Lesotho is a small land-locked country, completely surrounded by its neighbor South Africa. It has a population of about two million and a gross domestic product (GDP) per capita of $1,020. Lesotho is classified as a low-income country. Its territory is mostly highland with its lowest point sitting at 1,400m above sea level (making it the highest base altitude in the world).
Previously a British protectorate, the nation gained its independence in October 1966. Lesotho is a constitutional monarchy that is ruled by a King as head of state and governed by a 33-member Senate and a 120-member National Assembly. In recent times, Lesotho’s political climate has been in flux with the country seeing its first coalition government after elections held in 2012. A snap election was held two years later in 2015 and another coalition government was formed after then Prime Minister Thomas Thabane prorogued parliament and advised the King to call fresh elections.
Two years later, following a motion of no-confidence passed against Prime Minister Pakalitha Mosisili, the country is headed for another snap election that is due to take place in June, 2017.
Growth is estimated to have registered at 2.5% in 2016/17, due to drought and weak regional and global growth prospects. Although the mining sector is expected to contribute to growth in the near term, narrowing fiscal space will limit the contribution of the public sector to growth.
Unemployment remains high at estimated levels between 24% and 28%. Although the headcount poverty rate (1.9 $/day PPP) fell from 61.3% in 2002 to 59.7%, estimates suggest that 56.2% of the population in 2016 still lived in extreme poverty. The slowness of poverty reduction goes hand-in-hand with high inequality, measured at 0.54 by the Gini coefficient.
Lesotho’s fiscal space is narrowing due to a decline in Southern African Customs Union (SACU) revenues from 25% of GDP in 2014/15 to 13.6% of GDP in 2016/17, and is expected to remain low in the medium term. The debt-to-GDP ratio stands at 48% of GDP in 2016/17, and the projected sharp decline in SACU revenues calls for a substantial and sustained fiscal adjustment to protect debt sustainability and the peg with the South African Rand.
The current account deficit of the balance of payments is estimated to have widened in 2016/17 with lower SACU revenues. Lesotho is facing a tough outlook with high current account deficits and lower SACU revenues to be able to finance the deficit. Fiscal consolidation is necessary for macroeconomic stability and higher growth in the medium to long term, despite the short-run negative impact on growth.
The country finds itself at a crossroads requiring new engines for growth, a more streamlined role for the state, and a dynamic private sector to seize opportunities in the Southern African market. Public spending stands at 50% of GDP in 2016/17. At 18% of GDP, the high public wage bill is one of the highest in the world, and is the biggest contributor to the public spending. The level of public spending is unsustainable with the narrowing fiscal space and it cannot be solely relied upon to drive growth.
With the second highest HIV prevalence rate in the world among adults, the government regards HIV/AIDS as one of its most important development issues, which it addresses through its HIV/AIDS National Strategic Plan. Between 1990 and 2005, life expectancy at birth declined from almost 60 years to 47 years, and currently stands at 49 years. HIV incidence is still high at 1.9 new infections per 100 person-years of exposure.
Several factors hinder Lesotho’s private-sector growth, affecting both Foreign Direct Investment (FDI) and the growth of local businesses. All quantitative measures suggest that business regulations seriously constrain growth. Despite making progress in streamlining business and property registration and in establishing and operating a credit bureau, Lesotho ranks low on key Doing Business Indicators, such as dealing with construction permits, accessing finance, and the cost of capital. These are constraints on domestic entrepreneurship, suggesting that the domestic private sector remains dependent on the state and non-tradable sectors.
(Source: World Bank)