Report number: 167998-LS SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE BRIDGING IMPLEMENTATION GAPS TO ACCELERATE DEVELOPMENT DECEMBER 2021 2 | LESOTHO • Systematic Country Diagnostic Update LESOTHO • Systematic Country Diagnostic Update | 3 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE BRIDGING IMPLEMENTATION GAPS TO ACCELERATE DEVELOPMENT DECEMBER 2021 • AFRICA REGION © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbankgroup.org Some rights reserved This work is a product of the staff of The World Bank Group with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. 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Third-party content - The World Bank Group does not necessarily own each component of the content contained within the work. The World Bank Group therefore does not warrant that the use of any third-party- owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permission is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. Photos: Shutterstock TABLE OF CONTENTS List of Figures 10 List of Boxes 11 List of Tables 11 Abbreviations and Acronyms 12 Acknowledgements 15 Executive Summary 17 1. Lesotho’s Macroeconomic Developments since 2015 27 1.1. What Has Driven Growth? 30 1.1.1. The supply side: expansion in the size of the public sector and in manufacturing 30 1.1.2. The demand side: government consumption and net exports 32 1.1.3. Strong economic ties to South Africa remain important for growth 36 1.2. What Has Constrained Growth? 38 1.2.1. A weak business environment 38 1.2.2. A large public sector, coupled with inefficiency of public spending 41 1.2.3. Heavy reliance on volatile and falling SACU revenues 46 1.2.4. Climate risks and environmental degradation 48 1.3. Macroeconomic Outlook 51 2. Poverty Reduction and Shared Prosperity 55 2.1. What Has Slowed Poverty Reduction? 61 2.1.1. A relatively small share of economic growth is passed through to consumption 61 2.1.2. Poor human capital outcomes and service delivery 62 2.1.3. Labor market outcomes are disappointing 68 2.1.4. Vulnerability to environmental and economic shocks is high 69 2.1.5. Remittances have been falling 72 2.2. Lesotho’s Lagging Regions: The Case of Rural Mountainous Areas 73 8 | LESOTHO • Systematic Country Diagnostic Update 3. Opportunities and Constraints for Development: What Needs to Change? 81 3.1. Rebalancing Growth: Shifting to Private Investment and Exports for Job Creation 82 3.1.1. Opportunities to shift to private investment and exports for job creation 82 3.1.2. Priority policy areas to shift to private investment and exports for job creation 84 3.2. Strengthening Human Capital and Improving Service Delivery, Especially in Rural Areas and Lagging Regions 86 3.2.1. Opportunities to strengthen human capital and service delivery 87 3.2.2. Priority policy areas to strengthen human capital and service delivery 89 3.3. Strengthening Climate Risk Management and Resilience 92 3.3.1. Opportunities to strengthen climate risk management and resilience 92 3.3.2. Priority policy areas to strengthen climate risk management and resilience 94 3.4. Overarching Constraint: Bridging Public Sector Implementation Gaps 98 3.4.1. Lesotho’s implementation challenge: a case of isomorphic mimicry? 99 3.4.2. Foundational factors contributing to the implementation challenge 100 3.4.3. Opportunities to bridge public sector implementation gaps 101 3.4.4. Recommendations for bridging public sector implementation gaps 104 4. Prioritization for Accelerated, Inclusive and Sustainable Progress 109 Selected References 118 Annexes 120 Annex 1. New Knowledge Generated by the WBG since 2015 and Remaining Knowledge Gaps 120 LESOTHO • Systematic Country Diagnostic Update | 9 LIST OF FIGURES Figure E. 1. Lesotho has the potential to harness the demographic dividend 22 Figure E. 2. Updated priority policy areas 25 Figure 1. The economy has been in recession since 2017 29 Figure 2. The shift from agriculture to services and manufacturing continues 31 Figure 3. Agricultural output is low and erratic 31 Figure 4. The economy remains highly government consumption-driven 32 Figure 5. Investment levels are high, led by the public sector 33 Figure 6. Government debt levels are rising 34 Figure 7. Exports have increased, driven by apparel and diamond exports 35 Figure 8. Lesotho has close economic ties to South Africa 37 Figure 9. Average public sectors salary costs have increased considerably faster than inflation 41 Figure 10. Government capital investment has been falling 43 Figure 11. Overall cash balance (deficit/surplus) 43 Figure 12. Lesotho is dependent on SACU receipts 47 Figure 13. Adverse weather events negatively impact the macro-fiscal situation, 1980–2018 49 Figure 14. Poverty has declined but remains widespread, especially in rural areas 57 Figure 15. The poor remain disproportionally concentrated in rural and mountainous areas 59 Figure 16. Inequality has fallen but remains relatively high 60 Figure 17. Human Capital Index 62 Figure 18. Disparities in access and retention in education 64 Figure 19. Poor access to electricity slows equitable and sustainable rural development 65 Figure 20. Employment cascade, 2019 69 Figure 21. The pandemic is projected to increase poverty 70 Figure 22. Mapping rural mountainous areas 74 Figure 23. Lack of access to basic services and infrastructure is associated with increased poverty 75 Figure 24. Limited economic opportunities are associated with increased poverty 76 Figure 25. Share of individuals living in household with remittances from South Africa 77 Figure 26. Increased vulnerability to climatic shocks is associated with increased poverty 77 Figure 27. Updated priority policy areas 117 10 | LESOTHO • Systematic Country Diagnostic Update LIST OF BOXES Box E. 1. Impact of the COVID-19 pandemic 19 Box 1. Economic impact of the COVID-19 pandemic 53 Box 2. The impact of the COVID-19 pandemic on human capital 71 LIST OF TABLES Table E. 1. Highlights in the evolution of key priority interventions identified in the 2015 SCD 21 Table 1. Key procurement and public investment management weakness 45 Table 2. Highlights in the evolution of key priority interventions identified in the 2015 SCD 111 Table 3. Summary of broad priority areas 114 LESOTHO • Systematic Country Diagnostic Update | 11 ABBREVIATIONS AND ACRONYMS ABC All Basotho Convention AD Alliance of Democrats ADB African Development Bank AfCFTA African Continental Free Trade Area AGOA African Growth and Opportunity Act AIDS Acquired Immunodeficiency Syndrome ASPIRE Atlas of Social Protection Indicators of Resilience and Equity BIT Bilateral Investment Treaties BNP Basotho National Party BOS Bureau of Statistics CEmONC Comprehensive Emergency Obstetric and Newborn Care CBL Central Bank of Lesotho CGP Child Grant Program CHAL Christian Health Association of Lesotho DC Democratic Congress DFS Digital Financial Services DP Development Partner DRM Disaster Risk Management DSA Debt Sustainability Analysis ECCD Early Childhood Care and Development ENSO El Niño Southern Oscillation EPA Economic Partnership Agreement EU European Union FDI Foreign Direct Investment GBV Gender-Based Violence GDP Gross Domestic Product GNI Gross National Income GoL Government of Lesotho HCI Human Capital Index HIV Human Immunodeficiency virus  HRM Human Resources Management HRMIS Human Resource Management Information System ICT Information and Communications Technology IFMIS Integrated Financial Management Information Systems IIA International Investment Agreements IMF International Monetary Fund ITU International Telecommunication Union LCD Lesotho Congress for Democracy LMIC Lower Middle-Income Country LNDC  Lesotho National Development Corporation LRA Lesotho Revenue Authority 12 | LESOTHO • Systematic Country Diagnostic Update LTDC  Lesotho Tourism Development Corporation M Lesotho Maloti MAFS Ministry of Agriculture and Food Security MDA Ministries, Departments, and Agencies M&E Monitoring and Evaluation MoET Ministry of Education and Training MoF Ministry of Finance MFN Most Favored Nation MoGYSR Ministry of Gender, Youth, Sports and Recreation MoH Ministry of Health MoHA Ministry of Home Affairs MIS Management Information System  MoLCD Ministry of Law and Constitutional Development MPO Macro Poverty Outlook MoPS Ministry of Public Service MoSD Ministry of Social Development MSME Micro, Small and Medium Enterprise NCD Non-Communicable Disease NGO Non-Governmental Organization NIMP National Irrigation Masterplan NISSA National Information System for Social Assistance NPL Non-Performing Loan NSDP II National Strategic Development Plan II OAP Old Age Pension PEFA Public Expenditure and Financial Accountability PER Public Expenditure Review PFM Public Financial Management PIM Public Investment Management PMDU Prime Minister’s Delivery Unit QMMH Queen Mamohato Memorial Hospital RCL Reformed Congress of Lesotho REER Real Effective Exchange Rate SACCOs Savings and Credit Cooperative Societies SACMEQ Southern and Eastern Africa Consortium for Monitoring Educational Quality SACU Southern African Customs Union SADC Southern African Development Community SARS South African Revenue Service SCD Systematic Country Diagnostic SEZ Special Economic Zones SOE State-Owned Enterprise SSA Sub-Saharan Africa STEM Science, Technology, Engineering and Mathematics TB Tuberculosis TVET Technical and Vocational Education and Training UNCTAD United Nations Conference on Trade and Development  VHW Village Health Worker WASH Water, Sanitation and Hygiene WSS Water Sanitation Services WHO World Health Organization WBG World Bank Group LESOTHO • Systematic Country Diagnostic Update | 13 14 | LESOTHO • Systematic Country Diagnostic Update ACKNOWLEDGEMENTS This report was prepared by a multisector team from the World Bank Group (WBG) led by Precious Zikhali. Monaheng Seleteng and Kirstin Conti were in the core team. Members of the extended team are listed below by sector and included Rajeev Gopal from the WBG’s International Finance Corporation (IFC) and Jessica Charles Wade, Olanrewaju Kassim, and Persephone Economou from the Multilateral Investment Guarantee Agency (MIGA). The report was finalized under the collective guidance and leadership of Country Director Marie Francoise Marie-Nelly; Africa Region Chief Economist Albert Zeufack; IFC Country Manager Adamou Labara; MIGA Country Head Hoda Atia Moustafa; Manager (Operations) Asmeen Khan; Program Leaders Wolfgang Fengler, Aleksandra Posarac, and Bekele Debele; former Program Leader Erwin De Nys; former Acting Program Leader Edouard Al-Dahdah; Practice Managers Pierella Paci, Mathew Verghis, and Omowunmi Ladipo; Lesotho Resident Representative Yoichiro Ishihara; Consultant Lolette Kritzinger-van Niekerk; Senior External Affairs Officer Zandile Ratshitanga, and Communications Consultant Nthati Moorosi. The report benefited from feedback provided at different stages by the following peer reviewers: Facundo Cuevas, Joel Turkewitz, Samuel Freije-Rodriguez, Simon Davies, Smita Kuriakose, Somik Lall, and Trang Van Nguyen. Logistical assistance during the preparation of this report was ably provided by Relebohile Mohlakoana, Mmaserole Mabuela, and Obadiah Mokhomo. Peter Kjaer Milne (an independent consultant) edited the report. The report was designed and typeset by Anatolie Ursu. Finally, the team would like to thank everyone at the WBG who contributed towards making the completion of this report a successful exercise. Global Practice or Theme Contributors Agriculture Peter Goodman, Meeta Sehgal, Bobojon Yatimov Digital Development Aki Enkenberg, Audrey Ariss Education Elizabeth Ninan, Jesal Chandrakant Energy & Extractives Frederic Verdol Environment & Natural Resources Sarah Moyer Ganesh Rasagam, Marc Schrijver, Barry Maher, Finance, Competitiveness & Innovation Uzma Khalil, Gracelin Baskaran Governance Kirstin Conti, Rachel Ort, Barak Hoffman, George Daniel, Tandile Msiwa Health, Nutrition & Population Omer Sidjou, Kajali Goswami International Finance Corporation (IFC) Rajeev Gopal Jobs Dino Merotto Macroeconomics, Trade & Investment Monaheng Seleteng, Jakob Engel, John Grinyer, Sashana Whyte Multilateral Investment Guarantee Agency (MIGA) Jessica Wade, Olanrewaju Kassim, Persephone Economou Poverty & Equity Precious Zikhali, Diana Garcia Social Development Samaneh Hemat, Moipone Ndlovu, Jana El-Horr, Alys Willman Social Protection & Jobs Victoria Monchuk Transport Noor Mohamed Urban, Disaster Risk Management, Yohannes Kesete, Megha Mukim Resilience and Land Water Palesa Mokorosi, Ruth Kennedy-Walker LESOTHO • Systematic Country Diagnostic Update | 15 EXECUTIVE SUMMARY Since 2015, Lesotho has been subjected to a myriad of uninsured climate, environmental and economic risks, which have negatively affected growth and poverty reduction 1. A small, mostly mountainous, and largely rural 2. Extreme weather events have had a negative country of about 2 million people, Lesotho is impact on the macro-fiscal situation of the country. highly vulnerable to frequent and severe weather The economy has been in recession since 2017 events, particularly flooding and drought, which and household consumption has declined sharply, have material impacts on lives, the economy, falling 17 percent in real terms since its peak in livelihoods, poverty, and inequality. In 2015/16, 2013. This decline marks a dramatic reversal of the Lesotho experienced an El Niño Southern sustained increase in private consumption levels Oscillation (ENSO)-induced drought, which was since independence in 1966. The 2019 Lesotho the driest on record and the largest drought Disaster Risk Financing Diagnostic estimates, recorded in terms of affected population. As a based on the cost of responding to all perils, result, although poverty fell between 2002 and the average annual cost of disaster response at 2017, the pace was slow, with the official national US$19.3 million or 1.6 percent of the total budget poverty rate falling by about 7 percentage points expenditure in the 2019/20 fiscal year. Droughts from 56.6 to 49.7 percent. Largely due to frequent also affect the electricity sector, given that local climate shocks, including the 2015/16 drought, power generation is primarily from hydropower, progress in reducing poverty has been much and imported electricity is highly dependent on slower in rural areas where the poverty rate fell water resources, and this is also likely to further marginally from 61.3 to 60.7 percent compared constrain private investments. with a reduction from 41.5 to 28.5 percent in urban areas. In the absence of the 2015/16 drought, rural 3. Unfolding in an already weak macroeconomic poverty would have been 6 percentage points situation, the economic shock due to the lower, and the pace of national poverty reduction COVID-19 pandemic presents additional would have nearly doubled between 2002 and challenges to be managed in the near to 2017. This is because frequent climate shocks medium term. Lesotho is facing a tough fiscal have contributed to a decline in agricultural outlook as Southern Africa Customs Union (SACU) productivity, which is largely rain-fed and a source transfers, revenue collection, remittances, private of livelihood for most of the population. Droughts, investments, and exports all take a hit. Overall, the most frequent source of risk, drive food prices this together with the weak regional and global higher, further worsening food insecurity. This is economic outlook is expected to result in a exacerbated by environmental degradation. Poorly continuation of the recession in 2020, with real integrated management of natural resources leads Gross Domestic Product (GDP) estimated to have to exploitation of resources and the degradation of contracted by 15.3 percent in the Q4 2020. On ecosystems and ecosystem services, undermining an annual basis, real GDP is estimated to have water availability, ecotourism, and agricultural contracted by 11.1 percent in 2020 compared with productivity. Degradation of landscapes and a contraction of 0.4 percent in 2019. This is on ecosystems, partly for wood fuels, also limits the the back of the country having introduced, similar resilience of communities to shocks. to other countries, unprecedented measures 18 | LESOTHO • Systematic Country Diagnostic Update Box E.1. Impact of the COVID-19 pandemic Daily changes in positive cases (13 May 2020 - 24 July 2021) 450 400 350 300 250 200 150 100 50 0 5/13/2020 6/1/2020 6/20/2020 7/9/2020 7/28/2020 8/16/2020 9/4/2020 9/23/2020 10/12/2020 10/31/2020 11/19/2020 12/8/2020 12/27/2020 1/15/2021 2/3/2021 2/22/2021 3/31/2021 4/1/2021 4/20/2021 5/9/2021 5/28/2021 5/28/2021 6/16/2021 7/5/2021 7/24/2021 COVID-19 crisis in Lesotho at a glance Poverty (as of July 24, 2021) Test conducted: 130,767 US$ 1.90/person/day (in 2011 PPP) poverty rate projection for 2020, according to the Wolrd Positive cases: 12,880 Bank’s Macro Poverty Outlook (MPO) Recoveries: 6,621 April 2020: 27.3% Deaths: 363 April 2021 MPO GDP contraction, 2020: 11.1% (revised to better account for the pandemic): 31.2% Relief package: US$141.9 mln (7.7% of GDP) to contain the spread of the pandemic, putting and inclusive recovery from the pandemic requires pressure on fiscal space. In a context of historically supporting micro, small and medium enterprises slow progress in reducing poverty, the COVID-19 (MSMEs) and protecting jobs as well as livelihoods, pandemic is reversing the modest gains that including support to the textile industry that is have been made, with at least 62,000 Basotho highly reliant on functional global value chains estimated to have slipped into poverty in 2020 and provides employment to the poor, especially (as measured by the international poverty line of women. It also requires, in addition to short-term US$1.90 per day). The unemployment rate was policy responses and as the pandemic subsides, high even before the pandemic, at 22.5 percent in undertaking longstanding structural reforms to lay 2019 (strict definition), rising to 38.3 percent (when the foundation for resilient economic recovery. the expanded definition is used). Thus, resilient LESOTHO • Systematic Country Diagnostic Update | 19 The challenges and binding constraints identified in the first SCD remain valid today 4. The 2015 Systematic Country Diagnostic (SCD) sector development has reduced the inclusiveness emphasized the need to shift from a public of Lesotho’s economic growth. While structural sector-driven to a private sector-driven, export- transformation has the potential to spur economic oriented, and job-creating economic growth growth, it has slowed following the leveling-off model. It proposed three pathways to sustainably of the garment industry boom and decelerating achieve the World Bank Group’s twin goals of growth in the services sector. eliminating global extreme poverty and promoting shared prosperity, namely: (i) redefining the role 7. As a result, Lesotho’s economy remains out of of the state through fiscal consolidation and balance; it is running on one engine. Domestic public sector modernization for effectiveness and demand and a large public sector continue to efficiency; (ii) promoting a competitive and export- drive economic activity. The share of the public oriented private sector by establishing incentives sector in the economy has barely changed. to support an outward-looking orientation; and On paper, Lesotho is performing well when (iii) strengthening individual and group assets considering the level of investment, which has by increasing the opportunities and returns to averaged 29 percent of GDP a year since 2010, self-employment by raising the productivity of and has remained high even during the recent smallholders and microenterprises, improving period of political upheaval. However, most of human capital (education and health), and this investment is led by government, with public strengthening the social protection system. sector investment levels ranking among the highest in the world. Government also remains the 5. This SCD Update revisits the constraints and largest employer, accounting for one-third of total priority interventions identified in the 2015 employment, while the private sector has created SCD and posits that most of the challenges and only limited job opportunities. binding constraints identified in the first SCD remain valid today. It uses new analytical work 8. The dominance of the public sector has steadily conducted since 2015 (see Annex 1) to reflect on increased government debt levels, which reached the main developments in Lesotho since then, 64.7 percent of GDP in December 2020. Reliance and to update the prioritization of constraints as on SACU transfers, which averaged 35 percent of relevant. The new analytical work undertaken GDP over the previous 15 years, has historically does not substantially alter the diagnostics created space for the Government of Lesotho (GoL) presented by the 2015 SCD. Rather, the analytical to finance these high investment levels and public work completed since 2015 reinforces findings of employment. But these transfers are volatile and the earlier analytical work that informed the 2015 have declined in recent years, exacerbating macro- SCD. Slow progress across priority interventions fiscal vulnerabilities. SACU transfers are expected proposed in the 2015 SCD is highlighted in Table to decline further due to the COVID-19 pandemic. E. 1. While remittances from migrant workers play a crucial socioeconomic role, they further reinforce 6. The private sector remains small and weak. This a consumption-driven economy. Shortcomings in is despite nascent success in integration into the public investment management—identified back world economy, especially through the African in 2012—are still leading to sub-optimal public Growth and Opportunity Act (AGOA). While investment decisions. This is evident in the failure net export performance remains an important of the high levels of government spending to driver of growth in Lesotho, exports remain low, promote inclusive growth and provide access to uncompetitive, undiversified, and with limited quality services for the poor, or provide access to value addition. There is evidence of erosion of services in a spatially blind manner. export competitiveness in the United States (US) market, where Lesotho is no longer the leading apparel exporter under AGOA. Limited private 20 | LESOTHO • Systematic Country Diagnostic Update Table E.1. Highlights in the evolution of key priority interventions identified in the 2015 SCD 2015 SCD: Evolution since 2015 Priority interventions 1. Reducing the size of the state, The size of the public sector remains large. ; rebuilding buffers and improving Fiscal consolidation is yet to take hold. ; service delivery by achieving fiscal consolidation and everal years of low transfers from the SACU have eroded Lesotho’s buffers. ; S modernizing the public sector SACU transfers are projected to decline further in the near to medium term due to the COVID-19 pandemic. Progress toward modernizing the public sector has been slow. ; 2. Facilitating a competitive, he overall doing business environment has deteriorated, with gaps in key ; T export-oriented private sector productive and connective infrastructure remain wide, especially in rural areas. by aligning incentives and The quality of governance is deteriorating in a range of areas. ; developing key infrastructure ; Political instability/weak political consensus weakens the business environment. xports lack diversification, still concentrated on very few products, mainly the ; E textiles and apparel, and diamonds sectors. esotho is no longer the leading apparel exporter to the United States under ; L the AGOA trade preferences arrangement. 3. Increasing the returns to Around 53 percent of businesses are excluded from the financial system. ; self-employment by raising abor productivity in industry and services (a sector in which microenterprises ; L productivity of smallholders and are concentrated) has declined over time. microenterprises Productivity is particularly low in subsistence agriculture (smallholders). ; imited job creation: Unemployment rate of 22.5 percent in 2019, with youth ; L unemployment at 29.1 percent. 4. Improving health and uman capital levels have improved since 2010 but with an HCI of 0.40, the ; H education outcomes by reducing score is low for the country’s income level. Learning performance remains the disease burden and raising among the lowest in Southern Africa. and aligning skills ealth outcomes are poor especially among the poor and rural population, with ; H high levels of stunting and a growing burden of non-communicable diseases (NCDs). ack of skills is a major concern for the private sector, with signs of a potential ; L mismatch between the skills pursued by the youth and those demanded by the private sector. 5. Reforming social protection ; There has been progress in reforming social protection, but more progress is to reduce fragmentation, and needed, notably in implementing a means-tested tertiary bursary program, as improve targeting, efficiency and well as in expanding coverage of the poor. linkages LESOTHO • Systematic Country Diagnostic Update | 21 There is an opportunity to build on past success to accelerate progress 9. Lesotho is completely surrounded by South dividend if the economy grows. Fifth, the country Africa, which makes it highly dependent on its enjoys significant financial and technical support neighbor’s economy and policies; however, from the development partner community. Lesotho’s geography and demography also Nonetheless, despite these favorable conditions, provide important opportunities for the Lesotho’s development challenges persist. country’s development. First, South Africa is the continent’s second-largest economy, and provides 10. There are opportunities to shift to private Lesotho with access to markets and advanced investment and exports for job creation. For infrastructure that create links with the rest of instance, Lesotho achieved notable success in the the world. Second, Lesotho enjoys preferential past through expanding the export manufacturing access to key international markets through, for sector under AGOA. The country can build on this example, the Southern Africa Customs Union success to revitalize the manufacturing sector by (SACU), the Southern African Development ensuring that the sector regains its competitiveness Community (SADC), the African Continental Free and leveraging close economic ties with South Africa Trade Area (AfCFTA), and the African Growth and and AfCFTA. Opportunities also exist in the non- Opportunity Act (AGOA) which, if leveraged, could textile and apparel sectors including opportunities in support export-led growth. Third, Lesotho has leather, automotive parts, horticulture, tourism, and abundant water resources that, if better managed, the digital economy. An increase in value added from could ensure reliability and quality of water agro-based industries, and agricultural trade and supply services, and support economic growth distribution services, as well as a shift from traditional and livelihoods. Fourth, demographic trends are exports to higher-value agricultural products in favorable, with an increase in life expectancy international trade, presents another opportunity and the supply of working age people alongside to unleash the potential of the agri-food sector for declining dependency ratios (Figure E. 1). These boosting exports and job creation. Furthermore, demographic trends, together with a relatively shifting market trends due to the impacts of the harmonious labor relations environment, can help COVID-19 pandemic offer new opportunities as Lesotho reap the benefits of the demographic global value chains are being transformed. Figure E.1. Lesotho has the potential to harness the demographic dividend a. Population by broad age groups b. Total dependency ratio 1.8 120 (ratio of population aged 0-14 and 1.6 65+ per 100 population 15-64) 100 Population by age group Total dependency ratio 1.4 1.2 80 (in millions) 1.0 60 0.8 0.6 40 0.4 20 0.2 0 0 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016 2022 2028 2034 2040 2046 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016 2022 2028 2034 2040 2046 Children (0-17) Working Adults (18-64) Seniors (65+) Source: United Nations Population Division, World Population Prospects 2019. 22 | LESOTHO • Systematic Country Diagnostic Update 11. There is also an opportunity to build on targeting system; harmonization of payment achievements made in the health, education, and systems; a new Management Information System social protection sectors since 2015 to accelerate (MIS); and plans to introduce a proxy-means- progress on human capital outcomes. In the health testing mechanism for the Tertiary Education Loan sector, major investments have been undertaken Bursary program for improving the equity of the by the Ministry of Health (MoH) in partnership with distribution of bursaries to young people. development partners (DPs), including the opening of Queen Mamohato Hospital in 2015. Linked to 12. Several opportunities to strengthen climate risk this, equity in health outcomes is on the right track, management and resilience exist. These include with a decline in fertility, and maternal, neonatal, building on progress made in developing various infant and under-5 mortality along with their bills, polices, strategies and plans to strengthen inequity levels. In the education sector, notable disaster risk management, as well as progress achievements include: increasing emphasis on made in advancing disaster risk financing. early childhood development and education Recently, several initiatives have worked to (ECDE) services by the Government of Lesotho strengthen hydro-metrological services. Steps (GoL); signs of improvements in mathematics and have been taken to develop renewable energy science education; progress in strengthening resources and this is expected to contribute to communities’ involvement in the management both mitigation of, and adaptation to, climate of schools; and several existing initiatives and change, while also increasing energy security. The extracurricular programs to support boys and COVID-19 pandemic has provided an opportunity girls to stay in school. In the social protection to accelerate certain Disaster Risk Management sector, Lesotho can build on the advances made (DRM) actions, including coordination of in: expanding the National Information System emergency operations. for Social Assistance (NISSA)  social registry and Compared with the last SCD, more attention needs to be paid to bridging public sector implementation gaps 13. The weak development performance reflects development partner community: the focus on the gaps in public sector implementation. While the form has overlooked significant implementation overall development narrative of the 2015 SCD gaps. The gaps in implementation are mainly due remains valid, there is growing evidence pointing to foundational constraints related to a fragile to the need to address implementation challenges political environment and deterioration in the facing the country, and improve the efficiency and quality of governance, as well as heavy economic effectiveness of public spending. Implementation reliance on external resources that enables high gaps reduce the efficiency and effectiveness levels of public spending but weakens policy of public policies and spending. In most cases, ownership. Instability of government coalitions the laws, policies and institutions that are meant in recent years, which is associated with a high to support the efficient and effective delivery of turnover of ministers and principal secretaries development outcomes do exist. However, they between elections, has led to weak coordination are often either not implemented, or distorted. between government ministries/agencies This suggests a challenge of form without function, and development partners, and delayed the a kind of ‘isomorphic mimicry’ in which policy implementation of key reforms. documents and development plans that meet international standards ultimately camouflage 14. This SCD Update, therefore, proposes a focus on deep dysfunction in the actual delivery of services. the ‘how’ rather than the ‘what’ through bridging Isomorphic mimicry partly explains why progress implementation gaps. It argues that implementing toward building real capability and improving better, along with addressing fundamental development outcomes has been slow despite high structural challenges, would improve the quality public spending, including significant financial and and efficiency of public spending and accelerate technical support that Lesotho receives from the progress, moving Lesotho from aspiration to action LESOTHO • Systematic Country Diagnostic Update | 23 to attainment. Broadly, this requires taking concrete 15. This SCD Update identifies four interconnected, steps to, among others: (i) enhance the capacity broad priority policy areas that could potentially and performance of the public sector; (ii) improve make the greatest contribution to eliminating commitment, coordination and cooperation; (iii) extreme poverty and boosting shared prosperity. strengthen the monitoring and evaluation of These are: (i) across all areas, bridging public implementation; and (iv) strengthen public financial sector implementation gaps. Implementing better accountability. In bridging implementation gaps, is key to accelerating progress in addressing the Lesotho has an opportunity to build on progress challenges and binding constraints to development. made in the recent past: for instance, the National In particular, it is key to accelerating progress in the ID and Civil Registry System provides the seeds for other three broad policy areas, which this Update more efficient, transparent, and citizen-centered identifies to include: (ii) rebalancing growth by service delivery. In addition, the Prime Minister’s shifting to private investment and exports for job Delivery Unit (PMDU) provides the institutional creation; (iii) strengthening human capital and capacity and leadership to unblock the critical improving service delivery, especially in rural constraints to private investment and job creation areas and lagging regions; and (iv) strengthening through strengthening inter-ministerial and inter- climate risk management and resilience. The agency coordination, and focusing on delivery of priority interventions within each of these areas the agenda on investment climate and economic are summarized in Figure E. 2. reforms. 24 | LESOTHO • Systematic Country Diagnostic Update Figure E.2. Updated priority policy areas Main challenges Priority interventions Pathways Goals A weak business ƒ Accelerate adoption and implementation environment, including of outstanding legislation and economic constrained access to reforms. finance particularly among Rebalancing ƒ Strenghten skills and employability of Growth: Shifting to Micro, Small & Medium the youth, ensuring a gender nuanced private investment Enterprises (MSMEs), approach. and exports for job discourages private investment and result in ƒ Close gaps in key infrastructure creation. small and weak domestic specifically in electricity, sustainable and private sector. safe road connectivity, and information and Communications Technology (ICT). Ending extreme poverty. Poor human capital ƒ Strenghten Early Grade Reading (EGR) Strenghtening outcomes and service and Early Grade Mathematics (EGM). human capital and delivery, especially improving service ƒ Develop and implement a plan to retain High poverty, inequality and joblessness among the poor and rural delivery especially secondary school students. population. in rural areas and ƒ Improve nutrition. lagging regions. Boosting shared ƒ Develop and adopt a national Disaster prosperiry. Risk Management (DRM) policy and strategy, along with a Disaster Risk High vulnerability to Financing (DRF) strategy. environmental and economic shocks amid ƒ Develop a shock-responsivness Strenghtening weak financial resilience framework for the overall social climate risk and gaps in the current protection system, including management and social protection system to strengthening its payment system. resilience. fully address them. ƒ Promote sustainable landscape management including integrated catchment management and climate- smart agriculture Cross-cutting: Bridging public sector implementation gasp ƒ Enhance the capacity and performance of the public sector. ƒ Improve commitment, coordination and cooperation. ƒ Strengthen monitorin and evaluation of implementation. ƒ Strengthen public financial accountability. Source: Authors’ own representation LESOTHO • Systematic Country Diagnostic Update | 25 26 | LESOTHO • Systematic Country Diagnostic Update LESOTHO’S MACROECONOMIC DEVELOPMENTS SINCE 2015 LESOTHO • Systematic Country Diagnostic Update | 27 As highlighted in the first SCD in 2015, Lesotho’s growth model remains unsustainable, with high reliance on debt-financed public investments. High levels of public investment have failed to translate into higher and more inclusive growth: the macroeconomic position has deteriorated since 2015, with the economy in recession since 2017 and household consumption levels falling 17 percent since 2013. The deterioration in macroeconomic performance is partly because the main challenges and constraints identified in the 2015 SCD remain valid today, as progress toward addressing them has been slow. The private sector has weakened on the back of a deterioration in the overall business environment. As a result, the state continues to play a dominant role in the economy, with evidence of inefficiencies in public spending. The COVID-19 pandemic has exacerbated the growth challenge. Real GDP is estimated to have contracted by 15.3 percent in the fourth quarter of 2020 largely due to the negative shock imposed by the pandemic, coupled with high levels of uncertainty over developments in South Africa and around the globe. 