In the last few years, Lesotho has made significant progress in macroeconomic performance (strong GDP growth, fiscal surplus, current account surplus, and high international reserves). Nevertheless, Lesotho remains exposed to economic developments in South Africa (through the monetary union and the pegged exchange rate) and relies heavily on workers’ remittances, customs revenues from SACU, and royalties for transfer of water to South Africa.
Lesotho’s vulnerability arises from two main sources: its huge dependence on textile exports to the US and on revenues from SACU (60 percent of total revenues). Firstly, the USA is Lesotho’s largest importer of its manufacturing exports (mainly textiles), and the recession lowered the aggregate demand by US consumers. Secondly, a slowdown in South Africa is likely to have a significant impact on remittances and SACU revenues. The recent large SACU transfers are in fact mostly due to growth in South African imports. Lower South African imports will therefore negatively affect Lesotho’s revenue stream. Similarly, retrenchments in South Africa will lower workers’ remittances towards Lesotho.
SACU revenues are expected to decline in the next two years, resulting in the current account moving from surplus to deficit. Lesotho’s challenge is to reposition itself to take advantage of its proximity to SA markets, improve the efficiency of public resources, and exploit the potential of non-traditional sectors.