Lesotho is a small land-locked country, completely surrounded by its neighbor South Africa. It has a population of about two million and a gross domestic product (GDP) per capita of $1034.20. Lesotho is classified as a low-income country. Its territory is mostly highland with its lowest point sitting at 1400m above sea level (making it the highest base altitude in the world).
Previously a British protectorate, the nation gained its independence in October 1966. Lesotho is a constitutional monarchy that is ruled by a King as head of state and governed by a 33-member Senate and a 120-member National Assembly. In recent times, Lesotho’s political climate has been in flux with the country seeing its first coalition government after the elections held in 2012. A snap election was held two years later, in 2015, and yet another coalition government was formed. The current seven-party coalition government is led by the Democratic Congress Party and it controls 65 of the 120 parliamentary seats.
Growth is estimated to have declined to 1.7% in 2015/16 mostly due to lower growth in South Africa, lower global growth prospects, and the drought. It is expected to remain low at about 2.4% in 2016/17.
The country faces an unemployment rate of 28%. Underemployment and low productivity employment is widespread, especially in rural areas. A 2010/11 household budget survey showed that an estimated 57 percent of the population lives below the poverty line, and that the Gini coefficient based on consumption is estimated to be 0.54. Poverty has decreased in urban areas, while it has increased in rural areas.
Lesotho’s fiscal outlook is deteriorating due to a decline in Southern African Customs Union (SACU) revenues from 29.2%of GDP in 2014/15 to 15.9% of GDP in 2016/17 and is expected to remain low in the medium term. Recent depreciation of the Loti has increased the public debt to GDP ratio to 60% in 2015/16, and the projected sharp decline in SACU revenues calls for a substantial and sustained fiscal adjustment to protect debt sustainability and the peg with the South African Rand.
The current account deficit of the balance of payments is projected to widen in 2016/17 with lower SACU revenues, before progressively narrowing thereafter as net exports grow. Although fiscal consolidation can have a small negative impact on GDP in the short term, it is necessary for macroeconomic stability and higher growth in the medium to long term.
The country finds itself at a crossroads requiring new growth engines, a more streamlined role for the state, and a dynamic private sector to seize opportunities in the Southern African market. Public spending grew from 45%of GDP in 2004/05 to about 59% in 2015/16, mostly due to the increase in the wage bill which was 22% of GDP in 2015/16, one of the highest in the world. The level of public spending is unsustainable, and it can no longer be relied upon to drive growth.
With the second highest HIV prevalence rate among adults in the world, the government regards HIV/AIDS as one of its most important development issues, which it addresses through its HIV/AIDS National Strategic Plan. Between 1990 and 2005, life expectancy at birth declined from almost 60 years to 47 years, and currently stands at 49 years. HIV incidence is still high at 1.9 new infections per 100 person-years of exposure.
Several factors hinder Lesotho’s private-sector growth, affecting both Foreign Direct Investment (FDI) and the growth of local businesses. All quantitative measures suggest that business regulations seriously constrain growth. Despite making progress in streamlining business and property registration and in establishing and operating a credit bureau, Lesotho ranks low on key Doing Business Indicators, such as dealing with construction permits, accessing finance, and the cost of capital. These are constraints on domestic entrepreneurship, suggesting that the domestic private sector remains dependent on the state and non-tradable sectors.
In the last two decades, Lesotho shifted its growth drivers from export-led development towards dependency on government spending.
Last Updated: Nov 02, 2016