However, SACU high receipts are transitory and fiscal management is expected to become more challenging in the near future. Lesotho obtains some 50 per cent of public revenues from the Southern African Customs Union (SACU). The possible decline of these receipts after 2009-2010 has thus caused concern. External debt has been brought down to sustainable levels mainly due to Government’s deliberate policy to use part of the SACU windfalls to repay its debt. However, inflation has become a challenge. In line with trends in South Africa, it continues to rise due to continued increased in global food and fuel prices.

Although Lesotho’s real GDP growth being above the population growth rate, poverty remains widespread with more than half of the population in the country living below the poverty line. Other challenges, include high vulnerability to external shocks due to the country’s narrow production and export base. Lesotho also has weak capacity and skill shortages in all sectors, low levels of infrastructure development, and a banking system whose efficiency will have to be improved upon.

The high incidence of HIV/AIDS also remains one of the main threats to the attainment of the country’s development agenda. With a prevalence rate of 23 per cent in nearly 2008, the high incidence of HIV/AIDS and its impact on productivity, real incomes and society as a whole.

Yet Lesotho also has opportunities it needs to exploit. These include its unique geography, which generates a number of positive spillovers for the country, preferential access to international export markets, abundant water resources and the country’s natural beauty which could become a more important tourist attraction.

Development policy

The country’s priorities and strategies for promoting economic growth and reducing poverty are outlined in the Lesotho’s Poverty Reduction Strategy (PRS), which originally covered the 2004/05-2006/07 period but has since been extended to cover up to April 2010 when it will be replaced by a National  development Plan (NDP). The PRS’s priorities actions are grouped into four main areas. These are accelerating shared and sustainable economic growth, human development, protecting and enabling disadvantaged groups, and good governance. Government has also a Growth Strategy Paper (GSP) in place. This identifies potential drivers of growth.

The performance of the Bank’s portfolio in Lesotho has generally satisfactory. There were in the first quarter of 2008 five ongoing operations which were progressing well.

Bank Group Strategy

The CSP is built around the Government of Lesotho’s development agenda and was finalized after broad based consultations with Government and other stakeholders. To support Government’s efforts to improve the country’s competitiveness and diversify the  export base, the Bank assistance strategy for Lesotho emphasizes three main areas. Theses are the improvement of governance, the expansion of infrastructure, and human resource development with emphasis on technical and vocational education and training (TVET).  The AfDB’s assistance programme is expected to contribute towards Lesotho’s efforts to reduce poverty through the promotion of private-sector led economic growth.

The Bank is selective and it focuses on key areas in which it has a comparative advantage, proven by past interventions. The Bank’s interventions are also designed to complement the work of other development partners.

Lesotho’s resource allocation for the African Development Fund (ADF-XI) 2008-2010 cycle is UA 16.02 million, of which UA 7.13 million will be provided on a grant basis. This allocation will be used to finance public sector activities focusing on improving governance and expanding infrastructure (energy). For governance, the Bank’s ADF Bank will provide general budget support that will focus on improving transparency and accountability in the management and use of public resources. For infrastructure, the Bank’s  intervention will support investment in the electricity supply sector. This is designed to improve efficiency of operations and increase output.

Lesotho’s relatively strong risk framework provides space for private sector lending. The Bank thus step efforts to identify bankable private sector projects in the country.