on the
banking system by matching long-term
investments with long-term capital. It
encourages broader ownership of
productive assets by small savers. It
enables them to benefit from economic
growth and wealth distribution, and
provides avenues for investment
opportunities that encourage a thrift
culture critical in increasing domestic
savings and investment ratios that are
essential for rapid industrialization.

The money markets are critical to

financial stability and development.
Well-functioning money markets enable
other financial institutions to cover their
short-term liquidity needs. Many banks
and other financial markets participants
obtain a significant portion of their
funding from the money markets and
rely on rolling over short-term debt
contracted.
Therefore,
if
market
participants become concerned about
their access to money market funding,
they can refrain from investing in the
capital market, reducing funding to bond
and stock issuers. This would ultimately
affect the market for long-term funds
and therefore the real economy.

Capital market and Economic

growth and Development
Economic growth in a modern economy
hinges on an efficient and effective
financial sector that pools domestic
savings and mobilises capital for
productive projects. Absence of effective
capital market could leave most
productive
projects
which
carry
developmental agenda unexploited.

CBL Economic Review, August 2009, No. 109

Capital market also provides equity

capital and infrastructure development
capital that has strong socio-economic
benefits through development of roads,
water and sewer systems, housing,
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energy, telecommunications, public

transport, etc. These projects are ideal
for financing through capital market via
long dated bonds and asset backed
securities. Infrastructure development is
a necessary condition for long-term
sustainable growth and development. In
addition, capital market increases the
efficiency of capital allocation by
ensuring that only projects which are
deemed profitable and hence successful
attract funds. This will, in turn, improve
competitiveness of domestic industries
and enhance ability of domestic
industries to compete globally, given the
current momentum towards global
integration. The result will be an
increase in domestic productivity which
may spill over into an increase in
exports and, therefore, economic growth
and development.

higher economic growth than countries

without. Evidence indicates that, while
most capital markets in African countries
are relatively underdeveloped, those
countries which introduced reforms that
are geared towards development of
capital markets have been able to grow
at relatively higher and sustainable
rates.
South Africa, the country whose capital
market is the largest and most
developed in Africa, in terms of market
capitalization and trading volume, has
been growing significantly since 2000.
Its average per capita real GDP over the
last 8 years has been at 3.2 %.
Countries like Egypt, Ghana, Tanzania,
Botswana and Mauritius, whose capital
markets have been developing recently,
were able to realize average per capita
growth rates of more than 2.8% for the
past 8 years.

Moreover, capital market promotes

public-private sector partnerships to
encourage participation of private sector
in productive investments. The need to
shift economic development from public
to private sector to enhance economic
productivity has become inevitable as
resources continue to diminish. It assists
the public sector to close resource gap,
and complement its effort in financing
essential socio-economic development,
through raising long-term project based
capital.

However, some economies which did

not have formal or effective capital
market like Lesotho, Seychelles and
Ethiopia could not manage to realize
average per capita growth rates above
2.7 % over the past 8 years. Even those
countries with small and less developed
capital market like Swaziland and
Uganda did not manage to realize
average per capita growth rates above
2.7 % during the past 8 years.

It also attracts foreign portfolio

investors
who
are
critical
in
supplementing the domestic savings
levels. It facilitates inflows of foreign
financial resources into the domestic
economy.

Conclusion
The
article
has
attempted
to
demonstrate an important role played by
capital market in economic growth and
development. Capital market enhances
efficient financial intermediation. It
increases mobilization of savings and
therefore improves efficiency and
volume of investments, economic
growth
and
development.

Recent empirical research linking capital

market development and economic
growth suggests that capital market
enhances
economic
growth
and
development. Countries with well
developed capital markets experience

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2. Economic implications of developing Capital Market in Lesotho

2009, commercial banks credit-deposits
ratio stood at 33.01 per cent, significant
portion of which was for private sector
enterprises. These, in effect, hinder
private sector development as most
projects, which could contribute to
employment
creation
and
hence
economic growth, are left un-exploited.
These developments could limit growth
and development within the economy
and, therefore, there is a need to
explore other avenues for funding viable
long-term (development) projects in the
country.

