Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 52466 - LS

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A

PROPOSED CREDIT

IN THE AMOUNT OF SDR12.9 MILLION (US$20 MILLION EQUIVALENT)

AND A

PROPOSED GRANT IN THE AMOUNT OF SDR3.3 MILLION

(USS5 MILLION EQUIVALENT)

TO

THE KINGDOM OF LESOTHO

FOR A

SECOND POVERTY REDUCTION SUPPORT CREDIT AND GRANT

M a r c h 1,2010

Afr ica Poverty Reduction and Economic Management Country Department 1 Afr ica Region

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not otherwise be disclosed without Wor ld Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective as o f January 26? 201 0)

AGOA AfDB ART BFPs CAS CBL CEM CFAA CMA CPIA CPAR DA DCs DCS Dfl D DHMTs DP DPO DSA EA EPA EU FDI FPE GDP GNP GOL GOLFIS HIV HDI ICA IDA IFA IFC IFMIS IMF INDF IRSC JBS LH WP LNDC LRA MCC MDAs

Currency Unit Lesotho Maloti L S $ 1 .oo Maloti 7.6

FISCAL YEAR April 1 to March 3 1

ABBREVIATIONS AND ACRONYMS

African Growth and Opportunity Act African Development Bank Anti Retroviral Treatment Budget Framework Papers Country Assistance Strategy Central Bank o f Lesotho Country Economic Memorandum Country Financial Accountability Assessment Common Monetary Area Country Policy and Institutional Assessment Country Procurement Assessment Review District Administrator District Councils District Council Secretary Department for International Development District Health Management Teams Development Partners Development Policy Operations Debt Sustainability Analysis Environmental Assessment Economic Partnership Agreement European Union Foreign Direct Investment Free Primary Education Gross Domestic Product Gross National Product Government o f Lesotho Government o f Lesotho Financial Information System Human Iinniunodeficiency Virus Human Development Index Investment Climate Assessment International Development Association Inter-Governmental Fiscal Architecture International Finance Corporation Integrated Financial Management and Information System International Monetary Fund Interim National Development Framework Improvement and Reforin Steering Committee Joint Budget Support Lesotho Highlands Water Project Lesotho National Development Corporation Lesotho Revenue Authority Millennium Challenge Corporation Ministries, Departments and Agencies

11

FOR OFFICIAL USE ONLY

MDGs MFDP MOHSW MTEF MTICM NDAP TU’DP NSDS NSP N S S OBFC oss PAC PAF PEFA PEMFAR

PFM PPAD PPP PPR PSCED

PSD PSIA PRSC PRGS SACU SADC SDR SMEs S WAp TIFC UNAIDS UNICEF WSIP

Millennium Development Goals Ministry o f Finance and Development Planning Ministry o f Health and Social Welfare Medium-Term Expenditure Framework Ministry of Trade, Industry, Cooperatives and Marketing National Decentralization Action Plan National Development Plan National Strategy for the Development o f Statistics National Strategic Plan National Statistical System One Stop Business Facilitation Centre One Stop Shop Public Accounts Committee Performance Assessment Framework Public Expenditure and Financial Accountability Public Expenditure Management and Financial Accountability Review Public Financial Management Procurement Policy and Advisory Division Public-Private Partnership Public Procurement Regulations Private Sector Competitiveness and Economic Diversification Private Sector Development Poverty and Social Impact Assessment Poverty Reduction Support Grant and Credit Poverty Reduction and Growth Strategy Southern African Customs Union Southern African Development Community Special Drawing Rights Small and Medium Enterprises Sector-wide Approach Trade and Investment Facilitation Center Joint United Nations Program on HIV/AIDS United Nations Children’s Fund Water Sector Improvement Project

Vice President: Obiageli Katryn Ezekwesili Country Director: Ruth Kagia

Sector Director Sudhir Shett Sector Manager: John Panzer

Task Team Leader: Preeti Arora

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

TABLE OF CONTENTS

Credit and GRANT PROGRAM SUMMARY .................................................................................. v I. INTRODUCTION ........................................................................................................................ 1 11. COUNTRY CONTEXT ............................................................................................................... 2 A. Country Overview ............................................................................................................... 2 B. Recent Economic Developments And Impact o f the Global Financial Crisis ........... C. Macroeconomic Outlook and Debt Sustainability .............................. 111. THE GOVERNMENT’S PROGRAM ....................................................... IV. BANK SUPPORT TO THE GOVERNMENT’S P m .................................................... 19

B. Relationship to other Bank Operations ............. ........................................................ 20 C. Coordination with the IMF and Other D. Lessons Learned ..................................

V. The Proposed Credit AND GRANT (PRSC-2) ........................................................................ 23 A. Operation Description ....................................................................................................... 23 B. Policy Areas ...................................................................................................................... 28 VI. OPERATION IMPLEMENTATION ...................................................................................... 43

A. Links to the Country Assistance Strategy ........ ...... ................................ 19

E. Analytical Underpinnings ....................

A. Poverty and Social Impact ........................................... B. Implementation, Monitoring and Evaluation .... ............................ .43 C. Fiduciary Aspects .............................................. ............................. 44 D. Disbursement and Auditing ............................................................................................... 45 E. Environmental Aspects ................................................................................................ F. Risks and Mitigation .. .............. .......... ....

List o f Boxes: Box 1: Donor Support to HIV/AIDS Programs ................................................................................... 39 Box 2: The Proposed PRSC and Good Practice Principles on Conditionality .................................... 42

List o f Tables: Table 1 : Evolution of Fiscal Variables, 2004/05-2008/09 ...................................................................... 5 Table 2: Selected Economic and Financial Indicators, 200 Table 3 Selected Fiscal Indicators, 2008/09- 2014/2015 ... Table 4: Progress against Prior Actions for PRSC-2 ........ Table 5: PEFA PFM Performance Indicators ....................

Table 7: Projected Growth in Demand Secondary E Table 6: Primary School Cohort Survival Rates ......

List o f Annexes: Annex 1:Policy Matrix and Results Framework for the PRSC Series .................................................. 47

......................... 5 1 Annex 3: GBS Performance Assessment Fra ......................... 61 Annex 4: Lesotho Relations with t h e IMF .... ........................ .76 Annex 5: Lesotho at a Glance ............................................................................................................... 78

Annex 2: Letter o f Development Policy .......

Map: lBRD 33434 This Operation has been prepared by an IDA team consisting o f Preeti Arora (TTL), Gert Van Der Linde (AFTFM); Kanako Yamshita-Allen. Feng Zhao (AFTHE); Aidan Mulkeen, Cristina Santos (AFTED); Thandi Gxaba (AFTEN); Louise Fox, Ian Gillson, Maria Benito-Spinetto, Phindile Ngwenya (AFTPI); Ganesh Rasagani (AFTFE); Andrew Asibey (AFTRL); Wedex Ilunga (AFTPC); Johan Mistiaen (DECDG); Husani Abudagga (AFMLS); Anthony Molle (LEGAF); Suzanne F. Morris (LOAFC); Melanie Jaya (AFCSI) and Dotilda Sidibe (AFTPI). Overall guidance for the Operation has been provided by Ruth Kagia (Country Director), John Panzer (Sector Manager, AFTPI) and Sandeep Mahajaii (Lead Economist, AFTP1). The Peer Reviewers are Zeljko Bogetic (ECSPE) and Hanid Mukhtar (SASEP). The IDA team collaborated closely with five other development partner agencies that are also committed to provide general budget support to Lesotho.

1v

KINGDOM OF LESOTHO SECOND POVERTY REDUCTION SUPPORT CREDIT AND GRANT

CREDIT AND GRANT PROGRAM SUMMARY

Borrower

Implementing Agency

Financing Data

Operation Type

M a i n Policy Areas

Key Outcome Indicators

Program Development Objectives and Contr ibution to Country Partnership Strategy

Kingdom o f Lesotho

Ministry o f Finance and Development Planning

A Credit and Grant o f SDR16.2 m i l l i o n (US$25 mi l l ion equivalent), including US$lO m i l l i on equivziznt f rom the Crisis Response Window, o f which US$5 m i l l i on equiva1c::r i s a Grant.

PRSC series with Standard IDA ::ms with 40 years maturity and a 10- year grace period for the Credit component. Second in the series o f three operations.

The main pol icy areas: (i) Creating a conducive environment for private sector led growth, (ii) Improv ing Public Expenditure Management and Fiduciary Framework; and (iii) Improving access to basic services.

Outcome Indicator

Days required to issue import permits and export visas

Improved accountability for Government finances and service delivery.

Primary School Cohort survival rate

Proportion o f people living with AIDS and in need o f ART who receive ARV treatment

Base (2006/07)

7

Public accounts not audited for 2004 and beyond

39

26

Latest (2 008/09)

2

Public accounts audit e d for 2006/07

50

52

Target PRSC-3 (2010/11)

1

Public Accounts audited up to 2008/09

55

60

The PRSC program seeks to contribute to the Government’s medium- term development objectives as set out in i t s Interim Development Planning Framework (IDPF) and the Growth Strategy aimed at addressing medium to long t e r m issues to achieve sustained and shared growth as i t seeks to mitigate the impact o f the global financial crisis on i t s growth prospects. The program will contribute to (i) strengthening the business environment and promoting economic diversification leading to broad-based and employment-generating

V

Risks and Risk Mit igation

Operation ID

growth, (ii) enhancing the effectiveness o f publ ic expenditures and sharpening the strategic focus o f the budget; and (iii) improv ing service delivery in key sectors. The proposed operation i s an integral part o f the Bank’s current Country Assistance Strategy for Lesotho and the new CPS under preparation. The new CPS i s built around two thematic pil lars and three cross-cutting issues. The two pillars are: (i) Human Development and Improved Service Delivery; and (ii) Economic Diversif ication and Enhanced Competitiveness. The cross-cutting issues are: (i) Public sector accountability and governance; (ii) Capacity development; and (iii) Regional integration.

Mucro risks: T w o distinct macro risks exist. First, the recovery o f the South Afr ican economy could be slower than anticipated and the rebound o f SACU revenues could be delayed. This would put enormous pressure on what already i s a tough fiscal adjustment process which can undermine fiscal sustainability and/or jeopardize necessary social and capital expenditure. Second, the Government may not fully implement the required program o f fiscal consolidation. The run-up to the local elections in 201 0 and the National Assembly elections in two years may lead to unplanned expenditures. Mi t igat ing these risks depends on Lesotho’s capacity to adjust to the shocks and the Government’s abi l i ty to manage the impact o f the shocks. Significant levels o f government deposits accumulated at the Central Bank during the years o f SACU revenue boom and high levels o f international reserves at the Central Bank (almost double the level required to maintain parity with the rand) provide a cushion f rom the short t e rm fiscal and external shocks. Bank and the Fund, through their respective programs, will work with the Government to identify ways to make this fiscal adjustment work through expenditure cuts, efficiency gains and revenue diversification. Predictable and timely budget support through the PRSC series and f rom other development partners, including the IMF will also help mitigate the risks.

Capacity risks: Limited Government administrative capacity and coordination among relevant central and local agencies could lead to delays in the implementation o f key reform measures particularly related to service delivery. T o mitigate this potential coordination failure, implementation arrangements for the PRSC seek to ensure oversight and buy-in at the poli t ical level. Capacity building initiatives underway with support f rom other Development Partners have gathered momentum and will also mitigate this risk.

P112817

vi

PROPOSED SECOND POVERTY REDUCTION SUPPORT CREDIT AND GRANT

TO THE KINGDOM OF LESOTHO (PRSC-2)

Program Document

I. INTRODUCTION

1. The PRSC-2 i s the second in a series o f three annual development pol icy operations (DPO), envisaged in the FY 2006-09 CAS.’ The operation wou ld support the Government o f Lesotho’s development program that underpins i t s In ter im National Development Framework (INDF) and the Growth Strategy. The proposed operation amount i s US$25 m i l l i on equivalent. The operation comes at a t ime when the Government o f Lesotho has to cope with the adverse impact o f the global recession while retaining focus on longer-term reforms to achieve faster growth, address the HIV/AIDS pandemic, to tackle significant human development challenges in health and education, and to improve public f inancial management. The proposed amount includes U S $ l O m i l l i on equivalent f rom the Crisis Response Window (CRW), o f which US$5 mi l l ion equivalent i s a grant.

2. The global crisis i s affecting Lesotho through the fo l lowing main channels: (i) economic slowdown in the Uni ted States (Lesotho’s ma in export destination for garments) has hurt Lesotho’s texti le industry, leading to j o b losses; (ii) a slump in diamond prices and the global credit crunch have resulted in reduced production and export o f diamonds; (iii) slowdown in the South Afr ican economy has led to a sharp decline in i t s imports, and, as a result, will cut into the Southern Africa Customs Un ion (SACU) revenues; and (iv) weakening o f the South Afr ican economy has also resulted in large-scale j o b losses in i t s mining sector where many o f the Basotho are employed. The decline in S A C U revenues, estimated at over 65 percent in the next two years poses by far the biggest challenge to Lesotho and can potentially create both fiscal and external imbalances. Managing these deficits wil l require a judicious balance between financing and containing growth o f government expenditures. The proposed financing f rom the C R W in FY 10/11 will provide much needed fiscal space as the Government undertakes fiscal consolidation o n the expenditure side.

