Lesotho’s GDP growth rate is currently estimated at 2.5% for 20166. The slow growth is because of a tightening fiscal space due to reduced government revenue, which declined by LSL 1.5 million from LSL 15.3 million (approx. USD 1.1 million) in 2016 to LSL 13.9 million (USD 1.0 million) in 2017. As a result, government had to increase its borrowing, which widened the fiscal deficit to 7.7% of GDP in 2017, from 1.6% in 20167. Furthermore, revenues from the Southern African Customs Union (SACU) have declined to an estimated 17.0% of GDP from 23.0% for the 2016/17 financial year8. The decline in revenues is largely driven by the 2015 El Nino drought, which saw the Lesotho government declare a state of emergency in December 2016, following reduced crop yields during the 2015/16 harvest season9. The subsequent state of emergency resulted in the government reallocating LSL 150 million (approx. USD 10.9 million) from the 2015/16 budget to provide emergency relief10. However, Lesotho’s economy is expected to make a slow recovery during the 2017/18 financial year, with an estimated GDP growth rate of 3.4%11.
The commitment of the newly formed coalition government to stabilise Basotho politics, by addressing constitutional reforms, will favour Lesotho in terms of retaining its much-needed benefits under the African Growth and Opportunity Agreement (AGOA) with the USA. Political stability and rule of law are part of the AGOA eligibility criteria12. During the 2015/16 financial year, 70.0% of Lesotho’s textiles were exported the USA under AGOA, while the remaining 30.0% went to South Africa13. The benefits Lesotho receives under AGOA go beyond government revenues, and assists with addressing some of its socio-economic challenges. Poverty alleviation is one such example, through the indirect creation of jobs associated with the manufacturing and exporting of textiles. The textile industry is the second largest employer after the government, approximately 86.0% of employees under AGOA are women, whom are disproportionately affected by poverty14. However, the government still has the challenge of adequately addressing the needs of 56.3% of its population that lives in extreme poverty as well as the 28.0% of its working population that is unemployed15.
One cannot divorce South Africa’s role, through its Deputy President Cyril Ramaphosa as the SADC Facilitator, in ensuring Lesotho adheres to the SOMILES recommendations and achieves political stability. In addition, South Africa is protecting its strategic water interest under the Lesotho Highlands Water Project (LHWP). For South Africa, the LHWP will not only cost billions of rands, but it provides the Gauteng province with its much-needed water security16. While for Lesotho, the LHWP will increase its hydro-electricity generation capacity as well as increase its revenue from royalties17. Construction of Phase II of the LHWP is set to commence in 2018 and will provide Lesotho with the triple benefit of infrastructure development, employment, as well as economic growth18. The 2015/16 drought added pressure to South Africa’s water security. The role of Deputy President Cyril Ramaphosa as SADC Facilitator in Lesotho can be viewed as a continuation of South Africa’s efforts in ensuring Lesotho achieves and maintains political stability in order to protect its strategic water interest.
Lesotho’s Minister of Finance, Dr Moeketsi Majoro, is faced with the monumental task of turning around an economy that has suffered because of continued political volatility. As such, the constitutional reforms stipulated in the SOMILES report are regarded as priority areas by Dr Majoro, which need to be incorporated into the strategy of turning the economy around. The political will for constitutional reform demonstrated by the Minister of Finance thus far is encouraging. South Africa and SADC will continue to play an important role in ensuring the progress made in stabilising Lesotho’s political landscape thus far is not derailed. As highlighted with AGOA, stabilising Basotho politics will improve investor confidence. In turn, this will allow the government to focus on more pressing socio-economic matters, such as poverty alleviation, reducing government debt and unemployment.
Current Affairs Update
Lesotho Government Embarks on Austerity Measures
During his maiden budget speech address, Lesotho’s Minister of Finance Dr Moeketsi Majoro revealed a series of austerity measures as part of the FY2017/2018 budget. These measures include reducing the benefits of members of parliament. The mountainous kingdom is in danger of entering a debt crisis. In 2016, government debt peaked at LSL12.6 billion and the Loti drastically depreciated against the US dollar19. The downgrading of South Africa’s economy by the major international credit ratings agencies coupled with its technical recession have contributed towards Lesotho’s slow economic performance. These factors affect the earnings received and remittances sent by Basotho labourers in South Africa, Lesotho’s exports to South Africa as well as revenues received from the Southern African Customs Union. The austerity measures introduced by Dr Majoro mean Lesotho will have to tighten its fiscal policy because, amongst other things, it is in danger of utilising its foreign currency reserves to the extent of leaving the country without the means to pay for its imports and finance investment in job creation. This, in turn, could threaten the Loti-Rand peg and make Lesotho more vulnerable to external and domestic shocks. One cannot divorce Lesotho’s political instability from its fragile economy which continues to threaten its eligibility to the African Growth and Opportunity Act with the United States. The new coalition government must prioritise addressing the factors contributing towards its chronic political instability if it seeks to turn its economy around.
Phase II of the Lesotho Highlands Water Project Begins
Phase II of the Lesotho Highlands Water Project (LWHP) commenced in July 2017 and is expected to continue until 2025 and will cost LSL 445 million20. Construction involves building the Polihali Dam as well as a tunnel which will connect to the Katse Dam21. Once construction is complete, water supply will increase from 780 million cubic meters per annum to more than 1,255 million cubic meters per annum22. The Polihali dam will increase Lesotho’s electricity supply which will be good for production once the dam is operational23. Construction will assist Lesotho in taking a step towards achieving independent electricity supply in order to meet domestic demand. The Polihali Dam will complement the hydroelectricity supply of the 72 megawatt Muela hydropower station which was built during Phase I24. Phase II will provide much-needed skills development, employment, and economic growth for the economies of Lesotho and South Africa. However, the commencement of Phase II has not been without controversy. South Africa’s Minister of Water and Sanitation Nomvula Mokonyane has been accused of delaying the commencement of construction and corruption costing South African taxpayers just over LSL 2 billion.
High Unemployment and Migration Patterns
Continued economic hardship in Lesotho is a key driver of migration amongst Basotho nationals into South Africa. The World Bank estimates Lesotho’s unemployment rate to be between 24% and 28%. A large proportion of Basotho nationals live in Lesotho and work in South Africa and vice versa. In response, the South African Department of Home Affairs introduced the Lesotho Special Permit that will be valid until 2019. Remittances from South Africa to Lesotho account for approximately 30% of Lesotho’s gross domestic product25. This figure is concerning for a small, fragile economy that continues to experience domestic and international shocks. Lesotho’s fragile political climate is also a driver of economic migration to South Africa as certain aspects of Lesotho’s public sector have notoriously become politicised.
1 Lesotho Government
2 Government Secretary’s Office
3 Lesotho Government
4 Mail & Guardian
5 Southern African Development Community
6 World Bank
7-11 Ministry of Finance
12 US International Trade Administration Website
13 Ministry of Finance, ibid.
14 African Development Bank
15 World Bank, ibid.
16-17 Lesotho Highlands Development Authority
18 Lesotho Highlands Development Authority
19 Ministry of Finance
19 Presidency Republic of the Republic of Ghana, ibid.
21-24 Lesotho Highlands Development Authority
25 Daily Nation.