Trade Policy Review: Lesotho by Lerato Ntlopo Class of 2007
tralac greatly acknowledges the financial support of the Ambassaden van het Koninkrijk der Nederlanden for the Post Graduate Training programme and the publication of this Working Paper.
Copyright © tralac, 2010. Readers are encouraged to quote and reproduce this material for educational, non-profit purposes, provided the source is acknowledged. All views and opinions expressed remain solely those of the authors and do not purport to reflect the views of tralac. This publication should be cited as: Ntlopo, L. 2010. Trade Policy Review: Lesotho. Stellenbosch: tralac.
Table of Contents List of Acronyms ......................................................................................................................... 3 EXECUTIVE SUMMARY ............................................................................................................ 4 1. Economic Environment ........................................................................................................... 5 1.1. Main Economic Features ................................................................................................. 5 1.2. Recent Economic Developments ..................................................................................... 6 1.2.1. Macroeconomic Framework ................................................................................... 6 1.2.2. Growth, Employment and Poverty.......................................................................... 7 1.2.3. Fiscal Developments.............................................................................................. 8 1.2.4. Balance of Payments (BOP) .................................................................................. 9 1.2.5. Structural Reforms ............................................................................................... 10 2. Development in Trade ........................................................................................................... 12 2.1. Major Trading Patterns .................................................................................................. 12 2.2. Direction of Trade .......................................................................................................... 12 2.3. Foreign Investment Partners.......................................................................................... 16 3. Trade Policy Regime: Framework and Objectives ................................................................. 16 3.1. Structure of Policy Formulation ...................................................................................... 16 3.2. General Constitutional and Institutional Framework ....................................................... 16 3.3. Relevant Institutions – Policy Making ............................................................................. 17 3.4. Trade Policy Objectives ................................................................................................. 17 4. Trade Agreements and Arrangements .................................................................................. 19 4.1. Multilateral ..................................................................................................................... 19 4.2. Regional Agreements .................................................................................................... 19 4.2.1. Southern African Customs Union (SACU) ............................................................ 19 4.2.2. Southern African Development Community (SADC) ............................................ 20 4.2.3. African Growth and Opportunity Act (AGOA) ....................................................... 22 4.3. Trade Preferences ......................................................................................................... 22 4.3.1. Generalised System of Preferences (GSP) .......................................................... 22 4.3.2. Cotonou Agreement ............................................................................................. 23 5. Foreign Investment Regime .................................................................................................. 23 5.1.The Business Environment ............................................................................................. 24 6. Aid For Trade ........................................................................................................................ 25 7. Trade-Related Technical Assistance ..................................................................................... 25 REFERENCES ......................................................................................................................... 26 APPENDIX................................................................................................................................ 28 2
List of Acronyms AGOA
African Growth Opportunity Act
BEDCO
Basotho Enterprise Development Corporation
BOP
Balance of Payments
CBL
Central Bank of Lesotho
DIFD
Department of International Development
DTIS
Diagnostic Trade Integration Study
GDP
Gross Domestic Product
GoL
Government of Lesotho
IF
Integrated Framework
IP
Investment Policy
LTPP
Lesotho Trade and Poverty Programme
MCA
Millennium Challenge Account
MCG
Millennium Challenge Goals
MDTF
Maloti Drakensburg Trans - Frontier
MTICM
Ministry of Trade and Industry, Cooperatives and Marketing
NEPAD
New Partnership Africa’s Development
PRAU
Policy and Regulatory Analysis Unit
PRS
Poverty Reduction Strategy
PRSP
Poverty Reduction Strategy Paper
PSP
Priority Support Programme
SA
The Republic of South Africa
SACU
Southern African Customs Union
SADC
Southern African Development Community
SMME
Small Medium Micro Enterprises
US
United States of America
WTO
World Trade Organisation
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EXECUTIVE SUMMARY The goals of the Government of Lesotho (GoL) are laid out in the “Vision 2020: Empowerment for Prosperity” document (2002). The vision statement is articulated as follows: By the year 2020, Lesotho shall be a stable democracy, a united and prosperous nation at peace with itself and its neighbours. It shall have a healthy and welldeveloped human resource base. Its economy will be strong, its environment well managed and its technology well established. (p. 4, emphasis added) The specific objectives of the vision are to: “establish a long term vision for Lesotho by looking beyond the short term plans and adjustment; explore the options for economic, political and human development”. In building a strong economy, the country will be characterised by the following: opportunities for full employment will be abundant and Lesotho will be a magnet retaining its people to jobs in the country; the country will have well developed Small, Micro and Medium Enterprises (SMMEs); a well developed entrepreneurial culture will be marketed among Basotho; and the tourism potential will fully be exploited. It was observed that at the end of 2005, the tertiary sector was the leading contributor to the Gross Domestic Product with an average of 42 percent, followed by the secondary sector with an average contribution of 40 percent. The primary sector only contributed 18 percent to GDP. Lesotho’s natural environment is very fragile. It is characterised by steep slopes and frail soil formation. The mandate on environment is derived from the Constitution of Lesotho, Section 36, which states: Lesotho shall adopt policies designed to protect and enhance the natural and cultural environment of Lesotho for the benefit of both present and future generations and shall endeavour to assure all citizens a sound and safe environment adequate for their health and well being.
