Investing in Electricity, Growth, and Debt Sustainability: The Case of Lesotho

Michele Andreolli and Aidar Abdychev

No 2016/115, IMF Working Papers from International Monetary Fund

Abstract: This paper analyses a large public investment in a construction of a hydropower plant in Lesotho and its implications on the growth and debt sustainability. The paper employs an open economy dynamic general equilibrium model to assess the benefits of a large public investment through growth-enhancing increase in domestic energy supply and receipts from selling electricity abroad to ease the fiscal burden, which is often associated with big investment projects. During the transition (construction stage), various financing options are explored: increase in the public debt, increase in domestic revenue (fiscal adjustment), and combination. The calibration matches Lesotho's data and it captures the project's main challenges regarding the project costs. Moreover,the key remaining issue is the agreement with South Africa to purchase sufficient amount of electricity to allow the potential plant to run at a high capacity. We find that, the project can lead to sizable macroeconomic benefits as long as costs are relatively low and demand from South Africa is sufficiently high. However, the risks for the viability of the project are high, if these assumptions are violated.

Keywords: WP; financing cost; depreciation rate; investment cost; concessional debt; GDP ratio; Lesotho GDP; policy instrument terms; Public Investment; Energy Production; Growth; Debt Sustainability; Fiscal Policy; cost share; energy sales; electricity market; debt terms; capital adjustment cost parameter; Electricity; Public investment spending; Consumption; Fiscal consolidation; Africa (search for similar items in EconPapers)
Pages: 42
Date: 2016-06-09
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