Debt Management Performance Assessment (DeMPA) Kingdom of Lesotho July 2018 i The DeMPA is a methodology for assessing public debt management performance through a comprehensive set of indicators spanning the full range of government debt management functions. It is adapted from the Public Expenditure and Financial Accountability (PEFA) framework. The DeMPA tool presents the 14 debt performance indicators along with a scoring methodology. For additional information on the World Bank's Debt Management Technical Assistance Program, including more on the DeMPA Tool, please visit our website at: http://www.worldbank.org/debt ii Contents Glossary...................................................................................................................................................... iv 1 Executive Summary ............................................................................................................................ 6 2 Country Background and Public Debt................................................................................................. 9 2.1 Economic Background .................................................................................................................. 9 2.2 Public Debt Overview ................................................................................................................... 9 3 Debt Management Performance Assessment (DeMPA) ................................................................... 12 3.1 DeMPA Methodology ................................................................................................................. 12 3.2 Summary of Performance Assessment ........................................................................................ 13 4 Performance Indicator Assessment ................................................................................................... 16 4.1 Governance and Debt Strategy .................................................................................................... 16 DPI-1 Legal Framework.................................................................................................................... 16 DPI-2 Managerial Structure .............................................................................................................. 17 DPI-3 Debt Management Strategy .................................................................................................... 20 DPI-4 Debt Reporting and Evaluation .............................................................................................. 21 DPI-5 Audit ....................................................................................................................................... 23 4.2 Coordination with Macroeconomic Policies ............................................................................... 24 DPI-6 Coordination with Fiscal Policy ............................................................................................. 24 DPI 7: Coordination with Monetary Policy....................................................................................... 26 4.3 Borrowing and Related Financing Activities .............................................................................. 28 DPI-8 Domestic Borrowing............................................................................................................... 28 DPI-9 External Borrowing ................................................................................................................ 30 DPI 10 – Guarantees, On-Lending and Derivatives .......................................................................... 32 4.4 Cash Flow Forecasting and Cash Balance Management ............................................................. 34 DPI-11 Cash Flow Forecasting and Cash Balance Management ...................................................... 34 4.5 Debt Recording and Operational Risk Management ................................................................... 36 DPI-12 Debt Administration and Data Security................................................................................ 36 DPI-13 Segregation of Duties, Staff Capacity, and Business Continuity ......................................... 40 DPI-14 Debt and Debt-Related Records ........................................................................................... 42 5 ANNEXES ........................................................................................................................................ 45 A. Agenda DeMPA Mission. July 2-6, 2018 ................................................................................. 46 B. Meeting List .............................................................................................................................. 53 C. DeMPA Comparison (2012 and 2018) ...................................................................................... 55 iii Glossary ADFD Abu Dhabi Fund for Development AED United Arab Emirates Dirham ADF African Development Fund AfDB African Development Bank AG Accountant General AIDS Acquired Immune Deficiency Syndrome ATM Average Time to Maturity ATR Average Time to Re-fixing BADEA Arab Bank for Economic Development in Africa BSP Budget Strategy Paper CBL Central Bank of Lesotho CNY Chinese Yuan CSD Central Securities Depository CS-DRMS Commonwealth Secretariat Debt Recording and Management System DeM Debt Management DeMPA Debt Management Performance Assessment DMS Debt Management Strategy DRP Disaster Recovery Plan DSA Debt Sustainability Analysis DvP Delivery versus Payment EIB European Investment Bank EUR Euro FY Fiscal Year GDP Gross Domestic Product GNI Gross National Income GoL Government of Lesotho HIV Human Immunodeficiency Virus IDA International Development Association IFMIS Integrated Financial Management Information System IMF International Monetary Fund KWD Kuwait Dinar LDC Least Developed Country LNDC Lesotho National Development Corporation MDP Ministry of Development Planning Macroeconomic and Financial Management Institute of Eastern and Southern MEFMI Africa MoF Ministry of Finance MPMD Macroeconomic Policy and Management Division MSM Maseru Securities Market MTDS Medium-Term Debt Management Strategy MWG Macro Working Group N/A Not applicable N/R Not rated iv NSDP National Strategic Development Plan OFID OPEC Fund for International Development PDAMD Public Debt and Aid Management Department PEFA Public Expenditure and Financial Accountability PFMA Public Financial Management and Accountability SACU Southern African Customs Union SADC Southern Africa Development Community SAR Saudi Riyal SDR Special Drawing Right SOEs State Owned Enterprises TSA Treasury Single Account UN United Nations USD United States Dollar WASA Water & Sewerage Authority WASCO Water and Sewage Company ZAR South Africa Rand v 1 Executive Summary At the request of the Minister of Finance of Lesotho, a joint World Bank - Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) mission visited Maseru, between July 2-6, 2018, to undertake a Debt Management Performance Assessment (DeMPA). 1 The objective of the mission was to evaluate current performance against the DeMPA methodology, and to assess progress since 2012, when the first DeMPA was performed. The mission met with government officials from several departments of the Ministry of Finance (MoF), including: Public Debt and Aid Management Department (PDAMD), Macroeconomic Policy and Management Department (MPMD), Treasury Department, Budget Department, Legal Department, Management Information System Department, Internal Audit and Human Resources Department. Other meetings were held with the Office of the Auditor General, Ministry of Development Planning, Central Bank of Lesotho (CBL), commercial banks, insurance companies and the public pension fund. The team greatly appreciates the cooperation and support provided by the staff of PDAMD as the main counterpart for the evaluation. The results of the evaluation, spanning the full range of debt management (DeM) functions, show limited progress. Compared to the previous DeMPA, the current assessment revealed only one upgrade related to the registry and management system for domestic debt of the CBL. Yet, additional actions to improve debt management in Lesotho are currently under discussion (i.e., approval of a new policy framework and public debt law), or have already started such as the publication of a debt statistical bulletin, undertaking of a Medium-Term Debt Strategy (MTDS) analytical exercise as the foundation for a Debt Management Strategy, and introduction of a Cash Management Unit. The assessment also revealed several downgrades associated to weaknesses in debt reporting to parliament, lack of regular information sharing between MoF - CBL and with market participants, as well as lack of secure storage and backup for the debt recording and management system of the MoF. Additional areas of improvement relate to, among others: i) fragmented legal framework; ii) lack of a loan guarantees’ framework; iii) preparation and approval of a formal Debt Management Strategy; iv) weak quality controls for data publication; v) quality of cash flow forecasts; vi) lack of policies and procedures for DeM operations; and, vii) completeness and timeliness of debt records. The main findings of the assessment are summarized below: 1 The team was comprised of Mr. Jaime A. Garron (mission lead, World Bank), Mr. Yuto Kanematsu (World Bank), Ms. Sashana Whyte (World Bank), and Ms. Josephine Tito (MEFMI). Mr. Lars Jessen and Ms. Lilia Razlog (both World Bank) supported the mission from Washington DC. Ms. Janet K. Entwistle, World Bank Country Representative to Lesotho, joined the meetings with the Principal Secretary of the Ministry of Finance. 6 Strengths Areas for Improvement 1. Governance and Strategy Development • The current legal framework states clearly the • Consolidate fragmented legal documents. authority to borrow, and issue loan guarantees Currently several pieces of legislation of behalf of the Government (Minister of deal with public debt management Finance with the approval of Cabinet; PFMA operations, and some key provisions are 2011). missing: debt management objectives, • An annual Public Debt Bulletin is publicly borrowing purposes, reporting, available (2015/16; 2016/17) and provides a evaluation, and debt management comprehensive set of information. strategy development. • Make debt management coordination operational: the Debt Management Committee and Technical Debt Management Committee are currently non-functional. • Formalize information sharing. • Develop a framework for appraise, issue and monitor loan guarantees. • Prepare, approve, publish and implement a Debt Management Strategy, as well as improve investor relations (information sharing). • Strengthen Debt Reporting, Evaluation and Audit: i) reinforce data quality assurance and achieve timely publication of the Statistical Bulletin (no later than six months at the date of publication); and ii) produce and share an annual report on debt management operations with relevant stakeholders. 2. Coordination with Macroeconomic Policies • Information exchange on key macroeconomic • Implement a formal and regular channel and debt variables for DSA purposes is frequent to exchange and discuss macroeconomic, within the MoF. monetary, fiscal and public debt-related • There is a clear legislation (CBL Law) limiting issues. the access to central bank financing. • Verify and ensure quality of DSAs. • Develop and formalize an Agency Agreement between CBL and MoF. • Make the Debt Committee operational (policy and technical levels). • Ensure clear separation and use of short- term debt instruments for monetary and fiscal purposes. 3. Borrowings and Related Financing Activities • Preparation and publication of an annual auction • Prepare borrowing plans consistent with calendar, including dates, instruments and the budget and the debt management indicative amounts. strategy. • Clear, well-documented and publicly available • Elaborate documented procedures for: 1) information for market participants to access contracting external loans; 2) issuing and 7 government securities (regulations and monitoring loan guarantees, including procedures). credit risk assessments; and 3) on-lending • Efficient auction and settlement process operations. undertaken by the CBL, whereby results are • Conduct assessments of most beneficial published the same day of the auction (T+0). or cost-effective borrowing terms and • Legal advisory during all the negotiation conditions (source of funds, currency, process for external borrowing. interest rate and maturity). 4. Cash Flow Forecasting and Cash Balance Management • A Cash Management Unit has been established • Improve the quality of the cash flow within the Accountant General’s office. forecast by developing a methodology • In 2018, a cash flow forecast was produced for and strengthening information sharing. the first time by the Cash Management Unit. • Issue short-term instruments for cash flow management. • Reinforce information sharing with the CBL for liquidity management purposes. 5. Debt Recording and Operational Risk Management • Interface between IFMIS and CS-DRMS • Identify an off-site storage for the public (electronic internal processes). debt database backups. • Adequate controls for processing debt service • Prepare procedures manuals for debt payments (3-person check). recording and validation, as well as for • Daily and weekly backups for the public debt processing debt service payments. database. • Improve completeness and timeliness of • Adequate number and qualifications of debt records (e.g. disbursements) and loan PDAMD staff. guarantees. • Complete and secure database for government • Establish segregation of duties and securities (CBL), audited annually. corresponding job descriptions. • Real-time backup, as well as business • Prepare a code of conduct, conflict of continuity and disaster recovery plans (CBL). interest guidelines, business continuity and disaster recovery plans. 8 2 Country Background and Public Debt 2.1 Economic Background The Kingdom of Lesotho is a lower-middle income country with a per capita GNI of USD 1,280 as of 2017. 2 According to the 2015 UN Human Development Index, Lesotho ranks160 out of 187 countries with a score of 0.497, falling into the category of low human development; 57.1 percent of the population is living below the poverty line. In addition, Lesotho remains second in the ranking of countries most impacted by HIV/AIDS in the world, with the prevalence of HIV at 25 percent. The economy is closely linked to South Africa and its currency, the Loti 3 is pegged (at one-to-one) to the Rand, which also serves as legal tender in the country. In the last three years, real Gross Domestic Product (GDP) growth in Lesotho averaged approximately 3 percent, driven primarily by textile manufacturing and agriculture. However, the country is currently facing a challenging fiscal and external position. Revenue has historically performed well in Lesotho, fueled by Southern African Customs Union (SACU) revenues. Nonetheless, they declined significantly in FY2014/15 and have remained low for the past three years, due to the decline in SACU revenue collection from 25 percent in FY2014/15 to 17.5 percent of GDP in FY2017/18 and slower economic growth in South Africa. The government responded to the decline in SACU Revenues by allowing the fiscal deficit to increase to 6.5 percent of GDP in FY2017/18 from a surplus of 0.3 percent of GDP in FY2014/15. This was financed by drawing down sizable buffers in the form of government deposits at the CBL, which has been mirrored in the loss of international reserves. Lesotho has faced a deteriorating macro-fiscal outlook in recent years due to increasing fiscal deficits and a decline in international reserves. Going forward, consolidation efforts are expected -including cuts in the wage bill and an overall reduction in expenditure- as the fiscal deficit is projected to decrease in the medium-term, following also an expected recovery in the South African economy and therefore SACU revenue collection. With regards to the financial sector, access to finance in Lesotho remains low and households are highly indebted. However, the financial sector is sound, and banks are highly capitalized. 