28 | LESOTHO • Systematic Country Diagnostic Update 16. The macroeconomic position has deteriorated percent in real terms since its peak in 2013. This since 2015; in fact, the economy has been in marks a sharp reversal of the sustained increase recession since 2017. Economic growth slowed in private consumption levels since independence from an average compound annual growth rate in 1966 and positions Lesotho as an outlier among of 3.9 percent in real terms between 2010 and its peers (Figure 1b). 2014 to an average contraction of 1.5 percent between 2015 and 2020. The economy was in 17. Inflation has remained stable. The headline recession for four years from 2017 to 2020, driven consumer price index averaged 5 percent growth, by contractions in the construction, transport and with remarkably little variation during the 2010s. storage, and wholesale and retail trade sectors. The current account position has improved since In per capita terms, real gross domestic product 2015, on the back of a notable increase in textile (GDP) has fallen by over 5 percent since 2016 and diamond exports, while worker remittances (Figure 1a) and convergence with other Southern have also held up. Gross international reserves African Customs Union (SACU) countries is still a have come under pressure in the past five years. long way off. Furthermore, real GDP growth is far Over the 2015–19 period, international reserves below the 7 percent convergence target set by have been on average 20 percent lower than the Southern African Development Community during 2010–14. The fall in reserves in 2016–17 (SADC). The deterioration of the macroeconomic coincided with large debt repayment outflows on position has been accompanied by a contraction the financial account, coupled with two years of in household consumption, which has shrunk by 17 current account deficits above 5 percent of GDP. Figure 1. The economy has been in recession since 2017 a. Real GDP growth 2010–2019 b. Average real household consumption 2015-2019 (Annual percentage change) (Annual percentage change) 8 5 4 6 3 4 2 Lesotho 2 1 0 0 Namibia Botswana Guatemala Mozambique Nepal South Africa Eswatini Zimbabwe -1 -2 -2 -4 -3 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Real GDP Per capita Source: Lesotho Bureau of Statistics. Source: World Development Indicators. LESOTHO • Systematic Country Diagnostic Update | 29 1.1. What Has Driven Growth? 1.1.1. The supply side: expansion in the size of the public sector and in manufacturing 18. In the 1990s, the economy was driven mainly by United States under the AGOA trade preferences subsistence agriculture supported by inflows of arrangement, with Kenya having taken the top remittances from South Africa, especially from spot.1 Overall, values of exports to the United migrant mineworkers. This has since shifted States have declined while Kenya, for instance, in the 2000s (Figure 2a), with growth driven by has managed to increase its value of exports to increasing net exports from, particularly, diamonds, the United States. textile and apparel manufacturing, and water to South Africa. In the 2010s, growth was dominated 20. Agriculture is a major source of livelihoods for by the services sector as depicted in government most of the rural population, with about 71 percent consumption. being involved in agriculture to some extent,2 but agriculture has struggled to be a source of 19. Expansions in the size of the public sector exports, income, and rural growth. Agricultural and in manufacturing have been the largest output growth was low at about 0.8 percent contributors to recent economic output. In average annual growth between 2010 and 2019, contrast, wholesale and retail trade, and finance and highly erratic (Figure 3). This is primarily due to and insurance have shrunk in real terms since 2015, several inter-related challenges, including, among after a period of strong growth in 2010–14 (Figure others, the limited size of arable land (only about 2b). The manufacturing sector contracted by 21 11 percent of Lesotho’s total land area is arable), percent between 2010 and 2014 but rebounded unfavorable farm structures (average land holding by 34 percent between 2014 and 2019, largely is 1 hectare per family), weak extension services, due to expansion in the apparel sector supplying lack of irrigation, inadequate rural infrastructure, South Africa. In earlier years, AGOA boosted the and limited access to credit and investment textile and apparel manufacturing sector, after capital. The situation is further exacerbated by which it became an engine of growth and job land degradation and massive soil erosion as creation. However, in recent years, Lesotho’s a result of the extensive, extractive cultivation textile industry has faced strong competition in the system and over-utilization of the rangelands. In United States (US) market from Asian producers addition, climate change has increasingly affected and increasingly Ethiopian and Kenyan producers, crop and livestock productivity, with the country which has subsequently led to a decline in export being highly vulnerable to climatic shocks, mainly volumes to the United States. Now, Lesotho is from droughts, frost, and floods. no longer the leading apparel exporter to the 1. AGOA is a non-reciprocal trade agreement enacted in 2000 that provides duty-free export to the United States from eligible countries in Sub-Saharan Africa. The purpose of AGOA is to support economic development in Sub-Saharan Africa and deepen US trade and investment ties to the region. AGOA extends duty-free benefits previously available only under the country’s Generalized System of Preferences (GSP) program. Newly added AGOA products include apparel, footwear, motor vehicle components, agricultural products, chemicals and steel. AGOA also offers a Third-Country Fabric provision, which allows low-income countries in Africa to export apparel using imported yarns and fabrics. 2. FAOStat 2018. 30 | LESOTHO • Systematic Country Diagnostic Update Figure 2. The shift from agriculture to services and manufacturing continues a. Services dominate the economy b. Expansion in the size of the public sector has contributed the most to recent economic output 100% Real change in activity Proportion of total 90% (M, millions) economic expansion 80% 2010-2014 70% Finance and insurance 1,085 29% Wholesale and retail trade 736 19% 60% Information and communication 367 10% 50% 2015-2019 40% Public administration 834 236% 30% Manufacturing 373 106% 20% Mining and quarrying 78 22% 10% Electricity and water -171 -48% 0 Wholesale and retail trade -324 -92% 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 Construction -342 -97% Agriculture, forestry and fishing Manufacturing Construction Mining and quarrying Utilities Services Source: Lesotho Bureau of Statistics. Figure 3. Agricultural output is low and erratic 60 50 40 Agriculture, forestry, and fishing, value added 30 20 (annual % growth) 10 0 -10 -20 -30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 -40 Lesotho Eswatini South Africa Botswana Namibia Sub-Saharan Africa Lower middle income Source: World Development Indicators. LESOTHO • Systematic Country Diagnostic Update | 31 21. The poor performance of agriculture in Lesotho The decline in the agriculture sector’s contribution does not mirror the yield and labor productivity to GDP is also likely to have had an indirect gains seen in the rest of Sub-Saharan Africa. economic impact through other sectors, as it is The low level of production, together with limited a supplier of inputs to manufacturing businesses marketing information and skills, weak private and a core market for rural, non-farm services. As sector engagement, inadequate agricultural such, enhancing productivity in this sector could policies, and inefficiencies in public spending increase rural incomes and strengthen linkages to have hampered agricultural commercialization and other sectors (e.g., manufacturing and services) to agribusiness development, and failed to provide support rural poverty reduction. a pathway out of poverty for Lesotho’s rural poor. 1.1.2. The demand side: government consumption and net exports 22. The economy remains highly government 23. Investment levels have remained high compared consumption-driven, a sign of an unsustainable with peers, even during the recent period of growth model. A growth-accounting exercise political upheaval, with government leading most confirms the contribution of declining total factor of the investment. Gross fixed capital investment productivity and capital stock (investment) in the averaged 29 percent of GDP between 2010 and slowdown in economic growth (Figure 4), and that 2019 (Figure 5a). Most of this investment was the economy is driven primarily by net exports led by government, with Lesotho’s public sector and government consumption rather than private investment levels ranking among the highest in consumption and investment. the world. Public investment is about 14 percent of GDP and puts Lesotho at the top of its peer group (Figure 5b). Figure 4. The economy remains highly government consumption-driven 8 6 Growth rate (percentage points) 4 2 0 -2 -4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -6 Total Factor Productivity (gA) Labor ((1-α) * gL) Capital Stock (α * gK) Real GDP (gY) Source: World Bank staff estimates. 32 | LESOTHO • Systematic Country Diagnostic Update 24. High public investment has compensated for by commercial banks), and the downward trend is low foreign direct investment (FDI), which attributable to higher FDI outflows as a result of has declined since 2015. After falling below 1 rising foreign assets held by commercial banks. percent of GDP in 2010, FDI increased to about Commercial banks have increased their foreign 5 percent of GDP in 2015 due to the expansion investments abroad due to the liquidity they in mining and in textiles and clothing under enjoy domestically, as well as better yields and AGOA. However, since 2015, FDI has been on a instruments abroad. Furthermore, FDI inflows to downward trend. Lesotho’s FDI is largely driven Lesotho have been steadily declining due to an by equity and investment fund shares (particularly undeveloped domestic debt market. Figure 5. Investment levels are high, led by the public sector a. Gross fixed capital investment, 2010–19 b. Public investment compared with peers (Percent of GDP) (Percent of GDP, average of 2010–18) 40 16 35 14 12 30 10 25 8 20 6 15 4 10 2 Gross fixed capital investment of which private 5 0 Lesotho Mozambique Botswana Eswatini Nepal Namibia South Africa Guatemala Zimbabwe 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: World Development Indicators and International Monetary Fund (IMF). LESOTHO • Systematic Country Diagnostic Update | 33 Government debt levels are steadily increasing 25. The dominance of the public sector in the Maseru Stock Market. Nevertheless, domestic economy is associated with increasing debt interest rates have been falling, making this levels. The debt-to-GDP ratio increased to 57 growing dependence on domestic borrowing less percent at the end of 2019/20. The equivalent costly. figure was 34 percent at the end of 2010/11 and 41 percent at the end of 2014/15 (Figure 6a). This 27. The most recent joint World Bank/IMF Debt increase in debt has been a result of persistent Sustainability Analysis (DSA) revised Lesotho’s fiscal deficits since 2015/16. These deficits have risk rating from ‘low’ to ‘moderate’ risk of been mostly financed from additional external distress. This revision is a return to trend, with borrowing, with the stock of external debt the ‘low’ rating of 2017 reflecting revised GDP increasing by 15 percent of GDP between end- data and a stronger GDP outlook, which has since 2017/18 and end-2019/20. This new borrowing weakened. An emerging issue noted since 2017 is has been less concessional than previously, with the underfunding of pension liabilities, estimated concessional debt as a proportion of total external at 3.5 percent of GDP. From the perspective of debt falling from 85 percent between 2010/11 breaching DSA thresholds (and, hence, moving and 2014/15 to 79 percent between 2015/16 and from a ‘moderate’ to ‘high’ risk of debt distress), 2019/20 (Figure 6b). Lesotho is most vulnerable to an export shock, with the DSA conducted in 2020 showing the 26. Domestic borrowing has seen a sharp increase present value of debt of the GDP threshold of from a low base. Domestic borrowing, which is 40 percent being breached from a 1 standard almost exclusively in the form of Treasury bills deviation shock to exports. Most borrowing is used (T-bills) and Treasury bonds, rose from 7 percent to finance government-implemented projects, but of GDP in 2016/17 to 12.5 percent in 2019/20. Most it is unclear if these projects generate the returns of this borrowing was in the form of short-term needed to service the debts they create. Most T-bills, reversing the trend since 2010/11 of short- of Lesotho’s external borrowing is from bilateral term lending being a declining share of domestic and multilateral lenders to finance specific capital borrowing. Domestic markets remain limited, as investment projects. few companies have listed and participate in the Figure 6. Government debt levels are rising a. Public debt stock b. Domestic short-term debt (Percent of GDP) (Percent of GDP) 60 4 50 3 40 30 2 20 1 10 0 0 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Total public debt of which domestic Source: Central Bank of Lesotho. 34 | LESOTHO • Systematic Country Diagnostic Update Increased levels of net exports have been driving recent economic growth, but they lack diversification 28. As a small landlocked country, net export exploratory operations between 2015 and 2019. performance is an important driver of growth Favorable global diamond prices in 2015 and 2019 in Lesotho. Since 2015, total merchandise also had a positive impact on diamond exports. exports have been on an upward trajectory. Total Lesotho’s diamonds are exported to the European merchandise exports increased from an average market and auctioned in Antwerp, Belgium. Water of 38.5 percent of GDP in the period 2010–15, to exports to South Africa remained constant as an average of 42.5 percent in the period 2015–19 determined by the agreement between the two (Figure 7a). However, exports are still concentrated countries. in just a few products, mainly textiles, apparel and diamonds. Textiles and apparel account for almost 29. Lesotho’s ratification of the African Continental half of exports, followed by diamonds at almost Free Trade Area (AfCFTA) agreement in one-third (Figure 7b). Textile and apparel exports November 2020 presents an opportunity for increased significantly mainly due to the extension the country to look beyond the traditional and of AGOA in 2015 to 2025, as most of Lesotho’s dominant markets of South Africa and the United textiles and apparel are exported to the United States as one of the measures to diversify the States. However, while exports of textiles and economy. Through the AfCFTA, African countries apparel to the United States have fallen, exports can diversify exports, accelerate growth, and to South Africa have increased. The value of attract FDI. The AfCFTA reduces tariffs among non-textile, apparel and footwear manufacturing member countries and covers policy areas such as exports has fallen since 2015, reflecting the closure trade facilitation and services, as well as regulatory of specific factories.3 Diamond exports increased measures such as sanitary standards and technical partly because more diamond mining companies barriers to trade (World Bank 2020c). started operating, while some expanded or started Figure 7. Exports have increased, driven by apparel and diamond exports a. Composition of merchandise exports b. Composition of merchandise exports (Percent of GDP) (Percent of total exports) 60 100 50 80 40 60 30 40 20 10 20 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Agriculture Diamonds Textiles Other Water Total Exports Source: Central Bank of Lesotho. 3. A small number of firms in other manufacturing production have closed down, resulting in the ending of television, radio, lightbulb, and car seat cover exports. A small number of firms in other manufacturing production have closed down, resulting in the ending of television, radio, lightbulb and car seat cover exports. LESOTHO • Systematic Country Diagnostic Update | 35 1.1.3. Strong economic ties to South Africa remain important for growth 30. Lesotho has close economic linkages to South funds, insurance companies, fund managers), as Africa. It is only as an export market where well as the non-financial sector (firms, households South Africa is not the overwhelmingly dominant and government), has been rising, from 3 to 7 partner, with the United States (for garments) and percent of GDP. This growth has been entirely the European Union (for diamonds) providing from additional lending by South African-based alternative export markets (Figure 8). The rise of financial institutions. Most of this additional Lesotho’s diamond exports has lowered South lending has been directly to Basotho households, African dominance as an export market, but South rather than firms or government. Africa remains the principal source for Lesotho’s imports. In 2010, 75 percent of Lesotho’s exports 32. Most of Lesotho’s worker remittances come by value went to South Africa, but by 2019 that from South Africa. Annual remittance flows to proportion had fallen to 39 percent. This was Lesotho are estimated to have averaged around largely due to the significant increase in diamond 24 percent of GDP in the 2010s, one of the exports to the European Union since 2010. In terms highest rates in the world. Traditionally, Basotho of imports, an average 77 percent of Lesotho’s mine workers employed in South Africa were the imports were registered as coming from South principal source of remittances, with employment Africa between 2010 and 2019. Taiwan, China is as high as 120,000 in the late 1980s. These still an important trading partner, in particular for remittance payments are mainly passed through the importation of raw or intermediate materials formal banking channels established by the mining used in the garment industry, while both China and companies. However, mineworker numbers had India have been slowly increasing their market fallen to less than 22,000 by the end of 2019 shares. and increasing numbers of Basotho are working both formally and informally in agricultural and 31. South Africa accounts for around 66 percent of domestic activities in South Africa. Data suggest international lending to Lesotho. Total liabilities that around 70 percent of total Basotho working owed to South African residents were equivalent in South Africa are outside the formal mining to around 17 percent of GDP as of end-2019. While sector. Remittance payments from this group pass lending to Lesotho’s banks has been declining through less formal channels, including as cash since 2010, lending directly to non-banks, which and physical goods carried over the border. includes non-bank financial corporations (pension 36 | LESOTHO • Systematic Country Diagnostic Update Figure 8. Lesotho has close economic ties to South Africa a. Exports by destination, share of total exports 100% South Africa 75% 50% United States 25% European Union 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: International Monetary Fund Direction of Trade Statistics. b. Estimated remittance inflows to Lesotho b. Basotho mineworkers in South Africa (Percent of GDP) (average number per year) 40 50 40 30 30 20 20 10 10 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: World Bank, Central Bank of Lesotho. LESOTHO • Systematic Country Diagnostic Update | 37 1.2. What Has Constrained Growth? 1.2.1. A weak business environment 33. The investment climate is lagging in several areas in key sectors limits competition as it deters or and the overall doing business environment has further crowds out new FDI.5 Restructuring SOEs deteriorated. This is reflected in several indices to transfer some of their functions to the private of economic competitiveness. For example, sector, while enhancing SOE governance and Lesotho ranks 131st out of 141 on the 2019 World efficiency, remains important. Economic Forum’s Global Competitiveness Index, ranking especially low in health, infrastructure and 35. The development of local competitors has innovation capacity. been limited. Key sectors, such as wholesale, retail, mining and textiles, are largely controlled 34. A weak business regulatory environment by expatriate groups. Large foreign-owned hampers competition. The investment policy and manufacturing firms have not facilitated the legal regime is complex, fragmented and sclerotic. development of local entrepreneurial skills and There is neither an Investment Promotion Law, technology transfer. To date, few Basotho manage an Investment Promotion Agency, nor incentives or own textile firms. In addition, there are just a small for FDI. In the absence of an explicit investment number of foreign-owned firms within most sectors legal framework specifically addressing both FDI in the formal economy. Within four subsectors of and domestic investment, investor protection manufacturing—apparel, construction, footwear, remains weak. The screening and approval of and food products—the four largest firms employ FDI are conducted through a process akin to a over half of all workers. The same is true for three licensing regime where every potential FDI is subsectors within the services sector—retail- subject to a one-off policy, subjective treatment, specialized stores, retail household equipment, and shifting GoL priorities, while its entry, and private security activities (World Bank 2018). establishment, operation and exit are based on This suggests that, while there are many individual unclear criteria and ad-hoc legal agreements. entrepreneurs within the MSME grouping and Weak tenure security adds to this challenge and several large firms, there is a ‘missing middle’ into is due to an outdated and dysfunctional system of which small firms are unable to grow. property rights transfer, acquisition, registration and protection, particularly for agricultural 36. Access to credit for MSMEs has been a significant land.4 Property rights are weak to non-existent challenge in Lesotho. As at the end of 2019, the in commercial, industrial and agricultural land private credit-to-GDP ratio was about 19 percent outside of Maseru and Maputsoe. Weak security of and the bank deposits-to-GDP ratio was 32 tenure creates risks for investors and means that percent (2018). The financial sector is dominated farmers are unable to provide enough collateral by banks, with total assets constituting 69 percent to secure loans. Furthermore, the dominance of of the total financial sector’s assets at the end of state-owned enterprises (SOEs) or joint-venture 2019. The monetary financial institutions (MFIs) and agreements between SOEs and foreign investors savings and credit cooperative societies (SACCOs) 4. Lesotho has fewer than 300 land titles issued for agricultural land, and the process of land transfer and registration takes over five years. 5. Examples include: the LNDC in property management, asset management, commercial real estate, SME finance, Special Economic Zones  (SEZs) and capital holding sectors; the Lesotho Tourism Development Corporation (LTDC) in tourism, entertainment and real estate; the Dairy Board in dairy; Maluti Beer in beverages; and Letzeng Diamonds in mining. 38 | LESOTHO • Systematic Country Diagnostic Update play a limited role in reaching underserved programs do not promote digital skills or ICT usage, segments, specifically lending to micro and small which is a missed opportunity to embed digital enterprises. Access to finance remains limited skills.6 This is critical since the COVID-19 pandemic for MSMEs owing to lack of a credit history, high is re-shaping remote working arrangements, and collateral requirements, a missing legal framework individuals without access to digital devices, digital for movable collateral-based (though efforts to skills, or the knowledge of how to leverage digital develop one have been undertaken), dysfunctional technologies for their businesses are especially credit guarantee schemes and an insolvency vulnerable. regime that is not functioning. The credit bureau is operational but has very limited coverage, 38. Limited connectivity weakens integration into with less than 16 percent of adults covered. The value chains. As a small, landlocked country, Secured Interest in Movable Property Act and its Lesotho’s domestic market is small, while limited implementing regulations were recently published virtual and physical connective infrastructure in the Government Gazette (August 2020), though hampers the integration of local producers into there is a need to establish the collateral registry global value chains. Cities have been shown to and increase capacity of the court system in order be effective in realizing agglomeration effects and to improve access to credit. Furthermore, while thereby generating economies of scale for the Lesotho has reached parity in financial inclusion, private sector.7 Agglomeration effects are expected women tend to rely more on informal savings and to increase with higher urbanization rates. credit, and have fewer assets to use as collateral Currently, only one-third of the population lives for the credit they would need to scale up small in urban areas. While improvements in transport businesses. Access to early-stage finance for infrastructure have enhanced connectivity, startup firms is limited and entrepreneurs have no Lesotho’s geology, topography, and climate information about, or access to, existing financing present unique challenges for developing its opportunities in the region. transport sector. Transport by road is the dominant mode of accessibility and mobility, and road freight 37. A shortage of skills is an impediment to is predominantly provided by the private sector.8 private sector development. Skills mismatches The road network remains unevenly distributed, adversely affect youth employment prospects. being mostly concentrated in the lowlands and For example, while many learning institutions foothills, which constitute 25 percent of Lesotho’s offer courses related to textiles and apparel, the total area. The drop in the Logistics Performance skills taught do not align with those required by Index (LPI), from 133/160 in 2014 to 139/160 in 2018, industry (World Bank 2018). Support programs underscores persistent connectivity challenges. are fragmented, with most providing rudimentary Overall, these physical connective infrastructure training and very limited follow-on technical or gaps adversely impact the efficiency of trade financial support. Hence, the impact of support facilitation, with poor linkages between production programs is relatively small, and their future sites and border posts. Enhancing connectivity sustainability is unclear. There are currently very and integration into value chains could benefit limited opportunities for networking, information- from better leveraging proximity to South Africa’s sharing and interactions among entrepreneurs, more modern and developed infrastructure. and examples of collaboration among the various programs are few. Furthermore, addressing the underrepresentation of women in digital startups remains important for promoting diversity and inclusivity in the sector. Many entrepreneurship 6. A small number of private sector initiatives, such as the Vodacom Innovation Park, Standard Bank’s Enterprise Hub, and GrindNation, are exceptions, since their programs offer access to computers, equipment and internet connectivity. 7. For a summary, see Gates to the World: African Cities, World Bank 2016. 8. Lesotho has no domestic air transport but is connected internationally through a scheduled service between Maseru and Johannesburg’s OR Tambo International Airport. The only rail transport is a freight service between Maseru’s container terminal hub and Bloemfontein in South Africa, with two freight trains running daily mainly carrying cement, maize, fuel and freight containers. This constitutes one-third of Lesotho’s international trade in bulk goods. LESOTHO • Systematic Country Diagnostic Update | 39 39. Improvements in digital infrastructure and ICT- (including MSMEs) to play a critical role in driving enabled services have the potential to enhance the digitization of small and large firms alike, the integration of Lesotho into regional and improving their chances of survival during the global value chains, but the adoption and use COVID-19 pandemic. of technology are lagging. Despite progress in improving digital infrastructure, Lesotho has a low 41. Lesotho has the opportunity to harness the digital standing on the World Bank’s Digital Adoption economy as an enabler of connectivity, growth Index (DAI), which measures the level of adoption and innovation. The World Bank 2020  Lesotho of technology by businesses, government, and Digital Economy Diagnostic (World Bank 2020b) citizens. Comparing Lesotho’s score and position argues that the digital economy is underutilized with comparator countries suggests a key issue and Lesotho’s adoption and use of technology is the low level of internet connectivity, with only are lagging in part due to weak competition in one-third of Basotho using internet regularly, the broadband market. At the same time, there pointing to a wide digital divide that has been is also slow progress in the development and difficult to close. Basotho consumers have been use of public and private digital platforms, a rapid adopters of new technology in the form of rigid enabling and regulatory environment to mobile phones and mobile payments, but limited support further innovation and market entry in the digital skills hold back the extent of their adoption, digital financial services (DFS) sector, insufficient and the greater use of digital products and implementation of digital skills, and a nascent services. The country also suffers from an exodus digital entrepreneurship ecosystem. To tap into of skilled people, who are more likely to have the potential that the digital economy holds, digital skills, to South Africa, constituting a drag the diagnostic identifies three broad priority on competitiveness and lessening the interest areas as opportunities for Lesotho. These are: of companies hoping to grow their operations in (i) improving the enabling environment for the Lesotho. digital economy; (ii) driving digital transformation and demand by strengthening public sector 40. Lesotho’s private sector makes limited use of platforms and infrastructure; and (iii) strengthening digital technologies, constraining its integration the digital ecosystem through digital skills into value chains. Data from the World Bank’s and entrepreneurship. Overall, the diagnostic Enterprise Surveys9 show that only 15 percent of emphasizes the need to shift the emphasis from formal manufacturing and services firms in Lesotho supply to demand-side measures. It finds that a have a website, compared with 31 percent of firms holistic approach to the use of the digital economy in Sub-Saharan Africa. Few Basotho firms engage that improves digital skills and literacy, access in e-commerce to attract international customers. to digital payments and other DFS, and support While a small local ICT industry has emerged, it is to digital entrepreneurs can promote inclusive hampered by the small size of the local market. growth. The limited demand and customer base constrain the ability of digitally enabled or ICT-driven firms 9. http://www.enterprisesurveys.org/data/exploreeconomies/2016/lesotho 40 | LESOTHO • Systematic Country Diagnostic Update 1.2.2. A large public sector, coupled with inefficiency of public spending 42. As argued in the 2015 SCD, “the sheer size of 18.3 percent of GDP and 41.6 percent of total the state, coupled with misaligned expenditures, expenditures for 2020/21. At this level, Lesotho’s including a high wage bill, is one of the fundamental public sector wage bill is one of the highest in obstacles to the sustainability of inclusive growth, the world,11 and large in relation to the country’s more diversified growth itself, and building assets income level. The high wage bill is due to high and among the poor.” This is still constraining growth rising wage levels, and high numbers of public today. employees (Figure 9b). Government workers enjoy a substantial wage premium vis-à-vis their private 43. A high proportion of revenues goes to cover sector counterparts with similar qualifications and government salaries. The budget speech for experience.12 For example, 80 percent of education FY2021/2210 suggested the compensation of expenditure is on teacher salaries, while outcomes employees accounted for 17.5 percent of GDP in the sector have been low and inequitable.13 in 2019/20. The budget speech further projects Increases in public wages push up wage demands the compensation of employees to account for Figure 9. Average public sectors salary costs have increased considerably faster than inflation a. Inflation rates, and announced b. Growth in the government wage bill salary increases for public servants and average employee cost (Percent) (Index 2010/11 = 100) 240 Announced salary No. of Inflation Av. employee cost (CBL data) adjustment public servants Av. employee cost (MoF data) 2010/11 3.6 3.5 43,700 200 Salary bill index 2011/12 5.0 5.0 43,800 Inflation index 2012/13 6.1 3.0 43,300 2013/14 5.0 6.0 43,700 160 2014/15 5.4 4.0 44,200 2015/16 3.2 6.0 44,000 120 2016/17 6.6 4.0 43,900 2017/18 5.2 3.0 43,700 2018/19 4.8 4.0 43,200 80 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20* 5.2 no change 42,300 2019/20* 2020/21* 6.5 5.0 42,800 Source: Central Bank of Lesotho, Budget speeches, various years. Source: Ministry of Finance budget data, Central Bank of Lesotho. 10. Tabled to Parliament on the February 17, 2021. 11. Note on the Management of the Wage Bill for the Government of Lesotho (World Bank 2019). 12. Ibid. 13. Lesotho Education Public Expenditure Review (World Bank 2019). LESOTHO • Systematic Country Diagnostic Update | 41 in the private sector, while increases in the number spending inefficiencies in the agriculture sector of public sector jobs lead to tighter labor market include: (i) the fertilizer and input subsidies conditions and increased wage pressure. As a program , with the National Fertilizer and Input result, although the country’s labor regulations Subsidy Program involving a 50 percent subsidy are broadly in line with other SADC countries, they on seed, fertilizer and mechanical operations;15 (ii) translate into generous terms given the country’s low and poorly managed infrastructure investment, relative income level. The minimum wage is a for example, public expenditures in irrigation relatively high share of per capita income (almost remain abysmally low at 0.5 percent of total public 80 percent, double that of South Africa at 40 expenditures in agriculture; and (iii) a high share percent of per capita income), and severance pay of salaries in sector spending compared with total in weeks of salary is higher than all other countries agricultural spending, with salaries representing in the region except Botswana. as much as 91 percent of the Ministry of Agriculture and Food Security (MAFS) District Office and 71 44. Weak basic payroll and human resource percent of the Livestock Department expenditure. management (HRM) controls drive high wages and impacts the GoL’s ability to effectively 46. Spending on goods and services, as well as manage staff performance. The recent Human grants, has been slowly falling as a share of Resource Management Information System (HRMIS) GDP. Domestic travel and transport accounts assessment found that there are no controls in for about 20 percent of goods and services major transaction and approval processes, as well spending. Efficient management of the GoL’s as issues with data quality.14 Efforts to complete vehicle fleet has been a concern for the past two a one-time cleanup of payroll/HR data and put in decades. Recent policy announcements discuss place strengthened HR business processes are downgrading vehicle types and better controlling ongoing, including efforts to verify the existence vehicle use to reduce costs. Spending on grants and uniqueness of individuals on the payroll with has been falling, while social benefits have been the National ID and Civil Registry. The Ministry of broadly flat.16 Budget transparency of grants could Public Service (MoPS) has also initiated efforts to be strengthened, with sizable expenditures being implement and automate more robust business recorded under this category that, ultimately, are processes, including through procurement of spent on staff salaries, suggesting an even larger a new HRMIS with interfaces to the National public sector wage bill than officially recorded. The ID and Civil Registry and Integrated Financial largest component of social benefits is payments Management Information Systems (IFMIS). This will under the old age pension, which accounts for strengthen the efficiency of public spending and about 75 percent of this budget area. In October lay the foundation for better staff deployment and 2019, the GoL launched an old age pension performance management. verification scheme to stop payments to deceased pensioners. 45. Inefficiencies are also evident in public spending in agriculture. Despite the significant role of 47. Inefficiencies are also evident in public social agriculture in Lesotho’s rural space, at less than 3 spending, which is relatively high, but outcomes percent of total spending, public spending on the remain poor suggesting spending on social sector is inadequate and inefficient. The share of services could be better targeted and more spending is far below the Comprehensive Africa efficient. Lesotho allocates a relatively large Agriculture Development Programme (CAADP) amount of its public resources to education, target of 10 percent. Agricultural spending is health, and social protection, but resources are highly dependent on international financing and not allocated equitably. For example, in 2018, bilateral development partner funding. Spending education spending accounted for 8.9 percent in agriculture is inefficient. Key areas of public of GDP. The health budget allocation was at 6.2 14. Lesotho Human Resource Management Information System Assessment (Government of Lesotho 2019). 