Introduction
Implementation of many developmental
projects in Lesotho is limited by
inadequate funds. Some of these
projects, particularly those outlined by
the Growth Strategy - which are likely to
have a significant impact on economic
growth - are faced with challenges of
inadequate funding. Most of these
projects rely mostly on Government
revenue and external donor funding,
predominantly in the form of multilateral
and bilateral loans and grants secured
on concessional terms. However, the
current situation is insurmountable; the
Government is facing a projected
decline in revenue emanating from
projected decline in Southern African
Customs Union (SACU) revenue. SACU
revenue constitutes a significant portion
of Government revenue. For the fiscal
year 2009/10, SACU revenue accounts
for more than 55 per cent of the overall
government revenue.

State of Capital Market in Lesotho

Currently, there is no active capital
market in Lesotho. Nevertheless, there
is a Unit Trust - Stanlib Lesotho,
formerly Standard Lesotho Bank Unit
Trusts. It was established as a joint
venture between Standard Lesotho
Bank
and
Stanlib,
the
asset
management arm of Standard Bank
Group Ltd. It was established under
Lesotho Unit Trust Act 8 of 2003 to
ensure that private individuals could buy
shares in large companies that were
privatised. Unit trust investments are
generally medium to long-term collective
investments, constituted under a trust
deed in which investors' funds are
pooled and used to purchase various
fixed interest instruments. The primary
purpose of the Unit Trust was to
encourage nationals to invest in
privatised parastatals.

In addition, due to the recent financial

crisis, most countries reduced financial
assistance to other countries in an effort
to dispel the crisis. Moreover, the
resulting uncertainty led to increased
credit rationing by international banks.
As a result, most countries which relied
on international donor assistance were
affected. These sources of funding
expose a country to external shocks.
Therefore, the importance of domestic
debt as a supplement to external
financing is increasingly becoming
critical and attractive.

There is also no formal bond market as

the Government only issues treasury
bills for its monetary operations.
However, the Government of Lesotho
issued special purpose Treasury bonds
in the past. The last time the
government issued Treasury bonds
five and ten year bonds was in 1999.
The five year and ten year bonds were

Even in the case of private sector, it is

currently difficult to source long-term
finance. Private sector relied mainly on
commercial banks financing. However,
sourcing finance, especially long-term
finance, from the banking system is
difficult given tight credit extension
criterion banks now employ. As of June
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Identification of the market potential

issuers and investors. There should be
sufficient number of potential investors
and
issuers
of
capital
market
instruments which promise good
prospects for the future; otherwise there
would be little or no justification for
establishment of capital market. In this
regard, the Bank has already identified
the Government and Government
agencies as potential issuers of bonds.
It has also identified some potential
investors such as insurance companies.
However, it is currently undertaking
more market research on the matter.

redeemed in 2004 and July 2009,

respectively. These bonds were issued
primarily to facilitate liquidation of state
owned banks in Lesotho; Lesotho Bank
as well as Lesotho Agricultural
Development Bank.
In preparation for a gradual move
towards development of capital market
in Lesotho, the Central Bank of Lesotho
undertook reforms geared towards
development of money market in 2008.
This included introduction of longer
dated money market instruments (273day and 364-day treasury bills),
reduction of threshold of competitive
segment of auction from M250 000 to
M100 000, shorter settlement procedure
(from two days to the same day) and
increased frequency of auctions to biweekly.

Development of appropriate legal and

regulatory framework which will ensure
that capital market operations are within
parameters of the law. These include
establishment of regulatory bodies and
management bodies which will ensure
smooth operations of capital market;
development of rules, regulations as
well as acts governing capital markets
activities. To this end, Treasury
securities trading regulations have been
amended to include Treasury bonds,
since initially these regulations covered
Treasury bills only. In addition, the Bank
is
currently
establishing
other
legislations
to
be
reviewed
or
introduced, reforms to be introduced as
well as regulatory and other related
bodies to be established.

Plans to introduce capital market in

Lesotho and progress thereof
The Bank is currently undertaking a
number of measures geared towards
establishment of capital market in
Lesotho. The plan is to introduce
government bond market first. This will
lay a good foundation for introduction of
corporate bond market and ultimately
stock market. Nevertheless, there are
some pre-conditions which should be
satisfied in pursuit of these objectives.
These include, inter alia;

Development
of
Information
Communication
Technology
(ICT)
infrastructure that will support the
efficient and effective operations of
capital market. ICT infrastructure is vital
in supporting the overall capital market
trading activities auctions, settlement,
secondary market trading, clearing
facilities etc. The Bank has identified
Central Securities Depository System
(CDS) as an important infrastructure
and the process of procuring it is at an
advance stage. CDS will facilitate dematerialisation of securities and faster
and easier processing of transactions.

