Lesotho’s Economy in Perspective: A Review of Major Macroeconomic Challenges

The economy of is faced with a number of challenges………..

Introduction Lesotho’s economy faces a number of employment generation and poverty challenges, some of which are not new reduction. This article provides an overview while some are recent and largely reflect the of major economic challenges that prevailed impact of the global economic crisis. These in Lesotho in 2011 and had an impact on problems need to be addressed for the Lesotho’s economic performance in the economy to be on a sustainable growth and same year even if they had been there development path, which is necessary for before 2011. Real Sector

Agricultural Production

Lesotho’s agricultural production has characterize the sub-sector cannot be deteriorated significantly over the years. overlooked. The subsistence nature of This is despite several attempts by Lesotho’s agriculture has failed to ensure Government to revive the sector through food security and reduce poverty for the various forms of support. The latest country. It has failed to promote the use of example is the financial assistance that was advanced and effective agricultural provided through the block farming initiative. production technologies and practices. Performance of the agricultural sub-sector Some of the factors constraining agriculture remained subdued in 2011. The Central production in Lesotho include, inter alia, Bank of Lesotho estimated that value added high production costs and lack of capital by the sub-sector contracted by 1.8 per cent resulting in a lot of arable land lying fallow in 2011 compared with an acceleration of from year to year. Lack of proper irrigation 10.9 per cent in 2010. The poor equipment and facilities have meant that performance was largely at the back of the crop production has been and remains damage to crops by the heavy rains, floods vulnerable to drought. Another pertinent and storms that were experienced during challenge over the years has been the the 2010/2011 agricultural year. Farming of inefficiency in input supply. This is animals also remained lackluster during the characterized by delays and inadequacies year. in fertilizer and seeds supply by government agencies. While the unsatisfactory performance of the agriculture sub-sector in 2011 could be Lesotho’s agricultural sector needs to be blamed on unfavorable climatic conditions, revived so that this sector could make a the long standing structural problems that meaningful and sustainable contribution to

CBL Economic Review, December, 2011, No.137 Visit: www.centralbank.org.ls/publications 1 poverty eradication and economic growth. and natural biological processes to restore Improved access to capital, efficient input and improve soil fertility. This could make supply, availability of irrigation facilities and food production more sustainable, improve other agriculture related technology and well food security and reduce poverty. Green managed water resources could result in agriculture presents an opportunity for proper utilization of the arable land. Lesotho to commercialise agriculture and Promotion of green agriculture, which has move away from subsistence farming. It the potential to increase food production involves production of organic food without depleting the earth’s resources or products, for which global demand has risen polluting the environment, could be an substantially in recent years, thus option for consideration. It minimizes presenting an opportunity for Lesotho to production costs because it involves the use increase its earnings. of location specific organic resource inputs

Manufacturing Production

Since Lesotho became eligible for trade operations in 2011. One other challenge benefits under the Africa Growth and threatening the sub-sector is increased Opportunities Act (AGOA) in 2000 and competition for the US market from East resumed to export to the US under the Asian countries. same in 2001, Lesotho’s textiles and clothing sub-sector has The textiles and clothing manufacturing sub- grown substantially. Nonetheless, the road sector dominates Lesotho’s manufacturing has not always been smooth. The phasing industry and makes a substantial out of the multi-fibre agreement in 2005 contribution to employment and economic resulted in a decline in the sub-sector’s growth in Lesotho. Nonetheless, its contribution to sustainability and reliability are threatened (GDP) in 2005 and 2006. Recently, by its high reliance on trade preferences Lesotho’s textiles and clothing and susceptibility to external shocks. The manufacturing sub-sector has been third country provision, which allows AGOA negatively affected by the global economic beneficiary countries to source fabric for crisis and the related slump in consumer production of apparel for export to the US demand in the (US). from anywhere, expires in 2012. If not Consequently, the sub-sector registered extended, Lesotho’s manufacturers will no negative growth rates from 2007 to 2009 longer be able to source cheap fabric from and recovered to positive territory in 2010. Asia, hence an increase in the sub-sector’s Nonetheless, it has not recovered fully as it production costs. In addition, the current was estimated to have registered a lower AGOA term expires in 2015. If it is not growth rate of 4.4 per cent in 2011 extended, Lesotho’s will have to compared with 6.4 per cent in 2010. compete on an equal footing with cheaper Asian exports for the US market. The bulk of the sub-sector’s products are exported to the US. The slow recovery of The need for export product and market the US economy from the recession and the diversification by Lesotho cannot be associated low consumer demand resulted overemphasised. The high reliance on in a decline in orders for Lesotho’s textiles and clothing and on the US market manufactured textiles and clothing by US makes Lesotho highly susceptible to shocks based enterprises. Consequently, the sub- that could negatively affect exports as has sector had to reduce production and some been demonstrated by the recent recession. manufacturing firms had to close down Studies such as the “Lesotho Potential Export Diversification Study” have identified