3. The Government o f Lesotho (GOL) i s seeking the support o f i t s development partners as i t responds to cushion the decline in aggregate demand and shelter the vulnerable segments o f the population. The proposed PRSC-2 will support and help protect the Government’s long term reform program, essential for the country’s sustained development, as it seeks to mitigate the impact o f the economic crisis while facing a shrinking resource base. The fiscal space, analytical support, and pol icy dialogue that wou ld go with the proposed operation would help guide the Government’s focus o n key reform areas. It will also play a catalytic role to furthering the po l icy dialogue o n major reform areas such as public financial management, education and health.

4. As was the case with PRSC-1, the proposed PRSC-2 i s being designed and implemented within a harmonized framework for the provision o f budget support. This framework comprises

The current CAS was discussed by the Board in April 2006 (Report No. 35621 -LS). 1

1

a multi-year Performance Assessment Framework (PAF) and a review process aimed at reducing transaction costs for the G O L and the development partners (DPs). Whi le the PRSC operations together w i th the contribution by the Joint Budget Support (JBS) Donor Group wil l provide reliable and timely financial support for the implementation o f the National Development Plan, support under each operation will be disbursed against specific prior actions as identified in the P A F and agreed with GOL.

11. COUNTRY CONTEXT

A. COUNTRY OVERVIEW

5. Lesotho i s a small, landlocked country, with a population o f around 1.8 million. I t has close economic t ies with South Afr ica through remittances f rom miners and other workers employed in South Africa; customs revenues f rom SACU; the sale o f water f rom i t s High land Water Project to South Africa; and, very strong trade with South Africa, especially imports. I t s monetary pol icy i s anchored in the monetary un ion and pegged exchange rate with South Af r i ca under the Common Monetary Area (CMA), while membership in S A C U determines i t s trade regime.

6. Lesotho’s per capita income o f US$1,080 (2008, Atlas method) places it within reach o f the IDA cut-off point o f US$1,135. Good, albeit uneven, recent growth performance, averaging 3.4 percent per annum f rom 2004-2008 accelerated the country’s ascent toward M I C status. This progress has however been halted by the impact o f the global crisis. A shift in the drivers o f production and income f rom subsistence agriculture and receipt o f remittances to modern manufacturing, natural resource exports, and the services sector resulted in growth rates higher than the sub-Saharan Afr ican average. However, over ha l f the population lived below the national poverty l ine o f $1.50 per day and 37 percent o f the households lived below $1 per day in 2002/032. Many households, mostly in rural areas, have not benefitted much f rom economic growth and the structural change. For some households, the loss o f income f rom remittances combined with the decreasing natural resources base for agriculture (arable land as w e l l as grazing fields) has increased poverty, vulnerability, and exclusion. B y far, the most important l ivelihood and income risk, however, i s the high prevalence o f HIV/AIDS.

7. Lesotho has the third highest HIV adult prevalence rate in the world at 23.23 percent and the fifth highest Tuberculosis (TB) incidence in the world with 635 cases per 100,000 people. There are an estimated 62 new infections and 50 deaths due to AIDS each day (implying that epidemic threshold has not yet been reached and that the poo l o f HIV positive persons - who need care and treatment, and who can infect others - keeps growing). At the end o f 2007, there were an estimated 270,000 people living with HIV (PLWHA), o f whom 11,801 were children. L i f e expectancy at birth has dropped to 36.8 years f rom 44 years a decade ago. The total number o f orphans i s estimated to be around 200,000. With 80 percent o f HIV positive patients co-infected with TB, the HIV epidemic has dramatically increased the threat o f TB. Mul t i -Drug resistant and Extremely Drug Resistant strains o f TB are on the rise, threatening both

’ This information i s based on the 2002/03 Household Budget Survey (the latest available).

June 2008. Data i s taken from the Lesotho UNGASS Country Report o f Jan. 2006 - Dec. 2007, as finalized and presented in 3

2

Lesotho and the Southern Afr ica Region as a whole. This “two disease, one patient” issue needs to be addressed in a carefully coordinated way.

8. Overall policy performance judged by the Bank’s CPIA indicators has been good and Lesotho stands among the better African performers on a broad range o f economic and structural policies. Lesotho’s aggregate CPIA rating was 3.6 in 2008 against the Sub- Saharan average o f 3.3 . Macroeconomic management has been good. Prudent fiscal policies enabled fiscal surpluses in each year between 2003104 and 2008/09. Less than 10 percent o f Lesotho’s budget i s funded by foreign aid4. Public expenditure management, though s t i l l weak, has been implov ing w i th the adoption o f the medium-term planning framework and the introduction o f the Integrated Financial Management Information System (IFMIS). There i s relatively easy movement o f goods and services across i t s borders. However, Lesotho lags behind IDA-borrowers o n average, in two crit ical areas - business regulatory environment and quality o f budgetary and financial management; both o f these reform areas wi l l be supported under the proposed operation.

9. The challenge for policy makers i s to sustain shared growth and reduce inequality in the face of the global economic crisis while addressing the critical human development issues. In order to achieve the high, sustained and j o b creating growth i t aspires to, Lesotho needs to diversify i t s economy and undertake structural reforms to enhance i t s competitiveness. This has to be tackled against the backdrop o f l imi ted human and institutional capacity. Deepening regional integration and exploit ing i t s proximity to South Afr ica can provide an important contribution to addressing these challenges by creating greater employment opportunities in the manufacturing sector, including agro-industry. Improv ing the business climate overall to attract foreign direct investment (FDI), particularly f rom South Afr ica to produce for the regional market will lessen the dependence on the US market for textiles. The recently signed Economic Partnership Agreement (EPA) with the EU relaxes the ru les o f origin that allows for single transformation rules to apply to manufacturing processes and provides another opportunity for Lesotho to expand i t s product and market base to the EU.

10. The process o f reforms i s made difficult by institutional and human capacity limitations on the one hand and a challenging political environment on the other. The relative political stability during the 2000s enabled Lesotho to proceed with important structural transformations that had been delayed over the previous decade by political instability. This instability was fed in part by declining employment opportunities for Basotho miners5 in South African during the 1990’s, and, in turn, by declining remittances to Lesotho by migrant labor. The economic transformation that came about at the beginning o f the millennium has expanded economic opportunities in Lesotho, which in turn have helped sustain the politic21 stability. However, the last National Assembly elections, held in February 2007, were hot ly colitested and aggrieved parties have periodically protested against the allocation o f seats in the National Assembly. Delays in enacting some key legislation6 could be at least partially attributed to these pol i t ical tensions.

Only grants and loans are included in this estimate o f foreign aid. However, SACU transfers also include a significant component that i s not attributable to the trade taxes that Lesotho would collect if there was no customs union. This i s roughly estimated to be about 70 percent of the transfers and could be classified as aid.

Basotho i s a Sotho-speaking ethnic majority in Lesotho comprising 99 percent of the population. The legislation required to prepare a Statement o f Affairs for the public accounts for 1997-2001 was delayed

5

6

initially as more time was required to get a buy in from the opposition party that chairs the Public Accounts Committee in Parliament.

3

B. RECENT ECONOMIC DEVELOPMENTS AND IMPACT OF THE GLOBAL FINANCIAL CRISIS

11. Economic performance in the period leading up to the global recession was good overall, with real GDP growth averaging 4.5 percent per annum between 2006 and 2008. This growth was achieved on the strength o f Lesotho’s exports (garments and diamonds) and large SACU transfers made possible by strong growth in South African imports in the midst o f a booming global economy7. SACU revenues rose sharply from 25 percent o f GDP in 2004/05 to about 40 percent o f GDP in 2006/07, falling somewhat to 37 percent o f GDP in 2008/09. The current account recorded a surplus o f about 10 percent o f GDP in 2008 and gross official reserves at over $900 mi l l ion were almost double the level required to maintain the parity o f the lot i with the rand. However, the impact o f the global economic crisis now risks unraveling this good progress. GDP growth i s expected to be only 1.4 percent in 2009, before recovering moderately to 2.8 percent in 20 10.

12. While the fiscal stance of GOL has been broadly prudent, expenditures shot up as a result o f S A C U windfalls. GOL saved a fraction o f the SACU “boom” by reducing public debt and increasing its deposits at the Central Bank. However, increasingly large portions o f the windfall SACU revenue were spent. As a result, government expenditures rose from 48 percent o f GDP in 2004/05 to 52 percent o f GDP in 2007/08, in large part because o f higher compensation o f employees and spending on goods and services. The establishment o f a Defined Contribution Pension Fund with an initial capital injection o f M600 mi l l ion and the establishment o f Block Farming scheme with a capital o f M200 mi l l ion in 2008/09 contributed to a sharp increase in overall spending to over 62 percent o f GDP in 2008/09. While a fiscal surplus was achieved every year up to 2008109, the non-SACU primary deficit increased from 16 percent o f GDP in 2004/05 to 32 percent o f GDP in 2008/09, making Lesotho vulnerable to the external shock to SACU revenues when the global financial crisis hit.

13. The immediate impact of the crisis was felt through a decline in export demand for textiles from the US market and a sharp decline in diamond production and prices. US clothing imports from Lesotho declined by an estimated 30 percent year-on-year in March 2009. As a result, employment in the textile sector dropped by over 10,000 (from a peak o f 50,000 jobs) over the same period. The mining sector (accounting for 6.5 percent o f GDP) came to a standstill in the last quarter o f 2008. While the demand from the US market remains weak, an upsurge in mining production on account o f the resumption in diamond mining at the biggest mine, and exports o f textiles and some non-traditional items to the South African market are having a positive impact on the economy. Overall, the pace o f economic growth i s expected to recover from 20 10 onwards.

Large increase in SACU revenues resulted from a restructuring o f the SACU revenue sharing formula, as well as a 7

rapid growth in the South African economy. The “new” 2002 SACU Agreement came into effect on July 15,2004 leading to a revision o f the revenue sharing formula in favor o f the smaller SACU members.

4

Table 1 : Evolution of Fiscal Variables, 2004/05-2008/09

2004 1005 2006 2007 2008 2009 In percent of GDP Total revenues SACU revenues

Total expenditures Recurrent Compensation o f employees

Goods and services Capital expenditures

Fiscal balance (including grants) Primary balance Non-SACU primary balance

Real GDP growth (calendar year) Current account balance (including transfers)

55.6 25.4

47.7 39.7 14.9 12.5 7.9

7.8 9.8

-15.6

1.1 -7.9

52.8 26.6

49.5 41.6 14.8 12.9

8.0

4.3 6.9

-19.7

6.5 4.7

65.1 39.7

48.9 41.6 14.4 14.4 7.4

16.3 17.3

-22.4

2.4

62.6 35.5

51.7 40.6 14.1 12.1 11.2

10.9 13.5

-22.1

4.5 14.1 9.6

66.8 37.1

62.4 48.3 15.3 13.8 14.0

4.4 5.3

-31.8

1.4 -1.5

69.1 35.3

70.2 52.3 18.1 14.5 16.1

-1.1 -1.1

-35.5

3 .O -19.7

Sources: Government o f Lesotho, IMF and Bank staff estimates. Note: data i s in fiscal years which begin on April 1st (Le. 2008 refers to FY 2008-09).

14. The more significant impact o f the crisis which i s expected to last through the medium term i s through SACU revenues. The S A C U revenue poo l i s shrinking, as the precipitous’ decline in South Afr ican imports since the onset o f the crisis results in lower customs collections. Given the S A C U revenue sharing formula and the agreed disbursement principles, Lesotho’s S A C U receipts in 2009/10 remain high at about 35 percent o f GDP9. However, SACU receipts are expected to decline to about 14 percent o f GDP in 2010/11 (paragraph 20). This steep decline in S A C U revenues i s expected to lead to sharp deteriorations o f both the fiscal balance and the current account, wh ich would move f rom a surplus in 2008 to a widening defici t in the medium t e r m (Tables 2 and 3), potentially leading to unsustainable fiscal and external positions in the absence o f strong adjustment measures.

15. Recognizing the challenge posed by lower SACU revenues, the Government scaled back from its initially announced countercyclical and significantly expansionary budget f o r FY10. Reaff irming a broad-based program of structural reforms to promote private sector investment and achieve broad-based growth, the budget set aside M600 mi l l i on over two years (about 6 percent o f i t s budget) to support specific investments related to the provision o f water, roads, factory shells and communications to attract f i r m s to locate in Lesotho. Part o f the stimulus fund i s also being used to support the upgrading o f tourism infrastructure to take advantage o f the Soccer Wor ld cup being held in South Africa. These activities have led to the

.

* Vehicle imports which account for 40 percent o f import tariffs in South Africa declined by an estimated 30 percent on a year to year basis since the onset o f the crisis.

Allocation for year “t” i s based on projections in year “t-1”. Positive adjustments for year “t” (under payment to a member country) are made in year “t+l” and negative adjustments for year “t” are effected in year “t+2”.

