Lesotho - African Economic Outlook · Fiscal policy remains dependent on the performance of SACU...

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Lesotho2012

LesothoThe Lesotho economy has partly recovered from the impact of the global economic crisis despite the effectsof floods in the early part of 2011. Over the medium-term economic growth will remain moderate,underpinned by the good performance of the mining sector, reconstruction activities to repair the damagedone by the floods, investment in the Phase II of Lesotho Highland project and rehabilitation ofinfrastructure affected by the floods.

Poverty, which is closely linked to inequality and unemployment, especially among the youth, and HIV/AIDSwill remain the main challenge to the country’s growth.

Private sector participation in the economy continues to be challenged by various structural constraints andyet has very high potential for creating employment and alleviating poverty.

Overview

Lesotho’s economy showed signs of economic recovery in 2009, following the global financial crisis; however,the impact of floods during early January, 2011 has slowed the pace of the expected recovery. Growth isestimated to have reached 3.1% in 2011 (down by 2.5 percentage points compared to 2010) due to recovery ofthe manufacturing sector and high demand of diamond exports. Notwithstanding projected higher importrequirements and low Southern African Customs Union (SACU) revenue, in the medium-term, growth is forecastto average 4.8%, driven by investment in phase II of the Lesotho Highland project and rehabilitation ofinfrastructure affected by the floods (Figure 1 and Table 1). Fiscal policy remains dependent on the performanceof SACU revenue (in particular, the core SACU revenue, which is non-cyclical) which will average 27% of GDPin the medium-term, much higher than the average of 15% (2010-2011). Lesotho has traditionally relied onSACU revenue to fund close to 60% of its national budget. Lesotho’s share of SACU revenue is expected todecline from M4.9 billion in 2009/10 to M1.7 billion in 2010/2011. The government’s budget of M13.7 billion isbased on the assumption of recovery in SACU recovery to M5billion and M4.7 billion in 2012/13 and M4.7 billionin 2013/14.

However, the Government medium-term fiscal sustainability plan entails limiting the fiscal deficit to 3% of GDPwhile maintaining recurrent spending constant in real terms. The resultant effect of this strategy would be tomaintain gross international reserves at five months of import cover and to have a sustainable debt position.Unemployment, especially among the youth, remains a real challenge to the economy of Lesotho. Theemployment to population ratio stands at 54.1% and it is estimated that 15.3% of the youth (25-29 age bracket)are unemployed. Unemployment is compounded by the small private sector which cannot absorb most of theyouth not employed by the public sector.

Lesotho has in the past few years embarked on important reforms mostly related to public financialmanagement in order to improve efficiency of resource allocation. It also adopted a strategic approach toreduce the public debt to sustainable levels by using accumulated reserves to service the debt and to buildadequate levels of international reserves. In the medium-term, the rationalization of expenditures focusingmainly on the productive components and pegging overall budget to core SACU revenues will enhance thequality of economic growth. There are fears that the expiration of concessions on textiles under the WorldTrade Organization (WTO) in 2012 will affect the country’s exports to the USA and hence economic growth inthe medium-term. Economic diversification with emphasis on the value chains in agriculture, industry andmining will help mitigate the potential risks from the expiration of the WTO concessions and their impact on thetextile industry. These, coupled with improvement of the business environment, should help to attractinvestment including FDI which will impact positively on economic growth in the medium-term.

Youth unemployment is a critical development challenge in Lesotho. According to the 2008 Labour Force Survey(LFS) youth labour force (15-24 years of age) participation rate stood at 45.1%. At 52.5%, males had acomparatively higher participation rate than females (37.8%). The effort to ease the challenges of integratingyouth into the labor market through the promotion of self-employment led to the creation of the YouthEmployment Promotion Project (YEP) in 2006. The recent evaluation of the YEP, by UNDP, found a very highlevel of satisfaction with the programme on the part of the Government of Lesotho, as evidenced by thefinancial subvention the government will be making to the expanded programme in coming years.

African Economic Outlook 2012 2 | © AfDB, OECD, UNDP, UNECA

Figure 1: Real GDP growth (Southern)

Figures for 2010 are estimates; for 2011 and later are projections.

