Figures for 2010 are estimates; for 2011 and later are projections.
Although there was recovery in LesothoÃ¢â‚¬â„¢s economic growth in 2010, the economy is likely to suffer another slowdown in growth in 2011 owing to a tight public-expenditure regime as well as to non-recovery in SACU revenues.Ã‚Â GDP growth in 2011 is projected at 2.9%. The deterioration in the fiscal position following the governmentÃ¢â‚¬â„¢s expenditure expansion in response to the economic slowdown in 2009 raised questions on the sustainability of such a course of action. SACU revenues, in particular, which account for nearly 60% of total tax revenues, declined by about 23%, generating a 4.9% deficit in the fiscal balance in 2009. This deficit is expected to widen further to 9.8% and 11.3% in 2010 and 2011, respectively.
Significant recovery in the volume and prices of diamond helped to increase export revenues in 2010. The Liqhobong and Kao mines, which had suspended operations during the financial crisis, have resumed operations, and new mines, Mothae and Lemphane, have started up. On the other hand, exports from the textiles sector are likely to remain weak because of competition from Asia and slow recovery in the United States (US). Lesotho is also a relatively high-cost source for American buyers compared with its Asian and South American competitors. This is partly explained by the unit costs faced by LesothoÃ¢â‚¬â„¢s producers, which in 2010 were almost 80% higher than those of Pakistan, the lowest-cost supplier. Appreciation of the rand, to which the loti (plural: maloti) is pegged, has also reduced the competitiveness of the textiles and clothing sector. The rand is reported to have appreciated by more than 8% in 2010. The Lesotho Textiles Exporters Association has requested government support to address this problematic situation in the short run. Such support is unlikely to be granted, however, as the government is facing a tight fiscal position.
While the recovery in the mining sector has helped absorb returnees from South AfricaÃ¢â‚¬â„¢s mining sector, the growth in export receipts from this sector is not expected to offset the decline in remittances, which have been a major source of income for many Basotho families for decades. These factors, together with the low SACU revenues, are putting pressure on the current account balance. This is worsened by the fact that Lesotho is due to repay an estimatedÃ‚Â LSLÃ‚Â 2.9Ã‚Â billion to the SACU Common Revenue Pool (CRP) in 2010 and 2011.Ã‚Â Net SACU revenue flows are therefore expected to fall by 57%, fromÃ‚Â LSLÃ‚Â 4.9Ã‚Â billion in 2009/10 to just LSLÃ‚Â 2.1Ã‚Â billionÃ‚Â in 2010. The current-account balance is estimated to worsen from its 2009 USDÃ‚Â 7.9Ã‚Â million deficit by nearly USDÃ‚Â 400Ã‚Â million more in 2010, widening the deficit from 0.2% to 14.9% of GDP during this period.
Despite economic recovery in South Africa and in the global economy, SACU revenues, which averaged 37% of GDP in 2006-08, are not expected to recover to pre-crisis levels in the future. Continuing trade liberalisation in the region, in particular the institution of a Southern African Development Community (SADC) customs union and other bilateral arrangements, along with a possible change in the revenue sharing formula may result in a decline in trade taxes as a share of total tax revenue. Projections suggest that SACU revenues will stabilise at around 20% of GDP in the medium term.
The worsening fiscal and current account deficits have led the government of Lesotho to embark on policy- and structural-reform processes aimed at fostering private-sector activity. Such reforms include the enactment of a new Land Act and revisions to the Financial Institutions Act. While fiscal adjustments are necessary for macroeconomic stability, expenditures on social sectors also need to be maintained. Maintaining high social expenditures, particularly in the health sector, is important because of the high prevalence of HIV/AIDS. In addition, Lesotho is the smallest and the only low-income country (LIC) in the SACU region. This means that stimulating private-sector investments is imperative for accelerating growth and productivity in the economy, all of which are important for raising per capita income. The need for a vibrant private sector is even more critical in a context of fiscal constraints, which argue against increasing the role of government in propelling economic growth in the medium term, especially given its current high share of GDP.
Inflation in 2010 stood at 7.3%, the same as in 2009, but increases in electricity tariffs and the projected depreciation of the rand in the year ahead are likely to push up inflation in 2011 before declining to 6.8% in 2012. Inflation is therefore not expected to meet the targeted 3-6% policy range. Regarding the exchange rate, the projected macroeconomic imbalances would have implied a higher depreciation of the loti than that projected due to its pegging to the rand. The focus on improving the business environment to a level similar or better than that of neighbouring countries is therefore important for Lesotho to attract foreign capital. This would compensate the policy limitations that the country is facing given the existing arrangements in the Common Monetary Area (CMA), in which the South African Central Bank determines monetary policy for the region.
Although the agricultural sector is vital for the rural livelihoods of the Basotho, its importance as a growth driver has been dominated by services and industrial activities. Almost 74% of the rural population depends on agriculture for its livelihood, but at the sectoral level, agriculture currently constitutes less than 8% of total GDP compared with more than 42% for services and about 19% for manufacturing. Agriculture is largely based on smallÃ¢â‚¬â€˜scale farming with little mechanisation. This is explained by the land-tenure system and to some extent by the terrain of the country. Moreover, the sector is vulnerable to seasonal rainfall levels. As a consequence, productivity in the agriculture sector is low. Income derived from agriculture is therefore minimal, partly explaining the high poverty rates in the rural areas. In response, the government is promoting block farming, where land holdings belonging to different owners are combined into larger blocks that would allow single-crop production so that it becomes viable to use machinery and benefit from extension services.
