Chapter four: Economic governance and management deposits of official entities at the CBL). Although measuring the loti component is an important indicator of the general trend in the growth of M2, there is, at present, no plausible method of measuring the rand in circulation in Lesotho. It is therefore difficult to obtain an accurate picture of movements in total money supply. 387. In most countries, there is usually a strong, direct relationship between growth in money supply and growth in economic activity. However, this link is difficult to assess in Lesotho, because both the rand and loti circulate freely. This allows distortions to occur as residents can substitute currencies by holding rand instead of loti. 388. Inflation is driven primarily by developments in South Africa and it is estimated that 70 per cent of Lesotho’s inflation is imported from South Africa. Although there is some element of internally generated inflation, the Consumer Price Index in Lesotho has tended to mirror that of South Africa. In 2002, regional food shortages caused a significant increase in prices of agricultural commodities and pushed the aggregate inflation rate up from 6.9 per cent in 2001 to 12.0 per cent (see figure 4.2). From this peak, there was a rapid reduction to 7.2 per cent in 2003, to 5.0 per cent in 2004 and a further reduction to only 3.4 per cent in 2005. This reflected favourable price developments in South Africa linked to the achievement of an inflation target of between 3 and 6 per cent by the South African Reserve Bank and the sustained appreciation of the currency, making imports relatively cheaper. However, this downward trend was reversed, as the inflation rate increased to 6.0 per cent in 2006 and then to 8.0 per cent in 2007. This was caused by substantial increases in food and fuel prices. Figure 4.2: Consumer price inflation, 2002–2008 (per cent) Source: MoFDP, Maseru. 389. The current account balance has improved significantly from a deficit of 23 per cent of GDP (M1,652.1 million) in 2002/2003 to a surplus of 3.7 per cent (M458.7 million) in 2007/2008. The main contributor to this improvement has been an increase in transfers that has grown by an annual average of 13.1 per cent between 2002/2003 and 2007/2008. In addition, there has been a substantial increase in net income from abroad for the period 2005/2006 to 2007/2008. It increased by 70 per cent from M1,985.06 million in 2005/2006 to M3,374.1 million in 2007/2008. 390. Between 2000/2001 and 2002/2003, the nominal value of exports increased by 130 per cent in response to strong demand from Lesotho’s main trading partners, the USA and the Republic of South Africa, encouraged by the depreciation of the local currency against the US dollar and the implementation of AGOA from the middle of 2000/2001. However, exports declined by 2.7 per 109