Table 1: Macroeconomic Indicators

2010 2011 2012 2013

Real GDP growth 5.6 3.1 4 4.5

Real GDP per capita growth 4.6 2.1 3 3.4

CPI inflation 3.6 4.7 6.7 5.3

Budget balance % GDP -3 -8 -3.4 -0.5

Current account % GDP -22.5 -17.3 -9.7 -14


Real GDP growth (%) Southern Africa - Real GDP growth (%) Africa - Real GDP growth (%)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-2%

0%

2%

4%

6%

8%

Real

GDP

Gro

wth

(%)


Recent Developments & Prospects

Table 2: GDP by Sector (percentage of GDP)

2006 2011

Agriculture, forestry, fishing & hunting 7.9 8.6

Mining and quarrying 4.7 7.9

of which oil - -

Manufacturing 21 12.8

Electricity, gas and water 5.1 4.7

Construction 4.6 6.5

Wholesale and retail trade, hotels and restaurants 9.1 9.1

of which hotels and restaurants - -

Transport, storage and communication 6.4 6.7

Finance, real estate and business services 18.6 17.7

Financial intermediation, real estate services, business and other service activities - -

General government services - -

Public administration & defence; social security, education, health & social work - -

Public administration, education, health 11.3 12.5

Public administration, education, health & other social & personal services - -

Other community, social & personal service activities - -

Other services 11.4 13.6

Gross domestic product at basic prices / factor cost 100 100


Economic growth at 3.1% in 2011 was lower compared to the previous year when Lesotho showed modestrecovery from the impact of the economic crisis. The drop in growth mainly reflected the impact of the floods inthe early part of the year which damaged infrastructure, crops and livestock. This notwithstanding, the recoveryof the prices of rough diamonds in 2011 resulted in renewed efforts in Lesotho to re-open mines that had beenshut down (Liqhobong and Kao) at the peak of the financial crisis and to open new ones at Mothae andLemphane.

In the medium-term, growth is expected to be broad-based and average at 4.0% annually. Growth will besupported by public investment as well as private sector participation. The secondary sector, which isdominated by manufacturing constituted 29.7% of GDP in 2010. This sector has been one of the majorcontributors to employment and is expected to play an important role in the medium-term. In support of thissector, the government has allocated US$10 million (US$: 10 Maloti) in the 2012 budget to enhancemanufacturing opportunities and markets. In addition, the new jewellery manufacturing and diamond centre inMaseru which is due to start operation in February 2012 is expected to promote export of products withsubstantial value added. The construction sub-sector is expected to be one of the main anchors of economicgrowth in the medium-term. The sub-sector is expected to benefit from activities related to the implementationof the US funded Millennium Challenge Account (MCA) such as the construction of the Metolong Dam as well asphase II of the Lesotho highland project.


The agricultural sector contributed 8.6% of GDP in 2011 and remains the main source of employment andsustenance for the majority of the rural population. Unfortunately, the sector was hit hard due to heavy floodingin the early part of 2011. In the medium-term, agriculture is expected to provide agro-based inputs to industrythrough the planned government diversification strategy which will be supported by Public -Private Partnershipin irrigation infrastructure. Public investment in rehabilitation of irrigation schemes and training centres (US$ 6million) will spur the sector’s contribution to GDP in 2011 and the medium-term.

Tourism is another sector with high employment potential, but its contribution to GDP, at 1.4%, remains verylow. Given the country’s location, there are plans to establish a joint tourist circuit with South Africa. In thisrespect, the planned investment of US$ 23 million will unlock the country’s potential and raise the sector’scontribution to GDP in the medium-term.

The overall economic environment in 2011 remained stable. Inflation fell from 7.2% in 2009 to 3.6% in 2010,and then rose to 4.7% in 2011. The rise in the consumer price index (CPI) during 2011 resulted mainly fromincreases in the prices of consumer goods, particularly food and petroleum products. This was in line with globaltrends in the prices of food and crude oil. In the medium-term the influence of these factors is likely to continuethereby leading to further price hikes. However, the projections by government indicate that inflation willremain below 7% over the medium-term. This is largely in line with the predictions AEO 2012 predictions.

On the aggregate demand side, the private sector was the main contributor to growth in gross investment in2011 and this dominant role is expected to continue in the medium-term. This underscores the need to enhancethe enabling business environment and public private partnership. Public consumption which contributed 1.7%to growth is expected to be scaled down to 1.3 % to make way for increased private investment. Thecontribution of private investment to growth is expected to average 1.4% annually over the medium-term. Thecontribution of exports to growth was 5.9% in 2011 and this will decline to an average of 1.7% annually in partdue to the impact of the expected expiration of WTO textile concessions. The above notwithstanding, growth inexports will more than outweigh the negative impact on GDP of increased imports to support construction.


