Lesotho

(e): Estimate, (f): forecast

* Budget year 2024: April 2024 to March 2025. ** International aid is included in this balance.

Risk Assessment

Sluggish growth but favourable economic outlook with the water infrastructure mega-project

Economic growth in Lesotho, a landlocked country within South Africa, will be positive but weak in 2024. It will be supported in particular by the continuation of the second phase of the Lesotho Highlands Water Project (LHWP-II), which consists of ensuring the delivery of water to South Africa and stimulating Lesotho's economic development by improving infrastructure and exploiting the potential for hydroelectric production. Public investment will represent around 12% of GDP. In addition, the expected rebound in the price of rough diamonds on the world market in 2024 will support the recovery in production and exports. In 2024, El Niño’s negative impact on agricultural sector production is expected to continue. As for textiles, a drop in US demand will harm growth prospects. Given Lesotho's dependence on South Africa for electricity, prolonged South African power shortages represent a perpetual risk for extractive and manufacturing activities. The fall in global energy and food prices has eased inflationary pressures more than expected. The monetary policy of the Central Bank of Lesotho, aligned with the decisions of its South African counterpart, remains restrictive at the start of 2024, but monetary policy easing is expected for mid-2024. Credit growth in the private sector will be driven by households. In fact, corporate lending will remain sluggish due to the underperformance of the economy and increased recourse to non-bank sources of financing.

Fiscal and external accounts on the road to consolidation

The budget deficit is expected to narrow during the 2024-2025 financial year. Given the substantial weight of SACU revenue in the budget (30% of revenue and 22% of GDP), economic recovery in South Africa and other SACU member countries from 2024 onwards will help to reduce the deficit. In addition, revenue will continue to grow thanks to efforts to modernise the tax system: adoption of the tax on mining exports, introduction of excise duties on alcohol and tobacco and inclusion of the informal sector in the tax base. Expenditure will be higher due to capital spending under LHWP-II and large debt repayments to the IMF. Despite the tax rules in force, Lesotho will find it difficult to control its massive current expenditure (38% of GDP) because of the dominant role of the unions, which are opposed to wage cuts (16% of GDP). While the majority of public debt is external (78% of debt) and contracted in concessional form (63% of debt), the budget deficit will mainly be financed by domestic debt.
In 2023-2024, the current account deficit remained substantial, but will narrow slightly in 2024-2025. The recovery in diamond prices will boost export revenues. However, with the textile sector in difficulty (company closures in 2023 and a poor US market), export growth will remain below potential. The slight decline in world commodity prices will help to reduce the amount of imports (99% of GDP) in 2024-2025, although these will continue to rise and far exceed exports (58% of GDP). The continuing need to import skills and equipment for the LHWP-II project explains the persistent gaping trade deficit. First, Lesotho has a surplus income account owing to the remuneration of frontier workers for their work in South Africa, and second, to a permanent flow of international aid (2.5% of GDP), South African capital transfers under LHWP-II and the share of expatriates.

Unstable political power: discontent, slow reforms and interference from the security forces

Lesotho's political situation will remain unstable in 2024. The Revolution for Prosperity (RFP), the party of Prime Minister and businessman Sam Matekane, won the elections in 2022 with 56 of the 120 seats, but a shifting coalition government had to be formed with the Alliance of Democrats (AD), the Movement for Economic Change (MEC) and, more recently, the Basotho Action Party. The Democratic Congress (DC) has become the main opposition leader with 29 seats. Owing to the RFP's fragile position and the absence of a two-thirds majority for the governing coalition in the National Assembly, the reforms softly requested by the Political, Defence and Security Organ of the Southern African Development Community (SADC), notably in favour of reducing the powers of the security forces and the Prime Minister, are unlikely to be adopted in 2024. In October 2023, the army, police and intelligence services declared that they would intervene to keep the government in power if it was toppled by a motion of no confidence in parliament. Although Mr. Matekane escaped the motion, the slow implementation of reforms, high unemployment (18% by 2022), armed crime and food insecurity continue to fuel public discontent. In May 2023, a curfew was introduced following social unrest caused by the murder of a journalist.

Last update: May 2024