Abstract
1. Lesotho has made considerable progress in reducing poverty during 2002–17. Since 2002, poverty rates fell by 6.9 percentage points (ppts) to just under 50 percent in 2017, such that 47,000 Basotho were able to escape poverty during this period (Figure 1, World Bank 2019). In addition, the intensity (poverty gap ratio) and severity (squared gap ratio) of poverty fell significantly.2 The greatest poverty reduction occurred in urban centers (13 ppts) rather than rural areas (0.6 ppts), where more than 60 percent are still below the national poverty line. The reliance of rural households on less productive, rainfed agriculture that is susceptible to frequent droughts and floods, with limited value added, has hindered poverty reduction in rural areas (World Bank 2019).
Toward Poverty and Inequality Reduction: The Role of Social Programs1
A. Poverty Decline Reversed by the Pandemic
1. Lesotho has made considerable progress in reducing poverty during 2002–17. Since 2002, poverty rates fell by 6.9 percentage points (ppts) to just under 50 percent in 2017, such that 47,000 Basotho were able to escape poverty during this period (Figure 1, World Bank 2019). In addition, the intensity (poverty gap ratio) and severity (squared gap ratio) of poverty fell significantly.2 The greatest poverty reduction occurred in urban centers (13 ppts) rather than rural areas (0.6 ppts), where more than 60 percent are still below the national poverty line. The reliance of rural households on less productive, rainfed agriculture that is susceptible to frequent droughts and floods, with limited value added, has hindered poverty reduction in rural areas (World Bank 2019).
Gains in Poverty Reduction Reversed during the Pandemic
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Gains in Poverty Reduction Reversed during the Pandemic
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Gains in Poverty Reduction Reversed during the Pandemic
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
2. Despite the overall drop in poverty nationally, the urban-rural divide has increased. The rural lowland and mountainous areas accounts for larger shares of the poor population. For example, more than 60 percent of the residents in Mokhotlong and Thaba-Tseka districts, lived in poverty in 2017 (Figure 2), whereas the Maseru district has a lower poverty rate—as low as 15 percent in Maseru city. Similarly, the constituencies that are closer to the border tend to exhibit lower poverty rates, owing to their better access to economic opportunities, well-developed markets, and larger remittance flows from Basotho working in South Africa (World Bank 2019). Well-targeted policy measures are needed to support these lagging districts.
Pockets of Poverty Persist
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Source: World Bank.Pockets of Poverty Persist
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Source: World Bank.Pockets of Poverty Persist
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Source: World Bank.3. The recent COVID-19 pandemic has reversed some of this progress. Extreme poverty— using the international poverty line of US$ 1.90 per person per day—is estimated to have increased from 25.7 percent in 2019 to 32.1 percent in 2020 (Figure 1). Despite the resumption of activity and relaxation of pandemic-related restrictions in recent months, extreme poverty is projected to remain elevated at 28.4 percent in 2022 (World Bank 2022).
B. Persistent Inequality
4. On inequality, changes in consumption shares and growth have contributed to an overall decline in inequality but more remains to be done. During 2002–17, the consumption share of the bottom 40 percent increased from 8.7 percent to 15.4 percent, while faster (annualized) consumption growth amongst the bottom 40 percent of households helped improve shared prosperity. Similar improvements have been observed amongst the middle class. On the other hand, the consumption shares of the wealthiest households (the top 20 percent) decreased from almost 60 percent of the total consumption in 2002 to 45 in 2017 (World Bank 2019).
5. Despite this important progress, Lesotho still has one of the highest levels of inequality in sub-Saharan Africa (SSA)—trailing other SACU member states. Welfare inequality, measured by the Gini coefficient, fell to 44.6 in 2017 from 51.9 in 2002, placing Lesotho in the top six countries that have made substantial progress in reducing inequality in the past two decades. However, even if Lesotho’s important strides has allowed it to show marked improvement relative to the poorer inequality outcomes across other SACU member states, it still ranks as the fifteenth most unequal country in the continent (Figure 3).
