LESOTHO ECONOMIC UPDATE April 2025 TRANSFORMING FISCAL POLICY INTO AN ENGINE OF INCLUSIVE GROWTH Followin dec de of low nd unsust in ble rowth Lesotho h s unique opportunit to build new found tion for robust nd inclusive rowth © 2025 The World B nk 1818 H Street NW, W shin ton DC 20433 Telephone: 202-473-1000; Internet: www.worldb nk.or Some ri hts reserved. This work is product of the st ff of The World B nk. The findin s, interpret tions, nd conclusions expressed in this work do not necess ril reflect the views of the Executive Directors of The World B nk or the overnments the represent. The World B nk does not u r ntee the ccur c of the d t included in this work. The bound ries, colors, denomin tions, nd other inform tion shown on n m p in this work do not impl n jud ment on the p rt of The World B nk concernin the le l st tus of n territor or the endorsement or ccept nce of such bound ries. Ri hts nd Permissions The m teri l in this work is subject to cop ri ht. Bec use The World B nk encour es dissemin tion of its knowled e, this work m be reproduced, in whole or in p rt, for noncommerci l purposes s lon s full ttribution to this work is iven. Attribution—Ple se cite the work s follows: “World B nk (2025) Lesotho Economic Upd te: Tr nsformin Fisc l Polic into n En ine of Inclusive Growth © World B nk.” All queries on ri hts nd licenses, includin subsidi r ri hts, should be ddressed to World B nk Public tions, The World B nk Group, 1818 H Street NW, W shin ton, DC 20433, USA; f x: 202-522-2625; e-m il: pubri hts@ worldb nk.or . All fi ures nd d t re current s of M rch 25, 2025. LESOTHO ECONOMIC UPDATE April 2025 TRANSFORMING FISCAL POLICY INTO AN ENGINE OF INCLUSIVE GROWTH LESOTHO ECONOMIC UPDATE 2025 - Transforming Fiscal Policy into an Engine of Inclusive Growth LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth ACKNOWLEDGEMENTS This first edition of the Lesotho Economic Upd te is desi ned to inform robust polic di lo ue round development ch llen es nd opportunities for rowth nd povert reduction. World B nk Economic Upd tes re imed t wide udience, includin st keholders from the overnment, c demi , civil societ , nd the intern tion l communit . E ch edition in the series includes review of recent economic developments, n ssessment of the countr ’s medium-term outlook, nd speci l focus section offerin deeper n l sis of s lient issue, trend, or polic re . In this edition of the Lesotho Economic Upd te, the speci l focus section ex mines the role of fisc l polic in st bili in the business c cle nd proposes polic ctions to improve the qu lit of the deliver of public services in n efficienc m nner. B contributin to stren thenin m croeconomic m n ement nd incre sin the v lue-for-mone in public spendin , fisc l polic will stren then the found tions for sust in ble nd inclusive lon -term rowth. This Economic Upd te w s prep red b te m led b Soni Ar ujo (Senior Economist, EAEM2). Ke contributors to P rt 1 included Mon hen Seleten , D niel Dborkin, nd Soni Ar ujo. The m in uthors for P rt 2 were Soni Ar ujo, D niel Dborkin, nd V lentin Bonif cio. The report lso benefited from v lu ble feedb ck provided b J cques Morisset, Pedro M rtins, Jo nn W tkins, J vier E. B e , Aj i N ir, Olive U. Ns b ber , Kirk Schmidt, nd Guillermo Vuletin. Cher l Khuphe ssisted with communic tions nd the dissemin tion of the report. Relebohile Mohl ko n provided dministr tive nd lo istic l support. The report w s prep red under the over ll uid nce nd supervision of S tu K hkonen (Countr Director for Southern Afric ), Din r Djoldoshev (Resident Represent tive for Lesotho), H ss n Z m n (Re ion l Director, Prosperit ), nd M rco Hern nde (Pr ctice M n er, Economic Polic ). The report w s edited b Se n Lothrop (Consult nt) nd desi ned b Luc Victori D vis (Consult nt). LESOTHO ECONOMIC UPDATE 2025 - Transforming Fiscal Policy into an Engine of Inclusive Growth LESOTHO ECONOMIC UPDATE 2025 - Transforming Fiscal Policy into an Engine of Inclusive Growth TABLE OF CONTENTS LIST OF ACRONYMS, FIGURES, TABLES AND BOXES .................................................. 6 EXECUTIVE SUMMARY .................................................................................................................... 9 PART 1: THE STATE OF THE ECONOMY ................................................................................ 15 1.1 RECENT DEVELOPMENTS ......................................................................................................................................... 15 1.1.1. Economic growth: A modest recovery highlights opportunities to accelerate macro-fiscal reforms ............ 15 1.1.2. Labor: A high poverty rate reflects limited employment opportunities ............................................................................. 17 1.1.3. Prices: Disinflation creates space for more accommodative monetary policy ............................................................. 19 1.1.4. The External Sector: Rising SACU revenues, water royalties, and robust remittances have brought the current account into surplus ................................................................................................................................................................................ 20 1.1.5. Fiscal Policy: Multiple factors have contributed to a burgeoning fiscal surplus ........................................................... 21 1.2 ECONOMIC OUTLOOK AND RISKS ..................................................................................................................... 23 1.2.1. The baseline scenario is broadly favorable .............................................................................................................................................. 23 1.2.2. High exposure to domestic and external risks clouds the outlook ....................................................................................... 25 1.3 THREE POLICY ACTIONS TO INCENTIVIZE PRIVATE SECTOR DEVELOPMENT, STRENGTHEN MACRO-FISCAL MANAGEMENT, AND ENHANCE PUBLIC SPENDING ................... 27 1.3.1. Policy Action 1: Incentivize Private Sector Development .............................................................................................................. 27 1.3.2. Policy Action 2: Strengthen Macro-Fiscal Management .............................................................................................................. 30 1.3.3. Policy Action 3: Enhance the Efficiency and Effectiveness of Public Spending .......................................................... 31 PART 2: SPECIAL FOCUS: HOW TO MAKE FISCAL POLICY AN ENGINE OF INCLUSIVE GROWTH ........................................................................................................................ 33 2.1 EFFECTIVE FISCAL POLICY IS VITAL TO LESOTHO’S DEVELOPMENT .......................................... 33 2.1.1. Longstanding challenges in macro-fiscal management weaken the impact of fiscal policy on growth .... 34 2.1.2. Budgetary rigidities constrain the capacity to align the use of public resources with the country’s needs ...... 37 2.1.3. Strengthening fiscal management and budget allocation could improve budget execution and enhance the effectiveness of public spending ........................................................................................................................................................................ 40 2.2 THREE REFORM AREAS TO TRANSFORM FISCAL POLICY INTO AN ENGINE OF INCLUSIVE GROWTH .................................................................................................................................................. 43 2.2.1. Reform Area 1: Adopting Fiscal Rules and Creating a Stabilization Fund to Promote Macroeconomic Stability 43 2.2.2. Reform Area 2: Improving the Allocation of Spending .................................................................................................................. 44 2.2.3. Reform Area 3. Enhancing the Efficiency of Public Spending .................................................................................................. 45 REFERENCES .......................................................................................................................................... 47 x LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth LIST OF ACRONYMS AfCFTA Afric n Continent l Free Tr de Are AGOA Afric n Growth nd Opportunit Act ECCD E rl Childhood C re nd Development CBL Centr l B nk of Lesotho CGP Child Gr nts Pro r m EIP Economic Inclusion Pro r ms FDI Forei n Direct Investment FY Fisc l Ye r GDP Gross Domestic Product GFS Government Fin nce St tistics IFMIS Inte r ted Fin nci l M n ement Inform tion S stem IMF Intern tion l Monet r Fund LHWP-II Lesotho Hi hl nds W ter Project Ph se Two M Lesotho M loti MoFDP Ministr of Fin nce nd Development Pl nnin MSMEs Micro nd sm ll enterprises MTFF Medium-Term Fisc l Fr mework NSDP II Second N tion l Str te ic Development Pl n OAP Ol A e Pension PA Public Assist nce PFM Public Fin nci l M n ement PIM Public investment m n ement SACU Southern Afric Customs Union SACCOs S vin s nd credit cooper tive societies SARB South Afric Reserve B nk SOEs St te-Owned Enterprises SP Soci l Pro r ms LIST OF FIGURES Fi ure 1. Despite reboundin in 2024, Lesotho’s rowth r te h s f llen over time… ............................................................ 15 Fi ure 2. … nd the GDP p between Lesotho nd its peers is widenin .................................................................................... 15 Fi ure 3. Textiles nd di monds represent the bulk of Lesotho’s exports… .............................................................................. 16 Fi ure 4. … nd exports re concentr ted in h ndful destin tion m rkets ............................................................................ 16 Fi ure 5. The fin nci l sector drove rowth in 2024… ............................................................................................................................ 16 Fi ure 6. …while w ter exports m de modest contribution. ........................................................................................................... 16 Fi ure 7. A l r e sh re of the popul tion does not p rticip te in the l bor m rket ......................................................... 17 Fi ure 8. Rel tive to peer countries, l bor-force p rticip tion is low nd unemplo ment is hi h ............................ 17 Fi ure 9. The public sector h s become the countr ’s l r est form l emplo er ................................................................... 18 Fi ure 10. Remitt nces h ve recentl incre sed… ....................................................................................................................................... 18 Fi ure 11. … nd re well bove the levels of re ion l nd income- roup peers ...................................................................... 18 Fi ure 12. Infl tion is trendin downw rd... ..................................................................................................................................................... 19 Fi ure 13. …but food prices rem in the l r est contributor to infl tion ...................................................................................... 19 Fi ure 14. The CBL polic r te closel tr cks the polic r te in South Afric ........................................................................ 20 Fi ure 15. The suppl of credit to the priv te sector h s exp nded, but most lo ns o to households .............. 20 Fi ure 16. SACU revenues nd w ter exports h ve bolstered the current ccount ............................................................ 21 Fi ure 17. W ter exports sur ed in 2024, but exports of di monds nd textiles rem in we k ................................ 21 Fi ure 18. A sh rp incre se in SACU tr nsfers nd w ter ro lties h s boosted revenue… ......................................... 22 Fi ure 19. …cre tin l r e but vulner ble fisc l surplus ....................................................................................................................... 22 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Fi ure 20. The sh re of domestic debt in tot l debt h s incre sed over time... .................................................................... 23 Fi ure 21. … nd interest p ments re hi h nd risin , p rticul rl on domestic debt ................................................... 23 Fi ure 22. Revenues depend on vol tile SACU tr nsfers nd w ter ro lties ........................................................................ 31 Fi ure 23. Arre rs h ve recentl been cont ined, but ch llen es persist ................................................................................... 31 Fi ure 24. The c clic ll djusted prim r b l nce is worsenin over time… ............................................................................ 35 Fi ure 25. …with frequent nd deep fisc l deficits ....................................................................................................................................... 35 Fi ure 26. Public spendin is incre sin l proc clic l ................................................................................................................................. 35 Fi ure 27. The rowth of the w e bill h s consistentl outp ced GDP rowth... ................................................................. 37 Fi ure 28. … nd the w e bill now si nific ntl exceeds the levels of peer countries ( ver e 2018-2023) ..... 37 Fi ure 29. Lesotho’s public-sector w e bill is the hi hest in SSA .................................................................................................... 38 Fi ure 30. The public-sector w e premium is the hi hest mon SACU countries… ........................................................ 38 Fi ure 31. … nd the premium is re test mon workers with lower educ tion levels ..................................................... 38 Fi ure 32. Most public spendin is hi hl ri id… ............................................................................................................................................. 39 Fi ure 33. … nd expenditure ri idit h s incre sed over time ............................................................................................................. 39 Fi ure 34. Public spendin is well bove the levels of peer countries nd re ion l ver es ........................................ 41 Fi ure 35. The “Ei ht Must-H ves”: A S stem tic Guid nce Fr mework for PIM ................................................................. 42 LIST OF TABLES T ble 1. B seline forec sts (Annu l percent ch n e unless indic ted otherwise) ................................................................ 27 LIST OF BOXES Box 1. A revised formul for w ter ro lties h s delivered sur e in fisc l revenue ......................................................... 21 Box 2. The Bud et Speech 2025/26 ..................................................................................................................................................................... 25 Box 3. The close economic ties between South Afric nd Lesotho .............................................................................................. 26 Box 4. Monet r nd fisc l polic under fixed exch n e r te re ime ....................................................................................... 36 Box 5. Me surin bud et r ri idit in Lesotho ............................................................................................................................................. 