Lesotho is a small, mountainous, landlocked country surrounded by its much larger neighbor, South Africa. It has a population of about two million and a per capita gross domestic product (GDP) of $999.7 in 2022. Lesotho is classified as a lower middle-income country. It is primarily highlands, with its lowest point 1,400 meters above sea level. Previously a British protectorate, the nation gained its independence in October 1966. Lesotho is a constitutional monarchy, ruled by a King as Head of State, and governed by a 33-member Senate and a 120-member National Assembly.
The current government came into power in November 2022 and is led by Prime Minister, Samuel Ntsokoane Matekane’s Revolution for Prosperity (RFP) party in coalition with the Movement for Economic Change (MEC) Alliance for Democrats (AD) and Basotho Action Party (BAP) parties.
The government extended Lesotho’s Second National Strategic Development Plan (NSPD II) 2018/19–22/23 for another five years until 2027/28. The NSPD II’s four priorities are: enhancing inclusive and sustainable economic growth and private sector-led job creation; strengthening human capital; building enabling infrastructure; and strengthening national governance and accountability systems.
Economic growth
The economy expanded by 2% in 2023, mainly driven by the public sector and construction, especially the Lesotho Highlands Water Project-II megaproject and its spillover effects on transportation, logistics, and financial services. The project experienced some delays in early 2024 owing to strikes, particularly on the dam construction work, but activity has since resumed. On the downside, weaknesses in public investment management and efforts to control spending are delaying the implementation of capital projects. On the supply side, the industrial sector grew by about 5%, while the expansion of the agricultural sector, while still positive, decelerated significantly.
Headline inflation decreased from its peak of 9.8% in July 2022 to 8.2% in January 2024, owing primarily to the moderation in fuel and food prices. The central bank revised upwards the net international reserves target floor to $750 million in January 2024 to maintain a one-to-one exchange rate peg between the loti and the rand and increased the policy rate to 7.75% in July 2023, which stands below the South African policy rate.
The fiscal balance improved dramatically, from a deficit of 4.3% of GDP in 2022 to a surplus of 5.5% of GDP in 2023, owing to the more than doubling of SACU revenue. The government has spent more than half of SACU windfall in 2023 to increase public investment and recurrent spending by 2 percentage points of GDP each. The latter was driven by transfers to other public sector bodies, social benefits, and subsidies. The public sector wage bill as a share of GDP remained constant, even though it increased above inflation. Little progress has been made on the clearance of arrears, which have emerged owing to recurrent fiscal deficits in the past, and weaknesses in public financial management and in public procurement.
The public debt stock is estimated to have declined slightly to 57.5% of GDP in 2023, compared to 60.6% in 2022 mainly due to the redemption of Treasury bonds. The majority of public debt is contracted from external sources, accounting for about 77% of total debt, while domestic sources contribute the remaining 23% of total debt in 2023. In terms of shares to GDP, external and domestic debt stood at 46.2% and 13.6% of GDP in 2023, respectively. Lesotho’s risk of external and overall debt distress remains moderate but risks to debt sustainability have risen.
Other Development Challenges
- Agricultural Productivity and Rural Development: Traditional, low-input, low-output rain-fed cereal production and extensive animal grazing systems face challenges due to agro-ecological and climatic conditions, including recurrent cycles of drought, erratic rainfall, hail, and frost.
- Human Capital Development: Skills development with equity is a priority, and there is a need to strengthen skills and employability of the youth, ensuring a gender-nuanced approach, and close gaps in key infrastructure, particularly in electricity, sustainable and safe road connectivity, and information and communications technology.
- Climate Change and Environmental Sustainability: Sustainable financial and human resources models are needed to manage climate shocks, and investments in land management practices, protection of forests and woodlands, improved management of water resources, and building resilience against shocks through responsive social protection are crucial.
Last Updated: Apr 09, 2024
