Public Disclosure Authorized Lesotho: Systematic Country Diagnostic Public Disclosure Authorized Public Disclosure Authorized June 25, 2015 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Lesotho -GOVERNMENT FISCAL YEAR April 1 – March 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of June 16, 2015) Currency Unit = Lesotho Loti (LSL) LSL 12.40 = US$1.00 ABBREVIATIONS AND ACRONYMS AfDB African Development Bank AGOA African Growth and Opportunity Act AIDS Acquired Immune Deficiency Syndrome ART Antiretroviral Therapy ARV Antiretroviral BEDCO Basotho Enterprises Development Corporation BFP Budget Framework Paper BLNS Botswana, Lesotho, Namibia and Swaziland BoS Bureau of Statistics CAS Country Assistance Strategy CGP Child Grant Program CHAL Christian Health Association of Lesotho CPF Country Partnership Framework CPIA Country Policy and Institutional Assessment DCEO Directorate on Corruption and Economic Offenses DFID Department of International Development from United Kingdom DPO Development Policy Operation ECF Extended Credit Facility ESW Economic Sector Work EU European Union FDI Foreign Direct Investment FIA Financial Institutions Act FIRST Financial Sector Reform and Strengthening Initiative GDP Gross Domestic Product i GNI Gross National Income GoL Government of Lesotho GPOBA Global Partnership for Output-Based Aid GTZ German Technical Corporation HBS Household Budget Survey HIV Human Immunodeficiency Virus HMIS Health Management Information Systems HRH Human Resources for Health IBRD International Bank for Reconstruction and Development ICOR Incremental Capital Output Ratio ICT Information and Communication Technologies IDA International Development Association IDM Institute of Development and Management IEC Independent Electoral Commission IFC International Finance Corporation IFMIS Integrated Financial Management Information System IFPRI International Food Policy Research Institute IMF International Monetary Fund LDHS Labor and Demographic Health Survey LEC Lesotho Electricity Company LHWP Lesotho Highlands Water Project LNDC Lesotho National Development Corporation LRA Lesotho Revenue Authority MAFS Ministry of Agriculture and Food Security MCC Millennium Challenge Council MDGs Millennium Development Goals MIGA Multilateral Investment Guarantee Agency M&E Monitoring and Evaluation MDP Ministry of Development Planning MoF Ministry of Finance MoH Ministry of Health ii MoSD Ministry of Social Development MSME Micro, Small, and Medium Enterprises MTEF Medium-Term Expenditure Framework NER Net Enrollment Rate NISSA National Information System for Social Assistance NPAB National Planning Advisory Board NSDP National Strategic Development Plan NUL National University of Lesotho OBFC One Stop Business Facilitation Center PAF Performance Assessment Framework PEFA Public Expenditure and Financial Accountability PMT Proxy Means Test PPAD Procurement Policy and Advice Division PPP Public/Private Partnerships PSCEDP Private Sector Competitiveness and Economic Diversification Project PSIRP Public Sector Improvement and Reform Program PFM Public Finance Management PFMRAP Public Finance Management Reform Action Plan PRS Poverty Reduction Strategy R&D Research and Development ROC Regional Operations Committee RVP Regional Vice President SACMEQ Southern and Eastern Africa Consortium for Monitoring Educational Quality SACU Southern African Customs Union SADC Southern African Development Community SARS South African Revenue Service SLM Sustainable Land Management SME Small and Medium Size Enterprises STI Sexually Transmitted Infection SWC Soil and Water Conservation iii TB Tuberculosis TCF Third Country Fabric TFP Total Factor Productivity TTCI Travel and Tourism Competitiveness Index TVET Technical and Vocational Education Training UNEP United Nations Environment Program UNFCCC United Nations Framework Convention on Climate Change WASCO Water and Sewerage Company Regional Vice President: Makhtar Diop Country Director: Asad Alam Global Practice Senior Director: Marcelo Giugale Practice Manager: Mark R. Thomas Task Team Leader: Christian Y. Gonzalez Amador iv TABLE OF CONTENTS 1. Setting the Scene ........................................................................................................................1 1.1 High economic growth but not shared among all the Basotho ........................................1 1.2 Preparing for a challenging future ..................................................................................5 1.3 Objectives and structure of this report ............................................................................6 2. Understanding Poverty in Lesotho ...........................................................................................8 2.1 Overview: poverty, shared prosperity, and inequality .....................................................8 2.2 Who are the poor and the bottom 40 percent in Lesotho? .............................................11 2.3 Looking ahead: addressing inequality is the key to poverty elimination ......................19 3. Assessing the drivers of growth in Lesotho ...........................................................................22 3.1 An overview of Lesotho’s growth model and its challenges ..........................................22 3.2 Identifying the constraints for broad based growth .......................................................28 3.3 Sectoral overviews .........................................................................................................34 3.4 Expanding trade and investment and deepening regional integration ..........................41 3.5 Growth: Brief summary of main messages and key challenges identified. ....................44 4. Inclusion: building assets at the micro level ..........................................................................46 4.1 Health and nutrition ......................................................................................................46 4.2 Education and skills ......................................................................................................53 4.3 Access to basic services ................................................................................................58 4.4 Financial assets ............................................................................................................60 4.5 Social protection ...........................................................................................................61 4.6 Social cohesion, voice, and participation .....................................................................63 4.7 Inclusion: brief summary of main messages and key challenges identified .................63 5. Is the growth model sustainable? ...........................................................................................65 5.1 Fiscal management ........................................................................................................65 5.2 Public sector management: at the heart of Lesotho’s challenge ...................................70 5.3 Natural capital and wealth conversion ..........................................................................75 5.4 Vulnerability to natural disasters and climate change .................................................77 5.5 Sustainability: brief summary of main messages and key challenges identified ...........79 6. Prioritizing the challenges .......................................................................................................80 6.1 Introduction and summary of the challenges .................................................................80 6.2 Description of prioritization process .............................................................................81 6.3 Prioritization: final results ............................................................................................83 6.4 Implementation of the priority interventions .................................................................87 Annex 1: Non-income dimensions of poverty in Lesotho—validation exercise .....................89 Annex 2: Gender ..........................................................................................................................94 Annex 3: Detailed description and results of prioritization process .....................................102 Annex 4: Summary of consultations ........................................................................................111 Annex 5: Assessment of key knowledge gaps ..........................................................................113 Annex 6: Assessment of data availability and gaps ................................................................115 Annex 7: Bibliography of studies and reports informing the SCD .......................................116 Bibliography ...............................................................................................................................118 v List of Tables Table 1: Participation in secondary education a privilege for the rich ........................................ xvi Table 2: Overall business climate is challenging ............................................................................ 4 Table 3: Poverty rates by urban/rural area, FY2002/03 and FY2010/11 ........................................ 9 Table 4: Growth scenarios ...........................................................................................................