39 LESOTHO ECONOMIC UPDATE 2025 - Transforming Fiscal Policy into an Engine of Inclusive Growth 8 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth EXECUTIVE SUMMARY Followin dec de of low nd unst ble rowth, Lesotho h s unique opportunit to build new found tion for robust nd inclusive development. As re l GDP rowth pivoted from 6.3 percent exp nsion in 2012 to n 8.2 percent contr ction in 2020, per c pit income levels declined sh rpl , nd Lesotho’s hopes of improvin livin st nd rds slipped w . However, the countr now h s ch nce to return to conver ence p th, s the second ph se of the Lesotho Hi hl nds W ter Project (LHWP-II), incre sed revenue tr nsfers from the Southern Afric n Customs Union (SACU), nd the rene oti tion of w ter ro lties from South Afric re expected to drive economic ctivit nd provide resources for much-needed soci l spendin nd infr structure investment. Sei in this opportunit will require effective prioriti tion of policies nd investments, sound public fin nci l m n ement, nd the restor tion of sufficient fisc l buffers (s vin s) to counter ne tive shocks. This Economic Upd te hi hli hts the critic l role of fisc l polic in miti tin m croeconomic vol tilit nd fosterin sust in ble nd inclusive rowth. It stresses the need for effective fisc l nd public investment m n ement reforms to ddress Lesotho’s economic ch llen es nd unlock opportunities for development. Ali nin fisc l policies with the o l of inclusive rowth is essenti l to ensure th t benefits re ch ll se ments of societ . THE STATE OF THE ECONOMY Lesotho h s experienced modest economic recover . After contr ctin for three consecutive e rs from 2017 to 2019, Lesotho’s econom w s h rdl hit b the COVID-19 p ndemic, which led to further contr ction of 8.2 percent of GDP in 2020. From 2021 to 2023, the econom exp nded t n ver e nnu l r te of 2.1 percent, which h s been insufficient to reverse the ne rl 20 percent decline in per c pit income observed since 2016. While extern l shocks nd extreme we ther events h ve lso pl ed role, Lesotho’s unf vor ble business environment h s discour ed domestic nd forei n investment, we kened export competitiveness, nd contributed to the rowth of l r e subsistence-oriented inform l sector. Consequentl , the income p between Lesotho nd its lower-middle income peers is widenin . 2024 w s n exception l e r for Lesotho. The econom exp nded b n estim ted 2.3 percent. Me nwhile, historic ll hi h SACU revenues nd the rene oti tion of w ter ro lties delivered l r e lbeit vulner ble fisc l surplus even s public spendin incre sed. Growth continues to be driven b the public sector, with the LHWP-II contributin to sur e in public investment. This project h s ener ted positive spillover effects on the fin nci l, communic tions, nd business services sectors, further cceler tin rowth. B contr st, m nuf cturin , utilities, nd minin slowed rowth in 2024. An especi ll sh rp contr ction in the m nuf cturin sector, which is domin ted b multin tion l textile nd rment firms, reduced over ll rowth b more th n 1.5 percent e points, while subdued intern tion l dem nd for di monds dversel ffected minin nd qu rr in output. Infl tion h s continued to decline, f llin from 6.4 percent in 2023 to 6.1 percent in 2024. Sust ined disinfl tion h s cre ted sp ce for more ccommod tive monet r polic . However, Lesotho’s centr l b nk rem ins ti htl focused on m int inin the st bilit of the pe between the Loti (plur l M loti:M) nd the South Afric n r nd, which limits the scope for monet r stimulus. Povert levels rem in hi h, l r el due to limited emplo ment opportunities. A l r e sh re of the popul tion does not p rticip te in the l bor m rket, nd household income rem ins critic ll dependent on remitt nces. The unemplo ment r te is persistentl hi h t n estim ted 16 percent, with women nd oun people overrepresented mon the unemplo ed popul tion of 125,000. Moreover, these fi ures do not ccount for underemplo ment or prec rious emplo ment in Lesotho’s l r e inform l sector. Supportin renewed priv te sector development will be vit l to cceler te job cre tion. 9 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Hi h SACU revenues ener ted the countr ’s first current ccount surplus in 17 e rs. Lesotho’s l r e tr de deficit t pic ll results in current ccount deficits. In 2024, however, the tr de deficit n rrowed t the m r in, s lower di mond nd textile exports nd hi her imports linked to the LHWP- II were compens ted b incre sed w ter revenues, which rose from 5 percent of GDP in 2023 to 7.2 percent in 2024. Unprecedented SACU revenue inflows, to ether with l r e nd sust ined remitt nces, helped boost the second r income b l nce, offsettin the tr de deficit. Hi h SACU revenues resulted in two consecutive nnu l fisc l surpluses. SACU tr nsfers nd w ter ro lties sur ed b cumul tive 17 percent e points in the p st two e rs, le din to surpluses of 7.1 percent of GDP in FY23/24 nd 8.8 percent in FY24/25. The uthorities used p rt of these resources to r ise spendin nd p down rre rs to priv te suppliers, which reemer ed in 2022 nd pe ked t 3.17 percent of GDP t end-FY23/24. In e rl 2025, rre rs fell to n estim ted 0.6 percent of GDP (ne rl M 250 million). A str te for ssessin nd cle rin the rem inin rre rs would improve bud et m n ement nd build trust nd ccount bilit in the public sector. Lesotho’s economic outlook is moder tel positive. Under the b seline scen rio, re l GDP rowth is projected to tempor ril incre se to 3.0 percent of GDP in 2025 nd return to its historic l ver e of 2 percent there fter. The exp nsion in 2025 will be driven b public investment, especi ll the LHWP-II nd tr nsport tion projects. Exports will rem in subdued mid we k extern l dem nd. He dline infl tion is expected to r du ll conver e to 5 percent s lob l fuel prices moder te nd infl tion in South Afric rem ins modest. In this context, monet r polic is expected to become more ccommod tive, which should help incre se the suppl of credit to the priv te sector. However, the n tion l he dcount povert r te is projected to rem in rel tivel st ble t bout 60 percent over the next three e rs due to persistentl hi h unemplo ment. A mix of new nd lon st ndin risks clouds the outlook. As sm ll undiversified econom surrounded b sin le, much l r er econom , Lesotho is ver sensitive to extern l dem nd shocks. We ker lob l nd re ion l rowth, potenti ll worsened b eopolitic l conflicts, could reduce di mond exports nd remitt nces, imp ctin jobs nd household consumption. The US overnment’s f ilure to renew the Afric n Growth nd Opportunit Act (AGOA) could lso decre se exports nd incre se unemplo ment. Lesotho’s economic perform nce is hi hl sensitive to developments in South Afric , which ffect tr de, monet r polic , the exch n e r te, nd remitt nces. Clim te-rel ted shocks could ne tivel imp ct the ricultur l sector nd slow the implement tion of infr structure projects, we kenin rowth nd reversin ins in povert reduction. Domestic risks include politic l inst bilit , which could st ll import nt fisc l reforms nd me sures to improve the business environment, hinderin rowth. Fisc l mism n ement, potenti ll includin the emer ence of new rre rs, could erode fisc l buffers nd we ken the imp ct of spendin on rowth nd povert reduction. On oin ch n es in US bil ter l nd multil ter l id pose ddition l risks. The US funds m n of Lesotho’s he lth pro r ms, nd reduction in id could incre se soci l tensions nd mplif domestic spendin pressures. Del s in implementin the Millennium Ch llen e Corpor tion (MCC) Comp ct II, which includes investments in w ter infr structure, he lth services, nd entrepreneurship pro r ms, could inhibit rowth, job cre tion, nd exports. Hei htened risks nd incre sed revenues c ll for bold reforms to bolster rowth. In context of consider ble extern l uncert int , the uthorities c n lever e combin tion of public investment nd economic reforms to e se constr ints on rowth nd job cre tion. Current rowth is bein driven b the LHWP-II project, incre sed SACU tr nsfers nd w ter ro lites. If the overnment does not sei e the initi tive nd implement bold reforms, rowth will decline s LHWP-II investments t per off, nd the du l surpluses will r du ll dis ppe r. Lesotho’s priv te sector development is hindered b we k business environment, domin nt public sector, skill short es, limited ccess to fin ncin mon sm ll nd medium-si ed enterprises, nd l r e infr structure p. These conditions h ve limited emplo ment opportunities nd discour ed investments in production nd export diversific tion. Improvin the business environment, exp ndin ccess to qu lit educ tion, nd boostin credit to the priv te sector will be cruci l to spur rowth nd job cre tion, especi ll for oun er workers. 10 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Historic ll , public expenditures h ve been driven l r el b SACU tr nsfers, ex cerb tin m croeconomic vol tilit . SACU tr nsfers tend to be vol tile nd proc clic l—sur in durin exp nsions nd f llin durin recessions. In the p st, polic m kers h ve tended to spend incre sed revenues immedi tel , nd it h s been difficult to djust spendin when revenues decline. Unsust in ble expenditure p tterns h ve depleted fisc l buffers nd led to the ccumul tion of rre rs, ener tin persistent fisc l imb l nces th t h ve c used the public debt to so r. With monet r polic ppropri tel focused on m int inin st ble exch n e r te with the r nd, fisc l polic is the prim r m croeconomic m n ement tool. We knesses in fisc l polic contribute to m croeconomic inst bilit , which undermines priv te investment nd rowth nd perpetu tes povert . Despite hi h levels of public spendin , rowth h s rem ined well below its potenti l. M n f ctors undermine the effectiveness of public spendin , includin inefficiencies in public procurement s stems, we knesses in public fin nci l nd investment m n ement, s well s bud et r lloc tion. This first edition of the Lesotho Economic Upd te proposes two p thw s to unlock virtuous c cle of development in which both the priv te nd public sectors ct s robust en ines of rowth. P thw 1: Enh ncin priv te sector development To cceler te priv te-sector development, the overnment could consider reforms in three re s: incentivi in priv te investment nd the cre tion of new businesses, improvin educ tion outcomes, nd exp ndin credit to the priv te sector. The followin polic ctions could cre te new opportunities for entrepreneurship nd investment: • Reduce the costs of doin business nd promote business entr . Simplif in business re ul tions nd dministr tive procedures, cceler tin public sector decisions nd limitin discretion in ev lu tin investment decisions would reduce costs nd uncert int . The uthorities could lso dv nce the implement tion of their investment polic nd cl rif the conditions for forei n direct investment in the business licensin nd re istr tion ct. • Lever e re ion l reements while continue to m ke pro ress in tr de f cilit tion nd connectivit . Lesotho could reinforce its reput tion of friendl pl ce to do business, with focus on exporters, b li nin its policies with re ion l reements. For ex mple, s member of the Afric n Continent l Free Tr de Are (AfCFT), Lesotho could t ke steps to li n its le isl tion with the requirements of the oper tion l ph se of the reement, which took effect in April 2024. • F vor open m rkets nd competition. The overnment could encour e competition b up r din nd moderni in its competition l w nd b reinforcin the level pl in field between the public nd the priv te sector in its St te-Owned Enterprise (SOE) Polic . The SOE Polic could lso inte r te provisions to enh nce efficienc , promote ood overn nce, nd stren then tr nsp renc nd ccount bilit in the use of public funds ssoci ted with SOE ctivit . • Economic Inclusion Pro r ms (EIPs) offer promisin p thw b providin poor nd vulner ble popul tions with inte r ted support—such s c sh tr nsfers, skills tr inin , productive r nts, nd fin nci l inclusion—to tr nsition from subsistence to sust in ble livelihoods. EIPs c n pl critic l role in fosterin self-emplo ment nd sm ll enterprise development, p rticul rl for women nd outh. Evidence shows th t well-desi ned EIPs re cost-effective nd le d to me nin ful improvements in income, resilience, nd economic mobilit . Inte r tin EIPs into existin s fet nets like the Child Gr nts Pro r m (CGP) nd Public Assist nce (PA) c n reduce dependenc on tr nsfers nd drive inclusive, sust in ble rowth. To improve educ tion outcomes, the uthorities could consider three ke reform objectives: • R ise the efficienc of educ tion spendin : the public educ tion bud et is hi h comp red to those of peer countries, but outcomes continue to l due to inefficiencies in the educ tion s stem. To improve educ tion outcomes nd enh nce equ lit of opportunit , the overnment could revise 11 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth the lloc tion of the educ tion bud et to r du ll exp nd ccess to qu lit e rl childhood c re nd development (ECCD), especi ll in rur l re s. It could lso incre se investment in buildin s, equipment, nd m teri ls, nd it could review the terti r educ tion lo n burs r scheme. • Improve the effectiveness of te chers. The overnment could enh nce te cher tr inin b implementin st nd rdi ed testin nd b developin Continuous Te cher Development Fr mework. The uthorities could lso improve te cher deplo ment to h rmoni e student-te cher r tios cross rur l nd urb n schools. • Ali n educ tion with l bor-m rket needs. The uthorities could reorient the curriculum for technic l nd voc tion l educ tion nd tr inin nd hi her educ tion to better reflect the dem nds of emplo ers. To exp nd ccess to fin nce, Lesotho could consider the followin options to further improve the credit environment: • Consolid te the p rti l credit u r ntee scheme. The uthorities could lso improve its overn nce nd oper tions in line with intern tion l best pr ctices. • Acceler te the est blishment of interoper ble p ments nd r pid p ments. The overnment c n speed the rollout of p ments between b nks nd nonb nk fin nci l institutions, f cilit te f st p ments throu h the N tion l P ment Switch, nd incre se the ccept nce of electronic p ments. P thw 2: Tr nsformin fisc l polic into n en ine of inclusive rowth To tr nsform fisc l polic into n en ine of inclusive rowth, the overnment could consider reforms in three re s. These include insul tin public spendin from vol tile SACU revenues, improvin the lloc tion of spendin focusin on inclusivit nd efficienc , nd stren thenin public fin nci l m n ement, investment, nd procurement. To insul te public spendin from vol tile SACU revenues nd enh nce the role of fisc l polic in st bili in the econom , the overnment could consider: • Implementin fisc l rules nd est blishin st bili tion fund. Addition l revenue from SACU tr nsfers nd w ter ro lties in the comin e rs would llow Lesotho to rebuild its fisc l buffers nd incre se its forei n reserves. B contr st, spendin revenue inflows immedi tel could fuel m croeconomic inst bilit nd undermine rowth. To miti te this risk nd stren then the overnment’s lon -term fisc l position, uthorities could est blish st bili tion fund underpinned b fisc l rules. To ensure th t the fund oper tes effectivel , cle r conditions for deposits nd withdr w ls need to be specified. In ddition, doptin debt rule could help shore up debt sust in bilit . The followin me sures could improve the lloc tive efficienc of the bud et: • Devotin l r er sh re of the bud et to investment nd controllin the rowth of recurrent expenditures. Me sures to control the rowin public w e bill could be complemented b fisc l rule to limit the over ll rowth of recurrent spendin or specific expenditures. Reforms to improve d t qu lit nd tr nsp renc will be vit l to the effectiveness of these me sures. The uthorities could lso revise the composition of spendin on hum n c pit l nd improve the t r etin of soci l pro r ms to more efficientl reduce povert nd inequ lit . For ex mple, refinin benefici r re istr of Old A e Pension (OPA) to elimin te ineli ible benefici ries h s the potenti l to ener te fisc l s vin s of up to 0.8 percent of GDP. This could be chieved b enforcin proof-of-life verific tion for ll benefici ries, conduct comprehensive cross-check of the entire OAP re istr inst the public sector pensions benefici r d t b se to identif nd elimin te duplic tes, conduct pre- re istr tion of proxies to void fr ud, nd produce benefici r -level p ment reconcili tion monthl , re the most import nt me sures to improve the efficienc in the OAP pro r m. 12 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth To further enh nce the effectiveness of public services, the overnment could consider reforms in the followin re s: • Stren thenin the qu lit of public investment. At the investment ppr is l st e, the uthorities could focus on differenti tin requirements ccordin to project si e to reduce costs nd speed up investment decisions while li nin projects with the N tion l Str te ic Development Pl n. Improvin the frequenc nd qu lit of reportin would enh nce monitorin , en blin the identific tion of underperformin projects for potenti l restructurin or closure nd llowin for the re lloc tion of resources to hi h-performin public investment projects. • Ensurin discipline nd ccount bilit in public fin nci l m n ement. Stron er enforcement of the use of the Inte r ted Fin nci l M n ement Inform tion S stem (IFMIS) for ll tr ns ctions (revenues nd expenditures) nd the d il reconcili tion of b nk st tements could stren then c sh m n ement, while doptin Tre sur Sin le Account could further improve tr nsp renc , monitorin , nd control. • Acceler tin on oin reforms in public procurement. Full implementin the Public Procurement Act nd its re ul tions would enh nce expenditure efficienc , incre se tr nsp renc , help prevent the emer ence of rre rs, nd improve the qu lit of procurement. 