2.2 Public Debt Overview 4 As of March 2017, central government debt stood at Maloti 12,386 million (USD 957.2 million), representing 41.3 percent of GDP (Table 1), a decline from 49.9 percent of GDP in FY 2015/16. This decrease was mainly attributed to the appreciation of Maloti against major currencies till mid- 2017, limited new borrowing, and solid GDP growth. On the other hand, domestic debt relative to GDP remained stable. 2 Source: World Development Indicators (WDI). 3 In the plural Maloti. 4 Source: 2016/17 Annual Public Debt Bulletin, Page 30. 9 Table 1. Lesotho’s Government Debt Outstanding at end-2016/17 (Maloti million) 2015/16 2016/17 Change Total debt 14,104.3 12,386.2 -1,718.1 (In percent of GDP) (49.9) (41.3) -8.6 External debt 12,829.5 11,032.6 -1,796.9 (In percent of GDP) (45.5) (36.8) -8.7 Domestic debt 1,274.8 1,353.6 78.8 (In percent of GDP) (4.5%) (4.5%) 0 Source: 2016/17 Annual Public Debt Bulletin, Ministry of Finance Debt composition External debt represents 89.0 percent of total government debt while domestic debt constitutes the remaining 11.0 percent. Almost three quarters of the total public debt is owed to multilateral creditors, including the International Development Association (IDA), the African Development Fund (ADF) and the European Investment Bank (EIB). External debt is denominated predominately5 in US dollars (35 percent reflecting loans mainly from ADF, Abu Dhabi Fund, IDA, Saudi Fund, Kuwait Fund, OPEC Fund for International Development -OFID and the Arab Bank for Economic Development in Africa -BADEA). The portfolio also includes debt denominated in Euro (EUR) (19 percent, loans from AfDB, EIB and a commercial bank), Rand (ZAR) (13 percent, loan from EIB), Yuan (RMB) (11 percent, from the Export-Import Bank of China), as well as in Dirham (AED), Dinar (KWD) and Riyal (SAR) currencies. Figure 1. External debt composition at end-2016/17 By Currency By Creditor Source: Mission team with data from the 2016/17 Annual Public Debt Bulletin, Ministry of Finance Government securities issued in the domestic market comprise Treasury Bills (T-bills) and Bonds, whereby T-bills have four tenors (91, 182, 273 and 364 days) and bonds have 2 tenors (7 and 10 years). Currently, the issuances of T-bills are mainly conducted by the CBL for liquidity 5 Special Drawing Rights (SDR)-denominated debt is separated into SDR’s basket currencies. 10 management purposes. Sixty-two percent of government securities are held by the commercial banks while non-banks represent the remaining 38 percent. Figure 2. Government security stock composition at end-2016/17 Source: 2016/17 Annual Public Debt Bulletin, Ministry of Finance The debt portfolio is exposed to high exchange rate risk due to significant share of FX debt and interest rate re-fixing risk due to large share of short term domestic debt. Refinancing risk for domestic debt is high with 44.5 percent of the stock maturing within 1 year and an average time to maturity of 3 years. In the case of external debt, considering the longer tenures of loans, exposure to refinancing risk is limited. Table 2. Cost Risk indicators of existing debt portfolio Indicators External Domestic Total Interest payment ( percent of GDP) 1.0 0.4 1.4 Cost of Debt Weighted Av. IR ( percent) 1.8 7.5 2.4 ATM (years) 11.1 3.2 10.2 Refinancing Risk Debt maturing in 1yr ( percent of total) 4.5 44.5 8.9 Debt maturing in 1yr ( percent of GDP) 1.7 2.0 3.7 ATR (years) 11.0 3.2 10.2 Interest Rate Risk Debt refixing in 1yr ( percent of total) 5.1 44.5 9.4 Fixed rate debt ( percent of total) 99.3 100.0 99.4 Foreign Exchange (FX) Risk FX debt ( percent of total debt) 89.1 - 89.1 Source: 2016/17 Annual Public Debt Bulletin, Ministry of Finance In addition to public securities, the government also issues loan guarantees and on-lends to State Owned Enterprises (SOEs). Data recording of guarantees is not complete (See DPI 14). As published in the Annual Public Debt Bulletin, government loan guarantees amounted to M703.6 million in 2016/17. Outstanding on-lent loans -excluding arrears and interest- declined from M1,061 million in 2016 to M1,045 million as of March 2017. 11 Lesotho’s risk of external debt distress has been revised from “moderate” in 2015 to “low” in 2017 according to the latest DSA carried out jointly by the World Bank and the International Monetary Fund (IMF) in February 2018. The upgrade is mainly due to the recent rebasing of GDP, but also to solid GDP growth and revisions to the assessment for new borrowing requirements (excluding a large hydropower plant project). A large negative shock to exports constitutes the main risk for a possible deterioration of external debt indicators, but even under the most extreme simulated shocks, debt ratios remain below their corresponding thresholds. While these simulations suggest that there is some —though limited— scope for additional non-concessional borrowing to finance infrastructure projects, careful cost-benefit analysis and debt sustainability implications must be considered going forward. In addition, country authorities agreed with the need to better monitor domestic contingent liabilities to have a comprehensive view of the debt. 3 Debt Management Performance Assessment (DeMPA) 3.1 Methodology The DeMPA comprises a set of 14 debt performance indicators (DPIs), which encompass the complete spectrum of government debt management operations, as well as the overall environment in which these operations are conducted. While the DeMPA does not specify recommendations on reforms and/or capacity and institution building, the performance indicators do stipulate a minimum level that should be met. Consequently, if the assessment shows that the minimum requirements are not met, this clearly indicates an area requiring attention and priority for reform. The DeMPA focuses on central government debt management activities and closely-related functions, such as the issuance of loan guarantees, on-lending, cash flow forecasting, and cash balance management. Thus, the DeMPA does not assess the ability to manage the wider public debt portfolio, including implicit contingent liabilities (such as liabilities of the pension system) or the debt of SOEs, unless these are guaranteed by the central government. The central government is nonetheless responsible for managing its contingent liabilities and thus for ensuring supervision of public debt and guaranteed public sector debt (which is part of the DSA), which DeMPA evaluates under the following indicators: DPI-1 “Legal Framework,” DPI-6 “Coordination with Fiscal Policy,” and DPI-10 “Loan Guarantees, On-Lending, and Derivatives.” The DeMPA is largely modeled after the Public Expenditure and Financial Accountability (PEFA) Performance Indicators. While the latter cover broad aspects of public financing, the DeMPA focuses exclusively on central government debt management in a greater level of detail than PEFA indicators do. The points of convergence between these two tools lie in the areas of the recording of cash balances, debt management, and guarantees. There are strong links between PEFA indicators for audit and fiscal planning and DeMPA indicators for audit and coordination with macroeconomic policies. The scoring methodology assesses each dimension and assigns a score of A, B, or C, based on a list of criteria. If the minimum requirements for a score of C are not met, the dimension is assigned a score of D. A score of C indicates that the minimum requirements considered necessary for effective debt management performance have been met. A score of D, however, indicates that the minimum requirements have not been met and that specific measures are necessary to correct the deficiencies and unsatisfactory performance noted. 12 The A score reflects sound practice for the dimension of the performance indicator, corresponding to the best practice level, while a B score is a mid-range score that falls between good practices and the minimum requirements. In some situations, a dimension is not scored because the activity in the dimension has not actually been carried out (for example, derivatives are not used), in which case the term N/A (not applicable) is assigned to the dimension. The lack of information or even insufficient information makes it difficult or even impossible to assess a dimension, in which case the designation N/R (not rated) is assigned. When the criteria for a score require that certain legislative provisions, regulations, or procedures be in place, the latter must not only have been approved or signed but must also have been implemented. If that is not the case, these provisions, regulations, or procedures are considered non- existent, and cannot be taken into account in the debt management assessment and thus in the DeMPA scoring. The same principle also applies when the debt management strategy, even if it has been drafted, has not been followed or updated. 3.2 Summary of Performance Assessment DPI Title 2012 2018 Governance and Strategy Development DPI - 1 Legal Framework 1 The existence, coverage, and content of the legal framework D D DPI - 2 Managerial Structure The managerial structure for central government borrowings and debt-related 1 D D transactions The managerial structure for preparation and issuance of central government loan 2 D D guarantees DPI - 3 Debt Management Strategy 1 The quality of the debt management strategy document D D The decision-making process, updating, and publication of the debt management 2 N/R D strategy DPI - 4 Debt Reporting and Evaluation 1 Publication of a statistical bulletin on debt, loan guarantees and debt-related operations D D 2 Reporting to the Parliament or Congress C D DPI - 5 Audit Frequency of financial audits, compliance audits, and performance audits of the central 1 D D government as well as publication of the external audit reports 2 Degree of commitment to address the outcomes from internal and external audits N/R D 13 DPI Title 2012 2018 Coordination with Macroeconomic Policy DPI - 6 Coordination with Fiscal Policy Support of fiscal policy makers through the provision of accurate and timely 1 C C forecasts on total central government debt service under different scenarios Availability of key macro variables, an analysis of debt sustainability, and the frequency 2 D D with which it is undertaken DPI - 7 Coordination with Monetary Policies Clarity of separation between monetary policy operations and debt management 1 D D transactions Coordination with the central bank through regular information sharing on current and 2 C D future debt transactions and the central government’s cash flows 3 Extent of the limit of direct access to financial resources from the central bank C C Borrowing and Related Financing Activities DPI - 8 Domestic Borrowing The extent to which market-based mechanisms are used to issue debt; the preparation of an annual plan for the aggregate amount of borrowing in the domestic market, divided 1 D D between the wholesale and retail markets; and the publication of a borrowing calendar for wholesale securities The availability and quality of documented procedures for borrowing in the domestic 2 A C market and interactions with market participants DPI - 9 External Borrowing Documented assessment of the most beneficial or cost-effective borrowing terms and 1 conditions (lender or source of funds, currency, interest rate, and maturity) and a D D borrowing plan 2 Availability and quality of documented procedures for external borrowings D D Availability and degree of involvement of legal advisers before signing of the loan 3 A A contract DPI - 10 Loan Guarantees, On-lending and Debt-related Transactions Availability and quality of documented policies and procedures for approval and 1 D D issuance of central government loan guarantees Availability and quality of documented policies and procedures for on-lending of 2 D D borrowed funds Availability of a DeM system with functionalities for handling derivatives and 3 N/R N/A availability and quality of documented procedures for the use of derivatives Cash Flow Forecasting and Cash Balance Management DPI - 11 Cash flow Forecasting and Cash Balance Management 14 DPI Title 2012 2018 Effectiveness of forecasting the aggregate level of cash balances in government bank 1 D D accounts Decision of a proper cash balance (liquidity buffer) and effectiveness of managing this cash balance in government bank accounts (including the integration with any domestic 2 debt borrowing program, if required) D D Debt Recording and Operational Risk Management DPI - 12 Debt Administration and Data Security Availability and quality of documented procedures for the processing 1 D D of debt-related payments Availability and quality of documented procedures for debt and transaction data 2 recording and validation, as well as storage of agreements and debt administration D D records Availability and quality of documented procedures for controlling access to the central 3 D D government's debt data recording and management system and audit trail Frequency and off-site, secure storage of debt recording and management system 4 B D backups DPI - 13 Segregation of Duties, Staff Capacity and Business Continuity Segregation of duties for some key functions, as well as the presence of an operational 1 D D risk monitoring and compliance function 2 Staff capacity and human resource management D D Presence of an operational risk management plan, including business-continuity and 3 D D disaster-recovery arrangements DPI -14 Debt Records Completeness and timeliness of central government records on its debt, loan 1 D D guarantees, and debt-related transactions Complete and up-to-date records of all holders of government securities in a secure 2 B A registry system, if applicable 15 4 Performance Indicators Assessment 4.1 Governance and Strategy Development DPI-1 Legal Framework Dimension Score 1. The existence, coverage and content of the legal framework on authorization to D borrow, to undertake other DeM activities and to issue loan guarantees. Requirements for minimum compliance: The legislation (primary and secondary) provides clear authorization to borrow and to issue new debt, to undertake debt-related transactions (where applicable) and to issue loan guarantees (where applicable) all on behalf of the central government. In addition, the primary legislation specifies the purposes for which the executive branch of government can borrow. The legal framework on authorization to borrow, issue loan guarantees and provide on-lending is fragmented. The Public Financial Management and Accountability Act (PFMA Act) of 2011, Art.28, states -among other provisions- that: i) the Minister, with the prior consent of Cabinet, shall approve any borrowings of funds or other assets for the public purposes of Government and of local authorities; ii) loan agreements on behalf of the Government shall be signed by the Minister only, after consultation with Cabinet; iii) the Minister may guarantee the repayment of loans on behalf of Government; and iv) before approving any loan or guarantee, the Minister shall be satisfied that the beneficiary of the borrowing or guarantee has the capacity to repay the amount involved, together with any interest, within the term proposed. Regarding financial derivatives, the PFMA Act, Art. 32, states that “a spending unit of Government shall not enter into a transaction in financial derivatives without the prior written approval of the Minister.” The PFMA Act, Art. 13, also requires that the budget documents for presentation to the Parliament shall include a limit on total guarantees and borrowings in the budget year and the following two years. The budget presents aggregate amounts for domestic and external borrowing for the coming three years, but there is no mention of guarantees in quantitative terms. In terms of limits as required by the Law (on guarantees and borrowings), however, the mission did not find explicit limits in the 2018/19 budget. The PFMA Act repealed the Finance Act of 1988 but no other specific debt laws. The Loans and Guarantees Act of 1967 (and its 1975 and 1976 amendments) states that: the Minister may raise funds outside Lesotho within a limit of the audited recurrent revenue for the last three years as recorded in the latest available estimates of revenue presented to the National Assembly; ii) the Government may issue guarantees for domestic or external loans, for a local authority or a body corporate or individual; and iii) the Minister shall approve the purpose of the loan and the terms and conditions of the loan. Regarding the borrowing limit introduced in the Loans and Guarantees Act, this provision is verified for each loan prior to be contracted, and it is part of the written legal opinion sign by the Attorney General and addressed to the Minister of Finance. 