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 party, in coalition with three parties: Movement for Economic Change, Alliance for Democrats, and Basotho Action Party.

Classified as a lower-middle-income economy, Lesotho recorded Gross National Income (GNI) per capita of $1,280 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 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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Economic performance has remained uneven, with growth averaging 0.5% over the past decade and fluctuating from year to year. Growth was resilient at the start of 2026, with output expanding by 2.8% year-on-year in Q1, driven by business services, finance, hotels and restaurants, information and communication, and utilities. Manufacturing contracted and mining remained under pressure, reflecting persistent challenges in export-oriented sectors. Inflation averaged 4.3% in 2025, down from 6.1% in 2024, reflecting lower fuel prices. Following further falls at the start of 2026, inflation picked up again in Q2 driven by higher fuel, food, and communication prices, before falling back to 2.9% in July. The Central Bank of Lesotho increased its policy rate to 6.75% in May 2026 to help safeguard the loti-rand peg.

The fiscal position has deteriorated, with surpluses of 9.5% and 3.1% of GDP in 2024 and 2025 respectively expected to shift to a deficit of -0.4%  of GDP in 2026, driven by rising expenditures and a decline in SACU revenues. Public debt declined to 53.1% of GDP in 2025, from 54.7% in 2024, and the risk of external and overall debt distress remains moderate. The current account was in balance in 2025, a deterioration from a 4.1% surplus in 2024.

Growth is projected to slow to 1.2% in 2026 and 2027, before picking up moderately to 1.4% in 2028, growth rates which are insufficient to meaningfully reduce poverty. The Lesotho Highlands Water Project, higher water royalties, and still-elevated SACU revenues are expected to provide some support to growth, along with the recently agreed extension of the African Growth and Opportunity Act to December 2028, 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, potential El Niño effects, and declining aid.

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The World Bank supports Lesotho through  International Development Association (IDA)  financing across 10 operations totaling $453 million, with $248 million disbursed (55%) and FY2027 disbursements of $5.7 million (2.7%). In FY26 the portfolio achieved a high disbursement rate of 36%.

IDA-financed projects are focused in the areas of agriculture, water, energy, nutrition, education, transport, and sustainable livelihoods. 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 U.S. import tariffs. Working with the Ministry of Trade, Industry, and Business Development through public-private dialogue, IFC will present a sector strategy in October 2026, positioning the sector for continued advisory engagement and possible investment.

IFC maintains an ongoing dialogue with financial institutions and the government on private sector investment opportunities, and has conducted a small and medium enterprise (SME) mapping to identify companies for advisory services and future investment.

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 Finance and Development Planning. The Japanese Government and IFAD co-financed the Smallholder Agriculture Development Project II while the European Union and European Investment Bank 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 extended National Strategic Development Plan (NSDP II) 2022/23- 2027/28.

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 Lesotho Basic Education Strengthening Project ($7.1 million) exceeded targets, with junior secondary dropout rates declining from 27% to 19.8% and literacy and numeracy in early childhood centers improving by 14% and 13.6%. Over 200 teachers completed professional development. These results set the stage for the $20.65 million Education Improvement Project, which will construct classrooms, gender-segregated toilets, and science laboratories in 54 schools, while training 500 secondary STEM teachers.

The Pathways to Sustainable Livelihood Project (PLSP) and its Economic Inclusion Program (EIP) provides a pathway from vulnerability to productive engagement. The program enrolled 9,970 beneficiaries across all 10 districts, of whom 8,667 completed training, received productive grants, and launched livelihood enterprises. The PLSP is also modernizing social protection delivery systems: 82.6% of the Old Age Pension has been fully digitized.

The Smallholder Agricultural Development Project II is transforming the rural economy, supporting 106,983 farmers to adopt climate-smart agricultural practices across 65,213 hectares, exceeding the 45,000-hectare target.

The Lesotho Renewable Energy and Energy Access Project is extending electricity access to underserved communities. To date, 2,718 households in Rothe, Moyeni, Hololo, and Thabana Morena have been connected to the grid. The project is now advancing into additional areas, with a further 8,600 households in new communities expected to be connected by November 2026.

The Competitiveness and Financial Inclusion Project ($52.5 million) is connecting entrepreneurs to economic opportunity, having supported 464,387 SMEs—52% women-led and 46% youth-led—enabling access to $2.5 million in finance and creating 2,100 jobs. Seven commercial farms were established, firms in the textile sector received targeted support, and government-to-business services were digitized, reducing barriers to formal market participation.

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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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