9

5

creation o f many jobs in the construction sector alleviating some o f the hardships caused by j o b losses in the textile sector. Significant allocations were also made to income- and employment- generating projects, including the Integrated Watershed Management Project which provides employment across al l ten districts to rehabilitate severely eroded roads and through the District Councils for local infrastructure projects. The Government also extended i t s key social safety net program b y raising the value o f the O l d Age Pension f rom M200 to M 3 0 0 per month and extending the pension scheme to civil servants aged 41 to 45, requiring a capital injection o f M500 m i l l i on over two years. Government's contribution o f 11.2 percent will require annual payments to be increased by M 3 2 m i l l i on per annum" (an increase o f about 25 percent f rom 2008/09).

16. With the scaling back of both, recurrent and capital expenditures, a small deficit of one percent of GDP i s projected for 2009/10. Spending on vulnerable groups and key priori ty areas needed to achieve sustainable growth has been safeguarded. Even so, total expenditures are budgeted to be 70 percent o f GDP in FY10, an 8 percentage point increase over the FY09 outcome, with most o f the increases coming in current expenditure categories which typically are difficult to ro l l back. Notably, the budget for wages and salaries goes up by 25 percent over the previous year budget, increasing their share o f GDP to about 18 percent (among the highest in Africa). Domestically financed capital spending has been rol led back f rom the init ial budget o f 14 percent o f GDP to about 9 percent o f GDP, while the capital budget financed by the Millennium Challenge Corporation (MCC) and other donors has not been rol led back. Spending on goods and services has been cut as well, particularly on defense and foreign affairs. The Government has also imposed an across the board reduction in travel related expenditures. While these measures help to keep the fiscal deficit manageable in 2009/10, sharp decline in SACU revenues require a much stronger response in the medium term.

c. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

17. Lesotho faces significant challenges in the medium-term stemming from the uncertain global environment in general and from lower SACU revenues in particular. Real GDP growth i s projected to be only about 1.4 percent in 2009 on account o f a sharp decline in the manufacturing sector, particularly textiles, which i s expected to decrease by about ten percent. As the global economy recovers, Lesotho's economic growth i s also expected to recover modestly to about 3 percent in 2010 and 2011. The outlook for SACU revenues i s largely dependent on South Africa's economic recovery, which i s projected to be lackadaisical in the next few years. A steep decline in S A C U revenues i s projected in 201 0/11 and 201 1/12 resulting in the deterioration o f both the external and fiscal positions. S A C U revenues are expected to revert to their historical pre-boom level o f about 20 percent f rom 2013/14 (see Table 3).

l o In 2008109, the Government established a Defined Contribution Pension Fund for civil servants aged 40 and below.

6

Table 2: Selected Economic and Financial Indicators, 2008-2014

2008 2009 2010 2011 2012 2013 2014

Annual percentage change Real GDP 4.5 1.4 3.0 2.8 5.8 2.7 4.8 Consumer price index (avg.) 10.7 7.7 5.9 5.7 5.6 4.7 4.7 Exports, f.0.b 8.2 -11.5 9.8 5.3 11.1 3.3 6.6 Imports, f.0.b 5.2 1.0 11.4 -3.5 4.5 0.8 5.5

As percent ofGDP Current account balance (excl.transfers) -22.5 -33.9 -37.3 -29.8 -26.6 -23.9 -23.6 Current account balance (incl. transfers) 9.6 -1.5 -19.7 -15.7 -12.7 -6.8 -5.4 Capital account 0.9 4.4 6.2 6.8 6.4 3.6 3.6 Financial account 2.7 1.4 1.7 4.6 5.4 3.0 2.9 Changes in reserves -9.7 -4.3 11.8 4.3 0.9 0.2 -1.1 Discrepancy/Financing gap -3.4 0.0 0.0 0.0 0.0 0.0 0.0 SACU revenues 1/ 37.1 35.3 14.2 15.3 15.1 19.8 19.8

Gross official reserves (end period) In million US dollars 923.1 1122.6 831.4 734.7 700.3 681.4 687.2

Months o f imports o f goods and services 6.2 7.4 4.9 4.5 4.1 4.0 3.8 Sources: Government o f Lesotho, IMF and Bank staff estimates and projections. 1 / Refers to f iscal year which begins on April 1

18. Growth will be driven by moderate growth o f the garment industry through roduct and market diversification, a significant growth in the non garment manufacturing sector (although f r o m a small base), a pick-up in construction driven by public investment to support private sector growthI2, and resumption in mining. A surge in mining and construction activity i s expected in 2012 as a new diamond mine comes on stream and the key works for the second phase o f the Lesotho Highlands Project13 are undertaken. As a result, GDP i s projected to grow by about 6 percent in 2012. However, there i s a risk o f delays in implementing the Highlands project arising if financing cannot be mobil ized. GDP growth in that case i s projected to be about 4 percent in 2012.

19. The signing and f ina l ratif ication o f the interim (goods only) E P A with the EU in June 2009 allows for single transformation n i l e s to be applied just as they are applied under the Afr ican Growth and Opportunity Ac t (AGOA). I t therefore provides new opportunities to Lesotho to diversify i t s product and market base to the EU market. The potential for increased

PI

Phillips has started operations in Lesotho to manufacture light bulbs and related equipment for television for the regional market. Other non garment sectors showing potential are pharmaceuticals, footwear, and plastic hangers to supply to the garment industry.

Donor supported investment in the Metolong darn and the second phase o f LHWP are key elements o f the public investment program. l3 Like the first phase o f the project, South Africa i s the key financier, with Lesotho expected to contribute 25 percent o f the costs o f the project (total cost i s over R1 billion).

II

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regional trade under both S A C U and SADC and, in particular, i t s close l i n k s with the largest market in the region - South Afr ica also provide significant prospects for export growth and diversification in Lesotho.

20. South Africa’s economic recovery will continue to play a major role, with the most direct linkage being SACU revenues. Decline in S A C U revenues i s expected to continue in the next few years and the rebound in the outer years wi l l depend on the speed w i th which the South Afr ican economy recovers. The most recent economic analysis o f the South Afr ican economy projects a recession for 2009, w i th growth returning to positive territory thereafter. Whi le Lesotho’s relative share in each component o f the S A C U revenue sharing formula i s expected to remain constant unti l 2011/1214, net S A C U transfer^'^ to Lesotho will decline by about 50 percent between 2009/10 and 2011/12. As a share o f GDP, SACU revenues are projected to decline f rom 37 percent o f GDP in 2008/09 to around 15 percent o f GDP up to 2012/13. Revenues are expected to recover to about 20 percent o f GDP f rom 2013/14 onwards (See Table

21. The drop in SACU revenues in the medium term will lead to a widening fiscal deficit beyond 2009/10. In the absence o f any major po l icy shifts on the fiscal side, a fiscal deficit o f about 22 percent o f GDP i s projected for 2010/11 16, declining somewhat to 18 percent o f GDP in 201 1/12. While the buildup o f government deposits at the Central Bank, estimated at over M 4 b i l l i on (about US$500 mi l l ion at the current exchange rate), largely saved out o f the S A C U revenue windfalls in the past few years wil l provide a cushion in the short term, the fiscal position will not be tenable in the medium term without significant adjustments o n the expenditure front. Based on our analysis, sustainable non-SACU primary balance should hover around 20 percent o f GDPI7.

22. As a result o f this very large unanticipated shock, Lesotho will need to embark on a course o f strong fiscal consolidation. Therefore, designing and implementing a clear and credible path toward achieving fiscal sustainability over the next five years i s critical. The Government’s medium term strategy comprises: (i) a judicious balance between containing the growth o f Government spending and financing measures to address emerging fiscal deficits; (ii) improving tax administration to enhance collection o f non-SACU revenues, while improving the compliance rate for VAT and income tax collections; and (iii) increasing the efficiency o f spending, in particular capital expenditures. On financing measures, Government i s seeking bilateral support to repay the SACU obligations through soft loans”, seeking further budget support, and drawdown o f i t s deposits with the Central Bank o f Lesotho (CBL) in amounts which do not jeopardize the CBL’s international reserve position and i t s abil ity to maintain the loti’s peg to the rand. Other financing sources include some domestic borrowing in the f o r m o f bond issuance.

3).

The shares for FY 2008/09 are 13.1 percent o f the total Customs Duty Pool, 0.54 percent on the 85 percent o f the

Net SACU transfers include a repayment o f M750 million in 2010111 and M1.73 billion due in 201 1/12 on

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Excise Revenue Pool and 2 1.56 percent on the remaining 15 percent o f the Excise Revenue pool.

account of overpayments in 2008109 and 2009/10. The repayment for 2009110 i s split between 201 1/12 and 20 1211 3.

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The figures shown in Table 3 reflect the outcome with fiscal adjustment. Fiscal Challenges in Lesotho - Diagnosis and Options for Reform, Policy Notes, World Bank. Its earlier attempts to seek re-scheduling o f the obligations from the SACU Council were not successful and now

16

17

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alternative means are being explored.

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Table 3 Selected F isca l Indicators, 2008/09- 2014/2015

2008 2009 2010 2011 2012 2013 2014

In percent of GDP, unless othenvise indicated

Revenues and grants Grants SACU revenue

In million Maloti

Total expenditure and net lending

Compensation o f employees Goods and services

Capital expenditures

Recurrent

of which domestically funded

Overall balance (excluding grants) Overall balance (including grants) Financing

Identified financing New Commitinents Rescheduling o f SACU Liabilities to the CRP Net Domestic Financing Residual Gap (+ means need for additional measures/financing)/statistical discrepancy

Non-SACU overall balance (including grants) Non-SACU primary balance (including grants)

Government debt o f which external debt

66.8 1.7

37.1 490 1

62.4 47.4 15.3 13.8 14.0

9.1

2.7 4.4

-4.4 1.3 0.0 0.0

-2.8

-2.9 -32.7 -3 1.8

52.0 47.1

69.1 49.4 50.8 48.9 5.2 6.5 6.8 5.1

35.3 14.2 15.3 15.1 4918 2162 2579 2841

70.2 65.9 60.6 56.0 51.5 46.8 42.1 39.3 18.1 17.0 15.6 13.9 14.5 12.0 11.5 10.9 16.1 16.7 16.1 14.2 9.3 8.6 7.8 7.5

-6.3 -23.0 -16.5 -12.2 -1.1 -16.5 -9.8 -7.1

1.1 16.5 9.8 7.1 -0.3 0.2 0.3 0.4 0.0 3.8 4.1 3.8 0.0 0.0 0.0 0.0 1.3 12.5 5.4 2.8

0.0 0.0 0.0 0.0 -36.4 -30.7 -25.1 -22.2 -35.5 -29.9 -24.3 -21.2

39.4 46.1 49.4 53.0 35.5 41.7 44.1 46.4

50.5 2.0

19.8 4044

52.3 38.6 13.9 10.5 11.0 7.5

-3.7 -1.7

1.7 0.3 0.8 0.0 0.6

0.0 -2 1.6 -20.3

55.3 48.5

50.6 2.0

19.8 4528

50.8 37.2 13.9 9.8

11.0 7.5

-2.2 -0.2 0.2 0.5 0.7 0.0

-1.0

0.0 -20.0 -1 8.8

54.5 48.4

Sources: Government o f Lesotho, I M F and Bank staff estimates and projections. Note: data i s in fiscal years which begin on April 1st (Le. 2008 refers to FY 2008/09).

23. Fiscal consolidation on the expenditure side will be driven by cuts in both, recurrent and capital expenditures” up to 2014/15. O n the recurrent side, these measures include: containing the growth o f the wage bill by imposing a freeze on new recruitment o f c i v i l servants, and instituting no general wage increase in 20 1011 1 ; rationalization o f foreign missions; and reduction in non-priority recurrent expenditures including foreign travel and subsistence, training, office furniture and Government f lee t management. The wage bil l i s expected to

The cuts in capital expenditures wi l l largely reflect cuts in the recurrent expenditures associated with the capital projects. This distinction i s clear in the new 200 1 GFS format that the GOL i s beginning to use.

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decline f rom 18 percent o f GDP in 2009/10 to about 14 percent o f GDP in 2012/13, remaining below the 2008/09 level o f 15.3 percent o f GDP. Cuts in expenditures on goods and services are the largest and will require careful management and corresponding increase in efficiency o f expenditures to ensure delivery o f key public services. In this regard, strengthening o f public finance institutions, including the introduction o f the Integrated Financial Management Information Systems, the medium t e r m expenditure framework, outturn based budget (rather than on the basis o f previous year’s budget), revision o f the Public Financial Management and Accountability Act, as well as procurement reform provide a sound basis for improving the effectiveness o f expenditures. The proposed PRSC supports reforms in a l l these areas. To improve the quality o f capital expenditures, the Government has revived the Project Appraisal Committee (PAC). The P A C will review each new project for relevance, readiness and resource availability before it i s included in the budget. These measures are expected to provide a saving of about 5 percent o f GDP in 201 0/11 and about 8 percent o f GDP in 201 1/12.