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1. ECONOMIC ENVIRONMENT 1.1. Main Economic Features Lesotho is a democratic, sovereign, and independent country with the unique characteristic of being totally surrounded by its neighbour, the Republic of South Africa (SA). Formerly a British protectorate until she gained independence in 1966, the Kingdom of Lesotho is one of the three remaining monarchies in Africa. Lesotho proudly celebrated 40 years of independence during 2006, and continues to deepen and consolidate its record of democracy, good governance, stability, and commitment to the maintenance of sound and prudent economic and monetary policies. At the most recent general elections, the Lesotho Congress for Democracy (LCD) had the majority seat, and therefore remains the ruling party. Lesotho’s ability to achieve its sustainable human development objectives is closely linked to the evolving economic and political dynamics of neighbouring South Africa as well as other SADC countries. With the assistance of developing partners, new roads have been built to increase accessibility to the country’s highlands. Lesotho is a member of the New Partnership for Africa’s Development (NEPAD). The long-term objectives of NEPAD include the eradication of poverty in Africa and placing African countries, both individually and collectively, on a path of sustainable growth and development. NEPAD campaigns to encourage macroeconomic convergence on the continent and harmonised policy, therefore making Africa predictable for investment. Lesotho is also a member of the African Union (AU). The AU is accelerating the processes for regional economic integration and rationalization, as well as the consolidation of regional communities. Lesotho recognizes that it has a duty to preserve its unique African alpine environment and species associated with it. One of the concrete steps to reach this goal is maintaining the country’s commitment to implement the Maloti-Drakensberg Trans-Frontier (MDTF) Park in collaboration with South Africa, and maintaining the already existing nature reserves in the country. The GoL endorsed and adheres to internationally accepted principles of the 1997 Stockholm Declaration and 1992 Rio Declaration, as adopted by the UN Conference. Lesotho is also a signatory to the Protection of Fauna and Flora Convention on Biodiversity. With regard to HIV/AIDS issues, the GoL has formulated a strategic response to the pandemic, whose overriding goal was to reduce the prevalence rate by 15 percent by 2007. The first National Strategic Plan for the period 2002/2003 – 2004/2005 was drawn from the 5
HIV/AIDS policy framework and working document of October 2003, entitled “Turning Crisis into an Opportunity: Strategies for Scaling Up the National Response to HIV/AIDS”. Institutions that were initially launched to manage and coordinate HIV/AIDS programmes and activities are reviewed by the National AIDS Commission, which was approved by the cabinet in June 2005. The GoL also plans to intensify its efforts to arrest the spread of infection through education campaigns, and scale up its efforts to mitigate the adverse impact on the infected individuals as well as families. The GoL will therefore expand the use of anti-retroviral drugs. The strategy of reducing the prevalence rate in 2007 was implemented through four main programs: the HIV/AIDS infection prevention program; the prevention of mother-to-child transmission program; the treatment, care, and support program; and the program on impact mitigation. The Ministry of Trade and Industry, Cooperatives and Marketing, in support of the DFID-funded Lesotho Priority Support Programme (PSP), also plans to reach out to SMMEs, with a special focus on HIV/AIDS issues. 1.2. Recent Economic Developments 1.2.1. Macroeconomic Framework In setting an attractive environment for foreign and domestic investment, Lesotho’s economic policy is designed to encourage domestic saving and foreign capital flow; ensure that Lesotho experiences low and stable inflation; encourage rapid economic growth; influence the structure of economic growth to support the creation of productive employment opportunities; and set tax expenditure policies which have a beneficial impact on distribution of income and wealth. The Lesotho Poverty Reduction Strategy (PRS) was completed in 2004 with the assistance of the development parties. The PRS outlined eight priority areas and two cross-cutting issues that need to be addressed in an effort to promote rapid economic growth and reduce poverty in Lesotho. The eight priority areas are (Central Bank of Lesotho [CBL], 2006a): Employment creation, improvement of agricultural production and food security, development of infrastructure, deepening democracy, governance, safety and security, improvement of access to health care and social welfare, improvement of the quality of and access to education, enhancement of public service delivery, and management conservation of the environment.
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Most indicators reflected good performance of the economy in the third quarter of 2006. Economic growth in the US, measured by changes in the real Gross Domestic Product, continued to weaken during the same period. Table 1 Selected Economic Indicators 2003
2004
2005
2006*
Gross Domestic Product - GDP
2.7
4.0
2.7
4.8
Gross Domestic Product Excluding LHPW
4.3
4.5
3.2
5.1
Gross National Product - GNI
6.0
6.1
3.4
5.7
Per capita - GNI
3.7
3.9
2.2
4.4
Agriculture
0.3
13.5
20.0
10.7
Manufacturing
5.0
2.1
-8.0
1.2
Construction
-4.9
-4.4
2.5
2.8
Services
6.1
2.6
3.5
Imports of goods
84.0
84.5
69.5
77.7
Current Account
-6.3
-1.2
-1.0
8.6
Capital and Financial Account
3.9
1.5
2.0
2.3
Official Reserves (Months of Imports)
5.6
5.2
6.4
7.1
-0.4
5.6
4.4
9.3
Output Growth (%)
Sectoral Growth Rates
External Sector - % of GNI Excluding LHWP
Government Budget Balance (% of GDP) Source: CBL (2006d). Economic Review, August 2006
1.2.2. Growth, Employment and Poverty Contributions to GDP growth are important in ensuring sustainable growth through employment creation, increased government revenue earnings, and foreign investment, as per the Vision 2020 goals. Lesotho’s economy was projected to grow at a rate of 4.8% in 2005. Growth in the sub-Saharan Africa region declined from 5.3% in 2004 to 4.6% in 2005. The SADC member states implemented sound macroeconomic policies that resulted in the region having the political will to achieve sustainable growth. Growth in SA during 2005 generally benefited Lesotho, with favourable inflation conditions and low interest rates.
