Excess liquidity in the financial sector of Lesotho : main drivers and policy options

Abstract

This study investigates the main drivers of excess liquidity in the financial sector of Lesotho using Vector Auto Regression (VAR) analysis. The study also undertakes a comparative analysis of Lesotho and CMA economies for economic and financial sector characteristics to benchmark and assist policy recommendation. The results of the study suggest that excess liquidity in Lesotho’s financial sector is driven by undeveloped financial sector as reflected by significant private sector credit to GDP ratio in the results, government expenditure and central bank activities in the open market operations, together with past levels of excess liquidity in the model. Compared to CMA, financial intermediary in Lesotho is relatively undeveloped with government dominating economic activity. The banking sector is observed to be non-competitive for deposits as hinted by the wide intermediation margin compared to other CMA countries.