Lesotho, Kingdom of

Growth will continue to be restricted by external conditions

After a slowdown in the 2025-2026 fiscal year, growth will remain sluggish in 2026-2027 amid an unfavourable external economic environment. In the wake of a sound year, agricultural production (10% of GDP but employing 40% of the labour force) could be affected by drought caused by the likely return of El Niño in the summer of 2026. Access to fertilisers, which is already limited, will be hampered by supply disruptions and rising prices in the wake of the Middle East conflict. Diamond mining activity (8% of GDP) is suffering from the collapse in global prices, reflecting weak demand and competition from synthetic stones. The Letseng mine, the country’s largest, consequently announced a 20% reduction in its workforce in September 2025. On the industrial front, the textile sector downturn will persist after a very poor year in 2025 (-10% output, year-on-year), which has durably weakened the sector. The abolition of USAID in January 2025 and the cancellation in August of the Health and Horticulture Compact (Compact II) led by the US Millennium Challenge Corporation (MCC) will weigh on investment. Compact II had envisaged the deployment of USD 300 million in aid between 2024 and 2029 in the health and irrigation sectors. By contrast, growth in services is expected to hold up. GDP per capita in purchasing power parity (PPP) terms will remain significantly below its 2012–2016 level (-12% between 2016 and 2025). Efforts to fight HIV are being undermined by the decline in US aid, while Lesotho remains among the most affected countries worldwide, impacting 17% of adults in 2024.

The second phase of the Lesotho Highlands Water Project (LHWPII) will continue to account for the bulk of economic growth by driving activity in the construction sector. This largescale project aims to increase the capacity of the water supply system serving South Africa. It includes the construction of the Polihali Dam (with a planned storage capacity of 2,300 million cubic meters), scheduled for completion in 2028–2029, as well as a subsequent hydroelectric generation scheme that should turn the country into a net exporter of electricity in the medium term (in 2025, 50% of electricity consumed was imported from South Africa and Mozambique). The project is nevertheless facing significant delays and cost overruns (from an initially planned USD 450 million to an estimated USD 3 billion today). Moreover, its growth spillover effects are expected to slow markedly from 2027 onwards, with the completion of major civil engineering works.

Inflation is expected to rise again in 2026 and will initially be driven by higher fuel prices. As nearly all consumer goods are imported from South Africa, price developments will be closely correlated with the anticipated increase in South African inflation. Maintaining the peg of the loti to the rand (1:1) will remain the priority of the Central Bank of Lesotho (CBL), which is therefore expected to mirror any policy rate changes decided by the South African Reserve Bank (SARB). The CBL policy rate has been set at 6.5% since November 2025, i.e., 25 basis points below the SARB’s rate. After depreciating over the course of 2025 (-9%), the rand strengthened against the dollar in early 2026, before weakening again following the outbreak of the Middle Eastern conflict.

Fiscal surplus depends on volatile external transfers

The fiscal surplus remained comfortable in 2025-2026 and was supported by a sharp increase in the water royalty paid by the Lesotho Highlands Development Authority (LHDA), which now represents 11% of GDP following the renegotiation agreement with South Africa. Transfers from the Southern African Customs Union (SACU) remained stable at 20% of GDP, and together these two flows continue to account for the bulk of public revenues. By contrast, tax revenues fell short of expectations, as weak domestic consumption weighed on valueadded tax receipts. Foreign aid was durably reduced following the withdrawal of MCC Compact II and USAID, halving in 2025-2026. Looking to 2026-2027, the draft budget projects a deficit of 3% of GDP. However, Lesotho faces chronic budget execution difficulties and planned expenditures are rarely fully implemented. In 2025-2026, only 71% of budgeted expenditures (excluding those financed by aid) were executed. In this context, the country is expected to record another surplus in 2026-2027, despite more realistic public investment projections. The surplus is nevertheless expected to narrow due to stable tax revenues (19% of GDP and 39% of total revenues) and rising personnel expenditures (17% of GDP and 39% of spending, the highest ratio within SACU). Public expenditure remains high (57% of GDP in 2025/2026, with total revenues at 60%) and continues to be burdened by subsidies to stateowned enterprises (5.4% of GDP). Moreover, dependence on SACU revenues leaves public finances vulnerable to developments in South Africa’s external trade.

