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Lesotho: Lesotho Economy Profile

2012/08/01

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The outlook for Lesotho in 2014 and 2015 remains moderately positive with average growth of 4.4% expected, though there are risks over global demand for diamonds and the renewal of the United States' African Growth and Opportunity Act which runs out in 2015. The economy is estimated to have grown by 3.4% in 2013, well below the strong 6.5% recorded in 2012. Lesotho suffered from economic uncertainty in Europe which constrained production activity in the mining sector. Growth was supported by booming construction activities, a strong recovery by textile and clothing, transport and communications, and financial intermediation.

Growth so far has not been inclusive enough and there is widespread unemployment, inequality and poverty, particularly in rural areas. The proportion of households living below the poverty line has increased from 56.6% in 2003 to 57.1% in 2013. The Gini inequality index coefficient remains high at 0.51. HIV/AIDS continues to have a serious impact on the young. These factors mean increasing numbers in need of social protection.

The fiscal policy stance in 2013 remained tight because of the need to curb high spending. However, the fiscal consolidation, in the absence of strong private sector support, is likely to compromise the country's growth. Coupled with this is the government's weak capacity to implement a sound capital programme aligned to its development objectives. The government needs to undertake deep reforms to improve capacity, accountability and efficiency.

Clothing, textiles and livestock are the most important value chains with considerable potential to contribute to economic growth and poverty reduction. The livestock sub-sector can develop important value chains mainly focusing on wool and mohair by exploiting trade connections with South Africa.

Lesotho's economy grew by 3.4% in 2013 and should average 4.4% in the next two years.
With a 57% poverty level and a 25% unemployment rate, policies need to make growth more inclusive.
Textiles and livestock are key value chains with considerable growth potential.

Lesotho | Economic Indicators

Markets Last Reference Previous Range  
Currency 11.56  Jan/15 11.56 2.51 : 13.43
GDP Last Reference Previous Range  
GDP 2.23 USD Billion Dec/13 2.23 0.03 : 2.49
GDP Annual Growth Rate 3.4 percent Dec/13 3.4 -13.51 : 26.4
GDP per capita 978 USD Dec/13 978 197 : 978
GDP per capita PPP 2503 USD Dec/13 2503 1307 : 2503
Labour Last Reference Previous Range  
Unemployment Rate 25.3 percent Dec/08 25.3 25.3 : 39.3
Population 2.07 Million Dec/13 2.07 0.85 : 2.07
Prices Last Reference Previous Range  
Inflation Rate 4.13 percent Oct/14 4.13 2.91 : 35.14
Food Inflation 5.26 percent Oct/14 5.26 0.67 : 18.72
Money Last Reference Previous Range  
Interest Rate 6.11 percent Jun/14 6.11 5.18 : 20.42
Trade Last Reference Previous Range  
Balance of Trade -2595 LSL Million May/14 -2595 -3029 : -747
Exports 2261 LSL Million May/14 2261 477 : 2702
Imports 4856 LSL Million May/14 4856 1337 : 5244
Current Account -187 LSL Million May/14 -187 -2060 : 829
Current Account to GDP -4.4 percent Dec/13 -4.4 -39.67 : 14.65
Government Last Reference Previous Range  
Government Budget 1.5 percent of GDP Dec/13 1.5 -6.1 : 11.6
Government Debt to GDP 37.7 percent Dec/13 37.7 33.5 : 88.66
Credit Rating 15    15 :
Taxes Last Reference Previous Range  
Corporate Tax Rate 25 percent Jan/14 25 25 : 35
Personal Income Tax Rate 35 percent Jan/14 35 35 : 35

 

Fiscal Policy
Government spending as a percentage of GDP increased by over 10 percentage points over the last decade. In a proposed budget 2009/2010, total government spending should increase over the next years, despite declining revenues, raising the prospect of debt. In the past, public spending on track revenue outlook. Procyclical fiscal policy can be helpful in the long term because it could undermine the role of fiscal policy in promoting increase and ensuring in general price stability (Table 3). In a budget speech to Parliament in February 2010, the Minister of Finance stressed that the dependence on revenue from the SACU has made planning additional uncertain. He noted the department's commitment to determine the government's budget based on revenues from national resources.
he government's budget is driven largely by revenues from the SACU customs pool, creating strong links between the budget balance and performance of the South African economy, the major in the group of nations. SACU provides a substantial contribution to government revenue, reaching a peak of 60% of total tax revenue in 2006/07, but declined since then. It is expected that the year 2009/10 the budget balance could face a deficit for the first time in years mainly due to sharp decline in SACU revenue - the decline in imports in the region - and the mobilization lower income in the national economy. This limits the ability of government to stimulate the economy, while attempts to increase spending by borrowing could affect the balance of current account and official reserves from now on. In the short term it will be difficult for the government to sustain increase and achieve macroeconomic stability.