Macroeconomic Policy

Fiscal PolicyIn the wake of the drop in the South African Customs Union (SACU) revenues which was prompted by theimpact of the global economic crisis, Lesotho’s government has been cautious. However, fiscal policy in 2011was more expansionary compared to 2010. As a result, the overall deficit worsened to 8% of GDP from 3%.Apart from the drop in SACU revenue, the rise in expenditures by 1.9% of GDP also contributed to theworsening fiscal deficit. Expenditures were mainly driven by increased interest payments, employercontributions, subsidies and payments of extra budgetary units. Over the medium-term, the fiscal stance will beless expansionary and the fiscal deficit is forecast at below 4% of GDP in 2012. This partly reflects thecommitment to eliminate unproductive expenditures. The main focus will be on supporting capital spendingwhile maintaining recurrent spending at the same level in real terms. The verification of domestic arrears isunderway awaiting the formulation of an audit plan by the government of Lesotho. In the meantime, the lineministries have been instructed to undertake monthly verification of data in the system and to report anycommitment arrears. The objective is to avoid accumulation of domestic arrears which tend to erode publictrust in government, and undermine the gains in economic stability achieved thus far. The government has inplace a medium-term framework with a spending ceiling which is expected to enhance the credibility ofgovernment planning and avoid arrears in domestic commitments.

Following the global financial crisis, the capacity of the public sector to mobilize domestic tax revenues wasreportedly affected in many countries. In Lesotho domestic resource mobilization efforts had remained strong.However, domestic resource mobilization in terms of the share of revenue to GDP was at 38.6% in 2011 downfrom the average of 56% for the previous two years. Reforms aimed at strengthening the mobilization of taxrevenues including VAT and the capacity of the revenue authority have served to boost efforts at raisingdomestic revenue. The ratio is projected to increase to 47% of GDP in the medium-term owing to the expectedrecovery in SACU revenue. This is predicated on a projected increase in international trade flows to the SACUregion as the global economy recovers and growth in taxable income of residents. This underlines theimportance of having inclusive growth that will ensure that the vast majority of the population is productivelyemployed and paying taxes. Equally, it points to the need to improve the business environment and createimportant positive externalities that will give attractive signals to investors and development partners.Additionally, improving fiscal performance in the medium term would call for quality government expendituresthat will deliver socially productive outcomes. The authorities would have to desist from sizeable annualincreases in the wage bill as revenue improvements are expected to remain modest over the medium-term(Table 3).

Table 3: Public Finances (percentage of GDP)

2003 2006 2007 2008 2009 2010 2011 2012 2013

Total revenue and grants 47.4 52.3 62.3 64.5 62 67.4 56.4 63.5 65.6

Tax revenue 36.7 45.9 55.4 55.3 54.2 57.7 38.6 47.3 47.7

Oil revenue - - - - - - - - -

Grants 4.2 1 1.6 2.1 1.4 4.9 9.5 10.9 12.6

Total expenditure and net lending (a) 52 49.3 50.8 55.6 60.1 70.5 64.4 66.9 66.1

Current expenditure 40.9 41.2 39.9 42.7 44.8 49 43.2 45.7 45.3

Excluding interest 37.8 38.6 37.4 40 43.8 48.2 42.6 44.4 44

Wages and salaries 15.4 14.5 15.6 13.8 14 17.8 16.3 16.5 15.6

Interest 3.1 2.6 2.5 2.8 1 0.8 0.6 1.3 1.3

Primary balance -1.5 5.6 14.1 11.7 3 -2.2 -7.4 -2.1 0.8

Overall balance -4.6 3.1 11.6 8.9 2 -3 -8 -3.4 -0.5



Monetary PolicyA key goal of the country’s monetary policy is to maintain Net International Reserves (NIR) at or above theminimum of USD 956 Million. These reserves are kept to ensure the parity between the South African Rand andthe Loti is maintained. This also acts as an anchor to inflation since the bulk of Lesotho’s imports are from SouthAfrica. In 2011, the economy remained stable. Inflation was moderate at 4.7% in 2011; this was underpinned byincreases in the prices of consumer goods, particularly food and petroleum products. IMF program monitoringreports indicate that the monetary policy indicators are on target. The reserves were US970 and would cover4.7 month of imports of goods and services. In the medium-term, the reserves are targeted at five months ofimports and inflation is targeted to remain below 7%, annually.