Lesotho is also food insecure and relies on maize imports from South Africa, even during good seasons. In this context, the government, in conjunction with the United Nations Food and Agricultural Organization (FAO), instituted an input-supply scheme. In particular, the government introduced a subsidy of between 30 and 50% on seeds and fertiliser in 2009 while FAO provided inputs to vulnerable families. As a result of these interventions, yields for maize increased by 90% and output for cereals rose by more than 79% in 2009. These interventions were continued for the 2010 season. However, the crops were affected by excessive rain in January 2011.
Recent investments in industry, especially in the textiles and clothing sub-sector and in mining and quarrying, have generated new job opportunities in the country. Textiles and clothing, which accounts for over 80% of all manufacturing jobs, was hit by the global financial crisis. Employment in the textiles and clothing sector declined as a result, shedding about 13% of jobs in 2009 compared with the 2008 level. A slight recovery in employment occurred in 2010, with employment increasing from just over 31Ã‚Â 000 jobs to 32Ã‚Â 000. Current total employment in the sector remains significantly low compared with the peak of about 48Ã‚Â 000 jobs in 2004. Women, who constitute more than 80% of the textiles-sector workforce, have been most affected by these job losses. With about 87% of manufacturing jobs being provided by the textiles sector, job losses in this sector are more visible than in others despite the fact that wages in it are lower than in others. Moreover, the increasing competition from producers in Asia is making the clothing-sector contribution to future economic growth uncertain. In contrast, the mining and quarrying sector is expected to grow by an average of 14.3% from 2009 to 2012. Activity atÃ‚Â the LetÃ…Â¡engÃ¢â‚¬ÂlaÃ¢â‚¬ÂTerae mine is expected to anchor growth in the sector. The Liqhobong mine, which reopened at the end of 2009, and the new Mothae mine, which started operations in 2010, are both expected to produce at full capacity in 2012.Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â Ã‚Â
Construction services have shown strong growth Ã¢â‚¬â€œÃ‚Â almost 7% between 2007 and 2009Ã‚Â Ã¢â‚¬â€œ but slowed down in 2010. Overall, services have grown at an average rate of about 3% between 2008 and 2010. This growth has been supported by investments in infrastructure, especially in the Metolong Dam, which is also receiving joint financing from the Millennium Challenge Account (MCA) and the Lesotho Highlands Water Project II (LHWP II), a Lesotho and South Africa bi-national water project. The Metolong Dam, which is expected to cost about USDÃ‚Â 413Ã‚Â million is scheduled to be completed by 2013 and will help to meet the increasing domestic demand for water resulting from rapid urbanisation. Another flow of about LSLÃ‚Â 12Ã‚Â billion (USDÃ‚Â 1.7Ã‚Â billion using the December 2010 exchange rate) in investment for the LHWP II, planned for 2012 to 2017, is likely to make infrastructure projects a dominant factor in supporting LesothoÃ¢â‚¬â„¢s growth over this period.
Phase 2 of the LHWP includes the construction of the Polihali Dam at Tlokoeng in the Mokhotlong District. The Polihali Dam involves the construction of a 165-metre-high dam wall and a 2.2Ã‚Â billion cubic metre reservoir. Water harvested from Polihali will flow into South Africa through a series of transfer tunnels via the Ash river in Free State and then into the Vaal river system. When completed, this project is expected to generate significant revenues for Lesotho.
Other services sectors have also grown significantly in recent times. Transport and communications, and the financial sector grew by more than 11% between 2008 and 2010, while the wholesale and retail sector recorded 4.7% over the same period. The financial services reform and innovations expected to simplify transactions might result in further growth of the sector in the next three years.
A slowdown in total investment and consumption, as well as the projected high currentÃ¢â‚¬â€œaccount deficit, is expected to result in low growth in 2010 and 2011. Growth in public and private consumption in 2010 has been estimated at 6% and 4.8%, respectively, down from more than 16% for both expenditure components in 2009. The sharp slowdown in private consumption was a result of an 8% fall in remittances from South Africa in 2010 compared to 2009. In spite of a projected recovery in remittances in 2011, remittance flows are expected to remain below their 2008 level until 2013. The slowdown in total investment expenditures was less than that recorded for consumption; investment growth in 2010 was 5% lower than levels realised before the financial crisis. Foreign direct investment (FDI) has also been declining, from its peak of USDÃ‚Â 106Ã‚Â million in 2007 to USDÃ‚Â 64Ã‚Â million in 2010. Economic growth in Lesotho would have been severely affected were it not for the continuing infrastructure investment projects, which are being supported by donors and government loans.
Recent economic developments suggest that while agriculture remains important for ensuring broad-based growth, diversifying production and generating jobs in other sectors, manufacturing and services in particular, have a greater potential to reduce poverty. Experience from the investments in the textiles and clothing sector, and more recently in mining and electronics, has demonstrated LesothoÃ¢â‚¬â„¢s potential to address its unemployment problem. To realise increased investment flows, however, the country has to do more to establish an investment-friendly environment, a process that has already begun but might need to be accelerated.
Figures for 2010 are estimates; for 2011 and later are projections.