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

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  • Michele Andreolli
  • Aidar Abdychev

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.

Suggested Citation

  • Michele Andreolli & Aidar Abdychev, 2016. "Investing in Electricity, Growth, and Debt Sustainability: The Case of Lesotho," IMF Working Papers 2016/115, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2016/115
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    References listed on IDEAS

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    7. Mr. Antonio David & Luis-Felipe Zanna & Mr. Raphael A Espinoza & Michal Andrle & Marshall Mills, 2012. "As You sow so Shall You Reap: Public Investment Surges, Growth, and Debt Sustainability in togo," IMF Working Papers 2012/127, International Monetary Fund.
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    Cited by:

    1. Grace Li, 2018. "Investing in Public Infrastructure: Roads or Schools?," 2018 Meeting Papers 338, Society for Economic Dynamics.

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