Economic Cooperation, Regional Integration & TradeThe deficit on the external current account which was 17.3% of GDP in 2011 is projected to fall to 9.7% in 2012as a result of growth in export volumes, increase in current transfers and the factor incomes over the sameperiod.

Lesotho has a long history of membership in regional groupings. It is currently a member of the Southern AfricaDevelopment Community (SADC), SACU and the (CMA). The country has been very active in joining newinitiatives. In 2007, Lesotho, together with Botswana, Mozambique and Swaziland, signed an Interim EconomicPartnership Agreement with the EU after extensive negotiations which began in 2004. Similarly, in August 2006,Lesotho and other leaders of SADC endorsed a trade protocol, which led to the launching of the SADC FreeTrade Area in August 2008. Increased regional integration and the development of new partnerships with Asiancountries, China in particular, has opened up new markets for exports. While the bulk of Lesotho’s exports aredestined for the US market, India and Pakistan are increasingly becoming important trading partners providinginputs into the textiles and clothing sub-sector.

Additionally, the government has effectively explored and taken advantage of opportunities arising fromLesotho’s geographical location, including through the Highlands Water Project and favourable roadinfrastructure to boost economic growth. However, the process of economic diversification and transformationhas been slow. According to World Economic Forum, on a scale of 1-7, seven being the highest score in globalcompetitiveness, Lesotho’s score fell from 3.5 to 3.3 between 2009 and 2011, respectively.

Development partners including the World Bank and the African development Bank are working closely with thegovernment to support efforts towards economic diversification and export competitiveness. According to the2011 Global Competitiveness Index, Lesotho is ranked 135 out of 142 economies. The country’scompetitiveness is largely affected by structural factors which include high utility costs in particulartelecommunications and energy supply shortages. The country has in the recent past embarked on reforms suchas the Land Act passed in 2010 and establishment of a one stop Centre for business counseling and mentoringthat have facilitated improvement in the investment climate. However, more reforms are needed in order toattract more domestic and Foreign Direct Investment (FDI). Lesotho’s inflows of FDI averaged US$ 93 millionannually for the period 2006-2007. However, from 2008 onwards the FDI inflows dropped to less than US$ 57million compared to 2006. Unlike most African countries, close to 90% of FDI flows to Lesotho had targetedexport oriented manufacturing. Most FDI originates from Taiwan whose outward FDI as a share of total trade inmerchandise and services has declined from close to 5% in 2007 to 4% in 2010.

Cross border trade plays an important role in improving the social and economic well-being of bordercommunities by generating employment and incomes to support the livelihoods of these communities. Crossborder trade is sensitive to government policies with respect to border controls for visa and onerous proceduresfor customs clearance at the border including delays due to limited working hours. In Lesotho, cross-bordertrade remains a challenge. The country was ranked 147 out of 183 with regard to cross-border trade (2012Doing Business Index). Lesotho faces various challenges with regards to efficiency and effectiveness of theclearance process by Customs and other border control agencies. The government is taking steps to improve itsranking. It plans to open its border twenty four hours a day and is recruiting competent staff to handle cross-border transactions. Since Lesotho has only one neighbor, South Africa, harmonization of border policiesremains critical in the medium-term. Combined efforts tailored towards single stop customs practices in cross-border clearance would be required.


Table 4: Current Account (percentage of GDP)

