Abstract
1. Lesotho relies on a handful of markets for the majority of its trade. Trade patterns largely reflect geography, endowments, and preferential trade arrangements.
Lesotho’s Trade: Overview and Risks1
A. Introduction
1. Lesotho relies on a handful of markets for the majority of its trade. Trade patterns largely reflect geography, endowments, and preferential trade arrangements.
On imports. 85 percent of goods imports come from South Africa, including most agricultural products (one-third of the total) (Figure 1).2 Intermediate products, particularly fabrics, are sourced from China and Taiwan (around 5 percent of the total each). Households depend heavily on remittances from family members working in South Africa in mines, on farms, in the informal sector, and as domestic workers, though mining employment has declined substantially since the 1990s.
On exports. Lesotho’s exports are highly concentrated in few markets and products. Over 80 percent of exports comprise textiles and diamonds, and about 85 percent of exports go to three countries—Belgium, South Africa, and the United States (Figure 1). And while concentration in products has increased over the past decade, concentration in destination markets is lower than in 2010 when over 95 percent of exports went to only these three countries. The top export markets remained relatively stable over the past decade, with roughly 30 percent shipped to Belgium, South Africa, and United States each. While exports to South Africa are broad-based, exports to the US and Belgium are concentrated in a single key product category: apparel (85 percent of total exports to the US) and diamonds (100 percent of total exports to Belgium). Among the remaining destination markets, the majority either grant preferential access or have signed a bilateral free trade agreement with Lesotho as part of SACU or SADC (see Box 1).
Main Trade Partners
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: Atlas of Economic Complexity, and IMF staff calculations.Main Trade Partners
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: Atlas of Economic Complexity, and IMF staff calculations.Main Trade Partners
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: Atlas of Economic Complexity, and IMF staff calculations.Lesotho’s Trade Arrangements and Tariff Regime
Lesotho’s participation in a number of trade arrangements reflects its decades-long efforts at trade integration both within the continent and outside the region (Figure 1.1). Lesotho has been a member of the World Trade Organization (WTO) since May 1995 and a member of GATT, the WTO predecessor, since 1988. At the regional level, Lesotho has been a member of the Southern African Customs Union (SACU), the oldest existing customs union in the world, since 1910. Lesotho has two other regional trade agreements in force: Southern African Development Community (SADC), founded in 2000, and Common Market for Eastern and Southern Africa (COMESA), founded in 1994 (Figure 1.2). Outside the continent, Lesotho has signed free trade agreements as part of SACU with (i) the European Free Trade Association (EFTA)—Iceland, Liechtenstein, Norway, and Switzerland, in effect since May 2008; (ii) the Southern Common Market (MERCOSUR)— Argentina, Brazil, Paraguay, and Uruguay, since April 2016; and as part of SADC (iii) an Economic Partnership Agreement (EPA) with the European Union, effective since October 2016. Following Brexit, Lesotho as part of SACU signed an FTA with the UK, which entered into force in January 2021. Negotiations are ongoing to conclude a free trade agreement between SACU and India and the Tripartite Agreement between COMESA, EAC and SADC. Lesotho is also among the 54 African Union nations that have signed a deal to form the African Continental Free Trade Area (AfCFTA), launched on January 1, 2021.
Lesotho benefits from preferential access to a number of countries. Lesotho is a beneficiary of the generalized systems of preferences (GSP) granted by Australia, Canada, Eurasian Economic Union (Armenia, Kazakhstan, Kyrgyz Republic, and Russia), European Union, Iceland, Japan, New Zealand, Norway, Turkey, UK, and US. As a least developed country, it also has preferential or duty-free market access to Chile, China, Korea, India, Montenegro, Morocco, Tajikistan, and Thailand. Most importantly, Lesotho qualifies for duty-free and quota free access to the US market under the African Growth and Opportunity Act (AGOA).
B. Evaluating Lesotho’s Export Performance
2. Lesotho’s growth in recent decades has relied on trade in few key export sectors. While the country has limited natural resources, several are of considerable economic value— diamonds, cotton, wool, and water—and have become key export commodities. However, Lesotho’s exports are dominated by the apparel sector (Figure 2), which accounts for about 10 percent of GDP. Compared to 2010, Lesotho's export basket did not change much, with apparel remaining the leading sector, accounting for over 40 percent of the total in 2019, followed closely by diamonds (just under 40 percent in 2019, compared to 26 percent in 2010).
