Lesotho is a constitutional monarchy – one of only three which remain in Africa – and gained its independence from Britain on 4 October 1966. This small, land-locked country with a population of just over 2 million people has been referred to as the ‘Switzerland of Africa’ because of its rugged topography and high altitude: its lowest point is approximately 1 400 metres above sea level.
The country is encircled by the economic powerhouse of South Africa, and has forged strong regional ties and trade links with its neighbours. It is currently a member of the Southern African Development Community (SADC), Common Monetary Area (CMA) and Southern African Customs Union (SACU), as well as benefiting from a fixed exchange rate regime with South Africa. Furthermore, trade preferences such as the United States’ African Growth and Opportunity Act (AGOA) have been beneficial for the textile and garments industry.
While agriculture was once the dominant sector, today Lesotho’s most important economic activities include construction, mining and manufacturing, and its chief exports are textiles and garments, diamonds, water, wool and mohair.
Lesotho’s small domestic market underlines the importance of strengthening regional links to boost its export potential. It is a member of the Southern African Customs Union (SACU) and Southern African Development Community (SADC), and participates in a number of economic partnership agreements with various regional and international blocs. It is also part of the Common Monetary Area (CMA) which links South Africa, Namibia, Lesotho and Swaziland.
The country is also part of two continental initiatives: the New Partnership for Africa’s Development (NEPAD) and the African Union. Regional activities are guided by SADC’s revised Regional Indicative Strategic Development Plan (RISDP) 2015-2020 which prioritises, among others, industrial development and the realignment of existing priorities with resource allocation in terms of their relative importance and greater impact on regional integration.
The Basotho economy is closely integrated with that of its neighbour, South Africa, and the countries share a fixed exchange rate regime. Imports from South Africa account for 84.1 percent of all imports, while Lesotho’s main export trading partners are South Africa (56.4 percent) and the United States (35.4 percent). The latter serves as the main market for Lesotho’s textile exports, thanks to the preferential trade terms afforded by the African Growth and Opportunity Act (AGOA).
Lesotho’s investment environment has strengthened in recent years with the introduction of business reform measures and increased protections for investors. Government is committed to promoting private investment and attracting foreign direct investment (FDI) through the updated Companies Act of 2011, supported by legislation covering sectors such as mining, tourism and industry – particularly textile manufacturing.
The private sector makes up around 20 percent of Lesotho’s GDP, but is slowly expanding as a result of Government’s private sector development initiatives, such as financial sector reforms and implementation of the Land Act. Efforts to improve the efficiency and effectiveness of the public sector and promote high quality job creation in the private sector through strategic investments are taking place under the new private sector growth model and the World Bank’s country partnership framework (CPF).
THE BASOTHO ECONOMY
Lesotho’s economy, like many small economies, is relatively undiversified. It is predominately based on agriculture and textile manufacturing, and highly dependent on trade as the main avenue for growth, with the export of diamonds as well as water being important foreign exchange earners. This makes Lesotho particularly vulnerable to international or regional shocks. Diversifying into further economic activities is vital, and requires strong industrial policy and strategic governance to encourage the discovery of new sectors and the establishment of infant industries.
Growth over the past two decades has averaged 3.3 percent. Economic activity in the 1990s was driven by the construction boom which accompanied the first phase of the Lesotho Highlands Water Project (LHWP), an extensive water transfer scheme to supply the needs of South African industry. Around the turn of the millennium the manufacturing sector, specifically the textiles and apparel industry, took over as the principal source of foreign revenue and jobs. Diamond mining has become an increasingly important industry, with its contribution to GDP having risen from 0.1 percent in 1999 to around 9 percent in 2015. In addition to diamonds and textiles, large infrastructure projects like the second phase of the LHWP are expected to attract ever greater levels of investment in the medium to long term.
Strategic development plans
Lesotho’s National Strategic Development Plan II (NSDP II) has identified commercial agriculture, manufacturing, tourism and creative industries, and technology as the strategic sectors that can be prioritised for growth and job creation for the period 2018/19 to 2023/24. To unlock this latent potential, Government is implementing a two-pronged strategy of: attracting private investment (both domestic and foreign investment) into these sectors; and resolving the constraints that hinder their growth and development.
