Lesotho is a small landlocked country (completely surrounded by the Republic of South Africa) of about 30,000 sq. km in size (just about the size of Burundi) with a population of about 2 million people. Lesotho’s highlands constitute two-thirds of the country’s territory, less than 10% of which is suitable for cultivation.

Lesotho became independent in 1966. As a constitutional monarchy, Lesotho is ruled by a king and governed by a 33-member Senate and a 120-member National Assembly. Since independence, Lesotho experienced 23 years of authoritarian rule, which includes 16 years of de facto government and seven years of military rule. There were four military coups; the first coup took place on January 20, 1986 to unseat the de facto government of Prime Minister Leabua Jonathan.

After nearly 40 years of turbulent political history, the people of Lesotho (the Basotho) finally witnessed a peaceful transition of power from former Prime Minister Pakalitha Mosisili to a new Prime Minister – Mr. Thomas Thabane. Mr. Thabane was sworn in on Friday, June 8, 2012 as the Prime Minister of the Kingdom of Lesotho and leader of a coalition government formed by the four major opposition parties – All Basotho Convention (ABC), Lesotho Congress for Democracy (LCD), Basotho National Party (BNP) and the Popular Front for Democracy (PFD), who control 71 out of the 120 parliamentary seats.

Lesotho’s economy remained resilient in the face of the global financial crisis. Gross Domestic Product (GDP) grew 3.6% in 2009 and 5.7% in 2010. Lesotho has continued to work very hard to diversify its economy away from relying heavily on subsistence agriculture and remittances, to a more competitive economy based on manufacturing, services, and export of its abundant water resources. Despite the flood-related damage in early 2011, Lesotho maintained robust growth of 4.2%, driven mainly by a mining sector (in particular, diamonds) expanding on the back of an increase in demand and higher prices. Diamond production accounted for nearly seven percent of GDP in 2010/11 as compared to 0.5% of GDP in the early 2000s. Agriculture has had to bear heavy losses of crop and livestock because of the floods. The infrastructure damage also affected the transportation and commercial sectors. In contrast to the mining sector, the outlook for the textile industry in Lesotho appears gloomy.

In the last six years Lesotho’s manufacturing sector’s relative contribution to GDP declined from 20.1% in 2004 to 11.4% in 2010 as a result of stagnation in the textile and garments sector, due to the global economic crisis and the rapid growth in other sectors, notably mining. Textile producers have struggled in recent years to compete with low-cost Asian producers. They have been further hampered by a strong exchange rate and by withdrawal of the Southern African Customs Union (SACU) duty rebates for imported raw materials. The Lesotho Loti is pegged at par to the South African Rand, which is also a legal tender in the country.

Development Challenges

A key challenge for the Lesotho government has been managing budgetary shortfalls and exercising fiscal discipline. The government continued to focus on issues of income equality, HIV/AIDS, water resource management, transportation, disaster relief for flood victims, and education.

In 2010, the government launched a medium-term fiscal consolidation program with International Monetary Fund (IMF) and World Bank support. The government made a good start in FY11 cutting expenditures by an estimated six percent of GDP. This, aided by improved domestic revenue collection and one-off windfall gains in SACU revenues led to the deficit being contained at 4.6% of GDP, a significantly better performance than initially budgeted. For 2012-2013, budget deficits are expected to fall further to around one percent of GDP.

About 70-80% of Lesotho’s people live in rural areas, and more than three-quarters of these are engaged in agriculture – mostly traditional, low input, low output, rain-fed cereal production and extensive animal grazing. In the past, remittances from mineworkers were a major source of rural livelihoods, providing vital cash needed to purchase agricultural inputs and productive assets or to invest in household assets and housing, but remittances have declined steadily over the past decade as competition for jobs in the South African mining sector has intensified. The rural economy in general and agriculture in particular will continue to play a major role in Lesotho’s development strategy for the foreseeable future, due to the limited ability of the urban economy to absorb new labor market entrants.

