Chapter four: Economic governance and management cent in 2003/2004 (principally because the appreciation of the currency from late 2002 weakened textile demand). Although the appreciation continued in 2004/2005, exports grew by 27.1 per cent as a result of improvements in global trade (especially the US market) and the commencement of diamond exports. Despite the continued increase in diamond sales, total exports fell by 11.4 per cent in 2005/2006, mainly because of the adverse impact on the textile industry of the currency movements and the ending of the Agreement on Textiles and Clothing with effect from 31 December 2004. In 2006/2007, the textile industry bounced back from the weak performance in the previous year and the mining sector continued to expand, resulting in an increase in exports of 27 per cent. Exports increased by a further 12.2 per cent in 2007/2008 as a result of substantial increases in diamond exports, which grew by 97 per cent. The ratio of exports to gross national income (GNI) averaged 37.5 per cent for the period between 2002/2003 and 2007/2008. 391. Financial services are limited in Lesotho. There are four registered commercial banks, five insurance companies and 21 registered moneylenders located in the urban areas. They are all under the supervision of the CBL. It has been observed in recent times that the economy is excessively liquid, as banks prefer to hold short-term government securities than lend to the public. This may be because there is a shortage of suitable loan proposals or because potential borrowers are unable to provide the necessary collateral to ensure repayments. In either case, the financial intermediation ratio is low, averaging 51 per cent between 2002 and 2008. 392. It is generally thought that large parts of Lesotho, particularly the rural areas, are underserviced and that access to credit is severely limited. Thus, in 2003, the CBL approved the establishment of the Rural Credit Guarantee Fund to help reduce the risk of lending to rural communities by commercial banks. Various reforms of the financial sector have been implemented during the past decade. They include establishing a commercial court, passing the Financial Institutions Act (FIA) and the Central Bank Act, restructuring the former Lesotho Bank, introducing measures to remove structural rigidities in the financial sector, and providing in-house credit bureau services. These reforms were intended to encourage banks to pursue a more aggressive lending policy, since loans to business enterprises had been depressed by the write-off of nonperforming loans made by the former Lesotho Bank. 393. Over the past six years, interest rates have always moved in line with developments in the CMA (as measured by changing rates in South Africa). Whenever the South African Reserve Bank changed its interest rates, the changes were always transferred into the Lesotho money market. In principle, the CBL has the power to influence domestic interest rates and the reserve ratios of commercial banks. However, this power is difficult to exercise given the relationship between movements in inflation rates in Lesotho and South Africa and the free capital movement within the CMA. iii. Recommendations 394. The APR Panel recommends that: • 110 Government take measures that could deepen financial intermediation, especially opening rural areas to banking and financial facilities. Financial policy, in particular, should attempt to