24. Following this adjustment path, the non-SACU primary deficit i s expected to reach sustainable levels by 2013/14. The fiscal position i s projected to return to balance by 2014/15. Reforms at the Lesotho Revenue Authority aimed at addressing loopholes in the collection o f income taxes and value added tax have resulted in significant increases in tax revenue over the past several years. Implementation o f further reforms being considered by the Government will sustain this increase. Current in i t ia t ives t o increase government revenue20 tha t have recently been presented t o the commit tee of Permanent Secretaries include: (i) raise the value added tax rate on electricity, postal services and telecommunications f rom 5 percent to 14 percent; (ii) evaluate with other S A C U countries, a potential increase in Excise taxes on luxury goods; (iii) computerization o f al l systems which should reduce costs for the private sector; control fraud more efficiently and improve the accuracy o f intra-SACU imports; and (iv) transfer the responsibility to audit and collect a l l taxes should to LRA (property tax, taxes on transfers o f property, al l levies on fuel including the road levy, stamp taxes, estate tax). Overall, the non- S A C U primary deficit i s projected to decline to about 20 percent o f GDP by 2014/15.

25. Declining SACU revenues and falling garment exports will also worsen the current account balance. While this decline wil l be countered somewhat by resumption o f mining activity, threats remain to the external balance in the medium term. Strong competition f rom Asian producers for the US textile market will lead to lower demand for Lesotho’s textiles. The long term viabi l i ty o f the sector will require significant efforts to improve productivity and diversify i t s products and markets. Given the need to maintain the loti ’s peg to the rand, there i s l i t t le scope for external adjustment through the nominal exchange rate. The current account balance i s expected to move f rom a surplus o f over 9 percent o f GDP in 2008 to a deficit o f 1.5 percent o f GDP in 2009. While capital inf lows are expected to fully offset the current account deficit and even build some reserves in 2009, the situation changes dramatically in 2010 and a current account deficit o f about 20 percent o f GDP i s projected for 2010. About 40 percent o f the deficit in the current account i s offset by capital transfers. Donor financing, and drawdown o f reserves (which have reached over 1.1 b i l l ion US dollars at end 2009, well in excess o f US$700 m i l l i on required to maintain its parity with the rand) will finance the current account deficit. The current account deficit recovers to about 7 percent o f GDP by 2013, largely on account o f some recovery in SACU transfers, exports, and remittances.

2o These are some o f the recommendations coming out o f the Policy Note on Fiscal Challenges and Options for Reform.

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26. Debt sustainability analysis (DSA) shows that Lesotho i s at moderate risk o f debt distress over the medium term. The risk has increased relative to last year‘s assessment, reflecting large fiscal and external deficits expected through 20 1211 3. Debt ratios are expected to remain manageable over the medium t e r m as the fiscal position returns to balance. At end- 2008, the PV o f external debt stood at 33.2 percent o f GDP. Under the baseline scenario, Lesotho’s PV o f debt to GDP ratio i s projected to fa l l to 29 percent in 2009, reflecting the appreciation o f the loti, and then increasing to 35 percent by 2012 as a result o f debt incurred to finance the fiscal deficits. The P V o f debt-to-GDP ratio i s projected to rise further to 43 percent by 2019, above the 40 percent indicative threshold2’, although this i s almost entirely due to borrowing related to the second phase o f the LHWP. The ratio i s expected to decline to 21 percent by 2029 as the fiscal position remains in balance. The P V o f debt relative to exports and to revenues would also r ise through 2019, but remain well be low the indicative thresholds for debt distress. There wou ld also be a modest increase in the ratio o f debt service to exports (from 4 to 5) and debt service to revenues (from 3 to 6) reflecting the increased stock o f outstanding debt, but debt service wou ld remain manageable due to the highly concessional nature o f the existing debt. The highly concessional nature o f the existing debt and new borrowing (with the exception o f the rescheduled S A C U payments and the borrowing for LHWP) helps to contain the increase in debt service ratios and contributes to their return to lower levels as the impact o f the S A C U revenue shock begins to recede.

27. The risk o f debt distress i s further magnified in the event o f adverse shocks to economic growth o r large exchange rate depreciation. The key debt ratios are projected to fa l l back below the indicative thresholds as the authorities move forward with the planned adjustment o f expenditures and S A C U revenues recover. A large part o f the increase in debt levels reflects the substantial increase in borrowing that would be required to finance the second phase o f the L H W P . Assuming that the project does not go forward as planned, the PV o f debt to GDP ratio would init ial ly increase to 35 percent by 2012, but would return below the indicative threshold throughout the projection. In this scenario, Lesotho would continue to face debt distress in the event o f a large nominal depreciation or deterioration in borrowing terms, but the sensitivity to these shocks i s greatly diminished. These results underscore the need to realign spending with i t s sustainable leve l based o n the long-run level o f S A C U revenues, and move forward with structural reforms needed to boost productivity and competitiveness and accelerate growth. Lesotho wil l also need to continue to receive grants and highly concessional loans.

111. THE GOVERNMENT’S PROGRAM

28. The Government’s program i s driven by the long term aspirations o f the Basotho, which are articulated in the Vis ion 2O2Oz2. The long-term vision i s that by the year 2020 “Lesotho shall be a stable democracy, a united and prosperotu nation at peace with itselfand its neighbors. I t

” The applicable indicative thresholds for debt sustainability, proposed under the framework for low-income countries are: (i) 40 percent for the NPV o f debt-to-GDP ratio, (ii) 150 percent for NPV o f debt-to-exports ratio; (iii) 250 per-cent for the NPV o f debt-to-fiscal revenues ratio; (iv) 20 percent for the debt service to exports ratio; and (v) 30 percent for the debt service to revenue ratio. 22 Vision 2020 was published in 2004.

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shall have a healthy and well developed human resotme base, a strong economy, a well managed environment and an established technological base”. The key elements o f t h i s vision were reflected in Lesotho’s Poverty Reduction Strategy (PRS) covering the period 2004105 - 2006/07.

29. The GOL has adopted an Interim National Development Framework (INDF) to bridge the period between the end o f the PRS and the adoption o f a comprehensive national Development Plan in 2012. The INDF will guide planning and resource allocation, particularly in light o f fiscal challenges resulting f rom the global economic crisis and projected declines in S A C U revenues. The overall objective o f the INDF i s to promote good government; improve public services and accountability, and reduce poverty through: (i) pursuing high, shared, sustainable private sector led growth that generates employment; (ii) reducing social vulnerabilities, including fighting the H I V / A I D S pandemic; and (iii) fostering good governance to improve service delivery. The G O L has also prepared the PRGS which lays down short and medium te rm approaches to achieve broad-based, sustainable growth as set out in Vis ion 2020. The Growth Strategy identifies the expansion and diversification o f the manufacturing sector in to higher value added product l ines and n e w markets as a key potential driver o f growth. Continued expansion o f the mining sector, support for small, medium and micro enterprises (SMMEs), greater emphasis o n tourism and agriculture are also identif ied as having great potential for growth in Lesotho.

Growtk and Diversifcation

30. The number one priority o f the Government i s to generate high, shared, private sector led growth. This requires a large increase in the domestic production base, which requires h igh level o f investment from the private sector. While the global economic slowdown could ho ld back some o f this needed investment, Government wants to keep i t s focus on the medium to long term. In i t s role as an “enabler” o f private sector generated growth, Government plans to focus on undertaking structural and institutional reforms to enhance Lesotho’s global competitiveness and attractiveness for doing business and for being an investment destination o f choice.

31. Building on the lessons and successes o f the garment sector, Government i s facilitating entry of other light manufacturing export-oriented activities and strengthening the linkages o f the export-oriented sectors with the domestic economy. Lesotho has made great strides and gained much in terms o f i t s success in the garment manufacturing industry made possible by AGOA. This Agreement, while extended f rom i t s original expiration o f December 2004, will expire in 2015 and the provision o f sourcing fabric from third countries i s scheduled to expire in 2012. The signing and f inal ratif ication o f the interim (goods only) E P A with the EU in June 2009 allows for single transformation rules to be applied just as they are applied under AGOA. This opens new opportunities for Lesotho to produce for the EU market. There i s also the potential for increased regional trade under both S A C U and SADC and in particular, with South Africa.

32. A crucial determinant o f Lesotho’s abil ity to realize new export opportunities will be i t s capacity to attract and sustain foreign investments, particularly f rom new sources such as South Africa, but also in new sectors. While i t i s clear that Lesotho has been actively trying to attract FDI to develop export production in these areas, as well as to service new markets, such investments (especially those f rom outside Asia) have not reached their potential. In particular,

12

its success in attracting Taiwanese FDI for clothing export to the US has not been matched in other sectors (e.g., agribusiness) o r by other types o f investment (e.g., South African). Lesotho therefore needs to increase i t s attractiveness as an investment destination and, to really succeed, provide a better investment climate than South Africa, wh ich i s facing i t s o w n challenges. This means that those indicators o f competitiveness that rank relatively l o w in Lesotho should be targeted for accelerated improvement if FDI i s to be attracted to promote export growth and diversificationz3.

33. Key elements o f the Government’s program to create an enabling business environment to attract private sector investment include:

(i) One Stop Business Facilitation Center (OBFC), previously called the One Stop Shop (OSS). OBFC was established in September 2007 and it brings under one roo f the functions o f approval o f trading and manufacturing licenses, import and export issuances, residency visas and work permits. WMe the OBFC has facilitated the administrative process o f starting a business, outstanding challenges o f transfers of control f rom other ministries effectively impede the OBFC’s objective o f functioning as a single administrative unit.

(ii) Provision of complementary physical infrastructure. Government recognizes that access to factory shells and supporting infrastructure must be facilitated. Most crucially, and to secure those foreign investments that are already wait ing to happen in Lesotho by South Afr ican f i r m s , the Government must take immediate action to house these and provide the supporting infrastructure. This i s b y far the most serious constraint for n e w FDI in Lesotho. To overcome the current shortage in suitable industrial estates, Government has funded the provision o f advance infrastructure, including uti l i t ies and roads for Tikoe industrial estate. A proposal to build factory shells in this estate i s being considered to be financed f rom the economic stimulus funds allocated in the budget. While these are the necessary immediate measures, the land l a w needs to be changed to al low foreign investors to lease land directly and for longer periods. There i s also a need to reform land institutions, particularly the LNDC, to promote private sector development and/or management o f industrial estates.

Government recognizes that the Companies A c t o f 1969 and the Business Reporting and Industrial Licensing Bill are outdated and do not support a business fr iendly environment. The Companies Ac t has been reviewed and the draft has been resubmitted to the Attorney- General for approval and issuance o f a clearance certificate. The process however has been unduly delayed. Further delay in enacting the Companies Bill will adversely affect Government’s objectives to ease the burden on business, as reflected in the Do ing Business International ranking. In addition, the transfer o f the Companies Registry, which has been digit ized and has the potential o f reducing the number o f days i t takes to register a company name f rom 5 days to 1 day, to the OBFC may not take place until the Bill i s passed. This further highlights the urgency o f the legal process.

(iii) Creating legal and regulatory support services and institutions.

23 Lesotho i s currently ranked 130 out o f 183 countries in Doing Business.

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(iv) Investing in skills enhancement. Government i s paying special attention to ski l ls development in the garment sector. With the support o f i t s Development Partners, two training centers (Northern Region Skills Center (NRSC) and the Maseru Ski l ls Center) are registered with the Technical and Vocational Training Department, Min is t ry o f Education (TVD), fu l ly staffed and operational. Based on the training needs assessment carried out by both centers, training has been designed to respond to industry needs which reflected a need for a large number o f basic machinists. They have developed a formal training curriculum that has been submitted to the TVD for accreditation. Together the centers have trained 3 7 9 workers to date. Furthermore, with the support o f the Wor ld Bank, analytical work i s being developed w i th regards to the contribution o f the education sector to the development s k i l l s in l ine with the economic demands and the characteristics o f the Lesotho labor market. Such work i s expected to lead to policy reform in post-basic education.

34. Government’s growth strategy also focuses on agricultural development. As i t stands today, the public sector dominates Lesotho’s agricultural sector. I t provides the strategic direction for agriculture; dominates with respect to choosing appropriate technologies; provides almost al l o f the capital used in the sector; and assumes most o f the risk associated with sector performance. The participation o f the private sector i s on ly marginal. A fundamental dichotomy persists in government pol icy between assuring food security and diversifying agricultural production. So far, this dichotomy has been resolved de facto in favor o f food security which has translated in to the continued provision o f agricultural extension and other services, designed to help farmers do more o f what they have traditionally done - subsistence agriculture (largely maize). M o v i n g forward, Government plans to fo l low the two tracks in parallel. Subsistence farmers need ,to be assisted in discovering paths for diversifying their livelihoods beyond traditional farming.

35. Advancing commercial agriculture in Lesotho will involve the creation o f market linkages - between poorer rural areas and better o f f urban areas within the country, as well as between the Lesotho agricultural economy and the better o f f South Afr ican economy. In his Budget Speech to Parliament in February 2009, the Minister o f Finance noted the need for programs wh ich support commercialization and diversification in both the crops and livestock sectors and that facilitate the development o f agro-industries. In order to attract agribusiness investors, the Government needs to provide a supportive business environment which assures contract enforcement, consolidation o f arable land in to economic lots for farming and which facilitates the development o f supply chain linkages between farm level organizations and niche markets. The Government also needs to reform existing regulatory structures which limit competit ion and which lock in traditional business models, modes o f competition and inefficient forms o f supply chain operation. A National Forum o n agriculture i s planned to be held in the early part o f 20 10 to review o f the status o f the agriculture sector and to chart a way forward.

