increased from 8.4 percent of GDP in LESOTHO CY15 to 11.1 in CY16. In FY16/17, the debt Recent developments to GDP ratio was revised downward to 48 percent (from 59% previously) with the Growth is estimated to have registered rebasing of GDP, and risks of external 2.5 percent in CY16, which is much lower debt distress continue to be assessed as Table 1 2016 than the 5 percent growth target set in the moderate. Population, million 2.2 National Strategic Development Plan Inflation has picked up due to sharp in- GDP, c urrent US$ billion 2.2 (NSDP) to reduce poverty and inequali- creases in food prices; CPI inflation in- GDP per c apita, c urrent US$ 1020 ty.1 Following average growth of 4.8 per- creased to 6.7 percent in CY16. Food infla- Poverty rate ($1.9/day 2011PPP terms) a 59.6 cent from CY11 to CY14, GDP growth tion registered 10 percent in November Poverty rate ($3.1/day 2011PPP terms) a 77.3 declined to 2.5 percent in CY16.2 The 2016 on a year-on-year basis due to the a main factors constraining growth include drought- and despite food subsidies pro- Gini Coeffic ient 54.2 b shrinking agricultural production due to vided by the government. Sc hool enrollment, primary (% gross) 108.0 El-Nino and limited contribution of gov- The headcount poverty rate ($1.9/day b Life Expec tanc y at birth, years 49.3 ernment spending due to fiscal con- PPP) fell from 61.3 percent in CY02 to 59.7 Sources: World Bank WDI and M acro Poverty Outlook. straints. The services sector has been the percent in CY11. Estimates suggest that Notes: most resilient in CY16 with estimated 56.3 percent of the population in 2016 is (a) M ost recent value (2010) (b) M ost recent WDI value (2014) growth of 3.1 percent. still trapped in extreme poverty. The slow The fiscal deficit increased to 7.7 percent poverty reduction was accompanied by of GDP due to a decline in the Southern high inequality measured at 0.54 by the African Customs Union (SACU) revenues Gini coefficient. Higher remittances in the in FY16/17. SACU revenues declined from past enabled migrant workers from Leso- 25 percent of GDP in FY14/15 to 13.6 per- tho to South Africa to reduce dependence cent in FY16/17. The fiscal deficit was on agriculture. Yet, a steady fall in re- The decline in growth since 2014 has per- largely financed through a drawdown of mittances in recent years has had a nega- sisted through 2016 due to drought and reserves due to limited domestic borrow- tive effect on low income groups. Unem- weak regional and global prospects. Lower ing opportunities. Subsequently this re- ployment remains high at estimated levels SACU revenues and delayed fiscal consol- sulted in reduction of import coverage between 24 and 28 percent. Inclusiveness from 5.6 months in FY15/16 to 4.4 months of growth is also constrained by high HIV idation are causing increased fiscal pres- in FY16/17. The current account deficit prevalence (23 percent of the population). sures. Although the mining sector is ex- Climate change and droughts exacerbated pected to contribute to growth in the near low agricultural productivity. These fac- term, narrowing fiscal space will limit the 1/ Lesotho has rebased its GDP which led to a change tors, combined with low SACU revenues contribution of the public sector to in both the level and growth rate of GDP (figures have led to sluggish poverty reduction and changed in comparison to the previous MPO). The widening income disparities. growth. Sluggish and non-inclusive expenditure side GDP estimate is not currently availa- ble. 2016 growth figures are estimates. . Lesotho has rebased its GDP which led to growth is expected to lead to only slow a change in both the level and growth 2/ Fiscal year runs from April 1st to March 31st, e.g. poverty reduction. FY16/17 refers to fiscal year that runs from April 1st, 2016 rate of GDP (figures have changed in to March 31st, 2017. CY16 refers to calendar year 2016. comparison to the previous MPO). The FIGURE 1 Lesotho / GDP growth by sector FIGURE 2 Lesotho / Poverty projections for GDP per capita 30 Poverty rate (%) GDP per capita (constant LCU) 90 14000 20 80 12000 70 10 10000 60 0 50 8000 40 6000 -10 30 4000 -20 20 2000 10 -30 2000 2002 2004 2006 2008 2010 2012 2014 2016e 2018p 0 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 GDP growth (factor cost) Growth in Agriculture Growth in Industry Growth in Services $1.9/day PPP $3.1/day PPP GDP pc Sources: WDI and staff estimates. Sources: World Bank (see table 2). MPO 1 Apr 17 expenditure side GDP estimate is not A gradual and moderate expected fiscal currently available. 