15. The program primarily targets cereal production aimed at strengthening food security. 16. ‘Grants’ covers a wide range of transfers, including grants paid to extra-budgetary units, as well as student loan and bursary payments. 42 | LESOTHO • Systematic Country Diagnostic Update percent of GDP for 2019/20. Public expenditure on social protection is 6.4 percent of GDP. Despite Figure 10. this generous spending on these sectors, however, Government capital investment has outcomes remain poor, signaling efficiency gaps. been falling (Percent of GDP) To illustrate, the share of spending on post- secondary level education generally benefits the non-poor, such as the tertiary education bursaries, 16 as the poorest children rarely complete secondary education and access tertiary education. When it comes to social protection, coverage of the poor 12 is limited, and the administrative systems are antiquated and lead to expensive implementation. 8 Overall, the efficiency of social spending could be improved by better accountability of service provision, and targeting of resources to rural, poor 4 households. 48. Spending on foreign interest payments has 0 overtaken payments on domestic debt. Around 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 three-quarters of Lesotho’s debt stock is external, largely on concessional terms, and mostly denominated in US dollars. A combination of Source: Central Bank of Lesotho. factors has led to the interest costs for external debt exceeding the interest costs for domestic debt: the depreciation of the South African rand Figure 11. against the US dollar has pushed up the maloti Overall cash balance (deficit/surplus) value of US dollar denominated interest payments; (Percent of GDP) grace periods for some concessional external loans have been ending; and nominal interest costs on domestic borrow have fallen sharply. 15 Average interest rates on public debt have been flat at around 2 percent per year. The overall fiscal balance has been volatile year-to-year, reflecting 10 volatility in SACU transfers, but average deficits have grown larger in recent years (Figure 11). The estimate for the cash balance for 2019/20 5 published with the 2020/21 budget forecasts a -5.7 percent of GDP deficit. Over the years, fiscal 0 deficits have been financed through domestic and external borrowing, the accumulation of domestic arrears, and the drawdown of government deposits -5 at the Central Bank of Lesotho. -10 -15 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 Source: Budget books, various years. LESOTHO • Systematic Country Diagnostic Update | 43 49. Capital investment has been falling as a led agencies to procure goods and services proportion of GDP in recent years. From a peak using alternative and non-transparent methods. of over 14 percent of GDP in 2011/12, capital Updating the legal and policy framework taking spending declined to an average of 9 percent of into consideration the weakness highlighted in GDP between 2015/16 and 2018/19 (Figure 10).17 A Table 1 is critical. The Public Procurement Bill has persistent challenge lies in executing the capital been approved by the Cabinet for submission to budget, which continues to underspend, with the parliament. Meanwhile, Lesotho received a ‘D’ implementing capacity of line ministries, cash grade in the Procurement Pillar of its 2016 Public shortages at the Treasury, and for development Expenditure and Financial Accountability (PEFA) partner-financed projects complications with review, the lowest score possible. Among the main tendering and procurement processes18 being shortcomings were discretionary selection criteria, some of the reasons behind this underspending. a lack of standardized procedures, and insufficient Road building is important, with in particular the monitoring and evaluation.19 Leshoele-Mathokoane and Mpiti-Sehlaba-Thebe roads being the largest projects in recent years. 52. Ensuring discipline and accountability in public financial management (PFM) remains a critical 50. Capital investments are sometimes poorly challenge. Despite a recently upgraded IFMIS, targeted and improperly procured. The budget key processes occur outside the system and the includes capital investments and PPP projects number of unreconciled transactions continues not assessed through the public investment to grow. Strong expenditure controls that ensure management (PIM) system (e.g., construction of resources are spent according to government sports stadiums, representing 6.5 percent of GDP, priorities and prevent the build-up of arrears have was approved outside PIM processes), and not all become more critical in the context of declining capital spending is on budget. For example, in the government revenues resulting from the COVID-19 FY2020/21 budget, only 77 percent of new capital pandemic and the long-term decline in SACU investment projects were appraised by the Public revenues. Strong commitment from the MoF to Sector Investment Committee (PSIC) and selected enforce the use of IFMIS to capture all transactions from the Public Sector Investment Plan (PSIP) (revenue and expenses) and reconcile bank aligned with the National Strategic Development statements on a daily basis is required to maximize Plan (NSDP) II. Absence of a strong legal and the benefits from the upgraded system. regulatory PPP framework constrains investments in privately financed infrastructure and social 53. Regarding decentralization, the challenge is services. PPP Regulations were prepared and to manage the risks to fiscal discipline while submitted in 2020 by the Ministry of Finance (MoF) achieving the long-term goal of strengthening to the Office of Parliamentary Council (OPC). local governments to manage their own financial resources. Decentralization has been an 51. Public procurement, equivalent to about 35 important theme in governance reforms, with the percent of GDP, is a key determinant of the 2014 National Decentralization Policy. Given the Government’s effectiveness in delivering level of budget resources involved in the functions essential services, programs and projects. being decentralized to the local level, Lesotho However, the legal and policy framework for needs to complement the fiscal decentralization procurement is not comprehensive and needs by simultaneously strengthening local governance to be updated. For example, there are no systems and local administration at the district provisions for emergency procurement, resulting level. At the central government level, the GoL in inefficiencies when procurement must be has a strong and transparent budget framework executed expeditiously, and at times this has with a modern budget management system 17. It is important to note that while Figure 5 refers to Gross Fixed Capital Formation (or investment), Figure 10 refers to Government Capital Expenditures (or budget). 18. For example, the disbursement rate for the African Development Bank’s Lesotho portfolio was only 45 percent. 19. European Union. 2017. Public Expenditure and Financial Accountability (PEFA) Assessment 2016. Washington, DC: PEFA Secretariat. 44 | LESOTHO • Systematic Country Diagnostic Update Table 1. Key procurement and public investment management weakness PROCUREMENT PUBLIC INVESTMENT MANAGEMENT (PIM) he Public Procurement Advisory Department in the ; T nvestments are not to linked to national priorities, ; I MoF lacks the power to enforce compliance with existing but instead used for narrower political and/or procurement laws and regulations business considerations Lack of standard bidding documents ; ; Insufficiently rigorous project appraisal process ; Deficient procurement systems allow corruption to ; Weak monitoring and evaluation processes undermine project execution ; Procurement manual is confusing and subject to ; Insufficient project implementation oversight discretionary interpretations No procurement qualifications ; ; Limited ex-post monitoring and evaluation Opaque contract award systems ; ; Insufficient budgeting for maintenance Source: Authors’ representation. implemented to facilitate national planning and its value to the economy and the country, poor budget formulation, with systematic efforts made reporting performance, and current weak oversight to enhance the effectiveness of the central and management are exacerbated by the lack of treasury system. In contrast, district councils, the an adopted SOE Policy and SOE Act. Maseru Municipal Council, as well as community councils, typically manage their finances using 55. In sum, as highlighted in the 2015 SCD, the manual books of accounts without the benefits of state continues to play a dominant role in the an integrated financial management system. economy. The high level of public investment raises some interesting questions given Lesotho’s 54. Reporting on the fiscal impact and performance declining GDP and private consumption levels. For of SOEs needs to be strengthened, along with instance, is this high level of investment generating measures to address the large size of SOEs in returns? Lesotho undertook a Public Investment the economy. While efforts to improve reporting Management Efficiency Review in 2012, which by state-owned (six) and invested (14) enterprises identified several issues common with public have resulted in the publication of the first SOE investment in many emerging economies, such Annual Report (FY2016/17), transparency and as: (i) project selection is not always closely linked accountability of individual SOEs’ performance to national priorities and often projects might be are not yet efficient or comprehensive. The GoL included for political reasons; (ii) many large-scale remains invested in SOEs that are not strategic projects do not go through a rigorous appraisal and it lacks a legal framework for SOEs that process, reflecting limited demand and low ensures policies, procedures, responsibilities capacity for rigorous project appraisal; (iii) a lack and accountabilities are clear. The fragmented of effective monitoring of projects and programs and incomplete understanding of the SOE sector, by the MoF during implementation and ex-post; (iv) LESOTHO • Systematic Country Diagnostic Update | 45 a tendency for line ministries to continue projects There is a need to improve government readiness and programs even when their net benefits have for home-based work, and the remote functioning been put in doubt by changing circumstances; and of government systems and back-office functions, (v) the MoF has not yet been empowered to carry including government-to-government (G2G) out its central gate-keeping functions in practice. services. The pandemic has highlighted the benefits of a stronger, and more flexible and 56. High public sector spending has been amplified responsive civil service. The crisis has also by the COVID-19 pandemic, as the GoL is required highlighted the urgency of digitizing services and to deliver essential services that protect lives and government-to-people (G2P) transfers to ensure livelihoods, while facing decreased government that services are not only more user-friendly but revenues. Responding to the pandemic has can reach citizens during periods of crisis. In put pressure on government systems across all addition, the issue of equity of access to digitized sectors. Government coordination is crucial during services needs to be considered, together with the recovery and rebuilding phases. Furthermore, modernization efforts across income levels, and the lockdown in Maseru from March to May the rural-urban divide in connectivity and device 2020 revealed challenges in ensuring business affordability. continuity during periods of social distancing. 1.2.3. Heavy reliance on volatile and falling SACU revenues 57. Lesotho is highly dependent on SACU transfers 58. Volatile SACU revenues have contributed to an and worker remittances. Total government increase in government arrears. Although the revenues averaged 54.9 percent of GDP between volatility of SACU receipts has fallen, government 2010 and 2014, and fell to 45.6 percent of GDP spending remains highly correlated with SACU between 2015 and 2020 (Figure 12a), almost revenues. SACU revenue windfalls lead to higher entirely due to lower SACU revenues and public wage bills and other recurrent expenditures development partner (DP) grants. Tax revenues that cannot be cut when SACU revenues decline, have been remarkably stable at around 22 percent rather than being saved to build up buffers. For of GDP over the past decade. In contrast, SACU example, while Lesotho’s dependence on SACU revenues have fluctuated between a high of 27.8 revenues to cover its import bill has been slowly percent of GDP and a low of 14 percent of GDP. declining, it tends to spend whatever money from Grants fell from an average of 6.2 percent of GDP SACU is received. If SACU transfers increase, then between 2010 and 2014 to 3.0 percent of GDP imports also increase in the same year. As such, between 2015 and 2020 (Figure 12b). Royalties and the economy is prone to amplified boom-and-bust dividends from diamond mining were equivalent cycles due to this procyclical fiscal policy.21 With to 29.6 percent of mining value added, producing SACU revenues below historical averages and government revenues of 1.3 percent of GDP.20 This government expenditure persistently high, the reflects the shareholdings that the GoL holds in all GoL has run into fiscal difficulties, leading to the diamond mining companies. Remittance flows to emergence of government domestic arrears, which Lesotho are estimated to have averaged around are estimated at M1.2 billion (3.3 percent of GDP) as 24 percent of GDP in the 2010s, one of the highest of January 2020. The perception of the GoL being a levels in the world. ‘late payer’ increases public procurement costs and deters private sector investment. 20. FY2016/17 and FY2017/18. 21. Declines in SACU revenues are usually followed by large or sharp spending cuts and increases in SACU revenues are followed by increased fiscal spending. 46 | LESOTHO • Systematic Country Diagnostic Update Figure 12. Lesotho is dependent on SACU receipts a. Total revenue 2009/10 – 2019/20 b. Grants and SACU receipts (Percent of GDP) 2009/10 - 2019/20 (Percent of GDP) 70 35 SACU receipts 60 30 Grants 50 25 40 20 30 15 20 10 10 5 0 0 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Source: Central Bank of Lesotho, Ministry of Finance. 59. Overreliance on SACU revenues reflects textiles, apparel, and diamonds. Thus, exploring Lesotho’s inability to increase domestic revenues. the scope for diversifying domestic revenue This is exacerbated by the limited diversification sources, considering that Lesotho is a small state, of revenue sources and the generally weak remains important. In addition, creating a buffer mobilization of domestic revenues. Other concerns against the volatility of SACU revenues is essential are the relatively high dependence on remittances for reducing the volatility of economic growth, as and the lack of export diversification—exports well as enhancing fiscal consolidation. are still concentrated on a few products, mainly LESOTHO • Systematic Country Diagnostic Update | 47 1.2.4. Climate risks and environmental degradation 60. Lesotho is highly exposed to hydrometeorological industry projected at almost 60 percent. This will hazards, including droughts, floods, storms, destabilize farming systems, decrease agricultural strong winds, heavy snowfall, and severe frost. productivity and raise the vulnerability to food Variability of weather conditions is related to the insecurity of those relying on subsistence farming. El Niño Southern Oscillation (ENSO), as was the While irrigation could offer some opportunities case during the regional 2015/16 drought. Floods for building resilience to droughts, it remains from extreme rainfall in Lesotho occur relatively highly underdeveloped. The potential irrigable frequently and adversely impact the population, area in the country is estimated at 53,524 ha,23 economic activity, and the environment. There but currently only about 2,600 ha have been is no record of moderate or severe earthquakes developed for irrigation, of which a mere 1,200 affecting Lesotho in recent decades. However, ha are actually under irrigation.24 The GoL has probabilistic hazard and risk assessments show prepared a National Irrigation Masterplan (NIMP) that earthquake risk is not negligible. Lesotho is (approved by the Cabinet in January 2021) that particularly vulnerable to climatic events, given a provides an investment framework for irrigation in combination of factors such as the high proportion the short, medium and long term in areas of high of high-altitude rangeland and the highly erodible agricultural potential. Implementation of the NIMP soils in the lowlands, loss of arable land from will be critical for achieving the dual objectives human migration to the lowlands, high poverty of commercialization and climate resilience in levels, and competition between crops and Lesotho’s agriculture. livestock for land. Urbanization, which is projected to reach 46 percent by 2050, will reshape 62. Water insecurity will adversely affect the stability disaster risk in coming years. While urbanization of Lesotho’s power generation and undermine the is positively regarded, unmanaged urbanization development of the country’s vast hydropower and weak land regulation can lead to informal potential. Lesotho’s main source of power development and urban sprawl. The relationship generation is the 72 MW Muela hydropower plant between rural and urban areas and the pace of managed by the Lesotho Highlands Development rural-out migration, need to be fully understood Authority (LHDA). Droughts reduce water to ensure that appropriate land management availability at the Muela dam. Increased electricity policies are in place. Limited territorial planning, needs for water pumping and irrigation put land management, urban sanitation, drainage, and pressure on the electricity demand. As indicated the general infrastructure gap can make Lesotho in the Lesotho Renewable Energy Investment Plan vulnerable to fast-onset hazards such as flooding. endorsed by the GoL in 2017, the use of solar and wind resource could alleviate the risk engendered 61. Existing climate hazards pose substantial risk to by severe droughts. water infrastructure and service delivery. Climate change will further stress water resources—one of 63. Land degradation and soil erosion are Lesotho’s most valuable resources, contributing exacerbated by climate change and threaten about 8 to 10 percent to its GDP. According Lesotho’s reputation as a water tower. Increases to the Lesotho Water Security and Climate in temperature and rainfall variability are forecast Change Assessment Report,22 in the absence of to result in an increase in evaporation losses, and augmentation measures, demand for domestic a decrease in runoff and groundwater recharge. and industrial water supply will not be reliably The quality and quantity of water generated met under a series of future climate scenarios. in Lesotho’s wetlands will decline, ultimately Total unmet water demands are expected to impacting the volume of water Lesotho has for reach 40 percent by 2050, with demand for domestic consumption and regional export. 22. https://hubs.worldbank.org/docs/imagebank/Pages/docProfile.aspx?nodeid=26730092 23. National Irrigation Masterplan, 2021. 24. Bureau of Statistics, 2011/12. 48 | LESOTHO • Systematic Country Diagnostic Update Figure 13. Adverse weather events negatively impact the macro-fiscal situation, 1980–2018 Disasters are also A marked slowdown in growth ... while prices increase. associated with a deterioration follows disasters... of the fiscal position... Real GDP Growth Inflation, period average Fiscal Balance 4.3 12 2.5 4.2 10 Average, percent of GDP Average, percent of GDP Average, percent of GDP 2.0 4.1 8 4.0 1.5 6 3.9 1.0 4 3.8 2 0.5 3.7 3.6 0 0 -1 0 1 -1 0 1 -1 0 1 Year of disaster Year of disaster Year of disaster ...as well as weaker external ... increased debt levels... balance... Government Total Debt Current Account Balance 60 14 50 12 Average, percent of GDP Average, percent of GDP 10 40 8 30 6 20 4 10 2 0 0 -1 0 1 -1 0 1 Year of disaster Year of disaster Source: Authors’ calculations based on data from EM-DAT and World Development Indicators. Rangeland conditions may deteriorate—and ecosystems are under threat of degradation and ultimately be destroyed—leading to a change in susceptible to climate change effects, despite the quality of livestock and livestock products. their importance for water security and livelihoods. The present indigenous forests may change into In terms of water security, for example, wetlands semi-arid types, while agricultural production play a critical role in maintaining the hydrological will decline, possibly leading to food shortages. functions necessary for the quality and quantity Unsustainable land use practices, coupled with of water that has been harnessed through the an expected increase in climactic weather events, Lesotho Highlands Water Project for transfer to weaken the country’s resilience to climate change South Africa, thereby earning the country royalties. and threaten livelihoods. Furthermore, the wetlands LESOTHO • Systematic Country Diagnostic Update | 49 64. Adverse weather events have had a negative and ex-post climate risk and resilience-related impact on the macro-fiscal situation of the investments is limited and, as a result, the GoL will country. Event analysis shows that disasters have have to rely on ex-post financing, including budget adverse macroeconomic impacts in Lesotho, reallocation and humanitarian funding, for disaster including significant impacts on economic growth, response. While DPs’ support is critical after the fiscal position and the external balance, disasters, both the amount to be made available warranting a scaling-up of measures to enhance and the activities to be funded can be uncertain resilience against climate and disaster risks (Figure and slow to materialize. DPs’ support is usually 13). The fiscal cost of climate and disaster risks is mobilized only for extreme events, which may driven, to a large extent, by chronic food insecurity: leave the country financially exposed, especially in prior to the COVID-19 pandemic, around one- the event of more frequent disasters.26 Disasters quarter of the population was facing severe food have stretched the GoL’s limited resources at a insecurity as a result of a widespread drought. time when state revenues have been hit by lower Land degradation has decreased rangeland commodity prices, reduced earnings from SACU, carrying capacity and quality, and this has had and declining remittances from South African- negative impacts on livestock productivity and based workers. its contribution to livelihoods and the economy.25 The current annual cost of land degradation is 65. Lack of robust institutions and coherent sectoral- estimated at US$57 million, equivalent to 3.6 level climate change and resilience policies lead percent of the country’s GDP (World Bank 2019a). to ineffective coordination. The multi-sectoral Future disasters in a context of limited economic nature of climate change and resilience requires diversification could impose further fiscal pressure that Lesotho develop a common framework for the on the GoL and inflate its imports bill. The 2019 management of climate change, the planning and Lesotho Disaster Risk Financing Diagnostic design of resilient infrastructure, and the effective estimates the average annual cost of disaster management of water, land and other critical response at US$19.3 million, or 1.6 percent of the resources. However, the lack of such a common total budget expenditure in the 2019/20 fiscal framework and weak institutional arrangements/ year. This is based on the cost of responding to mandates lead to siloed interventions and all perils. Overall, the fiscal space for both ex-ante responses to these challenges. 25. The 2019 Land Degradation Neutrality (LDN) report indicates that over the past 20 years, Lesotho has lost over 100,000 ha of arable land, resulting in a 25 percent decrease in usable land to produce food and fodder. 26. This paragraph was adapted from World Bank 2019d. 50 | LESOTHO • Systematic Country Diagnostic Update 1.3. Macroeconomic Outlook 66. The latest publication of national accounts from cash transfers, such as the Child Grant Program the Bureau of Statistics shows a significant (CGP), were also topped up. Public assistance was contraction in the economic growth in 2020. expanded for three months, to add vulnerable From a pre-COVID-19-pandemic estimate of groups such as children, elderly disabled, and +0.4 percent growth in 2020 and +2.5 percent those working in the informal sector. Industrial in 2021, the latest preliminary estimates are for workers were provided with wage subsidies for a contraction of 9.5 percent in 2020. According three months from May to July; LNDC-supported to the World Bank’s October 2021 Macro Poverty firms were provided with rental holidays for Outlook (MPO) economic growth is expected to one month; and tax-compliant businesses were rebound to +3.2 percent in 2021, +3.0 percent in provided with tax deferrals, while income tax 2022, and then +2.8 percent in 2023. However, filing deadlines were extended until the end of these forecasts are subject to an extreme level of September 2020.27 uncertainty, as the pandemic plays out both within Lesotho and across the region, and on global 69. Emerging trade data show a V-shaped fall in levels of demand for Lesotho’s exports. Lesotho’s exports to the United States. While exports to the United States were 13 percent 67. A revised COVID-19 budget for FY2020/21 was higher in Q1 2020 compared with Q1 2019, Q2 presented. On paper, the budget anticipates a 4 2020 saw a sharp deterioration, with exports in this percent fall in revenues, adjusts total spending up period down 59 percent year-on-year. Globally, by 9.6 percent, with the resulting change in the the United States imported 42 percent28 less fiscal balance from +3.0 percent to -4.1 percent textiles and apparel in May 2020 than in May 2019, of pre-COVID-19 GDP. Most additional spending matching other data on retail sales,29 showing is classified under ‘centralized items’ with line sales of clothing in the United States falling over ministry recurrent budgets largely unchanged, 50 percent compared with 2019. Nevertheless, while government-funded capital spending is retail sales have begun to pick up, with sales in revised down by 20 percent. The FY2020/21 May 2020 up 176 percent on April 2020, but still budget (both original and revised) is supported by 62 percent below June 2019. The two-month lag higher-than-average SACU transfers (M9.0 billion, between shipment from Lesotho and clearance compared with M6.2 billion and M5.5 billion in the into the United States will mean a delay between preceding two years). US sales increasing and imports from Lesotho being registered in the trade statistics. 68. Policy responses to the pandemic include both a health response and economic mitigation 70. After a sharp decline in April 2020, exports to measures. A M700 million (about 2 percent of GDP) South Africa have rebounded. From an average fund has been set aside for the National COVID-19 of M335 million per month between 2017 and Response Integrated Plan 2020, more than half 2019 (of which are around two-thirds are apparel), of which is being used for health-care personnel, exports to South Africa fell to only M25 million in and the purchase of critical goods and services, April and M136 million in May 2020. Exports for with the remainder covering logistics, security, June to August 2020 averaged M320 million per and border management. Economic mitigation month, suggesting a quick bounce back. However, measures are also being considered, including the latest World Bank Global Economic Prospects M1.2 to M1.5 billion for emergency assistance and (June 2020) forecast that the South African expanding social protection, respectively. Existing economy will contract by 7.1 percent in 2020—the 27. See https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#L for further details. 28. Source: https://otexa.trade.gov/PDFs/Press_Release_May_2020_Data.pdf 29 Source: https://www.census.gov/retail/index.html LESOTHO • Systematic Country Diagnostic Update | 51 deepest contraction in a century and 8 percent addition, a sharp recession in South Africa, and weaker than previously forecast. This will impact the resulting decline in imports into South Africa, Lesotho’s export demand, and much will depend especially for motor vehicles, will impact SACU on whether Lesotho’s suppliers, in particular for transfers in coming years, with FY2022/23 likely apparel, will suffer as firms downsize their Lesotho to see a large negative adjustment. operations and shift production to their South African factories, and whether there are supply 73. The financial sector is exposed to second- disruptions in apparel from East Asia, providing an round impacts of the pandemic and existing opportunity for Lesotho firms to fill the gap. vulnerabilities in the non-bank financial institutions sector could further worsen. The 71. Diamond exports have been less affected. overall banking sector is well-capitalized, with Production curtailments by mining companies due the capital adequacy ratio at 21.5 percent and to the national lockdown, travel restrictions, and non-performing loans (NPLs) at 4.1 percent at the temporary closure of some mining operations end June 2020.30 There might be an upside did see diamond exports fall to near zero in March risk to NPLs due to the adverse impact of the and April 2020. However, exports in May and pandemic on households (that already had June have been in line with 2019 levels, and for high levels of over-indebtedness prior to the 2020 as a whole, exports to June were 4.1 percent pandemic) and businesses in 2020 that might higher than in 2019. Nevertheless, export values not yet have transpired because of the prudential in both 2019 and 2020 are down on the record measures taken by the Central Bank of Lesotho highs of 2018. While weak global demand is (CBL) (banks have been asked to suspend loan expected to exert downward pressure on diamond repayment by borrowers). However, the CBL has prices, export volumes from Lesotho’s producers, indicated that, so far, the situation remains stable which largely operate outside of De Beers/Anglo (also after the prudential measures were lifted at American, may well stay at historical levels as the end of September 2020) in terms of capital mines remain able to cover their operating costs adequacy, liquidity buffers and asset quality. even with lower prices. Only the profitability of the banks evaporated in 2020, as a result of shrinking interest margins, 72. There is an extremely high level of uncertainty increasing provisioning, and lowering transaction given developments in South Africa. The early fees. Asset quality concerns are higher in the lockdowns in much of Southern Africa delayed non-bank financial institutions sector, particularly the spread of the virus. However, the easing of large financial cooperatives that are already facing lockdown restrictions has been followed by a solvency issues with very high levels of NPLs. rapid increase in cases in South Africa, and the emergence of cases in Lesotho. Of Lesotho’s main exports (garments, diamonds, water), only water is likely to be unaffected, with demand for garments in particular likely to be severely impacted. In 30. Central Bank of Lesotho. 52 | LESOTHO • Systematic Country Diagnostic Update Box 1. Economic impact of the COVID-19 pandemic Lesotho’s economy was already in recession even Central Bank of Lesotho (CBL) eased the monetary before the advent of the COVID-19 pandemic. Real GDP policy stance by reducing the policy rate by a cumulative contracted by 3.1, 1.2, and 0.4 percent in 2017, 2018 and 275 basis points from March to July 2020 to react to 2019, respectively. It further contracted by 1.8 percent the COVID-19 shock. The fiscal deficit is expected to in the first quarter of 2020 before any COVID-19 case narrow to 3.7 percent of GDP in 2020 largely due to was reported in the country. The first positive COVID-19 higher SACU inflows, but is expected to widen in the case was reported in May 2020 and economic growth medium term. Health and social-related expenditures contracted by 21.5 percent in the second quarter of are expected to rise in line with COVID-19 mitigation 2020, as a consequence of the nationwide lockdown measures, while capital expenditure is expected to implemented in late March that brought the economy decline due to reallocation. to a halt. Economic growth further contracted by 9.8 percent in the third quarter and by 15.3 percent in the Economic growth is expected to rebound to 3.2 percent fourth quarter of 2020. On an annual basis, preliminary in 2021 and gradually recover to 3.0 and 2.8 percent estimates indicate a contraction of 9.5 percent for the in 2022 and 2023, respectively. Agriculture is expected entire 2020. to grow moderately in the medium term as agricultural subsidies and good rains are expected to contribute Inevitable spillovers from the South African economy, to crop production. Furthermore, medicinal cannabis especially due to high prevalence of COVID-19 and farming, as well as horticulture farming, projects are also unsolved structural impediments to growth in South expected to provide impetus to grow. The projected Africa, such as electricity shortages and political unrest recovery in the medium term is set to be led by a rebound that led to recent looting, destruction of infrastructure and in manufacturing, construction, and mining activities. alleged insurrection, are expected to pose challenges The construction activities associated with the second to Lesotho. The pandemic has worsened the already phase of Lesotho Highlands Water Project (LHWP-II) dire economic performance in South Africa, and this is started in the first half of 2021, and these are expected expected to spill over into Lesotho through the supply to have a positive impact on growth. Services are also shortages of goods and services, lower remittances, and expected to add impetus to the growth momentum over lower SACU receipts. the medium term. The fiscal deficit widened in FY2020/21 due to higher Inflation is expected to follow developments in the government expenditures associated with COVID-19 regional food and energy prices due to supply-demand mitigation measures introduced by the Government, challenges imposed by restricted movements and the as well as declining revenues due to lower economic closure of borders, and will accelerate steadily to 5.5 activity. The preliminary estimates depict a fiscal deficit percent by 2023. Uncertainties surrounding the efficacy, of 12.6 percent of GDP in FY2020/21. To finance this affordability and timeliness of COVID-19 vaccines widening deficit, the public debt levels have risen to 50.3 continue to pose a huge risk to macroeconomic outlook. percent of GDP in FY2020/21 due to higher borrowing associated with the policy responses to the COVID-19 The recovery of exports and overall economic growth pandemic. On the inflation front, average annual largely depends on external demand conditions, as inflation rate registered 5.0 percent in 2020, largely due well as the re-opening of the global economy. The to higher food and energy prices, amid supply-demand expected recession in the neighboring South African challenges imposed by closure of borders and domestic economy largely attributed to the recent instability lockdown measures during 2020. The current account that involved looting, destruction of infrastructure and deficit narrowed from 4.1 percent of GDP in 2019 to alleged insurrection are most likely expected to dampen 3.6 percent in 2020, as exports of goods and services Lesotho’s growth prospects through various channels, declined faster than imports of goods and services, as such as shortages of goods and services, and lower well as higher SACU revenue inflows since April 2020. remittances. It is expected to widen further in the medium term. The LESOTHO • Systematic Country Diagnostic Update | 53 54 | LESOTHO • Systematic Country Diagnostic Update 2. POVERTY REDUCTION AND SHARED PROSPERITY LESOTHO • Systematic Country Diagnostic Update | 55 Lesotho made progress in reducing poverty between 2002 and 2017, but the pace was slow, with progress far slower in rural areas. Even among those who have escaped poverty, many remain vulnerable to falling back into poverty. Poverty reduction has been slow in part because a relatively small share of economic growth is passed through to consumption: growth has played a relatively small role in poverty reduction despite Lesotho’s high average growth rates from 2002 to 2017. Also slowing down poverty reduction are low human capital outcomes, poor labor market outcomes, vulnerability to environmental and economic shocks and declining remittances. These challenges are heightened in rural and mountainous areas where poverty is high, and access to basic services and infrastructure is low. The spatial pattern of access to basic services and infrastructure suggests that accelerating poverty reduction and shared prosperity in Lesotho hinges disproportionately on addressing key constraints to improving living standards in lagging rural regions. Such an approach will also support further inequality reduction: while Lesotho is now the least unequal country among its neighbors, it nonetheless remains among the 20 percent of the most unequal countries in the world. 