13 LESOTHO ECONOMIC UPDATE 2025 - Transforming Fiscal Policy into an Engine of Inclusive Growth 14 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth PART 1: THE STATE OF THE ECONOMY Lesotho, sm ll, mount inous, nd l r el rur l n tion with popul tion of bout 2.3 million, f ces si nific nt vulner bilit to frequent nd severe we ther events such s floods nd drou hts. Since 2015, Lesotho h s experienced multiple exo enous shocks th t h ve ne tivel imp cted rowth, povert , nd inequ lit , but the countr now h s n opportunit to cceler te economic ctivit nd drive r pid nd inclusive development. The nnu l GDP rowth r te plun ed from pe k of 6.3 percent in 2016 to trou h of -8.2 percent in 2020, nd per c pit income levels declined over the period. Prior to 2014, Lesotho’s ver e rowth r tes were consistent with those of lower-middle-income countries worldwide, but since 2020 rowth h s been in line with the ver e for low-income countries. 2024 w s n exception l e r, s risin tr nsfers from the Southern Afric n Customs Union (SACU) nd w ter ro lties cre ted simult neous fisc l nd current- ccount surpluses, en blin n incre se in public investment. The econom exp nded b n estim ted 2.3 percent 2024. Growth is projected to rise to 3 percent in 2025, supported b the implement tion of the LHWP-II nd other public investment projects. However, the public sector continues to drive rowth, while priv te-sector ctivit is limited. The fisc l surplus is fr ile, s it depends on vol tile SACU revenues, nd rowth is projected to decline s the LHWP-II investment c cle winds down. Deep reforms will be necess r to return Lesotho to conver ence p th. The time is ri ht. 1.1 RECENT DEVELOPMENTS 1.1.1. Economic rowth: A modest recover hi hli hts opportunities to cceler te m cro- fisc l reforms Followin severe contr ction durin the COVID-19 p ndemic, Lesotho’s recover h s been l ckluster, nd the countr rem ins tr pped in low- rowth tr jector (Fi ure 1). Politic l inst bilit nd n unf vor ble business environment h ve discour ed domestic nd forei n priv te investment nd contributed to l r e subsistence-oriented inform l sector. As popul tion rowth outp ced economic rowth, ver e income per c pit fell from pe k of US$1,140 in 2016 to just US$951 in 2023. At its current r te, GDP rowth will be insufficient to n rrow the p with peer countries (Fi ure 2) or reverse the decline in per c pit income. Fi ure 1. Despite reboundin in 2024, Lesotho’s Fi ure 2. … nd the GDP p between Lesotho nd rowth r te h s f llen over time its peers is widenin . Source: Centr l B nk of Lesotho nd World B nk st ff. Source: WDI, World B nk. 15 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Multiple exo enous shocks, includin the p ndemic nd dverse we ther events, h ve hindered rowth over the p st dec de, but Lesotho lso f ces deeper underl in ch llen es. Drou hts nd floods c used re l GDP to contr ct b n ver e of 2.0 percent e ch e r between 2017 nd 2019, nd in 2020 the shock of the p ndemic c used n 8.2 percent contr ction. A modest recover followed, with rowth reboundin to 2.3 in 2021 nd 2.4 percent in 2022. However, the lin erin effects of the p ndemic, decline in SACU tr nsfers, we ther-rel ted shocks, nd the imp ct of Russi ’s w r in Ukr ine on prices for imported fuel, fertili er, nd r in intensified infl tion r pressures while we kenin the fisc l nd extern l ccounts. GDP rowth slowed to 1.8 percent in 2023 s exports coll psed mid uncert int round the renew l of the Afric n Growth nd Opportunit Act (AGOA). Me nwhile, Lesotho h s continued to stru le with we k competitiveness, sm ll tr d ble sector, nd limited export diversific tion both in terms of products nd m rkets (Fi ure 3 nd Fi ure 4), nd economic output h s et to return to its 2016 level. Fi ure 3. Textiles nd di monds represent the bulk Fi ure 4. … nd exports re concentr ted in of Lesotho’s exports… h ndful destin tion m rkets. Source: Centr l B nk of Lesotho nd World B nk st ff c lcul tions. Source: WITS, World B nk. Note: 2024 export d t re for Q1 – Q3. Note: The Hirschm n Herfind hl index is me sure of the dispersion of tr de v lues cross n exporter’s p rtners. A countr with exports th t re concentr ted in ver few m rkets will h ve n index v lue close to 1. Simil rl , countr with perfectl diversified tr de portfolio will h ve n index v lue close to ero. In 2024, rowth rem ined concentr ted in the fin nce, communic tions, nd business-services sectors, driven b the LHWP-II. The m nuf cturin , utilities, nd minin sectors reduced the GDP rowth r te b over 2.0 percent e points durin the first h lf of the e r. The contr ction in the m nuf cturin sector, which is domin ted b multin tion l textile nd rment firms, reduced over ll rowth b more th n 1.5 percent e points (Fi ure 5), while subdued intern tion l dem nd for di monds dversel ffected minin nd qu rr in output. The sectors th t emplo the most people, such s construction, tourism, nd riculture, either exp nded modestl or rem ined unch n ed, nd n exception ll dr se son incre sed food-securit concerns cross the countr . Fi ure 5. The fin nci l sector drove rowth in 2024… Fi ure 6. …while w ter exports m de modest (Contribution to rowth b sector, H1 2024) contribution. (Contribution to rowth b dem nd component) Source: Centr l B nk of Lesotho. Source: Centr l B nk of Lesotho nd World B nk St ff estim tes. 16 Note: 2024H1 corresponds to 12 months ccumul ted rowth. LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth The public sector continues to support the econom , nd public investment incre sed b bout 17 percent in 2024 (Fi ure 6). The LHWP-II h s driven sh rp incre se in public investment over the l st two e rs, due both to the si e of the project itself nd the construction of complement r projects such s Polih li Vill e, multi-stor office complex housin n uditorium, conference rooms, n exhibition h ll, 96 residenti l units, nd four-st r hotel. Consumption h s lso contributed to rowth, supported b incre sed credit nd remitt nces. The priv te sector’s contribution to rowth rem ins ver modest. In 2024, domestic investment mounted to just 15 percent of GDP, while FDI inflows fell to less th n 1 percent of GDP. The limited role of the priv te sector slows job cre tion nd we kens the overnment’s c p cit to ener te t x revenue. A ch llen in re ul tor environment, in dequ te skills nd skill mism tches, insufficient credit to businesses, nd infr structure ps re bindin constr ints on the priv te sector.1 1.1.2. L bor: A hi h povert r te reflects limited emplo ment opportunities Povert r tes re persistentl hi h due to the priv te sector’s limited c p cit for job cre tion nd the imp ct of multiple exo enous shocks. Accordin to the l test v il ble offici l d t , in 2017 lmost h lf the popul tion w s livin below the n tion l povert line, nd 32.4 percent were below the extreme povert line of US$2.15 per d . Povert levels h ve likel risen in recent e rs due to we k economic rowth, the COVID-19 p ndemic, nd the on oin drou ht, which h ve disproportion ll ffected poor households. Projections b sed on the rel tionship between GDP rowth nd povert su est th t n estim ted 37 percent of the popul tion w s livin in extreme povert in 2024. Moreover, n tion l povert fi ures m sk si nific nt eo r phic nd socioeconomic disp rities, s povert is disproportion tel concentr ted in rur l nd mount inous re ions with limited ccess to infr structure, b sic services, nd economic opportunities. These re s lso f ce hei htened vulner bilit to clim te shocks nd rem in reli nt on subsistence riculture nd inform l emplo ment.2 Lesotho is mon the top 20 percent of countries r nked b inequ lit , due in p rt b its l r e urb n-rur l divide. Emplo ment rowth is vit l to sust in ble povert reduction. As of M 2024, the unemplo ment r te w s estim ted t 16 percent, with women nd oun people overrepresented mon the unemplo ed popul tion of 125,000 (Fi ure 7).3 However, this fi ure does not ccount for underemplo ment or prec rious emplo ment in Lesotho’s l r e inform l sector. Lesotho’s l bor-force p rticip tion r te is one of the lowest mon peer countries, its unemplo ment r te is f r hi her th n the re ion l nd income- roup ver es (Fi ure 8). Fi ure 7. A l r e sh re of the popul tion does not Fi ure 8. Rel tive to peer countries, l bor-force p rticip te in the l bor m rket. p rticip tion is low nd unemplo ment is hi h. Source: Intern tion l L bor Or ni tion, “ILO modelled estim tes d t b se-,” ILOEST, Accessed 12-13-2024, https://ilost t.ilo.or /d t / Note: Emplo ment estim tes re for November 2024; unemplo ment Source: Intern tion l L bor Or ni tion. Note: L bor force estim tes re for M 2024; estim tes of the composite me sure of p rticip tion b sed on modelled estim tes d t b se; l bor underutili tion (LU4) re for November 2022 nd include unemplo ment r tes s v il ble l test household surve nd unemplo ment, time-rel ted underutili tion, nd the si e of the modelled estim tes. R tes refer to popul tion >15 e rs old. potenti l l bor force. _______________________________________________ 1 World B nk, 2021 2 World B nk, 2024 . 3 D t refer to ILO Modelled Estim tes nd not to observed d t . Emplo ment estim tes re from November 2023, nd unemplo ment estim tes 17 re from M 2024. A composite me sure of l bor underutili tion (LU4) is estim ted for November 2022, which includes unemplo ment, time- rel ted underutili tion, nd the si e of the potenti l l bor force. LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Fi ure 9. The public sector h s become the countr ’s l r est form l emplo er. Source: Authors’ c lcul tions b sed on LNDC d t . The priv te sector is not exp ndin , nd the number of form l jobs is declinin . The number of workers emplo ed in the priv te sector4 contr cted b 32 percent between e rl 2019 nd 2024, with job losses concentr ted in the textile industr , owin to uncert inties in the renew l of AGOA nd the possible loss of competitiveness. As result, despite recent hirin free e, the public sector h s become the countr ’s l r est form l emplo er (Fi ure 9). Remitt nces re m jor source of household income nd h ve si nific nt imp ct on povert reduction. A l ck of loc l job opportunities h s pushed m n workers to seek emplo ment bro d, p rticul rl in South Afric . In 2023, remitt nces ccounted for 23 percent of GDP, one of the hi hest r tes in the world (Fi ure 10 nd Fi ure 11). Remitt nces h ve si nific nt imp ct on povert reduction. Households th t received remitt nces would h ve been 13 percent e points poorer h d the not received n remitt nces, nd without remitt nces the Gini index would be 2 points hi her.5 Poor households, especi ll those with less educ tion nd those in rur l re s, re p rticul rl dependent on remitt nces, lthou h those in the richest quintile receive t pic ll more remitt nces th n poorer ones, nd urb n households tend to receive more remitt nces th n rur l households.6 Remitt nces serve s buffer when shocks occur, nd the f ct th t remitt nces re m inl spent on food nd clothin , followed b educ tion, underscores their critic l role in helpin households meet their b sic needs. Fi ure 10. Remitt nces h ve recentl incre sed… Fi ure 11. … nd re well bove the levels of re ion l nd income- roup peers. Source: WDI, World B nk. Source: WDI, World B nk. _______________________________________________ 4 Bec use there re no offici l d t on privte-sector emplo ment, fi ures from the Lesotho N tion l Development Corpor tion (LNDC) re used s prox . 5 World B nk (2022). 6 World B nk (2019). 18 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth 1.1.3. Prices: Disinfl tion cre tes sp ce for more ccommod tive monet r polic In line with lob l nd re ion l trends, he dline infl tion in Lesotho declined from pe k of 9.8 percent in Jul 2022 to 4.1 percent in Febru r 2025 (Fi ure 12). The spike in infl tion w s driven b exo enous f ctors th t h ve r du ll f ded, but food nd utilit prices rem in t historic hi hs nd continue to put upw rd pressure on infl tion (Fi ure 13). Hi h food prices, which disproportion tel ffect the poor, reflect poor clim tic conditions, nd we k domestic production h s led to risin imports of rel tivel expensive m i e from South Afric . On n nnu l b sis, infl tion r te e sed from n ver e of 6.4 percent in 2023 to 6.1 percent in 2024. As p rt of the Common Monet r Are , the Centr l B nk of Lesotho (CBL) rem ins focused on m int inin st ble exch n e-r te between the loti nd the r nd. The CBL t pic ll mirrors the monet r polic decisions of the South Afric Reserve B nk (SARB), but since April 2023 it h s m int ined lower polic r te despite elev ted infl tion. Followin the SARB’s decisions, the CBL cut its polic r te from 7.75 percent to 7.50 percent in November 2024 nd to 7.25 percent in Febru r 2025, m int inin this r te in the Monet r Polic Committee meetin of M rch 25 (Fi ure 14). Goin forw rd, r tes re expected to continue to f ll, both in South Afric nd Lesotho. The rowth of credit to the priv te sector h s cceler ted in recent e rs, risin to 23 percent of GDP in 2024 but credit rowth to businesses h s st n ted (Fi ure 15). The m in benefici ries of b nkin credit rem in households, followed b firms, especi ll in the construction sector. Credit to the public sector h s incre sed m rkedl in 2024, lmost re chin the level of credit extended to the non-fin nci l corpor te sector. Accordin to 2021 Finscope Consumer Surve , fin nci l inclusion h s si nific ntl improved since 2011, nd bout 87 percent of the popul tion now h s ccess to tr ns ction ccounts from b nks or non-b nk fin nci l institutions.7 Fi ure 12. Infl tion is trendin downw rd… Fi ure 13. …but food prices rem in the l r est contributor to infl tion. Source: Bure u of St tistics (Bos), Lesotho nd St tistics South Afric Source: Bure u of St tistics (Bos), Lesotho nd St tistics South Afric (St tsSA). (St tsSA). Note: 2024 s October, 12 months ccumul ted ver e. _______________________________________________ 7 FinM rk Trust (2021). 19 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Fi ure 14. The CBL polic r te closel tr cks the Fi ure 15. The suppl of credit to the priv te sector polic r te in South Afric . h s exp nded, but most lo ns o to households. Source: CBL nd South Afric n Reserve B nk. Source: CBL. 1.1.4. The Extern l Sector: Risin SACU revenues, w ter ro lties, nd robust remitt nces h ve brou ht the current ccount into surplus Historic ll hi h SACU revenues led to the first current- ccount surplus in 17 e rs. The current- ccount b l nce h s improved si nific ntl , risin from deficit of 6.4 percent of GDP in 2023 to surplus of 4.4 percent of GDP in 2024 (Fi ure 16). Unprecedented inflows of SACU revenues (Box 1), to ether with l r e nd sust ined remitt nces, helped boostin the second r income b l nce, offsettin the tr de deficit. The tr de deficit lso n rrowed, s hi her w ter ro lties compens ted for the we k perform nce of textile nd di mond exports, s well s sur e in imports rel ted to the LHWP-II (Fi ure 17). The terms of tr de lso deterior ted sli htl , f llin b bout 3 percent in 2024. Exports rem in hi hl concentr ted, with textiles, di monds, nd w ter ccountin for over 85 percent. Most exports re bound for South Afric nd the United St tes. The c pit l- ccount deficit h s been fin nced b overnment s vin s in the b nkin sector, domestic debt, nd c pit l tr nsfers from South Afric for the LHWP-II, while FDI inflows equ l less th n 1 percent of GDP. Lesotho’s extern l position rem ined st ble in 2024, with ross intern tion l reserves t US$952 million in September. An incre se in imports c used import cover e to decline to bout 4.6 months. Nevertheless, import cover e is still within the IMF-recommended r n e, nd the stock of forei n reserves is sufficient to m int in the st bilit of the pe .8 _______________________________________________ 8 IMF (2024). 