36. The Government recognizes that good quality and t imely statistical data are prerequisites to in form pol icy and for monitoring progress towards the goals set out in the results-based development agenda; including the Poverty Reduction Strategy Budget framework papers, the National Development Plan and the Millennium Development Goals. The Lesotho Bureau o f Statistics (BoS) i s spearheading the process to improve the National Statistical System (NSS) and i s preparing a National Strategy for the Development o f Statistics (NSDS). This first phase o f the process culminated in August 2008 with the draft NSDS (2008/9-2012113) that covers 10

14

key MDAs in the NSS. This draft outlines the current situation o f the NSS in terms o f operational strengths and weaknesses, opportunities and threats, data demands and gaps, and capacities in statistical data production. This draft provides a good framework upon which to build a result-oriented action plan to generate statistics that meet the crit ical information needs of the Government. While achieving these goals wil l require a concerted effort by a l l key MDAs in t h e NSS, the BoS recently started implementing substantive programs to improve the quality, t imeiiness and dissemination o f survey-based statistical data.

Public Expenditure Management

37. Another key priority of the Government i s fostering good governance to improve public service delivery. The most important component o f this i s improving public expenditure management. High levels of S A C U revenues have allowed the Governnient to p lay a substantial role in the economy. And public expenditures have been steadily rising in the last few years reaching over 60 percent o f GDP in 2007/08. Recognizing that future economic growth i s unl ikely to fully offset potential decline in SACU revenues, Government i s committed to plan for the eventuality that public spending has to be rationalized to ensure macro stability. This includes reducing fLiture expenditures and improving the efficiency and effectiveness o f expenditures.

38. Government has embarked on a comprehensive and ambitious Public Sector Improvement and Reform Program (PSIRP) in order to increase the impact o f these expenditures. PSIRP has the following k e y components: (i) Public Expenditure and Financial Management Reform: to improve planning, budgeting, accounting and accountability in the Public Service; (ii) Decentralization: to bring service provision closer to end users; and (iii) Civ i l Service Reform: to improve public service delivery.

39. The Public Expenditure and Financial Management Reform program covers a l l stages o f the budget cycle f rom budget formulation to legislative scrutiny and audit. Significant progress has been made in implementing these reforms. Budget Framework papers have been developed by a l l line ministries and steady progress i s being made with the pi lot ing and introduction o f a MTEF linked to the PRGS. The MTEF approach to budgeting marks a significant shift away from earlier budget preparation and implementation processes. New procedures and forms have been developed, and the budget classification system has been expanded to accommodate new information about programs, objectives, outputs and activities. Several hundred ofi icials f rom al l m in i s t r i es have also been trained in the n e w approach. S ix ministries have been used to p i lo t different stages o f the MTEF implementation. As at 31 March 2009, al l l ine ministries: have been trained in the key concepts and processes that comprise the MTEF approach; prepare their budgets using a three year ro l l ing forward estimates approach; prepare annual Budget Framework Papers containing details o f their vision, mission, objectives, cost centers, programs, outputs, activities, program and project performance, and proposed additional funding requirements. Further, a consolidated National Budget Framework has been prepared for Cabinet summarizing the competing priorit ies and bids o f the various ministries. This i s used by the Ministry o f Finance and Development Planning (MFDP) and Cabinet to decide o n budget ceilings for each ministry.

40. Lesotho’s fiduciary framework and public expenditure management are severely hampered by weaknesses in i t s financial reporting. An Accounting and Reporting Task Force

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aims to develop effective budget execution and reporting systems through amongst other things: (i) replacement o f the existing Government o f Lesotho Financial Information System (referred to as GOLFIS) by a new IFMIS, which became operational o n 1 April; (ii) resolving the issue o f incomplete balances information, due to the absence o f financial statements for the five years 1996/97 to 2000/01; (iii) increasing training in accounting, IFMIS and internal control issues, including raising the competence o f financial controllers and the awareness o f chief accounting officers; (iv) establishing a new treasury organization within M F D P to undertake the new accounting and cash management processes proposed under the IFMIS; (v) developing the internal audit system into a hybrid arrangement under which internal auditors wil l report to the top management o f the ministry in which they are located, as well as to MFDP; and (vi) reforms to the public procurement system based on standardized procurement documentation and streamlining procurement systems. Improved reporting facilities and control features in the IFMIS should facilitate both timely and better quality reports. The Statement o f Affairs (dealing with the impact o f the period 1996 to 2001 for which no accounts are available) has been prepared and submitted to Parliament. This affects the opening balances to be recorded in the IFMIS.

41. IFMIS went live on April 1, 2009. All ministries n o w prepare their MTEF budgets using the budget module o f the IFMIS, using the new chart o f accounts, and using the new budget classification system. However, implementation problems arose. The key issues relate to:- (i) staff (1400 direct users) inadequately prepared for the use o f the system and the impact that i t would have on financial processing; (ii) user profi les not being correct, resulting in inabil ity in some cases to perform transactions; (iii) problems to interface the payrol l data into the IFMIS and cheque payments not being possible until affected personnel were created as "vendors" in the system, resulting in delayed and manual salary payments outside o f the system; (iv) some supplier data not registered in the system, resulting in inabi l i ty to effect payments to such suppliers; (v) budgets for cost centers not loaded or incorrectly loaded, resulting in inabil ity to process payments for such cost centers; and (vi) bank reconciliation interfaces not yet activated. A help desk and issues l og i s in operation and corrective actions are being taken. Improved control and benefits o f the system are realized and collective support for corrective action has been secured24. About 18,000 transactions have already been processed using the IFMIS.

42. A Public Finance Management (PFM) Bill has been draft. Donors have supported the purchase, set-up, user training and go-live o n April 1, 2009 o f a central IMFIS, using EPICOR software. Furthermore, Public Accounts for 2005 and 2006 have been audited and Submitted to Parliament. Nevertheless, significant delays in getting the P F M Bill enacted are a cause for concern.

Public accounts for 2007 have been submitted for auditing.

'' The Prime Minister and PSs convened to discuss the situation and provide support to the process.

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Improving Access to Basic Services and Tackling the HIVIAIDS Paizdemic

43. Government i s committed to maintaining and strengthening its interventions which seek to directly improve the quality of l i fe o f the Basotho. Getting services to the general population, much less to the poor, remains a challenge for the Government. I t aims to address the quality and efficiency o f service delivery, and the targeting o f services to the most vulnerable sections o f society.

44. Health. Health i s a key pi l lar o f the Vis ion 2020. Vis ion 2020 outlines h o w Lesotho should become “a healthy nation w i th a well developed human resource base”. There are two core issues in the health sector - access and quality. The share o f the health budget over the total Government budget has increased steadily f rom 5.8 percent in 2000 to over 13 percent in 2008. However, the poor and rural areas have suffered worse health outcomes and benefited less f rom essential health services. Many Basotho, especially those in rural areas, are unable to access health services. These problems o f access and quality explain why most o f the health outcome indicators are very poor; infant mortality per 1000 live births was 91 in 2006 and maternal mortal i ty per 100,000 l i ve births i s 762.

45. The Government has identified three core reasons that have caused these l o w and deteriorating outcomes: (i) brain drain o f skilled health workers overseas. Despite recent major recruitments, about 18 percent o f the established posts continue to be unfilled (including 20-25 vacancies for doctors); (ii) HIV and AIDS, which not on ly directly affects the health o f people, but also robs the health service o f key workers and increases the strain o n existing healthcare facilities; and (iii) high unit costs o f providing social services due to the topography o f Lesotho. Several key development partners (including the Bank) are jo in t l y supporting a long-term health sector reform led by the Ministry o f Health and Social Welfare (MOHSW) in order to achieve a sustainable increase in access to quality preventive, curative and rehabilitative health care services in Lesotho. The support i s organized through a Sector-wide approach (SWAP), with an agreed sector expenditure framework, harmonized fiduciary systems, and common performance indicators,

46. In i t s efforts to improve health services, Government has successfully completed the tender o f a new referral hospital to replace the Queen Elizabeth 2 hospital in Maseru. The proposed hospital i s based on the principles o f Public Private Partnership (PPP). The new 390 bed public hospital will be designed, built and fully operated (including clinical services) by the private operator for 18 years. The Government has allocated M 4 0 0 mi l l ion for the 2008/09 and 2009/10 budget. The private sector under the leadership o f Netcare wi l l provide additional M 6 0 0 mi l l ion. The Global Partnership on Output-Based Aid has provided a performance-based grant o f US$6.25 m i l l i on to support service delivery to the poor under this project. Three f i l ter clinics wil l also be constructed at Likotsi, Mabote and Qoaling. The project’s innovative PPP structure and the use o f an output-based financing instrument enable Government to maximize the quality and quantity o f health services while remaining within the budget, while the private sector has been presented with a new and robust market opportunity. Most importantly, this also means that patients wil l have access to significantly better medical services without increasing the min imal charge they pay for public services today.

47. HIV/AIDS. A key challenge facing the Government i s dealing w i th the H I V / A I D S pandemic, wh ich has the potential o f reversing past progress o n human development and which continues to threaten the productive sectors o f the economy. Lesotho has shown strong

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commitment to f ighting HIV. A National HIV and AIDS Strategic Plan (2006-201 1) (NSP) and a corresponding HIV and AIDS Monitoring and Evaluation Framework (2006-201 1) were approved in December 2006. The NSP focuses on achieving four main strategic objectives: (a) strengthening management and coordination mechanisms; (b) preventing transmission o f HIV; (c) treatment and care; and (d) mitigating the impact o f the epidemic in the population. in addition, Lesotho expressed openness to work with vulnerable groups in HIV and AIDS prevention and control.

48. The coverage o f several key HIV and AIDS interventions has improved. The strong pol i t ical commitment and increasing social mobil ization plus increasing internal and external funding have contributed to improvement in several key HIV and AIDS related interventions in recent years. The coverage o f Prevention o f Mother to Ch i ld Transmission (PMTCT) increased f ivefold f rom 15 percent in 2006 to 56 percent in 2008. The ro l l out o f Antiretroviral Therapy (ART) made significant progress, 52 percent o f patients needing ARVs received treatment in September 2009. The “Know Your Status” (KYS) campaign resulted in a total o f 229,092 people being tested for HIV by December 2007, representing 12 percent o f the population and about three times the number tested in 2005. Lesotho has maintained a TB case detection rate above 80 percent for the past 3 years, and currently has a treatment success rate o f 73 percent.

49. Education. The education sector has gone through a process o f re form mainly at the level o f basic education, which led to substantial gains being achieved in education in recent years, and the Millennium Development Goals for universal primary education and gender parity are within reach. The Government introduced free primary education (FPE) o n a phased basis f rom 2000, bringing the net enrollment rate f rom 60 percent (1999) to 82 percent (2008). Good progress has been made in laying the foundations for improved quality, and the Government i s very much committed in sustaining the gains already obtained in education and in working towards improving the quality o f the services provided. W i t h the introduction o f FPE, the system went through a period o f instability, characterized by overcrowded facilities and decline in quality indicators such as the cohort survival rate. Such a result in not unusual in process o f expansion o f education systems, where a l l children, regardless o f age suddenly attends school.

50. The primary school cohort survival rate in Lesotho decreased f rom 53 percent to 39 percent f rom 2005 to 2006. i t has however, regained pace and in 2008, i t was already 50 percent, and it i s expected to continue increasing given government interventions in quality. For the past eight years the government has been investing in improving the quality o f infrastructure, the quality o f education inputs through the distribution o f textbooks and other materials, and qualifying teachers. Furthermore, with the support o f the education local donor group, the government has prepared, and approved in parliament the Education Sector Strategic Plan 2005- 20 12, which lays the policy foundations for the development o f education and the achievement o f the education MDGs. The Plan i s under implementation, and again with the support o f the local education donor group, a revised version o f the Plan for the years 2009-20 12 was prepared. Be low i s a summary o f some o f the results o f Plan implementation, which has been taken place with government fLinds and w i t h the external support o f the Wor ld Bank, Irish Aid, and the EFA Fast Track Init iative Catalytic Fund.

5 1. Access and vetention: Enrollment stabilized in 2008, as t h e expansion wave has already passed through the system. The gross and net enrolment and rates for pr imary education in 2008 were respectively 1 18 percent and 82 percent. Access in pre-primary education, although s t i l l

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very low, has also increased and the gross enrolment rate for this sub-sector moved from 8 percent to 13 percent. The completion rate i s high, 93 percent.

52. Qzialitv: In spite o f s t i l l being high, pupil qualif ied teacher ratio decrease f rom 69 in 2005 to 61 in 2008. The implementation o f a teacher training distance education program was an important element for such decrease. More progress i s expected with the completion o f a second campus o f the Lesotho Teacher College o f Education, which was financed by funds f rom the FTI Catalytic Fund. Investment in the quality o f physical infrastructure and school and learning materials and textbooks was also significant. As mentioned above, the cohort survival rate has also increased and reached 50 percent.