The budget is allocated according to priorities set in its national development strategy. In 2009/10, total spending allocated to education, health and economic affairs was almost 47%, which helped the efforts to achieve universal primary education, reduce infant and maternal mortality and improve well-being. The decline in 2009/10 SACU revenue accelerated the government's commitment to improve the effectiveness and efficiency of public spending through its improvement in the public sector and reform program (PSIRP), which has three components Essential: improved financial management, decentralization of public services and reform public services management. The government as well plans to increase the administrative capacity to pay promptly and allocating funds. In 2009/10, only 70% of the capital budget has been fully utilized. Part of the reform aims at strengthening project preparation and approval procedures to ensure that projects are ready for implementation once funding is allocated.

 
Monetary Policy
 
The country maintains a system of fixed exchange rate under the Common Monetary Sector(CMA), shared with Namibia, South Africa and Swaziland. The local currency - the loti - is pegged to the rand. It made the monetary sector Lesotho sensitive to changes in monetary policy in South Africa, including inflation, real exchange and interest rates. In 2009, the prime rate of commercial banks rose from 16.58 % in September 2008 to 12.17 % in September 2009 due to a lower rate of return on Treasury bills in South Africa.

Inflation fell in the last quarter of 2009, down from a peak of 16% in 2008 to about 4% in 2009. The decline was driven primarily by lower food prices and utility. Since August 2009, Lesotho's inflation rate was lower than South Africa which stood at 6.1% during the same period. Lesotho's inflation rate fell within the target range of South Africa 3% -6% over the last months of the third quarter. This was particularly significant for the poor in the light of declining incomes and employment in 2009. Food price inflation reached a peak of 25% in 2002 due to a poor harvest and a decrease of 36% in the South African Rand during the period. The currency peg is maintained by the holding of foreign reserves, the adequacy of which is ensured by setting a minimum target. The goal - 120% of narrow money - has been changed from USD 500 million in January 2009 for $ 700 million last quarter. open market operations involving the sale of government securities (91, 182, 273 and 375-day Treasury bills) are conducted each weeks to manage liquidity in the banking sector, ensuring the staff of the central bank reserve is achieved and interest rates move in line with comparable rates in nations other CMAs.
In 2009, reserves were generally maintained at a comfortable level above the minimum target. This has been influenced by a strong current account driven by the customs revenue, exports and elastic currency spending submitted foreign government. Interest rates offered online with the rest of the region, mainly down as South Africa monetary authorities have responded to slowing inflation and weakening economic activity. The Treasury bill rate at 91 days increased from 10.03% at the beginning of the year to 6.7% at the end of 2009.

 
 
External Position

Outstanding external debt as a percentage of GDP has declined significantly since 2000. In 2009, total public debt amounted to 43.8% of GDP, below the 60% threshold set by the Southern African Development Community (SADC) objectives of macroeconomic convergence. ratio of debt service as well remained below the threshold of sustainability to 2.6% (Figure 6). The external debt is a higher percentage of in general debt. The ratio of external debt to total debt was 88.5% while the ratio of domestic debt to total debt was 11.5% in 2009.

Export earnings and remittances, which were struck down the current account balance, which went from a surplus of 3.2% of GDP in 2008 to a deficit of 2% in 2009. However, capital inflows should fully offset the current account deficit and to facilitate the accumulation of gross international reserves to a level of $ 1.1 billion at the end of 2009 (equal to 7 months imports of goods and services ), double the target set by the Central Bank of Lesotho (CBL) to ensure the stability of the exchange rate pegged to the South African Rand.
Exports declined in part due to the impact of the world crisis on the manufacturing sector has forced the closure of textile mills and a decline in the mining sector, particularly for exporters of diamonds. The 2009 deficit trade balance showed a significant increase compared to 2008 despite a contraction in imports. Improvements are expected in 2010.
Textiles, an export product and a key source of employment, critical need for reform to remain competitive and profitable. The sector faces strong competition in the U.S. market, even if the existing preferences under the U.S. increase in Africa and Opportunity Act (AGOA) is extended beyond its expiration in 2015. The government produced a policy document to support the strategy in 2009, which recommends giving the working capital at highly concessional rates, guarantees of export insurance, thereby reducing the risk premium by specialized agencies , capital grants to support technology improvements, better education of workers, subsidizing utility costs, brand support strengthening and expanding support to stop exporting, particularly for non residents. The work plan with the Chinese textile companies to transfer technology and technical expertise should be fully implemented. This will help reduce costs and improve efficiency. It is as well government policy to diversify production by introducing new product lines. The multinational Philips has built a new factory built to produce energy-saving bulbs in Lesotho.

