Due to the severe drought, year-on-year LESOTHO inflation increased to 7.5 percent in June Recent developments 2016, tied in large measure to increasing food prices. Food prices surged by 14 per- Following average growth of 4.7 percent cent in June 2016 contrasted with levels in 2012 and 2013, the advance in real GDP for the same period a year earlier. CPI Table 1 2015 softened to 3.6 percent in 2014 and slack- inflation registered 6 percent in 2015 and Population, million 2.1 ened further to 1.7 percent in 2015. The is likely to rise to 8.5 percent in 2016. In- GDP, c urrent US$ billion 2.0 main drivers of growth deceleration in- ternational reserves were the equivalent of GDP per c apita, c urrent US$ 926 clude shrinking agricultural production 6.1 months of imports in 2015, similar to Poverty rate ($1.9/day 2011PPP terms) a 59.6 due to El-Nino, a slowdown in industrial year earlier ratios. a output due to uncertainty of AGOA exten- Between 2002 and 2010 Lesotho made Poverty rate ($3.1/day 2011PPP terms) 77.3 a sion, and slippage in mining production. little progress in reducing extreme pov- Gini Coeffic ient 54.2 Services remain a brighter spot, growing erty. The headcount poverty rate was 57.1 b Sc hool enrollment, primary (% gross) 111.0 at 2.6 percent in 2015. percent in 2010 (national poverty line), b Life Expec tanc y at birth, years 48.8 Net exports declined due to supply re- accompanied by high inequality, meas- Sources: World Bank WDI and M acro Poverty Outlook. ductions and weak demand from trade ured at 53.8 percent by the Gini coeffi- Notes: partners. Investment growth was mod- cient—such inequality itself an obstacle to (a) M ost recent value (2010) (b) M ost recent WDI value (2014) est due to the shortfall in the govern- poverty reduction. Lesotho’s economic ment’s capital budget, uncertainty over structure and poorly targeted social pro- AGOA and the completion of the tection policies are at the heart of high and Metelong Dam. Although government stagnant poverty and inequality. Low- consumption remained high as the wage productivity agriculture remains the main bill increased to 21.8 percent of GDP, source of income for over 1 in 3 house- government investment was limited due holds. The benefits of a well-paid public The easing of GDP growth since 2013 is to under-execution of the capital budget sector mainly flow to the most affluent (65 percent). households. Most social protection trans- expected to continue through 2016 due to Fiscal balances are likely to deteriorate fers do not target the poor. persistent drought effects and weak re- over the next years due to lower SACU gional conditions, leading to a decline in revenues-which amounted to 30 percent SACU revenues and associated fiscal of GDP in 2014/15. The overall fiscal bal- ance registered a modest surplus of 0.6 Outlook pressures. The drought will likely trans- percent of GDP in 2015, while the non- late into only a moderate decline of 1.36 SACU fiscal deficit is estimated to stand at Growth is expected to increase slightly to percentage points in the poverty rate 24 percent of GDP in 2015/16, improving 2.4 percent in 2016-- a downward revision ($1.9 PPP a day) to 55.4 percent by 2018. from 28.6 in FY2014/15. The current ac- from the last forecast (2.6 percent). Weak- count deficit widened to 9.4 percent of er growth prospects in South Africa, and GDP; while Lesotho’s public debt in- uncertainty due to the sustainability of the creased to 59.5 percent of GDP in 2015 due exchange rate peg are key factors in the to depreciation of the local currency. markdown to growth. Over the medium FIGURE 1 Lesotho / Contributions to annual GDP growth FIGURE 2 Lesotho / Actual and projected poverty rates and GDP per capita (constant LCU) Percent Poverty Rate (%) GDP per capita (constant LCU) 20 90 7000 15 80 6000 10 70 5000 5 60 50 4000 0 40 3000 -5 30 -10 2000 20 -15 1000 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 pc Source: Lesotho Bureau of Statistics. Source: World Bank (see notes to table 2). MPO 236 Oct 16 term growth is expected to pick up gradu- increases. Investment has dropped con- growth in South Africa, fiscal sustainabil- ally to 3.7 percent in 2017/18 driven by the siderably following completion of the ity and competition due to the potential commencement of operations at the Metelong Dam and increased uncertainty coming on-stream of the Trans-Pacific Liqhobong mine in the 4th quarter of 2016, regarding AGOA. Capital