The African Development Bank Group (AfDB) has advised Lesotho to implement sound macroeconomic monetary and fiscal policies tailored to its circumstances.
Such policies should prioritise spending and take into account the fiscal space available, and avoid crowding out the private sector.
In its Country Focus Report 2024 titled ‘Driving Lesotho’s Transformation: The Reform of the Global Financial Architecture’, the AfDB also noted that Lesotho needs to encourage local food production. Currently, it imports 80 percent of its needs from South Africa.
“Encouraging local production has the potential to ease pressure on the loti, tame inflation, reduce its debt and improve the balance of payments,” the report said.
It added that in the medium to long term, the country should intensify domestic resource mobilisation efforts by improving tax compliance and administration.
Lesotho must also create an enabling environment. The country was ranked 122nd out of 190 economies in the 2020 edition of Ease of Doing Business by the World Bank.
The lowest rankings were recorded in the following sub indicators: dealing with construction permits, getting electricity, protecting minority investors and resolving insolvency.
This poor performance was due to cumbersome business procedures, insufficient access to finance, inadequate digital infrastructure, and skill gaps, among others.
According to the AfDB report, Lesotho has in recent years made major strides in improving its business environment in terms of licensing, business registration, water, and electricity connections.
With the advent of the new government in October 2022 led by prime minister Sam Matekane, the Kingdom has announced its intention to strengthen the private sector and to welcome foreign direct investment focused on job creation, market diversification, and local capacity development.
The report further indicates that there is need to accelerate structural reforms aimed at stimulating job creation and investment, and improving productivity.
These reforms may include improving the business environment regulations to support more flexible labour markets, streamline the tax system or reduce the red tape, making it easier for companies to do business and plan for the future.
“This will help enhance the competitiveness and growth potential of the economy,” it points out.
The report adds that Lesotho’s fiscal position is expected to improve in the medium-term on account of higher Southern African Customs Union (SACU) revenues and modest growth in domestic tax revenues.
In 2023, the fiscal balance was projected to improve to a surplus of 1.0% of gross domestic product (GDP) from a deficit of 4.3% in 2022, reflecting the recovery in SACU revenues.
Looking further ahead, real GDP growth is projected to rise to 1.7 % in 2024 and 2.2% in 2025 from 0.9 in 2023 with the expected recovery in the mining and manufacturing sectors.
The second phase of the Lesotho Highlands Water Project (LHWP II) and related knock-on effects will also continue to drive the projected growth trajectory.
But for this happen, the AfDB underlines, there is need to develop effective institutions as a solution to Lesotho’s sluggish implementation of strategic development policies.
“Lesotho needs to define the type of institutions that need to be developed to address all constraints to effective implementation of policies that have the potential to transform the economy, create jobs and reduce poverty,” it says.