CBL Economic Review, December, 2011, No.137 Visit: www.centralbank.org.ls/publications 2 products in which Lesotho could have exports could compete in the global market comparative advantage and potential with countries like without preferential additional markets for her products. Efforts treatment. This could be achieved by, should be geared towards attracting both amongst other things, investing in human domestic and foreign investment in such capital development to enhance labour areas. Besides, the list of AGOA eligible productivity in Lesotho’s textiles and products is long enough and diversification clothing sector, which is said to be very low could help Lesotho to reap more benefits compared with more competitive countries from AGOA before it expires in 2015. like China and Singapore. In addition, the business environment should be improved The high dependency on preferential market to make it easy for both local and foreign access for the exports of textiles and entrepreneurs to start and operate clothing needs to be reduced. Lesotho businesses in Lesotho. Provision of the should use the remaining AGOA period to necessary infrastructure could also attract strengthen her competitiveness so that her investment into Lesotho. The Fiscal Sector One other challenge that Lesotho excisable imports by all member countries. experienced in 2011 was the continued low In addition, the share that a member gets in level of Southern African Customs Union any particular year depends mostly on the (SACU) revenue, which compelled cost of insurance and freight (c.i.f.) value of Government to undertake some fiscal total imports by the member. consolidation measures. SACU revenue, which is the most significant source of The global recessionary conditions reduced revenue for the Government of Lesotho, production and employment and in turn comes from Lesotho’s membership of domestic demand in a number of the world SACU with , , Swaziland economies including SACU countries. As a and (SA). Historically, this consequence, these countries experienced source of revenue financed more than 50.0 declines in imports of goods and services per cent of the national budget. and in the sales of excisable goods, hence revenues from import and excise duties. SACU member countries levy a common The decline in the high imports had the external tariff on imports from non-members biggest impact. The most significant and do not charge any duties on imports contribution to the SACU revenue pool, from each other. The SACU agreement estimated at above 90 per cent, comes from provides for a common excise tariff to the SA. Imports of goods by SA fell dramatically customs area. Import duties are charged at in 2009 and 2010. In addition, car sales, the first port of entry of imports, regardless which contribute the most to excise of their final country of destination within revenue, also plummeted, thus hurting SACU. Customs and excise duties collected collection of excise duties. Merchandise by each member at a particular period are imports by other SACU member countries sent to the pool and each financial year the also fell during the same period. common customs revenues are shared according to an agreed formula. Customs The consequence of all this has been and excise duty revenues are highly volatile. considerable declines in SACU member They increase with strong economic countries’ transfers to the revenue pool, performance and fall when the economy is hence in revenue shares that they received. struggling. The total amount of SACU Lesotho’s share fell from above 50.0 per revenue available in the pool at any cent of total revenue in the years before particular year is highly dependent on the 2010/11 and 60.1 per cent of total revenue level of tariff duties as well as the value of in 2009/10 to 35.9 per cent and

