The Role Of Interest Rate Reforms In Lesotho: An Empirical Investigation

Abstract

This paper examines the efficacy of interest rate reforms in Lesotho during the period 1972-2009. The study attempts to answer one critical question: Does interest rate liberalisation positively or negatively affect financial deepening in Lesotho? The study examines this linkage by regressing the financial depth variable on real income, deposit rate, foreign aid, the expected inflation and the lagged value of financial depth. Using the ARDL-Bounds testing approach, the study finds that there is a positive relationship between interest rate reforms and financial deepening in Lesotho, meaning that interest rate reforms lead to financial deepening in Lesotho. The results apply regardless of whether the financial deepening model is estimated in the short run or in the long run. Other results indicate that: i) An increase in real GDP has a positive effect on financial deepening in Lesotho - both in the short run and in the long run; ii) expected inflation has a positive effect on financial deepening in the short run; and iii) foreign aid has a negative effect on financial deepening in Lesotho in the short run.