16 As part of their benefits, members of parliament are individually entitled by law to an interest free 5-year loan of up to M500,000.00 from a commercial bank and the government acts as the guarantor. The interest free component means that the government pays the interests. The Local Loans Act of 2001 authorizes the Government (under the authority of the Minister of Finance) to borrow domestically up to a limit of one third of the recurrent revenue for the last three years. The Loans (Statutory Bodies) Act of 1975 states that no statutory body shall borrow either domestically or externally without obtaining the prior approval of the Minister of Finance. As mandated by section 7(1) of the Central Bank Act (2000) and regulated by the Local Loans (Government Treasury Securities) (Trading) Regulations -last amended in 2009- approved by the Minister of Finance, the CBL is in charge of issuing treasury bills (T-Bills) and treasury bonds, along with managing the process of issuing, recording, and settling these government securities. The CBL Governor requests the approval from the Minister before issuing bonds and the Minister signs the bond prospectus that is published at the CBL website and local newspapers. Government bonds were introduced in 2010 to finance both development projects and the budget deficit. As the PFMA Act did not formally repeal previous legislation regulating government debt and guarantees, the legal framework is fragmented and, in some cases, overlaps. The Ministry of Finance (MoF), has been working on new legislation and has produced a draft “Public Debt and Aid management Bill”, that is currently under revision, and expected to be approved later in the year (2018). Whereas the borrowing limits set in the legislation are subject to scrutiny as per the legal advice from the Attorney General prior to contracting new loans, the mission did not find evidence that this is the case for the issuance of guarantees. Score: The Minister has been given the authority, with consent of the Cabinet, to borrow and issue guarantees on behalf of the Government. Nonetheless, as the primary legislation does not specify the purposes for which the Minister may borrow or issue guarantees, the legal framework for debt management does not meet the minimum requirements, and a “D” score is assigned. While the draft law currently under discussion incorporates several improvements including the introduction of borrowing purposes, this cannot be taken into account in the current evaluation. This is the same score that the 2012 DeMPA, as the situation has not changed. DPI-2 Managerial Structure Dimension Score 1. The managerial structure for central government borrowing and debt-related D transactions. 2. The managerial structure for preparation and issuance of central government D guarantees. 17 Dimension 1 Requirements for minimum compliance: Borrowings and debt-related transactions are undertaken either by the principal DeM entity or, if there is no principal DeM entity, by DeM entities that regularly exchange debt information and closely coordinate their respective activities through formal institutional mechanisms. The managerial structure of the MoF includes one Principal Secretary and nine departments, including the PDAMD. The duties of the PDAMD have not been officially approved -nor is there any legislation determining the role of the department- and they are based on the scheme of service from 2010 under the former Ministry of Finance and Development Planning. PDAMD is the main debt management entity within the Government, responsible for debt management strategy formulation, preparation of annual borrowing plans, management of public debt and negotiating loan agreements, debt analysis and issuance, preparing annual debt service budgets, paying annual subscriptions to international organizations, and monitoring of guarantees. Domestic borrowing operations are undertaken by the CBL. Thus, CBL is issuing government securities for fiscal policy purposes (bonds) on behalf of MOF and at the request of the government. Minister of Finance Principal Secretary Private Sector Public Debt and Economic Policy Budget Treasury 4 Other Development Aid Managment Department Department Department Departments Department Department Until 2014, two levels for debt management coordination at the central government level existed: the Public Debt Committee -responsible for advising the Minister of Finance in debt management issues, chaired by the Principal Secretary; and the Public Debt Technical Committee -responsible for providing technical advice to the high level committee regarding public debt management, chaired by the CBL. However, these committees have not been operational since December 2014 and the roles had not been specified in any legislation. Instead, basic coordination for the budget preparation phase is conducted within the Macro Working Group (MWG), chaired by the Macroeconomic Policy and Management Division (MPMD) in the Economic Policy Department of the MoF. The MWG consists of representatives from the MPMD, PDAMD, Budget, the Lesotho Revenue Authority, and the Research Department of the CBL. Currently, the group meets on an ad hoc basis (about four times a year) when there is a need to discuss the macro-fiscal framework produced by MPMD. The MGW advises the Minister on domestic and external borrowing; who in turn advises the Cabinet sub-committee for the Budget, which provides aggregate figures for domestic and external financing in the tables included in the annual budget law. In addition, the PDAMD and the CBL meet once a year, during the budget preparation process to discuss domestic borrowing as input to the budget. 18 The PDAMD normally leads the loan negotiating teams. However, there are instances where the PDAMD was informed afterwards that a loan negotiation had been conducted and finalized. Domestic borrowing is managed by the CBL, which requests a formal approval from the Minister of Finance specifying the bond tenor for issuance and the respective volume, before they issue government bonds, and in line also with the published auction calendar. Score: Public borrowing is undertaken and managed by the MoF -with collaboration from the CBL acting as agent for domestic securities issuance. Nonetheless, as the role of the PDAMD is not formally defined and coordination for loan negotiations is not clear, the minimum requirements are not met and therefore a score of “D” is assigned. This rating did not change from the 2012 DeMPA. Dimension 2 Requirements for minimum compliance: If applicable, loan guarantees are issued by one or more government entities that regularly exchange information, and closely coordinate their respective activities through formal mechanisms, both between themselves and with the DeM entity or entities. Currently, there are no procedures in place for the preparation and issuance process of loan guarantees. Although responsible for monitoring guarantees, PDAMD is not always notified about guarantees being issued by the MoF. The Minister of Finance has issued several loan guarantees for SOEs, private sector, parliamentarians (150 guarantees were processed for parliamentarians 6 in 2017), Principal Secretaries, and other statutory bodies including the Lesotho National Development Corporation (LNDC), and the Water and Sewage Company Lesotho (WASCO). In 2016/17, total government guarantees amounted to M703.6 million. Called guarantees -the money that GoL has paid due to failure of the borrower to pay their debt- amounted to M197.3 million during the same period. Loan guarantees for SOEs are generally not prepared by the PDAMD, but directly by the Principal Secretary with participation of the Chief Legal Officer. Except for guaranteed loans to the parliamentarians, most of the domestic guarantees are not recorded by the PDAMD. As for guarantees for external loans, according to the Debt Bulletin there is one outstanding loan guarantee for the Water and Sewage Authority (WASA). In addition, although the Loans (Statutory Bodies) Act of 1975 states that no statutory body shall raise a loan domestically or externally above a limit of M1 million without having obtained the prior approval of the Minister, the limit for loans as stated in the Act has been breached numerous times as informed to the mission. Score: The minimum requirements for this dimension are not met, as coordination to issue loan guarantees is not well developed considering that preparation, issuance and monitoring functions 6 Parliamentarians qualify for a M500,000 (currently about USD 38,000) interest-free loan from commercial banks as part of their benefits, to be repaid in five years (their tenure). The government serves as the guarantor and pays the interest on behalf of the legislators. 19 for loan guarantees are not clearly defined within the MoF. Consequently, a “D” score is assigned. This is the same score that the 2012 DeMPA, as the situation has not changed. DPI-3 Debt Management Strategy Dimension Score 1. The quality of the debt management strategy document. D 2. The decision-making process and publication of the debt management strategy. D Dimension 1 Requirements for minimum compliance: A medium-term Debt Management Strategy (DMS) is in place covering all existing and projected central government debt, based on DeM objectives. The strategy is expressed at least in the form of guidelines for the preferred direction of evolution of specific indicators for interest rate-, refinancing- and foreign currency risks. In addition, if applicable, the strategy document contains a description of measures aimed at supporting domestic debt market development. Following the work undertaken during a workshop held in April 2017 supported by the World Bank, the IMF and the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI), in January 2018 the PDAMD published a medium-term debt management strategy (MTDS) analysis document for the period 2017/18 to 2021/22. 7 The mission team advised the PDAMD that the MTDS analysis document published on the website as the Debt Management Strategy (DMS) still reads as a mission report and not a country’s DMS, highlighting the need for a proper development process going forward. While the MTDS exercise includes cost and risk analysis for several portfolio choices, the document does not identify the chosen strategy and does not include guidelines for the preferred direction of evolution of specific indicators for interest rate-, refinancing- and foreign currency risks; all key components of a DMS. The MTDS analysis document covers the medium term (until 2020/21). The analysis does not include all guarantees -especially domestic guarantees to commercial banks on loans to parliamentarians, due to lack of information (outstanding amounts, interest rates and repayment schedules). In addition, there are discrepancies between the medium-term budget framework and the MTDS exercise conclusions, as the latter implies a strategy more inclined towards the domestic debt market but the budget figures still portrait a higher reliance on external financing in the medium term. Currently, there are no explicit debt management objectives in any legislation, policy document or debt management strategy. To the extent that concessional debt is maximized, the implicit strategy has been on cost minimization from external sources. Nonetheless, the PDAMD is now seeking to 7 A Debt Management Strategy is a plan that the government intends to implement over the medium term to achieve a desired composition of its debt portfolio, which captures its preferences regarding the cost-risk trade-offs. It operationalizes the DeM objectives and has a strong focus on managing the risk exposure embedded in the debt portfolio. 20 increase its share of domestic borrowing, as set in the MTDS analysis document, in order to reduce the exchange rate risk exposure, as experienced by the sudden depreciation in December 2017. The mission was informed that following the preparation of the MTDS analysis document during the workshop, further consultations with other relevant stakeholders, such as market participants were not held. During the meeting with commercial banks, the mission noted that none of them were aware of the MTDS document, despite the pivotal role given to domestic debt in the analysis. Score: While the MTDS analysis that was produced is a stepping stone and key input for undertaking debt management operations it cannot be considered a DMS due to the lack of guidelines for the preferred direction of specific indicators for interest rate, refinancing, and foreign currency risks. Therefore, the minimum requirements are not met and a “D” score is assigned. Dimension 2 Requirements for minimum compliance: The strategy proposal is prepared by the principal DeM entity or, if there is no principal DeM entity, jointly by the DeM entities. The views of the central bank are obtained; the strategy is formally approved; and the strategy report is made publicly available, including through publication on official website(s) and in print media. The MTDS document incorporated comments from the CBL. Yet, the results were not shared with market participants and the mission could not find evidence that it has been formally approved. While the MTDS document has been published, it does not meet the requirements to be considered as a Debt Management Strategy, as noticed under Dimension 1. Score: Considering the absence of a quality Debt Management Strategy document and a formal approval process for it, the minimum requirements are not met and a “D” score is assigned. In the 2012 DeMPA assessment this dimension was not rated (N/R). DPI-4 Debt Reporting and Evaluation Dimension Score 1. Quality and timeliness of the publication of a debt statistical bulletin (or its equivalent) D covering central government debt, loan guarantees, and debt-related operations. 