20 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Fi ure 16. SACU revenues nd w ter exports h ve Fi ure 17. W ter exports sur ed in 2024, but bolstered the current ccount. exports of di monds nd textiles rem in we k. Source: CBL. Source: CBL. 1.1.5. Fisc l Polic : Multiple f ctors h ve contributed to bur eonin fisc l surplus Followin e rs of fisc l distress, the overnment recorded surplus 7.1 of GDP in FY23/24 nd 8.8 percent in FY24/25 (Fi ure 18 nd Fi ure 19). SACU tr nsfers nd w ter ro lties sur ed b bout 13 percent e points of GDP in FY 23/24 nd rose b nother 4 percent e points in FY 24/25, outp cin expenditure rowth (Box 1). T x revenue lso incre sed b 1.5 percent e points in e ch of the l st two fisc l e rs due to the introduction of new excise t xes on lcohol nd tob cco in J nu r 2023, thou h revenue from t xes on income, profits, c pit l ins, nd oods nd services ll incre sed over the period. The uthorities used p rt of these resources to p down rre rs to priv te suppliers, which reemer ed in 2022 nd pe ked t 3.17 percent of GDP t end-FY23/24. Followin recent p ments, rre rs fell to n estim ted 0.6 percent of GDP (ne rl M 250 million) in e rl 2025, but the overnment h s et to ddress the underl in c uses th t led to their ccumul tion. Box 1. A revised formul for w ter ro lties h s delivered sur e in fisc l revenue In ccord nce with Article 12 (6) of the Tre t of the Lesotho Hi hl nds W ter Project, ro lt r tes were rec lcul ted on September 13, 2023, due to n incre se in the minimum w ter deliver to South Afric . The new ro lt r tes took effect on J nu r 1, 2024, incre sin monthl bil ter l ro lt p ments from M 130 million (US$7 million) to M 298 million (US$16 million). The new r te is retro ctive, which will further incre se ro lt p ments in the comin e rs. Combined with risin SACU tr nsfers, the incre sed ro lt p ments re expected to brin fisc l surpluses over the next few e rs. How the uthorities m ke use of this windf ll will h ve profound imp ct on Lesotho’s development tr jector . 21 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Fi ure 18. A sh rp incre se in SACU tr nsfers nd Fi ure 19. …cre tin l r e but vulner ble fisc l w ter ro lties h s boosted revenue… surplus. Source: Ministr of Fin nce nd Development Pl nnin nd World B nk C lcul tions. A combin tion of fisc l prudence, polic constr ints, nd we knesses in public investment m n ement (PIM) prevented r pid incre se in spendin . A hirin free e limited the rowth of the public sector w e bill. Me nwhile, ch llen es involvin PIM coupled with ch n es to the public procurement s stem slowed the rowth of c pit l spendin , which rem ined const nt in FY23/24. The implement tion of new policies m nd tin th t ll public procurement be performed throu h the Inte r ted Fin nci l M n ement Inform tion S stem (IFMIS) led to tempor r decline in the cquisition of oods nd services b 0.6 percent e points of GDP in FY 23/24. An incre se in public investment—which is expected to exceed 11 percent of GDP nd is m inl fin nced b r nts nd lo ns—is drivin up public expenditures in FY24/25, m r in ll n rrowin the fisc l surplus. The public debt stock incre sed despite the fisc l surpluses, le vin little sp ce to bsorb shocks. The public-debt-to-GDP r tio is estim ted to h ve incre sed from 55.1 percent of GDP in FY23/24 to bout 59 percent of GDP in FY24/25 s the overnment continued to borrow from extern l nd domestic m rkets. Extern l debt ccounts for bout 80 percent of tot l debt. While m inl concession l,9 extern l debt is still vulner ble to exch n e-r te risk. Chin is Lesotho’s prim r non-P ris Club bil ter l creditor nd ccounts for 70 percent of the countr ’s bil ter l debt. The domestic debt stock is risin f ster th n the extern l debt stock (Fi ure 20). The sur e in SACU tr nsfers nd w ter ro lties is expected to improve the fisc l b l nces nd lower the public debt burden, but un ddressed contin ent li bilities, exch n e-r te depreci tion, nd persistent domestic rre rs ll thre ten debt sust in bilit . A moder te risk of debt distress su ests limited sp ce to bsorb shocks. Hi h debt levels impose subst nti l burden on the bud et. The overnment spends 2.4 percent of GDP on debt service, or more th n 5 percent of recurrent expenditures. Domestic debt mounts to onl 20 percent of tot l debt but is f r more expensive to service th t extern l debt, which is m inl concession l (Fi ure 21). Incre sin domestic debt issu nce h s helped the uthorities meet public fin ncin needs while deepenin loc l currenc m rkets, but the b nkin sector’s ppetite is limited. In n environment of we k fin nci l intermedi tion, the overnment c nnot excessivel borrow on the domestic m rket without crowdin out lendin to the priv te sector. _______________________________________________ 9 Lesotho’s m in creditor is the Intern tion l Development Associ tion, followed b the Afric n Development Fund, the Europe n Investment B nk, nd the IMF. 22 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth The overnment f ces si nific nt ch llen es in m n in rre rs to suppliers. While rre rs h ve recentl decre sed, the tot l stock m be underestim ted due to the l ck of comprehensive udit. Sever l f ctors h ve contributed to the ccumul tion of rre rs, includin deficiencies in bud et pl nnin nd m croeconomic coordin tion, inefficient procurement pr ctices, in dequ te enforcement mech nisms, nd ch llen es involvin c sh m n ement. To improve nd moderni e public procurement pr ctices, the overnment p ssed the Public Procurement Act in M rch 2023. Amon other re ul tor ch n es, the ct prohibits public procurement outside of IFMIS. However, new rre rs h ve emer ed since then, m n of which seem to be linked to commitments cl imed prior to M rch 2023. Fi ure 20. The sh re of domestic debt in tot l debt Fi ure 21. … nd interest p ments re hi h nd h s incre sed over time... risin , p rticul rl on domestic debt. Source: Joint IMF-World B nk DSA. Source: Ministr of Fin nce nd Development Pl nnin nd World B nk c lcul tions. 1.2 ECONOMIC OUTLOOK AND RISKS Growth is expected to cceler te tempor ril in 2025, driven b the LHWP-II, while hi h SACU nd w ter revenues will llow for ddition l public investment. However, s lon s rowth continues to depend l r el on the public sector, job cre tion will rem in low nd povert levels hi h. Moreover, rowth will likel f lter s m jor investment projects wind down. Sust in ble nd inclusive rowth will require reforms to bolster priv te-sector development nd improve the effectiveness of public spendin . These me sures re ur ent, s risks re mountin , nd the fisc l surplus is fr ile. 1.2.1. The b seline scen rio is bro dl f vor ble Re l GDP rowth is projected to tempor ril incre se to 3.0 percent of GDP in 2025, nd to return to the historic l ver e of 2 percent (T ble 1). The exp nsion will be driven b the public sector, especi ll investments rel ted to the LHWP-II nd tr nsport tion projects. Under current policies nd extern l conditions, rowth is expected to f lter fter the LHWP-II is complete. Moreover, SACU revenues re projected to decline from 2025 onw rds, nd while this m be p rti ll offset b risin w ter revenue, incre sed pressure on the fisc l nd extern l b l nces could slow rowth over the medium term. The limited d n mism of the priv te sector will continue to undermine job cre tion nd povert reduction over the medium term. In the bsence of reforms to reduce the costs of doin business nd mid n uncert in extern l environment, priv te investment is expected to rem in subdued. As result, the n tion l he dcount povert r te is expected to rem in bro dl st ble t bout 60 percent over the next three e rs. He dline infl tion is expected to r du ll f ll to 5 percent s lob l fuel prices moder te nd infl tion in South Afric rem ins subdued. Prices in Lesotho re hi hl sensitive both to imported fuel prices nd to infl tion in South Afric . In this context, monet r polic is expected to become more ccommod tive, nd r du l decline in interest r tes should help boost dem nd for credit b the priv te sector. 23 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth The current ccount is projected to return to deficit over the medium term. SACU tr nsfers re projected to f ll from 28 percent of GDP in FY24/25 to ne r 20 percent of GDP in FY25/26, just bove their historic l ver e for the p st 15 e rs, nd incre sed w ter ro lties nd sust ined remitt nce inflows will onl p rtl offset this decline. The tr de deficit will persist, m inl driven b si e ble imports ssoci ted with the LHWP-II nd we ker exports. The prim r nd second r income b l nces re likel to rem in in surplus. The c pit l b l nce is projected to rem in st ble. The fisc l surplus is expected to n rrow r du ll . Expenditures re projected to incre se f ster th n GDP, driven b the public sector w e bill nd the overnment’s renewed efforts to step-up public investment. In the bsence of reforms, the public w e bill, which lre d ccounts for bout 40 percent of recurrent spendin nd more th n 70 percent of t x revenue, is expected to continue to incre se nd could re ch 20 percent of GDP in the medium term. The overnment is pl nnin to implement series of me sures to boost the pro ressivit of t x polic nd reduce costs for businesses (Box 2). Some of the pl nned me sures will n rrow the t x b se, reducin t x collection, thou h hi her r tes for some person l income t x br ckets nd excise t xes could potenti ll incre se t x revenue. However, the ultim te imp ct of these t x reforms will lso depend on beh vior l ch n es. The public debt stock h s tripled over the p st 15 e rs, but fisc l surpluses re expected to brin it down over the medium term. The public debt should st bili e t round 55.0 percent of GDP over the medium term, below the 60 percent threshold specified in the Public Debt M n ement Bill currentl under discussion in the P rli ment. En ctin this bill would contribute help incre se the tr nsp renc of public debt nd stren then its m n ement. The overnment could build on this reform to improve the collection of public debt st tistics, includin inform tion on u r ntees nd rre rs. 24 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Box 2. The Bud et Speech 2025/26 On Febru r 19, 2025, the Minister of Fin nce nd Development Pl nnin delivered to the P rli ment the Bud et Speech for 2025/26. The Minister hi hli hted the prioriti tion of infr structure development in ener , w ter, tr nsport nd w ste m n ement to stir economic rowth. Commitment to efficient public deliver will put lid to rowth in current expenditures. The Minister identified Lesotho’s immedi te fisc l ch llen es. These stem from continued he v reli nce on SACU revenues nd th t the overnment is committed to reducin the debt burden in the medium term b introducin fisc l rules. The Bud et Speech hi hli hts re s follows: Revenues re projected to incre se b 1.5 percent e point to 67.1 percent of GDP. SACU receipts re expected to decline from 27 percent of GDP in 2024/25 to 20 percent in 2025/26, while w ter ro lties re expected to rise from 7.2 percent of GDP to 11.1 percent nd r nts from 4.1 percent of GDP to 7.8 percent. The incre se in r nts is due to decline in the execution of c pit l spendin in this fisc l e r. T x reforms nd efficienc improvements in t x collection re lso expected to incre se revenues b 1 percent e point of GDP to 25.2 percent. Tot l expenditure is projected to re ch lmost 70 percent of GDP, mostl driven b c pit l expenditure but lso b ood nd services. The bud et foresees si nific nt exp nsion in c pit l investment, from 4,698 million m loti in 2024/25 to 10,575 million m loti in 2025/26, or ne rl 24 percent of GDP. In turn, recurrent expenditure will incre se b 2.2 percent e points with respect the previous fisc l e r, s oods nd services re expected to re ch 10 percent e points of GDP in FY25/26 (up from 6.5 percent of GDP expected this FY), mostl driven b the expected incre se in electricit costs, driven b imports from South Afric nd Mo mbique, followin the tempor r closure of the Muel pl nt. Compens tion of emplo ees will re ch 18.4 percent of GDP, 0.5 percent e point incre se with respect to the previous fisc l e r. Authorities expect the bud et surplus to turn into deficit iven the exp nsion in public expenditure, p rticul rl investment. Given the d n mics described bove, with spendin incre ses not full compens ted b revenue rise, the l r e fisc l surplus estim ted for 2024/25 will turn into 2.6 percent deficit in 2025/26. This projection relies on si nific nt incre ses in c pit l bud et execution, n re where Lesotho h s stru led owin to we knesses in public investment m n ement (see P rt 2 of this Economic Upd te). Goin forw rd, the overnment propose to st bili e the bud et b l nce t 2 percent of GDP surplus, b brin in down c pit l expenditure to bout 15 percent of GDP, thereb reducin tot l expenditure to ne rl 62 percent of GDP, while tot l revenues will st bili e round 64 percent of GDP. 1.2.2. Hi h exposure to domestic nd extern l risks clouds the outlook While the rowth outlook is bro dl positive, Lesotho f ces si nific nt he dwinds, old nd new. Extern l risks emer e from we ker-th n-projected lob l nd re ion l rowth, possibl ex cerb ted b the intensific tion of eopolitic l conflicts, which would reduce di mond exports nd remitt nces, curbin jobs nd household consumption. Uncert int re rdin the renew l of the Afric Growth nd Opportunities Act (AGOA) be ond 2025 could discour e investment in the textile nd pp rel sectors. Moreover, economic rowth in South Afric , Lesotho’s m in export m rket nd source of remitt nces, is expected to be modest over the medium term, with nnu l GDP rowth r tes r n in from 0.6 percent in 2024 to 1.7-1.9 percent in 2025-27 (Box 3). 25 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Box 3. The close economic ties between South Afric nd Lesotho Lesotho is l ndlocked nd wholl encomp ssed b South Afric . The two countries h ve stron economic link es, includin throu h tr de nd investment, fisc l tr nsfers, monet r polic , nd remitt nces. Lesotho relies on South Afric for bout 80 percent of its imports, mostl m nuf ctures nd chemic ls, nd 45 percent of its exports, mostl textiles. In 2022, the FDI flows from South Afric mounted to bout 1 percent of Lesotho GDP. Lesotho h s lso historic ll received export-oriented FDI, m inl in the textile nd pp rel sector, t r etin the l r er South Afric n m rket s well s the US m rket, to which it receives preferenti l ccess under AGOA. Lesotho lso receives l r e inbound remitt nces equ l to bout 20 percent of GDP, most of which ori in te in South Afric . SACU fisc l tr nsfers re m jor contributor to public revenue, representin 42 percent in FY24/25. These tr nsfers re m inl fin nced b customs dut collected in South Afric , nd thus the tend to be proc clic l. The sh re of SACU revenue tr nsferred to Lesotho is expected to decline over time, widenin the countr ’s structur l current- ccount deficit nd ne tive imp ctin the fisc l deficit. However, these effects will be p rti ll offset b incre sed w ter ro lties fter the completion of the LWPH-II. Lesotho is p rt of Common Monet r Are th t lso includes Esw tini, N mibi , nd South Afric . While it issues its own currenc , Lesotho’s monet r polic is focused on m int inin the fixed exch n e r te with the r nd. As result, Lesotho’s monet r polic r te closel tr cks ch n es in the South Afric n r te. Domestic risks lso cloud the outlook. The projections rest on f vor ble ssumption th t Lesotho will implement the LHWP-II s pl nned, lon with other c pit l investments. However, the execution r te for the c pit l bud et is low owin to we knesses in public investment pl nnin nd m n ement, nd prolon ed del s could inhibit rowth. The risk of politic l inst bilit c nnot be ruled out iven the countr ’s histor over the p st few dec des. Politic l inst bilit could compound le l ch llen es nd st ll import nt reforms to stren then fisc l polic nd improve the business environment, del in more robust rowth. Fisc l mism n ement, expenditure slipp es, nd the emer ence of new rre rs could prevent the rebuildin of fisc l buffers nd w ste of v lu ble resources t the expense of rowth nd the wellbein of current nd future ener tions. Clim te-rel ted shocks could ne tivel ffect the ricultur l sector nd infr structure me projects. Clim te shocks could we ken the rowth outlook nd reverse ins in povert reduction, underscorin the need to stren then clim te resilience. A prolon ed or severe El Niño event could reduce w ter v il bilit , worsenin crop nd livestock conditions. Diminished r inf ll could lso limit the scope for w ter exports to South Afric , which would reduce fisc l revenue. New risks stem from on oin ch n es in bil ter l id. A reduction in bil ter l id could incre se soci l tensions nd incre se spendin pressures, s n import nt sh re of he lth-rel ted pro r ms re fin nced b the USA. Likewise, del s in the implement tion of MCC Comp ct II (US$300 million), comprisin w ter irri tion infr structure investment, ddition l he lth support nd entrepreneurship pro r ms for women nd outh, would hinder Lesotho’s rowth, job cre tion nd exports prospects. 