Despite Some Success in Containing Inequality, Lesotho Remains Highly Unequal
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Despite Some Success in Containing Inequality, Lesotho Remains Highly Unequal
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Despite Some Success in Containing Inequality, Lesotho Remains Highly Unequal
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
6. Inequality among households residing in the same subnational units has decreased since 2002. The decline has been broad-based, both urban and rural areas have seen remarkable reductions. The strongest reductions in inequality were observed in rural foothills and urban Maseru, where Gini coefficients declined by 13.1 and 11.5, respectively (Figure 4).
Subnational Inequality
(Gini Index)
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Source: World Bank.Subnational Inequality
(Gini Index)
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Source: World Bank.Subnational Inequality
(Gini Index)
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Source: World Bank.7. A large share of persistent income inequality can be attributed to differences in access to formal wage employment. Conditions in Lesotho are such that access to formal employment makes a significant difference to the incomes of families, with 66 percent of income inequality attributable to differences in formal wage income. Wage discrepancies—driven in part by a well-paid civil service and a big public-private wage gap— are the largest driver, followed by income from self-employment that contributed 30 percent of the inequality (Figure 5).
Access to Formal Employment and Social Protection Supported the Decline in Inequality
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Access to Formal Employment and Social Protection Supported the Decline in Inequality
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Access to Formal Employment and Social Protection Supported the Decline in Inequality
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
8. Increasing access to social protection has helped improve inequality. During 2002–17, social assistance programs for low-income households have increased considerably, leading to improvements in inequality. At the same time, continued reliance on agriculture-based sources of income has tended to increase inequality (Figure 5). Similarly, remittances, on which many low-income Basotho households depended, has declined markedly between 2002 and 2017, leading to increases in inequality (World Bank 2019).
C. Impact of Social Programs
9. To combat the high poverty and inequality, Lesotho spends more than twice the SSA African average on social programs. Over half of the social spending is geared toward education, with the rest going toward food and pension transfers. Nearly two-thirds of households in Lesotho benefit from at least one social program and over 80 percent of poor households are beneficiaries. If Lesotho’s social spending was perfectly targeted, extreme poverty would be eliminated and the upper bound would be halved (World Bank 2021).
10. Most of Lesotho’s social programs are well-targeted, with a significant impact on poverty. In general, social spending is progressive, with most benefits going toward the poorest households (Figure 6). Using fiscal incidence analysis, the Old Age Pension has the biggest impact on poverty, followed by the School Feeding Program, which also covers the highest number of poor households. The Child Grant and Public Assistance programs, while progressive, do not provide large enough transfers to significantly reduce poverty. Overall social spending reduces the poverty rate by 3.4 ppts at the upper bound line and by 6.5 ppts at the extreme line and reduces the Gini coefficient by 4.1 percentage points (World Bank 2021).
Lesotho has Well-Targeted, High Impact Social Programs
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Lesotho has Well-Targeted, High Impact Social Programs
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
Lesotho has Well-Targeted, High Impact Social Programs
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A007
11. However, the Tertiary Education Loan Bursary Scheme, which is the costliest social program, is regressive. A recent World Bank report found that more than 90 percent of the beneficiaries are classified as non-poor (World Bank 2021). The result is a social program that increases inequality and has a minimal direct impact on poverty. While the government offers universal primary education, secondary education is expensive, with 65 percent of the costs falling on households (World Bank 2017). Only 4 percent of secondary-age students receive the Orphan and Vulnerable Children Program (OVC) grants. As a result, the FY17/18 household budget survey indicates that just 10 percent of the adult population has completed secondary education, with close to half of dropouts—indicating that cost was the main reason for quitting secondary school.
Summary of Social Programs1
This Box summarizes the key social assistance programs in Lesotho, which vary significantly by both cost and coverage.
Cash-for-Work Assistance Program. (Ministry of Forestry, Range, and Soil Conversation) This program is designed to help support households in coping with temporary loss of income. Total spending on program is 0.3 percent of GDP with coverage of 98,000 beneficiaries (approximately 20 percent of the target group).
