(3) Trade Performance and Investment

(3) Trade Performance and Investment

(i) Trade in goods and services

9. 
   Lesotho's trade deficit rose from US$517.8 million in 2003 to around US$769 million in 2008, while income and transfers, particularly SACU receipts, increased significantly during the period (Table I.3). Lesotho's external current account, as percentage of GDP, moved from a deficit of 12.3% in 2003 to surpluses of 4.3% in 2006 to 12.7% in 2007 (Table I.2) mainly due to the big jump in SACU receipts. Nonetheless, the external current account is estimated to have shifted to a deficit of 3.2% of GDP in 2008 largely as a result of reduced demand for exports of textiles, lower prices for diamonds, and reduced remittances.²³
   
10. 
    Lesotho's economy is highly dependent on international trade: the ratio of exports and imports in goods and services as a percentage of GDP averaged 155.3% during 2003-06 (Table I.2). In 2007, Lesotho ranked 121^st among world merchandise exporters and importers (considering the EC member states together and excluding intra-EC trade). In services trade, Lesotho ranked 152^nd among exporters and 153^rd among importers.²⁴
    

(US$ million)

b Central Bank of Lesotho projections.

c Lesotho Highlands Water Project.

Source: WTO Secretariat estimates, based on data provided by the Lesotho authorities.

11. 
    The direction of Lesotho's trade remains highly concentrated (Table I.4): in 2008, around 40% of total merchandise exports were destined to the SACU area, notably South Africa, followed by 35.4% to North America (especially the United States), and 24.4% to the EC. The U.S. share is largely due to textile and clothing products benefiting from the U.S. African Growth and Opportunity Act (AGOA) preferential trade arrangement (Chapter IV(4)). Lesotho's export structure is shown in Table I.5. Imports originate largely from SACU (although its share has declined during the review period), followed by Asia and the EC (Table I.6).
    

(US$ and per cent)

(US$ million and per cent)

(US$ and per cent)

1. 
   Balance of payments data indicate that Lesotho is a net importer of services, with a deficit averaging US$37.7 million per year during 2003-08, and peaking at US$46.6 million in 2005 (Table I.3). From the sale of electricity and water to South Africa, Lesotho's royalties increased from US$14.7 million in 2003 to US$18.4 million in 2006 (30.8% of total services receipts).²⁵
   

2. Investment

13. 
    Lesotho's average annual inflow of foreign direct investment (FDI) almost tripled from US$24 million during 1990-00 to US$70 million over 2003-07; FDI inflows in 2007 reached US$106 million. This was largely the result of the positive developments in the economy, and the reopening of diamond mines in 2004 (Chapter IV(3)). As a percentage of GDP, the stock of inward FDI increased from 36.4% in 2003 to 45.9% in 2007 (Table I.7). According to the authorities, FDI inflows reached US$89.8 million in 2008.
    

(US$ million)

14. 
    Over the last few years, Lesotho has taken steps to improve its investment climate, notably through the establishment of the trade and investment facilitation centre to serve as a one-stop-shop to speed up the licensing process. Nonetheless, in general, FDI in Lesotho has been inhibited by structural constraints, such as high transport costs; underdeveloped legal, judicial, and regulatory framework; labour market rigidities; limited access to bank financing; and prohibition on land ownership by foreigners. Lesotho ranks 123^rd (out of 178 economies) in the World Bank's Ease of Doing Business 2009 Index²⁶; the Bank's ongoing Private Sector Competitiveness Programme should help reduce the cost of doing business and enhance Lesotho's regional and global competitiveness.
    
15. 
    Under Lesotho's Vision 2020 and PRS, a key aim is to attract more FDI inflows as well as to promote domestic investment. A number of measures are envisaged such as: further reducing administrative impediments for investors; providing water supply and other basic infrastructure; improving workers' productivity and labour stability; and identifying industries, other than textiles and clothing, to add value to local products and diversify the economy (e.g. agri-business, mining, and tourism).²⁷
    
16. 
    About 90% of Lesotho's FDI inflows have gone into export-oriented manufacturing industries, notably textiles and clothing.²⁸ The telecommunications subsector has also attracted FDI (Chapter IV(5)(ii)). FDI in the mining sector has been revived through the reopening of diamond mines since 2004, such as the mines in Letseng, and in Liqhobong (both jointly owned by a British company and the government of Lesotho).²⁹ By country of origin, the United States and South Africa are the largest sources of FDI into Lesotho.