This involves creating an enabling investment climate and supportive regulatory framework by:
- Accelerating investment climate reforms and related legislation (residence and work permits, access to land, electricity, customs clearance)
- Maintaining macroeconomic stability
- Improving access to finance through the development of capital markets and other innovative products for Small, Medium and Micro Enterprises (SMMEs)
- Reforming the land tenure system, with the focus mostly in rural areas
- Reviewing current land policies and legislation to ease access to land, especially to support commercial agriculture, private investment in industrial infrastructure and tourism establishments
- Implementing key reforms for promoting democracy and political stability
NSDP II integrates emerging issues, national, regional and international policy commitments and programmes, particularly the United Nation’s Sustainable Development Goals (SDGs), the African Union Agenda 2063, and the SADC Regional Indicative Strategic Development Plan (RISDP).
Expansion and diversification of the economic base has been prioritised, along with increased productivity in key growth sectors and in the green economy.
The steady expansion of the global economy which has been underway since mid-2016 continues, with growth for 2018/19 projected at 3.7 percent, according to the International Monetary Fund (IMF) in its World Economic Outlook (WEO) report of October 2018. Nonetheless, expansion has become less balanced and may have peaked in some major economies.
In advanced economies, economic activity lost some momentum in the first half of 2018 after peaking in the second half of 2017. Outcomes fell short of projections in the euro area and the United Kingdom (UK); growth in world trade and industrial production declined; and some high-frequency indicators moderated. In the United States (US), momentum is still strong as fiscal stimulus continues to increase, but the forecast for 2019 has been revised down due to recently announced trade measures, including the tariffs imposed on US $200 billion of US imports from China.
Across emerging market and developing economies, activity continued to improve gradually in energy exporters but softened in some importers. Growth was revised down for Argentina, Brazil, Iran and Turkey, among others, reflecting country-specific factors, tighter financial conditions, geopolitical tensions and higher oil import bills. China and a number of Asian economies are also expected to experience somewhat weaker growth in 2019 in the aftermath of the recently announced trade measures. Some 45 emerging market and developing economies – accounting for 10 percent of world GDP in purchasing-power-parity terms – are projected to grow by less than advanced economies in per capita terms over the 2018 to 2023 period, and hence to fall further behind in living standards.
In sub-Saharan Africa, growth of 2.7 percent was recorded in 2017, with projections of 3.1 percent and 3.8 percent for 2018 and 2019, respectively. Growth performance varies, however, across countries. Despite the ongoing recovery, the medium-term outlook for commodity exporters remains generally subdued, with a need for further economic diversification and fiscal adjustment. In South Africa, prospects remain modest amid uncertainty in the run-up to the 2019 general elections, with growth projected to fall to 0.8 percent in 2018 from 1.3 percent in 2017, before recovering to 1.8 percent in the medium term.
The domestic economy: 2017-2020
Lesotho’s economy slipped into recession in 2017 for the first time in a decade. The majority of the services industries contracted during the year, on the back of weak domestic demand driven by, amongst others, spill-overs from the weak performance of the South African economy, given the historically strong economic ties between the two countries. Despite employment (real household incomes) remaining stable in key sectors such as manufacturing and government, domestic demand remains restrained.
According to the Central Bank of Lesotho’s Economic Outlook (2018-2020) projections released in June 2018, growth has been marked down by 5.7 percent and 2.0 percent for 2017 and 2018, respectively. This revision follows on the heels of a number of developments, including the recently released National Accounts, which revised the 2016 growth estimate upwards by 1.9 percent to 3.3 percent, changing some estimates and therefore the base for the forecasts.
In the primary sector, significant downward revisions in mining and agriculture have overshadowed both sectoral growth and the overall growth of the economy. The revisions in construction activities are mainly in line with recent government capital budget estimates and the revised implementation schedule of major capital projects, particularly the construction of the Polihali dam and transfer tunnel which will be preceded by the construction of advance infrastructure works.