74. Lesotho made progress in reducing poverty poverty rates of 69.2 and 61.2 percent in 2017, between 2002 and 2017, but the pace was slow respectively. Not only has progress been slow, a and, as a result, poverty remains widespread, high share of the population remains vulnerable to especially in rural areas.31 The official national falling into poverty.33 In 2017, more than 75 percent poverty rate fell by only about 7 percentage of the population were either poor or vulnerable points over a 15-year period, declining from 56.6 to falling into poverty. In rural areas, this rises to 49.7 percent (Figure 14a).32 In absolute terms, to over 90 percent. Most of the households that about 47,000 Basotho escaped poverty during have escaped poverty are characteristically this period and close to 1 million Basotho lived similar to those that have failed to escape poverty, below the national poverty line in 2017 (Figure placing them at risk of falling back into poverty.34 14b). Progress in reducing poverty has been much Furthermore, with an international US$1.90/day slower in rural areas. Poverty increased in the (in 2011 PPP terms) poverty rate of 27.2 percent rural mountains and the Rural Senqu River Valley in 2017, poverty in Lesotho is relatively high for a (Figure 14c). At the level of districts, Thaba-Tseka lower middle-income country (LMIC). and Mokhotlong are the poorest districts, with 31. The discussion in this section is based largely on the Lesotho Poverty Assessment conducted by the World Bank in close collaboration with the Lesotho Bureau of Statistics and published in December 2019. The main data sources for the Poverty Assessment were the 2002/03 Household Budget Survey (HBS), the 2017/18 Continuous Multipurpose Household Survey and the Household Budget Survey (CMS/HBS). In this section, 2002 refers to the 2002/03 survey year and 2017 to the 2017/18 survey year. The report can be accessed using the following link: https://openknowledge.worldbank.org/ handle/10986/33030 32. The official national poverty line was set at M648.88 in 2017/18 survey prices. 33. The analysis of economic vulnerability is based on the Gunther and Harttgen (2009) method is used to determine economic vulnerability. Details on how the method was adapted are provided in the Poverty Assessment. 34. The likelihood of being vulnerable to poverty is found to be inversely associated with household size, education levels, income from wages and non- agricultural businesses, and access to private sector wage jobs or government jobs. 56 | LESOTHO • Systematic Country Diagnostic Update Figure 14. Poverty has declined but remains widespread, especially in rural areas a. National poverty rates, b. Number of poor, 2002–17 2002–17 70 1200 61.3 60.7 1044 60 997 56.6 1000 49.7 864 50 801 41.5 800 40 600 28.5 30 400 20 170 196 10 200 0 0 Urban Rural Lesotho Urban Rural Lesotho 2002 2017 2002 2017 c. Rural and mountainous regions are the poorest 80 70 60 50 40 30 20 10 0 Maseru Urban Other Urban Rural Lowlands Rural Foothills Rural Mountains Rural Senqu River Valley 2002 33.7 46.3 62.4 66.8 56.9 55.5 2017 24.7 31.4 54.4 63.6 67.8 67.9 Source: World Bank 2019b: Lesotho Poverty Assessment: Progress and challenges in reducing poverty. 75. Progress has also been slow in reducing non- unevenly distributed between the poor and non- monetary poverty, especially in rural areas. While poor. These gaps manifest in a high incidence access to basic public services has improved, it of multidimensional poverty which, similar to remains unevenly distributed across regions, with monetary poverty, is also higher in rural areas. the spatial pattern of access closely following The poor are simultaneously deprived in multiple the urban-rural divide. Rural regions tend to have dimensions, and this reinforces and perpetuates smaller shares of people with access to basic poverty, particularly in rural areas. services. Furthermore, access to basic services is LESOTHO • Systematic Country Diagnostic Update | 57 76. Further progress in rural poverty reduction well as household dependency ratios.35 Regarding will require reaching lagging rural areas where educational attainment and employment, poverty poverty and vulnerability are most deeply rates generally decline with higher education entrenched. A 2017 national poverty map of levels and the pace of poverty reduction increases Lesotho shown in Figure 15a confirms the rural and with higher education levels, highlighting the mountainous nature of poverty. Furthermore, it role of education as a socioeconomic equalizer. suggests that peripheral areas are associated with Employment is associated with lower poverty rates, reduced poverty rates at the constituency level. but poverty rates are relatively high even among Given that Lesotho is surrounded by South Africa, the employed. Individuals living in households this means that areas closer to the border with with a head employed in the agriculture sector South Africa tend to exhibit lower poverty rates. exhibit the highest poverty rate, highlighting This could be capturing, among other factors, the heightened poverty risk for agricultural accessibility to economic opportunities and better households. developed markets in South Africa. Because of stronger poverty reduction in urban than in rural 78. While Lesotho has become more equal, it areas, the rural share of poverty decreased more nonetheless remains one of the most unequal slowly that the decrease in the rural share of the countries in the world. Consumption growth population between 2002 and 2017 and, as a result, between 2002 and 2017 was inclusive for the very the poor remain disproportionally concentrated in poorest segments of the population and this led rural areas. By region, the rural lowlands account to a decline in inequality. The annualized growth for the highest share of the poor, partly due to the rate of the bottom 40 percent—also referred to as region’s relatively high population share—32.2 shared prosperity—was 2.2 percent between 2002 percent in 2017, down from 38.9 percent in 2002. and 2017, much faster than mean annual growth Constituencies in rural and mountainous areas of 0.3 percent. The difference between growth of have the highest number of poor (Figure 15b). For the bottom 40 percent and the mean—the shared example, the constituency of Semena in Thaba- prosperity premium—was 1.9 percentage points, Tseka District had the highest concentration of indicating that the distribution is becoming more poor in 2017. The concentration of poor in rural equal. This boost in shared prosperity has led areas is troubling because about 66 percent of the to a decline in inequality. In 2002, Lesotho was population live in rural areas. one of the few countries in the world with a Gini coefficient above 50. Since then, pro-poor growth 77. Gender, household size and composition, has helped to induce a fall in inequality, and the educational attainment and employment are per adult equivalent Gini coefficient stood at 44.9 important determinants of poverty status. in 2017. Lesotho is now the only country in SACU Individuals living in female-headed households with a Gini coefficient well below 50 (Figure 16a), are more likely to be poor than those living in although it still remains among the 20 percent male-headed households. The poverty risks faced most unequal countries worldwide (Figure 16b). In by female-headed households are even higher addition to high inequality of outcomes, Lesotho in rural areas, consistent with gender differences faces high inequality of opportunity. Factors such in access to public services, as well as the social as gender, place of birth, parents’ education, health norms around the status of women that might affect shocks and environmental shocks contribute to their economic participation. Furthermore, poverty almost half (46 percent) of the current level of risks are higher if the household head is a single inequality. Intergenerational mobility is relatively parent. By marital status, widows and widowers low, exacerbating high inequality. exhibit the highest rates of poverty. In terms of household size and composition, the incidence of poverty increases with the size of a household and the number of children a household has, as 35. The dependency ratio is the number of dependents younger than 15 or older than 64 divided by the number of household members of working age. Dependency ratios are higher among the poor as they tend to live in households that are larger and have more children. 58 | LESOTHO • Systematic Country Diagnostic Update Figure 15. The poor remain disproportionally concentrated in rural and mountainous areas 14% - 20% ID NAME ID NAME 20% - 30% 1 Mechachane 48 Thaba-Phechela a. Poverty rates by constituency, 2017 Botha-Bothe 2 Hololo 49 Kolo 30% - 40% 3 Motete 50 Matelile Mafeteng 40% - 50% 51 Maliepetsane 4 Qalo 1 2 5 Botha-Bothe 52 Thabana Morena 50% - 60% 11 5 15 13 4 12 3 6 Malibamats’o 53 Likhoele 60% - 70% 10 17 16 14 9 7 Mphobong 54 Qalabane 21 8 7 18 70% - 80% 8 Thaba-Phats’oa 55 Mafeteng 28 78 30 24 23 20 77 29 6 32 31 27 25 22 19 9 Mahobong 56 Taung 36 26 33 79 10 Pela-Ts’oeu 57 Qhalasi 34 38 39 35 72 75 37 43 42 80 11 Matlakeng 58 Mohale’s Hoek Mohale’s Hoek 41 40 Leribe 44 45 12 Leribe 59 Mekaling 48 49 46 76 74 13 Hlotse 60 Qaqatu 73 54 51 47 53 14 Tsikoane 61 Mpharane 55 50 52 63 70 71 15 Maputsoe 62 Ketane 56 62 61 16 Likhetlane 63 Hloahloeng 57 69 58 67 17 Peka 64 Tele 68 60 59 18 Kolonyama 65 Moyeni Quthing 65 19 Mosalemane 66 Sebapala 66 20 Makhoroana 67 Mt. Moorosi 64 21 Bela-Bela 68 Qhoali 0 25 50 75 100 km 22 Malimong 69 Qacha’s Nek Q. Nek 23 Khafung 70 Lebakeng Berea 24 Teya-Teyaneng 71 Tsoelike 25 Ts’oana-Makhulo 72 Mants’onyane 2,000 - 10,000 Thaba-Tseka 26 Thupa-Kubu 73 Thaba-Moea 10,000 - 12,000 b. Number of poor by constituency, 2017 27 Berea 74 Thaba-Tseka 28 Khubetsona 75 Semena 12,000 - 14,000 29 Mabote 76 Mashai 14,000 - 16,000 30 Motimposo Mokhotlong 77 Malingoaneng 16,000 - 18,000 1 31 Stadium Area 78 Senqu 2 11 5 15 13 4 32 Maseru 79 Mokhotlong 18,000 - 20,000 12 3 10 16 14 9 33 Thetsane 80 Bobatsi 17 20,000 - 24,000 21 8 18 7 34 Qoaling 28 78 30 24 23 20 77 35 Lithoteng 29 19 6 32 31 25 22 27 33 36 26 79 36 Lithabaneng 34 38 39 35 72 75 37 Abia 37 43 42 80 41 Maseru 44 40 38 Thaba-Bosiu 45 48 49 39 Machache 46 76 74 73 54 51 47 40 Thaba-Putsoa 53 55 50 41 Maama 52 63 70 71 56 42 Koro-Koro 62 61 57 69 43 Qeme 58 67 68 60 44 Rothe 59 45 Matsieng 65 66 46 Machaleng 64 47 Maletsunyane 0 25 50 75 100 km Note: Poverty is measured at the official national poverty line. Source: Authors’ representation based on World Bank (2019b): Lesotho Poverty Assessment: Progress and challenges in reducing poverty. LESOTHO • Systematic Country Diagnostic Update | 59 Figure 16. Inequality has fallen but remains relatively high a. Regional comparison of Gini coefficients 65 65 63 63 60 59 Gini coefficients 54 58 55 53 52 53 50 51 Around 2002 Latest estimate 45 47 45 40 Lesotho Eswatini Botswana Mozambique Namibia South Africa b. International inequality comparison 80 60 Gini coefficients Lesotho, 2002 Lesotho, 2017 40 20 0 Countries ordered from lowest to highest Gini Source: World Bank (2019b): Lesotho Poverty Assessment: Progress and challenges in reducing poverty. 60 | LESOTHO • Systematic Country Diagnostic Update 2.1. What Has Slowed Poverty Reduction? 2.1.1. A relatively small share of economic growth is passed through to consumption 79. The reduction in inequality drove poverty stronger role. One possible explanation for the reduction between 2002 and 2017. About three- small contribution is that growth only benefited quarters of the poverty decline in this period can the top of the distribution. However, this also does be attributed to a more equitable distribution of not appear to be the case, given that consumption consumption (changes in inequality), while growth was more evenly distributed in 2017 than in in mean consumption per adult equivalent can 2002. Instead, the reason seems to be that only explain only one-quarter of the decline in poverty. a relatively small share of real GDP growth per The picture is reinforced when using the poverty capita was passed through to consumption. gap to make the decomposition, suggesting that the very bottom of the distribution saw significant 81. Growth may have failed to reduce poverty gains in living standards between 2002 and 2017. significantly because it went to sectors with It is important to note that, overall, consumption limited trickle-down effects. Final household growth was more favorable among the urban consumption expenditures’ share of total GDP population, contributing to the growing urban-rural decreased markedly between 2002 and 2017, divide. The median consumption in rural areas suggesting that growth in household consumption stagnated and the 40 percent wealthiest rural may not have mirrored growth in GDP. The sector households saw a decline in their consumption in that saw the largest increase in share of GDP was part due to the drought experienced in 2017. financial and insurance activities, which may not have trickled down to the rural poor. In contrast, 80. The relatively small role that economic growth the sectors that the poor tend to generally rely has played in poverty reduction is despite on most, such as agriculture and textiles, saw Lesotho’s high average growth rates from 2002 stagnation or declines in their shares of total to 2017. This suggests a low poverty elasticity of GDP. These observations point to challenges in growth, which is a measure of the effectiveness converting income growth into sustainable poverty of growth in reducing income or consumption reduction. For sustained reductions in poverty, it poverty. Several factors influence the poverty is vital that growth in GDP per capita translates elasticity of growth, such as the level of inequality, into increased consumption. In any case, initial the quality of growth (e.g., sectoral composition inequality was high, making growth significantly and labor intensity), and macroeconomic factors less poverty-reducing (Ravallion 2004). Poverty (e.g., inflation and exchange-rate dynamics), as well persisted despite modest growth rates, as well as structural factors (e.g., the share of agriculture as declining inequality, because even though in GDP and the distribution of assets such as consumption increased for the bottom, it was not education levels). With regards to inequality, enough to lift most of the poor out of poverty, the growth elasticity of poverty decreases with especially in rural areas. inequality (Ravallion 1997). Given that inequality has fallen in Lesotho, all other things being equal, this should improve the effectiveness of growth to reduce poverty. However, this does not seem to be the case, suggesting that other determinants of the poverty elasticity of growth have played a LESOTHO • Systematic Country Diagnostic Update | 61 2.1.2. Poor human capital outcomes and service delivery 82. Lesotho has made progress in improving human the 2010 estimate of 34 percent, the deficiencies development outcomes, but outcomes in in human capital are still considerable. Overall, education and health remain well below Lesotho’s while some improvements have been made over level of development and where they need to be. the past decade, human capital outcomes remain While public spending on human development is low compared with other LMICs (Figure 17). For generous, it could be more efficiently allocated instance, Lesotho performs worse in terms of child and used. Significant challenges exist around survival than other countries in Sub-Saharan Africa the efficient, effective, and equitable delivery of and LMICs. At 76.2 deaths per 1,000 live births, education and health services, together with the the under-five mortality rate is far more than the delivery of other basic public services. The Human average for LMICs at 49 deaths per 1,000 live Capital Index (HCI) estimates for 2020 showed births. Overall, significant changes are needed that a child born in Lesotho today will be only 40 to improve the quality, efficacy, efficiency, and percent as productive when s/he grows up as s/ equity in delivery of health, education, and social he could have been if s/he had enjoyed complete protection services in Lesotho. education and full health by the age of 18. While this shows an encouraging improvement from Figure 17. Human Capital Index 1.0 0.9 0.8 0.7 Human Capital Index (HCI) 0.6 0.5 Lesotho = 0.40 0.4 0.3 0.2 0.1 0 Source: World Bank Human Capital project 2020. 36. The analysis in this section is largely drawn from the forthcoming World Bank note “Investing in Human Capital in Lesotho: A Framework for A Coordinated Multi-Sectoral Approach” prepared in 2020/21 by the World Bank’s Human Development team working on the Lesotho human development program. 62 | LESOTHO • Systematic Country Diagnostic Update High levels of poverty and inequality affect human capital outcomes and are a bottleneck to accessing services 83. Lesotho suffers from the triple burden of 84. The poor tend to have the worst human capital malnutrition (i.e., undernutrition, overnutrition outcomes. Children from poor households are and micronutrient deficiency), adversely affecting less likely to stay and complete basic education, child development.37 This compromises children’s i.e., primary and secondary school, largely due to cognitive and non-cognitive development, placing the high cost of schooling. While primary school them at a disadvantage from an early age and is free in Lesotho, poverty remains a key factor reducing their potential to contribute to the affecting the dropout rate, as there are still indirect socioeconomic development of the country.38 This costs related to school attendance (such as is exacerbated by the high prevalence of HIV/AIDS, transportation, school uniforms) that households which continues to pose a big threat to Lesotho’s must bear. Unlike primary education, junior human capital, with a high prevalence rate of 23.6 secondary education is not free and the burden percent among adults aged 15 to 49. The impact of of paying for education is disproportionately HIV/AIDS on women has been significantly worse, high for the poorest households.42 Children from with women accounting for about 59 percent of rural mountains are less likely to complete senior those living with the virus.39 Despite an increase in secondary education (Figure 18a and Figure 18b). the use of modern contraceptive methods among Constituencies with higher poverty rates tend adolescent girls,40 pregnancy among teenage to have higher dropout rates among males and girls (ages 15 to 19) is high at 17.8 percent, which females in secondary education. Many children are affects child survival and development outcomes.41 orphaned and made vulnerable by the impact of The pressures of poverty and food insecurity, HIV/AIDS on their families and communities, which especially in rural areas, push many young girls significantly reduces their likelihood of staying in into early/forced marriage or intergenerational school. For children and youth who stay in school, (‘sugar daddy’) relationships, making them more they fail to learn enough by the time they leave likely to contract HIV. Tragically, HIV prevalence school, and the correlation between poverty and is 19 percent among girls and young women poor learning outcomes is even more stark. Once who have been physically forced to have sex. young people leave school, only a few move into Traditional roles that reinforce women’s economic higher levels of education, even though there is a dependence on men and discourage women strong correlation between education attainment from talking openly with men about birth control and labor market outcomes. Although Lesotho has contribute to this. This could increase with the a developed social protection system that makes COVID-19 crisis, as has happened elsewhere regular transfers to its beneficiaries, covering during pandemics. The cultural, economic, social, vulnerabilities throughout the lifecycle, a large share and legal barriers that obstruct girls’ and women’s of the social assistance benefits goes to non-poor empowerment (Kalimo 2018) must, therefore, be households. Coverage of social protection services addressed to ensure that adolescent girls have of the poorest is limited and benefit levels are low. access to reproductive health care and a healthy Universal and untargeted programs, such as school future. feeding and old age pensions, do however provide support for vulnerable groups. 37. According to the Cost of Hunger Study in Africa (COHA), over 19 percent of child mortality is associated with undernutrition, 17.7 percent of all repetitions in schools is associated with stunting, and stunted children achieve 3.6 years less in school. Micronutrient deficiency is a major contributor to childhood morbidity and mortality, intellectual and cognitive development, and learning outcomes in school. 38. Two recent studies assessed the quality of ECCD services in Lesotho—the 2018 Multiple Indicator Cluster Survey (MICS) and the Measurement of Early Learning and Quality Outcomes (MELQO) 2019—and found that only 15 percent of children were developmentally on track in the literacy-numeracy domain. That is, they could do two of the following: identify/name at least ten letters of the alphabet; read four simple and popular words; know the name and recognize the symbols of all numbers from 1 to 10. 39. The United Nations Joint Programmed of HIV/AIDS (UNAIDS). 2019. UNAIDS Data 2019. Geneva. 40. Multiple Indicator Cluster Surveys (MICS) 2018. 41. Multiple Indicator Cluster Surveys (MICS) 2018. 42. Household spending on junior secondary education accounts for 17 and 16 percent of household consumption for households in the poorest and poor households, respectively, compared with 7 percent for the richest households. LESOTHO • Systematic Country Diagnostic Update | 63 Figure 18. Disparities in access and retention in education a. Access and retention by ecological zone b. Secondary dropout by constituency 100% 96% 99% 89% 59% 54% 50% 30% 19% 9% 11% Grade 1 Grade 7 Form 1 Form 3 Form 4 Form 5 Urban Maseru Other Urban <20 25-30 >35 Rural Lowlands Rural Foothills 20-25 30-35 No data Rural Mountains Rural Senqu River Valley Source: Dropout data are based on Source: Lesotho Education Sector Analysis, 2020. World Bank analysis of EMIS, 2019 data. 85. Poor water supply, sanitation, and hygiene 86. The rural population has poor road access, (WASH) service delivery adversely affects human negatively affecting human capital outcomes. capital formation, especially among the poor A good and efficient transport system would and rural population, with inequities in access support an improvement in school attendance to WASH early in the life of a child perpetuating and a reduction in dropout rates, being the intergenerational transmission of poverty. influenced by the extent and quality of access, While official water supply coverage is high by especially in rural remote mountainous regions. Sub-Sahara African standards, many water points Available data suggest road accidents impact are non-functional and/or water is intermittent, the young school-going age and the most negatively affecting human capital and disease economically active segment of the population prevention, including in the current COVID-19 (5 to 29 years old),43 with 81 percent of deaths pandemic. Only 5 percent of the population have and injuries in Lesotho impacting this segment of access to basic hygiene (with water and soap). Less the population. Fatalities per 100,000 population than half the population has access to sanitation. in Lesotho (28.9) are higher than the Sub-Sahara Young children are particularly vulnerable. Diarrhea African average of 26.6. accounts for 25 percent and is the leading cause of death of children under age 5 in Lesotho. Of these, 87. Poor access to electricity slows equitable and an estimated 65 percent is attributable to poor sustainable rural development. The national sanitation and 73 percent is attributable to unsafe electricity access rates stand at 38 percent, with 60 water supply. Diarrhea increases the incidence of percent for urban and peri-urban households and malnutrition and stunting which, at an estimated 33 18 percent for rural households. Recent progress percent of children under age 5, is already high. to improve access rates44 have been achieved largely due to the push by the GoL to accelerate 43. WHO Status Report on Road Safety 2018. 44. About 60 percent of currently connected households were provided with access in the last 5 years, and 80 percent in the last 10 years. 64 | LESOTHO • Systematic Country Diagnostic Update grid electrification through an annual budget for 88. The distinct advantage that digitization provides electrification and funding from the Universal to increasing service delivery in rural and hard- Access Fund (UAF).45 If annual GoL electrification to-reach areas, and promoting inclusion overall, targets, at 15,000 grid connections per year, have has not yet been realized. The state of connectivity been achieved, their economic impact on the of government agencies, schools and health- newly electrified areas have been modest, as care facilities remains low, and this is a missed small entrepreneurship was not incentivized in opportunity for improved service delivery. Lesotho these areas. Most of the public rural electrification does not have a National Research and Education projects undertaken in the past decade lack Network (NREN), as is already stated in NSDP II. A sustainability at design. To accelerate grid and NREN could lower costs for internet bandwidth and off-grid electrification in a least-cost, impactful improve access to educational resources. In general, and coordinated way, the Cabinet adopted digital technology infrastructure and adoption exhibit the Electrification Master Plan (EMP) in June clear spatial and gender differences. For example, 2019. Although the grid extension to unserved in 2017, more than half of the urban population households was slower in 2020 due to the lower used the internet, but only 17.6 percent of the rural revenues from the UAF, the GoL has advanced population were connected (World Bank 2020b). implementation of the EMP by adopting the mini- Digital adoption also exhibits gender differentials: grids regulations in January 2021,46 providing the although more females than males are enrolled in regulatory framework for private investment and university education in Lesotho, very few females operation of mini-grids in Lesotho. enroll in ICT-related programs at higher education institutions and, of those that do, even fewer choose computer science as their specialization. Figure 19. Poor access to electricity slows equitable and sustainable rural development Botha-Bothe 34% Share Attribute Total electrified (%) Leribe 36% Households 537,457 40% Berea Businesses (small shops) 10,750 40% 14% Mokhotlong Schools 1,452 54% 15% Health Facilities 294 78% Principal Chief’s Offices 22 32% Maseru 81% Thaba-Tseka Local Courts 33 88% 9% Mafeteng Community Council Offices 47 30% 33% Other Government Offices 77 21% Qacha’s Nek Agricultural Resource Centers 22 36% 47% Police Stations 60 68% Mohale’s Hoek 24% Post Offices 47 85% Hostels and Barracks 131 83% Quthing Guest Houses and Hotels 285 91% 12% Churches 1,665 26% Source: Lesotho Electrification Master Plan (EMP), GoL June 2019. 45. The UAF collects roughly M18 million annually used to promote national electrification. The UAF is funded by levies (M0.02 for domestic and M0.03 for industrial) on every unit of electricity purchased by LEC customers on the grid. The main purpose of the UAF is to (a) subsidize the capital costs of new areas for electrification; (b) provide concessionary financing to developers toward the construction and upgrading for electrical systems for new areas of electrification; (c) facilitate education and training to local communities in the safe and efficient use of electricity; and (d) facilitate research relevant to the supply of electricity in rural areas. The UAF is currently funding only on-grid electrification efforts, mainly extensions of the existing LEC grid network. 46. Mini-Grids Power Generation, Distribution and Supply Regulations, published on the Lesotho Government Gazette No7 – Vol.66 on January 27, 2021. LESOTHO • Systematic Country Diagnostic Update | 65 Capacity constraints and weak accountability 89. The low capacity of teachers, alongside are managed at different governmental levels. Most inadequate systems to promote better programs lack digital management information accountability by teachers, is a key factor leading systems (MIS) or have limited capacity for updating to poor learning outcomes of students. In recent at decentralized levels. MoSD staffing is especially learning assessments,47 teachers perform only weak in the areas of IT, data management and slightly better than students. The capacity of M&E. With more integrated and digital systems, the Ministry of Education and Training (MoET) to social protection could more easily expand to develop and provide structured and effective in- cover more poor households. Today, 13.5 percent service training and follow-up support for teachers of the poor report not receiving any transfers. is weak. Most in-service training provided at Moreover, the payment of social assistance scale tends to be once-off and there are serious transfers in Lesotho is costly and payment systems concerns about the quality of the programs, are not secure. Most social assistance payments materials and capacity of trainers. Furthermore, are cash-based and made via district offices, the systems to promote better accountability G4S security company cash in transit services, by teachers are inadequate. Despite a large and even by helicopter to remote regions. As percentage of the education sector budget going such, these remain relatively expensive, partly as to teachers (81 percent of recurrent expenditure for a result of Lesotho’s topography, which includes primary education and 99 percent for secondary hard-to-reach areas, and the limited penetration education), there were teacher strikes in 2018/19 of rural banking.49 Beyond payment costs, some primarily related to a wage dispute, resulting in payments are also late. To improve the efficiency schools being closed for prolonged periods and of payment mechanisms and to ensure the transfer likely contributing to an increase in dropout rates of funds on a predictable and agreed schedule, observed in the past two years.48 Aside from these programs are increasingly looking to move from school closures, no institutional systems exist to cash to electronic payments (mobile money, bank periodically measure teachers’ content knowledge transfers, etc.). and pedagogy, teacher absenteeism, the amount of time teachers spend in the classroom teaching, 91. Gaps exist in the financial sector, affecting its and tracking teacher deployment, training, potential to support the country’s development. and professional development. Without such The distribution networks of the financial sector accountability systems in place, it is challenging to are dominated by agents of mobile network assess whether teachers are being efficiently and operators (MNOs),50 while banks have a very effectively used to support teaching and learning. limited distribution network.51 The distribution network is founded on the National Payment 90. The social protection system suffers from Infrastructure, which provides a solid basis for constraints mainly related to limited program further development of the financial sector. In coordination, together with weak information terms of geographic distribution, data from the management and IT systems. Administrative CBL suggest that 71 percent of total access points systems to support social assistance programs are concentrated in the following three districts: remain largely manual, though the Ministry of Social Leribe, Berea, and Maseru. Access to the SADC Development (MoSD) has been working on the regional cross-border payment system, the SADC integration of the administrative mechanisms of all Integrated Regional Electronic Settlement System social safety nets. Currently, program enrolments (SIRESS), allows for Person-to-Person and Person- 47. The 2018 Examination Council of Lesotho Baseline Assessment conducted in a national sample of 142 schools and 262 primary school teachers. 48. Schools have also been closed since March 2020 due to the pandemic (except grades where students take examinations, which opened on and off from September 2020), resulting in education service delivery being severely disrupted over the past three years. 49. Economic Policy Research Institute 2020. 50. It is important to note that there are no data for transactions on access points. 51. Despite the relatively small distribution network of banks compared with MNOs, it is noted that banks increased their agency network from 23 agents at the end of 2019 to 297 agents at the end of September 2020. 66 | LESOTHO • Systematic Country Diagnostic Update to-Business transfers. Access to this payment They indicate that the current functional Health infrastructure is limited to South African banks, Information Management System, which is mainly hence limiting development of remittances and supported by DPs, needs further strengthening. e-commerce solutions for non-bank payment Finally, the first active public health law in Lesotho service providers (PSPs). However, a SADC was adopted back in 1970. In the meantime, there retail payment system is under implementation have been significant changes in public health and this will connect banks and non-banks with issues, demographics, and available scientific settlement done via accounts held in SADC RTGS. knowledge. The active law still refers to outdated Furthermore, there is a lack of interoperability institutional and governance structures, and between financial service providers, which hinders to a less complex legal regime, nationally and the transfer of funds between mobile accounts internationally. A revised public health bill is and bank accounts. The CBL is moving forward warranted to update the institutional arrangements, in creating the architecture, business model and local authorities’ health services functions and operational scheme of a national switch that powers, health emergency preparedness and would settle card and non-card digital payments, response, and disease prevention, as well as and would allow for interoperability between the licensing and accreditation. different PSPs. 94. As a small country, Lesotho should be better able 92. In the health-care system, there is a lack of to implement nationwide programs, but spatial qualified staff, low preparedness to deal with disparities persist. While geography (a small, mostly patients, and drug shortages within health mountainous country completely surrounded by facilities. For example, only six out of 20 secondary South Africa) and connectivity constrain service hospitals (where nearly half of deliveries occur) delivery, there are other constraints, notably provide comprehensive emergency obstetric and weak decentralization. While decentralization has newborn care (CEmONC) to ensure safe delivery.52 been an important theme in governance reforms, A lack of qualified staff, the poor state of hospital culminating in the adoption of the 2014 National facilities and a general negative perception of Decentralization Policy, the policy has not yet service quality,53 contribute to a low average been fully implemented. As noted in NSDP II, a bed occupancy rate of 32 percent in public guiding framework for decentralization has not district hospitals. The low quality and sub-optimal been developed, and funding for local government utilization of facilities at the district level serve to structures is inadequate and unpredictable. The overwhelm tertiary level facilities, which average a relationship between the central government 74 percent bed occupancy rate. and decentralized structures in terms of funding, implementation and monitoring of development 93. The Ministry of Health (MoH) faces several programs and projects has still to be clearly defined challenges with the development, revision and and operationalized for effective delivery of services. approval of policies, as well as enactment of Overall, decentralization can contribute, if proper legislation. There are several health bills and political and fiscal institutions are put in place, to strategic documents (plans) in various stages improving service delivery. It is important to note that of development. There have also been delays improvements in service delivery do not depend on in translating some draft policies into guidelines the intensity of decentralization policies, but rather related to minimum benefit packages of health on their quality, meaning above all their capacity to services and referrals. These draft documents promote local accountability. diagnose poor management of health-service outsourcing (including public-private partnerships, or PPPs), and low capacity in terms of human resource that prevent the MoH from reaping the envisaged benefits of such arrangements. 52. CEmONC Report 2015. 53. Lesotho PER 2017. LESOTHO • Systematic Country Diagnostic Update | 67 2.1.3. Labor market outcomes are disappointing 95. Job prospects have not significantly improved. 