Macroeconomic environment that is

conducive for operations of capital
market.
Sound
macroeconomic
environment
promotes
business
operations and therefore enhances
participation in capital market. It is worth
noting that macroeconomic environment
in Lesotho has been identified as
conducive for operations of capital
market. Average per capita GDP growth
rate has been around 2.5 % over the
last 8 years. Moreover, inflation rate
has, on average, been below 10 % over
this period.
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Nevertheless, the Bank is also in the

process of establishing other necessary
ICT infrastructure at the moment.

well as exports will increase, leading to

more
economic
growth
and
development. In addition, it will help to
promote growth and competitiveness in
line with advanced economies.

Implications on Lesothos Economy

In a nutshell, development of capital

market in the country will bring about an
increase in the level of financial
intermediation which is critical for
efficient allocation of financial resources.
The current situation is such that
financial intermediaries mobilise funds in
Lesotho for investment in SA. This is
brought about by the fact that
investment opportunities are limited in
Lesotho as capital market is virtually
non existent in Lesotho. Therefore
aggressive development of capital
market will go a long way in reversing
this situation.

The development of capital market has

a number of implications for Lesothos
economy. Capital market will provide
long-term capital in the form of bonds or
equity. This will enable implementation
of developmental projects, which are
geared towards promoting economic
growth and development.
The bond market will enable the
Government of Lesotho (GoL) and
Government agencies to raise funds to
finance long-term development projects,
especially
now
that
Government
revenue is expected to decline. The
expected decline in revenue (especially
SACU receipts) is likely to undermine
the Governments efforts to reduce
poverty, therefore, alternative source of
funds, such as issuance of Government
bonds should be exploited. It may also
minimize governments financial stress
of funding government agencies in the
form of subventions.

Conclusion
It has been shown that development of
capital market in Lesotho will play a
significant role in promoting growth and
development within the country. It will
increase
the
level
of
financial
intermediation, leading to increased
volume and quality of investments, and
therefore economic growth.

The development of capital market will

also enable the private sector to raise
funds to finance various long-term
projects. In addition, given the fact that
capital market facilitates efficient
allocation of capital, based on the
viability and profitability of the project, it
is likely to stimulate private sector
competitiveness. This will put domestic
industries in a better position to compete
globally and take advantage of
opportunities
brought
about
by
Lesothos membership in regional
economic integration. As a result,
domestic productivity, employment as

CBL Economic Review, August 2009, No. 109

Effective bond market will free up capital

for investment in private sector; allow
the Government access to finance and
therefore
pursue
development
objectives and fuel economic growth. It
will also increase investments and flow
of money within the country; and
support the development of other
financial markets like stock exchange. In
short, it will increase sources of
investment funds for the domestic
economy.

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3. Monetary Policy Operations Report for August 2009

During the review period, monetary policy
operations undertaken by Central Bank
of Lesotho (CBL) were successful in
attaining desired objectives. The primary
objective of monetary policy is to achieve
and maintain price stability within the
economy. As a result, the Bank employs
Open Market Operations (OMO) to attain
the stated objective. The initiative
enables CBL to maintain the parity
between the local currency, Loti, and the
South African Rand which is important to
price stability.

auctions conducted on August 12 and 26,

2009, respectively, were ultimately
issued. During the review period, the
market responded relatively well to the
91-day treasury bills auction held in
August, 2009 compared with the previous
auctions conducted in July, 2009.
Competitiveness of the 91-day TBs
auction (as measured by the number of
bidders and bids received, over/under
subscription of the auctions as well as
the movements of discount rates)
improved marginally during the review
period. The number of bids received
increased slightly from an average of 10
bids to an average of 11 bids in August
2009. Oversubscription increased from
an average of M22.1 to M26.0 million in
August. Nevertheless, the number of
bidders remained unchanged at an
average of 5 participants from the
previous month.