26 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth T ble 1. B seline forec sts (Annu l percent ch n e unless indic ted otherwise) 2020 2021 2022 2023 2024e 2025f 2026f 2027f Re l GDP Growth t Const nt M rket Prices -8.2 2.3 2.4 1.8 2.3 3.0 2.2 2.1 Priv te Consumption 5.5 -6.7 9.1 3.8 3.8 3.9 3.9 3.7 Government Consumption 19.7 -5.3 2.4 2.2 13.5 21.2 7.8 7.1 Gross Fixed C pit l Form tion -54.5 9.1 18.9 49.4 17.4 31.5 23.0 22.7 Exports, Goods nd Services -15.0 5.1 36.7 2.2 2.2 2.0 2.0 2.0 Imports, Goods nd Services -0.2 -0.4 22.5 10.3 10.8 16.6 10.4 10.4 Re l GDP Growth t Const nt F ctor Prices -8.2 2.4 2.3 1.8 2.3 3.0 2.2 2.1 A riculture 8.5 -16.0 12.5 2.4 1.5 1.5 1.7 1.8 Industr -9.0 4.7 5.0 5.0 5.3 5.7 5.5 5.3 Services -8.9 3.0 0.9 0.8 1.3 2.1 1.0 0.9 Infl tion (Consumer Price Index) 5.0 6.0 8.3 6.4 6.1 5.4 5.2 5.0 Current-Account B l nce (% of GDP) -6.3 -8.0 -11.7 -6.4 4.4 1.8 -2.4 -5.7 Fisc l B l nce (% of GDP) -0.3 -5.4 -5.5 7.1 8.8 5.6 5.1 4.1 Prim r B l nce (% of GDP) 1.2 -3.9 -3.0 9.2 11.2 8.0 7.5 6.5 Debt (% of GDP) 50.4 58.0 57.3 55.1 59.2 57.5 54.9 51.4 Source: Ministr of Fin nce nd Development Pl nnin nd World B nk. Notes: e=estim tes, f = forec sts 1.3 THREE POLICY ACTIONS TO INCENTIVIZE PRIVATE SECTOR DEVELOPMENT, STRENGTHEN MACRO- FISCAL MANAGEMENT, AND ENHANCE PUBLIC SPENDING Lesotho h s now the opportunit to focus on reforms to stren then rowth nd reduce povert nd inequ lit . The current rowth momentum nd ddition l revenues provide respite th t Lesotho could h rness to desi n nd implement reforms th t would brin prosperit nd more resilient nd robust equit ble rowth. Att inin this objective would require comprehensive nd coherent set of reforms to (i) incentivi e priv te sector development; (2) stren then m cro-fisc l polic nd (3) improve the efficienc of public service deliver . Pl cin emph sis in reducin Lesotho’s l r e inequ lities, includin the urb n-rur l divide, could be cross-cuttin component of ll polic reform re s. 1.3.1. Polic Action 1: Incentivi e Priv te Sector Development A we k business environment, constr ined ccess to fin nce for MSMEs, domin nt public sector, poor infr structure, p rticul rl in rur l re s, nd skill ps, h ve been limitin priv te sector development. As consequence, the priv te sector h s offered limited emplo ment opportunities nd Lesotho h s stru led to diversif exports nd miti te exposure to few destin tion m rkets. Access to ood qu lit educ tion, infr structure nd public services re ke to lift rowth nd cre te jobs, p rticul rl for the outh (World B nk, 2021). Bold polic ctions, implemented in concerted m nner, could incre se business opportunities nd ttr ct priv te sector investment. Improvin the business environment First, uthorities could focus on t r eted reforms to reduce the cost of doin business. These could include the simplific tion of business re ul tions nd dministr tive procedures, to reduce uncert int , dministr tive costs nd time businesses spend de lin with these processes (IMF 2024). The overnment could lso revise the le isl tion to further open critic l m rkets to competition nd forei n investment. Amon import nt le isl tion is the countr ’s investment polic , offerin polic nd 27 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth re ul tor fr mework for priv te investment, nd the competition bill, which would l the fr mework to promote f ir competition, thereb promotin business entr nd rowth, while protectin consumers. Cl rif in uncle r dispositions on wh t re rds forei n direct investment conditions in ke sectors in the Business Licensin nd Re istr tion Act would provide predict bilit nd could encour e forei n entr , brin in c pit l inflows, knowled e of extern l m rkets, nd m n eri l c p bilities th t could spur job cre tion nd productivit rowth.10 Second, Lesotho could improve its reput tion for openness to tr de nd investment b li nin its policies with its commitments under re ion l reements. This would en ble Lesotho to position itself s n investment destin tion, potenti ll servin l r er m rket th n its domestic m rket. These reforms, which include revisin tr de policies, could f cilit te the entr nd rowth of firms, enh ncin competitiveness nd job cre tion t minim l fisc l cost. As sm ll econom completel surrounded b much l r er econom , South Afric , Lesotho’s bi est opportunities for tr de lie in improved tr de f cilit tion, includin tr nsport tion, lo istics nd customs f cilities, s well s in tr de polic inte r tion with South Afric ’s tr de s stem. Third, the uthorities could re ssess the st te’s role in the econom . The st te’s involvement in m n economic sectors, either throu h SOEs or joint venture reements, c n cre te n uneven pl in field for priv te firms nd discour e the entr of new businesses—hinderin business d n mism, priv te investment, job cre tion, productivit , nd rowth. Identif in when the st te is involved in sectors where priv te firms re or could be present nd n l in the effects of st te involvement on business development could help est blish b sis for deeper reforms to business re ul tions, competition l w, nd SOE policies, potenti ll includin divestiture in some sectors coupled with improvements in SOE overn nce, efficienc , nd service deliver in others.11 Fourth, introducin Economic Inclusion Pro r ms (EIPs) could offer promisin solution for equippin poor nd vulner ble individu ls with the tools to tr nsition from economic in ctivit nd subsistence to productive self-emplo ment nd entrepreneurship. These pro r ms inte r te c sh tr nsfers, skills tr inin , productive r nts, nd fin nci l inclusion str te ies to exp nd economic opportunities for those t pic ll excluded from form l emplo ment. EIPs c n pl c t l tic role in promotin self-emplo ment nd sm ll enterprise development, p rticul rl mon women nd outh. Glob l evidence shows th t well-desi ned EIPs re not onl cost-effective but lso le d to subst nti l ins in income, business revenue, sset ccumul tion, nd resilience to economic shocks (Arév lo- S nche et l., 2024). In Lesotho, inte r tin EIPs into existin soci l s fet nets—such s the Child Gr nts Pro r m (CGP) nd Public Assist nce (PA) pro r m—c n provide vi ble p thw out of povert . B reducin lon -term dependence on overnment tr nsfers nd fosterin economic self-reli nce, sc lin up EIPs h s the potenti l to boost inclusive rowth, stren then rur l livelihoods, nd contribute to more d n mic nd diversified l bor m rket. Liftin educ tion outcomes Skills short es re n obst cle to priv te-sector development nd job cre tion. Returns to educ tion re hi h, especi ll for post-second r educ tion, which incre ses the prob bilit of holdin form l job. However, educ tion l outcomes re mon the lowest in Southern Afric , be innin with the in dequ te cquisition of found tion l skills, p rticul rl mon bo s. On ver e, child completes fewer th n nine e rs of schoolin (out of 12) nd onl 37 percent of irls nd 28 percent of bo s complete the l st e r of schoolin .12 Inequ lit of opportunit in educ tion is lso hi h: there is stron nd ne tive correl tion between district-level povert r tes, rur lit , nd school enrollment r tes. A consequence of we k second r school s stem is th t onl sm ll number of students re ch the terti r level, nd most re from we lthier households.13 The underperform nce of the educ tion s stem, compounded b m lnutrition, is hinderin hum n c pit l ccumul tion. _______________________________________________ 10 World B nk (2021). 11 World B nk (2021). 12 World B nk (2022b). 13 World B nk (2019 ). 28 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Underdeveloped e rl childhood c re nd development (ECCD) services, hi h dropout r tes, nd mis li nment between skills tr inin nd l bor-m rket needs contribute to we k hum n c pit l form tion nd low emplo bilit . Exp ndin ccess to hi h-qu lit ECCD services, especi ll in poor communities nd rur l re s, c n l the found tion for better hum n c pit l outcomes. While there h s been pro ress in prioriti in ECCD, onl 31 percent of children h ve ccess to preschool educ tion. Dropout r tes re hi h, p rticul rl t the second r level. Students cite hi h cost, low qu lit , l ck of interest, poor perform nce, pre n nc nd m rri e, nd soci l vulner bilities s ke re sons for droppin out of school. The s fet nd qu lit of school infr structure lso rem ins ch llen e. Technic l nd voc tion l educ tion nd tr inin nd hi her educ tion pro r ms re not well li ned with the needs of the l bor m rket.14 Educ tion outcomes rem in poor, but the educ tion bud et ccounts for l r e sh re of tot l public spendin , indic tin s stemic inefficiencies. More th n 90 percent of the educ tion bud et is recurrent spendin , m inl te cher s l ries.15 However, prim r nd lower second r te chers’ content nd ped o ic l knowled e is we k, nd uneven te cher deplo ment le ds to l r e disp rities in student/ te cher r tios cross schools nd between rur l nd urb n re s, ex cerb tin sp ti l inequ lities.16 To improve educ tion outcomes, the overnment could consider implementin the followin reforms in the short-to-medium term. Gr du ll incre se fundin for ECCD, includin m teri ls provisionin , tr inin for te chers nd c re ivers, ssessment to ensure children re development ll on tr ck, nd provision of dequ te infr structure nd f cilities. Both t e rl childhood nd b sic educ tion, the overnment could improve school re diness b imp rtin stron found tion l skills for ll nd especi ll mon children nd outh from poor b ck rounds. It would be lso import nt to include re ul r st nd rdi ed testin of le rners in found tion l e rs nd develop coordin ted Continuous Te cher Development Fr mework nd oversi ht bod whereb qu lit te cher tr inin nd m n ement is bro dened, nd profession l development reco ni ed. Educ tion outcomes c n be lso improved b developin n inform tion nd communic tion technolo (ICT) fr mework to uide the inte r tion of di it l educ tion service deliver . To incre se the lloc tive efficienc of educ tion spendin , the uthorities could lso consider reviewin the terti r educ tion lo n burs r scheme nd exp ndin pro r ms for vulner ble roups. Incre se the Suppl of Credit to Businesses Businesses f ces ch llen es in ccess to fin nce. Credit to the econom h s exp nded but onl to households nd the public sector, rem inin st n nt for the business sector, s sh re of GDP. There re some improvements t the m r in: the 2023 Finscope Surve shows th t ccess to credit for MSMEs from the form l fin nci l sector h s rown from 2 percent in 2016 to 10 percent in 2023. B nks rem in the prim r fin nciers of MSMEs with 7 percent of MSMEs report ccessin credit from b nks nd onl 3% report ccess credit from nonb nk credit providers (e. ., microfin nce institutions) nd s vin s nd credit cooper tive societies (SACCOs). Access to e rl -st e fin nce for st rtup firms rem ins ver limited. Addition ll , si nific nt ender ps rem in. As per Finscope 2023, more th n h lf of Lesotho’s microenterprises re women-owned but the report just qu rter of ssets nd h lf the s les of micro-enterprises owned b men. As per the World B nk’s 2024 Enterprise Surve , ne rl h lf of MSMEs led b women identif ccess to fin nce s ke ch llen e, comp red to 40 percent of those led b men. Authorities h ve t ken some ke ctions to incre se business fin ncin but much more needs to be done. Two p rti l credit u r ntee schemes re oper tion l, but their re ch is limited. One credit bure u, Experi n, is oper tion l, nd its cover e is rowin but it does not et include inform tion on businesses. A move ble sset re istr , LERIMA, h s been cre ted nd is f cilit tin fin ncin usin move ble ssets s coll ter l. _______________________________________________ 14 World B nk (2022b). 15 World B nk (2022b nd 2024b). 16 World B nk (2022b). 29 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth To improve the credit environment, uthorities could consider ddition l me sures: mer e the two p rti l credit u r ntee schemes nd improve its overn nce nd oper tions in line with intern tion l best pr ctices; improve the insolvenc re ime nd enh nce the c p cit of the commerci l court s stem to h ndle insolvenc ; cceler te the roll-out of interoper ble (between b nks nd non-b nks) f st p ments throu h the N tion l P ment Switch; undert ke ctions to incre se ccept nce of electronic p ments; nd, collect nd m ke publicl v il ble on re ul r b sis suppl -side dis re ted credit m rket d t .17 1.3.2. Polic Action 2: Stren then M cro-Fisc l M n ement Sever l e rs of low tr nsfers from the Southern Afric n Customs Union (SACU) nd bud et ri idities h ve eroded fisc l buffers. In Lesotho, fisc l polic tends to mplif m croeconomic fluctu tions, s public spendin incre ses when SACU revenues re hi h, nd the overnment f ces difficulties in djust spendin when these revenues re low. Followin e rs of lower SACU revenues, debt h s incre sed while buffers h ve eroded, nd diminished c pit l spendin h s slowed rowth. Reorientin fisc l polic to miti te vol tilit nd support sust in ble rowth will require: • Resistin the tempt tion to spend revenue inflows immedi tel . SACU tr nsfers nd w ter ro lties re hi hl vol tile (Fi ure 22) nd ch nnelin them directl into the bud et will undermine m croeconomic st bilit nd erode expenditure efficienc . The followin section discusses how to m n e revenue inflows responsibl nd ensure th t the ener te sust in ble lon -term rowth. Lesotho could st rt b implementin Fisc l Rules to delink the spendin from SACU revenues nd prevent the build-up of public debt. Addition ll , Lesotho could use the current hi h revenues from SACU nd w ter ro lties to rebuild its fisc l buffers, includin b cre tin St bili tion Fund (IMF, 2024). • Keepin rre rs in check. The stock of rre rs is currentl t bout 0.6 percent of GDP, but the underl in c uses behind the repe ted ccumul tion of rre rs h ve et to be ddressed (Fi ure 23). Since 2022, the overnment h s p id round 2.7 percent of GDP in rre rs. An mbitious but credible reform effort could shore up priv te-sector confidence nd boost rowth. Options include conductin n independent udit to unveil the full universe of rre rs cross the entire public sector nd underst nd how the h ve emer ed nd in wh t sectors. Rin -fencin the p ment process nd enh ncin tr nsp renc nd ccount bilit in fin nci l m n ement could help preventin the emer ence of new rre rs. In the me ntime, publishin the rre rs p id, with det il on mounts, st keholders involved, nd the n ture of oods nd services rendered to the public sector would improve tr nsp renc , ccount bilit nd improve the ccur teness of public fin nces, s rre rs h ve not been specified in the bud et. • M n in the fin nci l situ tion of SOEs. SOEs re m jor source of fisc l risks. In FY21/22, the revenues of 12 noncommerci l SOEs mounted to 19.6 percent of GDP.18 These SOEs were m inl concentr ted in the minin , s, nd electricit sectors. Their over ll perform nce from FY17/18 to FY21/22 w s hi hl vol tile, with most oper tin below cost recover . SOEs in the utilities sector ch r e non-cost-reflective t riffs nd receive off-bud et subsidies complic tin their fin nci l situ tion. Disent n lin the commerci l functions of SOEs from their public-service obli tions could cl rif their responsibilities nd est blish b sis for reformin their fin nces. Most SOEs re lso he vil indebted, their debt profile must be c refull monitored to miti te risks risin from implicit or explicit contin ent li bilities. _______________________________________________ 17 World B nk 2022b, IMF 2024. 