2003 2006 2007 2008 2009 2010 2011 2012 2013

Trade balance -48.5 -47 -50.6 -39.5 -49.1 -50.2 -45.4 -47.9 -48.1

Exports of goods (f.o.b.) 57.3 49.3 50.9 53.6 42.2 40.1 46.1 49.8 49.7

Imports of goods (f.o.b.) 105.8 96.3 101.6 93.1 91.3 90.2 91.5 97.7 97.8

Services -3.6 -2.5 -2.2 -16.6 -20.5 -24.7 -24 -23.3 -25

Factor income 25.6 26.8 26.5 26 27.1 23 22.7 23.3 23.4

Current transfers 17.5 27.4 39.7 42.2 41.9 29.4 29.4 38.2 35.7

Current account balance -9 4.6 13.4 12 -0.6 -22.5 -17.3 -9.7 -14


Debt PolicyThe bulk of Lesotho’s total public debt (99.6%) is owed to the World Bank and the African Development Bank.The debt owed to these institutions is concessional which partly explains Lesotho’s moderate risk of debt stressover the medium-term. According to the 2010 debt sustainability analysis jointly conducted by the World Bankand the IMF, Lesotho’s present value of external debt to GDP was 28.3% in 2010 far below the 40% indicativethreshold. In the medium-term, the ratio is projected to be 2% above the threshold on the back of new nonconcessional borrowing to finance the Metelong Dam project.

Lesotho’s net barter terms of trade has declined by 33% over the decade (2000-2010). This decline in terms oftrade and exchange rate depreciation could make external debt unsustainable. This underlines the need tosupport government’s diversification drive aimed at making the economy more resilient to these shocks. Fiscalconsolidation and mobilization of concessional resources to finance development remain critical to the medium-term debt sustainability.

Figure 2: Stock of total external debt (percentage of GDP) and debt service (percentage of exports ofgoods and services)


Debt/GDP Debt service/Exports

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130%

20%

40%

60%

80%

100%

120%

Perc

enta

ge


Economic & Political Governance

Private SectorThe country’s private sector has remained small contributing 14% to GDP. The sector is comprised of a widerange of businesses from micro to medium enterprises and affiliated business associations. These include the taxiowners association, truck owners associations, small traders associations, street vendors associations and textileexporters. Since the inception of the African Growth and Opportunity Act (AGOA) in 2000, the textile industryhas benefited from US trade concessions. Consequently, Lesotho’s manufacturing subsector, in particular,exports of clothing and textiles, has become a major source of economic growth and employment, currentlyemploying over 40,000 workers. However, the sector has been affected by the weak demand, particularly, inthe US, and by the imminent expiration of US concessions in 2012.

Apart from this, the private sector is confronted with various challenges including an unfavorable businessenvironment. According to the 2011 Doing Business Indicators, the private sector in Lesotho is constrained bydifficulties in registering property, obtaining permits, accessing credit, and protecting investors. These are areaswhich are critical for attracting and retaining investors including Foreign Direct Investment (FDI). However, thegovernment is taking steps to improve the business environment through various reforms. The new Land Bill,which was passed by Parliament and assented to by the King in 2010, is expected to ease access to land. More isrequired to improve the enabling environment for the private sector. For example, according to the GlobalCompetitiveness Index (GCI) 2011-2012, with regard to procedures for starting up business, Lesotho is ranked63 out 142. However, in terms of market dominance its rank is 108th out of 142 countries. This is due to thepresence of monopolies in some sectors of the economy such as telecommunications. The government is takingsteps to address the above including the enactment of the Companies Act in 2011 which simplified theprocedures and requirements for registering a company. The government has already appointed an able deputyregistrar and registry clerks and aims to reduce the number of days for registering a company to one day. Theautomation of the Companies Registry and the implementation of a new business plan for the One Stop BusinessFacilitation Centre will greatly improve the business climate.

In addition, human capacity constraints and lack of adequate resources have continued to prevent theimplementation of laws that protect property rights resulting in a backlog of lawsuits. Despite this, the recentlyestablished Commercial Court is making some progress in this area.

Financial SectorThe financial sector is governed by the Central Bank of Lesotho Act of 2000 and the Financial Institutions Act of1999. The sector is still small comprised of four commercial banks, five insurance companies, two collectiveinvestment schemes, insurance brokers, and credit and savings cooperatives. Given the small number ofcommercial banks, competition in the sector is limited and the technology being used is not sophisticated. Thesector is still affected by various constraints which have limited the extent of service provision over space andtime. These include poor communications infrastructure, in particular, internet access and bandwidth (Lesothoranked 140 out of 142 economies by GCI). Additionally, the 2011 GCI identifies access to finance among themost problematic factors for doing business in Lesotho. In general, financial development is still poor (ranked120 out of 142 economies by GCI). Notwithstanding the above constraints, Lesotho’s financial sector remainedsound during and after the global financial crisis. The share of non-performing assets to total assets was 2.9% byend June 2011 compared to 3.1% in December 2010. The credit to deposit ratio increased from 35% in 2010 to41% in 2011.

