ľ��ӰԺ

Lesotho, a small mountainous nation entirely surrounded by South Africa, is often referred to as the “Kingdom in the Sky.” Home to just over 2.3 million people, it gained independence from Britain in 1966 and remains a constitutional monarchy. The King serves as Head of State with largely ceremonial functions, while executive authority rests with the government. Since November 2022, the country has been led by Prime Minister Samuel Ntsokoane Matekane and his Revolution for Prosperity (RFP) party in coalition with three partners–Movement for Economic Change (MEC), Alliance for Democrats (AD), and Basotho Action Party (BAP) parties.

Classified as a lower middle-income economy, Lesotho recorded GNI per capita of around $1,170 in 2024 (about $3,580 in PPP terms). Strong Southern African Customs Union (SACU) receipts and water royalties supported a fiscal surplus of about 7% in 2024, and public debt declined to about 57% of GDP. Poverty and inequality remain widespread, particularly in rural areas where access to healthcare, education, and clean water is limited. High prevalence rates of HIV/AIDS and tuberculosis further strain the health system and undermine human capital development.

To address these challenges, the government has extended its Second National Strategic Development Plan (NSDP II) through 2028. Its priorities include promoting inclusive, private sector-led growth and job creation; strengthening human capital; expanding enabling infrastructure; and improving governance and accountability systems.

Lesotho’s future depends on diversifying its economy, investing in people, and reinforcing governance structures. Harnessing its unique geography, from hydropower resources to mountain tourism, could provide pathways to resilience and sustainable growth that benefit all Basotho.

ECONOMY

Lesotho’s real GDP contracted by 0.6% in Q1 2025 after nearly 3% growth, 2024), mainly due to declines in mining (-5.9%) and public administration (-9.5%). Other sectors showed robust growth: information and communication (10.9%), hotels and restaurants (8.7%), and other services (8.5%). Headline inflation dropped to 4.4% in July 2025 from 8.2% in Jan. 2024, driven by lower fuel and food prices and a stronger Rand and Loti. The Central Bank cut its policy rate by 75 basis points, from 7.5% in Nov. 2024 to 6.75% in Aug. 2025, aligning with regional rates. Inflation is projected to ease from 6.1% in 2024 to an average of 4.9% in the medium term, reflecting stable energy and food prices, though risks from global trade tensions and geopolitical conflicts remain.

Fiscal performance improved, with the surplus rising from 5.7% of GDP in 2023 to 7.2% in 2024, supported by higher SACU revenues, renegotiated water royalties, and reduced capital expenditures under stricter procurement practices from the Public Procurement Act of 2023. Public debt declined to 56.8% of GDP in 2024 from 61.5% in 2023, mainly due to repayment of the IMF’s Rapid Financing Instrument, redemption of domestic bonds, and clearance of arrears. The risk of external and overall debt distress remains moderate.

The current account balance shifted from a deficit of 6.9% of GDP in 2023 to a surplus of 5% in 2024, driven by increased SACU revenues, higher water royalties, remittances, and lower imports. The outlook depends on the Lesotho Highlands Water Project Phase II, with limited prospects for private investment or job creation to sustainably reduce poverty. Risks are rising, including weaker regional and global growth, uncertain African Growth and Opportunity Act (AGOA) renewal beyond 2025, and domestic political and fiscal instability. Structural reforms to improve the business environment and address infrastructure and human capital gaps remain essential for boosting investment, exports, and employment.

Last Updated: Sep 26, 2025

Lesotho faces significant development constraints. The rugged terrain complicates infrastructure investments, poses connectivity challenges and the delivery of utilities and services. Traditional land rights and poor land records restrict access to arable land, limiting commercial agriculture. Many citizens rely on subsistence farming and are vulnerable to erratic weather. The private sector services industry is largely informal, dominated by day laborers. Lesotho’s economy is deeply linked to South Africa through employment, trade, and SACU revenues, making it susceptible to external shocks.

Economic growth is threatened by uncertainties in trade policy, the renewal of preferential market access under AGOA, and the suspension of the US Millennium Challenge Corporation (MCC) Compact II, which affects investments in agriculture, health, and business environment improvements. The health sector is further impacted by the cancellation of USAID funding.

The (April, 2025) highlights persistent challenges such as fiscal volatility, inefficient public spending, and inequalities. The report recommends adopting fiscal rules and a stabilization fund to buffer revenue shocks, improving resource allocation toward investment and human capital, and reforming public financial management.

Opportunities for Lesotho include leveraging SACU and water royalties to rebuild fiscal buffers, promoting private sector growth by reducing business costs and opening markets, and aligning with regional trade agreements. In education, expanding early childhood services, reducing dropout rates, and matching skills to labor market needs are vital for inclusive growth and poverty reduction. A bold reform program to stimulate private sector development and strengthen fiscal policy management could create a virtuous cycle of development, with both private and public sectors driving growth.

Last Updated: Sep 26, 2025

ľ��ӰԺ Group’s Lesotho  (CPF) FY2024-2028 is fully aligned with the second National Strategic Development Plan (NSDP II) 2018/19-2022/23.

The five-year CPF is centered around three high-level, long-term outcomes:

• increased employment in the private sector through improving the enabling environment for Micro, Small, and Medium Enterprises’ (MSMEs) growth to crowd in private investment for enhanced job creation.
• improved human capital outcomes through the strengthening of the quality of education, health, and social protection.
• strengthened climate resilience through improving the management of natural resources and access to climate-resilient infrastructure.

Last Updated: Sep 26, 2025

Lesotho benefits from International Development Association (IDA) support across nine operations totaling $385.7 million, with $175.3 million (45.9%) disbursed as of Sept. 2025. This financing is complemented by Advisory Services and Analytics, including the inaugural , focused on fiscal policy as a driver of inclusive growth.

Education investments have achieved strong outcomes. The $7.1 million exceeded targets: junior secondary dropout rates dropped from 27% to 19.8% (notably 5.2% for females), 87% of teachers completed online training (vs. 50% target), and literacy/numeracy in early childhood centers rose by 14% and 13.6%. Sixty-nine schools formed youth clubs, engaging 3,484 students. A total of 1,661 math and science teachers were trained, and 81% of early childhood staff (754) were prepared for the new curriculum. Building on this, the $20.65 million seeks to improve teaching quality and conditions for 100,000 students.

The $52.5 million Competitiveness and Financial Inclusion Project has trained 27 organizations, supported 125 startups and 119 SMEs, and established seven commercial farms prioritizing youth and women entrepreneurs. The Pathways to Sustainable Livelihood Project links social protection with economic empowerment, helping vulnerable families and people with disabilities launch enterprises in poultry, catering, and tailoring.

Agricultural transformation is supported by the , with 106,983 farmers adopting climate-smart practices (target: 75,000) across 65,213 hectares (target: 45,000). Nutrition initiatives reached 98% of households, with half reporting better food diversity.

Private sector engagement includes IFC support for SMEs and a new textile sector program, while MIGA maintains $5.15 million exposure in the financial sector to de-risk investment, expand climate finance, and create jobs.

Last Updated: Sep 26, 2025