The Demand for International Reserves in Lesotho
The Demand for International Reserves in Lesotho

Summary/Abstract: The study examines Lesotho’s demand for holding international reserves and assesses the country’s reserve adequacy position over the period 1981-2012. The results from the standard reserve adequacy benchmarks reveal that Lesotho generally has sufficient stock of foreign reserves to satisfy the minimum adequacy requirements, with the level of reserves in other periods being relatively higher than what is required. Furthermore, the estimates of Lesotho’s reserve demand function from the cointegration analysis suggest that the long-term reserve demand policies for Lesotho are positively related to average propensity to import, economic growth and export volatility while negatively associated with exchange rate volatility and opportunity cost of holding reserves. The former finding confirms that the precautionary motive plays a significant role in determining Lesotho’s demand for holding international reserves, while the latter indicates that reserve accumulation in Lesotho is based on profitability considerations. The results also show that although the demand for foreign reserves increased in the years of democracy, the country sometimes uses part its international reserves to finance government infrastructure projects.

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