Maseru: Against a backdrop of low growth, high unemployment, and widespread poverty, Lesotho’s government-led growth model has long struggled to deliver on the authorities’ growth and development goals. Now, an additional set of external shocks has further clouded the outlook. From a modest peak of 2.6 percent in FY24/25, GDP growth is expected to almost halve to 1.4 percent in FY25/26, reflecting a much more turbulent and uncertain external environment. The peg to the Rand has continued to serve Lesotho well, helping bring inflation down from a peak of 8.2 percent in early 2024 to 4.0 percent in April 2025.
According to African Press Organization, prudent government spending during FY24/25, along with buoyant South African Customs Union (SACU) transfers and water royalties, have once again resulted in a sizable fiscal surplus. This has enhanced longer-term fiscal sustainability and helped strengthen foreign reserves, which supports the peg. Looking forward, increased water royalties from South Africa will further boost revenue, and help offset easing SACU transfers.
The main challenge for the authorities is to transform these fiscal surpluses into sustainable and high-quality growth — now even more urgent in light of recent shocks. Public funds should be saved wisely and spent strategically, with an emphasis on high-return investment projects. More effective use of public funds, alongside structural reforms, should support longer-term private sector-led growth.
Lesotho’s fiscal balance registered a sizable surplus in FY24/25. SACU transfers are up by almost 14 percent of GDP compared with FY23/24, and recurrent spending has remained steady as a proportion of GDP, owing to a moratorium on public sector hiring and a reduction in the in-kind social assistance benefits. Capital spending increased but execution remained short of budgeted levels. The net impact has been a fiscal surplus of 9.0 percent of GDP in FY24/25, which helped lift gross international reserves to six months of imports, strengthening the peg.
However, a more uncertain global environment has undermined Lesotho’s economic outlook, with growth expected to almost halve to 1.4 percent in FY25/26. In particular, the sudden shift in policies by the United States on tariffs and official development assistance will hit the economy hard. Details of US intentions are still unclear, but as a small and vulnerable country, Lesotho is one of the most exposed countries in Africa to changing US priorities. Exports to the United States represent 10 percent of Lesotho’s GDP, and foreign assistance from the United States has typically amounted to around 3½ percent of GDP, mostly concentrated on disease prevention and other critical health needs.
Looking ahead, Lesotho has options. SACU transfers are expected to drop to their long-term average this year. Filling the gap, however, renegotiated water royalty rates under the Treaty with South Africa on the LHWP-II represent a significant source of revenue. On the monetary side, the peg to the Rand continues to serve the economy well and should remain the main focus of monetary policy. The central bank should take advantage of the current easing cycle to close the remaining gap with South Africa.
The key challenge for the authorities is to transform Lesotho’s fiscal surpluses into sustained, high-quality growth. A striking lesson from the country’s recent history, however, is that greater public spending is no guarantee of higher living standards. As a proportion of GDP, for example, government spending in Lesotho is well above international norms. But this has not been matched by improved economic performance. Indeed, real per capita incomes shrunk by 12 percent between 2016 and 2023, and unemployment and inequality remain high.
Greater savings will require continued fiscal prudence. To this end, the authorities should maintain their efforts to control recurrent spending and enhance capacity in tax revenue analysis and administration. Authorities should also improve the efficiency of social spending to target the most needy. Social spending is several times that of neighboring countries as a share of GDP but the targeting of social safety schemes should be improved.
The authorities should quickly establish a well-governed savings framework. A key anchor would be a target for Lesotho’s public debt. Until very recently, debt has trended steadily upward, rising sharply during the COVID-19 pandemic. The decline over the past year has been welcome, but there is little scope to absorb any further shocks. A medium-term goal of 50 percent of GDP would be appropriate, as it would allow for greater resilience.
Improved public investment management is needed to increase the quality of capital spending. Before Lesotho’s savings are allocated for investment or infrastructure projects, sufficient controls should be in place to ensure that this investment represents value for money. In support of efforts to ensure value for money, the authorities should enhance Public Financial Management.
Improved public investment will need to be accompanied by broad structural reforms. Better service delivery and higher-quality investment will be helpful. But the current government-led growth model has resulted in an economy with a small and undiversified private sector. Supporting financial inclusion and literacy is imperative. Evidence suggests that access to finance remains a key challenge, particularly for small and informal firms.
Providing a stable, predictable, and well-regulated business environment is also essential. For larger firms, needed reforms include measures to reduce the cost of doing business, and efforts to boost private investor confidence. Mitigating corruption and strengthening the rule of law is essential to restoring confidence, investment, and growth. Strengthening key bodies such as the Office of the Auditor General and the Directorate on Corruption and Economic Offences would send a strong signal of the government’s resolve.