While the domestic outlook is subdued, growth is expected to recover marginally from the preliminary real GDP growth contraction. The annual growth rate is expected to average just 1.1 percent in the medium term, underpinned by expected low aggregate demand from both the private sector and government. This is far lower than the past 20-year average of 3.3 percent, and is mainly accounted for by the slowdown across all sectors – particularly the contractions in the agriculture, wholesale and retail trade, and government activities subsectors, and lower growth in manufacturing.
The strong growth expected in the mining industry in 2018 is in line with the synchronised global economic upswing, and is forecast to offset the poor performance in other sectors before moderating towards the end of the forecast period. Construction activity is also expected to recover with the commencement of the auxiliary works associated with the LHWP Phase II. There is, however, uncertainty relating to adherence to implementation schedules for most construction projects.
Fiscal policy is expected to contract over the next two years in line with the deterioration in revenue and the decline in government deposits. The overall fiscal performance marginally improved in 2017 when compared with 2016, with the fiscal deficit narrowing from 8.8 percent to 5.7 percent of GDP. Revenues for 2017 fell by 1.2 percent on account of a reduction in tax revenue (particularly corporate income tax) and non-tax revenue. While SACU revenue collections improved by 15.7 percent in 2017, this was not sufficient to offset the lacklustre performance of domestic revenue collection.
The fiscal deficit is projected to narrow to 3.0 percent in the medium term. Despite subdued domestic demand, there should be marginal improvements in domestic tax revenue as the revenue authorities intensify tax compliance efforts for both individuals and corporates. In particular, corporate income tax is expected to rise in line with the robust performance of the mining sector. Revenue from SACU is predicted to remain subdued in 2018 and 2019, but to recover in 2020 in line with the anticipated recovery of South Africa’s economy.
The external balance registered a deficit equivalent to 5.7 percent of GDP in 2017 relative to 5.4 percent of GDP in 2016. The current account deficit narrowed due to the improvement in the primary and secondary income account balances. In addition, the financial account deficit contracted during the period, thus contributing to the observed improvement in the external sector position. However, the official reserve assets, measured in months of imports, declined from 5.1 months in 2016 to 4.1 months in 2017. Projections point to the widening of the current account deficit due to a higher trade account deficit.
Export growth is anticipated to remain strong, supported largely by sustained external demand. Diamond exports are expected to grow by 19.6 percent in 2018 and 7.0 percent in 2020, thanks to favourable prices as well as demand from international markets. New mining industry entrants are also likely to boost the performance of the sector. The forecast for textiles is that exports will remain flat at 3.5 percent in the medium term as the industry continues to face tight competition from its Asian counterparts. Other factors, such as the recent appreciation of the exchange rate, relatively higher wages, low labour productivity and inefficiencies in service delivery continue put pressure on the performance of the industry.
Future growth is anticipated
The Central Bank of Lesotho (CBL) expects the country’s performance to recover over the 2017-2019 period, primarily because of rapid growth in the primary sector – particularly the mining subsector – which is being driven by higher production levels at two of the biggest diamond mines. While the secondary sector is expected to contract in the medium term due to completion of construction activities in some mining plants, the commencement of advance infrastructure relating to Phase II of the LHWP is expected to contribute positively to the sector in the longer term.
The IMF estimates that Lesotho’s GDP will grow by 4.6 percent in 2017, and anticipates growth accelerating to 5.6 percent by 2021.
Lesotho’s year-on-year consumer inflation rate registered 5.4 percent for both July and August 2017, compared with the 5.0 percent recorded in June 2017.The acceleration in overall inflation comes against the backdrop of increased inflation in the ‘food and non-alcoholic beverages’ category, despite falling food prices across the southern African region.
Lesotho has realised major improvements in its business environment in terms of licensing, getting passports, identification cards, water and electricity connections, with the rollout of the one-stop-shop pilot project improving availability of services in the districts. While the country has made progress in areas such as the control of corruption, regulatory quality and accountability, factors such as government effectiveness and political stability require further work.
Being centrally situated in Southern Africa gives Lesotho access to a substantial consumer market in South Africa, as well as the more sophisticated transport and communication networks of its larger neighbour. There are good road connections to both the economic hub of Gauteng and the port of Durban on the Indian Ocean, and thus links to the wider international community, making it suitable for export-orientated manufacturing industries. Globally, Lesotho is ranked 40th out of 190 economies worldwide in the World Bank’s ‘Doing Business’ report for 2018 when it comes to the ‘Ease of Trading Across Borders’ indicator.