97. The returns to education are high, with According to the recent Labor Force Survey of education facilitating access to better jobs, 2019, the national unemployment rate is 22.5 reflecting its impact on labor productivity. The percent (Figure 20) and 38.3 percent according returns to education, especially post-secondary, to the standard and expanded definitions, are high, increasing the probability of being in the respectively. The unemployment rate is higher labor force and out of unemployment. Education among youth, at 29.1 percent, driven by skills levels play a role in securing employment outside mismatches and low wages. Women are less likely agriculture and qualifying for permanent jobs. The to participate in the labor force, have a higher highest returns to education accrue to those who probability of being unemployed, and tend to earn study in technical schools or those who have post- less than men. For instance, the female youth secondary education. An increase in educational unemployment rate was 31.1 percent in 2019 and attainment in urban areas between 2002 and the male unemployment rate was 27.1 percent. 2017 meant more people in urban areas could Among employed women, most are relegated access better paying, more stable and higher to insecure and low-paying jobs in the informal productivity jobs. In fact, skilled non-agricultural sector, including subsistence agriculture in rural jobs provided the main sources of income to lift areas and domestic work or street vending in urban households out of poverty. urban areas. The employment challenge is more severe among Basotho living in rural areas, those 98. Access to productive and stable employment is with low levels of education, and young women. associated with a reduced likelihood of being poor, but employment does not guarantee 96. In recent years, productivity growth has escaping from poverty. Whether individuals are slowed substantially, and labor productivity out of the labor market or in the labor market is low especially in subsistence agriculture. matters less for poverty than the type of jobs Productivity of labor is negatively affected by HIV/ they have. A large portion of Lesotho’s population AIDS. Weak total factor productivity also appears consists of working poor who earn very low wages. to reflect inefficient inter-sectoral allocations, Many enterprises operate only seasonally, and with labor concentrated in the economy’s least rural enterprises show this intermittent pattern productive sectors. Mining is one of the fastest- more frequently than urban ones. Workers with growing sectors of Lesotho’s economy, but it is seasonal contracts are the poorest, followed by capital-intensive, with little impact on employment. those with casual contracts and temporary jobs. Furthermore, the sector is constrained by low The portion of wage-earning workers increased labor productivity. Labor productivity is particularly more rapidly among poor households than non- low in subsistence agriculture, a sector that is poor households, indicating that getting a wage- important for the livelihoods of most Basotho. paying job may be instrumental in moving up Low productivity in subsistence agriculture means the consumption ladder, but might not always be agricultural work does not guarantee lower enough to escape poverty. poverty levels. The public sector dominates the economy, but it does not employ many of the poor. Furthermore, it is unlikely that the public sector will continue to expand enough to absorb the large future cohorts of working age people, especially given recent and future declines in fiscal revenues. 68 | LESOTHO • Systematic Country Diagnostic Update Figure 20. Employment cascade, 2019 Total population 2.13 million Non-working age Working age (15-64 years) 0.78 Mln (36.6%) 0.78 Mln (36.6%) Not economically active Economically active 0.67 Mln (50.1%) 0.67 Mln (49.9%) Unemployed Employed 0.15 Mln (22.5%) 0.52 Mln (77.5%) Formal Sector Informal Sector Private households 0.21 Mln (41.1%) 0.21 Mln (40.5%) 0.21 Mln (40.5%) Source: World Banks calculations using preliminary estimates from BOS. 2.1.4. Vulnerability to environmental and economic shocks is high Households have few coping strategies at their disposal to manage shocks and, as a result, shocks significantly slow poverty reduction 99. Basotho face a myriad of uninsured environ- development, lower school attendance rates, mental and economic shocks. Data from 2012/17 reduced human capital attainment, and higher risks suggest the frequency of weather and price of chronic disease and health problems in adulthood. shocks is high, reflecting abnormally bad weather Urban households and better-off households have conditions due to an El Niño-induced drought more coping mechanisms available to them. Those and high inflation during the survey period. who are educated, who have access to irrigation or Unsustainable land management practices, who have a source of remittance income are less leading to degradation of the natural resources susceptible to such risks. base, exacerbate vulnerability to shocks, especially among the rural poor who are more dependent on 101. The recurrent occurrence of shocks significantly natural resources for their livelihoods. slows poverty reduction. Without the 2015/16 El Niño-induced drought, rural poverty would 100. When shocks occur, households have few have been 6 percentage points lower, and the available coping mechanisms. This is particularly pace of national poverty reduction would have true for shocks that affect many households nearly doubled between 2002 and 2017. The in the same community or market at once. As a disproportionate impacts of low rainfall on rural result, consumption is often reduced in response households led to an increase in the urban-rural to these types of shock, increasing poverty and divide, with urban poverty decreasing while producing long-term consequences on human rural poverty stagnated. However, even with capital attainment for children. In 2016, the drought normal rainfall, a large urban-rural divide would resulted in a 23 percent reduction of consumption nonetheless remain in Lesotho. The 2015/16 El for rural households. For households with lower Niño-induced drought was not a one-off event. levels of consumption prior to the shock, reduc- Climatic shocks will continue to impact Lesotho, tions in consumption can lead to undernutrition, likely with increasing frequency and severity going with poor health consequences in the short term forward as a result of climate change. Preparing and serious long-term consequences. These for these events is therefore essential. include a high risk of stunting, impaired cognitive LESOTHO • Systematic Country Diagnostic Update | 69 The COVID-19 pandemic is projected to increase poverty and inequality 102. The COVID-19 pandemic is projected to have 103. To complement the MPO exercise, a micro- a strong poverty impact. Comparing the World simulation model was used to understand the Bank’s Macro Poverty Outlook (MPO)54 indicators impact of the pandemic on poverty through labor for April 2020 and April 2021 highlights the adverse market shocks. While assumptions were made impact of the pandemic on poverty (Figure 21). In regarding the duration of the lockdown measures the April 2020 MPO, extreme poverty, measured introduced by the GoL to curb the spread of the at the US$1.90 per person per day (in 2011 PPP) virus, the pattern of who is affected the most is poverty line, was projected to be at 27.3 percent clear. The impact is stronger for urban households, in 2020. The revisions to better account for the households with affected earners, those aged pandemic resulted in an increase in the projection 25 to 54, and those with primary or secondary by 3.9 percentage points to 31.2 percent. Likewise, education, together with younger households with the projections for 2021 and 2022 were revised children. Existing social protection programs have upwards. Economic recovery will be accompanied the potential to reach the most badly affected. by declining poverty rates but will nonetheless Specifically, top-ups of existing social protection remain higher than in 2019. grants can soften the poverty impact of the pandemic. Figure 21. The pandemic is projected to increase poverty 32 31.2 30.5 29.6 30 International poverty rate ($1.9 in 2011 PPP) 28.5 28.5 27.8 28 27.8 27.8 27.7 27.3 26.8 26 25.9 24 World Bank projections made in April 2020 World Bank projections made in April 2021 22 20 2017 2018 2019 2020 2021 2022 2023 Source: World Bank Macro-Poverty Outlook. 54. The Macro Poverty Outlook (MPO) analyzes macroeconomic and poverty developments in 146 developing countries. The report is released twice annually for the Spring and Annual Meetings of the World Bank Group and International Monetary Fund. Due to the extraordinary economic conditions caused by the COVID-19 crisis, the economic forecasts released in April in the MPO were updated on June 8, 2020. 70 | LESOTHO • Systematic Country Diagnostic Update Box 2. The impact of the COVID-19 pandemic on human capital The negative economic impact of the pandemic had led The pandemic presents an opportunity to overhaul to a decline in household incomes and consumption. delivery of education services, including in teacher This constrained financial situation for households is training. Based on lessons learned, the Ministry of likely to reduce household investment on human capital. Education and Training (MoET) is strengthening the For instance, in a context where dropout rates are resilience of the education system by ensuring all already high, especially for junior secondary education, students have access to digital devices with learning the impact of the COVID-19 pandemic is expected content, whether schools are open or closed. As a start, to be worse at the junior secondary level as the the GoL, in collaboration with UNICEF, has introduced economic impact of the lockdown is likely to make junior television-based learning programs for selected secondary education unaffordable for many students subjects and classes. These platforms are, however, not (junior secondary education is not free). In addition, with interactive and this compromises their effectiveness. the prolonged school closures, some young people may Nonetheless, they are an important step toward ensuring not be able to return to school. Many families that rely access to education, even in the context of shocks that on herding cattle and farming for their survival, income, make face-to-face interaction impossible. or both, may compromise the participation of boys in education. Furthermore, adolescent pregnancy is likely On the health side, the pandemic is unfolding in a context to increase during the prolonged school closures. Thus, of a fragile health system and poor health outcomes. many of the factors that contribute to the high dropout The health system is already overburdened. It lacks the rate at the junior secondary level are being exacerbated requisite resources and infrastructure and traditionally by the COVID-19 crisis. This underscores the importance relies on South Africa to provide complementary of addressing the demand-side poverty related barriers secondary and tertiary health care. Even before the to improve student retention. pandemic, access to health services had been difficult for many people, especially in rural areas. Another illustrative example is in the household budget for cooking and lighting, as the 2020 shock engendered The inequities in health-care service provision mean less purchase of paraffin and cooking fuels, inducing that the pandemic is affecting different population more time spent for wood fuels and dung collection, to groups disproportionately. Vulnerable populations will the detriment of education and health. be affected the most. For instance, the disruption in the supply chain could have an impact on the delivery of Low usage of digital platforms for teaching and learning antiretrovirals in the country, thus affecting people living has exacerbated the disruption in learning and support with HIV and subsequently increase HIV-related mortality for teachers. About 511,000 learners have been affected rates in the country. The vulnerability of people with by the closure of all schools and ECD centers, and most disabilities is heightened by the pandemic owing to stigma of the learners are in the rural areas. There is a digital and discrimination, to lack of access to information, basic divide that exists across space (urban vs rural areas), as services, remote or distance-learning options, and pre- well as between rich and the poor households. At about existing isolation and marginalization. This could result in one-third of the population, access to the internet is increased fatalities. The lockdown will also make access to low and even lower among rural and poor households. specialist health-care services in South Africa impossible, As a result, only a few, largely private schools and leading to mortalities. Anecdotal evidence suggests that tertiary institutions have continued learning using online access to sexual reproductive health services, including platforms. sanitary towels, was suspended due to the lockdown. Returning labor migrants coming through unofficial The pandemic is likely to increase inequalities in the borders could also increase the risk of infection within education sector. This is because continuing learning rural communities. This risk is compounded by the limited through digital technology solutions may not be widely capacity to effect quarantines and challenges in contact available and accessible to all learners, households and tracing. Gender-based violence has emerged as an area geographic areas. Children from marginalized and poor of concern during the pandemic. Furthermore, prolonged communities are at a greater risk of dropping out and periods of closures and restrictions on movement may falling behind as they have limited access to distance also lead to additional emotional unrest and anxieties learning opportunities. among young people. LESOTHO • Systematic Country Diagnostic Update | 71 Social protection helps to reduce poverty and inequality, but its ability to help households mitigate the impact of shocks is limited 104. The social protection system helps reduce poverty 106. The under-provision of public support persists and inequality. In 2017, social assistance transfers despite the significant government and reduced the poverty headcount rate by an estimated humanitarian response often put in place when 3.1 percentage points and the poverty gap by 5.3 large covariate shocks occur. Analysis shows that percentage points. The poverty-reducing impact pensions help households mitigate the impact of of Lesotho’s social assistance system ranks ahead shocks, but existing social protection programs of the average for Sub-Saharan African countries. are limited as coping mechanisms. However, The inequality-reducing impact of social assistance social protection policies are another means for is also significant: the Gini coefficient would be 3.8 governments to help households manage these percentage points higher without social transfers. risks. They provide a dependable source of This has a significant impact on inequality, greater household income that is not subject to risk (for than in many other countries contained in the example, pension support) and can be scaled up Atlas of  Social Protection  Indicators of Resilience to provide more support in hard times. The GoL and Equity (ASPIRE) database. Cash transfers play and the international community did increase the most significant role in reducing poverty and support in response to the 2015/16 drought and inequality. this response did help to ameliorate the shock somewhat, but the impact was limited. 105. However, existing social protection programs play a role of income supplementing rather 107. Use of digital platforms in the rollout of social than risk insurance. Social protection programs protection programs could strengthen resilience are limited in the degree to which they can help to shocks. While some social payments data are households mitigate the impact of shocks. Few stored in the National Information System for households report receiving help from the GoL Social Assistance (NISSA) database, real time birth/ or NGOs in the face of shocks. Households that death/income/location/contact data availability experienced drought, crop disease or chronic would facilitate targeting of social grants to help illnesses were more likely to report receiving during shocks. help from the GoL or NGO resources. These are situations in which informal networks, labor markets and financial markets struggle to provide the required support to affected households. But too few households benefit from public support. 2.1.5. Remittances have been falling 108. Remittances are strongly progressive, with 109. Poor households, especially the less educated significant impacts on poverty and inequality. and rural residents, are particularly likely to be Rural poverty would have been nearly 10 dependent upon remittances. Among the 30 percentage points lower in 2017 had remittances constituencies most reliant on remittances from not declined since 2002. Poor households use South Africa, 25 are rural and all have poverty the money to buy necessities and invest in human rates above 40 percent. Nonetheless, some of the capital. Urban households are less reliant on very poorest constituencies in the mountainous remittances, and urban poverty would be only areas rely relatively little on remittances. Their 2.7 percentage points lower if remittances had geographical isolation makes it harder to work in remained at their 2002 levels. South Africa and this has important implications for the well-being of Basotho living in these areas. 72 | LESOTHO • Systematic Country Diagnostic Update Remittances serve as a buffer when shocks occur; poor. This is particularly true of rural households, without access to remittances, these regions are where three out of four non-poor households face likely to be impacted more severely by shocks. high risks of falling into poverty. In contrast, only 30 percent of non-poor urban households are 110. Non-poor rural households are vulnerable to vulnerable to falling into poverty. falling back into poverty because of high reliance on agricultural income and remittances, which 111. Remittances are prominent channels for makes their livelihoods volatile, and a shock expanding financial inclusion and uptake of DFS, increases the risk that rural households that have but costs remain high. Lesotho is among the top escaped poverty may fall back into poverty. For 25 countries with the largest remittance inflows as one-quarter of Basotho, the predicted probability a share of GDP, at 16 percent. While 27 percent of of being in poverty is sufficiently high to make them the population sent remittances in the past year, vulnerable to falling back into poverty. This means only 8 percent used financial institutions to do that these households share characteristics with so. For households, the cost and time it takes to others that are poor and, under different shock receive remittances is an important driver in the scenarios, may find themselves characterized as choice of provider. 2.2. Lesotho’s Lagging Regions: The Case of Rural Mountainous Areas 112. As highlighted in preceding sections, progress in 113. Access to basic services and infrastructure reducing poverty has been slow, and even slower is low and this is associated with increased in rural areas where poverty remains highly multidimensional poverty. Rural areas, particularly concentrated. While the 2017 national poverty in the mountainous regions (Figure 22 maps rural map demonstrates heterogeneity in poverty mountainous zones), are more likely to suffer across space, constituencies in rural mountainous deprivations (Figure 23) and subsequently poverty. areas tend to have the highest poverty rate and As a result, the poor in these areas tend to suffer concentration (Figure 15). This section discusses multiple deprivations that reinforce and perpetuate some of the factors that are likely behind the slow poverty. Constituencies with low access to basic progress in these areas. infrastructure tend to have higher poverty rates. This underscores poverty as a barrier to access to basic services, and a contributor to and/or a result of resource inequality. LESOTHO • Systematic Country Diagnostic Update | 73 Figure 22. Mapping rural mountainous areas ID NAME ID NAME Share of population living in 48 Thaba-Phechela rural mountainous zones 1 Mechachane Botha-Bothe 2 Hololo 49 Kolo 0% - 20% 3 Motete 50 Matelile 20% - 40% Mafeteng 4 Qalo 51 Maliepetsane 40% - 60% 5 Botha-Bothe 52 Thabana Morena 60% - 80% 6 Malibamats’o 53 Likhoele 80% - 100% 1 7 Mphobong 54 Qalabane 2 11 5 15 13 4 8 Thaba-Phats’oa 55 Mafeteng 12 3 10 56 Taung 17 16 14 9 9 Mahobong 21 18 8 7 10 Pela-Ts’oeu 57 Qhalasi 28 24 23 78 30 20 77 29 19 6 58 Mohale’s Hoek 32 31 25 22 11 Matlakeng Mohale’s Hoek 27 36 26 Leribe 33 79 12 Leribe 59 Mekaling 35 34 38 39 37 43 42 72 75 80 60 Qaqatu 41 13 Hlotse 44 40 45 14 Tsikoane 61 Mpharane 48 49 46 76 74 73 15 Maputsoe 62 Ketane 54 53 51 47 55 50 16 Likhetlane 63 Hloahloeng 71 52 63 70 56 17 Peka 64 Tele 61 62 57 69 18 Kolonyama 65 Moyeni 58 67 Quthing 68 60 19 Mosalemane 66 Sebapala 59 20 Makhoroana 67 Mt. Moorosi 65 66 0 25 50 75 100 km 21 Bela-Bela 68 Qhoali 64 22 Malimong 69 Qacha’s Nek Q. Nek 23 Khafung 70 Lebakeng Berea 24 Teya-Teyaneng 71 Tsoelike 25 Ts’oana-Makhulo 72 Mants’onyane Thaba-Tseka 26 Thupa-Kubu 73 Thaba-Moea 27 Berea 74 Thaba-Tseka 28 Khubetsona 75 Semena 29 Mabote 76 Mashai 30 Motimposo 77 Malingoaneng Mokhotlong 31 Stadium Area 78 Senqu 32 Maseru 79 Mokhotlong 33 Thetsane 80 Bobatsi 34 Qoaling 35 Lithoteng 36 Lithabaneng 37 Abia Maseru 38 Thaba-Bosiu 39 Machache 40 Thaba-Putsoa 41 Maama 42 Koro-Koro 43 Qeme 44 Rothe 45 Matsieng 46 Machaleng 47 Maletsunyane 74 | LESOTHO • Systematic Country Diagnostic Update Figure 23. Lack of access to basic services and infrastructure is associated with increased poverty Share of population with access to 80 electricity grid, improved water sources Poverty rate (%) 60 and sanitations facilities 0% - 5% 35 5% - 10% 14 10% - 15% 54 80 90 100 15% - 20% Share of population with access to 20% - 25% improved water sources (%) 25% - 30% 30% - 70% 0 25 50 75 100 km 0 25 50 75 100 km 80 80 Poverty rate (%) Poverty rate (%) 60 60 35 35 14 14 10 30 50 80 0 15 40 85 Share of population with access to Share of population with access improved sanitations facilities (%) to an electricity grid (%) 0 25 50 75 100 km 0 25 50 75 100 km Note: The poverty rates were estimated using the national poverty line. See Figure 22 for an indication of which areas are broadly classified as rural and mountainous. Lesotho in Source: BOS 2021: Mapping subnational poverty in LESOTHO 2017/2018: • Systematic Diagnostic and Methodology Country key findings. Update | 75 Figure 24. Limited economic opportunities are associated with increased poverty a. Poverty and casual work as main income Share of households whose main source 80 of income is casual work Poverty rate (%) 60 5% - 10% 10% - 12% 35 12% - 14% 14 14% - 16% 5 10 15 18 16% - 18% Share of households in the district whose main source of income is casual work (%) 0 25 50 75 100 km 0 25 50 75 100 km b. Poverty and employment in agriculture Share of households with heads 80 employed in agriculture Poverty rate (%) 60 5% - 15% 35 15% - 20% 20% - 25% 14 25% - 30% 8 15 25 40 30% - 40% Share of households in the district with heads employed in agriculture (%) 0 25 50 75 100 km 0 25 50 75 100 km Note: The poverty rates were estimated using the national poverty line. See Figure 22 for an indication of which areas are broadly classified as rural and mountainous. 76 | LESOTHO • Systematic Country Diagnostic Update Source: BOS 2021: Mapping subnational poverty in Lesotho in 2017/2018: Methodology and key findings. Figure 25. Share of individuals living in household with remittances from South Africa Share (%) <10 10 - 20 20 - 30 30 - 40 40 - 50 Maseru 50 - 60 Note: See Figure 22 for an indication of which areas are broadly classified as rural and mountainous. Source: World Bank 2019b: Lesotho Poverty Assessment: Progress and challenges in reducing poverty. Figure 26. Increased vulnerability to climatic shocks is associated with increased poverty Share of households experiencing 80 a drought or floods Poverty rate (%) 60 60% - 65% 35 65% - 70% 14 70% - 75% 60 66 73 81 75% - 80% Share of households in 80% - 85% the district experiencing a drought or floods (%) 0 25 50 75 100 km 0 25 50 75 100 km Note: The poverty rates were estimated using the national poverty line. See Figure 22 for an indication of which areas are broadly classified as rural and mountainous. Lesotho in Source: BOS 2021: Mapping subnational poverty in LESOTHO 2017/2018: • Systematic Diagnostic and Methodology Country key findings. Update | 77 114. Access to financial services for individuals has While improvements in transport infrastructure, improved in recent years, driven by an increase the highlands, which cover three-quarters of the in mobile money penetration, but gaps remain. total land area, continue to suffer from low road Rural residents, adults belonging to the poorest densities and inadequate connectivity to rural 40 percent of the population, and females are less communities. Access to the main roads and to likely to own an account. In addition, less than 40 basic services and markets is impeded by the percent of the adult population (aged over 15) use mountainous terrain, and further limited by floods digital payments. Given the mountainous terrain and landslides during heavy rainfall. Second, while and low population density in many rural areas, digital technology can compensate for this, digital physical access points are mostly located in and infrastructure and adoption is low in these areas. around Maseru, underscoring the need to make digital payments more accessible. Outside Maseru 117. Being hard to reach, these lagging rural and the urban center, areas with low population mountainous areas tend to bear the brunt of the densities remain underserved by financial services. costs of remoteness, particularly in the form of Due to the impact of the COVID-19 pandemic, higher consumer prices. Remoteness is typically expanding and facilitating the use of digital delivery associated with higher marginal costs and less channels will be key to maintaining access and competition, which result in higher markups. potentially expanding access during recovery, For example, Matchaya et al. (2020)55 provide though high associated fees pose a challenge. evidence that maize flour prices in the markets located in rural mountainous areas (particularly 115. There are likely barriers to labor mobility in the Mokhotlong and Thaba-Tseka districts) were face of limited economic opportunities. Evidence generally higher than the prices in urban areas shows that mountainous areas tend to have a (Berea and Maseru districts) throughout 2019 and high share of household heads employed in 2020. One explanation is that the highlands have agriculture, as well as a high share of households limited arable land, which reduces agricultural with their main income coming from casual work productivity, resulting in households having to (Figure 24). This suggests limited economic supplement their home-milled maize flour with opportunities beyond agriculture, while reliance purchased maize flour. The COVID-19 pandemic on casual work and/or agriculture is associated has exacerbated the challenge: being further away with increased poverty. Given this, migration, from the urban districts and not easily accessible, especially to South Africa where there are more the shortage of maize flour was felt more acutely in economic opportunities, is a strategy many Mokhotlong and Thaba-Tseka, hence the notable Basotho households use to diversify income and significant price increases. sources. In general, poor households, especially the less educated and rural residents, are heavily 118. Vulnerability to environmental and economic reliant on remittances. However, some of the very shocks is high, but households have few coping poorest constituencies in the mountainous areas strategies at their disposal to manage shocks. rely relatively little on remittances (Figure 25), Rural mountainous areas are more likely to report suggesting barriers to labor mobility that could be drought risks (Figure 26). This is exacerbated by linked to the cost of migration, as well as poorer unsustainable land management practices, which human capital outcomes that might limit their lead to degradation of the natural resources base, ability to access jobs. adversely affecting the livelihoods of the rural poor. Because households have few coping strategies 116. Connectivity to global, national, and regional at their disposal to manage shocks, droughts markets is weak and this holds back productivity tend to be associated with reduced consumption, gains in rural mountainous areas. Both the hard with long-term consequences on human capital and soft connective infrastructure are weak. attainment for children. First, these areas suffer poor road infrastructure. 55. Matchaya G; Fakudze, B; Nhlengethwa, S; and Ikhothatseng Greffiths. 2020. Maize Flour Price trends in rural districts and urban districts of Lesotho under COVID-19. Covid-19 Bulletin No. 15, December. Kigali. AKADEMIYA2063. 78 | LESOTHO • Systematic Country Diagnostic Update 119. In sum, Lesotho is facing challenges in achieving balanced regional development, with rural mountainous areas lagging behind. Accelerating poverty reduction and shared prosperity therefore hinges disproportionately on addressing key constraints to ensuring that lagging regions are more productive and create economic opportunities for the poor. While the previous discussion describes the challenge of lagging regions in Lesotho, more analytical and policy work is needed in this area to inform a spatial development lens that allows for the identification of challenges, opportunities, and solutions at these subnational levels. At the same time, reducing persistent inequality between urban and rural areas will require an equity-based approach to investments in rural mountainous areas. 120. Lessons can be drawn from countries that have had to adopt a spatially informed approach to development with the aim of overcoming the challenge of concentration of economic activity that has failed to improve living standards across the country. Examples include Argentina (World Bank 2020a), Bhutan (Bhutan Urban Policy Notes: Regional Development and Economic Transformation), and Colombia. In the case of Colombia, the approach entails consolidation, coordination, and collaboration among territorial institutions to achieve increased regional impact, as well as working with institutions and policies for land market management in rural and urban areas to increase productivity and sustainable territorial development. The World Development Report 2009 Reshaping Economic Geography is a good resource for conceptualizing an appropriate framework for economic integration between leading and lagging areas. LESOTHO • Systematic Country Diagnostic Update | 79 80 | LESOTHO • Systematic Country Diagnostic Update 3. OPPORTUNITIES AND CONSTRAINTS FOR DEVELOPMENT: WHAT NEEDS TO CHANGE? LESOTHO • Systematic Country Diagnostic Update | 81 121. Building on the 2015 SCD and based on evidence especially in rural areas and lagging regions; presented in the preceding chapters, this SCD (iii) strengthening climate risk management and Update argues that, in order to achieve higher, resilience; and (iv) across all of these focus areas, more sustainable, more inclusive growth, and addressing public sector implementation gaps, faster poverty reduction and shared prosperity, which is important for improving the effectiveness interventions are needed in four areas. These are: and efficiency of public spending. The following (i) rebalancing growth toward private investment subsections describe the recommendations in and exports for job creation; (ii) strengthening detail. human capital and improving service delivery, 3.1. Rebalancing Growth: Shifting to Private Investment and Exports for Job Creation A shift to a growth model that is driven by a larger, more vibrant, internationally competitive private sector that creates jobs has still to be realized. As a small, landlocked country, improving trade competitiveness and increasing integration into regional and global value chains are essential to growth and economic development. However, exports remain low, uncompetitive, undiversified, and with limited value addition. While agriculture, especially high-value horticulture, presents opportunities for export growth, the sector continues to be characterized by low growth and productivity. An uncompetitive investment climate and business environment discourage investment, both domestic and foreign. The level of financial intermediation and financial inclusion is low, especially for micro, small and medium enterprises (MSMEs),  and the entrepreneurship ecosystem remains underdeveloped. The dominance of state-owned enterprises (SOEs) stifles private sector development. To rebalance growth toward private investment and exports, it would therefore be important to accelerate implementation of key business reforms, and close gaps in key infrastructure and increase agricultural productivity, while promoting integration between leading and lagging areas. 3.1.1. Opportunities to shift to private investment and exports for job creation 122. There is an opportunity to build on past success to competitiveness of this sector and tap into its huge revitalize the manufacturing sector, ensuring the job creation potential. Relatively reliable and cheap sector regains its competitiveness, by leveraging electricity (over half of Lesotho’s power is from bulk close economic ties with South Africa and the imports) and relatively low fuel prices (lower than in African Continental Free Trade Area (AfCFTA). South Africa) provide advantages for manufacturers. Lesotho has demonstrable comparative advantage in the textile and apparel sector. This is a priority 123. Opportunities also exist in the non-textile and sector to target for investment and job creation, apparel sectors, with the potential to attract focusing on improving manufacturing capabilities, private investment and create new and better jobs strengthening business and trade facilitation for in key value chains. These include opportunities export promotion, promoting industrial clustering in leather, automotive parts, horticulture, tourism, and integrated supply chains, and improving and the digital economy. Tapping into opportunities the overall regulatory framework to create a in the leather manufacturing sector requires competitive business environment. The post- addressing the cost and time to ship leather by air COVID-19 recovery in the export manufacturing from Ethiopia to Lesotho due to double clearances sector presents opportunities to enhance the into and out of South Africa. It also requires 82 | LESOTHO • Systematic Country Diagnostic Update developing the value chain for production at scale, approach, can improve agricultural productivity and including targeted support for skills development. marketable surplus among smallholder farmers. Tapping into opportunities in the automotive parts manufacturing sector requires strengthening 125. The biggest opportunities for trade lie in improved vertical integration between South African and trade facilitation and trade policy integration Lesotho firms, including through joint ventures. One with South Africa’s trade system. This benefits specific opportunity is to tap into the Automotive from Lesotho’s efforts to actively reform its trade Production Development Program (APDP), where facilitation practices and procedures in line with material from Lesotho could be regarded as the WTO’s Trade Facilitation Agreement obligations locally produced in South Africa, as part of a SACU and good practices. These include modernizing regional effort. In terms of tourism, nature-based its procedures, automating, and increasing and adventure tourism can help to increase private coordination at the border to reduce duplication investments and create new jobs in rural areas, and complexity. The Lesotho Revenue Authority tapping into regional markets. Furthermore, the (LRA) is also leading the implementation of a new digital transformation of the economy can be a integrated border management model that will source of growth and job creation, as it will lead to reduce duplication and foster joint inspections the creation of new digital jobs for young people, to reduce the burden on the trade sector. Other including tapping the benefits from private digital opportunities include alignment of automated trade platforms for online wholesale, and retail trading reporting to support integrated VAT refunds, as and consumer services. well as improved regional collaboration on both facilitation and on shared risk management and 124. Agribusiness also provides an effective pathway law enforcement. In 2019, Lesotho and South Africa to crowd in private sector support for unleashing agreed on the development of a One-Stop Border the potential of the agri-food sector for boosting Post at the Maseru Bridge and Ficksburg border exports and job creation. There is evidence of an posts by 2025. This is expected to improve trade increase in value added from agro-based industries, facilitation. In addition, to create a more favorable and agricultural trade and distribution services, as trade regime with South Africa, Lesotho could focus well as a shift from traditional exports to higher- on opportunities at the bilateral level, initiating value agricultural products in international trade. AGOA-like arrangements with multiple partners for In particular, high-value horticulture presents an multiple sectors. important opportunity (World Bank 2018a), with potential to supply both domestic markets and 126. Shifting market trends due to the COVID-19 export horticulture products.56 Tapping into this pandemic offer new opportunities. Global value potential will require investments to modernize and chains, including those in the textile and apparel upgrade farmers’ production processes, as well as sector, are being transformed due to the impacts in post-harvest infrastructure and management to of the COVID-19 pandemic, and this presents support value addition. Together with horticulture, opportunities to increase investments and jobs livestock farming offers opportunities for in the sector. The pandemic had pushed most US socioeconomic development, especially in the buyers to look to a diverse sourcing base. Increasing mountainous and remote areas of Lesotho, where it digital presence is important for tapping into these often serves as the primary source of food security opportunities, because online-focused operations and rural livelihoods. For instance, support for cattle are gaining more prevalence. Furthermore, a focus development also provides opportunities for the on fair wages and improved labor conditions is production of organic red meat for exports to South becoming increasingly important as global retailers, Africa and other reginal/global markets. Overall, including those in South Africa, prioritize fair wages evidence suggests that the provision of training and and uplifting workers due to customer preferences. investment support in productivity enhancing and Thus, supporting businesses to improve in these climate-resilient technologies and farm practices in areas is expected to strengthen the attractiveness the horticulture and livestock subsectors, as well of goods and services to international buyers. as capacity building activities to adopt a business 56. Source: Scaling investments in the horticulture value chain in Lesotho: summary note World Bank 2020 Internal Note. LESOTHO • Systematic Country Diagnostic Update | 83 3.1.2. Priority policy areas to shift to private investment and exports for job creation 127. Accelerate implementation of business reforms, several pieces of financial sector legislation remain leveraging on the PMDU, which is already playing pending. These include the Financial Cooperatives a key role in unblocking reforms and building Bill, the Insolvency Bill, and the Financial Consumer consensus among the various government actors. Protection Bill, which are critical to pave the way Several key reforms that had long been pending for increased MSME access to finance and uptake were recently adopted: the Business Licensing and of financial services. Key reforms to promote Registration Law and Regulations, and the Secured DFS include: (i) implementing a national switch; Interest in Movable Property Law and Regulations, (ii) removing regulatory barriers to facilitate the will make significant improvements to the ease entry of fintechs into the market; (iii) moving to of doing business in Lesotho. Adoption of the accept and use digital payments in G2P and P2G Insolvency Bill and Regulations and E-Commerce payments; (iv) simplifying know-your-customer Bill and Regulations will further improve the (KYC) requirements for low-income accounts to conditions for MSMEs. The PMDU could perform increase access to transaction accounts and usage; the role of coordination, performance tracking, and (v) developing a financial consumer protection monitoring, and facilitating to ensure that pending legal framework. Overall, interoperability across legislation is adopted and effectively implemented digital platforms would be beneficial for businesses. as soon as possible. 