CBL Economic Review, December, 2011, No.137 Visit: www.centralbank.org.ls/publications 3 36.8 per cent of total revenue in 2010/11 fiscal years. To this end, some of the and 2011/12 fiscal years, respectively. This measures that were proposed included demonstrated the highly volatile nature of cutting expenditure on international travel, this type of revenue and threatened fiscal eliminating purchases of furniture, training sustainability going forward. and workshops as well as short term vehicle hire. Preliminary estimates indicated a drop So far government has been able to in government expenditure, particularly navigate the storm caused by the decline in recurrent expenditure, which was projected SACU revenue mainly due to prudent fiscal to fall by 6.4 per cent while capital policy pursued prior to the crisis and the expenditure was expected to increase by resultant built up in foreign exchange 22.8 per cent in 2011/2012. In addition to reserves during that time. This unfortunate this, Government needs to come up with a state of affairs also increased awareness of long term plan on how to reduce the heavy the need for fiscal consolidation through reliance of fiscal operations on SACU expenditure rationalisation and reduction. revenue and to build up deposits during This was clearly articulated in the budget good times, when inflows are high, to be speeches for 2010/2011 and 2011/2012 used as a buffer during tough times.

The Monetary Sector

On the monetary and financial sector, the country, including unavailability of main challenge relates to the high liquidity information for assessing credit worthiness of the banking sector vis-à-vis credit of borrowers. However, it is expected that extension to economic agents. On the one the situation will improve in the short to hand, commercial bank’s liquidity, medium term as financial sector reforms are measured by the ratio of liquid assets to being undertaken, including efforts to deposit liabilities and placements with other establish a credit bureau in Lesotho. banks remained above 70.0 per cent in the fourth quarter of 2011. On the other hand, The distribution of credit is also a concern. while credit extension has recently been on While close to 100 per cent of credit goes to the rise, it still remains low compared to the the private sector, a larger share of it goes high liquidity. The high liquidity remained to households as opposed to business despite the introduction of treasury bonds in enterprises. In the final quarter of 2011, the October 2010 and the increase in tenors to largest share of domestic credit, estimated 10 years from 3 and 5 years at introduction. at 56.3 per cent was extended to The 10-year bond has so far not been very households and 43.7 per cent to business attractive and this could be attributable to enterprises. Business enterprises play a the fact that commercial banks’ liabilities are critical role in stimulating economic growth short term in nature and they opt for assets and creating employment. Thus, a shift such that match their liabilities. The low credit that more credit is extended to business extension may be indicative of commercial enterprises compared with households banks’ response to high risk factors in the would improve long term growth prospects and ensure growth sustainability.

Conclusion The article has provided an overview of commercialisation and promotion of green major challenges faced by the economy of agriculture. The issue of sustainability of the Lesotho. It has highlighted the need for the textiles and clothing manufacturing sub- agricultural sub-sector to be revived through sector was also discussed. The article has

CBL Economic Review, December, 2011, No.137 Visit: www.centralbank.org.ls/publications 4 indicated that heavy reliance of the sub- need for a long term plan to reduce heavy sector on trade preferences should be reliance of fiscal operations on SACU reduced by strengthening its revenue and to develop some savings when competitiveness through improvement of SACU inflows are high, to be used as a labour productivity, of the overall business buffer when inflows are low. Lastly, the environment and of availability of the need to expedite financial sector reforms to necessary infrastructure. In addition, promote higher credit extension to business diversification of the type of manufactured, enterprises than to households so as to hence export products and markets should stimulate rapid economic growth and be seriously considered. Concerning fiscal employment generation was highlighted. sustainability, the article has highlighted the

Crude Oil: Demand, Supply and Prices: Implications for Lesotho’s Economy

The price of crude oil is on the upswing again, maintaining the trend last seen before the 2008 global financial crisis ………..

Introduction

During the first half of 2011, the global oil Thus, this article provides an overview of market was characterized by considerable recent trends in the demand for and supply volatility in the price of oil. This moderated of oil. It also analyses their impact on the somewhat in the second half of 2011 with price of crude oil. The paper also highlights the price of crude oil, remaining above the the implications of the increase in crude oil levels realized in the first half. prices for the economy of Lesotho.