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Lack of comprehensive data on the labour market is a major obstacle to a full analysis of the labour market. Employment statistics show that an unskilled and low-skilled labour force grows at a higher rate than the economy’s capacity to create employment. Employment in Lesotho National Development Corporation (LNDC)-assisted companies increased by an estimated 16% in 2006. “The increase is a result of the recovery of the export manufacturing sector, where the majority managed to secure sales orders for a longer horizon” (CBL, 2006b). 1.2.3. Fiscal Developments The GoL has engaged in a number of reforms in recent years. Some of the reforms, although not directly fiscal in nature, have influenced the fiscal performance. For instance, the ongoing public sector improvement reform programme aims at improving efficiency in the delivery of public service. The total government revenue collection was 3 331.00 million Maloti in the 2002/2003 fiscal year and increased to 3 644.9 million Maloti in 2003/2004. The Value Added Tax was introduced in 2003. To further consolidate fiscal performance measures, while ensuring overall macroeconomic improvement, the national long-term vision and the PRS were approved in 2004. Table 2 Budgetary Operations (Million Maloti) 2002/2003
2003/2004
Total Receipts
3331.00
3644.90
Revenue
3034.70
3368.10
Tax revenue
2575.90
2872.90
Customs
1470.00
1421.60
Income Tax
762.20
950.20
Individual Income Tax
663.30
850.90
Company Tax
86.30
86.30
Other Income Taxes
12.60
13.00
Taxes on Goods and Services
343.70
501.10
Other Taxes
0.00
0.00
Non-tax Revenue
458.80
495.20
213.40
213.40
Grants
296.30
276.80
Total expenditure and net Lending
3656.10
3892.20
of which: water Royalties
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Recurrent expenditure
2876.20
3165.00
Purchases of Goods and Services
2147.10
2385.10
Personnel Emoluments
1082.10
1123.20
Other Goods and Services
1065.00
1261.90
Interest payments
219.70
215.10
External
109.50
90.30
Domestic
110.20
124.80
Subsidies and Transfers
509.40
564.80
of which: bank Restructuring
0.00
0.00
LHDA
0.00
0.00
Source: CBL (2005). Annual Report
1.2.4. Balance of Payments (BOP) The current account surplus in the emerging Asian economies was projected to decline to 3.7 percent of GDP in 2005 from 4.1 percent in 2004. In Lesotho, surplus in BOP was expected to increase from 1.6 million Maloti in 2004 to 260 million Maloti in 2005. This indicated that earnings from economic transactions between Lesotho residents and the rest of the world during the year exceeded the payments, and consequently, that the country is building reserves. The net payments on services were anticipated to decline by 15.9 percent as a result of deterioration in the capital and financial account. Table 3 Balance of Payments (Million Maloti) 2003
2004
2005*
Current Account
-983.92
-489.26
-145.31
Goods
-3890.13
-3827.12
-3757.85
Services
-251.11
-208.68
-255.57
Income
1874.36
1949.58
1932.23
Current Transfers
1283.56
1596.96
1935.88
929.55
611.66
371.96
Capital Account
208.10
216.30
133.30
Financial Account
721.45
395.36
238.66
516.99
-10.61
-274.75
Capital And Financial Account
Reserve Assets Source: CBL (2005). Annual Report
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1.2.5. Structural Reforms Lesotho has been selected as one among 16 countries that are taking greater responsibility for their own development and are eligible for the Millennium Challenge Account. The country’s proposal focused on three main areas, which are seen as programmes that will have measurable impact on employment creation, poverty reduction, and sustainable development. These include industrial development as well as tourism development. Table 4 Gross Domestic Product by kind of Economic activity (Million Maloti, at 2007 prices) 2003
2004
2005*
Primary Sector:
1317.50
1552.20
1647.70
Agriculture
1304.50
1368.80
1439.10
Mining and Quarrying
13.00
183.40
208.60
Secondary Sector:
2996.80
3260.90
3272.20
Manufacturing
1432.00
1623.70
1539.60
Electricity and Water
350.30
375.60
402.00
Building and Construction
1214.50
1261.60
1330.60
Tertiary Sector:
3283.40
3475.40
3738.40
Wholesale and Retail Trade
770.80
861.70
913.30
Catering
146.70
160.40
177.60
Transport and Communication
334.70
343.70
379.40
Finance and Insurance
383.40
401.90
457.10
Real Estate and Business Services
124.60
136.50
144.00
Ownership and Dwellings
262.10
267.30
281.90
Public Administration
511.80
532.30
565.80
Education
548.30
559.00
595.30
Health
117.20
123.40
130.50
Other Services
83.80
89.20
93.50
GDP at Factor Cost (unadjusted)
7597.70
8288.50
8658.30
Less: Imported Bank Service Charges
322.30
293.40
321.00
GDP at Factor Cost
7275.40
7995.10
8337.30
Plus: Indirect taxes, net
778.20
837.90
885.40
GDP at Market Prices
8083.60
8833.00
9222.70
Source: CBL (2005). Annual Report 10
More than 80 percent of the Lesotho population lives in rural areas and about 70 percent derives their livelihood, in part, from agriculture, largely at a subsistence level. Agricultural production is hampered by land availability and quality and water constraints, accentuated by climatic events on the physical side. Agricultural contribution to the GDP was 1552.20 million Maloti in 2004 and increased by 1.82% in 2005. See Table A in the Appendix for the estimated area planted and share harvested for main crops in Lesotho. Lesotho has become a net importer of basic foodstuffs. Despite good rainfall in 2005/2006, domestic availability of cereals stood at 172.9 thousand tonnes, while the cereal requirement for the marketing year was estimated at 414.6 thousand tones. In 2004/2005, domestic availability of maize was 117 tonnes, while the required maize was 242.1 tonnes, leading to a deficit of 10 tonnes of maize. In 2005/2006, there was a deficit of 16 tonnes of maize, 27.1 tonnes of sorghum, and 21.7 tonnes of wheat. Chart A in the Appendix shows Cereal Demand in Lesotho over the period 2004 to 2007. The mining and quarrying sector displayed an exceptionally good performance in 2004, rising by an estimated 150 percent following another 5 percent increase in the preceding year. This was a result of the revival of the Letseng Diamond mine. Lesotho is believed to have significant mineral deposits, but attempts at exploitation have been limited due to lack of investment and expertise. Manufacturing has recently been the main contributor to the growth of Lesotho’s formal GDP, with the textiles and clothing sub-sector contributing the largest portion to manufacturing growth and trade. Lesotho has become Africa’s largest garment exporter. The country’s exports have risen spectacularly since the late 1990s. Lesotho’s garment exports to the US increased from US$372.614 thousand in 2003 to about US$446.487 thousand in 2004, but then decreased to US$384.452 thousand in 2005 due to the end of the Multi-fibre Agreement. See Chart B in the Appendix for Africa’s exports to the US over the period 2004 to 2005. Data shows that the Tourism sub-sector has been growing at a slower rate. Lesotho has been experiencing a decline in international arrivals and hence, tourism. In 2003, there were 360 955 international arrivals, while there were 303 578 arrivals in 2005, marking a decline of approximately 16 percent. This is particularly worrying, as the sector has been identified as one of the potential drivers of economic growth within the Vision 2020 document.