53. PoZicy P form: Curricular re form aimed at focusing the primary education curricula o n basic skills was initiated. Emphasis will be given to issues o f numeracy and literacy f rom an early age. Reform on teacher career, salary, and incentives was also initiated. This aims at introducing performance based career progression and at attracting qualif ied teachers to the most remote and difficult to access areas o f the country.

54. Post-Basic Edzication: Lesotho does not have many donors involved in education and until 2005 it was considered a donor orphan country. Most o f the support provided to education targets the basic education sub-sector. Reform in post-basic education i s necessar) and desired b y the Government and the donors, but l i t t le progress has been done so far. There has been a traditional resistance to change in this education sub-sector. This has important negative consequences which the government needs to address. O n the one hand, post-basic education should develop in l i ne with the sk i l ls needed to promote sustainable growth. On the other, a revision o f financing o f the sub-sector i s urgently needed, as the current bursaries scheme, which targets higher education students, constitutes a key line o f expenditure, wh ich results have so far not justified the costs.

55. These programs and priorities are reflected in the Government’s PAF. Consensus on the main areas to be included in the P A F and the nature o f indicators to be included in the framework were reached during the in i t ia l discussions at the outset o f the PRSC program. A combination o f process and outcome indicators has been identified in the PAF. The P A F defines and elaborates the main objectives and a number o f indicators o f progress in the areas of: (i) Economic Growth and Macroeconomic Performance; (ii) Governance and PFM; (iii) Human Development; and (iv) Capacity Development.

IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

A. LINKS TO THE COUNTRY ASSISTANCE STRATEGY

56. The proposed PRSC series i s an integral part o f the Bank’s assistance to Lesotho as outlined in the CAS. The current C A S was approved in April 2006 and covers a four year period (FY06-09). A new CAS (FY10-14) i s under preparation. The FY10-14 CAS seeks to support Lesotho’s efforts of sustaining growth in the face of global crisis and addressing the critical human development cliallenges. T o help achieve these objectives, GOL and the Bank have agreed that the CAS would focus o n three areas o f engagement that are fu l l y aligned with the country’s Interim National Development Framework: (i) undertaking f iscal adjustment and strengthening public finance mnnagement; (ii) improving efficiency and equality in access to

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basic services; and (iii) Strengthening the competitiveness of the economy and benefitting from its proximity to Soritlz Africa.

57. Capacity development and regional integration are the cross-cutting themes that will become an intrinsic part o f the Bank’s program in Lesotho and will reinforce the CAS development impact. In this regard, the C A S foresees strengthening budget support as an instrument to provide additional fiscal space and help pursue an ambitious reform agenda. As envisaged in the CAS, the PRSC will support reforms aimed at: (i) economic diversification and enhanced competitiveness; (ii) strengthening the institutions o f publ ic sector accountability and governance; and (iii) human development and improved service delivery, including addressing the H I V / A I D S pandemic.

B. RELATIONSHIP TO OTHER BANK OPERATIONS

58. The Bank has a relatively small portfol io in Lesotho w i th an IDA allocation o f about US$24 mi l l ion per year in the IDA 15 period. The PRSC will complement several o f the current investment projects in Lesotho. These include the following: Private Sector Competitiveness and Economic Diversif ication (PSCED) Project, Integrated Transport Project, and Water Sector Improvement Project - all geared towards creating an enabling environment for broad-based growth and improving infrastructure and access to basic services. It also complements ongoing projects in the Health, Education, and HIV/AIDS geared towards improving access and quality o f services in these sectors. The PRSC i s also linked to the second phase o f the Water Sector Improvement Project (WSIP) (FY09) which wil l support long-term solution to water supply for the capital c i ty and surrounding lowland areas through the construction o f the Metolong dam. This i s essential to avoid crit ical shortages in domestic supplies and provide water required for continued industrial expansion, particularly in the texti le industry.

C. COORDINATION WITH THE IMF AND OTHER DONORS

59. Maintenance o f sound macroeconomic management wil l be a precondition for implementation o f the PRSC. While there i s no Fund program in Lesotho, Bank coordination with the IMF i s strong and the Bank team participated in the review during the Fund Art icle IV mission in November 2009. A joint Debt Sustainability Analysis (DSA) has also been prepared within the framework for l o w income countries. The staffs will continue this collaboration throughout the PRSC period and discuss areas o f common interest to be included in the PRSC program.

60. The PRSC i s being prepared within the jo in t framework o f budget support developed under the leadership o f the Government o f Lesotho (GOL) with f ive participating development partners, including IDA. The other development partners are the European Commission, United K ingdom (DFID), Afr ican Development Bank (AfDB) and Ireland. As a result o f the impact o f the global financial crisis on Ireland, budget support financing f rom Ireland will not be forthcoming in the near future. However, they have stated their commitment to the principles o f budget support and wil l continue to be actively engaged in the discussions. Gennany (KfW and GTZ) while not providing direct budget support at present have been active participants in this process.

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61. In M a y 2006, development partners established the guiding principles o f a possible future budget support program. I t was agreed that a nationally-owned PRS and an associated common performance assessment framework would provide the basis for prospective budget support. I t was also recognized that the program should al ign around the budget timetable and MTEF process and should be mindful o f the need to ensure predictability in disbursements. The program should also a im for a judicious balance betLYeen realism and ambit ion in the overall results indicators that would set the basis for these disbursements. The Government welcomed this approach, noting the importance o f budget support in securing the s t i l l fragile re form agenda whilst cautioning against the use o f unrealistic results indicators.

62. The donors are collaborating to support Lesotho in implementing i t s development programs by providing financial and technical support in a coordinated manner. Annual jo in t reviews are planned and the second review was conducted in November 2009.

D. LESSONS LEARNED

63. Preparation o f PRSC 2 has benefitted f rom lessons learnt f rom the First PRSC approved in M a y 2008. The design o f the operation i s also guided by the overall advice on D P L s provided by OPCS, including the good practices principles on conditionality and also takes into account IDA’S overall experience with regard to implementation o f projects in Lesotho. I t also takes into account the experience f rom the implementation o f the EU budget support operation in Lesotho. The first lesson concerns selectivity and f lexibi l i ty, focusing on reform areas that will have a significant impact when completed. The second relates to a broader ownership o f the reform program by the Government - al l stakeholder l i ne ministries should o w n the program and not just the MFPD. Other lessons include:

0 The program should be realistic as to what can be achieved, mindful o f capacity constraints. I t should have limited conditionalities/milestones and indicators that are monitorable. Where necessary, supporting operations should be in place to provide technical assistance and build capacity for reforms.

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E. ANALYTICAL UNDERPINNINGS

64. The preparation o f the PRSC program has been informed by several analytical studies and reviews. These studies and reviews were outlined in detail in the program document for PRSC-1. Since the PRSC-1 program document was prepared, the Poverty, Gender and Social Assessment has been completed. A set o f Pol icy Notes in key areas identif ied by the Government aimed at strengthening the overall dialogue and providing analytical inputs in to the government’s growth strategy and the National Development Plan have been prepared. These were presenred to Lesotho’s Cabinet in July 2009 and are being discussed further with the Government. Init ial findings fully support the focus and content o f the program.

65. The series o f Policy Notes examine: (i) Fiscal challenges in Lesotho and options for reform; (ii) Realizing the potential o f FDI to diversify Lesotho’s exports; (iii) Agriculture - Challenges and directions for agri-business; (iv) Growth potential o f mining sector; and (v)

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Effectively using available public resources, particularly for capital expenditures. The Fiscal Cltallenges note looks at two fiscal issues relevant for Lesotho: (i) developing a sustainable fiscal framework accounting for the vulnerability in S A C U revenues; and (ii) enhancing non- S A C U revenues to mitigate the impact o f declining S A C U revenues. Based on the long-term evolution o f fiscal variables, and under varying scenarios o f sustainable S A C U revenues, i t i s found that fiscal pol icy in Lesotho has been somewhat expansionary and i t i s l ikely to remain so. While there i s some scope for increasing grants, given Lesotho‘s unique characteristics*’, a future sizeable reduction in S A C U revenues will be dif f icult to offset by increasing tax and non- tax revenues. The significant decline in S A C U revenue foreseen over the next two years and uncertainty over the future evolution o f S A C U revenues reinforces the need for a prudent fiscal policy.

66. But external conditions that have driven Lesotho’s trade boom are disappearing. With a much lower export demand f rom the US (i ts largest export destination), there i s a need to diversify i t s exports to take better advantage o f i t s relatively l o w wage structure, the country’s easy access to South Afr ican physical infrastructure; i t s attractive position in the regional market by virtue o f i t s membership in S A C U and SADC; and new opportunities presented under the interim Economic Partnership Agreement with the EU. The policy note on realizing Lesotho’s export potential addresses the policy and structural constraints that must be overcome to attract FDI. This includes improving the investment climate by reducing the costs o f doing business and making Lesotho competitive vis-a-vis South Afr ica and providing factory shells and supporting infrastructure. Both these elements are an integral part o f the PRSC series. The PRSC program will draw on the findings f rom the other pol icy notes as the series progresses.

67. The Country Integrated Poverty, Social and Gender Assessment focuses on three main areas: l ivelihood patterns among Lesotho’s households and h o w these correlate with opportunity and exclusion; h o w the government could make access to public services and overall social development more equitable; and h o w the economic and social vulnerabilities o f households, including H IV /A IDS, could be alleviated in order to reduce poverty. Analysis in this report concludes that i t i s possible for Lesotho to reduce poverty and to continue i t s transition to an economically diverse middle-income country by undertaking three key strategies: continuing to develop the investment climate for labor-intensive production; implementing programs to support commercial agriculture and reduce land degradation in rural areas; and developing a strategy to support socioeconomic and geographic mobi l i ty o f workers into higher-productivity sectors. Public funds should be better targeted towards assisting the poor to build human capital and manage risks. Other recommendations to improve the plight o f the people o f Lesotho include creating a more equitable and inclusive society, especially for women, and developing a more effective campaign against HIV/A ids . The PRSC i s aligned with the key findings and recommendations.

Lesotho has done very we l l in attracting FDI for export led growth.

l5 As a small country fully surrounded by South Africa, Lesotho has a lot o f trade with South Africa and border trade i s more important than in countries o f larger size. Variances in tariffs for imports and excises would provide opportunities for round tripping o f exports and smuggling. The same logic applies for consumption taxes. Given its geographic characteristics, Lesotho has lower degrees o f freedom than most countries to vary its tax rates. This also puts some limits on the income tax rate and income tax base. Different rates with South Africa would encourage firms either to incorporate in the other country or to use transfer pricing.

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V. THE PROPOSED CREDIT AND GRANT (PRSC-2)

A. OPERATION DE.CRIPTION

68. The PRSC program aims to contribute to the Government's medium-term development objectives as set out in the IYDF and the SuppOrtii:Q Growth Strategy. While Lesotho has achieved respectable growth rates in the last few years, poverty remains widespread and unemployment levels are high. The situation has bee: further impacted by the global financial cr is is as mentioned earlier. SACU revenues wil l sharply decline over the next 2-3 years. The Government's program i s aimed at addressing medium to long t e r m issues to achieve sustained and shared growth. Significant progress has been made by the Government in implementing i t s reform program as identified in the PAF. Table 4 presents the progress to date. I t also includes the triggers for PRSC-2 as they were identified at PRSC-1 stage and also the prior actions identified for PRSC-2. The differences, if any, are explained in the comments column and are a result o f intensive consultations during the review period.

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i 2 m

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B. POLICY AREAS

Component 1: Creating a Conducive Environment for Private Sector Led Growth

69. Despite the setbacks arising f rom the global financial crisis, Lesotho i s keeping i t s focus on the medium and long term. As highlighted in the Budget Speech to Parliament for the 2009/10 fiscal year, the Government has identified the launch o f a coordinated program o f structural reforms aimed at removing barriers to doing business in Lesotho and creating a conducive and competitive investment climate as the first element o f i t s 1 O-pronged action plan to respond to the global crisis.

Macroeconomic Stability

70. A stable macroeconomic environment i s necessary for sustained economic growth. Lesotho’s membership in the C M A allows it l i t t l e oversight on matters regarding monetary policy. Therefore, the Government’s ma in instrument in sustaining a healthy macroeconomic environment i s i t s fiscal policy. As mentioned earlier, the GOL has done a good j o b in creating a healthy fiscal balance so far. However, in light o f the steep decline in S A C U revenues foreseen in the next two to three years and a permanent decline in the medium to long term reiterate the need for prudent fiscal policies to maintain macroeconomic stability. The expansionary Budget presented for 2009/10 raised concerns about fiscal sustainability. Even though a revised budget was drawn up, weaknesses in the communication mechanism resulted in failure to implement the revised budget. Therefore, GOL reverted back to the budget ceilings approved by Cabinet in December 2008. With the adoption o f these revised budget ceilings and a review o f the wage bill, a small deficit o f about 1 percent o f GDP i s envisaged for 2009/10. While the legal rules in Lesotho do not require this revised budget (lower than what was appropriated by Parliament) to be approved by Parliament, MFDP has expressed i t s intent to provide this revised budget to i t s Parliament for information. Adoption o f a macroeconomic framework reflecting ceilings approved by Cabinet, ensuring that the fiscal deficit does not exceed 3 percent o f GDP i s a prior action for PRSC-2. Adoption o f a sustainable macroeconomic framework with agreed ceilings on non-SACU deficit and the wage bil l i s a trigger for PRSC-3.