18 Ministr of Fin nce nd Development Pl nnin of Lesotho (2024). 30 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Fi ure 22. Revenues depend on vol tile SACU Fi ure 23. Arre rs h ve recentl been cont ined, but tr nsfers nd w ter ro lties. ch llen es persist. Source: IMF Government Fin nce St tistics (GFS), Ministr Source: World B nk St ff estim tes b sed on Government of of Fin nce nd Development Pl nnin nd World B nk Lesotho nd Centr l B nk. c lcul tions. 1.3.3. Polic Action 3: Enh nce the Efficienc nd Effectiveness of Public Spendin Fisc l polic pl s ke role in promotin inclusive economic rowth. Lesotho is currentl benefitin from combin tion of hi h SACU revenues nd incre sed w ter ro lties, which the overnment c n use to rebuild its fisc l buffers to incre se its resilience to shocks while lso investin in infr structure nd implementin complement r reforms to the business clim te. However, we knesses in public sector deliver reduce the efficienc nd effectiveness of spendin nd undermine the imp ct of public investment on rowth. To enh nce the efficienc nd the effectiveness of public spendin , the overnment could focus on stren thenin public fin nci l m n ement, public investment nd public procurement. Prospective me sures re det iled in the followin section. While implementin them will require concerted effort b the overnment, deep reforms re vit l to chieve more equit ble, resilient, nd prosperous future for the people of Lesotho. 31 LESOTHO ECONOMIC UPDATE 2025 - Transforming Fiscal Policy into an Engine of Inclusive Growth LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth PART 2: SPECIAL FOCUS: HOW TO MAKE FISCAL POLICY AN ENGINE OF INCLUSIVE GROWTH 2.1 EFFECTIVE FISCAL POLICY IS VITAL TO LESOTHO’S DEVELOPMENT Lesotho’s public sector is ver l r e, et its imp ct on rowth is limited. The public sector h s ccounted for more th n h lf of GDP over the l st dec de, et there is no evidence of positive correl tion between fisc l polic nd economic rowth. For ex mple, public spendin so red b 20 percent e points of GDP between 2000 nd 2019, et the nnu l GDP rowth r te ver ed just 0.13 percent over the period. Me nwhile, unemplo ment rem ins elev ted, inform lit is widespre d, nd while the povert r te h s declined it rem ins bove the levels of most comp r tor countries.19 Fisc l polic h s lon been influenced b l r e nd vol tile revenue inflows. Tot l revenues ver ed 54 percent of GDP over the l st 15 e rs, r n in from over 64 percent in FY09/10 nd FY12/13 to 45 percent in FY16/17 nd FY22/23. This vol tilit is due to fluctu tions in SACU revenues, which oscill ted between 33 percent of GDP in 2009/10, to just 15 percent of GDP in the followin two fisc l e rs. Spendin tends to incre se r pidl when SACU tr nsfers re hi h, but preference for recurrent spendin over public investment blunts the imp ct of fisc l polic on rowth. In ddition, deficiencies in public procurement, poor PFM pr ctices, nd we k investment pl nnin nd m n ement further undermine the contribution of fisc l spendin to rowth. Moreover, when SACU revenues f ll, expenditure ri idit nd the bsence of fisc l s vin s h ve led to the r pid ccumul tion of debt nd the periodic emer ence of rre rs. Lesotho’s fixed exch n e-r te re ime m nifies the import nce of fisc l polic . With monet r polic focused on m int inin the exch n e-r te pe , fisc l polic is the overnment’s onl instrument for m n in the m croeconomic c cle nd respondin to shocks. These m croeconomic objectives come in ddition to the lon -term o ls of promotin economic rowth, providin essenti l services, nd reducin povert nd inequ lit . The fixed exch n e r te lso h s direct implic tions for fisc l polic , s the public b l nce sheet ffects the level of forei n reserves nd the centr l b nk’s c p cit to intervene in the forei n-exch n e m rket. Windf ll revenues cre te intense expenditure pressures. The bud et surplus re ched 7.1 percent of GDP in FY23/24 nd is projected to incre se to 8.8 percent t the end of FY24/25. B contr st, just few e rs o deficits of 10 percent of GDP forced the uthorities to dopt p inful fisc l consolid tion pl n. Over the medium term, incre sed w ter ro lties should compens te for n nticip ted decline in SACU tr nsfers.20 However, SACU revenues will not rem in l r e indefinitel nd re vulner ble to exo enous shocks. _______________________________________________ 19 World B nk (2019). 20 The on oin revision of Lesotho’s GDP fi ures could result in lower SACU revenue lloc tion. 33 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Lesotho’s p st experience ields import nt lessons for how to m n e the current revenue windf ll. In the second h lf of the 2000s, the uthorities spent r ther th n s ved sur e in SACU tr nsfers. Public spendin shot from 38 percent of GDP in FY05/06 to over 60 percent in FY11/12, driven b the rowth of the public-sector w e bill nd expenditures on educ tion, he lth, nd soci l protection.21 However, this dr m tic fisc l exp nsion h d onl m r in l imp ct on rowth nd povert , due l r el to low expenditure efficienc nd we k public investment prioriti tion nd m n ement. After e rs of elev ted spendin , sudden decline in SACU tr nsfers in FY11/12 precipit ted fisc l crisis, which prompted the uthorities to l unch p inful consolid tion process. While si nific nt public resources re lloc ted to soci l protection pro r ms, inefficiencies in t r etin nd deliver reduce their effectiveness in llevi tin povert nd inequ lit . Lesotho lloc tes n estim ted 6.4% of GDP to soci l protection—one of the l r est sh res mon developin countries— et the cost-effectiveness of this spendin rem ins low.22 Soci l ssist nce pro r ms—includin the child r nt, public ssist nce, orph n nd vulner ble children burs r , nd terti r burs r —h ve helped miti te extreme povert , but the often l ck proper t r etin mech nisms. While these tr nsfers re ener ll pro-poor, subst nti l portion of benefits ccrues to non-poor households, dilutin their redistributive imp ct. Addition ll , the fr ment tion of soci l protection pro r ms le ds to inefficiencies nd overl ps, while some of the most vulner ble, p rticul rl in remote rur l re s, rem in excluded.23 Addressin these inefficiencies b improvin t r etin mech nisms nd ensurin equit ble distribution of soci l tr nsfers will be essenti l to m ximi in their imp ct on povert reduction nd sh red prosperit . Avoidin the mist kes of the p st c lls for c utious ppro ch to expenditures nd lon - term vision for fisc l prudence. Thus f r, expenditures rowth h s rem ined rel tivel modest, but fund ment l we knesses in the fisc l fr mework h ve et to be ddressed. Goin forw rd, combin tion of fisc l rules nd structur l improvements in expenditure efficienc will be vit l to lever e windf ll revenues to produce sust in ble lon -term rowth nd povert reduction. 2.1.1. Lon st ndin ch llen es in m cro-fisc l m n ement we ken the imp ct of fisc l polic on rowth The current fisc l surplus m sks structur l deficit. The surpluses recorded in FY23/24 nd FY24/25 were driven b exception l revenues th t will not persist indefinitel . Indeed, the c clic ll djusted prim r b l nce turned ne tive round 2010 nd h s deterior ted since then (Fi ure 24). A structur l prim r deficit me ns th t the overnment spends more th n it receives in revenue, not just durin economic downturns but consistentl over time.24 Since FY09/10, the fisc l b l nce h s mostl been in deficit, nd in some e rs these deficits h ve r n ed from 5 to 10 percent of GDP (Fi ure 25). The public debt stock h s incre sed b lmost 30 percent e points of GDP since 2010, end n erin the sust in bilit of the fisc l nd debt-m n ement fr meworks while underminin the credibilit of the currenc pe . To cope with these deficits, the uthorities h ve implemented public-sector hirin free e in 2024 while public investment h s been sh rpl reduced since 2014. _______________________________________________ 21 World B nk (2014) Group. https://documentsintern l.worldb nk.or /se rch/19459822 22 B sed on d t from 2017-18 (World B nk, 2022 ). 23 World B nk (2022 ) 24 A structur l prim r deficit occurs when the fisc l deficit is ne tive fter djustin for the economic c cle nd debt p ments nd even when the econom is oper tin t its potenti l level. 34 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Fi ure 24. The c clic ll djusted prim r b l nce is Fi ure 25. …with frequent nd deep fisc l deficits. worsenin over time… Lesotho: Adjusted Prim r B l nce (in percent) 18 13 8 3 -2 -7 -12 -27 C cle Observed Adjusted -22 1990 1995 2000 2005 2010 2015 2020 Source: IMF, GFS d t b se. Note: The c cle nd djusted components h ve been estim ted usin the Hodrick-Prescott filter. Source: IMF, GFS d t b se. Note: e=estim ted. In the p st, the overnment h s often spent revenue windf lls immedi tel . As result, fisc l polic h s tended to mplif r ther th n miti te the business c cle. This p ttern, known s fisc l proc clic lit , h s ne tive effects on lon -term rowth. Between 2011 nd 2022, the c clic l component of public spendin w s closel correl ted with the c clic l component of GDP (Fi ure 26).25 Moreover, this correl tion w s much stron er th n in 1990-2010, indic tin th t fisc l polic is becomin more proc clic l over time. This could be rel ted with public sector w e bill (which ver ed ne r 13 percent of GDP in the first dec de of the 21st centur - usin incre sed SACU resources - nd 17 percent in the followin dec de nd lso with the incre se in c pit l spendin re istered in the first h lf of the 2010’s, t the s me time the econom w s rowin ( t le st until 2016). To reverse this p ttern, the overnment must s ve excess revenues durin exp nsions to fin nce incre sed spendin durin subsequent downturns. Fi ure 26. Public spendin is incre sin l proc clic l. Source: IMF, WEO April 2023 Note: Public spendin c clic lit is me sured s the correl tion between the c clic l component of re l spendin nd re l GDP, st nd ri ed b the trend. Countr roups re defined s IMF WEO definition. _______________________________________________ 25 Proc clic l fisc l spendin me ns th t public spendin incre ses with economic booms nd declines in the coolin ph se of the economic c cle, thereb mplif in its mplitude r ther th n ctin s st bili tion tool. It is me sured b the correl tion between the c clic l component of the public spendin nd the c clic l component of the GDP. C clic l components re the residu ls th t re obt ined fter subtr ctin the trend from fisc l spendin series, which is c lcul ted usin n HP filter with =6.25, s in R vn & Uhli (2002). 35 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Limited fisc l buffers le ve the econom exposed to extern l shocks. Persistent fisc l deficits h ve usu ll been p rtl fin nced throu h overnment deposits t the centr l b nk. As result, fisc l reserves h ve declined over time, f llin from 32.5 percent of GDP in 2009 to 8.5 percent of GDP in 2023. Import cover e h s been below 4.5 months in nine of the l st 15 e rs, we kenin the st bilit of the pe . In spite of the l r e incre se in SACU revenues nd w ter ro lties, forei n reserves onl covered 4.6 months of imports b l te 2024.26 As sm ll open econom , Lesotho depends he vil on forei n dem nd for its exports s well s remitt nces from ke source countries. The underperform nce of the South Afric n econom , the we kness of the lob l di mond m rket, nd uncert int re rdin the renew l of AGOA h ve reduced remitt nces, incre sed unemplo ment, nd depressed exports. Lesotho’s ricultur l sector is lso hi hl vulner ble to we ther-rel ted shocks, with poor households bein p rticul rl exposed. In recent e rs, the effects of the COVID-19 p ndemic nd Russi ’s w r in Ukr ine h ve r ised import prices, promptin the overnment to incre se soci l spendin to protect poor households. Effective fisc l polic c n st bili e the business c cle nd miti te the imp ct of shocks. Usin fisc l polic to stren then m croeconomic m n ement requires s vin excess revenues ccumul ted durin exp nsions to build fisc l buffers inst downturns nd shocks. This is especi ll critic l in Lesotho, where fisc l revenues re closel tied to the m croeconomic c cle nd where fisc l polic is the sole instrument v il ble to m n e re te dem nd (Box 4). Box 4. Monet r nd fisc l polic under fixed exch n e r te re ime Lesotho’s currenc pe with the South Afric n r nd shields the econom inst hi h infl tion nd m croeconomic vol tilit while fosterin predict bilit in bil ter l tr de, investment, nd other economic tr ns ctions. However, the imper tive to m int in the pe l r el precludes the centr l b nk from pursuin other monet r polic objectives. As result, fisc l polic is the onl tool v il ble to support m croeconomic st bili tion. Fisc l polic c n effectivel m n e economic fluctu tions nd ttenu te the imp ct of shocks without support from monet r polic . However, chievin these objectives requires combin tion of lloc tive nd technic l efficienc , expenditure flexibilit , nd stron utom tic st bili ers such s pro ressive t x re imes, unemplo ment insur nce, nd t r eted soci l spendin . Prudent debt m n ement is lso vit l to ensure th t debt-service obli tions do not excessivel constr in public spendin or we ken the st bilit of the pe . Lesotho f ces ch llen es in e ch of these re s. Current spendin h s incre sed t the expense of c pit l investment, incre sin bud et r ri idit while reducin the imp ct of fisc l polic on lon -term rowth. Me nwhile, the countr ’s l r e inform l sector undermines the effectiveness of utom tic st bili ers. The recent incre se in the debt burden, coupled with the ccumul tion of rre rs to the priv te sector, underscores risks to debt sust in bilit , while deficit fin ncin vi withdr w ls from the Pension Fund is form of fin nci l repression.27 The overnment h s m de efforts to enh nce the effectiveness of fisc l polic s tool of m croeconomic m n ement. The recent re ctiv tion of the M croeconomic Workin Group is positive si n, s is the est blishment of medium-term fisc l fr mework (MTFF), nd the uthorities re explorin the possibilit of implementin fisc l rules. Complement r me sures to improve overn nce nd enh nce expenditure efficienc could further bolster the credibilit of fisc l polic . https://im eb nk2.worldb nk.or /se rch/34234423.28 _______________________________________________ 26 A forei n reserve cover e of 4.5 months’ worth of next e r’s imports of ood nd services is considered the minimum v lue dvised b the IMF in its ssessment of Lesotho’s reserve dequ c (IMF, 2024). 27 Mu (2022b). 28 World B nk (2024 ). 