2. The presentation and content of an annual evaluation report to the parliament or D congress on DeM activities and general performance. Dimension 1 Requirements for minimum compliance: A debt statistical bulletin (or its equivalent), with the main categories listed in the “Rationale and background” section of the DeMPA methodology for DPI 4 (with the exception of the basic risk measures of the debt portfolio), is published annually, with debt data that are not more than six months old at the date of publication. The MoF through the PDAMD has been producing and publishing a public annual debt statistical bulletin on its website during the last two fiscal years, the latest publication being the 2016/17 21 edition. The bulletin provides information on total central government debt including guarantees (partially, given lack of complete data) and on-lending, in an extended format including portfolio analysis. The components of the debt statistical bulletin include macroeconomic developments, overview of public debt management in Lesotho, new loans contracted during the year and their terms, disbursements, debt service, debt outstanding as well as cost and risks indicators. As noted by the mission, data quality needs to be assured and processes need to be in place to ensure satisfactory quality of debt statistics. There are data discrepancies in the bulletin compared to the MTDS analysis’ indicators that need to be addressed, and errors in the calculations for the bulletin (i.e., stating that 100 percent of the domestic debt is exposed to foreign exchange risk is a misrepresentation of Lesotho’s public debt portfolio). The Auditor General also expressed concerns on data inconsistencies among outstanding debt stock in the case of domestic debt (T- bills and bonds) and external debt. Score: Although the bulletin contains most of the key elements required by the DeMPA methodology, the minimum requirement could not be met, as the publication was more than six months after the reporting period and there are doubts surrounding the quality of underlying data. Therefore, a “D” score is assigned. This assessment is not comparable with the DeMPA 2012, since the methodology of DPI-4 has changed during the 2015 DeMPA revision. Dimension 2 Requirements for minimum compliance: A report (or section of a wider report) providing details of outstanding government debt and DeM operations is submitted annually to the parliament or congress and is also made publicly available. Currently, there is no formal requirement for the MoF to prepare a report to the Parliament on public debt operations during the fiscal year. At the time of the mission, it was noted that the PDAMD does not submit any report to Parliament on debt operations. As part of the GoL’s Consolidated Financial Statements, the Auditor General’s audit report contains information regarding debt management and debt-related operations undertaken during the fiscal year, new loans, disbursements, debt service, guarantees and on-lending. The latest audit report (FY 2016/2017) was published more than 12 months after the audited period, despite the legal requirement to present it within the following 8 months after the reporting period. Also, the audit report is not made publicly available. Score: Whereas there is no specific report prepared by the PDAMD regarding debt management operations during the year presented to Parliament, the Auditor General’s annual audit report containing debt management operations is submitted to Parliament by the Minister of Finance - with more than a 12-month lag. In addition, the report is not publicly available. Therefore, the minimum requirements are not met and a “D” score is assigned. The score was downgraded from the 2012 assessment, since the first DeMPA considered the Budget Strategy Paper (BSP) as the report containing debt management operations that is submitted to Parliament and currently this is no longer the case, as such report is only submitted to Cabinet. 22 DPI-5 Audit Dimension Score 1. Frequency of financial audits, compliance audits and performance audits (of the D performance and efficiency of government DeM operations, including the internal control system), as well as publication of the external audit reports. 2. Degree of commitment to address the outcomes from the audits. D Dimension 1 Requirements for minimum compliance: An external financial audit of DeM transactions is undertaken annually. External compliance audits have been conducted in the past two years. Audit reports are publicly available within six months of completion. In accordance with Section 117 (4) of the Constitution of Lesotho, Section 27 of the Audit Act 2016 and the PFMA Act, 2011, the Auditor General is responsible for conducting an annual audit of the GoL’s Consolidated Financial Statements to be presented to the MoF. The Minister submits the certified annual audit report to the Public Accounts Committee of the National Assembly. The primary focus of the audit report, as established by Law, is to examine that: i) the accounts have been properly kept; ii) all public moneys have been fully accounted for and the rules and procedures applied are sufficient to secure an effective check on the assessment, collection and proper allocation of the revenue; iii) money has been expended for the purpose for which it was appropriated by the Assembly or by law or regulation relating to other public funds; and, iv) essential records are maintained and the rules and procedures applied are sufficient to safeguard and control public property. The legal framework in place requires that the Auditor General’s Office submits the audit report within 90 days after all public entities have submitted their financial information. The latest annual audit report for FY 2016/2017 took almost 10 months to be completed and more than a year to be published, considering the limited staff at the Auditor General’s Office, the considerable delay and low quality of the information received from public institutions, as informed to the mission. The annual audit reports stopped being published on the website of the Auditor General’s Office in 2009. In the latest annual audit report, the Auditor General expressed concerns on issues related to public debt management, particularly regarding data inconsistencies among outstanding debt stock in the case of domestic debt (T-bills and bonds) as well as external debt. It also referred to the lack of a strategy to recover funds to compensate the cost incurred regarding loan guarantees being called related to SOEs, public officials and private companies, and the use of T-bills proceeds for fiscal policy purposes. The Internal Audit division of MoF exercises internal control and monitoring functions. The mandates of the Internal Audit division are the following: i) assess and evaluate adequacy, efficiency and effectiveness of internal control systems, risk management and governance processes; ii) check compliance with laid down rules and regulations, policies, procedures and contracts; and, iii) provide advisory role to management on issues relating to internal controls, risk 23 management and governance processes. According to Section 11 of the Treasury Regulation (2014), the Internal Audit division directly reports to the Chief Accounting Officer and the Audit Committee established in the MoF, then, the Audit Committee 8 reports to the Finance Minister. According to the Internal Audit Division, it conducts regular controls for all operations on a rolling-basis. Audits on debt management activities, policies, and operations have not been conducted recently. The Internal Audit staff highlighted the need for further training in order to perform debt management audits. 9 Compliance audits on debt management activities, policies and operations have not been conducted. Score: Since external compliance audits on debt management operations have not been conducted in the past two years and the financial audit report is not publicly available, the government does not meet the minimum requirement and a “D” score is assigned. The evaluation results did not change compared to the earlier DeMPA assessment. Dimension 2 Requirements for minimum compliance: Relevant decision makers produce a management response to address the outcomes of the external and internal audits of government DeM activities. As stated in the first dimension, external compliance audits have not been conducted. Regarding the financial audit, the mission was informed that there has been no official response to the concerns raised by the Auditor General in its financial audit reports regarding data inconsistencies related to ending and beginning public debt stock balances and use of T-bills for fiscal policy purposes. Score: Since there has been no official response to the audit concerns raised in the financial audit report, the minimum requirement is not met and a “D” score is assigned. In the 2012 DeMPA this dimension was not rated (N/R). 4.2 Coordination with Macroeconomic Policies DPI-6 Coordination with Fiscal Policy Dimension Score 1. Support for fiscal policymakers through the provision of accurate and timely forecasts C for total central government debt service under different scenarios. 2. Availability of key macro variables, an analysis of debt sustainability, and the D frequency with which it is undertaken. 8 The Audit Committee has not yet been established. 9 Some staff members joined a regional training including basic audit process on public debt management operations supported by MEFMI in the past. 24 Dimension 1 Requirements for minimum compliance: As part of the government’s budget preparation, reasonably reliable and timely forecasts are provided for total central government debt service. During the annual budget preparation, the PDAMD prepares a forecast of the expected government debt servicing costs, which it shares with the MPMD to update the medium-term fiscal framework and with the Budget Department in a timely manner. In the case of domestic debt service, the forecast is based on historic trends and projections considering the issuance calendar (which includes indicative amounts for T-bills and bonds) and the forecasted interest rates at the time of issuance. External debt is forecasted using historical data and projections for exchange rate movements. The PDAMD forecasts for external and domestic debt service payments, which are integrated in the Government’s annual budget process, have often been close to the actual outturn (Table 1). In the case of the difference in intertest charges for FY 2017/18, it was due to slow implementation of projects which were expected to start disbursing. Table 1: Budget and Actual Debt Service Payments FY2015/16 FY2016/17 FY2017/18 Budget Principal Repayment 468.7 544.3 638.6 Interest Charges 283.6 322.6 357.2 Total 752.3 866.9 995.8 Actual Payments Principal Repayment 431.9 526 694.5 Interest Charges 275.9 313.3 300.3 Total 707.8 839.3 994.8 Variance(%) Principal Repayment 8.52 3.48 -8.05 Interest Charges 2.79 2.97 18.95 Total 6.29 3.29 0.10 Score: As a reliable annual forecast of debt service is incorporated into the budget process, the minimum requirement is met and therefore a “C” score is assigned. Although the PDAMD undertakes sensitivity analysis for exchange rate risk, it does not perform it for interest rate risk and does not run alternative scenario analyses. This is the same score as the 2012 DeMPA. Dimension 2 Requirements for minimum compliance: Key macroeconomic variables (actual outcomes and forecasts) and an analysis of debt sustainability that has been undertaken by the government within the past three years are shared with the principal debt entity (or debt entities). The last time that the PDAMD prepared a DSA was in December 2016, with external assistance from MEFMI. The DSA Report is published on the official website of the Government of 25 Lesotho. 10 No DSA has been undertaken since. The mission was informed that preparation of an in-house DSA is currently underway with close collaboration between PDAMD and MPMD. Although not discussed during the mission, the team revised the quality of the DSA Report and identified some inconsistencies (e.g., continuous current account surplus in the projected input data -while the macro description provides a deficit outlook, negative gross financing needs throughout the projection period and unusually high values for the residual -more than 25 percent of GDP), which highlights the need for a more detailed scrutiny of the framework when preparing a DSA Report. The MPMD prepares annual forecasts of key macroeconomic variables and monitors actual outcomes. While there is a Macroeconomic Working Group, it meets on an ad hoc basis (currently about four times a year). However, information is shared regularly between the PDAMD, the Budget department and MPMD. The BSP contains projections until 2020/21. Score: While a DSA has been undertaken by the Government in the last two years, there are several quality issues that would need to be addressed in order to meet the minimum requirements, as highlighted in precedent paragraphs. Therefore, a “D” score is assigned. This is the same score as the 2012 DeMPA. DPI 7: Coordination with Monetary Policy Dimension Score 1. Clarity of separation between monetary policy operations and DeM transactions. D 2. Coordination through regular information sharing on current and future debt D transactions and the central government’s cash flows with the central bank. 3. Extent of the limit of direct access to financial resources from the central bank. C Dimension 1 Requirements for minimum compliance: Insofar as the central bank carries out DeM transactions as an agent of the central government, monetary policy operations are kept formally separate from DeM transactions. The central bank keeps the government and the market informed when transactions are undertaken for monetary policy purposes, and when it transacts in the market as an agent of the central government. According to the mandate of the Central Bank Act of 2000, the Legal Notice No.49 of 2009: Local Loans (Government Treasury Securities), (Trading) Regulations of 2009 provides for the authority of the CBL to issue debt on behalf of the Government of Lesotho -as its fiscal agent- with the obligation for payment of principal and interest falling on the consolidated fund of the government. However, no agency agreement exists between MoF and CBL outlining roles and responsibilities. 10 http://www.gov.ls/gov_webportal/documents/LESOTHO%20DEBT%20SUSTAINABILITY%20ANALYSIS%20%20%20DECEMBER%20%2 02016.pdf. 26 While there is no formal distinction in the case of T-Bills issuances for monetary and fiscal purposes, bonds issuances are clearly marked as being for fiscal policy purposes in the prospectus prepared for each new issuance. In the case of T-bills, the implicit policy is to use the proceeds for monetary policy purposes (i.e., open market operations undertaken by the CBL). This is also very well understood by market participants as attested by the mission during meetings with commercial banks, insurance companies and the public pension fund. When T-bills are issued, the proceeds from the issuance are deposited in a special CBL account that is not accessible by the MoF. Nonetheless, in practice, the proceeds have been used for fiscal policy purposes, as noted in the audit report for FY 2016/17. 