Lesotho’s labour force is young, predominantly English-speaking, literate and well-motivated, with a tradition of manual dexterity at competitive wage rates. Serviced industrial sites, factory shells and commercial buildings are available for rental, and there are special incentives provided to investors who erect their own factories at designated sites.
Backstopping services from the Lesotho National Development Corporation (LNDC) and a one-stop-shop for business brings together a streamlined and integrated suite of services for investors, and includes trading and manufacturing licences, import and export issuances, residency visas and work permits. Import and export procedures have been greatly improved in terms of number of procedures, length of time and cost.
Current tax and financial incentives are as follows:
- 10 percent corporate tax on profits earned by manufacturing companies exporting outside SACU
- Manufacturing corporate tax rate of 10 percent on profits for intra-SACU trade
- No withholding tax on dividends distributed by manufacturing companies to local or foreign shareholders
- No advance corporation taxes paid by companies on the distribution of manufacturing profits
- Training costs are allowable at 125 percent for tax purposes
- Payments made in respect of external management skills and royalties related to manufacturing operations are subject to withholding tax of 10 percent
- Easy repatriation of manufacturing profits
- A VAT rate of 15 percent (ensuring harmonisation with the RSA)
- Furthermore, the Lesotho Revenue Authority has introduced flexible VAT payment systems to tax compliant firms to ease cash flows
Traditionally, areas which have attracted the greatest investment include large infrastructure projects like the LHWP, and initiatives that aim at developing the hydroelectric power industry will likely attract new investors in the coming years. Lesotho’s textiles and garments subsector is another potent attractor of investors, who come mainly from South Africa and South-East Asia, with the country’s duty-free access to the US under AGOA having been extended until 2025. The mining industry also brings in a great deal of FDI.
Lesotho has benefited from a customs modernisation programme supported by South Africa which seeks to facilitate regional trade and reduce the time and cost of cross-border movement of goods.
Government announced a number of measures in the 2018/19 budget which are expected to stimulate investment and job creation. As such, each of the economic ministries has been instructed to devote its energies and efforts to catalysing domestic and foreign private investment, as well as to report on businesses it has helped start or expand.
To support these aims, Government established the Investment Climate Reform Committee in 2018, chaired by the Deputy Prime Minister and consisting of technical and policy input from key investment ministries. The committee is tasked with implementing a variety of reforms to make it easier to invest in Lesotho, including issues such as access to capital for starting a business.
Other initiatives are seeing the construction of industrial infrastructure, including a three-year, M800-million project to develop Ha Belo industrial estate, which will put industry closer to South Africa’s port of Durban. There are also plans to upgrade roads as well as the border crossing along this route.
LESOTHO NATIONAL DEVELOPMENT CORPORATION
The Lesotho National Development Corporation (LNDC) strives to facilitate economic growth and development in the kingdom and implement its industrial development policies, while promoting Lesotho as an attractive investment destination to foreign and local investors. In addition to a robust Government-administered incentive regime, the LNDC enjoys clear channels of communication with relevant state departments and parastatal organisations in order to speed up service delivery.
The LNDC is the first point of contact for investors who intend setting up operations in Lesotho. The corporation offers pre-investment and after-care services to both prospective and existing investors as an expedient means of simplifying and shortening the processes related to investment. Examples include facilitating the procurement of all permits and licenses, as well as providing assistance with company registration. Investment project appraisals are undertaken, along with equity participation in projects considered to be of strategic importance to the national economy and demonstrating long- term viability. Subsidies are given to investors wishing to construct their own industrial buildings at LNDC-serviced sites.
LNDC has developed and launched a Strategic Plan 2018-2022 with the objective of mobilising the private sector and all available resources around industrial development, particular focusing on rural areas.
Factory inspections are conducted to assess workplace circumstances and thereby ensure harmonious relations between employers and employees, as well as investor-compliance with the country’s labour laws. A specifically-designed checklist of all labour-related issues facilitates prompt detection and intervention where necessary.
