Macroeconomics (GDP)

The case of Lesotho

By

Pabatso Caroline Phalole

International economy & trade

ABSTRACT

The Gross Domestic Product (GDP) of a country is a measure of its economic performance that
reflects the entire value of goods and services generated within its boundaries in a particular period.
Lesotho's GDP, a small country in southern Africa, has been influenced by a variety of economic and
political issues since its independence in 1966. The purpose of this research study is to investigate the
elements influencing Lesotho's GDP and its recent changes.

INTRODUCTION

Lesotho is a small landlocked country in Southern Africa, home to about 2.2 million people.
Agriculture and mining are the two most important industries in the country. In recent years,
Lesotho's macroeconomic performance has been reasonably consistent, with moderate economic
growth, low inflation, and a stable exchange rate. This article will provide an overview of the
macroeconomic situation in Lesotho, covering economic growth, inflation, and fiscal policy.

LESOTHOS ECONOMIC STRUCTURE

The distinctive geography of Lesotho has played a significant role in the country's economic
development. The country's location, which is totally surrounded by South Africa, has had a
significant impact on the growth of industries, the development of the private sector, trade ties, and
the political economy of the nation. This is especially true given its severely limited monetary and
fiscal policy framework. Because Lesotho is a member of the Common Monetary Area (CMA), its
currency is pegged to the South African Rand. As a result, Lesotho has lost the independence of its
monetary policy, and its real effective exchange rate is now tightly correlated with the cycles of
commodities, particularly metal exports from South Africa. Lesotho's economy is impacted by cycles
in exchange rates and monetary policy that are solely determined by South Africa's monetary and
exchange rate policies. Lesotho is unable to benefit from demand management practices.
Since a sizable portion of the country's expenditure is funded by SACU tariff revenue, Lesotho's
membership in SACU has largely influenced how its fiscal policy operates. Trade liberalization has
been challenging since Lesotho cannot decide to liberalize its trade unilaterally due to its dependence
on SACU tariff revenue. Lesotho can only overcome poverty and unemployment by transforming to a
highly efficient economy and competing with others in the region given the limitations of
macroeconomic policy. For instance, if obtaining a trading license in South Africa requires 40 days,
obtaining one in Lesotho ought to take no more than five. If obtaining a work permit in South Africa
necessitates ten steps and procedures, obtaining one in Lesotho should only require one step and cost
less money. To guarantee a smooth transition to a more sophisticated economy, the nation must
simultaneously retain political stability and successfully use technology and innovation to suit societal
requirements. Lesotho's economy has shifted substantially over the last 30 years, from one dominated
by agricultural, real estate, and government services to one dominated by manufacturing, retail, and
services. Agriculture was the most dominating sector in the 1980s, accounting for 15.2 percent of
GDP. However, in recent years, the sector's contribution to GDP has fallen to 5.2 percent. With more
than 70% of households relying on subsistence farming, the sector is vital for maintaining the
livelihoods of individuals living in rural areas.

LESOTHOS ECONOMIC GROWTH

Following a 3.1% contraction in 2017, the economy expanded by 3.0% in 2021, with growth in
services (1.9%) and the secondary sector (7.2%). COVID-19 reduced per capita income by 3.9% in
2017, but increased by 0.2% in 2021. An increase in aggregate demand, notably consumption
expenditure, helped services, while a robust rebound in construction supported the secondary sector.
In response to COVID-19, the Central Bank established a program that provides 0% collateralized
loans against corporate debt. In 2021, inflation was 5.8%, up from 5.3% in 2017, owing to supply
chain disruptions.

The fiscal deficit increased from 3.8% of GDP in 2017 to 5.8% of GDP in 2021, funded by domestic
and foreign borrowing, as a result of a decline in SACU revenues. With the help of capital inflows
from South Africa, the current account deficit decreased from 7.9% of GDP in 2017 to 2.8% of GDP
in 2021, representing a fall in imports. In 2021, public debt was projected to represent 50% of GDP,
up from 48% in 2020. Due mostly to COVID-19, NPLs climbed from 3.3% in 2020 to 4.2% in 2021.
In 2021, poverty climbed from 49.7% to 50%, as a result of supply chain disruptions. In 2021, the
unemployment rate rose from 23.6% to 33%.