2016 growth figures are estimates. consolidation has been incorporated in the forecast with projected deficits Risks and challenges Fiscal year runs from April 1st to March viewed at 4.8 percent for FY17/18 and 3.2 31st, e.g. FY16/17 refers to fiscal year that percent in FY18/19. However, extra fiscal The key risk to the outlook is a possible runs from April 1st, 2016 to March 31st, pressures may arise due to the cost of delay in fiscal consolidation due to politi- 2017. CY16 refers to calendar year 2016. elections that is yet to be budgeted. If cal uncertainty. A delayed or lower fiscal fiscal balances are maintained at project- consolidation than the amount assumed in ed levels, the reserve balance is expected these projections will put the exchange Outlook to be slightly below 4 months of imports in FY18/19 which will put some addition- rate peg under greater pressure. Other risks to the outlook are weaker-than antic- al pressure on the peg. ipated global and regional recovery which Industry (mining) is expected to be the Inflation is expected to range near 6 per- can further restrain the pace of growth. main driver of growth in the near term. cent in CY17 and to decrease to 5 per- Increasing the focus on rapid private sec- The GDP growth rate is expected to in- cent in the medium term. Private con- tor development and employment crea- crease in FY17/18 to 3 percent due to two sumption is expected to grow modestly tion can lead to faster poverty reduction. mines ramping up production. Growth in CY17 assuming wage increases are Although Lesotho spends a large propor- rate is expected to further increase to 3.4 limited to inflation adjustment. Invest- tion of its budget on social spending, so- percent in CY18 due to construction activi- ment is expected to increase due to cial outcomes have not improved. Deliv- ties that will take place during the second LHWP2 in CY18. ery of poverty-targeted labor market pro- phase of the Lesotho highlands water pro- A slow trajectory of poverty reduction grams and increasing the efficiency and ject (LHWP2). However, growth could be is expected in Lesotho in the coming effectiveness of government spending will limited by expected fiscal consolidation years. The triple punch of droughts, lead to faster poverty reduction and re- efforts that should be undertaken by the fiscal consolidation and shrinking re- duce inequality. government starting from FY17/18. Indeed, mittances creates risks for the achieve- the macro-fiscal outlook remains uncertain ment of the target goals in reducing as the budget bill has not been tabled in extreme poverty outlined in the current the Parliament as of March, 2017.3 PRSP program. Given current growth projections, poverty rates are still ex- pected to decline, albeit at a slower pace. The $1.9 a day poverty rate is ex- 3/ The current coalition government has faced a no - confidence vote and Lesotho is expected to hold snap pected to fall from 56.3 percent in CY16 elections on June 3, 2017. to 55.5 percent in CY18. TABLE 2 Lesotho / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 4.5 1.6 2.5 3.0 3.4 3.6 Real GDP growth, at constant factor prices 4.0 2.2 2.5 3.0 3.4 3.6 Agriculture -3.5 -4.4 -5.0 2.0 2.0 2.2 Industry -0.8 1.6 2.9 3.1 3.5 3.7 Services 7.0 3.1 3.1 3.0 3.5 3.7 Inflation (Consumer Price Index) 5.3 3.2 6.7 6.0 5.0 5.0 Current Account Balance (% of GDP) -8.8 -8.4 -11.1 -12.1 -13.1 -16.0 Financial and Capital Account (% of GDP) 8.4 8.1 10.8 11.7 12.8 15.7 Net Foreign Direct Investment (% of GDP) 3.7 3.7 3.0 3.0 3.0 3.0 Fiscal Balance (% of GDP) 0.5 0.5 -7.7 -4.8 -3.2 -1.6 Debt (% of GDP) 43.3 49.2 47.9 46.5 44.7 43.6 Primary Balance (% of GDP) 1.4 1.5 -6.8 -3.9 -2.2 -1.2 Poverty rate ($1.9/day PPP terms) a,b,c 56.6 56.6 56.3 55.9 55.5 55.0 Poverty rate ($3.1/day PPP terms) a,b,c 75.5 75.4 75.3 75.0 74.8 74.5 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n 2001 - and 201 0-CM SHB S. (b) P ro jectio n using po int to po int elasticity at regio nal level with pass-thro ugh = 0.5 based o n GDP per capita in co nstant LCU. (c) A ctual data: 201 0. No wcast: 201 1- 2016. Fo recast are fro m 201 7 to 2019 MPO 2 Apr 17