to 60 percent of GDP in 2015 due to the LESOTHO recent depreciation. Recent developments Although falling fuel prices helped drive CPI inflation down, increasing food prices Following an average growth rate of 4.7 has mostly offset this decline in 2015. CPI percent in 2012 and 2013, real GDP inflation is estimated to be 4.1 percent in Table 1 2015 growth declined to 3.6 percent in 2014, 2015 and is expected to rise to 5 percent in Population, million 2.1 and is estimated to have further declined the medium term. International reserves GDP, c urrent US$ billion 2.0 to 2.7 percent in 2015. The main drivers are estimated to be 6.1 months of imports GDP per c apita, c urrent US$ 936 include shrinking agricultural produc- in 2015 similar to last year driven mostly Poverty rate ($1.9/day 2011PPP terms) a 59.6 tion due to adverse weather conditions, by the under-execution of the budget. a and industry declines due to uncertainty Between 2002 and 2010 Lesotho made Poverty rate ($3.1/day 2011PPP terms) 77.3 of AGOA extension and the halt in the virtually no progress in reducing extreme Gini Coeffic ient a 54.2 Kao mine production. Services remain a poverty. The headcount poverty rate was b Sc hool enrollment, primary (% gross) 111.0 relative bright spot, growing at 3.9 per- 57.1 percent in 2010 (national poverty b Life Expec tanc y at birth, years 48.8 cent in 2015. line), accompanied by high inequality, Sources: World Bank WDI and M acro Poverty Outlook. On the demand side, net exports declined measured at 54.2 percent by the Gini co- Notes: in 2015 due to supply reductions and efficient, itself an obstacle to poverty re- (a) M ost recent value (2010) (b) M ost recent WDI value (2013) weak demand from trade partners. Invest- duction. Lesotho’s economic structure and ment contracted both due to the under- poorly targeted social protection policies execution of the government’s capital are at the heart of high and stagnant pov- budget, AGOA uncertainty and the com- erty and inequality. Low-productivity pletion of the Metelong Dam. Government agriculture remains the main source of consumption remained high due to the income for over 1 in 3 households. The increased wage bill (22 percent of GDP in benefits of a well-paid public sector main- The decline in growth since 2013 is ex- 2015). The overall budget execution was at ly flow to the most affluent households. pected to continue through 2016 due to 67.3 percent of the approved budget as of Most of the social protection transfers do persistent drought effects and weak re- December 2015 mostly due to the under- not target the poor. execution of the capital budget. gional conditions leading to a decline in Fiscal balances will deteriorate over the SACU revenues and associated fiscal pressures. Accompanying the resumption next years due to lower SACU revenues which equaled 30 percent of GDP in Outlook of moderate economic growth, the poverty 2014/15 (the fiscal year starts April 1). The overall fiscal balance is estimated to be 0.1 Growth is expected to decline slightly to rate ($1.9 PPP a day) is projected to fall percent of GDP. The non-SACU fiscal defi- 2.6 percent in 2016, reflecting a downward by 1.1 percentage points to 55.3 percent cit is estimated to be 24.6 percent of GDP revision from the last forecast (2.8 per- by 2018. in 2015/16, improving from 28.6 in cent). Lower growth prospects in South 2014/15. The current account deficit in Africa, and the uncertainty due to the sus- 2015 is estimated to be 10.4 percent of tainability of the peg are the main reasons GDP. Lesotho’s public debt has increased for downward revision. Over the medium FIGURE 1 Lesotho / Contributions to annual GDP growth FIGURE 2 Lesotho / Actual and projected poverty rates and GDP per capita (PPP) Percent Poverty Rate (%) GDP per capita (USD PPP) 20 90 3,000 15 80 2,500 10 70 5 60 2,000 0 50 1,500 40 -5 30 1,000 -10 20 -15 500 10 0 0 Net Exports Investment 2002 2004 2006 2008 2010 2012 2014 2016 2018 Government Consumption Private consumption Residual GDP growth $1.9/day PPP $3.1/day PPP GDP per capita PPP Sources: Lesotho Bureau of Statistics. Sources: World Bank (see notes to table 2). MPO 238 Apr 16 term growth is expected to slowly pick up Investment has dropped considerably global recovery, lower growth prospects to 3.7 percent in 2017 driven by the com- due to the completion of the Metelong in South Africa, fiscal sustainability and mencement of Liqhobong mine during the Dam and AGOA