The International Monetary Fund (IMF) expects Lesotho to achieve gross domestic product (GDP) growth of 2.5% to 3% this year, but warns that growth might be lower depending on the severity of the drought affecting Southern Africa.

In a statement issued following the conclusion of an Article IV consultation with the country, the IMF noted that GDP growth had averaged about 4.5% a year from 2010 to 2014, falling to an estimated 2.6% last year amid weaknesses in the manufacturing and construction sectors and the spillover effects from slower growth in neighbouring South Africa.

Inflation was expected to remain moderate at between 5% and 6% this year, despite rising food prices and the recent depreciation of the South African rand.

Overall government expenditures remained comparatively high at 60% of GDP or more in recent years, with spending becoming increasingly slanted toward recurrent expenditures.

The government wage bill rose to 21.5% of GDP in 2014 – the highest in sub-Saharan Africa – and was expected to increase further to 23% of GDP in the current fiscal year.

Lesotho relied heavily on revenue from the Southern African Customs Union (Sacu) for government financing, but these revenues were highly volatile.

After a sharp drop between  2010 and 2012, Sacu revenues rebounded to an average of about 29% of GDP a year over the following three years. This rebound in Sacu revenues contributed to Lesotho’s recovery from a severe fiscal crisis and supported the rebuilding of fiscal and external buffers, with official international reserves reaching 6.3 months of imports by the end of March 2015.

However, Sacu revenues had fallen once again. After slipping to R6.6-billion this year, Lesotho’s allocation would drop sharply to R4.5-billion in 2017, with much of this decline expected to be long-lasting.

Lesotho’s current business environment had weakened, mainly owing to political difficulties around the collapse of the country’s first coalition government in 2014. Despite early elections in February 2015 and a smooth transition to a new coalition government, tensions had persisted.

Implementation of Lesotho’s National Strategic Development Plan (NSDP)
had stalled in this environment and investment had slowed.