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Lesotho’s economy catches flu from SA’s sneeze
25 January 2012

Lesotho's economy is inextricably linked to that of its neighbour, South Africa. As South Africa's economic difficulties threaten to drag Lesotho down, the kingdom is now looking at other avenues to stay afloat. For decades the mountain kingdom of Lesotho has relied heavily on South Africa to advance - until now.

South Africa employs thousands of Basothos (nationals of Lesotho) as migrant labour, buys water from a project that in turn generates enough electricity to meet Lesotho’s needs and generously shares revenue from a customs union that contributes significantly to the tiny kingdom’s budget. Moreover, South African companies are active in other sectors, including retail trade, insurance and banking.

Now the economic outlook is shifting, despite modest gains over the years Lesotho remains one of the world’s poorest countries. The 2011/12 budget was “the most difficult the government had to put together,” reckons Finance Minister Timothy Thahane. His worries include a slowdown in economic growth, rising unemployment and diminishing revenues from migrant workers who are losing jobs in South Africa. Lesotho also faces declining agricultural production, falling life expectancy and high HIV infection rates.

A steep decline in last year’s takings from the Southern African Customs Union (SACU) punched the biggest hole in the budget. SACU, the oldest customs union in the world (it recently celebrated its hundredth anniversary), maintains free trade among members — South Africa, Botswana, Lesotho, Swaziland and Namibia — and charges non-members a common tariff. Revenues are shared from a common pool run by South Africa under an agreed-upon formula. Since 1969, SACU receipts have been contributing more than half of Lesotho’s budget revenues.

Worse still, dwindling remittances from migrant workers in South Africa have dealt another blow. The World Bank’s Migration and Remittances Factbook 2011 shows that out of Lesotho’s 2.1 million people, about 457,500 were living outside the country in 2010. As the largest source of foreign exchange, remittances contribute an estimated US$525 million or 30 per cent of Lesotho’s GDP in 2010, says the report.

Despite the economic hardships, Lesotho has until now done better than its neighbours - Swaziland and Zimbabwe. There are a few silver linings that could change fortunes. To its credit, the government now realizes the hazards of relying too much on traditional sources of revenue.

Water is Lesotho’s “white gold,” as Basothos fondly call it. Income from the sale of water from the Lesotho Highlands Water Project is expected to increase with the construction of Metolong Dam and its spin-offs. Under the water project, created in partnership with South Africa, Lesotho exports water to its neighbour’s Gauteng province through a series of dams and tunnels blasted through the mountains. Gauteng, the hub of South Africa’s economy, has little water of its own and therefore needs Lesotho to quench its thirst. As a double benefit, the multi-billion-dollar project also generates enough hydroelectric power to meet about 90 per cent of Lesotho’s energy needs.

Lesotho could also count on a decent windfall from mining exports as global mineral prices go up. Income from diamonds, while still negligible, is growing. The government plans to generate additional funds by cutting and polishing the diamonds at home. Lesotho has shown renewed interest in attracting investors. The World Bank’s 2011 Doing Business report, which ranks countries’ business-friendly policies, grades Lesotho at a dismal 138 out of 183 countries. If it relaxes business restrictions, the government could easily lure investors into the mining, textile and retail industries.

Nevertheless, huge challenges lie ahead, including the likelihood of another global recession, which could upset many of Lesotho’s well-crafted economic plans. For now, the tiny mountain kingdom appears to have grasped the perils of unbridled reliance on South Africa’s magnanimity.
 

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