36 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth 2.1.2. Bud et r ri idities constr in the c p cit to li n the use of public resources with the countr ’s needs The qu lit of fisc l polic reflects both the lloc tive nd technic l efficienc of public spendin . Alloc tive efficienc refers to how well the overnment li ns spendin with its development priorities. The intern tion l liter ture su ests th t public investment nd productive spendin h ve the re test development l imp ct in the medium term,29 while educ tion h s the re test imp ct in the lon term. Technic l efficienc refers to whether expenditures themselves re m n ed effectivel , voidin w ste nd misuse. While estim tin the technic l efficienc of expenditures requires det iled n l sis of the public fin nces th t is be ond the scope of this report, the lloc tive efficienc of expenditures c n be estim ted b ex minin the distribution of spendin cross c te ories nd ssessin it inst the overnment’s needs nd objectives. In Lesotho, ri id expenditures, especi ll the public-sector w e bill, pose serious ch llen e for fisc l polic (Box 5). The w e bill is the overnment’s l r est expenditure item ( ver in 17 percent of GDP in the l st 15 e rs), nd the rowth of spendin on public-sector w es h s consistentl exceeded GDP rowth (Fi ure 27). Correl tion n l sis reve ls th t the public sector w e bill incre ses when SACU revenues rise but does not f ll when the f ll.30 As result, the sh re of public-sector w es in current expenditures h s risen from n ver e of 33 percent durin 2005-09 to n ver e of 43 percent in the l st dec de. Between 2018 nd 2023, the w e bill mounted to bout 18 percent of GDP, f r bove the ver e of 11.7 percent for SACU countries nd 8 percent for lower-middle-income countries (Fi ure 28 nd Fi ure 29). As sh re of current expenditures nd t x revenues, Lesotho’s public sector w e bill is lso much l r er th n those of most peer countries (Fi ure 29). The si e of the public sector w e bill sh rpl limits the resources v il ble to fin nce public investment in educ tion, he lth, or povert -reducin soci l pro r ms. Fi ure 27. The rowth of the w e bill h s Fi ure 28. … nd the w e bill now si nific ntl exceeds consistentl outp ced GDP rowth... the levels of peer countries ( ver e 2018-2023). Source: GFS, IMF, nd World B nk St ff Estim tes. Source: World B nk st ff estim tes b sed on MFMoD. Note: The fisc l series re defl ted usin the consumer price index. _______________________________________________ 29 IMF (2020) nd Moreno-Dodson (2008). 30 For the 1990 – 2021 period, the correl tion coefficient between SACU revenue nd the w e bill is -0.28 but is not st tistic ll si nific nt. 37 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Fi ure 29. Lesotho’s public-sector w e bill is the hi hest in SSA. Source: World B nk St ff b sed on IMF-GFS nd Lesotho Ministr of Fin nce nd Development Pl nnin . Lesotho’s outsi ed w e bill is not driven b the number of public-sector workers but b the hi h w es the receive rel tive to their priv te-sector counterp rts. Lesotho h s the fewest public serv nts per c pit mon SACU countries.31 However, public emplo ees receive nnu l cost-of-livin djustments combined with utom tic w e incre ses within e ch r de, which results in r pidl incre sin b se s l ries.32 A widenin w e premium—i.e. rowin p between the e rnin s of public sector workers nd comp r ble workers in the priv te sector—is dversel ffectin the l bor m rket. In 2022, w es for public-sector workers exceeded those for comp r ble priv te-sector counterp rts b 64 percent, much l r er premium th n in Esw tini nd Botsw n (close to 40 percent), South Afric (25 percent), nd N mibi (21 percent) (Fi ure 30).33 This differenti l between public nd priv te sector w es is four times hi her for emplo ees with no form l educ tion th n for emplo ees with terti r educ tion (Fi ure 31). Fi ure 30. The public-sector w e premium is the Fi ure 31. … nd the premium is re test mon hi hest mon SACU countries… workers with lower educ tion levels. 70 90 82% 80 No educ tion 60 70 Prim r level 50 60 50% 40 50 40 39% 30 64% 30 25% 42% 24% 20 41% 19% 19% 20 12% 13% 10 25% 21% 10 5% 6% 6% 0 0 Lesotho Esw tini Botsw n N mibi South Glob l SSA Lesotho Afric Source: IMF (2022) nd IMF st ff c lcul tions. Source: World B nk Worldwide Bure ucr c Indic tors Note: The w e premium is estim ted usin Mincer equ tions. D t b se. The lo incomes of individu ls/households re re ressed on Note: SSA= Sub-S h r n Afric . public emplo ment dumm , educ tion, e, nd dis bilit st tus ( s prox for experience nd skills), ender, household si e, m rit l st tus, nd re ion l dummies. Propensit score m tchin is used to endure robustness. Estim tes for Botsw n re b sed on 2020 Qu rterl Multi-Topic Surve ; for N mibi , b sed on 2018 L bor Force Surve ; nd for South Afric , FAD CD report. Estim tes for Esw tini nd Lesotho re from the SACU 2018 Sprin Meetin workshop. Tot l spendin in percent of GDP is c lcul ted usin 2020 d t . _______________________________________________ 31 IMF (2022). 32 World B nk (2024b). 33 IMF (2022). 38 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Box 5. Me surin bud et r ri idit in Lesotho Bud et ri idit rises from commitments nd obli tions, often est blished in l ws or form l reements, th t limit the overnment’s bilit to lter the level nd/or structure of public expenditures. T pic l ri id expenditures include: (i) spendin determined b previous polic decisions, such s pension p ments, multi- e r public investment nd procurement costs, or expenditures linked to e rm rked revenues; (ii) expenditure items th t h ve been “rin fenced,” deliber tel limitin the discretion of polic m kers, such s explicit or implicit u r ntees; (iii) obli tions determined b m croeconomic conditions, such s interest p ments on public debt or rules-b sed inter overnment l tr nsfers; nd (iv) politic ll inflexible expenditures such s the public-sector w e bill or the explicit priorities of the overnment. Expenditure ri idit c n be qu ntified s re te m nd tor spendin . M nd tor spendin includes hi h-, medium-, nd low-ri idit expenditures. The World B nk BOOST fr mework defines hi h-ri idit items s the public-sector w e bill (includin emplo ment contr cts), spendin on b sic services, interest p ments, soci l benefits (includin pensions), nd inter overnment l tr nsfers, ll of which re obli tions with limited scope for modific tion.34 Medium-ri idit expenditures include c pit l investments nd purch ses of oods nd services in the he lth nd educ tion sectors, s well s subsidies. Other t pes of expenditures re likel to be more discretion r nd less ri id. Ri id expenditures ccount for more th n h lf of Lesotho’s nnu l bud et, nd expenditure ri idit h s incre sed over time. Expenditure ri idit rose ste dil until 2019 nd declined onl m r in ll there fter (Fi ure 32). From 2013 to 2022, n ver e of 63 percent of tot l spendin w s hi hl ri id, with the l r est items bein public-sector w es nd soci l benefits. Medium-ri idit expenditures ccounted for n ver e of 13 percent of tot l spendin , while low-ri idit expenditures m de up 24 percent. Bud et r ri idit in Lesotho is both hi her th n in peer countries nd h s incre sed f ster, driven prim ril b the public-sector w e bill (Fi ure 33). Fi ure 32. Most public spendin is hi hl ri id… Fi ure 33. … nd expenditure ri idit h s incre sed over time. Source: World B nk St ff estim tes b sed on BOOST Source: World B nk St ff estim tes b sed on BOOST Initi tive, World B nk, GFS, IMF. Initi tive, World B nk, GFS, IMF. Sources: See Cetr n olo et l. (2010); Ve (2005); nd Ve h et l. (2017). _______________________________________________ 34 The World B nk BOOST pro r m w s l unched in 2010 to provide methodolo ic l uid nce nd ood qu lit d t for bud et r n l sis, polic desi n nd ev lu tion: https://www.worldb nk.or /en/pro r ms/boost-port l/ bout-boost 39 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth 2.1.3. Stren thenin fisc l m n ement nd bud et lloc tion could improve bud et execution nd enh nce the effectiveness of public spendin Despite hi h levels of public spendin , Lesotho f ces l r e infr structure p, we k development outcomes, nd persistent sp ti l disp rities in service deliver . The countr underperforms re ion l ver es in ll ke infr structure indic tors except ccess to w ter.35 In ddition, b sic infr structure such s ro ds, electricit , nd di it l connectivit is concentr ted in the lowl nds, p rticul rl in M seru, while isol ted mount inous re ions stru le with poor ccess to m rkets, schools, nd he lthc re f cilities.36 Lesotho’s im in chievin hum n nd soci l development is mirrored in the countr ’s bud et. Educ tion, he lth nd soci l protection re priorities for the overnment, representin ne rl third of tot l spendin on ver e since FY 2010/11 nd more durin the COVID-19 p ndemic. Educ tion spendin is si nific ntl hi her th n in other countries with the s me level of income per c pit . He lth spendin lso ppe rs hi h b intern tion l st nd rds, thou h in per c pit terms it is close to the SSA ver e.37 While educ tion nd he lth expenditure re import nt, outcomes indic tors in both sectors rem in well below Lesotho’s level of development, su estin sp ce to improve spendin efficienc .38 The educ tion bud et is domin ted b recurrent expenditures, m inl driven b hi h te cher s l ries, which represents over 85 percent of tot l educ tion spendin , le vin ps in complement r resources nd services not fulfilled. Lesotho’s educ tion sector fe tures slow pro ression throu h the school s stem, poor scores in intern tion l educ tion l ev lu tion nd poor perform nce t the hi hest levels in the school- le vin ex min tions.39 Te chers’ qu lific tions nd hi h bsenteeism r tes, s well s infr structure deficiencies ppe rs t ke f ctors ffectin educ tion outcomes. Simil rl , despite incre sin resources, the perform nce of the he lth s stem is we k nd incre sed resource lloc tion h s not improved he lth outcomes, s Lesotho h s one of the hi hest tuberculosis (TB) incidence r tes, m tern l mort lit r te (MMR) nd inf nt mort lit r tes (IMR) r tes in the world, nd the HIV prev lence nd incidence r tes re improvin but not r pidl enou h.40 The cover e nd t r etin of the soci l protection s stem lso imposes ch llen es. Lesotho’s soci l ssist nce pro r ms desi ned to m ke re ul r tr nsfers to the poorest nd most vulner ble roups, but the ctu l cover e of poor nd vulner ble households is low.41 Cover e of the l r est soci l ssist nce pro r ms t r eted to the poor, the Child Gr nt Pro r m, re ches 17 percent of households in the poorest quintile, sli htl below the ver e of 23 percent for developin countries. The dequ c of tr nsfers to the poorest households is lso well below wh t is lob ll known to support households to tr nsition w from povert . There is lso scope to enh nce the cost effectiveness of soci l spendin b improvin t r etin , which could include incre sin the use of di it l technolo in m kin tr nsfers nd stren thenin inform tion s stems. While public spendin is hi h b intern tion l st nd rds (Fi ure 34), c pit l expenditure fi ures re infl ted b the inclusion of recurrent spendin under extern ll funded pro r ms in the c pit l bud et. Lo ns nd r nts ccount for bout 15 percent of public spendin , nd these resources re lw s ch nneled throu h the c pit l bud et, even when the fin nce recurrent expenditures. As result, bout 40 percent of the c pit l bud et oes to pro r ms, technic l ssist nce, nd tr inin ctivities th t re cle rl recurrent,42 nd the number of recurrent items in the c pit l bud et h s incre sed si nific ntl since 2010. _______________________________________________ 35 World B nk (2024b). 36 World B nk (2024 ). 37 World B nk (2024b). 38 World B nk (2021). 39 World B nk (2024b). 40 World B nk (2022b) nd World B nk (2024b). 41 World B nk (2022b). 42 World B nk (2024b). 40 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Fi ure 34. Public spendin is well bove the levels of peer countries nd re ion l ver es. (Public expenditures (% of GDP) ) Source: World B nk St ff estim tes b sed on MFMod nd GFS, IMF. Note: D t re for the l test v il ble e r; d t for Lesotho re for FY24/25 (estim ted). Inefficiencies in public procurement s stems, we knesses in fin nci l nd investment m n ement, nd the mis li nment of bud et priorities with territori l needs undermine equit ble service deliver . While t r eted fisc l tr nsfers could help reduce these disp rities, implementin them without first improvin public fin nci l m n ement (PFM) risks further inefficiencies nd resource mis lloc tion. Stren thenin public investment m n ement, public fin nci l m n ement nd public procurement re essenti l prerequisites to ensure th t n future fisc l decentr li tion efforts contribute me nin full to closin re ion l development ps. We knesses in PIM contribute to the under-execution of the c pit l bud et nd reduce its imp ct on rowth. Lesotho’s c pit l expenditure execution r te ver ed onl 47.5 percent between 2018 nd 2023, much lower th n its SACU peers (84.9 percent) nd other lower-middle income economies (74.2 percent). Risin recurrent expenditures, driven b public-sector w es, h ve constr ined public investment nd disrupted the execution of multi e r projects. However, deficiencies in PIM processes nd s stems lso inhibit c pit l spendin .43 Lesotho l cks complete PIM fr mework (Fi ure 35), nd no ministr or enc is specific ll empowered to dr ft nd issue re ul tions or otherwise oversee public investment. While the Project Appr is l Guidelines touch on some elements of PIM nd include summ r of project ppr is l methods, Lesotho h s no comprehensive set of PIM uidelines.44 At e ch st e of the PIM c cle, the overnment h s est blished found tion for more mbitious reforms, but no st e is currentl robust. There is no independent bod with cle r m nd te to review projects nd select those th t re best li ned with the countr ’s development objectives. The Dep rtment of Project C cle M n ement t the Ministr of Fin nce nd Development Pl nnin (MoFDP) issues templ tes nd uidelines th t support the ppr is l, review, nd screenin of investment projects. The Project Selection nd Implement tion Committee, which is lso under the uthorit of the MoFDP, is responsible for reviewin nd overseein c pit l projects, but it is not independent, nd its decisions c n be influenced or overridden. _______________________________________________ 43 This section is b sed on World B nk (2024) nd follows the n l tic l fr mework presented in R j r m et l. (2010). 44 World B nk (2024b). 41 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth Fi ure 35. The “Ei ht Must-H ves”: A S stem tic Guid nce Fr mework for PIM Consistenc in Authorit to M inten nce of sset Ev lu tion to project screen nd re ister; oper tion nd improve prep r tion reject projects m inten nce of sset uid nce f f f f 1 2 3 4 5 6 7 8 Implement tion Independent Adjustment Ev lu tion Oper tion Appr is l Seleccion Guid nce review f f f f f Link to Ke to An effective bud et nd development credible procurement process to support str te selection implement tion nd oper tion Source: World B nk Public Expenditure Review (2024) b sed on R j r m t l. (2010). The we k li nment between the current investment portfolio nd st ted objectives indic tes th t there is scope to enh nce the lloc tive efficienc of the investment bud et. The second N tion l Str te ic Development Pl n (NSDP II 2023/24 – 2027/28) st tes ke objectives to be chieved, but the current portfolio of investment projects is not cle rl li ned with this vision. Moreover, ll c pit l projects re subject to the s me ppr is l requirements— li nment with the NSDP II nd technic l, fin nci l, nd economic fe sibilit —irrespective of their si e or complexit , overburdenin the s stem.45 Moreover, the qu lit of the ppr is ls differs widel cross projects, nd not ll c pit l investments included in the bud et h ve been properl ppr ised. Project monitorin nd ev lu tion re h mpered b l ck of form ll est blished monitorin pr ctices, s well s d t constr ints. The MoFDP does not receive nnu l upd tes to ch n es in project costs or timelines, which complic tes pl nnin nd monitorin nd reduces the ccur c nd usefulness of the MTFF. Projects re frequentl tre ted s if the were perpetu l pro r ms, nd line encies exp nd the scope of work with no limits on tot l estim ted costs. Projects re seldom dropped or p used even when ch n es in the m croeconomic environment or the specific context lters the costs nd/or benefits estim ted t the desi n st e. In ddition, the MoFDP l cks the uthorit to h lt underperformin nd mism n ed projects. Monitorin rem ins d hoc, nd d t on project m n ement nd execution re not reported to the Dep rtment of Project C cle M n ement in re ul r or s stem tic m nner. D t constr ints lso hinder efforts to determine how well the existin stock of c pit l projects is li ned with the overnment’s rowth objectives. These deficiencies in PIM result in numerous underperformin projects subject to frequent del s nd cost overruns. The uthorities re t kin import nt steps to control spendin . Interministeri l cooper tion is llowin for the periodic remov l of host workers nd pensioners from the public p roll. The IFMIS h s been up r ded but its use needs to be consolid ted. For ex mple, there re we knesses in the monitorin nd control of tr ns ctions involvin SOEs nd extr -bud et r units. The implement tion of Tre sur Sin le Account could improve tr nsp renc , monitorin , nd control. The overnment recentl conducted public expenditure nd fin nci l ccount bilit self- ssessment, which found improvements in bud et reli bilit but little or no pro ress in other re s. The next step is to build on this ssessment nd implement str te th t defines PFM reform priorities. Public procurement is ke determin nt of the effectiveness nd qu lit of public service deliver . The Public Procurement Act p ssed in M rch 2023 is n import nt chievement. It b rs procurement outside of IFMIS nd h s helped prevent the renewed ccumul tion of rre rs. The le isl tion est blishes fr mework for enh ncin tr nsp renc in the procurement s stem, reducin the rbitr riness of selection criteri , st nd rdi in pr ctices, nd stren thenin ccount bilit b producin udit ble records. These reforms re expected to ield si e ble fisc l s vin s while improvin the qu lit of public services. However, two e rs l ter, the second r le isl tion h s not et been p ssed, nd the pproved Public Procurement Re ul tor Authorit is still not oper tion l. ______________________________ 45 These requirements re. See: World B nk (2024b). 