However, to further enhance the sector and reduce the risks arising from inadequately regulated non-bankfinancial institutions, the 2011 Financial Institutions Act is expected to strengthen the prudential regulations ofSavings and Credit Cooperatives and other non-banking financial institutions. A credit reporting bill has alsobeen submitted to Parliament. Once passed into law, both of these will enhance the financial sector. Moreover,coordination with the Anti-money Laundering and Financial Intelligence Unit will enhance the resilience of thefinancial sector. According to the 2011 US State Department Money Laundering Report, Lesotho is steadilyincreasing its capability to control and monitor money laundering.

The Millennium Challenge Corporation in conjunction with International Fund for Agricultural Development(IFAD) are working with the government on the modernization of PostBank aimed at extending financialservices to rural areas and providing financial products to small and medium enterprises. These reforms areexpected to enhance access to financial services and ensure the stability of the financial sector.

Public Sector Management, Institutions & ReformThe budget process brings together various stakeholders during budget preparation. The budget preparations


are guided by the Medium-term expenditure framework and the ceiling dictated by the national resourceenvelope. Absorptive capacity continues to constrain resource utilization: while some ministries fail to use uptheir budget allocations by the end of the year, other ministries are unable to meet all their goals because of alack of financial resources. However, with improved budgeting and deepening of reforms including publicfinancial management, many of the problems that affect resource use will be addressed. The country’sdecentralization has advanced (already approved by Cabinet) and an Integrated Financial Management System(IFMIS) is being extended to all government agencies. It is expected that this will improve transparency inresource use and direct resources to the target beneficiaries.

In terms of the quality of management, recruitment and hiring of labour, as well as award of contracts, remainmerit-based. This is supported by the Public Sector Act and the 2005 amendment to the Act which fosterseffectiveness and efficient use of public services with zero tolerance for corruption.

Natural Resource Management & EnvironmentCommendable progress was made towards ensuring environmental sustainability. Lesotho has in place a policyframework that allows it to protect and enhance the natural and cultural environment for the benefit of bothpresent and future generations and to endeavor to assure to all its citizens a sound and safe environmentadequate for their health and well-being. Lesotho, has a National Environmental Action Plan (NEAP) formulatedin 1989 and thereafter launched a National Action Plan (NAP) to implement Agenda 21 in May 1994. TheGovernment of Lesotho endorses and adheres to the internationally accepted principles of the 1972 StockholmDeclaration and the 1992 Rio Declaration as adopted by the United Nations Conferences.

Additionally, it endorsed the Convention on the Protection of Fauna and Flora; Convention on Fishing andConservation of the Living Resources of the High Seas; Convention on Climate Change, Convention onBiological Diversity, and Montreal Protocol for the Protection of the Ozone and National Vision for Lesotho hasbeen developed. In order to follow up on the environmental policies and their mainstreaming in sectoralplanning, in 1994 a National Environment Secretariat (NES) was created. In terms of the new Environment Act,2008, the former NES is now known as the Department of Environment (DoE) and this department isresponsible for administering Environmental Impact Assessment (EIA) in Lesotho.

Lesotho has performed well in terms of integrating the principles of sustainable development into the countrypolicies and programs and reverses any loss of environmental resources. The proportion of land area coveredby forest has increased from 1.3% in 1990 to 1.4% in 2010, while consumption of ozone depleting substances inODP[1] metric tons fell from 6 to zero between 1995 and 2005 and has remained at the new level as of 2009.

The Lesotho highlands power project (LHPP) is estimated to generate 60000 megawatts of wind power and4000 Megawatt of hydropower. Lesotho offers the opportunity to build one of the highest wind-farms in theworld, with more than 80% of its territory lying at least 1,800m above sea level. The electricity generated bywind and water will be used to satisfy domestic demand and exported to South Africa that is keen on keepingpace with growing energy demands.