11 Score: While it is clear for market participants met during the mission that treasury bonds are used for fiscal policy and T-bills for monetary policy purposes, the misuse of funds raised by issuing T- bills blurs the ex-post distinction between monetary policy operation and debt management transactions. Therefore, the minimum requirements are not met and a “D” score is assigned. The evaluation results did not change compared to the earlier DeMPA assessment. Dimension 2 Requirements for minimum compliance: When relevant for monetary policy implementation, there is at least monthly information sharing on current and future debt transactions and central government cash flows with the central bank. The MWG does not meet on a regular basis (e.g., monthly), and there is no formal channel for information sharing between the PDAMD and CBL on current and future debt transactions. Likewise, there is no formal exchange of information between the Treasury Department and the CBL on cash flow forecast. Liquidity committees are in the process of being set up (see DPI-11). Score: Given the absence of a formal and regular exchange of information between the MoF and the CBL on future debt transactions and cash flows, the minimum requirements are not met and a “D” score is assigned. This assessment is a downgrade from the 2012 DeMPA score. Dimension 3 Requirements for minimum compliance: Access to financing from the central bank has a ceiling limit imposed by legislation. The Central Bank Law of 2000, section 42 (2) limits borrowing by the government from CBL to five percent of the government’s actual revenues from the previous year. The conditions set imply that the credit should be repaid within 93 days from the end of the Government’s financial year. However, the mission was informed that the government has never used this facility. Score: As the ceiling on financing from the CBL is specified in the legal framework, the minimum requirement is met and a “C” score is assigned. A higher score cannot be granted based on a technicality as the repayment period established in the CBL Law (i.e., 93 days) exceeds three 11 The audit report states that the Minister of Finance directed the Accountant-General to transfer the amount of M50,000,000 from the Treasury Bills and Bonds blocked account to the Consolidated Fund, then from the Consolidated Fund to the Recurrent Account. The report states that the funds were used to pay civil pensions for the months of February and March 2017. 27 months. Since there has been no change in the legal provisions on the CBL overdraft facility, this assessment reflects the score of the 2012 DeMPA. 4.3 Borrowing and Related Financing Activities DPI-8 Domestic Borrowing Dimension Score 1. The extent to which market-based mechanisms are used to issue debt; the preparation D of an annual plan for the aggregate amount of borrowing in the domestic market, divided between the wholesale and retail markets; and the publication of a borrowing calendar for wholesale securities. 2. The availability and quality of documented procedures for borrowing in the domestic C market and interactions with market participants. Dimension 1 Requirements for minimum compliance: The central government raises funds domestically using market-based instruments to fund the projected borrowing requirement. An annual borrowing plan for the projected aggregate amount of domestic borrowing—divided between the wholesale and retail markets and other sources—is prepared. In addition, a borrowing calendar that contains issue dates and instruments for wholesale securities for the following month is prepared and published at least one week ahead of the start of the month. Domestic borrowing operations are market-based. Given the mandate in the Central Bank Law, the Financial Markets Department of the CBL regularly issues T-bills and bonds through regular auctions. Both instruments are liabilities of the central government. Treasury bills are issued by the CBL mainly for monetary policy purposes. The PDAMD has expressed its willingness to issue short-term securities, but this proposition has not been accepted by the CBL, as informed to the mission. The proceeds of the T-bills issuances are placed in a blocked account at the CBL. Recently, they have been also used for fiscal policy purposes as mentioned in the audit report from the Auditor General’s Office. At each auction, T-bills are offered in tenors of 91,182, 273 and 364 days; the auctions are conducted every second week. Government bond auctions are held usually every second month. 12 Currently there are 7-year and 10-year bonds outstanding, which are to be re- opened in 2018. The auctions follow a preannounced calendar for the entire year, for both T-bills and bonds. The calendar lists the dates of issue for T-bills and government bonds. For T-bills, the 2018 calendar shows that all tenors will be issued each time. For bonds, the calendar also shows the instruments (maturities) to be issued as well as indicative amounts. The auctions are announced to the market one week in advance. The volumes for the T-bills are determined by the CBL’s Liquidity Forecasting Committee. In the case of bonds, the tenors and 12 In the 2018 calendar, there are two issuances planned for February and March 2019, introducing a new 15-year bond. 28 volumes are stated in the calendar and are subject to change by the Minister, who signs the prospectus for each new issuance. The PDAMD is not involved in the preparation of the bond issue. Currently, the policy is to re-open the 7-year and 10-year series, and a new bond (15-year) is expected to be introduced in 2019. The Budget Speech to the Parliament (BSP) contains a forecast of total domestic debt without detailing the source or instrument. Yet, this amount is in line with the indicative amount established in the annual calendar (M1.2 billion). The BSP does not include a projected amount, but it states the direction of the new financing toward increasing the participation of domestic debt. Auctions are open to all investors and are conducted as single-price auctions. Banks and larger institutional investors can bid electronically through the Central Securities Depository (CSD) system, managed by the CBL. The system is capable of automated bidding, trading, and settlement for both bills and bonds. The CSD also serves as a depository system for government and corporate securities. Bidders can provide both competitive and non-competitive bids. Small investors can provide bids in physical format directly to the CBL, one day before the auction date. Settlement takes place T+0 for banks through automatic debiting of the accounts in the CBL. Other investors settle through their respective commercial bank. For banks, the settlement procedure follows the Delivery versus Payment principle (DvP), (i.e. at the time the cash is withdrawn from their accounts their securities accounts in the CDS will be credited). The same procedure is followed at redemption when the securities accounts will be debited and the accounts in CBL credited. The proceeds of T-bills issuance are credited to a blocked government account at the CBL. The proceeds of bonds issuance are credited to the Consolidated Account of the Government in the CBL. As a principal or coupon payment approaches, the CBL informs the PDAMD so that it can produce the necessary payment order for the T-bills and bonds. Secondary market transactions between banks are facilitated through the CSD and settled on a DvP basis. In 2014 the Maseru Securities Market (MSM) was introduced as Lesotho’s stock exchange, but there is no secondary trading. The CBL offers a facility whereby it will buy back securities after 75 percent of their time to maturity has elapsed. The interest rates are computed based on the spread to comparable South African securities. Score: Domestic borrowing procedures are, in many aspects, well developed. An auction calendar is made public and the bidding and settlement procedures are highly automated. Yet, there is no explicit domestic borrowing plan (i.e., projected aggregate amount of domestic borrowing— divided by sources) and in the case of the T-bills, the use of the proceeds for monetary or fiscal policy purposes is not clear. Therefore, the minimum requirements for the first dimension are not met, and a “D” score is assigned. This assessment is not comparable with the 2012 DeMPA, since the methodology of DPI-8 has changed during the 2015 DeMPA revision. Dimension 2 Requirements for minimum compliance: Borrowing procedures for all domestic borrowings, as well as terms and conditions and criteria for access to the primary wholesale and retail markets are provided in print media, or on the central government- or central bank website. 29 Prospectuses for both bonds and T-bills, containing the terms and conditions for each security being offered, are available on the CBL website. General issuances procedures are documented in the Legal Notice No. 49 of 2009, Local Loans (Government Treasury Securities), (Trading) Regulations, 2009, which is also available on the CBL website. On primary market trading, the Legal Notice contains the following details: i) issue of treasury bills; ii) issue of treasury bonds; iii) participation; iv) frequency; v) invitation for bids; vi) submission of bids; vii) method of auction; viii) acceptance and rejection of bids; and, ix) announcement of results. As for settlement, it includes: i) settlement procedures; ii) method of recording ownership of treasury securities; and iii) premature disinvestment or rediscounting at the CBL. Regarding regular meetings with market participants to exchange views on borrowing plans and the domestic market, this has been an area of decline in recent years. Until a couple of years back, there was a quarterly “Financial Markets Forum” organized by the CBL. Nonetheless, since 2016 no regular meeting has taken place, and the interaction with market participants has been reduced to ad hoc reunions. During the meetings held with market participants, the lack of a regular and official venue for information exchange was highlighted as an area that needs to be improved, especially the relationship with the MoF. Score: All borrowing procedures are publicly available and meet the minimum requirements, therefore a “C” score is assigned. A higher score cannot be granted, as there are no regular meetings with market participants to exchange views on borrowing plans and the domestic market. This assessment is not comparable with the 2012 DeMPA, since the methodology of DPI-8 has changed during the 2015 DeMPA revision. DPI-9 External Borrowing Dimension Score 1. Documented assessment of the most beneficial or cost-effective borrowing terms D and conditions (lender or source of funds, currency, interest rate, and maturity) and a borrowing plan. 2. Availability and quality of documented procedures for external borrowings. D 3. Availability and degree of involvement of legal advisers before signing of the A loan contract. Dimension 1 Requirements for minimum compliance: A yearly borrowing plan for external borrowing is prepared, and assessments of the most beneficial or cost-effective terms and conditions for external borrowing that are obtainable from potential creditors and markets are conducted annually. External borrowing is conducted mainly to finance capital investment projects, predominantly at concessional terms. Some projects are initiated by the line ministries, some are initiated by the 30 ministries together with donors, and some are initiated directly by donors. If creditors have not been identified, it is the responsibility of PDAMD to find potential creditors. Normally the PDAMD leads the negotiation team. Although the terms and conditions of Lesotho’s creditors are known by the PDAMD staff, there is no documented assessment of most beneficial or cost-effective borrowing terms and conditions undertaken regarding potential creditors, nor is there a borrowing plan. Score: As there is no borrowing plan and no documented analysis of most beneficial terms, the minimum requirements are not met and therefore a “D” score is assigned. The evaluation results did not change compared to the 2012 DeMPA assessment. Dimension 2 Requirements for minimum compliance: Adequate and readily accessible internal documented procedures exist for all external borrowings, including from international capital markets, and contain the requirement to enter all financial terms of the loan transaction into the debt recording system within three weeks of signing. Priority for assigning external borrowing is based on the National Strategic Development Plan (NSDP), which provides information on priority projects. The project implementation process entails the line ministry submitting a project together with a feasibility study, environmental impact assessment, as well as the lease agreement showing evidence of access to land for project implementation to the Ministry of Development Planning (MDP). The MDP then assesses the viability of the project, its alignment to the NSDP and approval for submission to the MoF. The scrutinized projects are placed in a pool of projects and the MDP informs MoF on the priority ones for implementation. In addition, there is a Public Sector Investment Committee, which is co- chaired by the Principal Secretaries of the MoF and MDP that meets to appraise project documentation submitted by line ministries for implementation. The MoF (i.e. PDAMD) then takes the lead to find potential creditors. However, there is currently a tendency by some creditors to approach line ministries with funding arrangements leading to cases where some projects are submitted to the MoF that have already identified creditors. At the completion of negotiations, the loan agreement is signed by the Minister or his delegate. The loan agreement is entered into the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) by a debt officer and is approved by an administrator. No terms sheet is produced. Score: Despite the clear process for external borrowing, there is currently no documented procedures manual in place, which identifies the organizational entities and staff roles in mobilizing external resources. Therefore, the minimum requirements are not met and a “D” score is assigned. The evaluation results did not change compared to the 2012 DeMPA assessment. Dimension 3 Requirements for minimum compliance: Legal advisers approve all clauses of legal agreements before concluding the negotiation process. 31 Once the Ministries of Finance and Development Planning agree on the implementation of a project, a Cabinet approval is sought for negotiations to commence. Thereafter the MoF requests the identified creditor to send a draft loan agreement. The Chief Legal Officer (representing the Attorney General) analyses the draft agreement to assess whether the provisions of the contract are in line with the governing laws in Lesotho and make necessary amendments where necessary. The Chief Legal Officer also participates in negotiation meetings with creditors. After the loan is signed, but before it becomes effective, the Attorney General provides a written legal opinion. Thus, legal advisors are involved during the entire loan negotiating process. Score: The role of legal advisers in the process for contracting external borrowing meets the highest requirements and therefore an “A” score is assigned. The evaluation results did not change compared to the 2012 DeMPA assessment. DPI 10 – Guarantees, On-Lending and Derivatives Dimension Score 1. Availability and quality of documented policies and procedures for approval and D issuance of central government loan guarantees. 