42 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth 2.2 THREE REFORM AREAS TO TRANSFORM FISCAL POLICY INTO AN ENGINE OF INCLUSIVE GROWTH To improve the effectiveness of fisc l polic , the overnment should resist pressure to immedi tel incre se expenditures s revenues rise. While extern l revenue inflows re expected to rem in hi h over the medium term, SACU tr nsfers nd w ter ro lties h ve proven vol tile in the p st. The current sur e in revenues is windf ll th t will not be sust ined indefinitel , nd the overnment should ensure th t current inflows re effectivel lever ed to boost lon -term rowth throu h bro d-b sed improvements in fisc l polic nd PFM. The n l sis presented bove hi hli hts the import nce of reforms in three ke re s. 2.2.1. Reform Are 1: Adoptin Fisc l Rules nd Cre tin St bili tion Fund to Promote M croeconomic St bilit Fisc l rules c n pl ke role in st bili in the business c cle. Fisc l rules impose numeric l limits on bud et r re tes nd public debt, cont inin pressures to overspend when revenues re hi h. B stren thenin fisc l responsibilit , fisc l rules lso contribute to debt sust in bilit , which is vit l to preserve Lesotho’s forei n-exch n e reserves nd m int in the pe to the r nd. The overnment is lre d pl nnin to introduce fisc l rules into its fisc l fr mework. Implementin these rules swiftl will c pit li e on the existin reform momentum nd help bre k the lon st ndin proc clic lit of revenue inflows nd expenditure p tterns. The overnment could consider introducin the followin t pes of fisc l rules: • Expenditure Rule: An expenditure rule limits the rowth of cert in bud et c te ories, such s recurrent spendin . B committin the overnment to more efficient lloc tion of resources in dv nce, n expenditure rule c n help insul te the bud et process from pressure to spend resources unproductivel . • Structur l Bud et Rule: A structur l bud et rule t r ets the bud et b l nce, which is the most import nt driver of public debt d n mics th t the overnment c n directl control. Such rule c n cont in pressures to overspend, which for Lesotho would me n decouplin expenditures from vol tile extern l revenues. • Debt Rule: A debt rule t r ets the debt stock, which would support m croeconomic st bilit while helpin to s fe u rd the currenc pe . Such rule is lre d included in the Public Debt M n ement Bill, which is currentl bein discussed in the le isl ture lon with sophistic ted public debt m n ement reforms th t could re tl stren then the m croeconomic fr mework. Est blishin st bili tion fund could help build fisc l buffers while further stren thenin the currenc pe . St bili tion funds en ble overnment to s ve excess revenues nd dr w on them in the future to miti te the imp ct of shocks or compens te for lon -term decline in inflows. In Lesotho, st bili tion fund could lso provide ddition l forei n-exch n e reserves to support the pe . A st bili tion fund could include development component, which would ch nnel p rt of the ccumul ted s vin s to fin nce n incre se in public investment in the future, once pl nnin nd m n ement s stems h ve improved. S vin resources in st bili tion fund would miti te pressure to further incre se unproductive recurrent spendin nd prevent n influx of resources from overwhelmin Lesotho’s lre d str ined PIM s stem. Includin withdr w l rules th t llow for resources to fin nce future public investments would stren then m croeconomic st bilit in the ne r term while improvin the lloc tive efficienc of public expenditures in the lon term. The monies collected in the Fund could be invested bro d to spent domestic ll in the future. 43 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth 2.2.2. Reform Are 2: Improvin the Alloc tion of Spendin Alloc tin re ter sh re of the bud et to investment while controllin the rowth of recurrent expenditures would enh nce the lloc tive efficienc of public spendin . The overnment h s issued uidelines for revised medium-term expenditure fr mework, which should incre se investment spendin to ddress the countr ’s l r e infr structure deficit.46 The new fr mework could be complemented b me sures to control the rowth of the public sector w e bill, includin : (i) ensurin th t the cost-of- livin djustment is consistent with the MTFF; (ii) reviewin the desi n of utom tic notch incre ses nd reev lu tin the use of discretion r llow nces; (iii) conductin comprehensive review of the public-sector workforce to determine its li nment with the overnment’s priorities; nd (iv) improvin coll bor tion with the Bud et Dep rtment to secure fundin for new st ff. Spendin (fisc l) rules could lso help cont in the rowth of recurrent expenditures. Improvin the lloc tive efficienc of public spendin will require enh nced expenditure d t nd more effective bud et m n ement. Recurrent spendin items should be removed from the c pit l bud et, while public investment undert ken vi SOEs should be included. The bud et should continue to sep r tel identif projects fin nced b domestic revenues nd b lo ns nd r nts. Fin nci l tr ns ctions involvin SOEs nd p r st t ls re not full ccounted for in the bud et, which undermines the MTFF nd could imp ir the effectiveness of fisc l rule. Over the lon term, est blishin culture of hi h d t qu lit could re tl stren then fisc l polic is Lesotho, nd the countr would benefit from implementin IMF-recommended pr ctices for overnment fin nci l st tistics.47 Sever l reforms re cruci l to build hum n c pit l nd improve soci l development outcomes. Recent World B nk n l tic l work hi hli hts sever l reforms to stren then public service deliver .48 Well-t r eted nutrition support c n improve he lth indic tors t low cost, while investments in prim r he lthc re could reduce reli nce on expensive terti r -level services. In the educ tion sector, reforms re needed to boost efficienc nd incre se spendin on le rnin m teri ls, te cher tr inin , infr structure, nd f cilities. Reviewin nd improvin the t r etin of the terti r educ tion burs r scheme nd pro r ms for vulner ble roups could further enh nce the efficienc of educ tion spendin . Simil rl , soci l protection could be stren thened b shiftin soci l ssist nce s stems from c sh to di it l p ments, h rmoni in benefit levels between pro r ms, nd includin up-to-d te d t on overnment nd p rtner pro r ms in the N tion l Inform tion S stem for Soci l Assist nce (NISSA). Refinin benefici r re istr of Old A e Pension to elimin te ineli ible benefici ries h s the potenti l to ener te fisc l s vin s of up to 0.8 percent of GDP. The existence of l r e numbers of ineli ible benefici ries on the OAP benefici r re istr is ttribut ble prim ril to l ck of procedure, or its enforcement, nd s stemic in dequ cies in the dministr tion of the pro r m. Enforce proof- of-life verific tion for ll benefici ries, conduct comprehensive cross-check of the entire OAP re istr inst the public sector pensions benefici r d t b se to identif nd elimin te duplic tes, conduct pre-re istr tion of proxies to void fr ud, nd produce benefici r -level p ment reconcili tion monthl , re the most import nt me sures to improve the efficienc in the OAP pro r m. _______________________________________________ 46 The new Public Fin nci l M n ement nd Account bilit Bill l s the found tion for implementin medium-term expenditure fr mework b requirin the Minister of Fin nce nd Development Pl nnin to est blish medium-term bud et r fr mework th t includes the procedures to control expenditure within the expenditure ceilin s nd incre se efficienc in use of resources throu h expenditure prioriti tion. The Bill h s been submitted to the P rli ment in session th t h s been nnulled, forcin the process to st rt in s m n revisions h ve been requested b sever l st keholders. After more th n five e rs of prep r tion nd dr ftin , the bill is still not complete nd h s not been sent to C binet for pprov l. 47 IMF (2024b). 48 World B nk (2022b). 44 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth 2.2.3 Reform Are 3. Enh ncin the Efficienc of Public Spendin Reforms t r etin PFM, PIM, nd public procurement s stems c n improve the over ll efficienc of public spendin . PFM reforms need to be rounded in le isl tion m nd tin tr nsp rent nd well- coordin ted bud et process complimented b robust expenditure controls nd cle r le l b sis for SOE oversi ht. The move to IFMIS is positive step, but more c n be done to stren then PFM. Lesotho’s PIM s stem suffers from import nt we knesses in the re s of uid nce, ppr is l, independent review, nd project selection.49 The le l fr mework does not dequ tel support the development nd enforcement of procedures nd uidelines for e ch st e of the process, le vin it vulner ble to politic l interference nd excessive offici l discretion. In ddition to reformin the le l b sis for PIM, the overnment could m nd te th t ministries, dep rtments, nd encies produce det iled pl ns outlinin expenditure commitments nd disbursements. Est blishin comprehensive project d t b se could help ensure th t investment spendin is li ned with NSDP II priorities nd represents dequ te v lue for mone .50 Fin ll , procurement reforms could help improve the efficienc of recurrent spendin . This is n mbitious reform end but necess r one. Implementin these me sures ccomp nied b complement r policies th t ensure low-income households nd l in re ions c n ctivel p rticip te in nd benefit from the rowth process will be ke to chievin more equit ble, resilient, nd prosperous future for ll. Implementin the Public Procurement Act will require p ssin second r le isl tion nd est blishin Public Procurement Re ul tor Authorit . Second r le isl tion is necess r to oper tion li e the new procurement fr mework nd pprove ll workin documents nd st nd rds, includin n upd ted Procurement M nu l. Est blishin speci li ed Public Procurement Re ul tor Authorit with dequ te hum n resources will be critic l to ensure the effective pplic tion of ll relev nt l ws nd re ul tions, improve the decision-m kin process, nd stren then monitorin nd ev lu tion. Addition l re ul tions lso need to be est blished overnin emer enc procurement. Improvin PFM c n further enh nce the efficienc of public service deliver nd prevent the reemer ence of rre rs. Ensurin discipline nd ccount bilit in PFM rem ins critic l ch llen e. Despite the recent up r des to IFMIS, ke processes still occur outside the s stem, nd the number of unreconciled tr ns ctions continues to row. Ti ht expenditure controls re needed to ensure th t expenditures re consistent with overnment priorities nd to prevent renewed buildup of rre rs. Stron er enforcement of the use of IFMIS for ll tr ns ctions (revenues nd expenditures) nd d il reconcili tion of b nk st tements re import nt me sures to stren then c sh m n ement. Adoptin Tre sur Sin le Account could further improve tr nsp renc , monitorin , nd control. _______________________________________________ 49 World B nk (2024b). 50 IMF (2024 ). 45 LESOTHO ECONOMIC UPDATE 2025 - Transforming Fiscal Policy into an Engine of Inclusive Growth LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth REFERENCES • Cetr n olo, O., J. Jiméne , nd R. Rui del C stillo (2010). “Ri idities nd Fisc l Sp ce in L tin Americ : A Comp r tive C se Stud .” Series M croeconomí del Des rrollo 97, Economic Commission for L tin Americ nd the C ribbe n (ECLAC), S nti o, Chile. • FinM rk Trust (2021) Lesotho FinScope Consumer Surve Report 2021 https://finm rk.or . /Public tions/FinScope_Lesotho_2021_FI_Report.pdf • IMF (2020). “Public Investment for the Recover ”, Fisc l Monitor: Policies for the Recover . October 2020. Intern tion l Monet r Fund. W shin ton DC. • IMF (2022). “Kin dom of Lesotho: Selected Issues.” Countr Report No.22/162. M 16, 2022. Intern tion l Monet r Fund. W shin ton DC. • IMF (2024 ) Kin dom of Lesotho: 2024 Article IV – Press Rele se nd St ff Report. Intern tion l Monet r Fund. W shin ton DC. • IMF (2024b): Kin dom of Lesotho: Government Fin nce St tistics Technic l Assist nce Mission, Technic l Assist nce Report, Afrit c, M uritius. • Ministr of Fin nce nd Development Pl nnin of Lesotho (2024). St te Owned-Entities Report 2022, Ministr of Fin nce nd Development Pl nnin , Government of the Kin dom of Lesotho, M seru. • Moreno-Dodson, 2008. “Assessin the Imp ct of Public Spendin on Growth: An Empiric l An l sis for Seven F st Growin Countries,” World B nk Polic Rese rch Workin P per No. 4663, Jul . • Mu, Y. (2022b). Polic Coordin tion in Lesotho, Intern tion l Monet r Fund. W shin ton DC. • R j r m, An nd; Le, Tu n Minh; Biletsk , N t li ; Brumb , Jim. 2010. A Di nostic Fr mework for Assessin Public Investment M n ement. Polic Rese rch workin p per; no. WPS 5397. DC: World B nk. https://openknowled e.worldb nk.or /h ndle/10986/3881 • R vn, M. O., & Uhli , H. (2002). On Adjustin the Hodrick-Prescott Filter for the Frequenc of Observ tions. The Review of Economics nd St tistics, 84(2), 371–376. http://www.jstor.or /st ble/3211784 • Ve , S.(2005). Inflexibilid des: ri ideces fect ciones presupuest ri s otros spectos. Experienci Ar entin . XXXII Semin rio Intern cion l de Presupuesto Público, Lim Perú. • World B nk (2014). Lesotho - Public Expenditure Review. W shin ton DC; World B nk Group. • World B nk (2019): Lesotho Povert Assessment : Pro ress nd Ch llen es in Reducin Povert . W shin ton, D.C. : World B nk Group. https://documentsintern l.worldb nk.or /se rch/31634765 • World B nk (2019 ). Lesotho Educ tion Public Expenditure Review. W shin ton, D.C. : World B nk Group. • • World B nk (2021): Lesotho – S stem tic Countr Di nostic Upd te. Brid in Implement tion G ps to Acceler te Development. W shin ton, D.C. The World B nk. https://openknowled e.worldb nk.or /entities/public tion/d10e b81-4c46-545d-b26c-80d44ecde 9e • • World B nk (2022): Lesotho - Soci l Protection Pro r ms nd S stems Review. W shin ton, D.C. World B nk Group. https://documentsintern l.worldb nk.or /se rch/33869279 • World B nk (2022 ): Inequ lit in Southern Afric : An Assessment of the Southern Afric Customs Union. W shin ton, DC: World B nk. • World B nk (2022b): Lesotho - Polic Notes. W shin ton, D.C. The World B nk. • World B nk (2024 ): Glob l Economic Prospects, Ch pter 4: Fisc l Polic in Commodit Exporters: An Endurin Ch llen e, W shin ton, D.C.: World B nk Group. World B nk GEP. • World B nk (2024b). Lesotho Public Expenditure Review (PER), unpublished. 47 LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth LESOTHO ECONOMIC UPDATE 2025 - Tr nsformin Fisc l Polic into n En ine of Inclusive Growth To bolster inclusive rowth … • Incentivi e priv te sector development • Stren then m cro-fisc l m n ement • Enh nce the efficienc nd effectiveness of public spendin www.worldb nk.or