Lesotho Economic Outlook

Economic performance and outlook

GDP grew an estimated 4.6% in 2017, following 2.4% growth in 2016. Growth was driven largely by better performance in the primary sector, with production at the Lighongbong mine expected to rebound, accompanied by modest growth in the tertiary sector. The contribution of the secondary sector is constrained by lower construction activities. GDP growth is projected to moderate slightly to 4.3% in 2018, as mining growth drops, and to 4% in 2019. Growth will be driven mainly by enhanced construction activities under Phase II of the Lesotho Highland Water Project (LHWP). Manufacturing’s contribution to GDP growth remained modest in 2016, due to slow growth in textiles and clothing for the U.S. African Growth and Opportunities Act (AGOA) market.

Macroeconomic evolution

The government’s fiscal stance is likely to be less expansionary. The budget balance showed an estimated 0.1% surplus in 2017, up from a 0.5% deficit of in 2016, and is projected to be 0.3% in 2018, before moderating to 0.2% in 2019. Underlying the surpluses is a recovery in Southern African Customs Union revenue and a modest increase in government spending. Private-sector credit is expected to grow faster in 2017 in response to higher growth and the crowding-in effect of the government’s fiscal stance. Lesotho maintains parity between the loti and the South African rand and aligns its policy interest rate to South Africa’s repo rate. Public debt dropped an estimated 1.5 percentage points, to 46.3% in 2017 and is projected to drop to 45.5% in 2018. The decline is driven largely by lower external debt (accounting for 83% of total public debt), which more than offsets the increase in domestic debt. External debt remains sustainable, and the risk of debt distress is modest. Inflation decelerated from 2016, to an estimated 5.3% in 2017. This was in tandem with drops in food prices as domestic production in the region recovered from the carryover effects of the Dry El Niño weather conditions. The current account deficit improved from 16.7% in 2016 to an estimated 15.9% in 2017 and is projected to be 13.8% in 2018. The budget surplus and expected improvements in the current account result in projected official international reserves of 5 months of imports by 2019.

Tailwinds

The emerging opportunities for diversification to the neighboring South Africa market are promising in the medium term. Activities for the second phase of the LHWP, together with booming wholesale and retail trade, are expected to boost construction activities. Achieving full production capacity of existing mines at Lets’eng and Kao will support medium-term growth. The enhancement of telecommunications internet services since 2017 will improve access to financial and insurance services, which are expected to benefit from enhanced reforms under the financial sector development strategy, particularly improved access to credit and financial inclusion. Increased official transfers and foreign direct investment (FDI) are projected to cushion the reduction in FDI following the completion of the Liqhobong mining plant.

Headwinds

The risks to the domestic growth outlook remain elevated. Export demand could be hindered by the uncertainties surrounding continued access to the U.S. market under AGOA. Uncertainties surrounding South Africa’s growth prospects may constrain Lesotho’s growth prospects. Carryover effects of political developments may weaken implementation of economic policies and threaten private investment in the medium term. Increased domestic demand is boosting import absorption of consumer goods, with limited impact on domestic investment but negative impact on gross international reserves.