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Remittances by Basotho workers employed in mining in South Africa had formed an important part of household income in recent years, and their decline as a result of retrenchment in mining activity in that country in turn suppressed domestic consumption in Lesotho. Miners’ remittances fell by 6.9 percent in 2005. 2. DEVELOPMENT IN TRADE 2.1. Major Trading Patterns The Diagnostic Trade Integration Study (DTIS) of the Integrated Framework (IF) for Lesotho has identified that there are a number of problems related to trade statistics. The Ministry of Trade and Industry has had limited data analysis capacity which would be vital to assessing trade flows and formulating trade negotiation positions. The Lesotho Trade and Poverty Programme (LTPP) was officially launched in November 2003, and in January 2004, undertook a study on data needs assessment relating to Lesotho Trade Data to identify how the inconsistencies occur and how they can be rectified. Recognising the importance of data, analysis, and the current shortcomings in statistics in Lesotho, the Ministry of Trade and Industry, Cooperatives and Marketing (MTICM), with support from the PSP, has established a Policy and Regulatory Analysis Unit (PRAU). Working closely with the Bureau of Statistics, Ministry of Finance and Development Planning, Lesotho Revenue Authority, and the Central Bank of Lesotho, the unit is charged with collecting and collating economic data for analysis. This analysis is then used to inform the trade negotiating position, and appropriate MTICM regulatory reform impact assessment of GoL regulations on the private sector. The PRAU forum is constituted by Ministry Personnel although it plans to be autonomous. 2.2. Direction of Trade The growth of Lesotho’s economy depends on growth in employment as well as export revenue generated from the manufacturing sector that is almost entirely driven by the exportoriented FDI in the apparel industry. According to available data, Lesotho’s merchandise exports increased to 4 134.6 million Maloti in 2005 from 3 557.33 million Maloti in total (world) trade in 2003. Meanwhile, total imports dropped from 7 011.76 to 6 641.80 million Maloti. There was a large increase in imports from SADC over the same period, from 4.08 to 36.70 million Maloti. See Tables 5 and 6 below.
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Table 5 Direction of Merchandise Trade, 2003 – 2005: Imports C.I.F (Million Maloti) REGION
2003
2004
2005*
Africa
7011.76
6628.70
6641.80
SACU
7003.20
6584.40
6603.30
SADC**
4.08
38.20
36.70
Other
4.08
6.10
1.80
Europe
12.13
73.20
56.70
Europe
10.76
70.40
53.00
Other
1.37
2.80
3.70
North America
15.09
97.50
32.80
Asia
1109.67
2183.50
1133.10
Oceania
31.98
53.70
5.80
Source: CBL (2005). Annual Report * Projection ** excluding SACU
Table 6 Direction of Merchandise Trade, 2003 – 2005: Exports F.O.B (Million Maloti) REGION
2003
2004
2005*
World
3557.33
4533.30
4134.60
Africa
695.62
657.50
812.60
SACU
689.68
622.20
713.60
SADC**
0.23
0.00
0.00
Other
5.71
35.30
99.00
Europe
3.73
695.00
710.40
Europe
3.73
692.00
710.40
Other
0.00
3.00
0.00
North America
2849.09
3168.60
2597.80
Asia
8.89
12.20
13.80
Oceania
0.00
0.00
0.00
Source: CBL (2005). Annual Report * Projection ** excluding SACU 13
Bilateral trade between the US and Lesotho is characterised by Lesotho’s exports going to the US while the US only export a few products to Lesotho, in particular, agricultural products, which amounted to US$2 346 thousand in 2005. Table 7 Main trading partner – US (US$1 000) Major products
2003
2004
2005
US Exports
3,818
3,557
2,346
US Imports
0
0
0
US Exports
11
0
0
US Imports
456,010
390,690
387,576
US Exports
1,254
83
3
US Imports
0
0
0
US Exports
68
6
0
US Imports
9,206
10,696
20,026
US Exports
95
75
1,065
US Imports
0
0
0
US Exports
5481
5,481
4,029
US Imports
167,047
467,067
408,407
Agricultural products:
Textile and apparel:
Machinery:
Minerals and metals:
Electronic products:
All sectors:
Source: AGOA.info website
The Lesotho textile and garment sector has faced two major challenges: increasing competition after the phase out of the multi-fibre arrangement in 2005, and the scheduled 2007 expiration of the third world fabric provision in the African Growth and Opportunity Act (AGOA). Lesotho’s exports to the US decreased from US$111.128 thousand to US$93.458 thousand in 2005. Table 8 below shows the changes in US imports from Africa.