Political ContextLesotho is a constitutional monarchy with a bicameral legislature comprising a Senate and a National Assemblyelected since 2002 under a mixed first-past-the-post and proportional representation system with elections heldat the end of a five year term. The country has 11 opposition parties and over the last decade, it has had threeconsecutive democratic elections, with the Lesotho Congress for Democracy Party maintaining power during thewhole period. The plurality of political parties and intense political contestation and constant splits of politicalparties undermined stability resulting in elections-related protests during the last election in 2007. Interventionsby the Southern African Development Community (SADC) and other Civil Society Groups helped to resolve thesituation. New parliamentary elections are scheduled for 2012. In preparation for the forthcoming elections in2012, the competing parties have decided to sign an election roadmap. This is expected to diffuse tensionamong the political parties and pave the way for free and fair elections.


Social Context & Human Development

Building Human ResourcesThe attainment of Millennium Development Goals (MDGs) targets remains a major challenge despite someprogress towards achieving universal primary education, promotion of gender equality and womenempowerment. A lot of progress has been made in the education sector. Net primary enrollment was at 73% in2007 facilitated by the introduction of Universal Primary Education in 2000. Other indicators, such as the adultliteracy rate, proportion of pupils in standard one who reach standard five, pupil teacher ratios, pupil classroomdropout rates and primary completion rate are all on track. The rest of the MDG targets are registering slowprogress and meeting these targets is likely to be difficult. Lesotho’s human development indicators have showncommendable improvement relative to 2000.

Lesotho’s Human Development Index (HDI) improved modestly from 0.397 in 1980 to 0.427 in 2010 (above theSub-Saharan average of 0.389). However, the overall standard of living is still low. The effects of the globaleconomic recession as well as the HIV/AIDS pandemic continue to impact human development. According to2010 statistics, the HIV prevalence in the population aged 15-49 was 23.2%. Government is taking measures toimprove the efficiency of the health system. To this end, it adopted and is implementing the National Health andSocial Welfare Policy and Health and Social Welfare Strategic Plan (2004/05-2010/11). During the fiscal year2012/2013, an estimated amount of M 0.8 billion equivalent to 2.8% of the budget has been earmarked for thedevelopment of health infrastructure, immunization, TB control as well as the purchase and distribution ofdrugs.

Poverty Reduction, Social Protection & LabourOver the last decade Lesotho has made modest progress in terms of economic growth and economic well-being.The country has been able to transform from a subsistence to a modern economy with per capita income of US$1000 in 2010 and annual per-capita GDP growth of 2.2% was registered in 2010. The population has higher andmore predictable incomes and the percentage of the population living below US$1.25/day fell from 48 to about43% between 1995 and 2010. The aftermath of the global recession has resulted in enormous demand onlimited resources and the social sector was not completely spared. It is estimated that 27.5% of the population isat risk of multiple dimensional poverty (Government of Lesotho, 2011). Some social protection programsincluding support to extended orphans and vulnerable children had to be scaled down. Nonetheless the socialsector continues to claim close to 46% of government expenditure. According to (LDHS, 2009), access to socialamenities has improved with 76.7% of the population having uninterrupted access to water sources.

Lesotho has ratified all the fundamental conventions and labour standards of the ILO. The working conditionsand payment of remuneration including compensation are guided by the Labour Code Order 1992 whichrequires employers to provide adequate working conditions. It also accords to workers the right to join andform unions and strike in order to reach an amicable settlement. This has been the guiding framework for tradeunions in the country. The government is committed to involving communities in its work programs andconsequently it has initiated the participation of private sector through public-private partnerships in the healthsector. A National Referral hospital has been completed through this initiative.

Lesotho has an ongoing pension scheme (introduced in 2005) for those aged above 70 years, who constituteabout 3.6% of the total population., This scheme has been instrumental in improving the living standards of thesenior citizens, and providing them with improved access to social amenities.

Gender EqualityThe goal of promoting gender equality and empowerment of women is on track. However, the tradition ofhousehold chores for boys is seen as a challenge to the goal of gender equity (Government of Lesotho andUNDP 2010). Household chores requiring the participation of boys have reduced their education attainment insecondary and higher education. A study by UNICEF in 2005 had shown that boys were at a disadvantage interms of school attendance as a result of child labor. Correspondingly, the gender parity index in primary andsecondary level enrolment stands at 1.0 and 1.38, respectively. The above indicates equity in primaryenrolment, while secondary enrolment favors girls.

Lesotho has undergone significant improvements in terms of the proportion of parliamentary seats held bywomen and the proportion of adult women who have reached secondary level relative to their malecounterparts. The share of seats held by women in national parliament has leapt from 11.7% in 2007 to 24.2%in 2011.