 
Structural Issues
 
The average ranking of SACU was 65 years and South Africa was 34th. The poor investment climate has deteriorated. laws and regulations of Lesotho are long and costly for businesses. The country recognizes that sustainable increase requires a vibrant private sector. In 2009 he was ranked as the country least business friendly in the region of southern Africa, ranking 130 out of 181 at the World Bank's Doing Business survey. In 2009, Lesotho ranked 155th to the permitting and facilitating land titles, basic elements for promoting the private sector. It would take about 40 days to start a new business and 101 days to register property. It takes nearly years to enforce contracts and resolve problems of business license. Companies spend over 300 hours over 40 working, paying taxes.
To improve the investment climate, the government launched a strategy for 2010-2012, which, once approved, will be managed by the Private Sector Division for Development under the Ministry of Finance.
The reform proposes to change trade policies and put in procedures to promote entrepreneurship, savings and investment. The strategy focuses on reforming the legal framework for business, creating a stop center of trade facilitation, reducing the time the tax payment procedures, and propose solutions to get the reforms government. The strategy as well seeks ways to encourage small businesses. According to a survey conducted in 2009, nearly 65% of small business scale in retail operations and services. Encouraging them to participate in additional productive sectors such as manufacturing, agribusiness farms and business is an objective of the strategy, which as well aims to focus on skills development for small businesses, the market access and finance.
Lesotho has commercial banks, three of which are held by South African banks are in a strong financial position despite the world financial crisis. Amount meet the requirements of prudential banking supervision. In 2009, after the bank was granted a full license to engage in normal banking activities. This could improve the provision of credit to the private sector, which was low at about 30% of private sector deposits since the privatization and closure of national-owned banks 10 years ago.
The economy is facing several challenges such as lack of competition. The margin between lending and deposit rates (about 9%) is quite high compared to regional standards, mainly because of difficulties in entering the banking sector. The banking industry is facing bottlenecks that must be addressed. Efforts are underway to revise the law on financial investment in 1998. The reforms are expected on licenses for new banks, improving the collection of credit histories of potential borrowers through a credit bureau (where the story of a borrower may be centralized for easy access by amount Bank), rationalization of deeds that are often used as collateral for loans, improving the procedures for banking supervision and banking automation of a lot of. Debates on the transaction costs charged by commercial banks in the region continue. Studies in Lesotho showed that transaction costs imposed by banks in Lesotho supported the poor, with charges on services used mostly by small depositors relatively low compared to the loads on additional sophisticated services. In general, expenses, Lesotho are not significantly higher than in South Africa and other nations in the region. However, a 2009 study on bank charges in South Africa has concluded that charges were high compared to international levels, implying that the bank charges are a regional problem.
Significant evolution is expected in 2010 include the expansion of securities market where the central bank plans to introduce several products in treasury bills and a new bond market for long-term investments. To further enhance private participation in financial markets, regulatory frameworks and monitoring guidelines are being developed to create markets for secondary safety.
A large pyramid scheme illegal negates the savings of thousands of people in 2009. The central bank is looking for the liquidation of diet and distribution of remaining funds and assets to investors. In December 2009, the central bank distributed to investors in funds held by an institution that was closed accepting deposits without a proper license. Investors receive only a part of the money originally put into the institution.
The Lesotho government has continued its efforts to resolve obstacles to infrastructure, particularly in public services. Lesotho has experienced acute food shortages in 2008 due to a lack of regional supply. Electricity generation infrastructure is aging, there was insufficient investment in new power plants and request in South Africa is increasing. Lesotho own station 'Muela hydropower, built under the Lesotho Highlands Water Project in the late 1990s, does not satisfy domestic request especially during peak winter months of June and July. Plans are underway to increase the capacity of the station when the dam Polihali in the Highlands project. The dam is expected to commence in 2011 at a cost of 7.3 billion LSL (USD 950 million) and will be used to increase water supply in South Africa and increase the production capacity of hydropower. A feasibility study on expanding energy production is achieved.
USD 4.3 million contract was signed in June 2009 for the design and supervision of construction of the dam Metolong. The dam is to provide water for domestic and industrial lowlands of Lesotho, including the capital, Maseru, which is experiencing periodic water shortages due to increased request. The project cost a total of $ 280 million and is funded by a consortium of donors. The government built new access roads in major urban centers and bridges to link the mountainous regions with Semonkong Qach'a Nek, cutting the driving distance to the major port of Durban, South Africa.
The proximity of South Africa should be an opportunity for Lesotho to stimulate its economy and reduce the income gap with its neighbor. With appropriate structural and institutional reforms, Lesotho could attract investment from South Africa because of its low wage rates and public services relatively cheaper. banking reforms and efforts to promote the private sector would bear fruit if applied correctly.
 