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Table 8 US Textile and Apparel Imports from Africa (US$1 000) Country
2004
2005
% change
Botswana
5.835
7.836
34.24
Cape Verde
1.146
0.914
-20.24
Ghana
9.331
6.515
-30.18
Kenya
73.396
73.225
-0.23
Lesotho
111.128
93.458
-15.90
Madagascar
69.441
62.281
-10.28
Mauritius
37.406
28.932
-22.65
South Africa
57.362
28.445
-50.41
Swaziland
61.469
54.638
-11.11
Tanzania
1.541
1.616
4.87
Sub-Saharan Africa
462.100
386.333
-16.40
Source: CBL (2006c). Economic Review, January 2006
Policy responses The GoL has taken steps to assist the sub-sector to recover on the administrative side. Work resident permits have been eased, the fabric textile mill essential to meet AGOA has been established, and the third country fabric sourcing requirement of 2008 has been put in place. The GoL has also advanced steps of establishing a one-stop shop for import and export permits. The Lesotho National Development Corporation (LNDC) is responsible for investment promotion and procedures. In its attempts to meet the overwhelming challenges for rapid industrialisation, this parastatal agency initiates and facilitates the development of manufacturing and processing industries. The LNDC falls under the Ministry of Trade and Industry, Cooperatives and Marketing (MTICM), which is responsible for providing the overall policy direction on industrialisation. The recent Poverty Reduction Strategy Paper (PRSP) and the Integrated Framework (IF) on Trade have highlighted business linkages as critical for pro-poor economic growth and hence have the potential to reduce the level of poverty in Lesotho. In today’s increasingly globalised environment, business linkages represent a means for Small, Micro and Medium Enterprises (SMMEs) to access new markets, technical expertise, skills, and business support services. Recently, the LNDC undertook a study to 15
examine future aspects of the Lesotho garment industry. The aim was to determine the volume of knitted fabric being consumed by Lesotho’s manufacturers of knitted garments. This would be essential for the Lesotho manufacturing sector to have a reliable source of competitive knitted fabric that would be AGOA-compliant after September 2007. 2.3. Foreign Investment Patterns Foreign Direct Investment (FDI) in Lesotho’s textile and clothing sector is mostly from Asian countries. Data from the LNDC show that a concentration of the FDI is from Taiwan, with 31 factories and investment of about 1138.55 million Maloti. The second largest country is South Africa, with 26 factories and investment of about 957.9 million Maloti, followed by China with 4 factories and investment of about US$10 million. 3. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES 3.1. Structure of Policy Formulation Internally, the Ministry of Trade and Industry, Cooperatives and Marketing (MTICM) is the main state agency responsible for coordinating the country’s trade policy as well as all international trading relations, including WTO activities. The MTICM sets up forums to inform and seek full participation of all relevant stakeholders in national/international trade issues and policy making. These forums include the Inter-Ministerial Task Team and the National WTO Steering Committee and its sub-committees. Other line Ministries and trade-related organizations are closely consulted in the policy making process. The Ministries include Finance and Development Planning, Foreign Affairs and International Relations, and Agriculture and Food Security, while institutions include the Central Bank of Lesotho (CBL), Lesotho National Development Corporation (LNDC), and the Basotho Enterprises Development Corporations (BEDCO). The latter two are parastatals to the Ministry. 3.2. General Constitutional and Institutional Framework Lesotho is a constitutional monarchy. The trade policies and strategies for Lesotho are rooted in the main policy documents for the country: the Lesotho Vision 2020 document and the PSRS, as well as the budget speech for the current year. The MTICM also takes the lead in engaging in bilateral, regional, and international trade negotiations on behalf of the country. When Lesotho desires to enter into new negotiations, 16
the relevant Ministry is engaged and therefore justifies that decision, in communication with the Ministry of Foreign Affairs. The Ministry of Foreign Affairs is responsible for the signing and ratification of agreements or treaties on behalf of the country. Upon the desire for Lesotho to ratify or sign an agreement, the Ministry of Foreign Affairs seeks approval from the Cabinet and therefore signs on behalf of Lesotho. 3.3. Relevant Institutions – Policy Making Lesotho’s trade regimes stem from the country’s membership in the Southern African Customs Union (SACU), with the common external tariffs and duties relevant for member states enshrined in the SACU Agreement of 2002, which states: “Members shall establish, specialized independent and dedicated National Bodies or designate institutions which shall be entrusted with receiving requests for tariff changes and other SACU issues” (Part 3, Article 14). A National Body was developed in which all the stakeholders in trade-related issues are members. 3.4. Trade Policy Objectives Export policies are similarly determined by external conditions, including SADC, AGOA, and the EU. The guidelines within which the national development plans are formulated are provided in the Lesotho Vision 2020. The principal trade-related objective of the Vision is that by the year 2020, Lesotho should have a “stable economy”. The Poverty Reduction Strategy (PRS), together with the Millennium Development Goals (MDGs), are the operational tools formulated within the context of the Vision’s objectives. The PSR is a threeyear medium term development framework (2002/05 – 2006/07), with the overarching development goal being “to provide a broad-based improvement in the standard of welfare to the current generation of Basotho, without compromising opportunities for future generations”. The major macroeconomic targets for the PRS were to increase real GDP from 3% in 2003 to 75% by 2006. The main Lesotho PRS aim was that of expanding the international markets and supporting global efforts to liberalise trade while protecting Lesotho’s economic interests and maximizing the potential benefits for national welfare. Trade Laws and Regulations Below is a summary of Lesotho’s trade-related laws and regulations. 17
Box 1: Lesotho’s Trade-Related Legislation, December 2002 Area
Legislation
Customs matters, including anti-dumping and countervailing measures
Customs and Excise Act, 1982 (Act No. 10 of 1982); Customs and Excise Regulations, 1984; Customs and Excise (Amendment) Act, 1984
Sales tax/VAT
Sales Tax Act, 1995 (Act No. 14 of 1995); Value Added Tax Act, 2001 (Act No. 9 of 2001)
Health and sanitary regulations