The report present economic and

operational issues surrounding the
monetary policy operations conducted
during the review period to assess the
success of the operations.
Table 1 below shows that the entire
amounts of treasury bills (M40.0 and
M30.0 million) announced during the
Table 1: Treasury Bills Auctions
Maturity
Date

Auction
Amount
(Million
Maloti)

Amount
Issued
(Million
Maloti)

Over/(under)
subscription
(million)

Discount
Rate (%)

RSA
Discount
Rate (%)

11-Nov-09

M12.0

M12.0

M30.2

6.80%

7.44%

10-Feb-10

M12.0

M12.0

M32.2

7.18%

7.51%

273-day

12-May-10

M8.0

M8.0

M19.8

8.00%

7.44%

364-day

11-Aug-10

M8.0

M8.0

M13.5

7.92%

7.28%

91-day

25-Nov-09

M9.0

M9.0

M21.8

6.80%

6.97%

24-Feb-10

M9.0

M9.0

M18.0

7.18%

7.06%

273-day

26-May-10

M6.0

M6.0

M16.2

8.00%

7.08%

364-day

25-Aug-10

Type of
Security

Auction
Date

91-day
182-day

182-day

12-Aug-2009

26-Aug-2009

Total for reporting period

M6.0

M6.0

M12.1

7.92%

7.04%

M70.0

M70.0

M163.8

The intermediate target, the 91-day TBs

rate (discount rate) remained steady at
6.80 per cent, as shown in figure 2
below. However, SA 91-day TBs rate
declined by 47 basis points, from 7.44
per cent to 6.97 per cent at the end of
August 2009. Therefore, the margin
CBL Economic Review, August 2009, No. 109

between the two rates (discount rates)

narrowed by 47 basis points to 0.17 per
cent at the end of August, 2009. This
implies that there was a minimal
incentive for undesirable cross border
transfers of funds between the two
countries.
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In relation to the progress towards

attaining Monetary Policy objectives, the
minimum NIR limit set for the period
under review was successfully met. The
level of NIR at the end of August 2009
was US$906.4 million, above the upper
limit of the target range of US$500 million

to US$550 million set by the Monetary

Policy Committee (MPC) by US$356.4
million. Therefore, the Monetary Policy
operations undertaken during the review
month were successful in attaining their
desired objectives of financial stability by
maintaining the target NIR level.

Figure 2: Measuring the Success of Monetary Policy Objectives: Performances of

Lesotho 91-day T-bills vs RSA 91-day T-bills
12.0
11.0
10.0
9.0
SA 91-day TBs rate

8.0

6.97

7.0
Les 91-day TBs rate

6.0

6.80

5.0
eb
F

th
11

eb
F

th
25

ar
M

th
04

ar
M

th
18

pr
A

st
01

pr
A

th
15

pr
A

th
29

ay
M

th
13

ay
M

th
27

ne
Ju

rd
03

ne
Ju

th
17

ly
Ju

st
01

ly
Ju

th
15

ly
Ju

th
29

ug
A

th
12

ug
A

th
26

Table 2: Selected Monetary and Financial Indicators

1. Interest rates (Percent Per Annum)

1.1 Prime Lending rate
1.2 Prime Lending rate in RSA
1.3 Savings Deposit Rate
1.4 Interest rate Margin( 1.1 1.3)
1.5 Treasury Bills discount rate (91-day)
2. Monetary Indicators (Million Maloti)
2.1 Broad Money (M2)
2.2 Net Claims on Government by the Banking
2.3 Net Foreign Assets Banking System
2.4 CBL Net Foreign Assets
2.5 Domestic Credit
2.6 Reserve Money

System

3. Spot Loti/US$ Exchange Rate (Monthly Average)

4. Inflation Rate (Annual Percentage Changes)
5. External Sector (Million Maloti)

June

2009
July

August

12.17
11.00
2.11
10.06
6.76

12.17
10.50
2.12
10.05
6.80

12.0
10.50
2.11
9.89
6.80

5574.76
-4308.11
11293.98
7928.31
-2758.77
703.50

5754.69
-5138.00
12259.16
8796.24
-3533.80
822.99

6128.99
-4489.48
12104.17
8081.93
-2598.53
789.00

M8.0383

M7.9468

M7.9505

6.9

6.1

5.6

2008
QIV
330.59
-184.20
-558.82

5.1 Current Account Balance

5.2 Capital and Financial Account Balance
5.3 Reserves Assets

2009
QI+
322.98
132.85
67.28

QII+
356.20
607.24
70.01

+Preliminary Estimates.
*Prime and deposit (savings) rates are averages of all commercial banks rates operating in Lesotho. The Statutory
Liquidity Ratio in Lesotho is 25 percent of commercial banks short-term liabilities

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