Lesotho's economic challenges have exacerbated concerns about inequality. Lesotho ranks 141th out of 169 in the United Nations Human Development Index. Despite its middle-income status, Lesotho still has one of the highest levels of inequality (Gini of 0.66%), with about 60% of the population living below the poverty line of US$1.50 per day. There is a clear divergence between economic growth and human development in Lesotho evident in the country’s poor health outcomes. Maternal and newborn health is of particular concern; maternal mortality has been worsening and is among the highest in southern Africa, ranking among the 80th–90th percentile globally. Lesotho remains off track to meet the Millennium Development Goals (MDGs) of reducing child mortality and improving maternal health.

Infant mortality rates have increased alarmingly over the past decade, by approximately 19%, from 72 deaths per 1,000 live births (2000 – 2004) to 91 deaths per 1,000 live births (2005 – 2009). The lack of progress toward reducing child mortality is particularly alarming, given that it is considered the proxy indicator for overall health system functioning. Weak health service performance has contributed to Lesotho’s worsening health outcomes which have been exacerbated by the HIV/AIDS epidemic.

The Lesotho government regards HIV/AIDS as one of its most important development issues, and the it is addressing the pandemic through its HIV/AIDS National Strategic Plan (NSP). Lesotho has the third highest HIV adult prevalence rate in the world at 23.6 percent, according to the 2009 UNAIDS report. Life expectancy at birth has declined by more than 20 years to 41 years over the past decade. In 2009, annual new infections were estimated at 21,000 with 60 people newly infected and 40 people dying each day as a result of HIV/AIDS. According to the 2009 estimate, 290,000 people are living with HIV, 28,000 of them children.

Lesotho has a continuously growing number of orphans and vulnerable Children (OVC). There are more than 200,000 OVC, 67 percent of which are AIDS orphans. Overall, coverage of some key HIV/AIDS interventions has improved, including prevention of mother to child transmission (PMTCT) and antiretroviral therapy (ART). PMTCT coverage increased from five percent in 2005, to 31% in 2008 and 81% in 2010. ART roll-out has made good progress with 58% of the estimated HIV-positive population in need receiving ART at the end of 2011, a total of 62,190 adults and children.

Because of rugged mountain terrain, steep slopes abundance of water and high elevation, Lesotho is prone to natural disasters such as rockslides and flooding. Between December 2010 and February 2011, Lesotho was hit by severe weather which led to floods, run-off from hill slopes, and rock slides. In the lowlands, the accumulated rainfall over this period was the highest since records began in 1933. The rains were accompanied by strong winds and hailstorms. The storms resulted in significant damage to roads, housing, schools, and crops. The total value of the damages is estimated to be around US$66.1 million, or 3.2% of Lesotho’s GDP.

Lesotho’s vision

The government development goals are reflected in its “Vision 2020” and the National Strategic Development Plan (NSDP) approved in March 2012. In 2002, Lesotho issued “Vision 2020” to articulate its long-term strategic priorities so that by 2020: “Lesotho shall be a stable democracy, a united and prosperous nation at peace with itself and its neighbors. It shall have a healthy and well developed human resource base, a strong economy, a well-managed environment and an established technological base.”

In his inaugural speech, Prime Minister Thomas Thabane affirmed his commitment to maintain the current strategic direction of the government’s economic development program as articulated in the Vision 2020 and the National Strategic Development Plan (NSDP) documents. The NSDP, which serves as the implementation strategy for the National Vision 2020, re-affirms the government’s commitment to the objectives of fiscal consolidation, economic diversification, infrastructure and human development. The NSDP sets the following strategic goals: pursue high, shared and employment generating economic growth, develop key infrastructure, enhance the skills base, technology adoption and foundation for innovation, improve health, combat HIV and AIDS and reduce vulnerability, reverse environmental degradation and adapt to climate change, and promote peace, democratic governance and build effective institutions.

World Bank Assistance Strategy for Lesotho

The World Bank’s support to Lesotho is based on the Country Partnership Strategy (CPS) (2010-2014) prepared in consultation with government, civil society, private sector and other development partners and approved by the World Bank’s Board of Executive Directors in May 2010. The Bank’s current program in Lesotho aligned with the strategic priorities articulated in the Vision 2020 and the National Strategic Development Plan (NSDP). The CPS seeks to support Lesotho in addressing its immediate challenges while laying the foundation for sustained, long-term growth. Specifically, the Bank is assisting the government in addressing its short-term needs to deal with the consequences of the sharp decline in SACU receipts and improve social development indicators. It is also working with the government on the longer-term goal of enhancing competitiveness and fostering private sector–led growth. To achieve these objectives, the CPS is focused on three areas of engagement: fiscal adjustment and public sector efficiency, human development and improved service delivery, and economic diversification and improved competitiveness.