2. Availability and quality of documented procedures for approval and issuance of D central government on-lending of borrowed funds. 3. Availability of a Debt Management System with functionalities for handling N/A derivatives, and availability and quality of documented procedures for the use of derivatives. Dimension 1 Requirements for minimum compliance: There are adequate and readily accessible internal documented procedures for the approval, issuance, and monitoring of central government loan guarantees. According to the Loans and Guarantee Act 1967 (Amendment 1976), the Cabinet on recommendation of the Minister has sole authority to approve the purpose of a loan for which a government guarantee is proposed. The same law grants the authority to the Minister regarding approval of the terms and conditions of each loan to an individual, local authority or corporate body that is proposed to be guaranteed by the government. In addition, the PFMA Act states that the Minister of Finance shall be satisfied that the beneficiary of a guarantee has the capacity to repay the amount involved, including interest, according to the terms and conditions of the credit. To date, loan guarantees have been issued in favor of SOEs, private sector (mainly the textile industries) as well as loans to members of Parliament and other high-level officials, including external loan guarantees (i.e. for the Water & Sewerage Authority -WASA). Currently, there are no documented procedures for the approval, issuance, and monitoring of guarantees, including undertaking credit risk assessments. In practice, for guarantee issuances to SOEs and private companies, the entity submits a request to the MoF for a guarantee. The MoF through the PDAMD then sends a request to Cabinet to approve the guarantee to be issued. Once Cabinet approves, the guarantee is issued. In some cases, however, guarantees have been issued 32 without the involvement of PDAMD but rather through the direct involvement of the Principal Secretary (see DPI 2). Score: There are no procedures manual in place for approval, issuance and monitoring of guarantees; therefore, the minimum requirement of this dimension is not met and a “D” score is assigned. The evaluation results did not change compared to the 2012 DeMPA assessment. Dimension 2 Requirements for minimum compliance: There are adequate and readily accessible internal documented procedures for the approval and provision of credits- in the form of on-lending from external or domestic or external borrowing sources. The PFMA Act does not distinguish between credits provided by the Government financed from borrowing or from other sources. It also states that the Minister may extend a loan if it is included in the appropriation act. Before approving a loan, the Minister shall be satisfied that the beneficiary has the capacity to repay the loan, including interest, according to the terms and conditions for the credit. The credit agreement may include the right of the Minister to require, in the event of default, full repayment of the loan prior to the maturity. Nonetheless, there are no documented procedures. According to PDAMD, the basis for on-lending arrangements are the following: i) the object of a public enterprise is strategic and hence requires funding by the Government; ii) in the case of a social welfare project that would be efficiently executed by a public enterprise on behalf of the Government; and iii) the public enterprise has a weak balance sheet and cannot attract competitive funding from external or domestic sources. On-lending contracts are signed on a fixed-rate basis which includes a premium not due to credit risk considerations, but as a compensation for the fixed exchange rate offered in the on-lending contract. On-lending operations are normally undertaken to support SOEs in implementing their projects. The PDAMD and the legal department meet with the SOE to agree on the terms of the on-lending agreement, but there are no guidelines. Stock of on-lent loans as at March 2017 stood at M1,045 million. Score: There are no laid down procedures or policies in place for the approval and provision of credits via on-lending operations; therefore, the minimum requirement is not met and a “D” score is assigned. The evaluation results did not change compared to the 2012 DeMPA assessment. Dimension 3 Requirements for minimum compliance: There is a debt management system with functionalities for handling derivatives. In addition, there are adequate and readily accessible internal documented procedures for the use of derivative transactions. The Government has not undertaken any derivative operations thus this dimension is not applicable (N/A). This is effectively the same score as given in the last DeMPA assessment which was not rated (N/R); the change in score is driven by the amendment of the DeMPA methodology in 2015. 33 4.4 Cash Flow Forecasting and Cash Balance Management DPI-11 Cash Flow Forecasting and Cash Balance Management Dimension Score 1. Effectiveness of forecasting the aggregate level of cash balances in government bank D accounts. 2. Decision of an appropriate cash balance (liquidity buffer) and effectiveness of D managing the aggregate cash balance in government bank accounts (including the integration with any domestic debt borrowing program, if required). Dimension 1 Requirements for minimum compliance: Reasonably reliable monthly aggregate forecasts of cash inflows and outflows and cash balances on central government bank accounts are produced for the budget year and are made available to the debt management entity. In addition, the cash balance forecast is updated monthly. The GoL does not have a Treasury Single Account (TSA) in place and manages its recurring expenses through centralized disbursements. The government’s cash balances for meeting recurring expenses are held in an account at the CBL. Payments for capital projects are managed by line ministries responsible for project implementation. Funds for investment projects are released from the Treasury to the sponsoring ministries in accordance with the projects’ work plans. The line ministries hold these funds in accounts at commercial banks. After closing around 100 accounts with unused balances, there are approximately 400 accounts scattered among the four commercial banks in the country. 13 The mission was informed that the MoF will receive technical assistance (September 2018) from the IMF in order to implement a TSA. In 2014, a Cash Management Unit was introduced within the Accountant General’s Office, but it was not assigned staff until recently. Currently the Cash Management Unit has 2 staff positions, including the Deputy Accountant General for Cash Management. Among the plans of the Unit are the introduction of a Liquidity Committee, both at the technical and managerial levels, with regular meetings (weekly for the technical and monthly for the managerial one). Until end-2017, the cash balance position of the GoL usually was in surplus. In the last year, however, that position has changed dramatically mainly because of the drop in the SACU revenues and has put the government is a delicate position. As income did not materialized, the GoL started entering into arrears with private contractors. In 2018, the Cash Management Unit produced its first cash forecast for the fiscal year starting in April, on an annual basis and disaggregated monthly. 14 Access to information is still the main challenge, and cash balance information is limited to daily reports of closing balances of the 13 Standard Bank of Lesotho, First National Bank (FNB), Nedbank, and the Lesotho Post Bank. 14 The mission was informed that the forecast was produced with the help of an external advisor financed by the European Union. 34 government’s accounts in the CBL. The forecast is updated weekly for the revenues. Although there is a requirement for monthly reporting by the line ministries on funds held in commercial banks, the adherence is poor, according to the Cash Management Unit. As it is the first time that cash-flow forecasts are made by the Cash Management Unit, and considering the challenges in obtaining data, the first months of the projections vs. actuals show large variations (e.g., actual figures were five times higher than the projections in May). Score: The cash flow forecast is made on an annual basis with a monthly disaggregation, updated on a weekly basis. Yet, accuracy is low. Therefore a “D” score is assigned. This assessment is not comparable with the 2012 DeMPA, since the methodology of DPI-11 has changed during the 2015 DeMPA revision. Dimension 2 Requirements for minimum compliance: Issuance of short-term instruments is planned according to the monthly forecast of cash balances. In addition, the central government manages its surplus cash (i.e. cash in excess of the target) through investment in the market in line with appropriate credit risk limits, or with the central bank at market-related rates. The Accountant General (AG) has the responsibility for treasury operations. All funds in the consolidated fund are held in CBL. Section 40(2)(c) of the Central Bank Act of Lesotho of 2000 forbids the payment of interest on government deposits. The same law, in section 40(1) states that the government may maintain balances with any other bank under such terms as the government and CBL may find agreeable. The AG does not, however, move balances out of the government’s accounts at CBL and place them in commercial banks for deposit earning interests when it is prudent to do so. Line ministries do maintain commercial bank accounts, but these arrangements provide no benefit to the treasury. However, it should be kept in mind, that since CBL is a wholly owned entity of the government, the profits generated by CBL accrues to the benefit of the government via dividends. The issuance of short-term instruments (i.e., treasury bills) are not planned according the cash balance forecast of the MoF, as these instruments are mainly issued for monetary policy purposes. There is no target set for the size of the government cash balances. Score: Considering the absence of any target cash balance and lack of remuneration of cash balances held at the CBL, the minimum requirements are not met and a score of “D” is assigned. This assessment is not comparable with the 2012 DeMPA, since the methodology of DPI-11 has changed during the 2015 DeMPA revision. 35 4.5 Debt Recording and Operational Risk Management DPI-12 Debt Administration and Data Security Dimension Score 1. Availability and quality of documented procedures for the processing of debt related D payments and receivables. 2. Availability and quality of documented procedures for debt and transaction data D recording and validation, as well as storage of agreements and debt administration records. 3. Availability and quality of documented procedures for controlling access to the D central government’s debt data recording and management system and audit trail. 4. Frequency of off-site secure storage of debt recording and management system D backups. Dimension 1 Requirements for minimum compliance: There is an adequate and readily accessible procedures manual for the processing of debt service payments. The PDAMD is responsible for processing government external debt service payments, following a three-level approval process. The MoF is using the CS-DRMS to record and service external debt and external government guarantees. The MoF has an interface between the CS-DRMS and the Integrated Financial Management Information System (IFMIS), which allows for internal payment orders to be undertaken electronically. Debt service operations are assigned to one official every month on a rotational basis. The debt officer produces a report from the CS-DRMS on all out payments due for the month, and checks whether the relevant bills have been submitted by creditors. In cases where these are not available, the officer writes to the creditor requesting for the bill. Once available, the officer compares the report from CS-DRMS with the creditor statement. When the two statements reconciled, the bill is entered into CS-DRMS and then posted into IFMIS. The Debt officer checks the IFMIS report against the creditor statement, and this is verified by the senior debt officer. The verified report is approved by the debt manager, and a request for payment is done and signed by two signatories, the PDAMD Director and a Debt Manager. Then a written instruction is sent to the CBL to process external debt payments. Afterwards, the CBL will communicate on the payment made and the exchange rate used. The information is used to update the CS-DRMS and the IFMIS. On the 15th of every month, the PDAMD verifies whether all the payments of the previous month have been made. The PDAMD is not involved directly in servicing all categories of domestic debt, as this is handled by the CBL, who also has the complete database on government securities through the CSD 36 system. On the redemption or interest payment date, the CBL debits the Government account in favor of the domestic debt instrument holder. The funds for redeeming treasury bills are mainly sourced from a blocked account maintained with the CBL. For bonds, the CBL debits the Consolidated Account, and notifies the MoF accordingly. The PDAMD is working with the CBL to clarify the process, as currently these debits take place without prior authorization from the MoF. The MoF captures the transactions after receiving the debit advise from the CBL and during reconciliation of accounts. Consequently, the PDAMD may not have timely information on actual domestic debt service payments due to time lag between the actual transaction date and date of receiving and recording the debt advise or reconciliation date. Score: As there is no documented procedures manual for the processing of debt service in place, the minimum requirements of this dimension are not met and a “D” score is assigned. The evaluation results did not change compared to the 2012 DeMPA assessment. Dimension 2 Requirements for minimum compliance: There are adequate and readily accessible procedures manuals for debt data recording and validation, as well as for storage of agreements and debt administration records. When a loan agreement is signed, it is given to the back-office to make copies for filing and to record the new instrument into the CS-DRMS. The original agreement is kept at the office of the director of PDAMD in wooden cases, which are not locked, whilst the copies are filed in line with the set filing system. There are three categories of filling information: 1. Yellow file • All correspondences with the creditors relating to the project. • Project Appraisal Document • Copy of signed loan agreement • Filled Data entry sheet 2. Arch File • All withdrawal applications sent to the creditors • Disbursement notification from the creditor 3. Purple file • Invoice from the creditor • Copy of instruction letter to the CBL • Debit voucher from CBL indicating the exchange rate that was used to effect payment as well as the transaction date • Acknowledgement from the creditor that funds have been received The assistant