131. Improve land administration under the Lesotho 128. Establish a modern, competitive investment Land Administration Authority. This, together policy and legal regime. This can be done by: (i) with expansion of systematic land registration, is introducing an Investment Promotion Law (the draft important for creating an attractive investment Investment Promotion Bill is still in its draft stage), regime for FDI and developing smallholder with legally-binding investment incentives; and (ii) agriculture and rural transformation through land adopting a new investment promotion policy and consolidation.57 Improving land administration can legislation that will enhance the competitiveness of be done through: (i) building awareness of the Lesotho for private investments. Lesotho Land Administration Authority and the Land Act; (ii) strengthening the capacity and funding 129. Adopt a competition agenda for an effective role of the Lesotho Land Administration Authority to for SOEs. Given the small size of the economy and expand systematic registration of agricultural land; domestic markets, there is a need to ensure a level and (iii) strengthening the legal framework for the playing field for the private sector and to facilitate long-term lease of land to investors. the entry of new domestic firms, as well as foster efficient service delivery of SOEs. This will require 132. Close gaps in the supply and quality of electricity, clear and predictable regulations/guidelines road and water-related infrastructure. This and their effective implementation, as well as an requires creating an enabling environment for effective PPP framework for increasing private road infrastructure development by reviewing investments in infrastructure. and updating relevant legislation and institutions, improving M&E systems for infrastructure 130. Accelerate the implementation of key legal and development, ensuring that transport infrastructure regulatory financial sector reforms, together and connectivity are climate resilient, and with the rollout of digital financial services (DFS) improving efficiency and sustainability in road to expand financial inclusion. This would help in asset management, combining rehabilitation with unlocking finance to underserved segments and maintenance in primary roads contracts. Given that expand financial inclusion. While the GoL and population densities are higher in urban areas, it the CBL have implemented key reforms aimed at is imperative that an integrated land use planning financial sector deepening and inclusion since 2015, 57. A recent assessment report (Land Administration Reform Project (LARP), Millennium Challenge Corporation 2008–13, Impact Evaluation Report June 2020) found that such measures can significantly empower women (7.8 percent more women operated land in the project area than in the control area), and stimulate the rental market (rental values were 5.5 percent higher and 10 percent more households rented land in the project area than in the control area), potentially contributing to land consolidation. 84 | LESOTHO • Systematic Country Diagnostic Update and public transport system is introduced. This will commercial banks); and (x) promote agricultural enhance efficiency of mobility throughout urban risk management to provide insurance products to areas and contribute to growth and the efficient protect against extreme weather events. Overall, it matching of jobs with industries. Improving air will be imperative for the GoL to adjust the level and transport to support international trade and tourism composition of public expenditures to agriculture to is also important. align with the development objectives and critical needs of the sector. 133. Increase agricultural productivity, value addition and commercialization to promote agribusiness 134. Promote economic integration between leading development, MSMEs and food security. It is and lagging areas to grow the economy, as well as important that the GoL supports a shift toward improve the inclusivity of growth. Many Basotho the development of high potential value chains, continue to live far away from job opportunities, i.e., horticulture and livestock, and puts in place and this contributes to widening and persistent the right mix of policies to harness the investment differences in living standards between areas of opportunities in the sector. Toward this goal, the GoL the country. The World Development Report 2009 will, among others, need to: (i) provide incentives Reshaping Economic Geography outlines how for diversification from maize production into high- countries can speed up their own development value crops; (ii) build climate resilience through by “reshaping economic geography” and thus the promotion of CSA technologies; (iii) promote provides the conceptual underpinnings for such intensive and commercial livestock production, in policy actions. It argues that economic growth has particular; (iv) enhance the capacity of agriculture been, and will continue to be, unbalanced (at the extension service providers for continuous and local, national, and international levels). Efforts to sustainable advisory services to farmers and agro- redress the spatial imbalance, it argues, will only processors; (v) increase investments in irrigation; discourage further economic development and (vi) implement a targeted investment promotion poverty reduction. The key to inclusive, but spatially program for private investments in commercial uneven, development is economic integration farms and post-harvest/marketing infrastructure; between leading and lagging areas. It posits that (vii) incentivize private sector participation in economic integration requires a greater density of agribusiness by providing improved trade logistics, population, as seen in the growth of cities; shorter access to finance, market access, and agribusiness distances (through transport infrastructure, for innovation centers and incubators; (viii) continue example), to encourage businesses and workers to investments in establishing appropriate rural migrate toward dense areas; and fewer divisions, infrastructure; (ix) enhance measures to improve through thinner economic borders and access to farmer/agri-enterprise access to financial global markets. services (e.g., by providing risk guarantees to LESOTHO • Systematic Country Diagnostic Update | 85 3.2. Strengthening Human Capital and Improving Service Delivery, Especially in Rural Areas and Lagging Regions As shown in Chapter 2, high levels of poverty and inequality are critical drivers of low human capital outcomes in Lesotho and vice versa: the low human capital is one of the key determinants of high poverty and inequality. Health and child survival outcomes are the worst for the poorest who tend to be concentrated in rural regions, and the high prevalence of HIV/AIDS exacerbates the human development challenge in the country. Compounding this challenge is the inability of children from poor households to stay in and complete basic education. Children do not learn enough by the time they leave school. In addition, there tends to be a gap between skills that the education system currently delivers and skills that are in demand in the job market, contributing to poor labor market outcomes, which are more prevalent among the poor and those located in rural areas. To improve human capital outcomes, the focus should, therefore, be on ensuring that children access education and stay in school, but also that they are learning while in school and that they are equipped with skills that are in demand in the job market. In addition, it is important to address vulnerabilities, largely a result of poverty, such as gender-based violence, sexual and reproductive health, and substance abuse, among others. There also needs to be a deliberate focus on interventions that support poor communities in rural areas and lagging regions. To ensure effective implementation of programs and initiatives to improve human capital outcomes, better coordination between the health, education, and social protection systems, including building system-level capacity and improving accountability, is critical. 86 | LESOTHO • Systematic Country Diagnostic Update 135. Lesotho is making progress in improving human 18. This shows an encouraging improvement from development outcomes, but outcomes in the 2010 estimate of 34 percent. However, the education and health remain well below what is deficiencies in human capital are still considerable expected of the country’s level of development. and human capital outcomes remain low compared The Human Capital Index (HCI) estimates for 2020 with other LMICs. Significant changes are needed showed that a child born in Lesotho today will be to improve the quality, efficacy, efficiency, and only 40 percent as productive when s/he grows equity in delivery of health, education, and social up as s/he could have been if s/he had enjoyed protection services in Lesotho.58 complete education and full health by the age of 3.2.1. Opportunities to strengthen human capital and service delivery 136. Lesotho has an opportunity to build on 137. Notable achievements have also been made in achievements made in the health, education, the education sector. The Government is starting and social protection sectors since 2015. In to prioritize ECDE services as reflected in the 2013 the health sector, major investments have been National Policy on Integrated Early Childhood undertaken by the MoH in partnership with DPs, Care and Development, which prioritizes the including the opening of the Queen Mamohato development, health, education, nutrition, Hospital in 2015. Equity in health outcomes is on hygiene, and protection of young children from the right track, with a decline in fertility, maternal,59 preconception to age 5.61 The MoET is currently in neonatal, infant and under-5 mortality along with the process of revising the 1998 Early Childhood their inequity levels. Access to maternal health Care and Development curriculum to reflect services for women has been improving, with national and global policies pertaining to play- improvements in the number of births attended based learning and child development. There are by a health professional and the proportion of signs of improvements in mathematics and science women delivering in a health facility. Improvements education as a result of an innovative technology- are recorded on the 90-90-90 UNAIDS HIV- based pilot that has been implemented in related targets. Lesotho has also advanced in targeted junior secondary schools. The MoET has preventing mother-to-child HIV transmission and successfully piloted the Progressive Mathematics increasing the proportion of HIV+ women accessing Initiative-Progressive Science Initiative (PSI-PMI) treatment. Lesotho is on track to achieve the 2020 model, which has a strong online teacher training tuberculosis eradication milestones (WHO 2020). component. Furthermore, progress is being made Progress in these areas is important for inclusion in strengthening communities’ involvement in and enhancing the quality of life for women overall, the management of schools by establishing and as well as for their contributions to household institutionalizing School-Based Management wealth and overall economic growth. An effective Committees (SBMCs), which consist of key actors and extensive network of Village Health Motivators in the community and at the school level. In this (VHM) and social workers presents an opportunity regard, the MoET is collaborating with the MoSD for community-based nutrition and health service to enhance the role of SBMCs in liaising between delivery.60 58. This section was prepared by the Lesotho Human Development team: Victoria Monchuk (SPJ), Elizabeth Ninan and Jesal Kika (HNP) and Omer Ramses Zang Sidjou and Kajali Goswami (HNP), under the guidance of Aleksandra Posarac, Program Leader for Human Development. The analysis in this chapter is largely drawn from the forthcoming World Bank note “Investing in Human Capital in Lesotho: A Framework for A Coordinated Multi-Sectoral Approach” prepared in 2020/21 by the World Bank’s Human Development team working on the Lesotho Human Development Program. 59. Maternal mortality remains unacceptably high. 60. There are about 10,000 VHWs who offer health services at the community level. 61. An associated five-year Strategic Plan developed to guide the full implementation of the plan has, however, not been updated in recent years. LESOTHO • Systematic Country Diagnostic Update | 87 communities and schools to support children from poor households who are beneficiaries of social protection programs, such as the Orphans and Vulnerable Children Bursary (OVC-B) program, to enroll and stay in school. There are also several existing initiatives and extracurricular programs to support boys and girls to stay in school that can be strengthened and scaled up. These programs and initiatives complement the regular Life Skills Education Program, which is implemented in all secondary schools, by providing a safe space to empower adolescent girls and boys and enable them to make informed decision as they transition into adulthood by giving them relevant information and life-skills. 138. Lesotho can build on the advances made in reforming social protection since the 2015 SCD. First, the NISSA social registry and targeting system has been expanded to cover all 64 rural community councils across the country, and is currently in the process of being rolled out in the urban councils.62 Second, payment systems are in the process of being harmonized by using the same payment cycle and pay points. However, moving to digital payments, which is estimated to be much cheaper and a faster way of reaching households, is needed, especially in urban areas where connectivity and access to mobile phones and payment agents are relatively high. Third, over the past two years, the old age pension (OAP) program has undergone several reforms to improve its transparency, equity, and administrative efficiency. A new Management Information System (MIS) has been built and is almost ready to be launched.63 Fourth, technical work is underway to introduce a way of proxy-means-testing mechanisms for the Tertiary Education Loan Bursary program, to improve the equity of the distribution of bursaries to young people. 62. To date, the Child Grant Program (CGP) exclusively uses NISSA for targeting and the OVC program is in the process of doing so. NISSA was also effectively used as a targeting tool during the 2019/20 drought response when programs used it to identify new households that would benefit from additional temporary support. 63. The system includes automatic and regular cross-check of pensioners data with the civil-servant pensions database and the Ministry of Home Affairs (MoHA) national ID system to ensure that only eligible people receive the pensions. 88 | LESOTHO • Systematic Country Diagnostic Update 3.2.2. Priority policy areas to strengthen human capital and service delivery 139. Once young people leave school, only a small particularly young children in their first 1,000 days fraction moves into higher levels of education, to break the intergenerational cycle of malnutrition despite the strong correlation between education and poor health and contribute to Lesotho’s attainment and labor market outcomes. Investing human capital.64 In addition, strengthening the in human capital through multiple interventions institutional framework to improve coordination is critical throughout the lifecycle to maximize and collaboration between multiple ministries the life-time potential of individuals and improve involved in the delivery of different services for positive intergenerational effects, and at the children and pregnant mothers is key. A single aggregate level boost economic productivity and coordinating agency would ensure there are growth opportunities. At the population level, more programmatic approaches to address ECDE sound investments in reproductive health, health across human development sectors. It is important systems, education, social protection, and water that interventions are inclusive of children in rural, and sanitation can trigger a demographic dividend poor communities.65 that can contribute to a longer period of growth (Bruni, Rigolini and Troiano 2016). To maximize the 141. Interventions for school age children would need efficacy of resources invested in these programs, to support children from poor households to stay a strong harmonization and coordination of in school and to ensure that children are learning interventions across sectors is a must. Co- in school. This would entail, implementing location of human development initiatives at the interventions to ensure better targeting and local level and building on existing initiatives coverage of the OVC-Bursary program; providing that support greater linkages and coordination as part of the CGP a bonus payment for children between multiple implementing entities are key from poor households who transition from in strengthening human capital. This SCD Update primary school to junior secondary school; and argues for an individual-centered and holistic supporting young Basotho who face multiple service delivery approach focusing on three stages deprivations. In addition to keeping children in of an individual’s lifecycle: (i) early childhood; (ii) school, it is important to ensure that children are school age; and (iii) youth to adulthood. While learning in school. As a priority, interventions to it focuses on three main sectors—health and strengthen Early Grade Reading (EGR) and Early nutrition, education, and social protection—access Grade Mathematics (EGM) programs are key to other basic infrastructure services, such as to support the mastery of foundational skills of water and sanitation, electricity, housing, and literacy and numeracy in early grades (Grades roads, is important. 1-4) of primary school. This requires a structured pedagogy approach to teaching and learning, 140. Interventions in early childhood, with an including: (i) teaching in mother-tongue in early emphasis on expanding access to good quality grades before transitioning to English around ECCD services, especially for children in rural, Grade 4; (ii) teaching curricula that are relevant poor communities, are important for laying for today’s society including digital literacy skills; a foundation for improved human capital (iii) training and supporting teachers inside and outcomes. This requires well-targeted investments outside the classroom, to teach children with the to improve the nutrition status of all Basotho, most appropriate pedagogy; (iv) ensuring that all 64. Some of these investments include: (i) mobilizing the VHWs program’s platform to scale up community-based health and nutrition services provision to adolescents, mothers, and children; (ii) further addressing the adolescent health gap by implementing counseling and health service delivery programs in formal and non-formal education centers; (iii) extending the Health Management Information System to include community-based health and nutrition information; (iv) conducting Social Behavior Change Communication campaigns on malnutrition and NCD risk factors; (v) ensuring that mothers/caregivers of children from birth to age 3 in poor households receive adequate social assistance support; and (vi) advocating for an extra levy on soft drinks and tobacco. 65. This entails: (i) additional allocation of financing to this subsector, which could mean additional financing to the education sector, or more realistically, intra-sectoral reallocation of financing from tertiary education—which mainly benefits the non-poor—to ECCD; (ii) rolling out the new integrated ECCD curriculum; (iii) collecting information on child development and learning outcomes on a regular basis to monitor progress; (iv) adequately regulating ECCD service provision by public and private providers; and (v) developing a financing and expansion strategy for ECCD service provision that includes expansion in the most cost-effective manner including through PPPs. LESOTHO • Systematic Country Diagnostic Update | 89 children have access to age-appropriate learning to productive activities, economic inclusion, and materials; and (v) assessing student performance link the CGP to better invest in human capital; periodically, and adjusting teacher training and (ii) finalizing ongoing harmonization of targeting, lesson plans to address areas where there are payment, management information systems of the gaps in learning. In addition, it requires improving Public Assistance (PA) program, the OVC-Bursary, performance, management, and accountability and the CGP; (iii) reforming the management of teachers through a better MIS for teachers to information system, especially to incorporate the track their training, deployment, and utilization in PA and build a unified system that can support all school (absenteeism rates and time they teach social assistance programs, including the OAP; in class), as well as their content knowledge and (iv) investing in integrated registration platforms, pedagogical skills. and building on national IDs as identifiers to help further integrate social assistance programs; 142. Interventions from youth to adulthood are (v) harmonizing benefit levels between social important for strengthening the skills and assistance programs to increase the poverty- employability of the youth, preparing them for reducing impact of poverty-targeted programs; productive adult life. This means the education and (vi) shifting payments from cash to digital and training system needs to provide for different payment (including mobile money). routes into productive adult life, including tertiary education, and technical and vocational 144. The negative impact of the COVID-19 pandemic education and training (TVET), as well as a variety on human capital outcomes, which were already of non-formal immediately employment-oriented low before the pandemic, means recovery education and training formats. Interventions to efforts need to restore and protect human increase access to these education and training capital advancements, particularly among the programs, especially for the poor, are a priority, poor and the vulnerable. In parallel, it will be as is improving the quality and relevance of important to bolster service delivery systems training programs. It includes addressing the skills that can build, protect, and utilize human capital mismatches between training programs, and the in ways that position human capital for economic needs of the labor market by forging stronger recovery, and promote resilient and inclusive partnerships with the private sector and ensuring development. Given the adverse fiscal impacts of more on-the-job training through apprenticeships the pandemic, recovery requires strengthening and internships. Aside from developing the right the adequacy, efficiency, and sustainability of technical skills required by the labor market, public spending toward human capital outcomes. education and training programs also need to Immediate priorities include restoring health, build digital skills, entrepreneurship or business ensuring all students return to schools after they skills and other non-cognitive skills. As with the were closed due to the COVID-19 pandemic, ECCD subsector, it is also important to develop a recovering learning losses, and supporting labor comprehensive data system for TVET and tertiary income opportunities. Going forward, service education providers in order to quality assure and delivery systems would have to be reimagined regulate training programs. Improving access to through digitization and strengthening institutions these programs by applying the poverty targeting for preparedness, coordination, financing, and system for Tertiary Bursaries to make the system service delivery. more pro-poor is also critical. Furthermore, Active Labor Market Programs need to be more 145. It is important that the policy responses to coordinated and holistic, targeting at vulnerable improve human capital and service delivery youth and addressing both the demand and supply address widening and persistent differences in side of the labor market. living standards between areas of Lesotho. Many Basotho continue to have poor access to basic 143. Social protection services cut across the three services and infrastructure, partly due to poor lifecycle stages. Social program harmonization spatial planning and development. Access to basic and system integration need to continue to services and resources remains much weaker in improve to support human capital outcomes. remote and rural areas. This results in disparities This would entail: (i) introducing “Cash Plus” in access to economic opportunities. Interventions measures to link social assistance beneficiaries to strengthen human capital through a lifecycle 90 | LESOTHO • Systematic Country Diagnostic Update approach, therefore, need to be complemented of production from the geography of welfare or with the provision of basic services to poor living standards. That is, economic activity and households in rural areas of Lesotho, including growth can remain substantially concentrated in the provision of universal access to safe water, urban areas. However, effort is needed to ensure sanitation and hygiene (WASH), and access to all Basotho have access to opportunities and a basic housing, energy and transportation. This will decent standard of living. help to equalize opportunities. 147. Examples from other countries could inform such 146. Thus, improving human capital and service an approach. For example, the Republic of Korea delivery needs to be embedded in a broader had quite substantial economic concentration in approach to territorial development that seeks Seoul, while investing in world-class human capital to improve living standards in lagging rural and basic services across the country. This meant and mountainous areas where the poor tend that everyone enjoyed good living standards and, to be concentrated. As argued in the World with strong human capital, could also more easily Development Report 2009 Reshaping Economic migrate domestically to access opportunities. In Geography leaving no area behind is not equal Argentina, firms are tightly concentrated in the to “doing the same everywhere.” Rather, such capital and capital region, but provinces have an approach might call for heterogeneity of converged over time in key human outcomes policy instruments given heterogeneity across and service delivery, such as primary completion areas. That is, policies should seek unity, NOT rates. In France, from 1982 to 2002, production uniformity. In the case of Lesotho and consistent concentrated in certain regions with stronger with WDR 2009, this means: (i) there is no agglomeration economies, but strong progressive need to fight density, rather agglomeration of tax and transfer policies, captured these gains and economic production in leading areas can be redistributed them to less advantaged people, harnessed to benefit both firms and households with the effect of equalizing disposable incomes through job creation and economic growth; and across regions even while production remained (ii) de-linking the geographies of production and concentrated. Bhutan has begun to introduce living standards is key to promoting equity; (iii) more spatially differentiated national planning to integrating leading and lagging places through achieve convergence in living standards across institutions that promote mobility, augmented by regions. This is being done through initiatives spatially connective infrastructure, is important. such as the National Human Settlements Strategy Overall, an effective approach to territorial 2017, which breaks down key measures of service development is to delink the lumpy geography delivery and outcomes across space. LESOTHO • Systematic Country Diagnostic Update | 91 3.3. Strengthening Climate Risk Management and Resilience Lesotho, being highly vulnerable to frequent and severe weather events, particularly flooding and drought, is exposed to a myriad of uninsured climatic risks that threaten livelihoods and the economy, and have real impacts on poverty and inequality. The COVID-19 pandemic is set to compound these impacts as it is unfolding in a context in which the country is still addressing the recurring challenges posed by frequent droughts and floods. The prevalence of shocks with large impacts on welfare is higher in rural areas, resulting in poorer households being exposed to greater risk. Strengthening climate risk management and resilience is therefore important for inclusive growth and poverty reduction. This will require a comprehensive approach that promotes: physical resilience to reduce risk and prevent disasters; financial resilience to minimize the financial impact of shocks on the fiscal balance, subnational governments, households, and businesses; and social resilience to help households and society cope with shocks. In addition, building institutional capacity to enhance resilience to climate change, including strengthening the capacity of relevant ministries in risk and vulnerability assessment and supporting the Disaster Management Agency, and other relevant ministries in disaster preparedness and response, is important. 3.3.1. Opportunities to strengthen climate risk management and resilience 148. Progress has been made in developing various 149. Progress has been made in advancing disaster bills, polices, strategies and plans to strengthen risk financing. The World Bank supported and disaster risk management. Through the support helped conduct a disaster risk financing diagnostic of DPs, Lesotho has been updating several with the aim of identifying options to strengthen strategic documents, such as the Disaster Risk the country’s financial resilience to disasters (World Management Bill and an Early Warning Strategy, Bank 2019a). It identifies some of the next important that are critical for improving overall national interventions to include the development of a level disaster risk management (DRM). A National disaster rick financing (DRF) strategy to improve Resilience Strategic Framework (NRSF) has the timeliness of resource mobilization and the been developed. The Disaster Management strengthening of the budget execution system. It also Agency (DMA) continues to develop multi-hazard argues that Lesotho could explore the feasibility of contingency plans targeting a variety of hazards agricultural insurance, given its frequent exposure threatening the country to improve planning and to droughts. Moreover, the ability of households to coordination. withstand shocks is limited, and direct payments (social transfers) may be needed.66 66. According to Findex 2017, only 17 percent of the population in Lesotho report savings as a potential source of emergency funds. This proportion is much lower for those in the bottom 40 percent of the income distribution, of whom only 9 percent can mobilize savings for emergencies. 92 | LESOTHO • Systematic Country Diagnostic Update 150. The CBL has achieved significant progress Large agriculture projects have also been in maintaining the resilience of the financial implemented. An institutional framework for sector. Notable achievements have been made integrated catchment management (ICM) has been by the CBL in adopting the Basel Core Principles. adopted to protect and sustainably manage the Amendment of the Financial Institutions Act country’s water-producing landscapes and reduce is currently still pending. In addition, the CBL the impact of droughts. In social protection, existing is also in the process of implementation of programs were expanded in response to the 2015 the FSB Key Attributes of Effective Resolution drought emergency, during which about 447,000 Regimes, including the development of guidelines people were classified as being food insecure. for recovery and resolution, as well as the Similar programs were also utilized to respond Deposit Protection Policy and Bill. Cross-border to the 2019 drought. Overall, progress made in arrangements between the CBL and the South these three sectors was critical for improving African Reserve Bank (SARB) are important, since DRM in Lesotho. There is an opportunity to better most of the banks in Lesotho are subsidiaries of understand the specific vulnerabilities of rural and South African banks. urban areas, and develop a comprehensive land management policy that can support sustainable 151. Several initiatives have worked to strengthen urbanization and agricultural productivity. hydro-metrological services in Lesotho. The Lesotho Metrological Services (LMS) has, in 153. Development of renewable energy resources partnership with DPs, developed a long-term capital can simultaneously contribute to mitigation and investment and operational improvement roadmap adaptation to climate change, while also increasing by prioritizing expansion of selected observational energy security. Due to the highly sensitive aspect networks and fostering partnership with regional of current electricity supply to climate change, and international organizations. The Southern Africa for both local and imported electricity, the use of Severe Weather Forecast Demonstration Project abundant solar and wind resources would alleviate (SWFDP) and the Southern Africa Region Flash the negative impact of droughts on the energy Flood Guidance (SARFFG) systems implemented system in the future, as these renewable resources by the World Meteorological Organization (WMO) are independent from water resources, in addition and USAID have resulted in the support of regional- to being economically viable. The decentralized based systems designed to provide the LMS with characteristic of solar photovoltaic technology— the necessary data and information needed for and its dispatchability thanks to battery storage— timely and effective warnings of severe events.67 makes this solution even more attractive for both LMS is also developing a five-year climate change industrial and rural development. Development of adaptation early warning project with partial hydropower generation could also contribute to support from the Global Environment Facility (GEF). the mitigation of climate risks by allowing the use of Strengthening the metrological and hydrological cleaner energy and increasing the amount of water services, and the general technical capacity of the reservoirs in country for more climate-resilient Government to generate, analyze and use climate- irrigation. risk datasets is important. 