Product Composition of Imports and Exports
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: Atlas of Economic Complexity, and IMF staff calculations.Product Composition of Imports and Exports
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: Atlas of Economic Complexity, and IMF staff calculations.Product Composition of Imports and Exports
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: Atlas of Economic Complexity, and IMF staff calculations.Apparel. The largely foreign-owned textiles sector grew in the 1990s and early 2000s in large part due to the combination of cheap labor and the enactment in 2000 of the U.S. African Growth and Opportunity Act (AGOA) that attracted Taiwanese and Chinese investors to set up apparel factories in the country. Under AGOA, Lesotho has been highly successful in exporting apparel to the U.S. by utilizing the favorable rules of origin and duty-free and quota-free market access. Almost all of Lesotho’s exports to the U.S. (around 80–90 percent) take place in the apparel categories falling under Harmonized System (HS) Chapters 61 and 62 (70 percent of total apparel exports) (Figure 3). Moreover, the U.S. continues to remain a top destination market, with its share hovering around 30–40 percent in the past decade. Since then, the combined textile, apparel and footwear manufacturing industry has grown to become the Lesotho’s largest formal private sector employer with estimates in the range of 45,000 (mostly female) workers.
Figure 3. Exports to the US
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: US International Trade Commission, UN Comtrade, and IMF staff calculations.Figure 3. Exports to the US
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: US International Trade Commission, UN Comtrade, and IMF staff calculations.Figure 3. Exports to the US
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: US International Trade Commission, UN Comtrade, and IMF staff calculations.Diamonds. After a difficult year when COVID-19 restrictions decimated consumer markets, paralyzed supply chains, and led to the closure of mines, the diamond mining sector has bounced back strongly in 2021, supported by higher diamond prices driven by supply shortages, increased consumer demand, and the recent war in Ukraine. Following closures in 2020, three mines have reopened and are currently operational: Gem Diamond’s Letšeng, Lucapa Diamond’s Mothae, and Namakwa’s Kao. Despite the challenges presented by travel restrictions, supply chain constraints, extreme weather conditions and recurrent power outages, the Letšeng mine recovered 14 percent more carats in 2021 (115,335, compared to 100,780 in 2020), with the average price at $1,835 per carat, which was 4 percent lower than in 2020, mainly due to fewer large and exceptional diamond recoveries. The Mothae mine has expanded its processing capacity by 45 percent in 2021, and continued its cutting and polishing partnership, which promises to move the sector up the diamond value chain. After over a year of inactivity, Firestone Diamonds’ Liqhobong mine was expected to restart its operations in the second half of 2021 but remains inactive due to ongoing debt restructuring negotiations. Two locally owned mines, Thaba-Telle and Qaqa, have been awarded diamond mining leases, but are not yet operational.
Water. Lesotho is a net exporter of water. The Lesotho Highlands Water Project (LHWP), established through a bilateral treaty in 1986, comprises a system of dams and tunnels throughout Lesotho to deliver water to South Africa’s Gauteng region. The project transfers about 900 million cubic meters of water annually and generates 72-megawatt (MW) hydropower at the Muela Power Station. Annual royalties from water transfers have averaged LSL950 million over the last five fiscal years, or 2.8 percent of GDP. While the revenue potential is significant, ongoing delays—exacerbated most recently by the pandemic and adverse weather—continue to beset Phase II of the project.
3. Textiles, clothing, and footwear exports were hit hard by the pandemic. Of the key export sectors, textiles, clothing, and footwear have contributed the most to growth over 2015–19. The containment measures imposed at the onset of COVID-19 pandemic (i) disrupted supply chains leading to limited availability of inputs; (ii) resulted in a decline in global demand for apparel, and (iii) caused labor shortages, all of which negatively impacted the sector. As a result, apparel exports declined from $485 million in 2018 to $385 million in 2020 (Figure 4).
Exports of Key products, 2010–2020
(Million US$)
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: UN Comtrade, and IMF staff calculations.Exports of Key products, 2010–2020
(Million US$)
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: UN Comtrade, and IMF staff calculations.Exports of Key products, 2010–2020
(Million US$)
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: UN Comtrade, and IMF staff calculations.4. Lesotho is at risk of losing out to competitors in the apparel sector, both regional and global. The preferential access afforded by AGOA, coupled with a relatively low monthly wage of about $150, helped Lesotho remain moderately competitive in the past (Figure 5). In sub-Saharan Africa, Eswatini, Ethiopia, Kenya, Madagascar, and Mauritius also have large export-oriented apparel sectors, while global textile giants outside of China like Vietnam, Malaysia, and Singapore also pose a challenge. However, the recent 14 percent minimum wage hike in the textile sector and the anticipated expiration of AGOA in 2025 are expected to erode Lesotho’s competitiveness in the global apparel industry.
