Chapter four: Economic governance and management 108 381. The CSAR identifies the private sector as an important agent for achieving sustainable development. The government of Lesotho, with the support of the World Bank, therefore launched the Private Sector Competitiveness Project (PSCP) in 2006. The aims of the PSCP derive from the PRS document. However, several microeconomic policies and institutional reforms were introduced prior to the PRS to support economic growth and sustainable development. These policies focus on the primary sector and the mining subsector, which includes small enterprises. ii. Findings of the CRM Monetary and exchange rate policy 382. The dominant factor in implementing monetary and financial policies in Lesotho is its membership of the CMA. Thus, the primary objective of monetary policy is to maintain price stability and a oneto-one fixed exchange rate between the loti and the South African rand by ensuring an adequate level of reserves. The South African rand is recognised as legal tender and Lesotho’s currency is pegged at par to the rand. This complicates the assessment of monetary developments in Lesotho. It is difficult at any point in time to determine the number of rand in circulation within the country, not to mention the ineffectiveness in determining liquidity and measuring reserves. 383. However, membership of the CMA confers significant benefits: • It eliminates transaction costs and foreign exchange risks on trade between Lesotho and South Africa. • It reduces exchange rate volatility by pegging to a relatively stable currency. • Sound macroeconomic management by the reserve bank contributes to low inflation throughout the CMA. • It encourages fiscal discipline, as Lesotho must maintain an appropriate level of net international reserves to preserve the peg. 384. The CMA has the attributes of a currency board, whereby all currency issues are backed entirely by the country’s foreign reserves. The arrangement therefore insulates monetary policy from political interference and improves the credibility of macroeconomic policies. 385. However, the institutional arrangement limits the scope for monetary policy, though there is still a role for effective monetary management. This role is exercised by the Monetary Policy Committee (MPC). It ensures that an appropriate net international reserves target is achieved through the intermediate interest rate target and the operating target of reserve money. In 2001, the CBL introduced open-market operations as part of a system to implement monetary policy. This allowed the CBL to control domestic liquidity by issuing treasury bills, thereby mopping up excess liquidity as banks converted their surplus funds into treasury bills. In addition, the decline in banks’ surplus funds reduced reserve money and ensured that money supply did not reach a level that would exert inflationary pressure on the economy. 386. The broad definition of money supply (M2) is accepted as the norm in Lesotho. This is defined as currency in circulation plus quasi-money (i.e., demand, call, savings and time deposits, as well as