The Financial Cost of Lesothos Foreign and Domestic Public Debt

THE FINANCIAL cost of external public debt could have increased due to the recent depreciation of the Loti against major currencies, which could strengthen the case for increasing domestic debt. Thus this paper carries out a comparative assessment of the financial costs of external and domestic debt. The theoretical advantages and disadvantages of these two types of debt as identified in the literature are also reviewed. The findings of the study reveal that foreign debt remained financially cheaper than domestic debt despite the recent depreciation of the Loti against the currencies in which the bulk of Lesotho’s foreign public debt was held and serviced.

This was attributed to the highly concessional nature of Lesotho’s external public debt. Consequently, the major recommendation of the paper is that highly concessional foreign public debt should continue to be preferred more than domestic debt so as to maintain the burden of debt on government budgetary operations at sustainable levels. Nonetheless, domestic debt should be gradually increased when the fiscal space allows so as to develop the domestic capital market as an insurance against the disadvantages of foreign debt. A conducive environment should be created to minimize the possible costs and risks of foreign and domestic debt.