Lesotho

Lesotho is a small mountainous nation surrounded by South Africa. Home to over 2.4 million people, it gained independence from Britain in 1966 and remains a constitutional monarchy. The King serves as Head of State with ceremonial functions, while executive authority rests with the government. Since November 2022, the country has been led by Prime Minister Samuel Ntsokoane Matekane and his Revolution for Prosperity (RFP) party, in coalition with three parties: Movement for Economic Change (MEC), Alliance for Democrats (AD), and Basotho Action Party (BAP).

Classified as a lower-middle-income economy, Lesotho recorded a GNI per capita of about $1,180 in 2025. Development continues to be constrained by structural challenges, including a burdensome regulatory environment, governance and implementation gaps, weak fiscal management, limited access to finance, and heavy reliance on Southern African Customs Union (SACU) revenues and non-tax inflows. Lesotho is also vulnerable to climate-related shocks (droughts, floods). Poverty and inequality remain widespread, especially in rural areas where access to healthcare, education, and clean water is limited. High rates of HIV/AIDS and tuberculosis continue to strain the health system and weaken human capital outcomes.

The government has extended its Second National Strategic Development Plan (NSDP II) through 2028. Priorities include promoting inclusive, private sector-led growth and job creation; strengthening human capital; expanding infrastructure; and improving governance and accountability systems.

Opportunities for Lesotho include leveraging SACU and water royalties to rebuild fiscal buffers, promoting the private sector by reducing business costs and opening markets, and aligning with regional trade agreements. A bold reform program to stimulate private sector development and strengthen fiscal policy management could create a virtuous cycle of development based on both the private and public sectors.

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Recent economic performance has remained uneven, with growth averaging just 0.5% over the past decade and fluctuating sharply from year to year. Cumulative growth over the first three quarters of 2025 reached 4% relative to the same period in 2024, driven mainly by mining, hospitality, business services, and other services. However, continued weakness in manufacturing and softer activity toward the end of the year suggest that growth slowed to about 2% in 2025. Inflation averaged 4.4% in 2025, down from 6.1% in 2024, largely reflecting lower fuel prices. After a rate cut in late 2025, the Central Bank of Lesotho kept the policy rate unchanged at 6.5% in January 2026 to help safeguard the loti-rand peg.

Fiscal outcomes remain favorable, but volatile. The budget recorded a surplus of 3% of GDP in 2025, down from 9.5% the year before, mainly due to a sharp decline in SACU revenues, partly offset by higher water royalties. Public debt declined to 51% of GDP in 2025, from 54% in 2024, and the risk of external and overall debt distress remains moderate. The current account is expected to register a small surplus in 2025, supported by higher water royalties.

The outlook remains subdued, with growth projected to average about 1.5% over 2026–28. The Lesotho Highlands Water Project, higher water royalties, and still-elevated SACU revenues are expected to provide some support, but activity will remain constrained by weakness in the textile and diamond sectors, and a weaker external environment. Risks remain tilted to the downside, including weaker regional and global growth, heightened geopolitical uncertainty, higher and more volatile oil prices, declining aid, and continued uncertainty over the African Growth and Opportunity Act (AGOA) beyond 2026. Structural reforms to strengthen fiscal management, improve the business environment, and address infrastructure and human capital gaps remain critical to support investment, exports, and jobs.

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The World Bank supports Lesotho through International Development Association (IDA) financing across nine operations totaling $403 million, with $208 million disbursed (52%) and FY2026 disbursements of $40 million (18%).

IDA-financed projects include the Smallholder Agriculture Development Project II, Lowlands Water Development Project II, Renewable Energy and Energy Access Project, Nutrition and Health System Strengthening Project, Transport Infrastructure and Connectivity Project, Education Improvement Project, Pathways to Sustainable Livelihoods Project, and Competitiveness and Financial Inclusion Project. IDA financing is complemented by Advisory Services and Analytics, including the Lesotho Economic Update 2025, focused on fiscal policy as a driver of inclusive growth.

IFC is providing advisory support to Lesotho's textile sector, the country’s largest private employer, which is facing uncertainty due to US import tariffs. Working with the Ministry of Trade, Industry, and Business Development through public-private dialogue, IFC will complete a sector strategy in 2026, positioning the sector for continued advisory engagement and possible investment.

IFC is conducting an small and medium enterprise (SME) mapping exercise to identify companies that could benefit from advisory services and future investment, though the small scale of most businesses in Lesotho remains a key challenge. IFC also maintains an ongoing dialogue with financial institutions and the government on private sector investment opportunities.

The World Bank Group Guarantee Platform, housed by the Multilateral Investment Guarantee Agency (MIGA), has an active exposure of $5.2 million in Lesotho in the financial sector. Under the Platform, MIGA will deepen collaboration across the Group to de-risk foreign investment and focus on projects that reflect core objectives to scale impact, mobilize private capital, support climate-aligned investments, and drive economic growth and job creation.

Development cooperation is coordinated by the Ministry of Development Planning. The Japanese Government and IFAD co-financed the SADP II while the EU and EIB cofinance the Lowlands Water Development Project II.

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The World Bank Group’s Lesotho Country Partnership Framework (CPF) FY2024-2028 is fully aligned with the second National Strategic Development Plan (NSDP II) 2018/19-2022/23.

The five-year CPF is centered around three high-level, long-term outcomes:

• increased employment in the private sector through improving the enabling environment for Micro, Small, and Medium Enterprises’ (MSMEs) growth to crowd in private investment for enhanced job creation.
• improved human capital outcomes through the strengthening of the quality of education, health, and social protection.
• strengthened climate resilience through improving the management of natural resources and access to climate-resilient infrastructure.

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The Competitiveness and Financial Inclusion Project ($52.5 million) has supported 387 SMEs (54% women-led and 44% youth-led), enabled access to approximately $2 million in finance, and created 2,100 jobs. The project has established seven commercial farms, supported firms in the textile sector, and digitized government to business services.

The Lesotho Basic Education Strengthening Project($7.1 million) exceeded targets with junior secondary dropouts declining from 27% to 19.8% and 204 teachers completing professional development. Literacy and numeracy in early childhood centers improved by 14% and 13.6%. Building on these results, the $20.65 million Lesotho Education Improvement Project will benefit 100,000 students with the construction of classrooms, gender-segregated toilets, science laboratories, and workshops across 54 schools. The project will also support professional development of 500 secondary STEM teachers.

The Economic Inclusion Program (EIP) under the Pathways to Sustainable Livelihood Project (PLSP) is implemented across all 10 districts and covers 10,000 vulnerable households. In 2025, 2,200 beneficiaries received seed capital and in six months, these businesses generated revenues of $334,000. An additional 2,870 beneficiaries are undergoing training and another 5,000 will be trained from April 2026. Through the PLSP, 74% of Old Age Pension have been being fully digitized. Social registry roll-out has commenced in 20 community councils, with data collection expected to be completed by early April 2026.

The Smallholder Agricultural Development Project II is helping transform agriculture, supporting 106,983 farmers to adopt climate-smart practices (over the target of 75,000) across 65,213 hectares (over the target of 45,000).

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Lesotho’s five-year Country Partnership Framework is centered around three high-level, long-term outcomes: increased employment in the private sector through improving the enabling environment for Micro, Small, and Medium Enterprises’ growth to crowd in private investment for enhanced job creation, improved human capital outcomes through the strengthening of the quality of education, health, and social protection; and strengthened climate resilience through improving the management of natural resources and access to climate resilient infrastructure.

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