65 million SDRs were allotted, which works out to $95.18 billion ($1.4 billion), or 4.8% of GDP. It
has assisted the monarchy in dealing with its economic and liquidity crises while also containing the
COVID-19 situation. In 2020, official reserves climbed by $18.96 million (M 287 million) to $843.17
million (M 1.28 billion) to September 17, 2021.

On the back of services and construction, the economy is predicted to increase at 2.5% in 2022 and
2.8% in 2023. Food price inflation is expected to raise inflation to 7.6% in 2022 and 5.9% in 2023.
Due to a projected rise in SACU revenues, the budget deficit will be reduced to 4.6% and 3.7% of
GDP in 2022 and 2023, respectively. On the basis of lower imports, the current account deficit is
expected to fall from 6.8% of GDP in 2022 to 5.4% in 2023. Total debt is expected to be 50.2% in
2022 and 50.8% in 2023.
In a precarious fiscal environment, the Phase II construction of the Lesotho Lowlands Water
Development Project will slightly boost the economy. Both the revenue and expenditure sides of the
government's operations have undergone some reorganization.

On the GCRI for 2021, Lesotho ranks 61. In 2019, frequent droughts have reduced household
purchasing power by 37% and caused 500,000 people to experience food insecurity. One-fifth of the
population now needs emergency food assistance due to water shortages and crop failures.

To cut GHG emissions by 10% by 2030, the government passed the National Environment Act in
2001 and unveiled the National Adaptation Program of Action in 2007. The implementation of the
NDC mitigation measures is expected to cost around $5.37 billion. For the Lowlands Project Phase II,
the government has received funding from the GCF and the ADB. In order to improve the ability of
local communities to adapt to the effects of climate change, the Institute of Natural Resources has
launched a project with funding from USAID.

Agriculture's Role in Lesotho's Economy

Agriculture is the backbone of the Lesotho economy, accounting for 10% of GDP and employing
more than half of the population. The sector is mostly concerned with subsistence farming, with maize
serving as the primary crop. However, the country has been plagued by erratic weather patterns,
which have reduced crop yields and contributed to food insecurity and poverty.

To address this issue, the government has launched a number of agricultural support initiatives, such
as providing fertilizer and seed subsidies, improving irrigation systems, and encouraging crop
diversity. These initiatives have resulted in higher agricultural productivity and revenue, which has
boosted Lesotho's GDP.

Lesotho's Manufacturing Industry

Manufacturing is another important contributor to the Lesotho economy, accounting for 15% of the
country's GDP. The country's textile and garment industry is dominated by major corporations such as
Levi Strauss and Fruit of the Loom. Over 50,000 people, mostly women, have found work as a result
of the industry.

Lesotho, on the other hand, confronts intense competition from nations with lower labour prices, such
as China and Bangladesh. To remain competitive, the government has developed policies such as tax
breaks and infrastructure development to attract international investment and foster a favourable
business climate.

Lesotho's Mining Industry

Lesotho's mining industry is quite modest, accounting for less than 1% of the nation's GDP. However,
the nation has sizable reserves of diamonds, and the administration has been working to expand the
industry. In order to encourage sustainable mining practices and draw in foreign investment, the
government unveiled a new mining strategy in 2019.

CONCLUSION

Finally, agriculture, manufacturing, and mining are important components of the Lesotho economy.
The government has put in place a number of programs to help these industries and encourage
economic growth. However, the country faces difficulties such as erratic weather patterns,
international competition, and limited resources. Lesotho must continue to develop policies that
encourage sustainable economic growth and diversity in order to resolve these concerns. In recent
years, Lesotho's macroeconomic status has been reasonably steady, with moderate economic growth,
low inflation, and a conservative fiscal policy. The COVID-19 epidemic, on the other hand, has had a
significant impact on the country's economy, with GDP anticipated to decline in 2020. The
government's response to the epidemic has resulted in an increase in the budget deficit, which could
have long-term consequences for the country's budgetary sustainability. Political stability is
beneficial, and this year will be a honeymoon time for the new administration. We do not anticipate
any significant societal disturbance in 2023, despite the likelihood of it due to high domestic costs and
restricted economic possibilities. The Southern African Customs Union's declining revenues will put
pressure on the government's finances, which we anticipate to improve even though the budget will
continue to be in deficit with a shortfall of 6.2% of GDP in 2023, down from 9.3% of GDP in 2022.
The external position will worsen in 2023 as the current-account deficit increases to 9.9% of GDP
from 8.8% of GDP in 2022 as import costs stay high and export profits fall in line with falling
diamond prices globally.

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