Capacity development is a cross-cutting theme of the CPS and is embedded in all Bank-financed activities in Lesotho. The Bank has started the mid-term review process for the CPS, with a view to reassessing the relevance of the current strategy of the Bank in Lesotho, capturing the implementation experience and the results achieved so far and making any adjustment required to reflect the priorities of the new coalition Government in Lesotho. The CAS Progress Report (CASPR) will be finalized in March 2013.

World Bank Group Portfolio

Overall, the size of International Development Association’s (IDA) portfolio in Lesotho has been relatively stable, after a 40% increase in net commitment between FY09 and FY10. As of September 30, 2012, the portfolio comprised five IDA funded projects, one Global Partnership for Output Based Aid (GPOBA) grant and one Global Partnership on Education (GPE) grant, with a total net commitment of about US$126 million. The bulk of IDA financing is for infrastructure development—transport, water, and urban development. IDA is also funding projects in the social sector of the economy, health and HIV/AIDS, and private sector development and agriculture (in cooperation with IFAD). IDA has also been providing direct budget support to the government of Lesotho, through a series of Poverty Reduction Support Credits (PRSCs). These PRSC series support the economic and governance reform efforts of the government by creating the enabling environment and the right policy framework for the successful implementation of the National Strategic Development Plan. The Bank is about to start a new series for the Poverty Reduction Support Credit (PRSC).

The IDA portfolio is supplemented by several grants. A Trade Facilitation grant agreement was signed with the government of Lesotho. The grant will help to stimulate trade with South Africa – Africa’s largest economy – by streamlining border procedures. It will also increase economic competitiveness and attract investments, providing Lesotho with land-linking opportunities that are critical for achieving job-creating growth. A Fast Track Initiative grant supports primary education. A Global Partnership on Output-Based Aid grant supports a public-private partnership to replace the country's 50-year-old main public hospital in Maseru through a joint undertaking with the International Finance Corporation (IFC). A pioneering initiative, the project seeks to provide high-quality health care services to Basotho citizens at affordable costs.

In addition to the PPP Hospital project, the IFC is acting as lead transaction advisor on four Public Private Partnership (PPP) projects for the government. These transactions include developing PPP projects for facilities management, ICT and telemedicine in 168 public health facilities in Lesotho, developing PPP for health care waste management, development of five tourism PPP projects, development of a PPP framework for the tourism sector and streamlining the tourism licensing process and to undertake feasibility study of three wind energy sites in Lesotho, and if feasible, to package these as PPPs for development and financing by a private operator.

The Multilateral Investment Guarantee Agency (MIGA) is not active in Lesotho.

 

Private Sector Development

The Bank has supported the government priority of increasing private sector competitiveness and economic diversification. The Bank is currently financing the US$8.10 million Lesotho Private Sector Competitiveness and Economic Diversification Project (PSCED). The project was approved by the Board on March 21, 2007 and supports the government on a range of issues that help to improve the business environment and access to infrastructure and basic services, develop the financial system and promoting access to finance promote the creation of a strong, dynamic, competitive, and innovative private sector; and, promote the priority sectors, broadening entrepreneurship, and creating jobs in agriculture, tourism and manufacturing.

There has been substantial progress made on business environment reforms and improving economic diversification. The Companies Act prepared with the support of the project—the first since 1967— the Companies regulations have been finalized and the companies’ registry was successfully launched and the Companies Act implemented on May 2, 2012. The Trading Enterprises Regulations have been amended, approved and published and came into operation fully in April 2012. The drafting of the Industrial Licensing Bill has been completed and the Bill has received the clearance certificate from the Attorney General prior to the presentation to Cabinet for approval and subsequent presentation to the Parliament. The Financial Institutions Act which includes legislation on leasing has been passed.

