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Lesotho - Economy

With a gross domestic product (GDP) per capita of US$1,000, Lesotho is considered a very poor country. Lesotho's economy is based on water and electricity sold to South Africa, manufacturing, receipts from the Southern African Customs Union (SACU), agriculture, livestock, and to some extent, earnings of laborers employed in South Africa. Lesotho also exports diamonds, wool, and mohair. Lesotho is geographically surrounded by and economically integrated with South Africa. The western lowlands form the main agricultural zone. The majority of households subsist on farming or migrant labor, and approximately 86% of the population relies, at least in part, on crop cultivation or animal husbandry.

Lesotho has nearly 7,000 kilometers of unpaved and modern all-weather roads. There is a short rail line (freight) linking the capital city of Maseru with Bloemfontein, South Africa that is owned and operated by South Africa (the half-mile trunk inside Lesotho is operated by Lesotho Flour Mills, Ltd.). The South African rand can be used interchangeably with the loti, the Lesotho currency (plural: maloti). One hundred lisente equal one loti. The loti is at par with the rand.

The country has an open market economy that is closely linked to the South African economy. More recently between 2009/10 and 2010/11, changes to the revenue-sharing formula within the South Africa Customs Union (SACU) led to a major drop in Lesotho’s shares, leading to a drop in SACU revenues of 65 percent (African Economic Outlook 2012).

Lesotho is a member of the Southern African Customs Union (SACU) in which tariffs have been eliminated on the trade of goods with other member countries, which include Botswana, Namibia, South Africa, and Swaziland. With the exception of Botswana, these countries also form a common currency and exchange control area known as the Common Monetary Area (CMA).

The South Africa Customs Union is the economic grouping that brings together South Africa and the small neighboring states of Botswana, Lesotho, Namibia and Swaziland into an economic zone with duty-free trade and a common external tariff on imports from outside the zone. Since 1969, Lesotho has relied on SACU revenues to fund close to 60 percent of its national budget. An approximately 40 percent budget cut is a significant blow to Lesotho’s capacity to deliver minimum services, let alone fight poverty or food insecurity. Private sector participation in the economy is relatively low.

Given that the country is completely surrounded by the Republic of South Africa (RSA), which offers better-paid jobs than it, the country’s educated, skilled and experienced professionals have found it easier and more attractive to migrate to that country. This problem is worse in the civil service because, even locally, it cannot offer remuneration and conditions of service to match those in the private sector and parastatals. Furthermore, although the civil service guarantees job security for its employees, there are no mechanisms to instil the required performance standards. The civil service also is bottom heavy with a large number of support staff and very few professionals and decision makers.

The United Nations Development Program (UNDP’s) human development reports indicate that Lesotho’s human development indicators have worsened rapidly since the 1990s. In the 1990s, almost half of Lesotho’s gross national product (GNP) came from a combination of cash remittances from migrant mine workers in South Africa, the local textile industry, and foreign transfers for investments in the Highlands Water Project which exports water to Gauteng province in South Africa. In recent years, the contribution from the three sources of income has fallen by half. Unskilled labor demand in the mines in South Africa is down over the past 3-5 years mainly due to economic slowdown in the mining sector from the global financial crisis, technological innovations in mining requiring less unskilled and more skilled labor, and South African policy requiring companies to employ locals.

As a result, remittances declined significantly since the 1990s. The number of male migrant workers in the mines declined from about one million in 1990 to 460,000 in 2006 due to changes in mining technology (decreased demand for unskilled workers, increased demand for skilled workers). The expiry of trade agreements such as the African Growth and Opportunity Act (AGOA) in 2005, coupled with reduced demand for garments in the US market following the credit crunch beginning in 2007, led to further job losses in Lesotho’s formerly vibrant textile industry.

The textile and clothing industry played a crucial role in Lesotho’s economic development. Its growth was stimulated in the 1990s by investment mainly from Taiwanese companies, which moved to Lesotho to take advantage of duty-free access of clothing originating in Africa, Caribbean and Pacific (ACP) countries to the EU under the ACP-EU agreement. It was substantially boosted following the designation of Lesotho by the USA as one of AGOA eligible countries. Taking advantage of this opportunity, Lesotho’s textile and clothing industry achieved very rapid growth and the country became the largest single exporter of textile and clothing to the USA in sub-Saharan Africa. However, following the elimination of the quotas with the phasing out of the Multi-Fiber Agreement (MFA), Lesotho began to face fierce competition from low cost and more efficient producers from China and the Far East.

Lesotho’s major natural resource is water, often referred to as ‘white gold’ by the Basotho people. During 1995 and 1997, with intense construction activities involving the multi-million Lesotho Highlands Water Project, Lesotho registered an impressive economic performance – the real GDP growth rate made Lesotho one of the top ten performers in Africa at this time.

Water is Lesotho's most significant natural resource. It is being exploited through the 30-year, multi-billion-dollar Lesotho Highlands Water Project (LHWP), which was initiated in 1986. The LHWP is designed to capture, store, and transfer water from the Orange River system and send it to South Africa's Free State Province and greater Johannesburg area, which features a large concentration of South African industry, population, and agriculture. Completion of the first phase of the project in January 1998 allowed Lesotho to generate approximately 80% of the electricity it consumes annually and earn approximately $24 million annually from the sale of electricity and water to South Africa.

The World Bank, African Development Bank, European Investment Bank, and many other bilateral donors financed the project. Lesotho has taken advantage of the African Growth and Opportunity Act (AGOA) to become a major exporter of garments to the U.S. from sub-Saharan Africa. Exports to the U.S. under AGOA totaled $314 million in 2011, and the sector employs approximately 35,000 workers. Taiwanese and Indian investors own most factories.

The positive impact of the water project and the small but rapidly growing manufacturing sector contributed to the spurt in economic growth. The lessening economic contribution of the project as it nears completion will be more than offset by royalty payments from South Africa.

The economy of Lesotho is based on subsistence farming and animal husbandry, as well as small-scale industries that include clothing, footwear, textiles, food processing and construction. The small manufacturing base depends largely on farm products to support the milling, canning, leather and jute industries. The great majority of households gain their livelihoods from subsistence farming and migrant labour, with a large portion of the adult male workforce employed in South African mines (although the number of such mine workers has declined steadily over the past years). In the past financial year, Lesotho’s economy slowed down substantially because of major political conflicts causing temporary disruption in business activities. Unemployment remains high and is one of the most serious problems facing Lesotho, with poverty still severe.

In order to attain its macroeconomic objectives, the government of Lesotho is continuing to place high priority on parastatal privatization and private sector development, with this strategy forming the primary source of growth and employment creation. Based on free market principles and private ownership of property, the Lesotho economy presents a relatively open economic and business climate. Any institutional and regulatory constraints that impede growth are being addressed.