outlays should Partnership. In the medium term commit- and accelerate further to 4 percent by grow once more in 2016 due to com- ment to fiscal adjustment is crucial for 2018/19 supported by construction activity mencement of mine operations, and re- macroeconomic stability. The current tied to the Second Phase of the Highlands main strong in 2017 and 2018 due to the level of spending places strong pressure Water project. second phase of the Lesotho Highlands on the sustainability of public debt and Fiscal balances will come under increas- Water Project. the exchange rate peg. The government ing pressure over the next years due to Tied to persistent effects of drought, the has shown some commitment to fiscal lower SACU revenues. Such revenues are poverty rate ($1.9 PPP a day) is projected consolidation by keeping wage increases projected to fall to 15.9 percent of GDP in to fall only moderately by 1.36 percentage in line with inflation during 2016, but FY2016/17—almost halving from earlier points from 56.7 to 55.4 percent between proposed measures in the budget fall levels-- driven by a slowdown in the FY2016 and FY2018. This is attributable to short of the necessary adjustment. South African economy, and are expected the sectoral composition of growth. Ad- Though government spends a large por- to remain low into the medium term. verse weather conditions led to lower ag- tion of its budget on social sectors, out- Still, the fiscal shortfall is anticipated to ricultural production during FY 2015 with comes to date have not been encouraging. ease from 9.4 percent of GDP in 2016 to persisting effects through FY 2016. The Increasing efficiency and effectiveness of 3.2 percent by 2018. Lesotho is expected decline in production and corresponding government spending is important to to finance this deficit by drawing down increases in food prices will carry a more sustaining growth and promoting shared reserves. Limited commercial bank inter- negative impact among the poor, deriving prosperity. Along with fiscal adjustment, est in government bonds and potential most of their income from agriculture. ambitious structural reforms are needed additional spending needs arising from a Though mining will grow quickly, the to raise potential output. Improvements mid-term budget review have the poten- sector will not generate many jobs due to in human capital through lower HIV/ tial to exacerbate the fiscal stance. And its capital intensity. AIDS prevalence and better educational significant deterioration in the current outcomes, in investment climate con- account deficit is expected (to 19 percent straints, and in key infrastructure are nec- of GDP in 2016) due to the sharp falloff in SACU revenues. Risks and challenges essary to boost private sector develop- ment and job creation. Inflation is anticipated to bounce back to 6 percent over the medium term, while Risks to the outlook are several, and in- private consumption should advance clude: decline in SACU revenues, political only modestly in 2016 due to lower wage instability, slow global recovery, lower TABLE 2 Lesotho / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2013 2014 2015 2016 f 2017 f 2018 f Real GDP growth, at constant market prices 4.5 3.6 1.7 2.4 3.7 4.0 Private Consumption 0.2 7.0 2.0 3.0 3.0 3.0 Government Consumption -0.9 3.5 6.7 7.8 -3.3 6.2 Gross Fixed Capital Investment 17.4 -1.7 3.8 2.0 23.3 14.0 Exports, Goods and Services -5.2 13.1 0.8 3.0 6.0 7.0 Imports, Goods and Services 1.4 7.0 3.5 4.6 7.6 8.2 Real GDP growth, at constant factor prices 4.4 3.1 1.9 2.5 3.0 3.5 Agriculture 13.2 4.8 -4.8 -4.0 2.0 2.0 Industry -1.5 0.6 2.3 3.1 3.7 3.7 Services 6.8 4.2 2.6 2.9 2.7 3.5 Inflation (Consumer Price Index) 4.9 5.3 6.0 8.5 6.0 5.0 Current Account Balance (% of GDP) -11.0 -6.3 -9.4 -18.4 -17.6 -17.1 Financial and Capital Account (% of GDP) 9.0 11.2 2.4 14.3 8.3 5.9 Net Foreign Direct Investment (% of GDP) 1.2 1.2 1.2 1.1 1.1 1.1 Fiscal Balance (% of GDP) -2.3 0.6 0.1 -9.5 -4.9 -3.2 Debt (% of GDP) 44.2 49.5 59.5 59.9 57.3 54.5 Primary Balance (% of GDP) -1.4 1.6 1.3 -8.5 -3.9 -2.5 a,b,c Poverty rate ($1.9/day PPP terms) 58.5 57.3 57.1 56.7 56.1 55.4 Poverty rate ($3.1/day PPP terms) a,b,c 76.6 75.9 75.8 75.5 75.2 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: e = estimate, 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 private co nsumptio n per capita in co nstant LCU. (c) P ro jectio ns are fro m 2013 to 2018. MPO 237 Oct 16