debt officer enters the terms of the loan agreement on a data entry sheet, which are verified by the supervisor (senior debt officer). Thereafter the assistant debt manager enters the new loan into the CS-DRMS, and the supervisor verifies the information whilst the authorization is done by the debt manager in charge of the back-office. In addition, validation of the debt 37 database is undertaken bi-annually whereby the creditor figures are compared to the figures in the CS-DRMS. Generally, the external debt database is updated systematically. The PDAMD has three major mechanisms of reconciling records. First, the department authorizes applications for disbursement, the process in which a ledger of all applications is prepared for reconciliation with actual disbursements. Second, the major creditors provide online access to the loan statements that provide a basis for reconciliation. For other creditors, the PDAMD periodically requests information for reconciliation. Third, the most used data sources are the billing statements from the creditors, which summarize the previous transactions of the loan to the closing balance on the date of the bill. The source of disbursement information is the creditor. There are no mechanisms in place to require that project implementation units submit actual disbursements information to the MoF. For domestic debt data recording, on a monthly basis, the CBL submits information on debt securities issuances and related debt service to PDAMD who subsequently upload the information into the CS-DRMS. The PDAMD started digitizing all the debt-related files and store them in the CS-DRMS. This process is ongoing, but there is no clear timeline to finish the task. Despite the clear process, there are no documented procedures for debt data recording and validation, as well as storage of agreements. The mission was informed that a consultant had been engaged to assist in developing the procedures manual covering all aspects of public debt management. Score: In the absence of documented procedures manual, the minimum requirements for this dimension are not met, and a “D” score is assigned. The evaluation results did not change compared to the 2012 DeMPA assessment. Dimension 3 Requirements for minimum compliance: There are adequate and readily available procedures for controlling access to the central government’s debt recording and management system. There are currently two IT personnel supporting the CS-DRMS with one of them having been assigned the Administrator role within the CS-DRMS system after the position fell vacant in August 2017 and is still to be filled. There are 25 users of the system who are assigned different access rights, and these include database administrator and editing rights (i.e. data entry rights as well as browsing rights). The system is currently used by officials in the PDAMD and some CBL officials who have viewing rights only. The Excel-based database for guarantees is shared among PDAMD staff, so each staff can update it; the file is not password protected. The database administrator is responsible for creating user accounts and assigning roles in the CS- DRMS at the instruction of the PDAMD Director. Each user has a unique username and password for accessing the system. There are no written rules for assigning roles for the various users of the system. Currently, the database administrator receives instructions on the accounts that need to be created and the roles to be assigned through telephone communication. In addition, there is no policy in place that 38 requires officials to frequently change their passwords and thus user passwords don’t expire. In addition, whilst the audit trail functionality exists in the CS-DRMS system, the database administrator has not used it yet. For domestic debt securities, updated information is maintained in the CSD system at the CBL and access to the system is password protected, which is changed every 30 days. Roles are assigned with market participants having rights to view their own statements as well as place bids and the Research Department at CBL has viewing rights whilst dealers have editing rights. In addition, domestic debt data is also maintained in the CS-DRMS by the PDAMD, however, with a one- month lag. As with the external debt, access to CS-DRMS is assigned by the database administrator. Score: In the absence of documented procedures to access the CS-DRMS, the minimum requirement for this dimension is not met, and a “D” score is assigned. The evaluation results did not change compared to the 2012 DeMPA assessment. Dimension 4 Requirements for minimum compliance: Debt recording and management system backups are made at least once per month, and the backups are stored in a separate, secure location, where they are protected from incidents such as theft, fire, flood and other incidents that may damage or destroy any of these backups. The IT administrator is responsible for performing backups of the CS-DRMS server. The CS- DRMS server is maintained at the data center within the MoF building and access to the server rooms is only permitted to two IT personnel. At the moment, backups are done daily on an incremental basis, and on Fridays a full back up is performed. It is important to note that in 2016, the license for the system that was used to make backups expired, and the MoF did not undertake any back up for the system for over one and a half years. A new system was procured in 2018 and the IT administrator has commenced the backups again just recently. In terms of storage of the backup media, the last offsite back up occurred in January 2016 before the license expired. This was maintained at a different building though at the same compound with the MoF. Currently, backups are maintained in the IT department in a wooden lockable cabinet, not protected against fire, theft or floods. Information on domestic securities kept in the CSD are backed up in real time and in addition, daily backup on tapes is also undertaken. Score: While backups for the CS-DRMS are undertaken on a daily basis, the backup media is not stored at a secure location outside of the MoF. In addition, information on government guarantees is not kept entirely in the CS-DRMS, thus the backups do not contain a comprehensive dataset. In this regard the minimum requirements are not met, and a “D” score is assigned. The score has been downgraded from the 2012 assessment considering the lack of secure storage of backups. 39 DPI-13 Segregation of Duties, Staff Capacity, and Business Continuity Dimension Score 1. Segregation of duties for some key functions, as well as the presence of a risk D monitoring and compliance function. 2. Staff capacity and human resource management. D 3. Presence of an operational risk management plan, including business-continuity and D disaster-recovery arrangements. Dimension 1 Requirements for minimum compliance: There is a clear separation between staff responsible for loan negotiation and preliminary contract data entry, and those responsible for (a) confirmation of contract information and finalizing of records in the system, and (b) initiating and processing payments. The PDAMD is organized with a director and three debt managers, each sharing front-, middle-, and back-office duties. On the next level, senior public debt officers are also fulfilling a mixture of front-, middle- and back-office duties. For debt officers reporting to the senior public debt officers, the duties focused more on back-office and system-related duties. The details in duties to be undertaken are even more carefully maintained among the lowest level, that of assistant public debt officers. Director PDAMD Debt Manager Debt Manager Debt Manager Senior Debt Senior Debt Senior Debt Officer Officer Officer Debt Officer Debt Officer Debt Officer Assistant Assistant Debt Assistant Debt Debt Officer Officer (2) Officer (2) Regarding middle- and front-office functions, responsibilities are not clearly defined for senior staff. Because the duties overlap, the rights and authorities in the CS-DRMS necessarily have not been set up with a proper segregation of duties. For example, a debt manager that participates in the loan negotiation process is a key administrator of the system and, as such, can approve the entry of loan agreements and disbursements made by the editor staff. Ideally, it should be the 40 opposite; the front officer enters the loan agreement into the system, and the back officer confirms the details. Nor is there any separation between the functions of initiating payments and recording in the system. The editors perform both duties. They prepare the bills due for payment and enter information on disbursements in the system. There is no staff responsible for risk monitoring and compliance and these duties are not explicitly part of the director's duties. At the CBL, there is a clear separation between front-, middle- and back-office staff. In addition, there is both an overall risk management group and a risk management unit (4 staff positions) within the Financial Markets Department. Score: The minimum requirements are not met, as there is no clear separation between PDAMD staff responsible for loan negotiation and preliminary contract data entry and those responsible for (a) confirmation of contract information and finalization of records in the system, and (b) initiating and processing payments. Therefore, a D score is assigned. The evaluation results did not change compared to the 2012 DeMPA assessment. Dimension 2 Requirements for minimum compliance: There is a sufficient number of adequately trained staff members with formal job descriptions reflecting their current tasks. The PDAMD has currently 15 permanent staff positions, up from 12 positions that had in 2012, with one vacant for Senior Debt Officer: • Director (1) • Debt Managers (3) • Senior debt Officers (3) • Debt Officers (3) • Assistant Debt Officers (5) Based on current schedule of duties, the director of the PDAMD and the mission are of the opinion that the department is sufficiently staffed, and that the staff overall is adequately trained for the operations actually conducted. The majority of the staff has an economics background, including finance and accounting. Nonetheless, capacity building for middle-office functions is essential to pursue, as this is an evolving and relevant area that the PDAMD is engaging in more depth with the preparation of the debt management strategy going forward. The job descriptions are not regularly updated and are depicted in a generic form, as for staff level and grade, and do not follow the organization of the PDAMD into front-, middle- and back-office. In the case of the CBL, 10 staff positions are assigned to front-, middle- and back-office functions for domestic securities. Jobs descriptions for the CBL were reviewed in 2017. The MoF does not have a specific code of conduct, but there is one code for the whole public sector that was last updated in 2008. There is also an oath of secrecy that every new staff must sign once becoming a civil servant. The CBL has a code of ethics and a code of conduct for the whole institution, which are reviewed every two years. None of the institutions have a conflict of interest 41 guide for debt management operations. There are no individual training plans and yearly performance assessment are not undertaken. Score: The minimum requirements are not met because the job descriptions for the PDAMD are not reviewed or updated regularly. Therefore, a D score is assign. The evaluation results did not change compared to the 2012 DeMPA assessment. Dimension 3 Requirements for minimum compliance: There are written business continuity and disaster recovery (DRP) plans, which have been tested in the last three years. The MoF does not have business continuity and disaster recovery plans (DRP) 15. Access to CS- DRMS in case of an emergency is not secured through the establishment of a recovery site. At the CBL, a business-continuity plan is in place. A disaster recovery site is located at the Ministry of Communication, which is a 5 minutes’ walk from the MoF. The CBL has a recovery site where critical systems, such as the CSD are housed. The current recovery site is located 7 kilometers from the main building; on April 20, 2018, the CBL held an auction from the recovery site. A new recovery site is planned to be installed within the next two years, which will be located at 30 kilometers away from the main building. In both cases, the distance is too close to function effectively as a recovery site. Score: As there is no business continuity and disaster recovery plans in the MoF, the minimum requirements are not met, and a “D” score is assigned. The evaluation results did not change compared to the 2012 DeMPA assessment. DPI-14 Debt and Debt-Related Records Dimension Score 1. Completeness and timeliness of central government records on its debt, loan D guarantees and debt-related transactions. 2. Complete and up-to-date records of all holders of government securities in a secure A registry system, if applicable. Dimension 1 Requirements for minimum compliance: There are complete debt records within a three-month lag for central government domestic, external, and guaranteed debt, as well as all debt-related transactions, including past debt relief and debt restructuring. In the case of external debt, the basic details of new loans and their financing terms are entered into CS-DRMS as soon as agreements have been concluded. Disbursements are recorded after receiving information of withdrawals from creditors. In some cases, this is done online through the creditor’s electronic platform where amounts can be obtained by the officer in charge (e.g., 15 Information and guidance on operational risk management and business continuity can be found in http://documents.worldbank.org/curated/en/419301468153852761/Guidance-for-operational-risk-management-in-government-debt-management. 