The economy of this landlocked and mountainous country is inseparably linked with that of its much bigger and more developed neighbour, South Africa. A large number of Basotho work in South Africa – around 100,000 in the mid-1990s, falling to 40,500 in 2010 – and most of the government’s income comes from Southern African Customs Union import tariffs. Economic swings in South Africa are the biggest single influence on Lesotho’s economy. Moreover, the country has one of the world’s highest HIV infection rates.
Measures to diversify the economy have included encouragement of manufacturing, particularly of clothing, textiles, leather goods and footwear, and of tourism, including establishment of a ski resort in the Drakensberg. Manufacturing output grew by some ten per cent p.a. during the 1980s and by more than seven per cent p.a. in the 1990s; it surged in the early 2000s but declined during the rest of the decade. The manufacturing sector’s contribution to GDP fell from 22 per cent in 2006 to 12 per cent in 2012. With the support of the IMF, economic policy has focused on investment in education, developing the private sector and more effective revenue collection.
From 2005 exporters of textiles and clothing faced stronger competition in the US market from Asian producers, as their quotas were raised. But in 2006 measures under the US African Growth and Opportunity Act underpinned a recovery in the clothing industry and diamond production rose.
The strong growth of the 1990s was interrupted by the outbreak of political unrest in late 1998. There was large-scale damage to property and loss of an estimated 4,000 jobs. The economy was plunged into recession and contracted by nearly five per cent in 1998, compounded by rising unemployment due to the return of migrant mine workers.
It only recovered in 2000, with a resumption of good growth in 2001 and this was sustained through the 2000s, until it slowed slightly in response to the global economic downturn in 2008–09, picking up again in 2010 (with growth of 7.1 per cent), continuing with growth of at least four per cent p.a. in 2012–15.
The Highlands Water Development Project, undertaken jointly with South Africa and begun in 1986, has made the country self- sufficient in electricity and is providing income by supplying South Africa with water. The project comprises a series of dams and tunnels, which will take water from the Orange river and tributaries in the Maloti mountains northwards to the Vaal industrial basin in South Africa. The first phase included construction of a 185-metre dam at Katse – the highest in Africa – and was completed in 1996. The whole scheme is projected to be completed by 2020 and has already provided substantial spin-off benefits of improvements in infrastructure and employment.