PRSC -2 Prior Action: Macroeconomic framework for 2009/10 reflecting ceilings approved by Cabinet, w i th the fiscal deficit not exceeding 3 percent o f GDP.

Improving the Business Environment

71. The private sector i s the key in delivering jobs and investment necessary to realize and sustain Lesotho’s poverty reduction goals in the long term. For this, Lesotho needs to create a better investment climate to achieve this growth and to reverse its worsening performance vis-a- vis its competitors for jobs, trade and investment. Lesotho i s currently ranked 130 out o f 183 countries for ease o f doing business.26 There i s a worsening o f i t s position relative to other countries despite some progress being made to simplify procedures, reflecting the need to p ick up the pace o f reforms.

’‘ As measured by World Bank Doing Business Indicators 20 10: www.doingbusiness.org

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72. The OBFC has undergone a process o f reform. This involved folding the two distinct processes o f Trade and Lesotho Revenue Authority (LRA) into a single process. Export process have been redesigned to eliminate unnecessary steps. Exporters no longer need to: submit applications for recommendation to the M T I C M , they are approved at the OBFC; apply for rebate permits for each individual consignment, they n o w apply for rebates once a year irrespective o f the number o f consignments; and fill out f ive different forms, they only complete a universal data form. Import processes have been changed f ro in blanket permits o n al l goods to permits for only restricted goods27. Licensing administration has been changed to simplify the fee structure (no application fee28) and reduce the number o f pages o n a fo rm to 1 page f rom 5 for traders and 16 for manufacturers.

73. Sensitization and training o f private sector clients has been undertaken (information sessions, publ ic notices, publications etc.). New software has been developed to integrate business licensing, export and import permits. improving information collection, automating forms as we l l as reducing processing time. Import permits average lead time f rom application to issuance i s 1.9 days down f rom 4 days and export visas average lead time from application to issuance i s 5-6 hours down f rom 2-3 days. Since M a y 2009, the OBFC has been issuing residence permits for the manufacturing sector. Fo r the period July to September 2009, OBFC issued o n average 15 new residence permits. In 2008, OBFC issued an average o f 59 work permits per month and more than two-thirds o f these were issued to managers and supervisors. In the year to October 2009, OBFC issued 8,163 export visas (permits). In addition, during the same period, it issued 114 manufacturing licenses, 245 small scale industry licenses and 3,350 trading enterprise licenses.

74. While these achievements are positive and have reduced time and costs for businesses, there are further opportunities to simpli fy the process with the adoption o f new legislation and simplif ied procedures. The OBFC faces a number o f challenges in strengthening i t s capzcity and effectiveness. These include: (i) the lack o f an organizational and management structure including clearly established requirements for reporting, performance management, disciplinary procedures and operating hours; (ii) budget constraints and inconsistent employee remuneration (salary differentials are often three to four fo ld between LRA and M T I C M employees); (iii) timely recruitment o f a permanent Director as the Advisor’s current contract expires in December 2009 with the ending o f support under the DFID-funded Priori ty Support Program (PSP); and (iv) ensuring continuity o f IT support services after December 2009. The OSS Steering Committee has approved the appointment o f a Director for the OSS under the M T I C M which i s a key step in strengthening the institutional capacity. However, the OSS Steering Committee will not be fully effective without Cabinet leve l inter-ministerial support for the OSS. There needs to be a clear po l icy statement f r o m GOL on support for business environment reform under the oversight o f a Cabinet Committee. This recommendation i s also consistent with the findings o f the Economic Policy Notes.

75. PRSC-1 recognized the establishment o f the OSS (now the OBFC) and included i t as a prior action. The extension o f OBFC services to include rebate certificates, residence and work permits, and industrial licenses was an indicative trigger for PRSC-2. I t remains a prior action for PRSC-2. The incorporation o f Companies’ registration to the OBFC will be supported under

However, the Dept o f Trade’s preference i s to maintain the old system. This needs to be gazette before it comes into effect. 28

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the PRSC-3. These reforms are expected to reduce the time taken to register a business f rom 28 days to one day; reduce the time taken to issue export and import permits f rom 7 days to one day, and consolidate many procedures at the Trade and Investment Facil itation Centre (TIFC), including incorporation o f Companies Registration and introduction o f streamlined licensing procedures. Companies Ac t has been o n the agenda for the past several years but has not come to fruit ion. The long overdue enactment o f the Companies Bill i s a cause o f serious concern. Without the enactment o f this legislation, companies’ registration will not be incorporated in the OBFC. Similarly, the draft business reporting and industrial licensing has gone through numerous reviews but has not moved beyond the M T I C M .

PRSC -2 Prior Action: Extension o f One-Stop Shop services to include rebate certificates, work permits, residence permits and industrial licenses.

76. Addressing the infrastructure constraint in parallel i s critical to facilitate the entry o f new investment - foreign and domestic. Several international investors are currently wait ing for availability o f factory space to invest in garment and non-garment manufacturing. This expansion has the potential o f employing over 4,000 people. Identif ication o f industrial infrastructure sites and development o f new factory space were identified as indicative triggers for PRSC-2 and PRSC-3 respectively.

77. The L N D C has completed feasibility studies for two industrial sites (one o f which i s a new si te and the other i s an extension o f an existing industrial estate to accommodate more investors). Government undertook a feasibility study o n the Maseru Industrial Estate Traff ic R e l i e f Road to provide easy and safe movement o f traffic in Maseru West Industrial Estate during peak hours. I t also undertook a study o n the development o f vacant spaces at Maseru, Nyenye and Maputsoe to assist LNDC to explore the possibility o f securing commercial financing for the development o f factory buildings on the already serviced industrial estates. Significant progress in the provision o f advance infrastructure has been made at the Tikoe industrial estate. Seventeen sites have been provided with ut i l i t ies and roads and one factory shell has been completed. Construction o f Nyenye Fire Station (Leribe) funded by GOL has also been completed. Construction o f the Metolong D a m which will provide water to industrial users, amongst other things, has started. Border post infrastructure refurbishment has been completed at the Maseru border post to facilitate trade o f goods across border.

PRSC -2 Prior Action: Identification and approval o f target sites and related investments to enhance industrial infrastructure.

78. The PRSC series i s committed to supporting the strengthening o f the statistical systems to ensure that frequency and quality o f data improves to such levels that they can provide meaningful information to pol icy makers. The National Monitoring and Evaluation System has been set up to improve the collection, dissemination and use o f data across Lesotho. I t i s situated in the Department o f Development Planning in MFDP. One o f the first activities has been to compile an extensive database o f al l development data produced in Lesotho. This i s called “LesothoInfo”, based on the DevInfo software o f UNDP. A subset o f this database has been selected as “core national indicators: to best provide an overview o f the development situation in Lesotho. In parallel, the Bureau o f Statistics (BOS) undertook a concerted effort to document

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and disseminate existing household survey data (on which many o f the indicators are based) v ia their website. The BOS has also taken important steps towards the development o f a National Strategy for the Development o f Statistics (USDS) based o n the Paris 21 Principles. I t has completed the inception report on the design o f NSDS, conducted stakeholder consultations and completed situation analysis in key line ministries. This was recognized as a prior action for

79. A draft NSDS was prepared, but completion was delayed due to capacity constraints imposed by the need to engage staff in critical data collection and analysis activities (such as the 2006 Population Census and Labor Force Survey) and the recognition that the final strategy must be accompanied by a result- oriented action plan to generate statistics that meet the crit ical information needs o f the Government. T w o pr ior i ty actions to finalize and implement the NSDS include: (a) alignment o f the NSDS production and dissemination calendar for censuses, surveys, recurrent statistics and administrative data with the information needs outlined in the PAF, N M E S and the National Development Plan; and (b) adoption o f a data dissemination strategy and calendar, including for micro-data survey and census f i les . Recognizing these challenges, the Government has requested, and the Bank has agreed to provide technical assistance to finalize the NSDS addressing the concerns identif ied above. With this agreement on the Bank's direct engagement with the G O L in finalizing the NSDS, this trigger i s not turned into a prior action for the PRSC- 2. NSDS i s expected to be finalized by June 2010. The two priori ty actions to finalize and implement to NSDS wil l be triggers for PRSC-3.

PRSC-1.

Finalization o f NSDS was identif ied as a trigger for PRSC-2.

Component 2: Improving Public Expenditure Management and the Fiduciary Framework

80. Government i s a key player in the economy, with public expenditures accounting for over 50 percent o f GDP. For various reasons, including polit ical instabil ity and lack o f manpower and capacity, Lesotho has had a long history o f poor accountability and non-production o f financial statements. Weaknesses in the management o f these resources have resulted in less than favorable outcomes in terms o f reducing poverty and fostering growth. In order to increase the impact o f these expenditures, the Government has embarked upon a comprehensive reform prograin in 2005 covering a l l stages o f the budget cycle f rom budget formulation to legislative scrutiny and audit. In addition to significant professional training, GOL has introduced a medium-term perspective in i t s budget formulation and f rom 1'' April 2009 has introduced the core components o f an I F M I S across al l ministries and offices. The PRSC-2 will continue to support the Government's re form in al l aspects o f the budget cycle.

81. An assessment o f P F M based on the PFM Performance Measurement Framework (PMF) has recently been conducted j o in t l y by the Government and i t s key DPs and a draft report has been prepared. The assessment notes that although longstanding weaknesses in budget execution, the internal control framework and financial reporting identified in the previous assessment continue, some progress i s clearly being made. The assessment also notes that there are many bui l t - in features o f the new system that are designed to address problems in the areas o f expenditure commitments, authorization o f expenditure and reconciliation o f accounts29. However, there appears to be some evidence that there i s need for a greater sense o f urgency

29 The Assessment does not take into account the possible improvements that may be achieved as a result o f the recent introduction o f the integrated financial management and information system.

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particularly with regard to the legislative requirements o f the PFM reform process. The lengthy delay in presenting the draft audit bill to parliament i s an example o f where a delay in completing legal reforms impacts significantly on the overall reform process. Similarly, there have been delays in the submission o f the Public Financial Management and Accountability (PFMA) Bill, which i s required to support legally the new business processes, as well as the approval o f the Internal Audit charter.

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Table 5: PEFA P F M Performance Indicators

3 3

82. Lesotho has focused i t s PFM reform we l l on the areas o f significant weakness and has recorded good progress since PRSC-1. A key area o f further progress was the go-live with a central IFMIS on 1 April 2009. I t i s expected that the new IFMIS will further assist to improve transparency, budget predictability and expenditure control, financial reporting and auditing.

Planning and Budgeting

83. Lesotho has an orderly and participative budget process, involving spending agencies and the polit ical leadership in accordance w i th a pre-determined budget calendar that i s broadly adhered to. Cabinet discussion o f the budget has been enhanced by the establishment o f a Cabinet Budget Sub-Committee, chaired by the Deputy Prime Minister and comprising the Minister o f Finance and eight other ministers. The Budget sub-committee reviews the budget submissions mid-January. The budget i s normally approved by the Legislature in a timely manner.

84. A multi-year perspective in fiscal planning, expenditure pol icy and budgeting has been deepened wi th the adoption o f the MTEF. As an integral part o f MTEF development, a Med ium Term Fiscal Framework (MTFF) i s prepared annually. The annual preparation o f the' MTFF has five main objectives: (i) to prepare a realistic forecast o f the main components o f revenue and grants; (ii) to make an accurate assessment o f statutory expenditure obligations; (iii) o n the basis o f the current pol icy framework, to forecast the requirements for discretionary ministerial expenditure; (iv) to use these forecasts o f revenue and expenditure to recommend a budget balance and financing strategy which i s consistent w i th the core objectives o f fiscal policy; and (v) to set indicative ceilings showing the division o f future ministerial expenditure ceilings by economic classification (wages and salaries; goods and services; transfers and subsidies; and capital) . 85. As part o f the Medium-Term Expenditure Framework (MTEF) process, individual ministries also prepare Budget Framework Papers (BFP), setting out their visions, missions, objectives, proposed revisions to their programme structure and proposed changes to their pattern o f resource utilisation. Discussions on the BFPs are held to highlight the Government goals and priorities, and to build consensus o n the resource allocation by cost centres, sub-cost centres, programmes and sub-programmes. Whi le both the sector strategies and the BFPs are costed, the MTEF information being captured and reported f rom the IFMIS s t i l l largely focus on expenditure items, with 6 PRS p i lo t Ministries n o w preparing MTEF information on a program basis. The G O L plans to increase this to 10 for 201 1/12 budget cycle. MTEF information for the current fiscal year has also no*t been published and substantial work remains to be done to achieve the full benefits o f a transparent medium-term perspective in planning and budgeting.

86. Progress made by the Planning and Budgeting Task Force on integrating planning and budgeting processes through a MTEF was recognized as prior action for PRSC- 1. Development o f budget framework papers by a l l ministries for 2009/10 - 201 1/12 i s a trigger for PRSC-2.