uncertainty. Following the competition Lesotho is facing due to 4th quarter of 2016 and further accelerate this excessive drop investment is ex- the Transpacific Partnership agreement. In to 4.0 percent in 2018 supported by the pected to grow in 2016 due commence- the medium term commitment to fiscal Second Phase of the Highlands Water ment of the mine and is expected to adjustments is crucial for macroeconomic project due to construction activities. remain high in 2017 and 2018 due to the stability. The current level of spending Fiscal balances will deteriorate over the second phase of the Lesotho Highlands places a strong pressure on the sustaina- next few years due to lower SACU reve- Water Project. bility of the public debt and the peg. The nues. SACU revenues are projected to fall Accompanying the resumption of moder- government has shown some commitment to 16.4 percent of GDP in 2016/17, driven ate economic growth, the poverty rate to consolidation by keeping wage rate by a slowdown in the South African ($1.9 PPP a day) is projected to fall by 1.1 increases in 2016 in line with inflation, economy, and are expected to remain percentage points from 56.4 to 55.3 per- however proposed measures in the budg- low. As of end march 2016 the budget cent between 2016 and 2018. This is et fall short of the necessary adjustment. was not yet finalized and additional cuts attributable to the sectoral composition of In the medium to long term Lesotho needs were expected. Based on current infor- growth. Agriculture is still a low- to move to a model that can deliver broad- mation, the deficit is expected to be at 8.1 productivity sector and high-quality land based employment growth to promote percent for 2016/17, 7.0 percent in is limited. Poor weather conditions led to shared prosperity and eradicate extreme 2017/18, and 5.3 percent in 2018/19. Leso- lower production in agriculture in 2015. poverty. In addition to the fiscal adjust- tho is expected to finance this deficit by Mining is expanding fast, yet is capital ment ambitious structural reforms are drawing down reserves. The gross inter- intensive, and will not generate much needed to raise potential output. Improve- national reserves are estimated to be 5.2, employment growth. Public sector wages ments in human capital through lower 4.0 and 3.5 months of imports in 2016, are the main driver of growth, however HIV/AIDS prevalence rates and better 2017, and 2018 placing a significant pres- public sector largely benefits affluent seg- education outcomes, in investment cli- sure on the sustainability of the peg. The ments of the population. mate constraints, and in key infrastruc- current account deficit it is projected to tures are necessary. deteriorate to 18.5 percent of GDP in 2016 due to the decline in SACU revenues. Inflation is projected to decline to 5 per- Risks and challenges cent over the medium term. Private consumption is expected to grow mod- Risks to the outlook are the decline in estly in 2016 due lower wage increases. SACU revenues, political instability, slow TABLE 2 Lesotho / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2013 2014 2015 e 2016 f 2017 f 2018 f Real GDP growth, at constant market prices 4.5 3.6 2.7 2.6 3.7 4.0 Private Consumption 0.2 7.0 2.1 3.0 3.7 4.1 Government Consumption -0.9 3.5 6.6 6.3 -2.7 1.6 Gross Fixed Capital Investment 17.4 -1.7 10.2 -22.9 38.2 31.6 Exports, Goods and Services -5.2 13.1 0.8 3.0 5.0 6.0 Imports, Goods and Services 1.4 7.0 4.7 -3.8 10.9 12.7 Real GDP growth, at constant factor prices 4.4 3.1 3.1 2.6 3.7 3.9 Agriculture 13.2 4.8 -3.5 -4.0 2.0 2.0 Industry -1.5 0.6 3.0 3.1 3.7 3.7 Services 6.8 4.2 3.9 3.1 3.9 4.1 Inflation (Consumer Price Index) 4.9 5.3 4.1 5.5 5.0 5.0 Current Account Balance (% of GDP) -11.0 -6.3 -10.4 -18.5 -16.1 -14.8 Financial and Capital Account (% of GDP) 9.0 11.2 3.4 14.2 5.9 2.5 Net Foreign Direct Investment (% of GDP) 1.2 1.2 1.1 1.2 1.2 1.2 Fiscal Balance (% of GDP) -2.3 0.6 0.1 -8.1 -7.0 -5.3 Debt (% of GDP) 43.4 49.5 60.0 61.4 58.5 55.5 Primary Balance (% of GDP) -1.4 1.6 1.3 -7.1 -6.0 -4.6 Poverty rate ($1.9/day PPP terms) a,b,c 57.5 57.0 56.7 56.4 55.9 55.3 Poverty rate ($3.1/day PPP terms) a,b,c 76.0 75.7 75.5 75.4 75.0 74.7 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: f = fo recast. (a) Calculatio ns based o n 201 0-CM SHB S. (b) P ro jectio n using annualized elasticity at regio nal level with pass-thro ugh = 0.5 based o n GDP per capita co nstant P P P . MPO 239 Apr 16