- Against a backdrop of low growth and high unemployment, Lesotho's government-led growth model has struggled to deliver on the authorities' development goals. Now, an additional set of shocks has further clouded the outlook. GDP growth is expected to fall to 1.4 percent in FY25/26, from 2.2 percent a year earlier. Inflation has declined from a peak of 8.2 percent in early 2024 to 4.4 percent in May 2025, helped by the peg to the rand.
- Prudent spending in FY24/25, along with buoyant South African Customs Union (SACU) transfers and water royalties, delivered another sizable fiscal surplus. Looking forward, SACU transfers are expected to normalize, but increased water royalties from
- South Africa will help fill the gap and ensure continued strong revenue.
- The main challenge is to transform fiscal surpluses into sustainable and high-quality growth. Public funds should be saved wisely and spent strategically, with an emphasis on high-return investment projects. More effective use of public funds, alongside structural reforms, should support longer-term private sector-led growth.
Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation for the Kingdom of Lesotho [1] .
GDP growth picked up slightly in FY24 to 2.2 percent, inflation has eased, and fiscal and external balances remain strong. Construction of the Lesotho Highlands Water Project II has helped offset a decline in agricultural output, falling competitiveness in the apparel sector, and lower diamond prices. Easing price pressures and lower imported inflation from South Africa have brought headline inflation down from a peak of 8.2 percent in January 2024, to 4.4 percent in May 2025. On fiscal policy, Lesotho had a larger-than-expected fiscal surplus of 9 percent of GDP in FY24, supported by continued spending restraint, along with record SACU transfers and higher water royalties from South Africa. Gross public debt eased to
56.8 percent of GDP as of March 2025, with 80 percent owed to external creditors. The current account balance registered a surplus of 2.2 percent of GDP, the first surplus since FY07, with lower imports and higher SACU transfers and water sales more than offsetting lower exports.
Lesotho's outlook has worsened since the 2024 Article IV consultation, largely reflecting a less benign external environment. The uncertainty surrounding U.S. tariffs on Lesotho's textile exports has weakened a central pillar of the economy. At the same time, the disruption of U.S. official development assistance poses risks to key social services. As a result, GDP growth is expected to slow to 1.4 percent in FY25. Garment production for the U.S. market will likely fall (continuing an ongoing trend), but this will be partially offset by rising textile exports to South Africa, which have increased steadily in recent years. Going forward, delayed domestic reforms will likely keep growth subdued over the medium term, at about
1.5 percent—not enough to significantly improve per capita incomes.
Strong buffers will provide policy options. Supported by significant international reserves, the currency is credibly pegged to the rand, suggesting inflation trends in Lesotho will continue to mirror those in South Africa. Fiscal revenues are forecast to remain 8 to10 percentage points of GDP higher than a few years ago. SACU transfers will normalize over the near term to about 20 percent of GDP (long-term average), but renegotiated water royalties will increase to almost 13 percent of GDP in FY25 before settling permanently to about 10 percent of GDP over the medium term. The challenge is to transform these added resources into sustained, high-quality growth.
Executive Board Assessment [2]
In concluding the 2025 Article IV consultation with the Kingdom of Lesotho, Executive Directors endorsed staff's appraisal, as follows.
The authorities' management of windfall revenue has helped strengthen buffers and maintain stability. Amid sizable SACU transfers and additional water royalties, the government has contained the wage bill and cleared arrears. The resulting fiscal surplus has supported international reserves and stabilized public debt, strengthening the peg.
In FY24, Lesotho's external position was stronger than fundamentals and desirable policies (Annex VI). The EBA framework suggests that Lesotho's positive policy gap reflects its fiscal surplus and rapid reserve accumulation. But given long-standing competitiveness issues within the textile industry, exacerbated by the recent tariff shock, the medium-term external position continues to hinge on fiscal prudence and structural reforms.
Lesotho's main challenge is to translate its ongoing revenue windfalls into long-term development gains. With inefficient government spending already above regional peers, it is essential that this additional revenue be managed and spent prudently.
In the near term, capacity constraints on the government's ability to scale up public investment suggest that fiscal surpluses should be maintained and saved. The FY25 budget contains a dramatic increase in public investment that is neither realistic or advisable, as efforts to forcibly boost capital spending on this scale would only squander Lesotho's resources, with little impact on development goals. Instead, to ensure value for money, the authorities should accelerate the launch of a savings (stabilization) fund to boost resilience in the face of shocks, and to safeguard resources for future investment. For credibility and effectiveness, the fund should be underpinned by a legally binding fiscal-rules framework and supported by clear operational guidelines, strong PFM systems, and clear accountability channels.
Fiscal measures to help cushion the impact of the recent shocks on the most vulnerable are appropriate. Amid rising spending pressures, particularly in response to donor shortfalls, the authorities should ensure that social spending is well targeted. Staff caution against expansion of the wage bill, except for essential hires. On revenues, passage of tax legislation and improved revenue administration can ensure a fairer and more efficient tax system.
Looking forward, improved public investment management is needed to increase the quality of capital spending and boost growth. In line with the authorities' emphasis on capital spending, an increased focus on cost effectiveness would allow for higher and better-quality public investment. As reforms take hold and spending becomes less constrained, a more effective fiscal-rules framework will become increasingly critical to anchor medium-term policy. The authorities should reestablish their medium-term fiscal objectives within a legally binding framework, aiming at a 50 percent-of-GDP debt level as a medium-term anchor, combined with a 3 percent-of-GDP structural deficit target.
But delayed passage of long-overdue reforms is undermining Lesotho's ability to realize its economic potential. PFM shortcomings have not only undermined Lesotho's ability to expand public investment, they have also weighed more generally on efficient service delivery and fiscal governance. Budget credibility and internal controls need to be strengthened, and the authorities should continue their efforts to ensure comprehensive analysis and management of fiscal risks, including from SOEs. Passage of key legislation is needed urgently, including laws on public financial management; debt management; tax reform; tax administration; and amendments to the constitution that would boost central-bank independence and strengthen anti-corruption efforts.
The monetary stance is appropriate, and consistent with maintaining the peg. If the South African Reserve Bank continues to loosen its policy stance, the CBL should broadly follow suit, and should eventually close the small remaining gap between policy rates to more clearly signal Lesotho's commitment to the peg. On financial stability, the authorities should continue efforts to improve risk-based supervision of the banking sector, while enhancing supervision and regulation in the NBFI sector.
Structural reforms are critical to unlocking private sector–led job-rich growth, and are needed even more urgently in the face of recent shocks. The authorities are strongly encouraged to continue efforts to address weaknesses in PFM, improve financial inclusion and access to finance, enhance the broader business environment, and tackle governance vulnerabilities.
Staff strongly encourage the authorities to continue their efforts to increase capacity, improve data quality, and coordinate on macroeconomic policies. High-quality data and improved information sharing are critical for policymaking, while close coordination between fiscal and monetary authorities is key to ensuring the consistency of macroeconomic policies with the exchange rate regime.
Table 1. Lesotho: Selected Economic Indicators, 2021/22–2030/311 |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