154. The COVID-19 pandemic provides an 152. Given that drought has been one of the main opportunity to improve coordination for disaster natural disasters in the past few years, progress risk management and climate resilience. in sectors such as agriculture, social protection The pandemic also presents an opportunity and water has been critical in managing climate- to accelerate certain DRM actions, including related natural disasters. The Lesotho Climate coordination of emergency operations. There is Smart Investment Plan was developed in 2019, now a greater need for the DMA and the MoH prioritizing key policy actions and investments to work closely together in responding to the toward building a productive, climate-resilient, pandemic. Strengthening coordination between and low-emissions agriculture sector in Lesotho.68 the DRM agencies in the region will also be critical. 67. https://www.mdpi.com/2073-4441/8/6/258 68. http://documents.worldbank.org/curated/en/847551575647928833/Full-Report LESOTHO • Systematic Country Diagnostic Update | 93 3.3.2. Priority policy areas to strengthen climate risk management and resilience 155. Disasters have a disproportionate effect on small collection, disaster risk monitoring procedures states such as Lesotho, making a comprehensive weather forecasting systems, flood and drought approach to resilience imperative. Such an management, and monitoring natural resources; approach would have three broad pillars: (i) (iii) piloting the mainstreaming sustainable physical resilience that focuses on reducing risk landscape management across catchments; and and preventing disasters; (ii) financial resilience (iv) adapting to the impacts of climate change and that involves pre-arranged predictable funding variability by mainstreaming the Climate Change when disasters strike to protect the fiscal Policy 2017–2027. balance, subnational governments, households, and businesses; and (iii) social resilience that 157. Promote climate-smart agriculture. Promoting entails helping households and society cope with climate-smart agriculture is important because shocks. In addition, across these three broad agriculture, especially subsistence agriculture, pillars, building institutional capacity to enhance which is a source of livelihoods for poor rural resilience to climate change is important. households, is highly susceptible to climate change impacts. The  Lesotho Climate-Smart Agriculture Physical resilience: Strengthen investments Investment Plan  (CSAIP) (World Bank 2019c) offers two complementary pathways for scaling for comprehensive disaster risk management, up climate-smart agriculture (CSA). The first is the including sustainable urban development commercialization pathway that entails: focusing on commodities for which the country has a clear 156. Strengthen the management of water systems comparative advantage, such as: horticulture, and landscapes. Improving national water potatoes, poultry, and aquaculture; developing resources infrastructure and increasing water the country’s irrigation to its full potential; and security will be pivotal to enhancing resilience to developing linkages that connect smallholders extreme weather events. In the short term, this with both export and domestic markets. The entails: (i) enacting a National Irrigation Policy second pathway is the resilient landscape pathway based on the findings and recommendations that combines modern scientific practices such of the National Irrigation Master Plan (NIMP); as improved crop varieties with the traditional (ii) strengthening institutional coordination and Machobane farming system—a farming system that capacity for natural resources management (NRM); combines the use of crop rotation, relay cropping, (iii) improving the quality of ecosystem services and intercropping practices with the application of data through natural capital accounting to better manure and plant ash to conserve soil moisture understand health of water services and to inform and replenish soil fertility. decision-making; (iv) implementing public works programs and community-driven development 158. Build climate-resilient infrastructure. Emphasis (CDD) opportunities to promote job-intensive on building climate-resilient infrastructure is growth to support livelihoods, prevent or mitigate important to maintain all-year access to the road future crises, and build back better, greener and network and other infrastructure services, and with more resilience; (v) using the country’s National reduce the cost of frequent maintenance. Extreme Determined Contributions (NDC) implementation flooding continues to undermine infrastructure plan to identify implementation-ready projects and development gains, resulting in extensive damage programs for public works and CDD programs; and impeding access to socioeconomic services to and (vi) mainstreaming ICM and climate resilience a large segment of the rural population. Flooding considerations across sectors impacting water and other weather events have led to significant systems. In the medium to long term, key reform maintenance backlogs, with 42 percent of paved priorities include: (i) developing an integrated NRM roads and 85 percent of gravel roads in ‘poor’ approach to promote more inclusive, resilient, and or ‘very poor’ condition. The water supply and sustainable development; (ii) mitigating climate sanitation sector has also been widely affected change effects by strengthening the national by frequent flooding, causing frequent uptick of hydro-meteorological system, village-level data water-borne diseases due to water contamination. 94 | LESOTHO • Systematic Country Diagnostic Update Financial resilience: Improve financial resilience to disasters 69 159. Develop and adopt a national Disaster Risk 160. Increase the amount and improve the timeliness Financing (DRF) strategy. This would formalize of resources mobilized for disasters, through the policy priorities for financing disaster (i) a dedicated contingency fund with clear rules response, allowing Lesotho to define its priorities for replenishment and disbursement targeted at regarding financial planning for disaster response recurrent natural disasters, building on the existing and options to strengthen the Government’s contingency funds; (ii) access to a contingent line of financial resilience. By allowing the Government to credit; and (iii) purchase of sovereign catastrophe identify and plan where resources for responding risk insurance to cover severe disasters. The GoL to future disasters will come from, a national DRF has begun exploratory discussions with the African strategy would help to reduce financial distress, Risk Capacity on sovereign insurance solutions. and ultimately reduce the human and economic cost of disasters. It would set a legal framework 161. Strengthen budget execution systems for targeted to strengthen the financial management of support to affected households, including through disaster risks by outlining an optimal combination strong operational rules for the disbursement of of risk financing instruments, including both risk disaster risk finance instruments. Together with retention and risk transfer instruments, making the DMA, the MoF could lead the development response to different types of disasters more of the operational rules for disaster risk finance cost-effective. There is a  wide array of financial instruments, such as a disaster-dedicated protection policies and instruments  to consider contingency funds and Catastrophe Deferred Draw in developing a national DRF strategy, including Down Option (CAT-DDO). sovereign risk finance, social protection programs, 162. Strengthen the crisis preparedness and deposit as well as agriculture and risk insurance programs. insurance system for the financial sector. To do In particular, and in the context of limited fiscal this, the CBL should: (i) further implement Basel space, developing risk transfer mechanisms and 3 requirements for the banking sector and further insurance products would be important. Exploring strengthen cross border cooperation with the the feasibility of agricultural insurance as part of a SARB; (ii) implement the FSB Key Attributes of broader agriculture risk management and finance Effective Resolution Regimes; and (iii) establish agenda would protect farmers and herders against a deposit insurance fund to make the financial disasters through a public-private partnership with sector more resilient and protect deposit-takers. domestic insurance companies. Social resilience: Improve shock-responsiveness of social protection to deliver targeted early assistance to poor and vulnerable households after disasters 163. Improve the shock-responsiveness of social financing mechanism. This can be achieved protection. While current fiscal pressures pose through: (i) developing a shock-responsiveness a challenge to expanding social protection in framework for the overall social protection system, response to shocks, this remains a critical tool including a scalable/contingency financing to assist poor and vulnerable households to mechanism to more quickly mobilize resources in manage risks. Thus, it is recommended that times of shocks; (ii) supporting public assistance Lesotho leverages the existing social protection and public works programs that can be used to program systems to build a framework for how address short-term shock-response programs; social protection programs scale up and down to and (iii) a more responsive system that builds respond to shocks including developing a flexible contingency funding mechanisms to more quickly 69. The discussion in this subsection is drawn from the 2019 Lesotho Disaster Risk Financing Diagnostic, which can be accessed via the following link: https://openknowledge.worldbank.org/handle/10986/33141 LESOTHO • Systematic Country Diagnostic Update | 95 mobilize resources in times of shocks. Lesotho’s service providers, and new payment products and National Social Protection Strategy recognizes services (fintech); (iii) optimizing the distribution the need to strengthen shock responsive social network of financial institutions, for example, protection and, in the past, existing programs have bank agents and payment agents, by harmonizing been scaled up in response to disasters.70 its regulatory requirements, and expanding the usage of merchant payments; (iv) leveraging the 164. Digitize government-to-person (G2P) payments implementation of the National Identity Card and as a big part of strengthening the social simplifying customer due diligence requirements; system’s shock-responsiveness. This requires: (v) adopting a Financial Consumer Protection Legal (i) further development of the National Payment Framework and strengthening its supervisory Infrastructure that addresses the lack of framework to address high and opaque fee interoperability between different financial service structures by financial institutions that are stifling providers; (ii) enhancing the National Payment digitization; and (vi) developing and implementing System Act and implementing regulation (e.g., financial and digital education programs. an oversight regulation) to allow new payment 70. For example, the Child Grant Program has been used to provide additional assistance to existing beneficiaries (vertical scale-up) during the El Niño induced drought in 2015/16. 96 | LESOTHO • Systematic Country Diagnostic Update Strengthen institutional capacity for enhancing climate risk management and resilience 165. Develop and adapt a national Disaster Risk 166. Strengthen meteorological services. Establishing Management Policy and Strategy. Such a policy a functional early warning (and advisory) system and strategy would need to be comprehensive and that is community-based but informed by data and harmonize institutional and regulatory framework, products flowing from especially the hydromet as well as other sectoral policies, strategies, and value chain will be critical for building resilience in plans. Disaster Risk Management Act, policy and Lesotho. Consistent with meteorological services draft strategy exist, but need to be updated and in the Southern Africa region and around the harmonized. Greater focus on harmonization of world, adapting to the rapidly evolving way in all polices related to resilience and urbanization which national agencies operate, collaborate, will be critical to ensure effectiveness, including and use technologies is important. The sector alignment of DRM strategic documents with sector is highly complex, with high capital and running polices such as agriculture, water resources and costs required to run the state-of-the-art models hydro-meteorological services. It will be critical to and satellite systems that are needed to produce finalize, approve and implement these documents, weather and climate projections. Hence, there is including the draft Disaster Risk Management a need to have a robust strategy that prioritizes a Bill (drafted in 2020), the draft Disaster Risk focus on developing products and services that Management Strategy, the draft Early Warning are at the local level and are complemented by System Strategy, and the National Disaster Risk strong collaboration with the global community for Financing Strategy. The second set of documents the generation of information. The four strategic that are critical to finalize, approve, and implement areas that should be prioritized for strengthening are the construction industry policy, construction of meteorological services are: (i) providing standards, urban development plans, housing user-orientated weather, climate and related action plans, and a sectional titles bill. These environmental services to support the development set of policies and plans will ensure appropriate of fit-for-purpose services and products, guided management of the built environment. To ensure by a national framework for climate services; (ii) well-managed urbanization and resilience, infrastructure and information systems to streamline additional policies need to be drafted in the and modernize the service; (iii) partnership and medium to long term, including: (i) a National cooperation with the relevant agencies within the Hydro-Meteorological Policy; (ii) a National Urban country as a basis for developing fit-for-purpose Policy (NUP); (iii) a National Spatial Strategy (NSS); products. In addition, strong partnerships with and (iv) land, infrastructure and urban development international and regional organizations, the private framework. Well-aligned and timely updated sector and academia would help to leverage the vast polices will provide more opportunities for effective amounts of data and information being generated implementation. Finally, considering the COVID-19 by the various organizations involved; and (iv) pandemic, policies that will enable expansion of introducing a quality management system will strategic basic services and programs, including provide confidence to end-users on the information WASH facilities, targeted social services and labor- generated. Developing and implementing a intensive infrastructure development in cities, as sustainable financial and human resources model well as in remote districts, will be critical to easing to enable the LMS to fulfil its mandate will be central the immediate shock from the pandemic. to Lesotho’s ability to manage climate shocks. LESOTHO • Systematic Country Diagnostic Update | 97 3.4. Overarching Constraint: Bridging Public Sector Implementation Gaps Lesotho’s slow progress toward its development goals is partly due to public sector implementation gaps, which reduce the efficiency and effectiveness of public policies. These gaps are mainly the result of foundational constraints related to the fragile political environment, deteriorating quality of governance and economic reliance on external resources, which contribute to high levels of public spending and weak policy ownership. Overcoming implementation gaps is key to addressing fundamental structural challenges and thus accelerating progress. To do this, it is recommended that Lesotho: (i) enhances the capacity and performance of the public sector; (ii) improves commitment, coordination, and cooperation as core functions of institutions that are needed to accelerate development; (iii) strengthens monitoring and evaluation of implementation; and (iv) strengthens public financial accountability. 167. The preceding chapters have shown that progress sector investment levels rank among the highest in addressing the constraints that were identified in the world. This raises the following questions: in the 2015 SCD has been limited, resulting in Why do Lesotho’s development outcomes remain slow progress on development outcomes. The relatively poor despite high public spending, and poor outcomes are not primarily from a lack of the significant financial and technical support that spending: investment levels are high, with most the country receives from the DP community? What of this investment led by government. Public must be done differently to accelerate progress? 98 | LESOTHO • Systematic Country Diagnostic Update 3.4.1. Lesotho’s implementation challenge: a case of isomorphic mimicry? 168. This SCD Update argues that isomorphic mimicry 171. Implementation failures are evident in the partly explains the slow progress toward building legislative processes. An example is the lack of real capability and improving development well-functioning legislative processes that impedes outcomes, despite high levels of public spending the private sector development agenda and and significant support from development handicaps the GoL’s reform initiatives. Parliament, partners. Isomorphic mimicry is the tendency and the Ministry of Law and Constitutional of governments to mimic other governments’ Development (MoLCD) are understaffed and successes, replicating processes, systems, and decapacitated, impeding both horizontal and even products of ‘best practice’ examples (Andrews, sectoral reforms in the private and financial Pritchett and Woolcock 2017). This mimicry often sectors, as well as all other sectors. Another conflates form and function, leading to a situation example of implementation failure in the legislative where ‘looks like’ substitutes for ‘does’, i.e., processes and legal framework is regarding laws governments may appear more capable after the to promote gender equality. Despite having made mimicry but are in fact not more capable. strides in creating an enabling legal framework for gender equality, inconsistent implementation of 169. Lesotho has elements that render it susceptible gender-progressive laws and policies is a major to isomorphic mimicry. For instance, heavy barrier. The process of harmonizing common and reliance on DP funding makes Lesotho susceptible customary laws is particularly lengthy, and it is to (external) agenda conformity, resulting in weak unclear when it will be completed. In addition, the ownership of the reforms needed for economic Ministry of Gender, Youth, Sports and Recreation development, as well as heavy reliance on (MoGYSR), which is responsible for coordinating DPs for basic service delivery. Furthermore, across ministries, faces capacity and financial Lesotho exhibits characteristics of a state, limitations to implementing and monitoring of with laws, policies, and institutions (form), but actions related to gender equality. these do not always efficiently and effectively deliver socioeconomic outcomes (function). The 172. The way the GoL has handled the COVID-19 laws, policies and regulations are either not pandemic is another illustration of implemented, or distorted. implementation gaps in the public sector. The response plan was formulated late, few actions 170. Several illustrations of isomorphic mimicry have been implemented, and M&E of progress has exist in Lesotho. For example, there is a public been lacking. In fact, the pandemic has magnified investment management (PIM) system, but the the urgency of strengthening the social compact budget includes capital investments and PPP to support an integrated collaborative response in projects that are not assessed by the system. In terms of both containment of the pandemic and the FY2020/21 budget, only 77 percent of new recovery efforts. The pandemic has underscored capital investment projects were appraised by the the importance of addressing coordination failures, Public Sector Investment Committee (PSIC) and and promoting open government principles to selected from the Public Sector Investment Plan bolster the trust between all levels of government, (PSIP) aligned with NSDP II.71 A recently upgraded business, and citizens, and subsequently support IFMIS now supports improvements in PFM, but better implementation. key processes take place outside of the system and the number of unreconciled transactions continues to grow. 71. Ministry of Finance PFMR Secretariat reporting on Public Sector Modernization Project results framework. LESOTHO • Systematic Country Diagnostic Update | 99 3.4.2. Foundational factors contributing to the implementation challenge Distorted incentives in the public sector 173. Lesotho’s political settlement—the formal and than one year. (iii) Rising politicization of the civil informal systems for managing political and service is leading to the replacement of skilled economic competition—is associated with short- senior civil servants with politicians and officials termism in government, thereby undermining of varying degrees of competency and interest effective policy design and implementation, in policy. This is most apparent through the resulting in implementation gaps. Lesotho’s replacement of permanent secretaries, hitherto political system notionally accepts that elections senior civil servants, with politically appointed are the only legitimate way to gain political principal secretaries since the first coalition power, largely due to external pressure from government in 2012. Principal secretaries often other countries in the region and the international have political ambitions and are subject to the community, rather than through a long-standing and same high level of turnover as ministers. These demonstrated internal commitment to democracy. challenges are acknowledged in NSDP II, which The governance system is unpredictable because states that “the review of NSDP I revealed that governing coalitions can collapse when alternative one of the key factors that led to the sub-optimal viable ones emerge. The settlement has led to implementation of NSDP I was the chronic political high levels of political volatility, a concentration of uncertainty and the politicization of civil service economic opportunity and political power in the management.” hands of a very small elite. Political volatility has been a consistent feature of Lesotho’s political 175. The poor and deteriorating quality of governance system since 2012. The country’s Mixed Member and political instability contribute to a challenging Proportional (MMP)72 system has low thresholds business enabling environment. Nearly half of all for parties to gain representation in parliament and respondents on the World Economic Forum’s 2017 dissolving governments, creating strong incentives Executive Opinion Survey claimed that issues such for political entrepreneurs to form new parties and as corruption, political instability, and government push for votes of no confidence. The result, since inefficiency were the most problematic issues they 2012, has been a succession of unstable coalition faced. With the GoL being the largest purchaser governments. Political fragmentation exacerbates of goods and services from Lesotho’s private existing challenges in achieving more inclusive sector, cash shortages, late payments and arrears development, as it creates strong incentives to undermine business performance and discourage seek short-term political gains and encourages investment. opposition parties to exploit fissures within the The strong influence of external actors in governing coalition. the political and economic system results in a lack of accountability and weak policy 174. The damaging impact of political fragmentation ownership is evident in the increase in the number of political appointees and their rapid replacement, 176. Lesotho is heavily dependent on external exacerbating implementation gaps. Three actors, especially South Africa, a much larger changes are particularly clear: (i) The number of and wealthier country that surrounds Lesotho. ministers and deputy ministers (DMs) has risen This dependence is reflected in heavy reliance from 23 prior to the first coalition government to on SACU revenues, migration of many Basotho 35 under the current administration. (ii) Constant to find employment, access to good transport changes in the composition of the cabinet, infrastructure by textile exporters, and access to including reshuffles and replacements of individual essential health care and other critical services ministers and DMs. Many ministers serve for less not available in Lesotho. However, heavy reliance 72. Borrowed from New Zealand (Tsikoane et al. 2007), the MMP system is a hybrid of proportional representation that creates multi-member and single-member districts. 100 | LESOTHO • Systematic Country Diagnostic Update on South Africa also creates a disincentive for the best-practice models that may not be fit-for- efficient delivery of public services within Lesotho. purpose because they make Lesotho susceptible The elite and many political leaders can access to (external) agenda conformity. This explains, at better quality services (e.g., education and health) least in part, why progress toward building real in South Africa, with the result that those with the capability and improving development outcomes most control over policy-making do not face the has been slow, despite high public spending. In consequences of their decisions due to external hindsight, the focus of many of these interventions support systems. has been on the form, while overlooking the function, ultimately resulting in public sector 177. Funding from DPs is critical in filling some of the implementation gaps and a lack of sustainability gaps in service delivery and providing significant of the investments.73 Also, it is associated with technical assistance to the public sector; weak policy ownership and allows external actors however, reliance on external resource flows wide latitude in the process, with civil servants has resulted in high levels of public spending, encountering limited pressure to implement beyond what would be possible if Lesotho relied formal policies due to lack of accountability, on the domestic mobilization of resources. Lack rapid turnover of politically appointed officials, of discipline in the management of Lesotho’s and limited capacities and resources. In addition, public finances—ranging from leakage, manual external dependence is likely to have resulted in accounting, extrabudgetary expenditure, arrears, citizens of Lesotho being less likely to participate and underperforming government investments— in their political system.74 While protests occur, has impeded the country’s ability to deliver on its these focus on specific issues, such as wages in policy commitments without significant intervention the textile sector, not on broader issues regarding by external actors. Furthermore, influence by governance and development. external actors encourages the proliferation of 3.4.3. Opportunities to bridge public sector implementation gaps 178. In bridging public sector implementation gaps, 179. The National ID (NID) and Civil Registry system Lesotho has an opportunity to build on progress has the potential to promote more efficient, made in the recent past. There are positive transparent, and citizen-centered service recent developments in Lesotho that can serve delivery. Lesotho has made significant progress as a basis for learning about what works well implementing its NID system and extending and might be used to secure further gains. To coverage to the country’s population (85 percent demonstrate, this section highlights three such of the eligible population), providing significant pockets of effectiveness: (i) the Ministry of Home opportunities to promote more efficient, Affairs (MoHA) Department of National Identity transparent, and citizen-centered service delivery and Civil Registry (NICR); (ii) the Lesotho Highlands in both the public and private sectors. There Development Authority (LHDA); and (iii) the U.S. is significant demand for automated identity Government’s African Growth and Opportunity Act verification and authentication from both the (AGOA). Initial observations suggest a common private and public sectors. The MoHA is looking feature across these pockets of effectiveness is to strengthen the legal and regulatory framework that they contain individuals with a combination for data-sharing and privacy. The Data Protection of technical skills, dedication, and an ability to Act 2011 is the prevailing law related to data manage the political authorizing environment. 73. An example is the dichotomy that exists in Lesotho’s health sector between DP-funded areas, mainly related to HIV and TB, and areas lacking DP support. Performance in the former is generally competent because the interventions are driven by external actors, while outcomes for government-owned interventions are not commensurate with investment. 74. For example, the number of votes cast as a share of the eligible population has fallen steadily by about 20 percent from 1998 to 2017 (Independent Electoral Commission of Lesotho). LESOTHO • Systematic Country Diagnostic Update | 101 privacy, while the draft National Identity Cards combination of government interest in reform (Amendment) Bill 2019 is still under development. and clear evidence of corruption may be difficult As demand for linkages to the NIR that facilitate to replicate, it demonstrates that the GoL has the identity verification and authentication grows, capacity to fight corruption and manage complex strengthening safeguards for data protection and projects effectively. privacy will also be critical in maintaining trust in the NID system and its use in service delivery. There 181. AGOA has not only facilitated the development is scope to further leverage the NICR database to of the textile industry in Lesotho but has also facilitate verification of the identity of beneficiaries been a catalyst in improving governance more that open an account at a financial institution, broadly. While the garment industry existed and the burden of proof of low-income/low-risk prior to AGOA, primarily due to Taiwanese firms customers could be reduced. While significant relocating to Lesotho from South Africa to avoid progress has been made on the NICR form, in order apartheid sanctions in the 1980s, the sector to cover the entire population additional steps are expanded rapidly after becoming eligible for the required to address coverage gaps among those trade agreement. By July 2001, employment in living in the most remote rural areas, and among the sector had expanded from around 10,000 in members of marginalized and vulnerable groups 2000 to 23,500, and currently employs around who may have mobility constraints, are socially 40,000 people. AGOA also provides thousands of excluded, or lack the supporting documentation additional indirect jobs from goods and services needed to obtain an ID. surrounding textile exports. Between 2007 and 2018, exports to the United States under AGOA 180. The Lesotho Highlands Development Authority accounted for between 30 and 50 percent of the (LHDA) is one key pocket of effectiveness with country’s total exports. Furthermore, AGOA has demonstrated development impact. Despite an contributed to improving governance because initial lack of familiarity with building complex dams one of the requirements for continued AGOA and water delivery systems, and initial governance eligibility is that countries must make progress on challenges, the LHDA—an independent body, a range of governance criteria, such as creating with its own Board appointed by the Lesotho an enabling business environment, adherence to Highlands Water Commission (LHWC)—effectively the rule of law, and the protection of human rights. oversees the construction of high-quality dams There is evidence that the threat of losing AGOA and water delivery systems to South Africa. It eligibility resulted in the GoL making significant implements the Lesotho Highlands Water Project commitments to political reform, such as agreeing (LHWP)—one of Africa’s largest and most complex to continue to engage in the dialogue led by SADC civil engineering projects—on behalf of the GoL designed to improve political stability, limit the through the 1986 Treaty on the Lesotho Highlands role of the military in politics, and better adhere Water Project between South Africa and Lesotho. to the rule of law. The pressure from employers, The LHDA is also the main generator of electricity employees, civil society,75 foreign investors, and for the country. It is arguably now one of the best DPs played a central role in ensuring that the GoL governed public sector agencies in Lesotho and met AGOA eligibility requirements during this time a major public investment management success. period. High-level corruption occurred during the initial phase of the LHWP, but the corruption was 182. There is an opportunity to advance citizen exposed and successfully addressed through the engagement to enhance accountability through courts. Following the exposure of the corruption, M&E in public sector implementation. The NSDP the Governments of Lesotho and South Africa II acknowledges that demand for accountability made several fundamental changes that led from the general public has been weak due to to significant improvements in the autonomy several factors such as political polarization, lack and management of the agency. Though this of access to information, poor coordination of 75. In December 2016, about 20,000 people took part in public demonstrations to pressure the GoL to meet AGOA eligibility criteria. 102 | LESOTHO • Systematic Country Diagnostic Update institutions involved in oversight function as well non-state actors on local governance and service as weak Civil Society Organizations (CSOs) and delivery to stimulate demand for accountability private sector. As part of strengthening governance is included as an intervention that would support and accountability systems (the fourth key priority decentralization of public sector services. area), promoting civic education to stimulate Devoting more focus to promote civic engagement demand for accountability is indicated as an is therefore important, as it signals government’s intervention that would help strengthen oversight commitment to building strong partnerships with bodies and subsequently improve effectiveness of non-state actors to promote accountability. oversight institutions. Further, to support improved service delivery, raising awareness of citizens’ and LESOTHO • Systematic Country Diagnostic Update | 103 3.4.4. Recommendations for bridging public sector implementation gaps 183. The structure and depth of the disincentives only about the form of institutions, but also about for the GoL to bridge technical implementation their functions; (ii) thinking not only about capacity gaps imply that developing recommendations building, but also about  power asymmetries; and to address the symptoms of these disincentives (iii) thinking not only about the rule of law, but also is likely to have only limited impact. However, about the role of law. if designed carefully and with a results-based rather than input-based orientation, technical 185. Specific recommendations, based on lessons interventions could create incremental shifts learned from implementing policies and toward a more efficient, transparent and citizen- programs in Lesotho, include the following: centered public sector. This SCD Update emphasizes that, while it is important to prioritize Enhancing capacity and improving addressing the foundational factors (root causes) performance of implementation gaps, putting in place technical interventions to close the gaps is also important. 186. Creating greater accountability, autonomy, and performance incentives within the technical This is especially pertinent given that political cadre of the public service may support program fragmentation and dependence on strong implementation and results. A review of ‘pockets influence of external actors in the political and of effectiveness’ in Lesotho indicates that the economic system are likely to remain for the following are critical for driving results and foreseeable future. Considering this, the question enhancing service delivery: prioritizing professional is then: how can public sector implementation merit over political and personal considerations gaps be bridged in such a context? in civil service management decisions; ensuring 184. The World Development Report 2017 that performance management systems genuinely Governance and the Law provides the promote performance-oriented civil service conceptual underpinnings for this priority management decisions; and paying enough to policy. It puts forth the following main messages: retain more motivated civil servants and prevent First, successful reforms are not just about ‘best large-scale turnover of high performers.  The practice.’ To be effective, policies must guarantee Ministry of Public Service is working toward the credible commitment, support coordination, implementation of a performance management and promote cooperation. Second, power system for civil servants to link performance to asymmetries can undermine policy effectiveness results. If paired with a reward and/or award system, as they can lead to  exclusion, capture, and this could incentivize improved implementation clientelism. Exclusion occurs when individuals or across the technical cadre. groups are systematically sidelined from policy 187. Building the capacity of technical staff and non- decisions that affect their interests. In Lesotho, state actors for program implementation may exclusion manifests itself in the lack of access of also drive results. Once-off training and study tours the many Basotho in rural and lagging regions to have not been effective in building capacity over assets, markets, and services. Capture happens time—likely because of high turnover at multiple when powerful groups can influence policies levels of government. However, focusing on on- and make them serve their narrow interests. the-job training and linking the learned skill back One form in which capture manifests itself in to performance monitoring and management may Lesotho is through the political elite influencing prove more effective. Furthermore, engaging and policies and making them self-serving. Third, building the capacity of non-state actors, such as change is possible through shifting  incentives, the private sector and civil society organizations, reshaping preferences and beliefs, and enhancing can help crowd in the technical and contextual the contestability of the decision-making process. expertise needed to move complex reforms Fourth, three guiding principles can help rethink toward completion. governance for development: (i) thinking not 104 | LESOTHO • Systematic Country Diagnostic Update Improving commitment, coordination, and cooperation 188. To be effective, policies need to have devices structures with high-level political backing will that guarantee a credible commitment over time. be needed. Introducing incentives to coordinate In the context of Lesotho, political fragmentation through program-based budgeting, creation, and and instability create an environment of policy tracking of ministry, department, and agency uncertainty. It is associated with high staff (MDA)-level key performance indicators (KPIs), turnover in the public sector, resulting in short- together with the introduction of accountability termism and a lack of commitment, in particular to and reward systems for organization performance, tackling long-term structural issues. Other factors would support these efforts. Furthermore, the that compromise credible commitment to public GoL can build on progress made in establishing policies include, among others: lack of integrated mechanisms for aid coordination with DPs. planning for sectors in need of coordination (e.g., Overall, improving coordination requires the GoL infrastructure planning for industrial development); to integrate the different elements of Lesotho’s weak policy implementation; lack of prioritization development agenda, currently reflected in in the allocation of resources; uncertain regulatory NSDP II. Given the strong influence of DPs and environment; lack of political will and political other external partners, integration of different commitment to reform; top-down policy-making elements of the development agenda would with limited citizen engagement; and incidences reduce duplication and, where necessary, support of corruption and fiscal challenges amid declining consolidation of effort. SACU revenues. In particular, strengthening the link between the budget and policy priorities 190. Using principles of collaborative leadership by linking them to specific activities and budget could promote cooperation by ensuring that all allocations, will signal credible commitment. actors, including public service providers, uphold their end of the deal. Collaborative leadership 189. Resolving coordination problems is about puts leadership and coalitions at the center of the eliciting socially desirable actions based on rules, development agenda, seeking to strengthen the standards, and regulations that help coordinate capacity of government counterparts to work as actors’ actions based on shared expectations. effective teams and by helping to build coalitions New approaches to improving coordination for change among different actors in society. within government and with other stakeholders Some initiatives that could be components of a could be piloted by the GoL. One example of collaborative leadership and open government such a pilot is the Prime Minister’s Delivery Unit approach include: (i) regular training and (PMDU), which has been set up to address some sensitization on collaborative leadership and of the challenges of reaching political consensus open government, starting at the Cabinet level; (ii) and coordination failures across government, working with implementing teams in government, as well as strengthen public-private dialogue. civil society and business to strengthen their Given that coordination challenges are largely a roles; (iii) engagements and hands-on application consequence of the politically volatile nature of of building reform coalitions; and (iv) peer- Lesotho, ensuring policy certainty and keeping learning and knowledge-sharing between Lesotho implementation consistent will remain a challenge. and other regional and global countries that Thus, exploring context-specific opportunities to have successfully implemented collaborative incentivize coordination, based on lessons learned leadership. from pockets of effectiveness and leveraging LESOTHO • Systematic Country Diagnostic Update | 105 Strengthen monitoring and evaluation (M&E) of implementation 191. A stronger national M&E system that is an electricity connectivity, limited network coverage, integral part of the program and/or project unfavorable topography that impede effective cycle, being evident throughout the lifecycle data collection, field visits and supervision; and of a program and/or project, as well as after some of the surveys are DP-driven and only completion, would support the identification of undertaken when requested by DPs and, when implementation gaps, and the prioritization of they do, BOS takes the opportunity to include its actions and resources to closing them. NSDP II own module.  Most shortcomings can be better articulates the GoL’s plan to develop a national addressed with autonomy of BOS, especially M&E policy that would define the scope of, and operational autonomy. Now, the BOS budget assign responsibilities for, M&E activities across is controlled by the Ministry of Development ministries and government entities. This would Planning and budget cuts for surveys are frequent. build on existing sectoral or thematic M&E plans, Operational autonomy should be accompanied by for example on HIV/AIDS. stable funding, human resources, and technical capacity available across the National Statistical 192. Improving national statistics is at the core of System (NSS). improving and leveraging the national M&E system. To do this, Lesotho can build on recent 193. Improving the efficiency and use of digital achievements by the Bureau of Statistics (BOS)— systems has the potential to reduce the the government department charged with data transaction costs of coordination, increase collection, analysis, and the dissemination of accountability and transparency of government official statistics. The recent achievements by systems, and enhance citizen-centered service BOS include, among others, rebasing national delivery. E-Government systems are burgeoning in accounts and the development of quarterly GDP, Lesotho and leveraging them has the potential to improvements in the breadth of the surveys, generate significant savings for government. But and increasing use of digital technology in data to do so efforts around e-Government need to be collection. Another highlight is the approval by well-coordinated through a single well-capacitated the Cabinet, in December 2020, of the Data entity to ensure critical data can be smoothly Dissemination Policy, allowing anonymized micro- exchanged across systems (interoperability), and data to become available in the public domain—a key international and local systems standards are move that is envisaged to promote evidence- adhered to. The use of procurement and financial based policymaking. Despite improvements, management technologies, such as e-Government Lesotho will need to continue to direct resources Procurement (e-GP) and Integrated Financial toward improving capacity in M&E to ensure that Management Information Systems (IFMIS), all key indicators can be tracked regularly. Some promotes transparency and limits the opportunity of the challenges affecting BOS that need to be of corruption. Fast-tracking the digitization of addressed to strengthen the department’s capacity key public records and datasets would support to support an effective M&E system include: M&E. To ensure digitization is pursued safely, the persistent delays in implementation of surveys GoL needs to prioritize the updating of its legal due to a lack of resources; structural challenges framework and infrastructure for data privacy and such as poor infrastructure, access to roads, cybersecurity. 106 | LESOTHO • Systematic Country Diagnostic Update Strengthening public financial accountability 194. Improving the quality of PFM through fiscal framework with a modern budget management discipline and accountability is important for system implemented to facilitate national planning enhanced implementation and efficiency of and budget formulation.  In contrast, district public spending. A renewed commitment by councils, the Maseru Municipal Council, as well the GoL to complete the implementation and as community councils, typically manage their customization of the IFMIS, and enforce its use finances using manual books of accounts without for all government transactions (revenue and the benefit of an integrated financial management expenses) would be important. Similarly, it is system. The GoL will need to demonstrate a also important to insist on the use of project firm commitment to addressing these capacity appraisal guidelines for new capital investments constraints among central ministries and between and implement commensurate actions regarding central and local departments to reduce the public procurement and PPPs. Full implementation vulnerability of decentralized funds being misused of the Human Resources Management Information and prevent leakage. System (HRMIS) would shore up gains made with the biometric census of civil servants, which 196. An open government approach is key to removed thousands of deceased and unemployed demonstrating a commitment to strengthening persons from the government payroll, thereby public financial accountability. An open reducing the wage bill. Enacting and implementing government is one with high levels of transparency the Procurement Bill and the Public Financial and mechanisms for public scrutiny and oversight Management and Accountability Act will also in place, with an emphasis on government address some of the procurement shortcomings by accountability. In particular, fiscal openness, establishing the legal, regulatory, and institutional defined broadly to mean increased budgetary framework. In laying the foundation for transparent disclosure and participation, is associated with and accountable systems there is a need for a improvements in the quality of the budget, as well paradigm shift from the traditional view of seeing as governance and development outcomes. procurement as the floating of bids, evaluation, 197. In sum, this section has emphasized bridging and award of contracts, to a more strategic view implementation gaps as an overarching priority encompassing the development of strategic policy area that will accelerate progress options and the management of outcomes. in addressing the challenges and binding 195. While fiscal decentralization—a clear priority constraints to development. Implementing for the GoL as stated in the 2014 National better will accelerate progress in the other three Decentralization Policy—can improve service broad policy areas that have been identified in delivery, it imposes coordination complexities the preceding chapters to include: (i) rebalancing because it brings in different levels of growth by shifting to private investment and exports government. For successful fiscal decentralization, for job creation; (ii) strengthening human capital simultaneously strengthening local governance and improving service delivery, especially in rural systems and local administration at the district areas and lagging regions; and (iii) strengthening level is crucial. At the central government level, climate risk management and resilience. the GoL has a strong and transparent budget LESOTHO • Systematic Country Diagnostic Update | 107 108 | LESOTHO • Systematic Country Diagnostic Update 4. PRIORITIZATION FOR ACCELERATED, INCLUSIVE AND SUSTAINABLE PROGRESS LESOTHO • Systematic Country Diagnostic Update | 109 198. This SCD Update revisits the constraints and (v) reforming social protection to reduce identified in the 2015 SCD and provides a fragmentation and improve targeting, efficiency, renewed perspective on policy priorities based and effectiveness. on the developments since 2015, together with analysis of the constraints and opportunities 202. This SCD Update argues for a two-pronged discussed in the preceding chapters. agenda: (i) continuing the necessary reforms in priority areas that were identified in the 2015 199. Lesotho’s development outcomes have not SCD and that remain valid today; and (ii) placing changed substantially since 2015. However, emphasis in other areas that have grown in the macroeconomic position has deteriorated importance since the first SCD. The SCD Update markedly, with the economy in recession since identifies four priority areas, as shown in Table 3. 2017. While the long-term poverty trend shows The first group of priorities implies that Lesotho a decline between 2002 and 2017, almost needs to continue efforts in redefining the role half of the population lives below the national of the state by rebalancing growth from that poverty line and almost one-third lives below an driven by government to one driven by private international US$1.90/day (in 2011 PPP terms), not investment and exports for job creation. Reducing commensurate with Lesotho’s income levels. While the size of the state and facilitating a competitive, Lesotho managed to reduce inequality between export-oriented private sector were treated as two 2002 and 2017, the country nonetheless remains different priority areas under the first SCD, but a one of the 20 percent most unequal countries in competitive, export-oriented private sector is key the world. to rebalancing growth. As such, this SCD Update has grouped both elements under the same priority 200. The policy priority areas for Lesotho remain area, arguing that growing the private sector is largely the same as those identified in 2015. at the center of rebalancing growth. In addition, Many of the same constraints are still hindering Lesotho needs to build on recent achievements faster progress toward the WBG’s twin goals of on the human capital front to further strengthen eliminating extreme poverty and boosting shared human capital and improve service delivery, and prosperity. Thus, the factors that were considered on this, the SCD Update elevates the focus on critical to the development agenda of Lesotho in rural and lagging areas. The second group of 2015 remain critical today. Furthermore, climate priorities places increasing prominence on change risks and the COVID-19 pandemic have only strengthening climate risk management and served to exacerbate the existing development resilience. Also, the need to bridge public sector challenge. implementation gaps, which are wide and reduce the efficiency and effectiveness of public policies, 201. The evolution of the key priorities identified in the 2015 SCD are summarized in Table 2. The has increased in prominence. As the earlier summary is organized into five broadly defined discussions show, in most cases the laws, policies priorities for implementation. These are: (i) and institutions that are meant to support the reducing the size of the state, rebuilding buffers, efficient and effective delivery of development and improving service delivery by achieving fiscal outcomes already exist. However, they often are consolidation and modernizing the public sector; either not implemented, or distorted. Although (ii) facilitating a competitive export-oriented private these challenges were discussed in one form sector by aligning incentives and developing or another in the first SCD, they received less key infrastructure; (iii) increasing the returns attention in 2015 because the overwhelming to self-employment by raising smallholders’ urgency at that time was to redefine the role of the and small business’ productivity; (iv) improving state, and promote private sector-led job-intensive health and education outcomes by reducing the growth, as well as strengthen individual and group disease burden and raising and aligning skills; assets. 110 | LESOTHO • Systematic Country Diagnostic Update Table 2. Highlights in the evolution of key priority interventions identified in the 2015 SCD 2015 SCD: Evolution since 2015 Priority interventions 1. Reducing the size of the state, The size of the public sector remains large and characterized by inefficiency of rebuilding buffers and improving spending: service delivery by achieving ; Public spending has averaged over 50 percent of GDP over the past five fiscal consolidation and years, driven by one of the highest wage bills to GDP in the world: the public modernizing the public sector sector accounted for 36 percent of total employment in 2015, and 35 percent in 2019; the public sector wage was at 22.7 percent of GDP in 2014/15 and 17.4 percent in 2019/20, although this may be an underestimate given the number for 2018/19 was 20.2 percent. eneral government final consumption expenditure was at 37 percent of GDP ; G in 2015, and 38 percent in 2019. Fiscal consolidation has yet to take hold: ; Consequently, large deficits have persisted since 2015/16, which cumulatively sum to 19 percent of GDP in 2019/20. Debt-to-GDP ratio has increased: 41 percent at end 2014/15 to 57 percent. ; ; Domestic payment arrears emerged after attempts to raise financing were hampered by the limited domestic market. ross international reserves have come under pressure: Over the 2015–19 ; G period, international reserves have been on average 20 percent lower than during the 2010–14 period. Fiscal buffers: ; Several years of low transfers from the Southern African Customs Union (SACU) have eroded Lesotho’s buffers. SACU transfers are projected to decline further in the near to medium term due to the COVID-19 pandemic. Progress toward modernizing the public sector has been slow: ; Lesotho is one of the few countries in Africa with a fully biometric National ID that has been rolled out to 85 percent of the eligible population, forming a basis for digital authentication services. ; Several government-to-business (G2B) services have been developed and adopted with success. owever, progress on digitalizing government services has been slow: ; H Lesotho ranks among Africa’s lowest performers in the United Nations’ global e-Government Development Index (EDGI), falling below the continental average and other Southern African Development Community (SADC) countries. SCD Update proposal: The need to reduce the size of the state remains important and closely linked to growing the private sector. The Update emphasizes the need to improve the efficiency and effectiveness of public spending in order to strengthen service delivery in a spatially blind manner. There is need to rebalance public investments to increase complementarity with private sector development (particularly digital technology and energy). LESOTHO • Systematic Country Diagnostic Update | 111 2015 SCD: Evolution since 2015 Priority interventions 2. Facilitating a competitive, The overall doing business environment has deteriorated: export-oriented private sector ; Global Competitiveness Index ranking dropped from 107/144 to 131/141. by aligning incentives and ; Gaps in key productive and connective infrastructure remain wide, especially developing key infrastructure in rural areas: the Logistics Performance Index dropped from 133/160 in 2014 to 139/160 in 2018. ; Political instability/weak political consensus weakens the business environment: fragile coalition governments, frequent elections (2015, 2017) and high turnover of ministers and principal secretaries between elections. ; Foreign direct investment (FDI) has fallen since 2015. xports lack diversification, still concentrated on very few products, mainly the ; E textiles and apparel, and diamonds sectors. esotho is no longer the leading apparel exporter to the United States under the ; L African Growth and Opportunity Act (AGOA) trade preferences arrangement. SCD Update proposal: The need to facilitate a competitive, export-oriented private sector that creates jobs has increased in prominence, together with the need to reduce the size of the state. 3. Increasing the returns to s of June 2020, there are 12 main active entrepreneurship support programs ; A self-employment by raising that could be considered as providing support to grow entrepreneurs. However, productivity of smallholders and these are concentrated in Maseru and around 53 percent of businesses are microenterprises excluded from the financial system. abor productivity in industry and services (a sector in which microenterprises ; L are concentrated) has declined over time. Productivity is particularly low in subsistence agriculture (smallholders): ; ƒ Yields remain low and highly variable due to drought vulnerability. ƒ S low progress in crop diversification from staples to high value/ job creating value chains. ƒ rogress: slight improvement in labor productivity; significant export P diversification after 2012 (mainly from greasy wool to non-greasy wool, mohair, cotton, but also into processed fruit and vegetable oil). imited job creation: Unemployment rate of 22.5 percent in 2020, with youth ; L unemployment at 29.1 percent. SCD Update proposal: Increased vulnerability to climate change impacts has raised the prominence of the need to raise productivity of smallholders and small business. 112 | LESOTHO • Systematic Country Diagnostic Update 2015 SCD: Evolution since 2015 Priority interventions 4. Improving health and Education, learning, health and nutrition outcomes remain poor and not education outcomes by reducing commensurate with the high levels of public spending on education and health. the disease burden and raising esotho has managed to improve human capital levels since 2010 but with ; L and aligning skills an HCI of 0.40 the score is low for the country’s income level. Learning performance remains among the lowest in Southern Africa. ealth outcomes are poor especially among the poor and rural population: ; H over one-third of children under 5 are stunted; 23.6 percent of adults lived with HIV in 2018; only 52 percent of 15-year-olds survive to age 60; HIV/AIDS prevalence (25.6 percent), TB incidence (611/100,000) are among the highest globally. There is a growing burden of non-communicable diseases (NCDs), estimated to account for about one-third of all deaths. ack of skills is a major concern for the private sector, particularly in skilled ; L occupations such as managers, chefs, engineers, and technicians. In general, there are signs of a potential mismatch between the skills pursued by the youth and those demanded by the private sector. For instance, two-thirds of tertiary students complete study fields of education and the social sciences, while most of private and public investment is oriented toward creating jobs in the fields of agriculture, manufacturing, tourism, and technology. SCD Update proposal: Progress has been made in selected areas, but significant gaps remain, especially on learning and nutrition outcomes, and the skills shortage. This remains a priority because outcomes remain poor despite progress and are an important driver of poverty and inequality reduction. Further the SCD Update emphasizes the need to pay particular attention to improving outcomes in rural areas and lagging regions. 5. Reforming social protection There has been progress in reforming social protection, but more progress is to reduce fragmentation, and needed. improve targeting, efficiency and he National Information System for Social Assistance (NISSA) is available in all ; T linkages rural areas and in the process of being rolled out in all urban areas end 2020. NISSA is a national social registry and targeting system now serves as a unified targeting tool. ayment systems are in the process of being harmonized: programs are moving ; P toward delivering payments using electronic methods and relying on National IDs for identification, but uptake of e-payments is still low. eforms to reduce leakages and administrative efficiencies in the old age ; R pensions are progressing. Opening for means-testing tertiary bursary program. ; Expansion of coverage but coverage of the poor is still low. ; SCD Update proposal: Notable areas of progress have been made (and some are ongoing) to reform the social protection system. The gaps are in coverage of the poor, as well as shock responsiveness. Furthermore, the link between social protection and other social outcomes, specifically education and health, can be further strengthened. LESOTHO • Systematic Country Diagnostic Update | 113 203. The prioritization is informed by new knowledge 204. The priorities identified are necessary to from recent analytical work,76 as well as overcome the main development constraints by additional internal and external consultations. rebalancing growth, strengthening human capital These included discussions with the WBG’s and basic services, and strengthening climate Lesotho country team and five workshops with risk management and resilience, and bridging representatives of government, the private sector, public sector implementation gaps. Figure civil society and the youth, development partners, 27 provides details on interventions that are and academia. During these discussions, analysis recommended for prioritization under each from the preceding chapters was presented, of the broad priority policy areas. Bridging together with the logic leading to the identification implementation gaps is seen as a guiding of challenges and priorities. This was followed by framework for how to act rather than stand-alone discussions of the analysis and the identification actions to be prioritized, and is envisaged to of priorities. Overall, the consultations underlined improve efficiency and effectiveness of the public broad support for the analysis and priorities sector. identified. There was broad consensus on the slow progress toward addressing challenges and constraints identified in the 2015 SCD, and its negative impact on progress toward the twin goals. Table 3. Summary of broad priority areas Priority areas where continued efforts are needed Priority areas with increasing prominence 1. R ebalancing growth: shifting to private investments and 3. Strengthening climate risk management and exports for job creation (previously: facilitating a competitive, resilience. export-oriented private sector). 4. Overarching constraint: Bridging public sector trengthening human capital and improving service delivery, 2. S implementation gaps. especially in rural areas and lagging regions (previously: improving health and education outcomes by reducing the disease burden and raising and aligning skills). This SCD Update emphasizes closing gaps in rural areas and lagging regions. 76. See Annex 1 for new knowledge and an update of key data and knowledge gaps. 114 | LESOTHO • Systematic Country Diagnostic Update 205. To rebalance growth by shifting to private others. Third, investing in nutrition through investment and exports for job creation, this well-targeted investments, particularly young Update identifies three interrelated priority children in their first 1,000 days, will help break interventions. First, accelerating the adoption the intergenerational cycle of malnutrition and and implementation of outstanding legislation poor health, and contribute to Lesotho’s human and business environment reforms to enhance capital. Strengthened complementarity between the role of the private sector in fostering a more social protection programs and education, export-oriented economy. This could leverage nutrition and health investments would maximize on the PMDU, which is already playing a key role impact, especially among youth. Overall, priorities in unblocking reforms and building consensus to strengthen human capital and improve service among the various government actors, providing a delivery need to be embedded in a territorial good avenue for accelerating progress. Given the development approach that delinks the lumpy dominance of Micro, Small and Medium Enterprises geography of production from the geography of (MSMEs) in the private sector, it is important that welfare or living standards. these reforms strengthen the ecosystem for MSMEs including improving access to finance. 207. In terms of strengthening climate risk Second, strengthening skills and employability management and resilience, the three priority of youth, ensuring a gender-nuanced approach interventions include: first, develop and adopt a is important. This should be anchored on providing national Disaster Risk Management (DRM) policy relevant skills training to, and better coordination and strategy, along with the development and between the existing youth employment programs adoption of a national Disaster Risk Financing (by both public and private actors) to improve their (DRF) strategy. The DRM policy and strategy reach, impact, and efficiency. In addition, there is would be anchored on updating and harmonizing a need to support gainful self-employment among institutional and regulatory frameworks, as well as the most disadvantaged youth, comprising mainly sectoral policies and plans thereby strengthening low-skilled youth, particularly in rural areas, who institutional capacity for enhancing climate risk are most severely affected by unemployment, management and resilience. The DRF strategy inactivity and, when employed, low earnings. Third, would formalize policy priorities based on a risk- closing gaps in key infrastructure, specifically in layering approach, and address both budget electricity, sustainable and safe road connectivity, mobilization and budget execution. Such a strategy and ICT infrastructure, as highlighted in the 2015 would strengthen the financial management of SCD, remains critical to competitiveness. disaster risks and, by diversifying risk financing instruments, create a fiscal buffer and reduce 206. Priority interventions to strengthen human budget volatility. Second, developing a shock- capital and improve service delivery, especially responsiveness framework for the overall social in rural areas and lagging regions include: first, protection system, building on ongoing efforts in strengthening Early Grade Reading (EGR) and this direction by the Ministry of Social Development, Early Grade Mathematics (EGM) to ensure that in coordination with the DMA and with the support children are learning in school by supporting of DPs. Progress made to update, extend, and the mastery of foundational skills of literacy and strengthen the NISSA database are crucial to numeracy in early grades (Grades 1-4) of primary scaling up social protection system in response school. Second, developing and implementing a to disasters, together with digitizing government- plan to retain secondary school students taking to-person (G2P) payments in a manner that does into account gender, income and location-level not lead to the exclusion of vulnerable populations differences, and considering the reasons behind and accompanied by strong institutional, legal dropping out, which include the high cost of and technical safeguards for data protection and education, lack of interest in education, pregnancy privacy. Third, promoting sustainable landscape or marriage, poor performance, and insufficient management, including integrated catchment supply of quality secondary schools, among management and climate-smart agriculture (CSA), can be a cost-effective way to shore up LESOTHO • Systematic Country Diagnostic Update | 115 resilience. Linked to this, promoting CSA guided growth; deeper international and regional by Lesotho Climate-Smart Agriculture Investment economic integration; an integrated approach Plan (CSAIP) is important for protecting livelihoods to tackling multiple dimensions of inequality, of poor rural households that depend on rain-fed including strengthening human capital and service subsistence agriculture. delivery especially among the poor and in rural and lagging areas; promoting a modernized and 208. Overall, this SCD Update has shown that Lesotho resilient economy; and a public sector with the needs new and integrated approaches to tackle capacity and orientation to effectively implement longstanding and emerging development development policies and programs. constraints. This would entail an integrated approach to rebalancing the economy towards inclusive private sector led development and 116 | LESOTHO • Systematic Country Diagnostic Update Figure 27. Updated priority policy areas Main challenges Priority interventions Pathways Goals A weak business ƒ Accelerate adoption and implementation environment, including of outstanding legislation and economic constrained access to reforms. finance particularly among Rebalancing ƒ Strenghten skills and employability of Growth: Shifting to Micro, Small & Medium the youth, ensuring a gender nuanced private investment Enterprises (MSMEs), approach. and exports for job discourages private investment and result in ƒ Close gaps in key infrastructure creation. small and weak domestic specifically in electricity, sustainable and private sector. safe road connectivity, and information and Communications Technology (ICT). Ending extreme poverty. Poor human capital ƒ Strenghten Early Grade Reading (EGR) Strenghtening outcomes and service and Early Grade Mathematics (EGM). human capital and delivery, especially improving service ƒ Develop and implement a plan to retain High poverty, inequality and joblessness among the poor and rural delivery especially secondary school students. population. in rural areas and ƒ Improve nutrition. lagging regions. Boosting shared ƒ Develop and adopt a national Disaster prosperiry. Risk Management (DRM) policy and strategy, along with a Disaster Risk High vulnerability to Financing (DRF) strategy. environmental and economic shocks amid ƒ Develop a shock-responsivness Strenghtening weak financial resilience framework for the overall social climate risk and gaps in the current protection system, including management and social protection system to strengthening its payment system. resilience. fully address them. ƒ Promote sustainable landscape management including integrated catchment management and climate- smart agriculture Cross-cutting: Bridging public sector implementation gasp ƒ Enhance the capacity and performance of the public sector. ƒ Improve commitment, coordination and cooperation. ƒ Strengthen monitorin and evaluation of implementation. ƒ Strengthen public financial accountability. Source: Authors’ own representation LESOTHO • Systematic Country Diagnostic Update | 117 SELECTED REFERENCES Andrews, M., L. Pritchett and W. Woolcock. 2017. 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New Knowledge Generated by the WBG since 2015 and Remaining Knowledge Gaps 2015 SCD knowledge Priority areas with increasing gaps prominence ; Remittances, 2017 etter understanding of deeper business ; B migration and ; Public Health Sector Expenditure environment issues—e.g., considering in brain drain Review detail key remaining business environment constraints, especially sector-specific ; Growth-poverty ; Youth Employment Programs in constraints. link Lesotho: The Policy Gaps (and Overlaps) Country Economic Memorandum (CEM) ; A ; Skills premium/ to provide a comprehensive analysis of a new labor force ; Renewable Energy Investment Plan country’s economic developments, prospects, survey (link) and policy agenda, and it identifies policy ; Addressing energy 2018 reforms for key economic sectors.  needs ; Public expenditure review: hat is it that the other sectors such as ; W Improving expenditure efficiency for ; Constraints mining and manufacturing have done to inclusive development and growth to agricultural attract foreign investment? How can this be productivity ; Jobs analysis replicated in other sectors? ; Addressing nlocking the potential of Lesotho’s ; U cope for diversification of exports, including ; S childhood Private Sector: A Focus on Apparel, understanding the impact of the African malnutrition horticulture, and ICT Continental Free Trade Area (AfCFTA) on exports and growth. ; Climate change orever Young? Social Policies For ; F impacts on rural A Changing Population In Southern cope for diversification of domestic revenue ; S communities, Africa. sources. migration and 2019 Labor Force Survey analysis. ; urbanization ; Agriculture Public Expenditure alue-chain analyses of growth sectors that ; V ; Private sector Review generate jobs for youth. analysis Disaster Risk Financing Diagnostic ; nderstanding of within-country migration ; U ; Gender constraints ; E ducation Public Expenditure trends, and implications on aggregate to agricultural Review productivity and service delivery. productivity ; Poverty Assessment ; Gender assessment. ; E lectrification Master Plan (EU- ; S trategies to increase student retention funded) particularly in secondary education. 2020 ; H ow and to what extent can fiscal ; Digital Economy Diagnostic decentralization strengthen service delivery? ; Gender Assessment nalyses of challenges and opportunities ; A in lagging rural and mountainous regions to Social Protection Assessment ; inform an appropriate territorial development ; S trengthening efficiency in health framework for Lesotho. care delivery in Lesotho 120 | LESOTHO • Systematic Country Diagnostic Update LESOTHO • Systematic Country Diagnostic Update | 121 122 | LESOTHO • Systematic Country Diagnostic Update LESOTHO • Systematic Country Diagnostic Update | 123