Proclamation 57, 1952 (Importation of livestock and livestock products); Stock Diseases Proclamation (Amendment), 1954; Stock Diseases Regulations, 1973; Stock Diseases (Amendment) Act, 1984; Notes of the Chief Veterinary Officer, May 2000, relating to the Stock Diseases Proclamation of 1896, as amended; Agricultural Marketing (Distribution of Dairy Products) Regulations, 1992; Proclamation 45,1951 - Fishing Regulations; Act to Provide Protection to Agricultural Plants from Damage by Pests and Diseases, 1985
Trade development
Lesotho National Development Corporation Act, 1967; Lesotho National Development Corporation Order, 1990 (effective 1993) * Basotho Enterprises Development Corporation Act, 1980 (Amendment Act 2000) * Pioneer Industry Encouragement Act, 1967
Import and export controls
Agricultural Marketing Act, 1967; Export and Import Control Act, 1984 (amended 1996); Export Control Regulations, 1972 (cereals and legumes); Export Control Regulations, 1975 (preparation of sunflower); Export Control Regulations, 2001 (AGOA textiles and apparel)
Export finance
New Export Finance and Insurance Scheme, 2001
Privatisation
Privatisation Act, 1995 (Act No.9 of 1995); Privatization Regulations, 1997
Government procurement
Act 4 of 1965; Financial regulations for the Central Tender Board
Mining and mineral operations, including sales of diamonds
Mining Rights Act, 1967; Precious Stones Order, 1970
Intellectual property: industrial designs, control of anticompetitive practices
Patents, trademarks, utility models, Industrial Property Order, 1989, amended 1997 (Order No. 5 of 1989 and Act No. 4 of 1997)
Copyright
Copyright Order, 1989 (Order No. 13 of 1989)
18
Financial services
Central Bank of Lesotho Act, 2000 (Act No. 2 of 2000); Financial Institutions Act, 1999 and related legal notices (Act No.6 and Legal Notices Nos. ll 0-113 of 1999); Money Lenders Order, 1989; Building Finance Institutions Act, 1976; Insurance Act, 1976
Telecommunications services
Lesotho Telecommunications Authority Act, 2000
Air transport services
Aviation Act, 1975
Road transport services
Road Transport Act and Regulations, 1981; Road Transport (Amendment) Act, 2001
Tourism Services
Tourism Act, 2002 (Act No. 4 of 2002)
Source: SACU Review 2003 – Annex 2: Lesotho
4. TRADE AGREEMENTS AND ARRANGEMENTS Lesotho is signatory to a variety of trade agreements which afford expanded access to both regional and international markets. 4.1. Multilateral Lesotho is a member of the World Trade Organisation (WTO). Within the WTO system, Lesotho is recognized as a Least Developed Country (LDC). Members are committed to implement all WTO rules and agreements, including progressive liberalization of trade, although as an LCD, Lesotho is given exceptions and waivers. Lesotho is eligible for Special and Differential Treatment (S&D) provided under the WTO agreements. 4.2. Regional arrangements Regional cooperation includes membership to the Southern African Customs Union (SACU) and Southern African Development Community (SADC). 4.2.1. Southern African Customs Union (SACU) Lesotho’s sustainable development is closely linked to the opportunities offered by the Southern African Customs Union (SACU) market, and in particular, its closer integration with South Africa (Government of Lesotho/World Bank, 1995). SACU is a customs union of five 19
states: Botswana, Lesotho, Namibia, South Africa, and Swaziland. Under this Customs Union, Lesotho has duty-free access to the market while on the other hand, extending a Common External Tariff against imports from the rest of the world. Lesotho, as a member of SACU, is also benefiting from the free trade agreement concluded between South Africa and the EU – the Trade, Development and Cooperation Agreement (TDCA). Since South Africa is a member of SACU, the TDCA de facto has to be implemented by other SACU Member States, which Lesotho is in accession to. The new SACU Agreement came into force on 15 July, 2004, and provides for member states to negotiate free trade agreements (FTAs) with third parties on a collective basis. Article 31: 1 and 3 of the new SACU Agreement read: “Member states may maintain preferential trade and other related arrangements existing at the time of entry into force of this Agreement.” “No member shall negotiate and enter into new preferential trade arrangements with third parties or amend existing agreements without the consent of other Member states.” 4.2.2. Southern African Development Community (SADC) All SACU member states are members of the Southern African Development Community (SADC). Under this regional group, Lesotho has some duty concessions to the SADC Member States. A SADC Trade Protocol came into operation in 2000, with the intention of moving to a Free Trade Area in 2008. In this regard, tariffs which would remain after 2008 would be on those goods that are regarded sensitive, but those tariffs should be eliminated or be fully liberalized by 2012. SADC is progressing well on the road towards trade integration, and the following target dates still remain on the road map towards full regional integration: FTA by 2008 (which was achieved), Customs Union in 2010, Common Market in 2015, Monetary Union in 2016, and a single currency in 2018. Official intra-SADC trade is largely insignificant to Lesotho (Imani Development International, 2007). This problem is caused by Lesotho’s geographic location, as it is landlocked into the Republic of South Africa. Therefore, there are some difficulties to differentiate goods originating from other SADC countries and transited through SA. South Africa represents a minimum of 99 percent of SADC imports to Lesotho. However, as indicated above, some goods originate from other member states. Almost all of Lesotho’s exports are destined for SA, with a similar problem for imports. These trade flows are shown in Tables 9 and 10 below. Exports to Botswana and Mauritius seem to be gaining traction. The major exports to these areas are textiles and clothing.
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Table 9 Lesotho’s Exports to SADC, 2003 – 2006 (US$ million) Value of Exports 2003
Value of Exports 2004
Value of Exports 2005
Value of Exports 2006*
Botswana
0.1
0.5
0.9
0.7
Namibia
0.0
0.0
0.0
0.0
South Africa
91.2
108.9
113.3
168.5
Swaziland
0.0
0.0
0.0
0.0
Total
91.3
109.4
112.2
169.2
Angola
0.0
0.0
0.0
0.0
DRC
0.0
0.0
0.0
0.0
Malawi
0.0
0.0
0.0
0.0
Mauritius
0.0
0.0
0.7
2.0
Mozambique
0.0
0.0
0.0
0.0
Tanzania
0.0
0.3
0.0
0.0
Seychelles
0.0
0.0
0.0
0.0
Zambia
0.0
0.0
0.0
0.0
Zimbabwe
0.0
0.0
0.0
0.0
Total Non-SACU
0.0
0.3
0.7
2.0
91.3
109.7
112.9
171.2
SACU
SADC
Total SADC
Source: Imani Development International, 2007 *Estimates
Table 10 Lesotho’s Imports from SADC, 2003 – 2006 (US$ million) Value of Imports 2003
Value of Imports 2004
Value of Imports 2005
Value of Imports 2006*
Botswana
0.0
0.0
0.0
0.0
Namibia
0.0
0.0
0.0
0.0
South Africa
963.0
1,029
974.2
851.8
Swaziland
0.0
0.0
0.0
0.0
Total
963.0
1,029
974.2
851.8
SACU
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SADC Angola
0.0
0.0
0.0
0.0
DRC
0.0
0.0
0.0
0.0
Malawi
0.0
0.3
0.3
0.4
Mauritius
0.0
0.4
0.5
0.0
Mozambique
0.0.