Lesotho has made progress towards fostering gender equality over the past two years. According to the WorldEconomic Forum (2011) women in the labor force as a ratio of men stood at 0.92 attesting to gender equity in


terms of employment opportunities at the job market. This places Lesotho 12th among 142 countries in theworld. Similarly, the 2011 Ibrahim Index of African Governance ranked Lesotho 2nd out of 53 countries ongender equality. Given the above improvements, more qualified women have had equal access to employmentat senior level in the country. Since 2005, 58% of the councilors from local elections have been women. Thishas been facilitated by deliberate government actions to eliminate regulations and laws that are unfavorable togender equality. Gender equality is underpinned by the Married Persons Act of 2006(which abolished the lawthat treated women as minors) and the Sexual Offences Act of 2003.

The gender and development policy which was adopted by government in 2003, endorsement of theConvention on the Elimination of All Forms of Discrimination against Women, Beijing Platform for Action andother international and regional protocols have provided the framework for equal status and protection ofwomen in the country.


Thematic analysis: Promoting Youth Employment

Youth unemployment is a critical development challenge in Lesotho. According to the 2008 Labour Force Survey(LFS) the labour force participation rate among people aged 15-24 stood at 45.1%. At 52.5%, males had acomparatively higher participation rate than females (37.8%). Participation rate among males is consistentlyhigher across all districts, with only marginal gender differences in participation rate in the capital Maseru. Atabout 16%, the unemployment rate for women is slightly higher than the 15% for males. While more than 50%of youth are economically inactive, those with secondary and tertiary-non graduate levels of education aredisproportionately more affected.

The survey shows 60.0% of employed youth are engaged in agriculture, hunting and forestry and 10.1% inmanufacturing. In urban areas, the manufacturing sector employs 31.4% of youth, while 71.2% of employedyouth in rural areas are engaged in agriculture, hunting and forestry industry (71.2%). Privatization ofparastatals and civil service reform over the past decade has facilitated the retrenchment of thousands of jobs inthe clothing and footwear industries. As a result the economy is unable to create formal employmentopportunities for the 25,000 young men and women entering the labour market each year, as the nationallabour force of 1.2 million people expands at an average annual rate of 2.1%.

The effort to ease the challenges of integrating youth into the labour market through the promotion of self-employment led to the creation of the Youth Employment Promotion Project (YEP) in 2006. YEP is implementedby the Ministry of Gender, Youth, Sports and Recreation, (MGYSR) and is supported by the United NationsDevelopment Programme, (UNDP) in collaboration with the International Labour Organisation, (ILO), theCommonwealth Youth Initiative, (CYI) and the Moliko Micro Finance Trust, (Moliko). A draft national action planon youth employment is already in place and the ministry is moving ahead to implement an entrepreneurshipdevelopment programme. This will provide training and mentoring for the youth, mobilize resources andestablish strategic partnerships for youth employment.

The pilot phase of the project demonstrated that with efficient guidance and support from government anddevelopment partners the youth can be placed in a better position to create self-employment opportunities.During the pilot phase (2007-2009) 2000 youth were trained in the skills of entrepreneurship and as a result,between 2008 and 2009, 500 small businesses were established with average employment of 1.6 perestablishment. The project was useful in dispelling the characterization of the youth as risky borrowers and thusun-bankable. The repayment rate for trained youth who received credit under the Lesotho Youth CreditInitiative (LYCI) was over 85%. LYCI is an initiative designed to encourage entrepreneurship developmentthrough credit provision as part of the Commonwealth Youth Initiative and was initially launched in 2005. Aftera brief spell with World Vision, the LYCI was reorganized under Moliko Micro Finance Trust, (Moliko)

The recent evaluation of the YEP, by UNDP, found a very high level of satisfaction with the programme on thepart of the Government of Lesotho, as evidenced by the financial subvention the government will be making tothe expanded programme; on the part of the UN partners, who also indicated their keen interest in anexpanded programme; on the part of the Moliko, which intends to increase its capacity in response to demandfor credit amongst the youth (and other groups); amongst programme beneficiaries, who have highexpectations of continued capacity building and credit support; and amongst other non-benefiting individuals,among whom there is anecdotal evidence of high interest in similar training and credit providing programmes.

Notes

1. Ozone Depletion Potential (ODP)


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