With a view to diversify the economy, the project has supported two Skills Development Centers to help train unemployed workers demonstrating that unskilled workers can be employed through training. Further, the horticulture pilots have proved that high quality fruit yields can be produced in rural Lesotho with a harvest season that is a few weeks earlier than South Africa, implying promising price advantages for Lesotho fruit exports. Achievement in supporting the tourism industry includes the establishment of the online reservation portal, World Hotel Link (WHL) which has 28 tourism establishments and the participation of two tour operators, support to the Lesotho Tourism Development Corporation (LTDC) on tourism promotion and marketing; and adoption of a tourism concessions manual and helping to facilitate concession contracts for major tourism assets. Finally, the matching grant scheme, namely the Lesotho Enterprise Assistance Program (LEAP), has supported 168 firms and private sector associations. Most of the beneficiary firms reported substantial growth in sales and employment.

Education

Lesotho’s education system has achieved substantial gains in recent years. After introducing free primary education in 2000, the primary net enrollment rate (NER) rose from 60% in 1999 to 81% in 2009, among the highest in Sub-Saharan Africa. In order to ensure that the Millennium Development Goal of universal access to primary education is met, the government made primary education compulsory in 2011. This is expected to increase the NER further. At the same time, Lesotho has achieved gender parity in primary education. Approximately 49% of primary school students are female and more than 50% of secondary school students are female. The transition rate between primary and lower secondary education is also high with 81% of primary students advancing to secondary education. Learning outcomes as measured by SACMEQ results have also begun to improve: from 2000-2007 SACMEQ reading scores rose from 451.2 to 467.9, while SACMEQ math scores rose from 447.2 to 476.9.

Lesotho has also made advances in other areas such as in Early Childhood Development (ECD) with the establishment of 240 reception classes for the most poor children and training of care givers. Enrolment in secondary education has increased with the construction of 20 new secondary schools (in 2009 and 2010) and the establishment of combined schools. An electronic teacher management system is being introduced. As a consequence, primary education teachers are already being paid on time.

For the past four years, the Bank has been working closely with the Global Partnership on Education (GPE), Irish Aid, and the local donor group to improve in-country donor harmonization. As part of this harmonization effort, the Education Sector Strategic Plan 2005-2015 was updated in 2009 and Lesotho benefited from a third GPE Fund grant, for which implementation is once again being supervised by the Word Bank. The agreement for this US$20 million grant was signed in August 2010, and it is currently under implementation. The funds from this grant are pooled with a US$6.8 million grant from Irish Aid, which created the first pooled fund in the education sector of Lesotho. This project includes an impact evaluation of a teachers’ incentive scheme which data has just been collected.

Water Sector

The Bank has supported the government in its effort to capitalize on the development opportunities afforded by the countries abundance of water, high altitude and a geographically strategic location. Sustained Bank support to the water sector began in the late 1970s with support for the construction of piped water systems in seven small towns, serving about 50,000 inhabitants, which was complemented with measures to strengthen the Water and Sewerage Branch. Establishment of the Lesotho Water and Sewerage Authority (WASA) as an independent entity in 1991 and its subsequent strengthening has resulted in a decrease in unaccounted-for water from 40%  to 30% and a 67% increase in the customer base (from 35,000 in 2004 to 55,000 today). The utility’s revenues have consistently covered its operational costs and meet its debt service requirements. Sixty-two percent of the population within WASA’s service mandate has access to piped water, and an ambitious expansion program aims to increase this to 75% by 2012.

Phase 1 of the Water Sector Improvement Project (WSIP1) was the first of a two-phase program to continue the reforms and address national priorities in parallel to support for the Lesotho Highlands Water Project (LHWP). Phase 1 closed in July 2011. The US$14 million project has provided support to the office of the Commissioner of Water to lead water sector policy development, strategy setting, and coordination, and to support decision-making regarding a long-term solution to water supply for industrial growth and domestic use in the regularly water-stressed and rapidly growing Maseru area. The Water and Sewerage Authority has also supported capital investments, network extensions, a successful pilot peri-urban expansion program, and improvements in its systems and operational efficiencies, including support for a Performance Agreement between WASA and the Ministry of Finance.