The corporation administers the Partial Credit Guarantee Scheme, where the commercial banks provide loan guarantees (on a 50/50 risk sharing basis) to entrepreneurs who wish to start or expand medium to large businesses but do not have sufficient collateral/security. Furthermore, the launch of the M20 million Supply Chain Finance facility, one of the four components of LNDC’s Enterprise Development Facility (EDF), is an important step.
The LNDC was one of the winners at the United Nations Conference on Trade and Development (UNCTAD) Investment Promotion Awards at the World Investment Forum in Nairobi, Kenya, in July 2016. The corporation was honoured for its instrumental role in forging effective collaborations with strategic partners, in particular the Industrial Development Corporation of South Africa and the China-Africa Development Fund, to promote investment in strategic projects in infrastructure, agriculture, energy and manufacturing. Its efforts have attracted investment in renewable energy and in rural areas.
Promoting investment and competitiveness
LNDC is a member of the Africa Investment Promotion Agency Network (AfrIPANet). This is a programme developed by the United Nations Industrial Development Organisation (UNIDO), with the aim of providing investment promotion agencies with up-to-date and accurate investor survey information, thus enabling them to readjust investment promotion interventions in areas expected to realise the most impact in terms of linking domestic investment to FDI.
Roadshows and joint ventures are the preferred method of catalysing FDI. These can help exploit the 6 400 product lines under AGOA as well as previously untapped European preferential trade opportunities. Events held during the year include the investor roadshow in London in April 2018 in conjunction with the Commonwealth Heads of Government Meeting (CHOGM).
Government is also working with USAID to increase the number of products Lesotho exports to the United States. This includes a roadshow in Lesotho for US investors with the purpose of establishing links with Basotho investors. USAID is also assisting Lesotho to brand food and medicinal products for export to the US.
The LNDC has identified 21 priority products which already have international market access or hold a great potential to do so. These include high-tech agriculture and agribusiness in respect of meat and meat products, fruits and vegetables. In addition, the textiles and apparel manufacturing value chains have the potential for expansion, as does the light-engineering value chain. In line with the NSDP II, the LNDC aims to facilitate further investment into national priority sectors such as tourism and the creative industries, while also developing infrastructure and technology-based industries.
Support is being given to leading export-oriented companies by scaling up their productive capacity, facilitating international market access and integrating these companies into supply chains. Also in the spotlight is the setting up of new companies in the abovementioned priority areas and related product categories.
In order to bring in higher levels of FDI, partnerships have been initiated with renowned regional and global players in targeted product lines. The intention is to establish national champions that are capable of competing on par with their regional and global peers in strategic industries, particularly in manufacturing and high-tech agro-processing. This foresees cross-border acquisitions of strategic assets, raw materials, distribution channels and technology, with companies to be enabled with the requisite technology, product and process certifications as well as human capital.
Among others, LNDC currently has a stake in Basotho Canners, CashBuild, Shoprite stores, Avani Maseru/Lesotho hotels, LNDC Centre Property, Maluti Mountain Brewery, Loti Brick, Lesotho Milling Company and Defcort Flats, as well as factory shells in different parts of the country.
The launch of the Lesotho Standards Authority in 2018 to accredit and certify local products for safe entry into domestic and international markets will support export-oriented investors.
SOUTHERN AFRICAN TRADE & INVESTMENT HUB
The Southern Africa Trade and Investment Hub (SATIH) engages with partners across Southern Africa to deepen regional economic integration, promote two-way trade with the US under the African Growth and Opportunity Act and attract investment that drives commercial expansion of Southern African companies into global markets. SATIH works with the five SACU countries – Botswana, Lesotho, Namibia, South Africa and Swaziland – as well as Malawi, Mozambique, Zambia and Zimbabwe, in collaboration with governments and the private sector to advance international trade.
By building a vibrant, broad-based and export-oriented private sector, and promoting an attractive business environment, SATIH fosters resilience among Southern African economies. From 2013 to 2017, the Hub facilitated US $41 million in private sector investment, reduced the time it takes to trade by 20 percent across the region, and promoted US $40 million in intra-regional trade.
