Lesotho is a small, mountainous, and landlocked country, surrounded by its much larger neighbor, South Africa. It has a population of about 2.2 million, and nominal gross domestic product (GDP) per capita of $1,091 in 2021.
The World Bank classifies Lesotho as a lower-middle-income country. It is mostly highlands, with its lowest point being 1,400 meters above sea level. Previously a British protectorate, the nation gained its independence on October 4, 1966. A constitutional monarchy, Lesotho is ruled by a king as Head of State, and the Prime Minister as Head of Government, governed by a 33-member Senate and a 120-member National Assembly. The last elections were held in June 2017, leading to a four-party coalition government whose composition changed when the previous Prime Minister stepped down mid-term in May 2020, culminating into a two-party coalition government. The next election is expected to be held in the second half of 2022.
In recent years, Lesotho’s economic performance has remained slow, exacerbated by the COVID-19 pandemic. Agriculture has been the only key sector to have registered positive growth in the three quarters of 2021 due to favorable weather, government subsidies, and import substitution measures. The other key sectors – manufacturing, particularly textiles, mining, construction, and services –have contracted due to the adverse effects of the pandemic and associated restrictions on economic activity, weak external demand, and supply chain disruptions, exacerbating pre-existing structural competitiveness problems.
Sustained political instability has also contributed to the weak economic performance. Real GDP contracted by 3.2 percent and 1.2 percent in 2017 and 2018, respectively, before rebounding and expanding by 2.6 percent in 2019. It then contracted sharply by 6.5 percent in 2020 largely due to the COVID-19 related restrictions and several country lockdowns. The downturn continued into 2021, with the economy contracting by 11.1 percent in the first quarter, after which it recovered and expanded by 10.5 percent and 2.2 percent in the second and third quarter of 2021, respectively. Real GDP growth is projected to average 2.1 percent between 2022–2024. The expected recovery in the medium-term is set to be led by a rebound in the mining, manufacturing (including textiles) and construction activities on the back of supportive external demand conditions and improved business and consumer confidence.
In the medium-term, economic growth is expected to be boosted by construction-related projects including the second phase of the Lesotho Highlands Water Project (LHWP II), the Lesotho Lowlands Water Development Projects (LLWDP -I and-II), government roads construction projects and the Maseru district hospital construction. The water and electricity subsectors are expected to be boosted by green energy projects, while the tertiary sector is expected to recover to near pre-pandemic levels in the medium-term as less restrictions are imposed and more travel is permitted, adding impetus to the growth momentum.
The unemployment rate remains high at 22.5 percent (using strict definition) and 38.3 percent (using expanded definition that includes discouraged job seekers) in 2019. Poverty levels are estimated to have stagnated at around 30 percent between 2020 and 2021, with the $1.90/person/day (in 2011 PPP terms) international poverty rate estimated to have decreased marginally from 30.4 percent in 2020 to 30.1 percent in 2021. This is despite the projected modest economic recovery in 2021, suggesting other factors such as rising food prices (particularly basic food items such as maize flour and wheat flour) and slow labor market recovery from COVID-19-related lockdown measures slow poverty reduction. The $1.90/person/day (in 2011 PPP terms) poverty rate is project to fall slightly to 29.6 percent in 2022 and further to 28.4 percent in 2024.
Development Challenges and Risks
Lesotho remains vulnerable to the COVID–19 pandemic after emerging from a second wave of infections at the start of 2021 and coming to the end of a third wave that started in June 2021. While Lesotho launched a timely national response since the first cases of COVID-19 were identified in May 2020, Lesotho, like neighboring countries, continues to experience resurgences of infections which pose challenges to the health sector and the economy as a whole. As of mid-March 2022, it is estimated that about 57 percent of eligible population in Lesotho have been vaccinated. During the same period, there have been cumulative 32,720 confirmed cases and 697 deaths. Despite the vaccine roll-out, new variants or strains of the virus are likely to necessitate new restrictions and further lockdowns which imply downside risks to growth. New waves of infection globally, regionally and domestically are expected to weigh down Lesotho’s exports, lower remittances and capital inflows.
The country has, in recent years, experienced unstable governments, characterized by weak coalitions and frequent change of government and/or cabinet reshuffles which delays developmental progress and national goals. The national elections are scheduled in the second half of 2022 and more splits in the current ruling coalition have started to emerge ahead of the elections. More new political parties have emerged and the motion of no confidence against the current Prime Minister has failed implying that the current coalition government between the two political parties is expected to remain in power until the next national elections.
The COVID-19 pandemic is expected to setback human capital accumulation. Although the human capital index increased from 0.34 in 2010 to 0.40 in 2020, the level is below the average of lower middle-income countries and the situation has been exacerbated by the pandemic. In addition to the immediate impact of income losses, disruptions in essential health and education services are likely to reverse progress made in human capital accumulation and poverty alleviation thus far.
The COVID-19 pandemic has exacerbated weak macroeconomic performance and budgetary constraints, leading to limited fiscal capacity to respond to shocks. The geographical proximity, porous borders, and close economic ties with South Africa—for example, more than 60 percent of Basotho households receive remittances from South Africa monthly—place it at a particular risk of continued importation of coronavirus infections and subsequent community transmissions. Exports have declined in light of the economic contractions in many countries and remittances, on which Basotho households rely on, have dropped significantly, especially with the shut-down in South Africa.
High HIV/AIDS prevalence and tuberculosis (TB) remain Lesotho’s greatest health challenges. The HIV prevalence rate in Lesotho is 25 percent in the adult population (15-49 years), the second highest in the world. The incidence of TB stands at 611 cases per 100,000, according to the World Health Organization’s Global TB Report 2019. While high health costs exert more pressure to the fiscal burden, high HIV/AIDS and TB rates continue to contribute to persistently high inequality and poverty.
Last Updated: Apr 15, 2022