42 World Bank loans) but there are also cases where there is a delay in obtaining disbursement information from the creditors, which can go beyond three months. On average, external debt records are reconciled every six months. This reconciliation involves comparing the debt records in CS-DRMS with information that is contained in the creditor billing statements, including disbursements, amortization, interest payments, and other charges. In case of discrepancies, the PDAMD upon satisfactorily confirming that their data are correct, communicate with the creditor for final reconciliation. As for domestic debt, the CBL uses the CSD system for data recording and it is updated as soon as changes in holdings occur. The PDAMD also maintains a domestic debt database in CS-DRMS. The information is recorded upon receiving confirmation of payment from the CBL and is subject to a lag of up to three months. The PDAMD has a database in excel regarding loan guarantees; on-lending operations are entered into CS-DRMS. In both cases, recording is made after the Minister for Finance has concluded the agreement with creditors / borrowers. In the case of guarantees, however, it does not cover all outstanding amounts for all type of guarantees (only to parliamentarians). Currently there are four type of loans guarantees that have been issued: i) to SOEs, ii) parliamentarians; iii) private sector enterprises, and iv) Principal Secretaries. Score: The recording of government guarantees is incomplete and disbursement information for central government debt is recorded with a time lag that can exceed three months. Therefore, the minimum requirements are not met, and a D score is assigned. The evaluation results did not change compared to the 2012 DeMPA assessment. Dimension 2 Requirements for minimum compliance: Government securities are dematerialized and kept in a central registry that has up-to-date and secure records of all holders of government debt. It is subject to an audit of internal controls and management of operational risk every two years. Government securities in Lesotho are dematerialized since 2010, and the settlement takes place on a DvP basis. The Financial Markets Department in the CBL uses the CSD system to record and manage government securities (i.e., T-bills and bonds). The CSD is also used for securities auctions and for settlement of payments. In the CBL, the records are secured with real time back- ups to the offsite temporary disaster recovery center. The CBL shares domestic debt records with the PDAMD, where it is recorded in CS-DRMS. This database is backed-up with a similar frequency as the CS-DRMS. The CSD is subject to internal and external audits. The latest external audit to the system was conducted in December 2017, confirming its reliability, correctness and timeliness of the recorded information. Score: Considering that government securities are dematerialized and kept in a central registry that has up-to-date and secure records, and that the system (CSD) is subject to annual audits, whereby settlements takes place on a DvP basis, a score of A is assigned. The score has been 43 upgraded since the 2012 DeMPA considering that the CDS system at the CBL is audited every year, the most recent one being in December 2017. 44 5 ANNEXES 45 A. Agenda DeMPA Mission. July 2-6, 2018 46 47 48 49 50 51 52 B. Meeting List Ministry of Finance Motena Tsolo Principal Secretary Mamakopoi Letsie Deputy Principal Secretory Khotso Moleleki Director, Public Debt and Aid Management Department (PDAMD) Mosito Ntema Manager, PDAMD Mapoloko Seitlheko Debt Manager, PDAMD Thuso Seoane Senior Debt Manager, PDAMD Makubutu Rakubutu Debt Officer, PDAMD Mannosoa Mosesene Senior Project Officer, Management Information System Department Masebili Masia Acting Director, Internal Audit Division Seriti Mohobela Chief Economist, Macroeconomic Policy and Management Department (MPMD) Libako Leisanyane Chief Economist, MPMD Moeketsi Ntoi Economist, MPMD Neo Tau Assistant Economist, MPMD Maleshoane Lekomola Deputy Budget Controller, Budget Department Thuto Mohale Finance Director, Cash Management, Treasury Mabakubung Pitso Deputy Accountant General, Cash Management, Treasury Khoboso Molungoa Director, Human Resource Motale Tseole Chief Legal Officer, Legal department Ministry of Development Planning Mahlape Ramoseme Coordinator Leieie Eim Coordinator Motai Ramokoinihi Coordinator Office of the Auditor General Monica Besetsa Deputy Auditor General Kopano ’Mou Assistant Auditor General Central Bank of Lesotho Bohlale Phakoe Director, Financial Market Department (FMD) Thabo Makafane Senior Dealer, FMD Motebang Mphi Section Head of Domestic Market Development, FMD Standard Bank Lesotho Mpho Vumbukani Chief Executive FNB Delekazi Mokebe Head of Treasury Motšeare Tsosane Head of Corporate & Investment Banking 53 Post Bank Molefi Leqhaoe Managing Director Molesi Ramaili Head of Operations Narl Matsoha ALM Managers Mabakoena Thamae Acting Head of Credit Lesotho National Insurance Group Joseph Letsoela Managing Director Motlalepula Sempu Finance Manager Tumelo Kepa Assistant General Manager Nosebi Mahloko Senior Manager, Underwriting Department Public Officers’ Defined Contribution Pension Fund Lihtso Mafike Investment Manager Hangare-Ramone Finance and Admin Manager Makoa Makeli Benefits and Admin Manger Thabo Thulo Principal Officer EU Delegation Markus Theorald Minister Counsellor, Head of Cooperation Jyrki Torni First Secretary, Operations Manager 54 C. DeMPA Comparison (2012 and 2018) 55 Score Score DPI Title Comments 2012 2018 Governance and the Debt Strategy DPI - 1 Legal Framework While the draft debt law currently under discussion incorporates several improvements including the The existence, coverage, and content of the legal introduction of borrowing purposes, this cannot be taken into 1 D D framework. account in the current evaluation and therefore for the scoring purposes, this is the same score that the 2012 DeMPA as the situation has not changed. DPI - 2 Managerial Structure As the role of the PDAMD is not formally defined and coordination for loan negotiations is not very clear, the The managerial structure for central government minimum requirements are not met and therefore a score of 1 D D borrowings and debt-related transactions. “D” is assigned. This rating did not change from the 2012 DeMPA. There is no principal guarantee entity and coordination to The managerial structure for preparation and issuance of issue loan guarantees are not well developed. This is the 2 D D central government loan guarantees. same score that the 2012 DeMPA as the situation has not changed. DPI - 3 Debt Management Strategy While the MTDS analysis document that was produced is a stepping stone and key input for undertaking debt management operations it cannot be considered a DMS. 1 The quality of the debt management strategy document. D D Therefore, the minimum requirements are not met and a “D” score is assigned. The situation has not changed since 2012, as effectively there is no DMS in place. Considering the absence of a quality Debt Management Strategy document and a formal approval process for it, the minimum requirements are not met and a “D” score is The decision-making process, updating, and publication 2 N/R D assigned. In the 2012 DeMPA assessment this dimension of the debt management strategy. was not rated (N/R). 56 Score Score DPI Title Comments 2012 2018 Reporting, publication, and evaluation of debt DPI - 4 management operations Although a debt statistical bulletin has been produced and contains most of the key elements required by the DeMPA methodology, the minimum requirement could not be met as the publication was more than six months after the reporting Publication of a statistical bulletin on debt, loan 1 D D period and there are doubts surrounding the quality of some guarantees and debt-related operations. of the variables. This assessment is not comparable with the DeMPA 2012, since the methodology of DPI-4 has changed during the 2015 DeMPA revision. The score was downgraded from the 2012 assessment, since the first DeMPA considered the Budget Strategy Paper 2 Reporting to the Parliament or Congress. C D (BSP) as the report containing debt management operations that is submitted to Parliament and currently this is not the case as such report is only submitted to Cabinet. DPI - 5 Audit Frequency of financial audits, compliance audits, and The situation remains the same compared to the 2012 1 performance audits of the central government as well as D D DeMPA assessment. publication of the external audit reports. Since there has been no official response to the audit Degree of commitment to address the outcomes from 2 N/R D concerns raised in the financial audit report, the minimum internal and external audits. requirement is not met and a “D” score is assigned. Coordination with Macroeconomic Policy DPI - 6 Coordination with Fiscal Policy Support of fiscal policy makers through the provision of The situation remains the same compared to the 2012 1 accurate and timely forecasts on total central government C C DeMPA assessment. debt service under different scenarios. 57 Score Score DPI Title Comments 2012 2018 Availability of key macro variables, an analysis of debt The situation remains the same compared to the 2012 sustainability, and the frequency with which it is DeMPA assessment. In addition, several quality issues need 2 undertaken. D D to be addressed in order to meet the minimum requirements. DPI - 7 Coordination with Monetary Policy The score has not changes. While it is clear for market participants that treasury bonds are used for fiscal policy and T-bills for monetary policy purposes, the misuse of funds Clarity of separation between monetary policy operations 1 D D raised by issuing T-bills blurs the ex-post distinction and debt management transactions. between monetary policy operation and debt management transactions. Given the absence of a formal and regular exchange of Coordination with the central bank through regular information between the MoF and the CBL, the minimum 2 information sharing on current and future debt C D requirements are not met and a “D” score is assigned. This transactions and the central government’s cash flows. assessment is a downgrade from the 2012 DeMPA score. The situation remains the same compared to the 2012 Extent of the limit of direct access to financial resources DeMPA assessment. A higher score cannot be granted based 3 C C from the central bank. on a technicality as the repayment period established in the CBL Law exceeds three months. Borrowing and Related Financing Activities DPI - 8 Domestic Borrowing Domestic borrowing procedures are, in many aspects, well developed. An auction calendar is made public and the The extent to which market-based mechanisms are used bidding and settlement procedures are highly automated. to issue debt; the preparation of an annual plan for the Yet, no domestic borrowing plan is produced. Therefore, the 1 aggregate amount of borrowing in the domestic market, D D minimum requirements for the first dimension are not met, divided between the wholesale and retail markets; and the and a “D” score is assigned. The assessment is not publication of a borrowing calendar for wholesale comparable with the 2012 DeMPA, since the methodology securities. of DPI-8 has changed during the 2015 DeMPA revision. 58 Score Score DPI Title Comments 2012 2018 A higher score cannot be granted as there are no regular meetings with market participants to exchange views on The availability and quality of documented procedures borrowing plans and the domestic market. This assessment for local-currency borrowing in the domestic market and is not comparable with the 2012 DeMPA, since the 2 A C interactions with market participants. methodology of DPI-8 has changed during the 2015 DeMPA revision. DPI - 9 External Borrowing Documented assessment of the most beneficial or cost- The evaluation results did not change compared to the 2012 effective borrowing terms and conditions (lender or DeMPA assessment, as there is no borrowing plan and no 1 D D source of funds, currency, interest rate, and maturity) and documented analysis of most beneficial terms regarding a borrowing plan. potential creditors. Availability and quality of documented procedures for The evaluation results did not change compared to the 2012 2 D D external borrowings. DeMPA assessment. There are not documented procedures. The evaluation results did not change compared to the 2012 Availability and degree of involvement of legal advisers DeMPA assessment. The role of legal advisers in the process 3 A A before signing of the loan contract. for contracting external borrowing meets the highest requirements. Loan Guarantees, On-lending and Debt-related DPI - 10 Transactions The evaluation results did not change compared to the 2012 Availability and quality of documented policies and 1 D D DeMPA assessment. There are no procedures manual in procedures for approval and issuance of central place for approval, issuance and monitoring of guarantees government loan guarantees. The evaluation results did not change compared to the 2012 DeMPA assessment. There are no laid down procedures or 2 Availability and quality of documented policies and D D policies in place for the approval and provision of credits via procedures for on-lending of borrowed funds. on-lending operations 59 Score Score DPI Title Comments 2012 2018 Availability of a DeM system with functionalities for This is effectively the same score as given in the last DeMPA handling derivatives and availability and quality of assessment which was not rated (N/R); the change in score is 3 documented procedures for the use of derivatives. N/R N/A driven by the amendment of the DeMPA methodology in 2015. Cash Flow Forecasting and Cash Balance Management DPI - 11 The cash forecast is made on an annual basis with a monthly Effectiveness of forecasting the aggregate level of cash disaggregation, updated on a weekly basis. Yet, the accuracy 1 D D balances in government bank accounts. level is low. This assessment is not comparable with the DeMPA 2012, since the methodology of DPI-11 has changed during the 2015 DeMPA revision. There is absence of any target cash balance and lack of Decision of a proper cash balance (liquidity buffer) and remuneration of cash balances held at the CBL, and thus the effectiveness of managing this cash balance in 2 D D minimum requirements are not met. This assessment is not government bank accounts (including the integration with comparable with the 2012 DeMPA, since the methodology any domestic debt borrowing program, if required). of DPI-11 has changed during the 2015 DeMPA revision. DPI - 12 Debt Administration and Data Security The evaluation results did not change compared to the 2012 1 Availability and quality of documented procedures for the D D DeMPA assessment. No procedures manual in place. processing of debt-related payments. Availability and quality of documented procedures for debt The evaluation results did not change compared to the 2012 2 D D and transaction data recording and validation, as well as DeMPA assessment. No procedures manual in place. storage of agreements and debt administration records. 60 Score Score DPI Title Comments 2012 2018 Availability and quality of documented procedures for The evaluation results did not change compared to the 2012 3 D D controlling access to the central government's debt data DeMPA assessment. No documented procedures in place. recording and management system and audit trail. Frequency and off-site, secure storage of debt recording and The score has been downgraded from the 2012 assessment 4 B D management system backups. considering the lack of secure storage of backups. Segregation of Duties, Staff Capacity and Business DPI - 13 Continuity Segregation of duties for some key functions, as well as the The evaluation results did not change compared to the 2012 1 D D presence of a risk monitoring and compliance function. DeMPA assessment. There is no clear separation of duties. The evaluation results did not change compared to the 2012 2 Staff capacity and human resource management. D D DeMPA assessment. Job descriptions are not reviewed or updated regularly. The evaluation results did not change compared to the 2012 Presence of an operational risk management plan, including 3 D D DeMPA assessment. there are no business continuity and business-continuity and disaster-recovery arrangements. disaster recovery plans. DPI -14 Debt and Debt Related Records The evaluation results did not change compared to the Completeness and timeliness of central government records earlier DeMPA assessment. Recording of government 1 D D on its debt, loan guarantees, and debt-related transactions. guarantees is incomplete and disbursement information recorded with a time lag higher than three months. Complete and up-to-date records of all holders of The score has been upgraded considering that the CDS 2 government securities in a secure registry system, if B A system at the CBL is audited every year, being the last one applicable. performed in 2017. 61