The World Supply of and Demand for Crude Oil

Developments in the oil market are especially in North Africa (for example determined by interaction of supply of and Libya, Sudan, etc.) and the Middle East demand for crude oil, and hence its price. (Iran, Iraq, etc.). According to the figure Majority of studies on energy and below, the world supply of crude oil declined commodity prices argue that demand for from the first quarter of 2008 to the last crude oil is the main determinant of quarter, albeit with relatively lessvolatility, movements in crude oil prices. However, after which it started to climb until the last supply–side proponents argue that it is the quarter of 2010. Thereafter, it started to supply of oil that determines its price. Since fluctuate between 85.0 million barrels per oil is an exhaustible resource, its scarcity day and 90.0 million barrels per day. After (natural or artificial) permanently affects the declining by 1.0 million barrels per day in price of oil. Figure 1 below shows the the first quarter of 2011, it rose by 2.1 evolution of supply and demand for crude oil million barrels per day from the second from the first quarter of 2008 to the fourth quarter to the fourth quarter of 2011. In the quarter of 2011. first quarter of 2011, the supply disruption emanating from turbulence in Libya and The World Supply of Oil: On the supply geopolitical tensions in the Middle East side, conditions are highly dictated by curtailed the supply of oil. production state of oil producing countries, which are largely driven by a host of Nonetheless, towards the end of the second geological, political and economic factors. half of the year, oil production and hence These factors include geopolitical tensions, supply increased as Libya returned to

CBL Economic Review, December, 2011, No.137 Visit: www.centralbank.org.ls/publications 5 normal capacity utilization and, to a lesser increased output of oil from the extent, and United Arab Organization of Petroleum Exporting Emirates (UAE) slightly increased their Countries (OPEC). production quotas. According to the International Energy Agency (IEA) Oil The outlook for the supply of oil is clouded Market report (OMR) for December 2011, with uncertainty as looming UN sanctions the global supply of oil rose by 1.8 million over Iran’s controversial nuclear energy. barrels per day in December 2011 The EU has proposed an embargo on all compared with the December 2010 supply. purchases of Iranian oil. This leaves the 80.0 per cent of this supply emanated from supply of oil in doldrums as 2012 unfolds.

Figure 1: The Demand for and Supply of Crude Oil 91 2.0

90 1.5 89 1.0 88 87 0.5 86 0.0 85 -0.5 84 83 -1.0 82 -1.5 08QI 08QII 08QIII 08QIV 09QI 09QII 09QIII 09QIV 10QI 10QII 10QIII 10QIV 11QI 11QII 11QIII 11QIV

Demand for Oil Supply of Oil Excess Demand for Oil

Source: International Energy Agency (IEA)

The World demand for Crude Oil: The countries are also oil intensive in their demand for crude oil plays a major role in production processes. Nonetheless, the the determination of crude oil price. As such recent financial market turbulence in it is important to understand what and the dim outlook of the global economic determines oil demand. According to the activity poses a threat to the oil demand. As United States Government Accountability demonstrated in figure 1 above, the demand Office report, the Understating Gasoline for oil declined from around 87.5 million Prices, the demand for crude oil has been barrels per day in the first quarter of 2008 to increasing since 1980 from around 59.0 less than 85.0 million barrels per day in the million barrels per day to more than 82.0 second quarter of 2009. However, during million barrels per day in 2004. This trend the third quarter of 2009, demand for oil was largely driven by the world’s largest oil started increasing from around 86.0 million consumer, the United States. Recently, the barrels per day to around 89.5 million rapid growth in demand for oil by the Asian barrels per day in the fourth quarter of 2010. countries, notably China and India has been In the first half of 2011, oil demand declined the main driver of the world demand for oil. but picked up in the second half of the China and India are rapidly industrializing review year. and their economic growths are oil intensive. Behind this volatile demand for crude oil Moreover, the Organization for Economic were a combination of factors. These Co-operation and Development (OECD) included, the deterioration in the global