Phase 2 of the Water Sector Improvement Project (WSIP2: US$38 million) supports the Metolong Dam and Water Supply Program (MDWSP), which is a multi-donor partnership developed with the government over many years to realize an extensive infrastructure program in support of continued socio-economic growth. WSIP2 provides specific support to continued reforms in the sector, the water conveyance to the town of Teyateyaneng, and management of the environmental and social program for the MDWSP.

The Lesotho Highlands Water Project (LHWP) is one of the world’s most ambitious water transfer projects. Bank support to the Government of Lesotho for the LWHP dates back to the 1980’s, when the Bank was the executing agency on behalf of the government for UNDP-financed design studies. Since then the Bank has provided US$165 million in support of the LHWP, including through the Lesotho Highlands Water Engineering Project (1986), which assisted the government in the design and preparation of the LHWP, and two loans for Phase 1A and 1B of the LHWP. Total revenues from water sales since November 1996 amount to over US$400 million with an additional US$90 million in electricity sales to the Lesotho Electricity Company and another US$1 million in sales to Eskom.

The Agreement on Phase 2 of the Lesotho Highlands Water Project, signed on August 12, 2011, includes provision for augmenting the water transfer to South Africa through construction of a new dam and transfer tunnel and the development of a 1000MW pump storage scheme to generate electricity for the benefit of Lesotho using water from the Phase 1A Katse reservoir. The pump storage scheme would be financed principally through the export price differential between low-cost off-peak sources of energy and peak prices.

Transport Sector

Lesotho’s transport infrastructure development programme largely concentrated its activities in the Lowlands strip that borders the Republic of South Africa, leading to a neglect of the basic access needs of populations that reside in the Mountains and other remote regions. This social exclusion has been identified as the underlying dynamic in the structure of inequality in the country today. The Integrated Transport Project (ITP), funded by the Bank, the EU and the government, aims at improving transport network connectivity so that populations located in isolated rural areas will have more reliable access to basic services. This project has contributed to an increase in the length (shares) of roads in “good” and “fair” condition as a share of total classified roads. The percentage of roads classified as “good” has risen from 27% to 37%.

The local population in Senqu-Senqunyane rivers area has benefited a lot from the World Bank-financed Senqu-Senqunyane civil works project. Average travel cost to social services and markets has been reduced from original 1,500 Maloti per trip to 900 Maloti in 2010. Share of rural population with access to an all-season road (within Senqu-Senqunyane project area) has reached the target of 42%.

In addition to improving access to basic services, the World Bank assistance to the transport sector is also helping link people in rural areas to markets, creating the legal and regulatory framework for effective roads management, strengthening the institutional capacity of relevant agencies in the sector, and creating employment for inhabitants of rural and urban areas. This has resulted in the establishment of a fully functioning Directorate for Roads to manage the newly established Roads Fund, which provides sustainable financing for routine and periodic maintenance of the road networks. This Directorate is the first of its kind in the history of the country and it followed the passage of the Roads Directorate Act by Parliament in March 2010 and the drafting of the Road Directorate Regulations. Twenty road safety workshops and campaigns have been undertaken, more than 700 government drivers have been trained, and the integration of road safety education into school curriculum is on-going.

Health Sector

The Global Partnership on Output-based Aid (GPOBA) grant of US$6.25 million, finances both the provision of outpatient services at the three newly refurbished filter clinics in Maseru as well as selected additional inpatient services at the main hospital. The OBA subsidies are disbursed based on the achievement of performance targets for key service delivery indicators. The refurbishment of the three filter clinics in Qoaling, Likotsi and Mabote was completed on schedule in April and May 2010 and the Queen ’Mamohato Memorial Hospital opened in October 2011. The hospital is already operating at an occupancy rate of 70% and staff report seeing a greater survival of low birth weight babies due to availability of equipment and appropriate care.
 