Public Assistance Program (PAP). (Ministry of Social Development) The PAP is the oldest social program in Lesotho. The program provides quarterly cash and in-kind transfers to the ultra-poor and disabled on a temporary or permanent basis. The total budget for the program equals roughly 0.24 percent of GDP and covers approximately 12,700 beneficiaries (around 6 percent of the target group).
Orphan and Vulnerable Children Program (OVC). The OVC program was established in 2000 and covers secondary school children with sick or disabled parents. Children that are accepted to a secondary school can apply to the OVC to pay tuition and other fees. Benefits are disbursed according to a district-level quota. The OVC covers roughly 21,000 beneficiaries (around 11 percent of the target group) at a cost of 0.2 percent of GDP.
Tertiary Education Loan Bursary Scheme. (National Manpower Development Secretariat, Ministry of Development Planning) The largest of Lesotho’s social programs, the bursary costs an estimated 1.84 percent of GDP. The program covers tuition and other university fees for qualified students. Eligibility is determined by academic merit, rather than income level. Although the benefits are supposed to be repaid by beneficiaries, it serves as a de facto grant due to very low recovery rates. Despite its cost, the program covers just 19,500 beneficiaries.
Child Grant Program (CGP). (Ministry of Social Development) The CGP is the newest of Lesotho’s social programs. The program provides cash transfer to poor households with children under the age of 18. The cash transfers are based on the number of children and are disbursed quarterly at a total cost of 0.2 percent of GDP, covering 27,000 households (around 22 percent of the target group).
School Feeding Program. (Ministry of Education and Training) The School Feeding program is the largest program in terms of coverage, with roughly 295,000 beneficiaries (100 percent of the target group). The aim of the program is to provide 1–2 meals per day to early childhood and primary school students. The program is administered in collaboration with the World Food Programme and costs about 0.5 percent of GDP.
Old Age Pension (OAP). (Ministry of Finance) Established in 2004, the OAP is a universal, non-contributory pension covering adults over 70 that do not receive a civil service pension. Monthly transfers are periodically increased, with annual benefits equaling roughly 50 percent of per capita GDP. The OAP covers approximately 84,000 people at a cost of 2.0 percent of GDP. According to the World Bank (2021), there are a significant number of “ghost” OAP pensioners, implying a coverage of over 100 percent.
1 Cost and beneficiary data refer to FY17/18. For more detail on Lesotho’s social programs, see World Bank (2021).12. To further enhance their effectiveness in reducing poverty and inequality, resources should be redirected to the most successful social programs. For example, increasing transfers via the Public Assistance program as it is currently designed would do little to reduce poverty. Transfers are too small, and the coverage is too low for any expansion to have a significant impact. Conversely, increasing the School Feeding program by 50 percent would reduce poverty by 1¼ percent. As one of the most progressive schemes, the Old Age Pension scheme can be augmented but only after the incidence of “ghost pensioners” (fake claimants) is reduced. To mitigate the additional costs, expansions of well-targeted program could be combined with reducing the budget transfers to the regressive and ineffective tertiary education loan bursary program, introducing means-testing and pursing loan recovery.
References
World Bank. 2017. “Kingdom of Lesotho Public Expenditure Review”. Volume I. World Bank, Washington, DC.
World Bank. 2019. “Lesotho Poverty Assessment: Progress and Challenges in Reducing Poverty.” World Bank, Washington, DC.
World Bank. 2021. “Lesotho Social Protection Programs and Systems Review.” World Bank, Washington, DC.
World Bank. 2022. “The World Bank in Lesotho: Context.” World Bank, Washington, DC.
Prepared by Habtamu Fuje, with contributions from Alexander Massara.
The poverty gap ratio is measured by taking the average poverty gap in the population as a proportion of the poverty line. The squared gap ratio averages the square of the poverty gap ratio, thus putting more weight on extremely poor households.