Other Recent Developments
The Lesotho government pursued efforts to resolve infrastructure impediments, particularly in utilities. Lesotho experienced acute power shortages in 2008 due to a regional supply deficiency. Power generating infrastructure is ageing, there has been inadequate investment in new power stations and request in South Africa is increasing. Lesotho’s own ‘Muela hydropower station, built as part of the Lesotho Highland Water project in the late 1990s, does not meet domestic request especially during the peak winter months of June and July. Plans are underway to increase the capacity of the station during the construction of the Polihali Dam as part of the Highlands project. Construction of the dam is expected to commence in 2011 for a cost of LSL 7.3 billion (USD 950 million), and will be used to increase water supply to South Africa and increase hydropower generation capacity. A feasibility study on the power generation expansion is being carried out.
A USD 4.3 million contract was signed in June 2009 for the design and supervision of the construction of Metolong dam. The dam is to supply water for domestic and industrial purposes in the lowlands of Lesotho including the capital, Maseru, which experiences periodic water shortages due to increased request. The project costs a total of USD 280 million and is financed by a consortium of donors. The government built new access roads in major urban centers and bridges aimed at linking the mountainous Qach’a Nek with Semonkong, cutting the driving distance to the significant South African port of Durban.
The proximity to South Africa should be an opportunity for Lesotho to boost its economy and narrow the income gap with its neighbour. With appropriate structural and institutional reform, Lesotho could attract investment from South Africa given its low wage rate and relatively cheaper utilities. Banking reforms and efforts to promote the private sector could bear fruit if implemented properly.
 

Public Resource Mobilisation

The contribution of tax revenue to total revenue rose 75% in 2000 to 91% in 2009 while non-tax revenue has declined. The tax is dominated by indirect taxes, mainly from customs duties (64%), followed by VAT (13 %). The share of income tax has declined steadily from 18% in 2000 to 13% in 2009. A major reason is that while customs revenues have increased at an annual rate of 2 5% over the last years, tax revenues increased by only 5%.

Tax revenues have increased significantly over the last ten years, mainly due to the establishment of the Lesotho Revenue Authority in 2003, as improved revenue mobilization, revenue and increasing the pool of SACU. The national budget recorded a surplus for the last years, if a deficit is estimate in 2010 and 2011 mainly due to the impact of the world crisis.There is room for tax government reforms to maneuver around the band top income tax to raise revenue and make the system additional equitable by introducing additional income brackets.

The tax authority is an autonomous body which assesses and collects revenue and is responsible for the government and enforcement of laws relating to income. The authority is managed by an independent board and is accountable to parliament. It integrates the functions of the former Income Tax, Customs and Excise and Sales Tax departments.
The authority is implementing three tax codes: the income tax in 1993, the Customs and Excise Act 1982 and the VAT Act 2001. Income Tax Act deals with corporate tax, withholding tax (corporation tax on dividends received by shareholders), Pay As You Earn tax (tax paid by employers for employees) and others. The tax rate on income is revised periodically by the Parliament, taking into account revenue increase, inflation and other factors. In general, individual incomes are grouped into three categories with the revised thresholds by the Parliament. For 2009, for example, an income of less than 22 728 LSL, about 2 950 USD per year were exempt from income tax. For incomes above that threshold, the first tranche pays 22% and the last installment of about 35%. nd type of goods in and out of Lesotho. Currently, the VAT rate is 14% or 15% depending on the product.