The public debt-to-GDP ratio remained stable in 2025-2026 and is expected to decline slightly in 2026-2027, in line with the downward revision of the debt target (50% of GDP compared with 60%). In addition, in July 2025 Lesotho was reclassified by the World Bank from a “gap” country to a country eligible exclusively for the International Development Association (IDA). This change improves access to concessional financing. Public debt is predominantly external (83%) and largely held by multilateral lenders (73%). In 2026-2027, concessional loans will account for almost all external debt issuances. Debt servicing will therefore remain broadly sustainable: in 2025-2026, it amounted to 3.7% of GDP and absorbed 7.5% of public revenues. The government plans in 2026-2027 to prepay all external loans with maturities of less than five years (representing 3% of total external debt), taking advantage of the favourable peg of the loti. Domestic issuance will continue to increase in order to deepen the local bond market. Overall, Lesotho’s debt risk is assessed as moderate by the IMF and the World Bank.

The current account slipped back into deficit in 2025 and is expected to remain in negative terrain in 2026 owing to a persistent trade imbalance. Diamond exports, which accounted for 23% of total exports in 2024, fell by 63% year on year in value in the first quarter of 2025 and are unlikely to recover significantly in 2026. The Middle East conflict could further restrict access to the Emirati market, Lesotho’s secondlargest customer after Belgium. The textile sector, which represents 58% of exports, is also under pressure due to intensifying competition on the US market—the destination of 37% of textile exports in 2024—from Asian, Turkish, and Kenyan producers. Lesotho has been losing market share in the US since 2020, and the decline in exports accelerated in 2025 (–28% year on year) following the temporary imposition of a 50% tariff, which disrupted the sector. Nevertheless, the temporary renewal of the African Growth and Opportunity Act (AGOA) by the US Congress in February 2026 should provide some relief, while diversification of textile exports toward South Africa is expected to continue (+15% in 2025, year on year). Despite tight domestic demand, imports of goods and services are projected to rise again in 2026, driven by higher fuel prices (fuel accounts for 15% of merchandise imports) and by needs related to the LHWP II project. Primary and secondary income surpluses will not be sufficient to offset the widening trade deficit but will remain sizeable thanks to crossborder worker earnings (21% of GDP), SACU customs transfers and water royalties paid by South Africa. The residual deficit will be financed by foreign direct investment. As at March 2026, foreign exchange reserves stood at around seven months of imports.

Slow progress in rolling out reforms amid a fragile political and social environment

The legislative elections held on 7 October 2022 were won by the newly created Revolution for Prosperity (RFP) party, founded only six months earlier, which secured 56 out of 120 seats. In order to become Prime Minister, the party leader Sam Matekane formed a coalition with the Movement for Economic Change (MEC), the Alliance of Democrats (AD) and the Basotho Action Party (BAP), bringing the governing majority to 70 seats. After surviving a noconfidence motion in 2023, partly thanks to public support from the army, Mr. Matekane is expected to retain a sufficiently strong coalition to remain in office until 2027. His majority has nonetheless been weakened by the withdrawal of two BAP members who unsuccessfully demanded the dismissal of the commander of the armed forces. The army and the police continue to wield significant influence over political life. Despite this context, one of the three constitutional amendments recommended by the Southern African Development Community (SADC) was finally adopted in August 2025. As a result, Lesotho was removed from the SADC watch list, on which it had been placed following the South African military intervention in 2014. This tenth constitutional amendment strengthens parliamentary oversight of public expenditure and reinforces the role of the Directorate on Corruption and Economic Offences (DCEO). However, the passage of the remaining two amendments, which require a twothirds majority, appears unlikely before 2027. In 2026, the temporary renewal of the African Growth and Opportunity Act (AGOA) is expected to ease social tensions for a time, after challenges in the textile sector triggered major protests and prompted the government to impose a state of economic emergency through to 2027. Nevertheless, corruption, high crime rates, the decline in international aid and a potential increase in fuel prices are likely to continue to exacerbate public discontent.

Lesotho maintains good relations with South Africa and other SADC countries, which regularly conduct mediation missions in the country. Its South African neighbour continues to be its main source of imports, export revenues and remittances from expatriate workers. Ties with the US are expected to strengthen as tariffs are reduced and Lesotho was one of the main advocates of the renewal of the African Growth and Opportunity Act (AGOA) by Washington. In December 2025, Washington and Maseru signed a health assistance agreement that will provide USD 232 million in funding over five years. Financial (EUR 119 million between 2021 and 2027) and technical support from the European Union will continue. Other partnerships are also expected to persist, notably with India on agricultural development and with China on infrastructure construction. Nevertheless, the slow pace of progress on constitutional and security reforms could undermine relations with international development partners.

Last updated: March 2026