In 2010 the World Bank and the Lesotho’s Ministry of Health and Social Welfare also concluded the Health Sector Reform Program, which achieved a sustainable increase in the access to quality preventive, curative, and rehabilitative health care services. The project targeted the huge imbalance between overcrowded government health centers and the non-government health centers, the high cost of medical care, long distances to medical facilities in mountain areas, and the insufficient numbers of health personnel, especially in rural areas. Specific results from the project include:

• an increase in the tuberculosis cure rate from 52% to 72%;
• a decrease from 4.5 to 3 hours in average waiting time at the country’s largest hospital;
• an increase from nine to 136 in the number of facilities providing mother-to-child HIV transmission prevention;
• expanded coverage of the DPT3 vaccine;
• an increase in the number of mothers who received ante-natal care from a health professional and
• an increase in the percentage of births delivered in a health facility

An HIV and AIDS Technical Assistance Project became effective in January 2010. The objective of the project is to build capacity of government’s agencies and civil society organizations at both the national and local levels to address the identified key gaps in implementing the National HIV and AIDS Strategic Plan in an effort to contain and reverse the epidemic. The Annual Work Plan and Procurement plan were approved in July 2010. Initial activities focus on capacity, building support to the Lesotho Council of Non-Governmental Organizations (LCN), which is a Principal Recipient for the Global Fund Round 8, and in particular supporting: governance and management, monitoring and evaluation and finance and grant management, support to the Ministry of Health and Social Welfare (MOHSW) for reviewing the public health laws with a view to ensuring access to quality services, empowering the regulatory and control mechanisms and protecting the public; support to the National AIDS Commission (NAC) to strengthen funding coordination, including the HIV and AIDS expenditure tracking system; and support to the Ministry of Local Government and Chieftainship (MOLGC) to build the skills and capacity of District and Community Councils.

The Bank is currently working with the MOHSW to prepare the proposed Maternal Newborn Health (MNH) Performance-based financing (PBF) Project. The project aims to improve the quality and uptake of maternal and newborn health services using performance-based financing to promote a continuum of care during pregnancy, childbirth, postpartum and neonatal care in order to combat Lesotho’s serious worsening of maternal and child mortality rates. The proposed project will contribute to improving the quality and uptake of maternal and newborn health (MNH) care by stimulating performance of health workers at health centers as well as Village Health Workers (VHWs); and improving the capacity to provide MNH care through facility-level support, including essential equipment, commodities and training.

Agriculture

The Smallholder Agriculture Development Project (SADP) is funded jointly by the World Bank and the International Fund for Agricultural Development (IFAD), and became effective on March 13, 2012. It has the objective to increase marketed output among project beneficiaries in Lesotho’s smallholder agriculture sector. The project targets smallholder farmers and farmer groups that need support to improve their operations and sources of livelihoods; and have the basic resources and motivation required to successfully improve agricultural productivity by diversifying into market-oriented agriculture. To help develop markets for their outputs, the project will also support the development of agriculture-related and rural businesses. The project operates in four of Lesotho’s ten districts (Botha-Bothe, Leribe, Berea, and Mafeteng).

Fifteen development partner agencies are active in Lesotho. Donor coordination, alignment and harmonization have improved since the formation of Development Partners Consultative Forum in 2005, which is co-chaired jointly by the United Nations Development Program (UNDP) and Irish Aid. All development partners are members of the Development Partners Consultative Forum (DPCF), which includes the World Bank.

The overarching objective of the Development Partners Consultative Forum is to increase level and frequency of communication and promote transparency between the development partners and the government. The forum seeks to improve aid coordination, promote harmonization and support the government in ownership of development processes as envisaged in Paris Declaration (PD) and Accra Agenda of Action (AAA). Donor development strategies in Lesotho are generally aligned with the government’s priorities as set out in National Strategic Development Plan (NSDP).

The World Bank has built successful partnerships with a range of donors, such as the jointly financed Integrated Transport Project (with the European Commission), the Smallholder Agriculture Development Project (with IFAD) and the Metolong Dam and Water Supply Program, along with the U.S. Millennium Challenge Corporation, the European Investment Bank, the Arab Bank for Economic Development in Africa, the OPEC Fund for International Development, the Kuwait Fund, the Saudi Fund, and the Republic of South Africa.

The World Bank’s HIV/AIDS Technical Assistance Project, a US$5 million grant, helps to fill the capacity gap impeding implementation of the National Strategic Plan for HIV/AIDS. The Bank mobilized FTI grant resources and partnered with Irish Aid to create the first pooled fund in the education sector. The Bank manages the implementation of grants from FTI and Irish Aid jointly.