Global Apparel Industry: Monthly Minimum Wage, 2018
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Source: NYU Stern Center for Business and Human RightsGlobal Apparel Industry: Monthly Minimum Wage, 2018
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Source: NYU Stern Center for Business and Human RightsGlobal Apparel Industry: Monthly Minimum Wage, 2018
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Source: NYU Stern Center for Business and Human Rights5. Historically, AGOA suspensions haves had a significant negative impact on the apparel exports of affected countries.3 For instance, Eswatini, another SACU member, with predominantly apparel exports to the US, was removed from the AGOA in January 2015. Pre-suspension, in 2014, Eswatini claimed AGOA benefits for $59 million of its exports to the US of which $57 million were apparel products (one-third of the country’s apparel exports). Eswatini’s apparel exports to the US dropped to $2.7 and $1 million in 2015 and 2016, respectively, and never recovered despite its redesignation as an AGOA beneficiary by end-2017. It takes three or more years for the lost exports to recover as countries divert exports to other existing destination markets. In case of Eswatini, apparel exports were entirely diverted to South Africa (Figure 6). Similarly, in case of Madagascar, they were predominantly diverted to EU, with the US regaining its market share after the AGOA benefits were reinstated. More recently, anecdotal evidence from Ethiopia, another apparel manufacturing hub benefitting from AGOA, suggests that the suspension of AGOA benefits has led to apparel manufacturers closing shops and moving elsewhere. The US tariff rates on apparel are quite high, ranging from 15 to 32 percent. Hence, the estimated tariff savings from AGOA are sizable—over $70 million (Table 1). The anticipated loss of preferential access will increase the pressure on the apparel sector in an increasingly competitive global market.
Evolution of Apparel Exports Post-Suspension
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: Atlas of Economic Complexity, and IMF staff calculations.Notes: Shaded areas represent years of suspension.Evolution of Apparel Exports Post-Suspension
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: Atlas of Economic Complexity, and IMF staff calculations.Notes: Shaded areas represent years of suspension.Evolution of Apparel Exports Post-Suspension
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: Atlas of Economic Complexity, and IMF staff calculations.Notes: Shaded areas represent years of suspension.Lesotho: Top 10 Products Exported to the US, 2021
Lesotho: Top 10 Products Exported to the US, 2021
| Product | Value of exports (million US$) | Share in exports (percent) | MFN tariff rate (percent) | AGOA eligible? | Estimated duty savings (million US$) |
|---|---|---|---|---|---|
| Women's or girls' trousers, breeches and shorts, of synthetic fibers | 100.5 | 29.8 | 28.2 | yes | 28.3 |
| Men's or boys' trousers and shorts, of cotton | 54.1 | 16.0 | 16.6 | yes | 9.0 |
| Sweaters, pullovers and similar articles | 33.3 | 9.9 | 32.0 | yes | 10.6 |
| Nonindustrial diamonds, unworked | 29.8 | 8.8 | 0 | no | 0 |
| T-shirts, singlets, tank tops and similar garments | 24.7 | 7.3 | 32.0 | yes | 7.9 |
| Men's or boys' trousers, breeches and shorts, of synthetic fibers | 19.8 | 5.9 | 28.2 | yes | 5.6 |
| Men's or boys' shirts, of manmade fibers | 18.0 | 5.3 | 32.0 | yes | 5.8 |
| Women's or girls' trousers, breeches and shorts, of cotton | 11.9 | 3.5 | 14.9 | yes | 1.8 |
| Women's or girls' trousers, breeches and shorts, not knitted/crocheted | 10.5 | 3.1 | 16.6 | yes | 1.8 |
| Nonindustrial diamonds, worked, but not mounted or set | 10.5 | 3.1 | 0 | no | 0 |
| Total Top10 | 313 | 93 | 71 |
Lesotho: Top 10 Products Exported to the US, 2021
| Product | Value of exports (million US$) | Share in exports (percent) | MFN tariff rate (percent) | AGOA eligible? | Estimated duty savings (million US$) |
|---|---|---|---|---|---|
| Women's or girls' trousers, breeches and shorts, of synthetic fibers | 100.5 | 29.8 | 28.2 | yes | 28.3 |
| Men's or boys' trousers and shorts, of cotton | 54.1 | 16.0 | 16.6 | yes | 9.0 |
| Sweaters, pullovers and similar articles | 33.3 | 9.9 | 32.0 | yes | 10.6 |
| Nonindustrial diamonds, unworked | 29.8 | 8.8 | 0 | no | 0 |
| T-shirts, singlets, tank tops and similar garments | 24.7 | 7.3 | 32.0 | yes | 7.9 |
| Men's or boys' trousers, breeches and shorts, of synthetic fibers | 19.8 | 5.9 | 28.2 | yes | 5.6 |
