Syndicate content

Protecting the Minnow - Lesotho Economic Update

As uncertainty increases about where the global economy is headed and whispers grow about a “double-dip,” spare a thought for Lesotho.

A small developing country (population less than 2 million), Lesotho is located in one of the most resource-poor parts of Southern Africa.  Around 37% of households live on less than $1/day and about half are below the national poverty line. As a small and relatively undiversified economy, heavily dependent on foreign markets, Lesotho is very vulnerable to shocks. It is also ill-equipped to deal with them.

A small domestic market means that Lesotho perforce has to look to external markets for growth. It has done a reasonably good job of this, increasing its diamonds exports, selling water and power to South Africa , and exporting textiles to North America taking advantage of AGOA. These efforts have helped it transition from a predominantly subsistence economy to being at the verge of attaining middle income status today. 

Dependence on foreign markets can however be risky. When the external environment was favorable, the country managed good growth (averaging 3.4% between 2004 and 2008), faster than sub-Saharan Africa.  However when the global economy suddenly went sour in 2009, the same dependence led to a steep decline in growth (see Figure 1).

An even bigger shock came from the subsequent decline in transfers from the Southern African Customs Union (SACU), as imports into the region went down. SACU transfers fell by almost 17 percentage points of GDP in 2010/11, plunging the Government into a serious fiscal crisis and throwing the current account into deficit (Figure 2, second panel).  

It has taken fully two years for growth to recover. The current recovery is being driven by an improving external outlook and higher infrastructure spending (financed in part by grants and concessional loans from donors).  This could easily change.

The Government is however banking on this recovery to help it consolidate fiscally. Consolidating fiscally means trying to control the fiscal deficit, either by increasing revenues or by cutting expenditures. In the case of Lesotho the focus is largely on controlling expenditures, as the scope for increasing revenues is limited.

Even consolidation is far from being an easy task. Public expenditures remain a big driver of the economy, and this year the country faces especially large spending needs, in part because of recent floods and severe weather. These have devastated crop production and an assessment warns that Lesotho is on the verge of a major food security crisis. The Government has also committed to donors to start construction of the economically crucial Metelong Dam. 

To meet these spending needs, the Government is heavily dependent on foreign resource flows. Domestic revenues do not fully cover even current expenditures, (Figure 2, right panel), while capital expenditures in FY12 will be an additional 24% of GDP.

The gathering storm clouds are therefore ominous. The only tool Government has at its disposal is fiscal policy. There is room for improvement here. The state is overextended (public expenditures in 2010/11 were 64% of GDP) and not all public money is well spent. Some recent decisions have even worsened the situation. Correcting this can give Government more room for maneuver. The IMF has a program to help the government consolidate fiscally, and the Bank is assisting it in improving the quality of expenditures. 

But will this be enough? What more can we do to make the country less vulnerable to shocks?  And how can we help insure small poor countries like Lesotho against the risks that inevitably come with the opportunities that international markets offer?  
 

Figure 1: Economic growth is projected to pick-up

 

Figure 2: Fiscal and external imbalances are worsening

Comments

Is it logical to state that "Lesotho is located in one of the most resource-poor parts of Southern Africa", and then a paragraph add that "A small domestic market means that Lesotho perforce has to look to external markets for growth. It has done a reasonably good job of this, increasing its diamonds exports, selling water and power to South Africa"? Diamonds and water are resources, and their abundance in Lesotho is overwhelmingly enough (plus the resource of the country's natural beauty) to care 2.8 million inhabitants.

Submitted by Nathan on
Agreed, I think the biggest problem Lesotho has is that there seems to be no negotiation with South Africa regarding economic independence in a real sense. I would not say that water and diamonds have brought any stability to the country economically. The water deal was made under a military regime in Lesotho and Apartheid in RSA and as such was not much of a winner for the former (Residents will be reminded of the drought a few years back when Maseru had to by water back from RSA through the LHDA). Furthermore, one can live 20 Km from the capital as I do and not be on the electricity grid; the hydro-power promised from the first LHDA phase did not have the domestic grid structure to support it and thus half of the turbines remain idle. Diamonds have reaped no social uplift either for the country and I defy anyone to prove otherwise (not counting the employment created, which seems the only indicator the protectors of AGOA are concerned with). No, diamonds have been nothing more that an opportunity for corruption. Lastly, the population is 1.8 million, not 2.8. It seems to me such a population is manageable yet all economic development ventures seem to point to urban and in fact Maseru, when the majority of inhabitants are living in rural areas. If the western and multi-lateral organizations continue with 'one-size fits all' neo-liberal economic models, it will be another 30 years of poverty for the country.

Submitted by Ryan Webb on
Hello Ashish, I enjoyed reading your post as it accurately demonstrates the headwinds Lesotho is facing economically and as a country. A critical component to its continued success will be the extension of the third country fabric rule under AGOA, as almost all of Lesotho's textile exports to the US qualify for duty free quota free benefits by utilizing the provision. It is set to expire at the end of 2012 and the US Congress is painfully dragging its feet on the rules extension along with a host of other trade related issues. Further, there is a movement to extend duty free quota free benefits to all LDCs, notably Cambodia and Bangladesh, whose textile sectors are already hyper-competitive. Extending AGOA like benefits to other LDCs will erase Lesotho’s competitive advantage, and that of Africa’s entire textile sector for that matter. The textile factories are the largest formal sector employer in Lesotho. With stakes so high, it is disheartening to think that the possible fate of Lesotho’s economy rests in the hands of a bickering US Congress. Regards, Ryan Webb Analyst the Whitaker Group ryan@thewhitakergroup.us +1 (202) 293-1453

Submitted by Nathan on
I think what is worse for Lesotho is that it is somewhat in the hands of people like Ryan and the Whitaker Group. On the one hand they talk about neo-liberal growth models and on the other they talk about protectionist policies as Whitaker is a paid consulting firm hired by the government of Lesotho because of its close contacts with AGOA (the founder fostered these while working at AGOA or a parallel US government agency, I don't really care either way). The textile sector in Lesotho, developed under AGOA as the only option for 'growth', while in fact many sectors were open to explore, is 100% foreign owned (perhaps a few token local shareholders who have the position and power to be so) and entirely depends on such protectionism as the multi-fibre agreement was ending shortly after the AGOA benefits started and thus a level playing field should have been implemented with no more bans on Chinese textiles. Furthermore, there has been no technology transfer and localization of firms and most local jobs are subsistence at best, besides the urban slum dwelling such a 'job creating' sector creates. It always amazes me that the only indicator the US uses, with all its developmental tools to push its own political economy policies, is to aggregate numbers like jobs created. Other well known tools of development like the Gini Coefficient for inequality parameters, household well-being indicators, etc.. and many more are completed disregarded in the quest to show the US is helping and thus the recipient country should comply with US policy. What is disheartening is that Lesotho has become dependent on the US congress period and is not an independent country charting its own course.

Submitted by Anonymous on
I beleive we should leave Lesotho alone. they are doing fine without "the benefits." during the economic crises, lesotho would not have been harmed. perhaps having less countries dependant on global market systems we claim to understand would be a good thing.? i don't know...

Add new comment