CBL Economic Review, December, 2011, No.137 Visit: www.centralbank.org.ls/publications 6 economic environment, driven mainly by the 2008 to around -0.6 million barrels per day Eurozone financial market turbulence, high during the last quarter of 2008. From the debt problems in the OECD countries, the first quarter of 2009 to last quarter of 2011, slowdown in China and a recent spate of there was excess demand and this was in earthquakes in Japan. The demand-supply line with the persistently rising crude oil balance for oil declined from around 0.5 prices. million barrels per day in the first quarter of

The Crude (petroleum) Oil Price Movements: 2005 January – 2011 December

The persistently increasing and volatile oil crude oil over the 2005-2011 periods. prices have sparked debate regarding its Following a prolonged increase in the price potential impact on the global economy. of crude oil, which peaked in mid-2008, During the course of 2011, as mentioned international petroleum prices fell sharply earlier, crude oil prices had been on the rise but bottomed up in early 2009. Since then, albeit slightly moderated in the fourth the crude oil prices have risen, with quarter of 2011. Figure 2 below shows the accelerating speed throughout 2010 and monthly US dollar average spot price of much of 2011.

Figure 2: Crude Oil Price (Average of U.K. Brent, Dubai, and West Texas Intermediate) in USD per barrel 160 140 120 100 80 60 40 20 0

Source: International Monetary Fund’s International Financial Statistics (IMF’s IFS)

The average spot price of crude oil depicted relatively low as a result of supply chain high volatility from the first half of 2009 to disruptions. July 2011. It then moderately increased with The oil price volatility seen during 2011 also some volatility to around $110.0 per barrel emanated from concerns surrounding the in December 2011. global economic activity which was forecast Against this backdrop of high volatility in to slow down by the IMF, due to contagion crude oil price were factors that created effects arising from the European debt supply-demand imbalance in the oil market. crisis. Other emerging economies that As mentioned earlier, the demand for oil consume huge amounts of oil, such as emanating from Asia, especially from China China, were expected to slow down in 2011, and other developing countries drove the thus leading to low demand for oil. The prices higher, while supply remained supply side situation was characterized by

CBL Economic Review, December, 2011, No.137 Visit: www.centralbank.org.ls/publications 7 control of production by some OPEC Middle East unrest especially in Syria, countries and supply disruptions due to Yemen and Iraq.

Implications for the Economy of Lesotho

The crude oil industry is central to Lesotho’s The impact will emanate from the import bill economy since the transportation sector, which may affect the current account mining industry and manufacturing sector balance negatively. use oil in their production processes. As a On the monetary policy front, the rise in the consequence, any developments in the oil crude oil prices may lead to a hike in market, such as fluctuations in the price of interest rates. This is because changes in crude oil, have a bearing on the economy of crude oil prices explain- most of the Lesotho. variation in rate in the (CMA). The tighter monetary A sudden rise in the price of crude oil will policy stance if implemented would derail spark an increase in the price of liquid fuels credit expansion to the private sector, (petrol and diesel) which are used for leading to a decline in aggregate demand transportation and other personal purposes. through investment and consumption. An increase in the price of petrol will squeeze the profit margins of the taxi Finally, the recent spike in the price of crude operators forcing some out of the business. oil may derail the SA economy crippling In the medium term, this may raise issues of demand and leading to slowdown in higher taxi fares. The high taxi fares could imports. This may negatively affect the affect the commuters negatively. South African Customs Union (SACU) revenue pool, which depends largely on the Moreover, the rise in the price of paraffin will performance of SA economy. If crude oil affect the poor households negatively since prices are persistent the decline in the pool, most of the people in the rural towns of means that the SACU revenue share for and other districts use it extensively Lesotho will also be reduced, leading to for cooking, lighting and heating homes in expansion in both external sector and fiscal winter. This may further squeeze their deficits. The combination of these deficits, budgets forcing them to cut expenditure on known as the twin deficits may plunge the some areas of their daily living because economy into long term imbalances, thereby they cannot go without cooking and lighting. creating further challenges in the fight against poverty. The increase in the price of crude oil may also filter through the economy of Lesotho affecting its Balance of Payments (BOP) position.

CBL Economic Review, December, 2011, No.137 Visit: www.centralbank.org.ls/publications 8