A tiny landlocked country entirely surrounded by South Africa, Lesotho has its fair share of geographical challenges: mountainous terrain, a lack of port access and high transport costs. Beyond this are the human challenges: 57% of the country’s population of roughly 2 million lives below the poverty line, unemployment stands at 45%, and Unicef estimates that Lesotho suffers from one of the highest rates of HIV infection in the world at 23%.

The government has no shortage of work to do. Realising the potential of private enterprise to reduce Lesotho’s poverty level, it has introduced a number of measures to improve the business climate and increase FDI levels. The ability of these measures to attract investors amid corruption, social unrest and a poor macroeconomic climate will determine much of the country’s future.   

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Lesotho is on the UN list of least developed countries (LDCs). Changing this is the government’s top priority, according to deputy prime minister Mothetjoa Metsing. “Most of our people are living below the poverty line, and we need to address that,” he says. “As a country we’ve invested in our people; they are getting educated, but immediately after school they do not have jobs.” The focus, then, is on prioritising labour-intensive sectors.

“Apart from the fact that we need to create jobs, we need to create sustainable growth,” says Joshua Setipa, minister of trade and industry. “Sectors for employment need to be labour intensive, and these days we don’t have very many, so that is what influences our choices. Mining is definitely at the top of the list, and then manufacturing and infrastructure development, ICT, tourism and agriculture, because most of our population is involved in agriculture in some way.” About 80% of the country works in subsistence agriculture, according to the World Bank.

Strong sectors

The majority of Lesotho’s FDI comes from South Africa, which shares dominance of the country's mining sector with the UK. Lesotho’s clothing industry is a significant provider of employment, composed of 70% Taiwanese and 30% South African companies, and provides about 40,000 jobs according to Mr Setipa. FDI in other sectors adds only a further 15,000 jobs, hence the urgent need for reforms.

“In order for poverty reduction to take place, economic growth needs to be inclusive, and the sectoral structure needs to be explicitly taken into account in the promotion of higher labour intensity,” says Archbold Macheka, an economist for sub-Saharan Africa at risk consultancy firm IHS Jane’s. “Ideally, Lesotho should focus on private sector growth led by labour-intensive industries such as tourism, manufacturing and commercial agriculture.”   

Mr Setipa adds: “We cannot do much about things like our location. We can, however, bring in reforms that significantly reduce the cost of doing business in Lesotho, and cut the time it takes to register a company to three hours. We have centralised almost all the business processes – licensing, work permits and so on – which will be under one roof in the trade ministry. The idea is to bring up that level of efficiency.”  

Reform minded

While the push for business reform is a step in the right direction, governance issues plague the small country which, if left unaddressed, will continue to be a barrier to FDI. A lack of policy reform and civil rights protection by the state has led the EU and the US-sponsored Millennium Challenge Corporation to suspend aid to Lesotho. Opposition parties have boycotted the parliament, effectively creating a one-party system. Further institutional weaknesses such as an underdeveloped legal framework for investors and contract enforcement are similarly discouraging, though Lesotho scored a 9.5 in the World Bank’s quality of judicial processes index, compared with the sub-Saharan Africa average of 6.43. 

Political instability is an additional concern. “Rivalries within the defence and security forces pose risks of sporadic violent clashes, and the likelihood of opposition protests has also risen in the capital Maseru amid ongoing political-military instability,” says Mr Macheka. Tax increases are also likely, he adds, as South African Customs Union revenues – Lesotho’s biggest source of income – are expected to fall to 17% of GDP in 2016/17 compared with nearly 30% in the previous fiscal year.

And while Lesotho fares better than many of its regional counterparts in terms of corruption – ranking 61st in Transparency International’s 2015 Corruption Perception Index, on par with South Africa, Italy and Montenegro – the African Union’s African Peer Review Mechanism reported corruption in Lesotho as “the second [out of 16] most problematic factor hindering business after access to financing, with inefficient government bureaucracy ranking sixth”.

Lesotho's best friend

Nevertheless, Lesotho’s hope lies in a resource lucrative enough to lure investors regardless of political and economic climate: diamonds. Of the country’s nine largest greenfield projects since 2003, seven were in diamond mining, according to greenfield investment monitor fDi Markets.

“The diamond industry has performed quite spectacularly in the past couple of years: its contribution to GDP is now up to about 27%,” says Mr Setipa. Its employment contribution is not very high, however, as the industry is highly mechanised, he admits.

“If you take the 15 biggest diamonds ever discovered in the world, five of them are from Lesotho,” says Mr Setipa. “The average per carat cost globally is about $100. Our average cost is $1500.” This value provides a return on investment in a country where mining is more costly due to the harsh weather and terrain. “Now we have to use that revenue to drive development and really push for a more inclusive benefit from the industry. We are currently working on mining laws to ensure more long-term sustainable investments, because we have many areas where there are mining operations, yet the surrounding neighbourhoods are destitute,” he adds.

“We will make a decision very soon as to how we can ringfence the dividends from the mines and put them into a fund for development, infrastructure and healthcare, exclusively.”

Role models  

Neighbouring Botswana provides an example of how the diamond industry can provide a route to growth. The country has built up a large foreign reserve pool from diamond mining proceeds, now being used to stimulate growth amid low commodities prices. “In addition to those already employed by the sector, 3000 more jobs were created by the relocation of the De Beers diamond sorting facility to Botswana in 2013,” says Mr Macheka. “However, high dependence on diamonds leaves the economy vulnerable to adverse external shocks.”    

Further government reforms in Lesotho include the recent formation of courts to deal specifically with commercial disputes, addressing investors’ concerns of previously slow and inefficient court processes. While these developments are positive, there is a acceptance that many other areas of the economy must follow suit.

Asked about his goals for the country, Mr Setipa speaks in terms of people rather than dollar figures. “Every year we get about 9000 new young people into the labour market,” he says. “If I can create work for 5000 every year and the other 4000 I help get into their own businesses, I’ve succeeded. That for me would be the best way to benchmark how successful we are – giving people skills to start their own business. And we want to keep those skilled people in Lesotho, otherwise we could not drive our development model.”