Economic diversification desperately needed

Lesotho has to diversify its economy if it hopes to achieve the UN's Millennium Development Goals (MDGs), confront a high prevalence of HIV/AIDS and address widespread poverty, according to the International Monetary Fund (IMF). In a recent review of the country's economic performance, the IMF said "persistent drought conditions, weakened external competitiveness, a continued worsening of the terms of trade, and job losses from the phasing out of textile quotas by industrial countries" had caused real GDP growth to slacken off. The IMF's executive directors observed that "the further loss of trade preferences, declining revenues from the South African Customs Union (SACU), and contraction of inward remittances from migrant workers were likely to be durable economic shocks". Faster economic growth was likely to depend on raising efficiency and broadening the production and export base. The IMF urged the authorities to implement "ambitious structural reforms aimed at restoring competitiveness and fostering private sector development". Landlocked Lesotho has a population of just under two million people, of whom almost 50 percent live in poverty; it would have to achieve economic growth of 7.5 percent per annum to reach the MDG of halving poverty by 2015. Real GDP growth decelerated to about 2 percent in 2004/05, from over 3 percent in the preceding two years, "mainly due to the impact of adverse shocks affecting manufacturing and agriculture", the IMF noted. The slowdown in the manufacturing sector reflected the impact of currency fluctuations - the Lesotho maloti is linked to the South African rand, which has strengthened against the US dollar - since February 2002, and uncertainty regarding Lesotho's duty free access to the US market under the African Growth and Opportunity Act (AGOA). The elimination of textile quotas in January 2005, which had capped exports from Asian giants such as China and India to the US, also accounted for a dent in manufacturing sector output. Three years of drought and the resultant decline in agricultural production had harmed the country's GDP, "as well as structural weaknesses, such as poor farming techniques, soil erosion, lack of water in the lowlands, and lack of agro-financing", the Fund pointed out. "Over one-quarter of the population is estimated to be in need of emergency food assistance," the IMF added. Dr Adelaide Matlanyane, senior economics lecturer at the National University of Lesotho, told IRIN the country had to develop mining, tourism and agriculture to mitigate the impact of shocks to the manufacturing and agricultural sectors. The textile sector faced too many challenges to rebound. "The volatility of the exchange rate, coupled with the fact that the opportunity we had was anchored mostly on arrangements we had through AGOA and the Multifibre agreement, and so on - I doubt the industry will recover. Most of the companies that were here in Lesotho had aimed to exploit those opportunities, but with all those [advantages] expiring I really don't see hope for sector recovery. Diversification is the only way forward, the way I see it," Matlanyane commented. "The action being taken now is to look for alternative commodities for export. The commodities we are looking at in the agricultural sector are fruits and vegetables that are drought-resistant," she explained.