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Quick Facts
- Population:
- GDP (PPP):
- $3.3 billion
- 2.4% growth
- 3.9% 5-year compound annual growth
- $1,299 per capita
- Unemployment:
- Inflation (CPI):
- FDI Inflow:
Lesotho’s economic freedom score is 46.6, making its economy the 161st freest in the 2012 Index. Its score is 0.9 point worse than last year, with a large decline in the score for government spending partially offset by small gains in other freedoms. Lesotho is ranked 39th out of 46 countries in the Sub-Saharan Africa region, and its overall score is below the world average.
Lesotho lags far behind many other developing countries in terms of economic and human development, largely due to the lack of much-needed institutional reform. The economy performs poorly in many of the four pillars of economic freedom. In particular, the rule of law is too weak to sustain meaningful economic progress. Protection of property rights is ineffective, and corruption is rampant.
A large portion of Lesotho’s population remains engaged in subsistence farming, and dynamic private-sector activity remains limited. Heavy state involvement in most economic activity fuels high levels of government spending and prevents the emergence of entrepreneurial dynamism. Significant barriers to trade constrain poverty-alleviating growth. Lesotho’s burdensome regulatory environment increases the cost of foreign and domestic investment, constraining the development of a vibrant private sector.
Background
Lesotho became independent in 1966, but instability in the 1990s led to military intervention by South Africa and Botswana. An interim authority overhauled the government and oversaw elections in 2002. King Letsie III is ceremonial head of state, and Prime Minister Bethuel Pakalitha Mosisili is head of government and holds executive authority. Mosisili’s party won a parliamentary majority in February 2007. Lesotho is surrounded by and economically integrated with South Africa, and its government relies on customs duties from the Southern Africa Customs Union for revenue. Lesotho’s small economy relies on exports for its stability. Trade with the United States is important, and apparel exports have grown significantly with the help of the African Growth and Opportunity Act.
Protection of private property rights is ineffective, but expropriation is unlikely. The judiciary has been relatively independent, even during the years of military rule. However, draconian internal security legislation gives considerable power to the police and restricts the right of assembly and some forms of industrial action. A law to ensure the access of married women to property has been enacted. Corruption remains a major problem.
The top income tax rate is 35 percent, and the top corporate tax rate is 25 percent. Other taxes include a value-added tax (VAT) and a tax on dividends, with overall tax revenue amounting to 56.9 percent of national income. Government spending has increased to a level equivalent to 65 percent of GDP. The deficit has also risen, and public debt amounts to about 40 percent of total domestic output.
Lesotho has pursued regulatory reform measures including various incentives for small-scale enterprises. However, the regulatory system’s overall efficiency remains limited, with licensing requirements costing over 10 times the level of average annual income. The labor market remains rigid, driving a large share of the labor force into the informal economy. Inflation has moderated. The government influences prices through state-owned enterprises.
The trade weighted average tariff rate is quite high at 10.5 percent, and import licensing and other non-tariff barriers raise the cost of trade. Lesotho’s inadequate regulatory capacity and non-transparent regulations inhibit investment. Much of the population lacks adequate access to banking services. The high cost of credit hinders entrepreneurial activity and the development of a vibrant private sector.