In Lesotho, SATIH is supporting economic diversification and job creation, while fostering a business environment conducive to trade and investment. The Hub implements activities in four critical areas:
- Finance and Investment – Accelerating US and international investment to businesses to promote strategic value chains and expand international trade links
- Export Competitiveness – Helping companies to leverage AGOA to increase exports to the US
- Enabling Environment and Trade Facilitation – Fostering transparent, reliable, efficient and cost-effective trade policies and related infrastructure
- Agribusiness – Increasing the competitiveness of agricultural value chains for export through investment, technology transfer and greater private sector participation
The Hub links export-oriented companies in key sectors such as textile/apparel and specialty foods to potential buyers and investors, as well as including them in regional directories. It partners with the LNDC to facilitate trade links, and promotes awareness of Worldwide Responsible Accredited Production (WRAP) standards. Further, it supports private sector initiatives to increase market transparency and trade in textiles and apparel.
SATIH assists local companies and the mohair wool industry association in complying with cross-border pesticides control and grading. It supports the development of an Authorised Economic Operator (AEO) facility to assist cross-border trade.
TRADE & MARKET ACCESS
Regional integration is of prime importance, given Lesotho’s small size and geographical position within the larger economy of South Africa. Benefits to this relationship include ready access to its neighbour’s excellent transport network, technology, expertise, goods markets, investment resources and capital and financial markets.
To take full advantage of these opportunities, Lesotho has been involved in the upgrading of border post facilities and access roads, and the establishment of a dry port. Furthermore, it has undertaken several initiatives in the form of bilateral, sub-regional and regional agreements to facilitate regional trade relations. These include a Joint Bilateral Commission on Cooperation between Lesotho and South Africa on issues of infrastructure and transport.
The Lesotho Revenue Authority’s Asycuda customs border control system is part of the broader Customs Modernisation Programme meant to simplify clearing processes and reduce the costs of doing business, while also reducing levels of corruption at the border and increasing revenue collection. The system entails non-intrusive methods of inspections, such as the use of X-rays to scan goods and baggage at both the border and airport.
Trade facilitation is of prime importance in lowering cross border transaction and transport costs for a Land Locked Developing Country (LLDC) such as Lesotho. The LLDC group lobbies for special consideration to be shown to export-driven countries lacking their own direct sea-freight facilities.
Lesotho has signed a number of trade agreements which afford expanded access to regional and international markets. In addition, its status as a Least Developed Country (LDC) in the World Trade Organisation (WTO) gives it duty-free access to the markets of industrialised countries. The Enhanced Integrated Framework (EIF) is an aid-for-trade partnership for LDCs that supports such countries in being more active in the global trading system by helping them to address supply-side constraints to trade.
Along with South Africa, Botswana, Namibia and Swaziland, Lesotho is a member of the Southern African Customs Union (SACU), which is the oldest functioning customs union in the world, having been established in 1910. SACU is the regional framework for trade cooperation, and seeks to maintain the free interchange of goods between member countries and provide a common external tariff for the common customs area. Lesotho’s products therefore enjoy duty free access to a market of more than 62 million consumers with a combined GDP of US $307 billion.
The Prime Minister of Lesotho, Dr Thomas Thabane, assumed the chairmanship of the Southern African Customs Union at the 6th Summit of the Heads of State and Government held in Gaborone, Botswana, In June 2018.
The revenue realised from external trade is coordinated through a joint revenue pool and distributed proportionately to SACU member states, based on an established revenue sharing formula. A regional financing mechanism has been established for SACU-wide infrastructure and industrialisation projects.
Countries in the common customs area are able to negotiate Free Trade Area (FTA) agreements with third parties as a bloc. SACU members are party to the SADC Protocol on Trade signed in 1996, and enjoy a Free Trade Agreement with the European Free Trade Association (EFTA) states, made up of Switzerland, Norway, Iceland and Liechtenstein. In addition, there is a Preferential Trade Agreement (PTA) with the Common Market of the Southern Cone (MERCOSUR), comprising Argentina, Brazil, Uruguay and Paraguay (a total market of 385 million consumers). A Trade, Investment and Development Cooperative Agreement (TIDCA) was signed in 2008 with the USA.
