World Bank2025-04-082025-04-082025-04-08https://hdl.handle.net/10986/43035Following a decade of low and unstable growth, Lesotho has a unique opportunity to build a new foundation for robust and inclusive development. As real GDP growth pivoted from a 6.3 percent expansion in 2012 to an 8.2 percent contraction in 2020, per capita income levels declined sharply, and Lesotho’s hopes of improving living standards slipped away. However, the country now has a chance to return to a convergence path, as the second phase of the Lesotho Highlands Water Project (LHWP-II), increased revenue transfers from the Southern African Customs Union (SACU), and the renegotiation of water royalties from South Africa are expected to drive economic activity and provide resources for much-needed social spending and infrastructure investment. Seizing this opportunity will require effective prioritization of policies and investments, sound public financial management, and the restoration of sufficient fiscal buffers (savings) to counter negative shocks. This economic update highlights the critical role of fiscal policy in mitigating macroeconomic volatility and fostering sustainable and inclusive growth. It stresses the need for effective fiscal and public investment management reforms to address Lesotho’s economic challenges and unlock opportunities for development. Aligning fiscal policies with the goal of inclusive growth is essential to ensure that benefits reach all segments of society.en-USCC BY-NC 3.0 IGOECONOMIC GROWTHREAL GDP GROWTHWATER ROYALTIESFISCAL POLICYMACROECONOMIC VOLATILITYReportWorld Bank10.1596/43035https://doi.org/10.1596/43035