0.0.
0.2
0.4
Tanzania
0.0
0.0
0.0
0.2
Seychelles
0.0
0.0
0.0
0.0
Zambia
0.0
0.0
0.3
2.2
Zimbabwe
0.4
5.3
1.0
0.0
Total Non-SACU
0.6
5.9
2.4
3.3
963.8
1,034.90
976.6
855.1
Total SADC
Source: Imani Development International, 2007 *Estimates
4.2.3. African Growth and Opportunity Act (AGOA) AGOA is an American initiative that has created preferential terms of trade on a range of products manufactured in Africa for the US market. Under AGOA, Lesotho could sell all products duty- and quota-free to the United States during two different phases. The first phase of the agreement was the most beneficial part of the scheme in which inputs could be sourced from the rest of the world (AGOA 1, 2000 – 2004). In the second phase (AGOA 2, 2004 – 2008), products could still be sold to the US duty- and quota-free. However, inputs were to be sourced from Sub-Saharan Africa or from the US. The US is one of the two main markets for Lesotho’s exports. Lesotho takes 31 percent of the AGOA market share by exporting US$388.42 thousand in 2006, as shown in Chart C in the Appendix. 4.3. Trade Preferences 4.3.1. Generalised System of Preferences (GSP) The Generalised System of Preferences (GSP) gives preferential access for Lesotho to North America, Japan, and other developed markets, as well as to 18 markets in the Preferential Trade Area in Eastern and Southern Africa. Lesotho also has preferential access (quota-free, duty-free) to the Canadian market for all eligible goods.
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4.3.2. Cotonou Agreement Lesotho has been enjoying preferential access into the EU market through different Lomé Conventions for 25 years, which ran until 2000 when it was replaced by the Cotonou Agreement (CA). Under the CA, Lesotho is classified as a least developed country (LDC), and its status is enhanced by the EU’s Everything But Arms (EBA) initiative. Under this initiative, Lesotho enjoys quota- and duty-free access to the EU market for everything except arms. In addition, there are no requirements for reciprocating preferential trading access to the EU. The CA is being negotiated with the aim of creating free trade areas between the African, Caribbean and Pacific (ACP) region and the EU. Known as the Economic Partnership Agreement (EPA), these arrangements are essentially reciprocal free trade arrangements. Since the existing system of preferences will continue to apply for a period of eight years before reciprocity will come into effect, Lesotho and six other SADC Member States have been negotiating the EPAs as a bloc with the EU since July 2004. 5. FOREIGN INVESTMENT REGIME Lesotho’s investment regime is fairly liberalized and embraces Foreign Direct Investment (FDI) in virtually all sectors of the economy through a stable political environment and provision of attractive incentives. The investment climate and private sector development were the key areas emphasized in the budget speech for 2007/8. The GoL has undertaken policy reviews to assist SMMEs, in particular, to take an active role in employment creation. Producers whose exports are destined beyond the SACU region were accorded a zero percent company tax on income. The overall company tax was revised downwards from 35 percent to 25 percent. The preferential rate for manufacturing and agriculture was also revised from 15 percent to 10 percent. These initiates aim to protect and promote the existing companies in the country by foregoing income tax. The budget also called for the private-public partnership approach to infrastructure provision. The GoL sees the danger in the present industry structure which relies on one industry producing one category of products for one market. The Investment Policy (IP) objective will be a GoL effort to maintain and, if possible, expand garment sales to the US market because of the importance of this market for the country. It is also necessary that other markets are found and developed, and that the industrial sector is diversified. The IP is developed in the light of the historical reviews of the development of the industry sector. The specific objectives of the Policy are to maintain the present level of garment exports to the US market, despite the depressing effect of the present weakness of the US dollar against the 23
SA Rand; to diversify the activity of the industry sector; to revive Lesotho’s former garment export sales to the EU market on the back of the improved access negotiated under the EPA; to manufacture garments for SACU/SADC markets; to promote investment in fabric mills to supply the SACU/SADC region market; and to add value to agricultural products and minerals. The products that do suggest considerable potential include furniture manufacturing, pharmaceutical products, and the recently-revived diamond industry. In addition, bricks and possibly sandstone have been identified. Manufacturing reached a peak of 16 percent of GDP in 2004, although a decline was witnessed in 2005. The growth of the main sub-sector was driven by the LNDC identification of potential foreign investors. The sector improved in 2000 following the introduction of AGOA buy the US Government. This has lead to a significant increase in manufactured exports. The expiry of quota restrictions at the end of 2004 increased competition for Lesotho’s exports from countries such as China and India. 5.1. The Business Environment There are foreign investment restrictions in licensing of business and consumer services, and in a de facto form of FDI screening, for very small-scale manufacturing in Lesotho. FDI is not permitted in designated services that require a reserved trading license. The general objective of GoL’s Industrial Policy is to promote further industrial activity in Lesotho’s economy with a view to ensuring that the sector plays its part in achieving the Vision 2020 goals. The Lesotho investment climate consists of the following incentives: •
A stable social-political environment that is investor friendly
•
Allowance of a corporate tax rate of 15% on profits earned by manufacturing companies
•
General sales tax exemption on capital machinery and equipment for manufacturing industries, as well as full rebate on imported raw materials or components used solemnly in the processing on manufacturing of goods for the exports market
•
Declining water and electricity tariffs as a direct spin-off from the Lesotho Highlands Water Project
The manufacturing industry has a number of infrastructural constrains that include lack of pre-built factory shells, lack of serviced industrial land, inadequate water supply and waste water treatment facilities, low electricity supply, and difficult access to credit.