The US has historically proven a ready market for Lesotho’s exports of apparel. The African Growth and Opportunity Act (AGOA) provides eligible African countries with duty and quota-free access to the US market – the largest consumer market on earth with a GDP of US $20 trillion and 325 million people. Lesotho, which has been exporting to the US under AGOA since 2001, is allowed to utilise third-country textile inputs because of its LDC classification. The country’s exports to the US under AGOA were worth US $308.6 million in 2017. About 40 000 jobs in Lesotho depend directly on AGOA, while the programme additionally provides indirect benefits to a further 120 000 citizens.
Lesotho is a member of the Southern African Development Community (SADC), a grouping of 15 countries with a combined population of some 330 million and a cumulative GDP of US $573.597 billion. Other members of SADC include South Africa, Zimbabwe, Zambia, Malawi, Tanzania, Madagascar, Mauritius, Seychelles, Angola, Democratic Republic of Congo, Namibia, Botswana, Swaziland and Mozambique. Intra-SADC trade is governed by the SADC Protocol on Trade, while extra-regional trade is aligned with both the WTO negotiated tariff liberalisation process as well as bilateral and/or inter-regional trade arrangements.
The SADC FTA has been fully implemented since 2012, with 92 percent of product lines traded at zero percent. The FTA is one of the first milestones towards regional integration and a common market. An agreement has been reached on a SADC Regional Development Fund.
The EU signed an Economic Partnership Agreement on 10 June 2016 with the SADC EPA Group comprising Botswana, Lesotho, Mozambique, Namibia, South Africa and Swaziland. Angola has an option to join the agreement in future. The agreement became the first regional EPA in Africa to be fully operational after Mozambique joined in February 2018. The agreement grants free access to the European market while allowing member states to maintain tariffs on products sensitive to international competition; a strategy known as asymmetrical liberalisation. In exchange, these countries are removing custom duties on 86 percent of EU imports. The agreement is contingent on the provisions in Article 2 of the EPA, which include respect for human rights, rule of law and democracy.
Lesotho, as well as fellow SADC members South Africa, Botswana and Namibia, exports large quantities of diamonds to the EU. At the same time, the EU exports a wide range of goods to these countries, including vehicles, machinery, electrical equipment, pharmaceuticals and processed food. There is potential to develop the services sector in Lesotho, and the EPA provides for cooperation in this area as well. Currently, SADC exports to the EU total some US $31.7 billion, while EU exports to SADC stand at around US $32 billion.
The European Union is the Southern African Development Community EPA Group’s largest trading partner.
Lesotho is also a signatory to the Tripartite Free Trade Area (TFTA) between SADC, the East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA), which was launched in June 2015. To date, 22 of the 27 member states have signed the agreement, which is expected to boost trade among the participating countries as a result of market expansion. Negotiations are ongoing, with four countries having so far ratified the agreement, which requires 14 ratifications to enter into force. It is expected that this target will be reached by the end of April 2019.
The TFTA has been used as a basis for engaging in the ongoing African Continental Free Trade Area (AfCFTA) negotiations. As of July 2018, Lesotho is among 49 African countries to have signed the agreement establishing the AfCFTA, which is meant to create one African market, bringing together all the 55 member countries of the African Union to trade tariff-free. The AfCFTA foresees the creation of a market of over 1.2 billion people with an aggregate GDP of close to US $4 trillion.
Lesotho’s products also benefit from preferential market access to the Australian market of 22 million consumers, with products entering either duty-free or at reduced rates of duty. Under the GSP system, a long list of products (excluding dairy, poultry and eggs) have been granted duty-free entry to Canada with its population of 34 million people.
Furthermore, close to 100 percent of Lesotho’s industrial products, including textiles and clothing, can be exported duty and quota free to Japan with its 127 million consumers. Lesotho’s products are eligible for duty free access to New Zealand in terms of a GSP scheme introduced in 1972, while Turkey also provides duty free access for Lesotho’s industrial products.
In conjunction with her regional partners, Lesotho is keen to foster closer economic ties with Asian countries, including China, India and Pakistan, creating new opportunities for product and market diversification.