Lesotho - Economy

Overview: The economy of this landlocked and mountainous country is inseparably linked with that of its much bigger and more developed neighbour, South Africa. A large number of Basotho work in South Africa – around 100,000 in the mid-1990s, falling to 62,200 in 2002 – and most of the government’s income comes from Southern African Customs Union import tariffs. Economic swings in South Africa are the biggest single influence on Lesotho’s economy. Moreover, the country has one of the world’s highest HIV infection rates.

Measures to diversify the economy have included encouragement of manufacturing, particularly of clothing, textiles, leather goods and footwear, and of tourism, including establishment of a ski resort in the Drakensberg. Manufacturing output grew by 9.8% p.a. 1980–90 and 5.9% p.a. 1990–2004. With the support of the IMF, economic policy has focused on investment in education, developing the private sector and more effective revenue collection.

The strong growth of the 1990s was interrupted by the outbreak of political unrest in late 1998. There was large-scale damage to property and loss of an estimated 4,000 jobs. The economy was plunged into recession and contracted by nearly 5% in 1998, compounded by rising unemployment due to the return of migrant mine workers. It only recovered in 2000, with a resumption of good growth in 2001 and this was sustained through the 2000s, becoming stronger in 2006 (7.2%) and 2007 (4.9%), with inflation generally under 10%.

From 2005 exporters of textiles and clothing faced stronger competition in the US market from Asian producers, as their quotas were raised. But in 2006 measures under the US African Growth and Opportunity Act underpinned a recovery in the clothing industry and diamond production rose.

Trade: Exports of goods and services account for 48% of GDP (2004). Lesotho’s main exports are manufactured goods including clothing, textiles and leather goods. The main imports are consumer, capital and other goods, fuels and food. Main trading partners are the US, which is the major export market, and the SACU countries (and especially South Africa), which provide more than 80% of imports.

Lesotho enjoys reciprocal duty- and quota-free access to the European market under an interim Economic Partnership Agreement on trade with the European Union.

Energy: The Highlands Water Development Project, undertaken jointly with South Africa and begun in 1986, has made the country self-sufficient in electricity and is providing income by supplying South Africa with water. The project comprises a series of dams and tunnels which will take water from the Orange river and tributaries in the Maloti mountains northwards to the Vaal industrial basin in South Africa. The first phase included construction of a 185-metre dam at Katse – the highest in Africa – and was completed in 1996. The whole scheme is projected to be completed by 2020 and has already provided substantial spin-off benefits of improvements in infrastructure and employment.