The Need for Policy Coherence for Financial Liberalisation in Southern Africa: Lessons from a Small Developing Economy

This paper looks at the policy of financial liberalisation within the context of a small developing economy that is experiencing financial sector distress. The performance and structure of the banking sector of the economy of Lesotho is in particular reviewed before, during and after the reform period. The paper also draws on the theoretical arguments for financial liberalisation in developing countries in line with distinguishing structural features of financial systems in developing countries. The implications of the analysis are extended to make an analysis of the likely effects of financial liberalisation in a group of countries that are a part of trade and monetary arrangements. Particular attention is given to the institutional arrangements that deal directly with financial issues, in this case the CMA. The primary outcome of the paper is that the economy hardly met the prerequisites for financial liberalisation at the time when the policy was implemented hence the distress in the banking sector that followed. While contagion may not be a significant problem given the size of the economy relative to its closest neighbour, South Africa, the experience nevertheless provides important lessons for economies in similar situations.