| Men's or boys' shirts, of manmade fibers | 18.0 | 5.3 | 32.0 | yes | 5.8 |
| Women's or girls' trousers, breeches and shorts, of cotton | 11.9 | 3.5 | 14.9 | yes | 1.8 |
| Women's or girls' trousers, breeches and shorts, not knitted/crocheted | 10.5 | 3.1 | 16.6 | yes | 1.8 |
| Nonindustrial diamonds, worked, but not mounted or set | 10.5 | 3.1 | 0 | no | 0 |
| Total Top10 | 313 | 93 | 71 |
6. While Lesotho’s export- and import-product concentrations are broadly comparable with the average for other SACU members, export- and import-market concentrations are the highest among SACU members. Lesotho exports about 700 products (out of the approximately 5,300 products), based on the HS6 classification, down from about 960 in 2010, significantly lower than SACU average of 2,500 products (Figure 7). Nevertheless, the export-product concentration index is comparable with the average for other SACU members, excluding Botswana. Imports are more diversified; the number of imported goods is much larger—about 3,000—and has been broadly stable, except for a dip in 2018. In terms of trading partners, Lesotho’s both exports and imports are highly concentrated—about 30-40 markets or source countries—significantly lower than the SACU average of 80, excluding South Africa. Over 85 percent of Lesotho’s imports come from South Africa.
Trade Concentration Indices
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: Atlas of Economic Complexity, and IMF staff calculations.Trade Concentration Indices
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: Atlas of Economic Complexity, and IMF staff calculations.Trade Concentration Indices
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A009
Sources: Atlas of Economic Complexity, and IMF staff calculations.7. Diversification will make Lesotho more resilience to external shocks. Going forward, to mitigate the impact of AGOA expiration and full implementation of African Continental Free Trade Area (AfCFTA), it would be important to move from heavy dependence on a narrow range of products and a small number of trading partners to diversification into new products and trading partners, as well as increase in the quality of existing products, which would also offer opportunities to move labor from the low productivity informal sector to higher productivity activities that are globally competitive.
C. Implications for SACU after AfCFTA
8. The AfCFTA provides an opportunity to diversify export markets. Given that Lesotho’s imports are highly concentrated and arrive predominantly duty-free from South Africa under SACU (imports from other African countries comprise less than 1 percent of total imports), there is little scope for change in import patterns, at least in the short run. Likewise, exports to African countries outside of SACU/SADC are negligible. However, the AfCFTA has the potential to open new market opportunities for apparel exporters to further diversify their markets toward other African countries that are net importers of apparel (e.g., Angola, Nigeria, Senegal, and Togo).
9. The full implementation of AfCFTA is likely to have a minimal impact on SACU transfers. SACU transfers have been in decline due to shifting global and regional trade dynamics, with imports increasingly entering SACU duty-free and at lower MFN duty rates. The SACU average external import duty against other non-SADC African countries stands at 11 percent, generating about $40 million in customs revenues, which pales in comparison to the duties collected on imports from the rest of the world (over $3.5 billion) (Table 2).
SACU: External Tariff and Duties Collected
SACU: External Tariff and Duties Collected
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SACU: External Tariff and Duties Collected
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Prepared By Shushanik Hakobyan.
Such heavy dependence on South Africa for imports is partly being incentivized by the SACU revenue sharing formula, with its customs component based on the share of intra-SACU imports. Lesotho’s share was about 9 percent on average over the last decade.
Prior to 2022, 15 AGOA eligible countries (out of 45) have seen their preferential access to the US market suspended. An empirical analysis of AGOA eligible countries’ exports to the US shows that the suspension of AGOA benefits leads to a significant and sizable drop in exports to the US. This effect is greater for apparel exports, for countries with longer suspension periods (more than three years) and for the first year of suspension.