24
The present institutional set up does not provide for effective dialogue between government and the public sector or within the private sector. Existing consultation mechanisms are sporadic and do not cover the spectrum of firms. The government should be aware of the needs of foreign investors. The investors should understand the policy objectives and feed into the design of the new policies. 6. AID FOR TRADE Successful development of linkages between private businesses in Lesotho is constrained by a variety of market failures. Therefore, carefully targeted interventions are needed from government, the Corporations, and donors to provide the financial mechanisms and institutional and physical infrastructure that could stimulate business links, and hence create new jobs for the poor. Lesotho was selected among the 16 countries that are eligible for the Millennium Challenge Assistance. The Lesotho National Development Corporation (LNDC) is involved in a funded project for Promotion of Business Linkages through capacity building, provision of infrastructure, and facilitation of market access, submitted to the Millennium Challenge account that cost US$30.7 million. The project’s overall objective is investment promotion, skills transfer, and poverty reduction through job creation. The Integrated Framework (IF) Coordinator has been recruited by the MTICM to monitor IF activities in the country. The IF-assisted mushroom and peaches projects have been approved by the International Trade Centre (ITC) and equipment for the project has arrived. Lesotho is currently benefiting from an examination of its general policies under the donor funded Integration of the World Environment study. The European Union has provided €17 million for data capacity-building in the country. 7. TRADE-RELATED TECHNICAL ASSISTANCE Lesotho has a number of wide-ranging trade-related capacity building needs, such as implementation of the WTO agreement, human and institutional capacities, and supply-side constraints. Lesotho’s landlocked location and physical infrastructure also impede the country’s ability to integrate into the global economy (WTO, 2003).
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REFERENCES Central Bank of Lesotho. 2005. Annual report. Maseru: CBL. Central Bank of Lesotho. 2006a. Economic Review No. 75, November 2006. The government of Lesotho holds the 9th donor round table conference on sustainable economic growth and poverty reduction. Maseru: CBL. Central Bank of Lesotho. 2006b. Quarterly Review. Volume XXVI, No. 3, September 2006. Maseru: CBL. Central Bank of Lesotho. 2006c. Economic Review, January 2006. Lesotho’s Potential for Export Diversification. Maseru: CBL. Central Bank of Lesotho. 2006d. Economic Review No. 72, August 2006. The Launching of Lesotho Wire System: Prospects for the economy. Maseru: CBL. FIAS. 2006. The Competitiveness of Regional and Vertical Integration of Lesotho’s Garment Industry ‘Discussion Draft’. FIAS. Lesotho and Market Diversification. FIAS/CSR 713970 Government of Lesotho/World Bank. 1995. Lesotho – Strategic Economic Options Report Phase II. Summary Document, Final Draft for Internal Review, November 1995. Imani Development International. 2007. Update Survey of Non-Tariff Barriers To Trade: Lesotho. Regional Trade Facilitation Programme. International Monetary Fund. 2005. Country report for Lesotho. Document No/05/438. Kingdom of Lesotho. Poverty Reduction Strategy, 2003/04 – 2006/7. Maseru. Lesotho National Development Corporation. 2004. Lesotho Review: An Overview of the Kingdom of Lesotho’s Economy. Maseru: LNDC. Lesotho National Development Corporation. 2006. Lesotho Review: An Overview of the Kingdom of Lesotho’s Economy. Maseru: LNDC. 26
Lesotho National Development Corporation. 2007. Lesotho Review: An Overview of the Kingdom of Lesotho’s Economy. Maseru: LNDC. Lesotho Trade and Poverty Programme. 2004. Trade Policy Study. Maseru. Lesotho Trade and Poverty Programme. 2005. Data Needs Assessment. Maseru. Mohatla, M. 2007. HIV/AIDS material development for the SMME sector in Lesotho. Poswell, L. 2005. Lesotho Trade and Poverty Programme Half yearly progress Report. Sandrey, R. 2004. Lesotho: Potential Export Diversification Study, And Strategic Plan: Trade Data. United Nations Conference on Trade and Development. 2003. Investment Policy Review. Geneva. World Trade Organisation. 2003. SACU Trade Policy Review. Annex 2: Lesotho. Document no. WT/TPR/114/LSO. Geneva.
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APPENDIX Table A Estimated Area Planted (hectares) and Share Harvested (%) for Main Crops Cereal
2002/03
2003/04
2004/05*
Area planted
131025
129434
122338
Share harvested
97.29
98.6
99.59
Area planted
26442
29378
33179
Share harvested
93.81
99.37
99.87
Area planted
15998
16032
16858
Share harvested
98.57
97.92
98.41
Area planted
12364
9261
8672
Share harvested
90.33
92.53
96.07
Area planted
3276
2710
2400
Share harvested
91.97
93.94
96.46
Maize
Sorghum
Wheat
Beans
Peas
Source: CBL (2006b). Quarterly Review, September 2006
28
Chart A Cereal Demand in Lesotho, 2004 – 2007 (‘000 tonnes) 300.0
250.0
200.0
150.0
Amount
100.0
50.0
D
-150.0
-200.0 Cereal demand
it ef ic
d
/d ls Su p
h hi c fw O
-100.0
Source: CBL (2006b). Quarterly Review, September 2006
ai
rts Im po
e an c
eq u R
om
es t
ic
av a
-50.0
Ba l
ir e m
ila bi
lit
en ts
y
0.0
2004/2005 Maize 2004/2005 Sorghum 2004/2005 Wheat 2005/2006 Maize 2005/2006 Sorghum 2005/2006 Wheat 2006/2007 Maize 2006/2007 Sorghum 2006/2007 Wheat
Chart B Africa’s Exports to the US, 2004 - 2005
120.000
100.000
Amount ($1,000)
80.000
2004 2005
60.000
40.000
20.000
0.000 Botswana
Cape Verde
Ghana
Kenya
Lesotho
Madagasca
Mauritius
South Africa Swaziland
Tanzania
Country
Source: CBL (2006c). Economic Review, January 2006 30
Chart C
35% 30% 25% 20% 15% 10% 5% 0%
% Share for 2006
Le so th o Ke M ad nya ag as Sw ca az r ila M nd au So riti us ut h Af ric Na a m Bo ib ia ts wa na M al aw i G ha na
% Share of the market
Top 10 Sub-Sahara Countries’ Exports to US, 2006
Contriy
Source: Compiled by the US International Trade Commission from official statistics of the US Department of Commerce
