The Lesotho Economic Update (LEU): Transforming Fiscal Policy into an Engine of Inclusive Growth, released April 7, 2025 by the World Bank, includes a review of recent economic developments, an assessment of the country’s medium-term outlook, and examines the role of fiscal policy in stabilizing the business cycle and proposes policy actions to improve the quality of the delivery of public services in an efficiency manner.
By contributing to strengthening macroeconomic management and increasing the value-for-money in public spending, fiscal policy will strengthen the foundations for sustainable and inclusive long-term growth in the country.
This first edition of the Lesotho Economic Update is designed to inform a robust policy dialogue around development challenges and opportunities for growth and poverty reduction. The report offers insight into transforming fiscal policy into an engine of inclusive growth.
First, implementing Fiscal Rules and a Stabilization Fund would contribute to delinking revenue volatility from spending and enhance the role of fiscal policy in stabilizing the economy. Additional revenue from SACU and water royalties in the next years would allow Lesotho to replenish low fiscal buffers and strengthen foreign reserve accumulation. Refraining from spending windfall SACU revenues and water royalties could help rebuild fiscal buffers to spend when most needed and strengthen foreign reserve accumulation.
Second, authorities could improve the allocation of spending by placing a greater share of budgetary resources into investment and controlling the growth of recurrent expenditures. Measures to control the growing public wage bill will be instrumental in this regard. A fiscal rule to control recurrent expenditures or specified components could also help. For such measures to be effective, reforms to improve data quality and transparency are key. Improving the allocation of resources dedicated to human capital and social sectors could boost growth and reduce the country’s large inequalities.
Third, authorities could embark on a bold set of reforms to enhance the efficiency of public spending. Given Lesotho’s development needs, the government will face intense pressure to increase expenditures immediately, but in the past high rates of public spending have failed to deliver sustainable growth and poverty reduction. This outcome has been found to be rooted in deficiencies of public investment management, public financial management and public procurement.
Recommendations to boost growth and development in Lesotho
A bold reform program to spur private sector development and improve the management of fiscal policy management could unlock a virtuous process of development, where both the private sector and the public sector serve as engines of growth.
To enhance business opportunities and attract private sector investment, Lesotho could consider enacting reforms in three areas:
- Reduce the costs of doing business and promote business entry. Additionally, Lesotho could revise legislation to open markets to competition and foreign investment, including by upgrading the competition bill, the country’s investment policy and clarifying the conditions for foreign direct investment in the business licensing and registration act.
- Leverage regional agreements: As a member of the African Continental Free Trade Area (AfCFT), Lesotho could take steps to align its legislation with the requirements of the operational phase of the agreement, which entered into force in April 2024 and create mechanisms to demonstrate progress.
- Rethink the involvement of the State in the economy: Lesotho could rethink the State's role in the economy to avoid creating an uneven playing field. Policy options to consider include divestiture to delegate key functions to the private sector and improving SOE governance and efficiency.
To lift education outcomes, Lesotho could consider three important reform areas:
- Improve the efficiency of spending in education: Lesotho could revise the allocation of education budget, to gradually expand access to quality early childhood care and development (ECCD) services, especially in rural areas and invest in buildings, equipment and materials. Lesotho could also review the tertiary education loan bursary scheme.
- Addressing high dropout rates: Beyond prioritizing ECCD, the government could focus on teacher training, including by implementing standardized testing and develop a Continuous Teacher Development Framework. Furthermore, improving teacher deployment to harmonize student-teacher ratios across rural and urban schools. Develop an ICT framework for education to integrate digital service delivery. and improve programs for vulnerable populations.
- Align education with labor market needs, in both technical and vocational education and training (TVET) and higher education programs.