The share of tax revenue in GDP is high by world standards and has grown considerably from 36% in 2000 to 57% in 2009, although the bulk of revenues came from amount SACU receipts. From now on the government was able to mobilize nearly 30% of revenue in GDP from domestic sources in the last decade, above the sub-Saharan average of about 21%. However, this effort must be redesigned to compensate for the substantial decline in revenue from the SACU.

The Ministry of Finance, Economic Development and Planning (MFED) is formulated and oversees tax policy. The tax government implements the policy and has an advisory role. Tax collection has remained within 2.5% of total revenue collected. Although there is room for improvement, the threshold is acceptable international standards.
of the difficulties encountered by the tax authorities is the prospect of lower revenues from SACU, which has prompted the Agency to develop reforms to mobilize resources from domestic sources. Some of the measures the authority intends to implement include: improved revenue collection procedures, identification of new sources of tax revenue (the tax base), increasing compliance tax public and reduce corruption.
A major challenge for government is to diversify the tax base, reduce corruption at collection points and educate the public about the civic duty to comply with tax obligations. The tax government has had some success. The number of registered taxpayers business increased substantially from 2955 in 2003/04 to 31,762 in 2008/09. In 2009, the Authority has received technical assistance to help build capacity and improve operational efficiency has helped the organization to adapt best international practices to local circumstances.
The share of development aid as a percentage of GDP has declined considerably over the years, a low in 2008 to about 2%, but should increase slightly in 2009 and 2010. The bulk of ODA in recent years has been in the form of budget support mainly from the European Union. Assistance specialist focused on the use of natural resources, including renewable energy, research on water management, rehabilitation and restoration of wetland areas, etc. In 2009, the share of management of natural resources in total aid was about 37% and grow to 50% in 2011. The next most favored sector is health, which received nearly 13% of total aid in 2009 and is expected to double its share in 2010 and 2011. Education receives about 10% of total aid, which should remain unchanged in the short term. The government expects that the total funding to a 36% increase in 2010 in nominal terms and substantially lessen in 2011 as projects are completed. It is vital for the government to mobilize international resources to overcome difficult moments approaching through better coordination and harmonization of policies with key bilateral and multilateral donors.

Social Context and Human Resource Development
 
The financial crisis is likely to erode some of the gains made in the country with the MDGs. A survey of labor forces conducted in 2008 indicated that the unemployment rate was 21% and rising in 2009 by percentage points. declining incomes, rising unemployment and limited social security provisions should increase the proportion of people living in extreme poverty by about percentage points in 2009.

It has of the highest rates of extreme poverty and low human development in SSA. The last decade has seen evolution in reducing hunger and malnutrition. The proportion of the people living on less than U.S. dollar per day declined from 45% in 1999 to 33% in 2008. However, evolution in human development has been severely affected by the HIV / AIDS. The country's ranking in the index of the United Nations Development Programme's Human Development in 2008 was 156 out of 186. Evolution towards achieving the Millennium Development Goals (MDGs) has been encouraging in the areas of universal primary education, and to some extent in infant mortality and maternal mortality.

The government provides free primary education and the partial financing of secondary education. Net enrollment in primary education increased from 57.7% in 1999 to about 84% in 2009. It has as well been improving the quality of education, with a significant drop in pupil-teacher ratio during this period. However, difficulties remain. According to a study by the National Bureau of Statistics and the Ministry of Education, there is an increase in repetition and dropout in particular part children in rural areas. Parents find it expensive to keep children in school. The planned withdrawal of the World Food Programme (WFP) to support primary school feeding programs can aggravate attendance rates. The government may have to provide resources to continue the program. This can be difficult with declining government revenues in the short term.

Modest evolution has been made in the last decade in reducing child mortality. From 2000 to 2007, infant mortality has declined at an annual rate of 3%, whereas the child mortality figure was 2%. This trend however will not reach the goal of reducing child mortality by third by 2015. The same applies to maternal mortality. Lesotho needs to double its efforts to be on track to achieve the health MDGs. HIV / AIDS plays an significant role derail efforts to improve health indicators.
The prevalencerate 24% of HIV / AIDS in Lesotho is the third highest in the world. The U.S. funded Millennium Challenge Account allows you to build health centers. The first of the 150 clinics will be open in 2010. The centers should provide better access to anti-retrovirals. Work on replacing the Queen Elizabeth II Hospital should be completed in 2011.