PRSC-2 Prior Action: Development o f budget framework papers by al l ministries for 2009/10 - 201 1/12.

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Financial Reportirig

87. Lesotho’s fiduciary framework and public expenditure management are severely hampered by weaknesses in its f inancial reporting. Reliable and timely in-year and annual information to monitor budget execution i s not yet available. Because o f weaknesses o f the Government o f Lesotho Financial Information System (GOLFIS) there was heavy reliance on manual accounting procedures, rendering the accounting system and financial reporting susceptible to inaccuracies and delays. Further, the lack o f adequate numbers o f trained accounting staff has Seen a major contributing factor. This has prevented drafting and submission for audit o f financial statements for the five years 1996197 to 2000/01, which in turn resulted in incomplete information o n opening balances in financial statements for subsequent years and qualif ied audit reports.

88. An Accounting and Reporting Task Force aims to develop effective budget execution and reporting systems through amongst other things: (i) replacement o f the existing Government o f Lesotho Financial Information System (referred to as GOLFIS) by a new IFMIS, which became operational on 1 April; (ii) resolving the issue o f incomplete balances information, due to the absence o f financial statements for the five years 1996/97 to 2000/01; (iii) increasing training in accounting, I F M I S and internal control issues, including raising the competence o f financial controllers and the awareness o f chief accounting officers; (iv) establishing a new treasury organization within M F D P to undertake the new accounting and cash management processes proposed under the IFMIS; (v) developing the internal audit system into a hybrid arrangement under wh ich internal auditors wil l report to the top management o f the ministry in which they are located, as we l l as to MFDP; and (vi) reforms to the public procurement system based on standardized procurement documentation and streamlining procurement systems. Improved reporting facilities and control features in the I F M I S should facilitate both timely and better quality reports.

89. The adoption o f an I F M I S implementation plan by MFDP was a prior action for PRSC-1. The submission o f publ ic accounts for the years 2004/05, 2005/06 and 2006/07 to the Auditor General i s a PRSC-2 pr ior action and the phased roll-out o f the IFMIS starting with the six p i lo t l i ne ministries already implementing the MTEF has been agreed as a trigger for PRSC-3.

PRSC-2 Prior Action: Submission o f Public Accounts for 2004/05, 2005/06 and 2006/07 to Auditor General for auditing.

External Oversight and Audit

90. Wh i le publ ic sector auditing in Lesotho i s carried out in accordance w i th international standards, i t i s hampered by delays in account preparation, lack o f financial resources and skil led staff. Progress with a n e w Audit A c t t o strengihen the independence o f the Off ice o f the Auditor General has been s low and it s t i l l awaits submission to Cabinet and Parliament. At the same time the capacity o f the Public Accounts Committee (PAC) i s weak and needs to be strengthened to review reports issued by the Auditor General and ensure adequate fol low-up o f i t s reports by the Executive. The P A C should also consider having i t s meetings open to the public on a regular basis to foster greater transparency and accountability.

3 5

91. Office o f the Auditor General i s a prior action for PRSC-2.

The audit o f public accounts for the financial years 2004/05, 2005/06 and 2006/07 by the

PRSC - 2 Prior Action: Audit o f Public Accounts for 2004/05, 2005106 and 2006/07 by the Auditor General and submission to Parliament.

Public Procurement

92. Lesotho has made significant progress in reforming and modernizing i t s public procurement system since the adoption o f the Public Procurement Regulations 2007 (PPR). The fundamental principles o f the PPR are generally sound and go a long way in ensuring consistency with international practices and procedures. The 2007 Regulation i s based on a decentralized system in order to foster transparency and accountability. To that effect, Ministr ies and District Councils are in charge o f their own procurement management through their Procurement Units while the former Central Tender Board has been disbanded. The procurement process within each Ministry and District Council i s based on distinct evaluation and award phases by an Evaluation Team and a designated Tender Panel in each institution.

93 . A Procurement Policy and Advisory Division (PPAD) to support, monitor, and enforce compliance at the ministries and at the districts has been established. According to the Regulations, PPAD actually covers the major functions o f developing relevant legislation, providing means o f controlling and enforcing compliance through audits, channeling information relating to all procurement activities, managing the training efforts, and providing an independent appeal mechanism. Other roles include guidance and advice to procurement units as well as compiling an inventory o f public assets.

94. Training programs have been initiated under the auspices o f the Chartered Institute o f Purchasing and Supply (CIPS) and the first batch o f CIPS graduates will be on board by the end o f 2009 and the next batch by end 2010.

’

95. Review and revision o f the coverage and provisions o f the public procurement regulations in l ine with CPAR findings was identified as a trigger for PRSC-2. The Government has confirmed i t s broad agreement wi th the findings o f the CPAR and has taken steps to implement several o f the identified actions. Amendments to the Public Procurement Regulations have been drafted. However, i t s finalization i s awaiting the legislation o f the revised P F M Act. Under the circumstances, this trigger i s not retained as a prior action for PRSC-2. While the CPAR proposed establishment o f an Independent Procurement Regulatory Authority (IPRA), Government i s establishing a Procurement Tribunal to provide an appeals mechanism that would have been provided by the IPRA. The required amendments to the PFM Bill have been made. Establishment o f the Procurement Tribunal i s a PRSC-3 trigger The Government has requested technical and financial assistance from donors, including the Bank, to fully implement the action plan.

Component 3: Improving access and quality o f basic services

96. Lesotho’s human development path has diverged from i t s economic development path in the past decade. Despite high economic growth and public expenditures, particularly in the social sectors, Lesotho’s Human Development Index (HDI) has worsened by nearly a tenth. This divergence has strongly been influenced by the impact o f HIV/AIDS on a key element o f the

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HDI calculation, namely l i f e expectancy at birth3'. The quality and efficiency o f service delivery, and the targeting o f services to the most vulnerable sections o f society remains a significant concern. For example. Lesotho has one o f the lowest rates o f outpatient visits per capita o f around 0.75. The national average of bed occupancy rate in the same year i s on ly 3 8 percent, below the 80-85 percen: target. Lesotho has the worst ratio o f health care workers to population in sub-Saharan Afr ica with less than one health professional for 1,000 people.

97. In the health sector, the reform program, wh ich commenced in 2000 with the assistance f i o m the Bank and other development partners, entered i t s ninth year in 2009. Since i t s start, the SWAP has been fundamental to harmonize efforts in order to achieve the objectives o f the reforms. Progress in the area o f institution building includes strengthened capacity to coordinate and monitor the reform program as evidenced by the development o f a 10-year health sector pol icy and strategic plan and the first three-year ro l l ing health sector expenditure program l inked to the overall MTEF. Progress has been made in achieving high immunization rates, revitalizing the national Tuberculosis program, and improv ing access to HIV testing, prevention and treatment. New notif ied TB cases in 2008 were 541 per 100,000 o f which 19 percent were smear positive. TB success rate was 76 percent. The number o f sites prov id ing HIV testing and treatment has gone up f rom 102 in 2007 to 171 in 2009. The proportion o f people living with A I D S and in need o f ART who receive ARV treatment increased f rom 41 percent in December 2008 to 52 percent in September 2009, meeting the target o f 50 percent. This i s commendable given that the Government changed the el igibi l i ty criterion for receiving treatment f rom a CD4 count o f 250 to CD4 count o f 350, making more patients eligible for treatment. Proportion o f mothers attending anti natal care (ANC) who were HIV positive was 15 percent while the proportion o f A N C attendees who were HIV positive and eligible and g iven ART or HAART was 98 percent. More than 1100 pregnant women attended ANC at least once.

98. Progress in the area o f human resources continues to be a challenge, but there have been some successes in the development and implementation o f the Emergency Human Resources Plan. In addition, the organizational structure o f the MOHSW was reviewed in order to improve efficiency. The decentralization process o f health services has been slow but i s gradually taking shape-most o f the Distr ict Health Management Teams (DHMTs) have the core staff and are able to develop their operational plans.

99. Despite the above achievements, concerns exist under the health sector reform. Lesotho i s off track to reach the health MDGs-with continuing high maternal mortal i ty rate, high chi ld mortal i ty rate that i s being fueled by an increasing number o f orphans, and the third highest adult H I V / A I D S prevalence in the wor ld and, as a consequence, an increasing tuberculosis prevalence. The human resource crisis persists at a l l levels; i t hampers the implementation o f the health sector reform program and severely weakens service delivery. The unresolved issues around health service decentralization also continue to cause problems in service delivery at the district level . Because o f these factors, wh i le the budget for health significantly increased in the last several years, the expenditure level remains low.

100. The PRSC supports GOL programs focused on key health and related interventions that are doable within the three-year time-frame: (a) improvement in chi ld nutr i t ion through greater food security at the household level to avert the adverse consequences o f the drought and increasing level o f food deprivation o f orphans; (b) sustaining disease prevention through

30 Lesotho - Health Sector Public Expenditure Review, The World Bank, 2009.

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immunization mainly by making vaccine financing more predictable and sustainable; (c) improvement in case-finding and treatment o f tuberculosis through the implementation o f the new national program on TB control; (d) widening the ARV treatment and prevention program through more intensive implementation o f the national HIV/AIDS strategic plan, greater mobil ization o f donor support and N G O involvement, and a more intensive local response; and (e) broadening the support to orphans and vulnerable children through wide-scale registration o f beneficiaries and provision o f an essential package o f support t o them, as delineated in the National O V C Strategic plan.

101. The Ministry o f Local Government (MoLGC) has completed a broad registration o f orphans with the support o f Distr ict Councilors and the Ministry o f Health and Social Welfare and about 200,000 orphans have been identified. U N I C E F i s supporting the M o L G C to design and implement a more comprehensive O V C registration system, which i s l inked to the vital registration system (births and deaths). Stakeholders consultations, development o f a data collection tool (module), development o f a computerized database, procurement o f computers, development o f guidelines on the implementation process, and the training o f data collectors in some communities in four districts (Thaba-Tseka, Berea, Quthing and Qacha's Nek) has taken place. Needless to say, a l l o f these interventions hinge crit ically o n more intensive recruitment o f health workers to be deployed in under-staffed districts/facilities, and stronger capacity building, staffing, and equipping o f district health offices to enable them to manage health interventions in their localities. The Table below highlights the support provided by key donors.

I

3 8

Box 1: Donor Support to HIV/AIDS !

PRSC - 2 Prior Actions: Capacity to deliver ARV treatment improves so as to increase the number o f eligible people getting treatment.

Clinton Foundation DfID European Commission

Anti-Retroviral Drug management and support ALAFA program Orphans and vulnerable children (OVCs)

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GTZ Irish Aid Millennium Challenge Corporation (MCC)

HIViAlDS training; decentralized response to HIV/AIDS Anti-Retroviial Drug management and support; ALAFA program Renovation and construction o f lower level health facil i t ies, and

UNAIDS UNDP UNESCO UNFPA UNICEF USGiPEPFAR WFP WHO

technical support for health systems strengthening including HMIS HIV/AIDS policy support HIV/AIDS policy support EDUCAIDS program Development o f National BCC strategy PMTCT, “Know Your Status”, HIV/AIDS Education HIV, PMTCT, UCT, M&E School feeding; food relief ART, PMTCT, HCT, safe blood transfusions; management o f STI, “Know Your Status”, HMIS

Cohort survival rate (Net o f repeaters)

1999-2005 2000-2006 200 1-2007

61 41 5 5 Pre FPE First FPE Second FPE

104. Secondary education enrollment grew by 11 percent f rom 2006 to 2007, with a 25 percent increase in Form A intake. In 2007 the f i rst cohort enrolled with FPE reached secondary school, and a record number passing the primary school leaving examination (PSLE) created a surge in demand for secondary places. Increases in demand for enrollment o f around 8,000 students per year are expected until 201 1, if Form A intake i s sustained at current rates, and these enlarged cohorts progress upwards through the system.

Enrollment 2007 2008 Form A 34,81 I 35,545 Form B 23,669 28,601 Form C 16.796 17.550

2009 2010 201 1 2012 35,981 35,623 35,341 34,488 30,534 31,901 32,585 33,195 2 1.288 23.605 25.443 26.780

Fo rm D 1 13,641 I 14,389 I 15,246 I 18,519

105. The PRSC supports an improvement in the quality o f primary education as measured by a progressive increase in the cohort survival rate and access to secondary education over the PRSC series. Extension o f existing infrastructure to accommodate additional entrants at the secondary school leve l has led to a ten percent increase in secondary school enrollment. This was recognized as a prior action for PRSC-1. Preparation o f a three year costed p lan for the education sector aimed at increasing access to secondary schools i s a pr ior action for PRSC-2. The Government has developed a medium term update o f the Education Sector Strategic Plan, covering the period 2009-2012. This plan includes detailed costing f rom the planned development o f the sector, consistent with the approved budget for 2009-10 and the medium term expenditure framework indicative ceilings for subsequent years. This update o f the Education Sector Strategic Plan (ESSP) has been appraised and the basic education components endorsed by the development partners active in the sector. This has not been taken to cabinet as the plan i s only a 3 year costed updated version o f the Education Sector Strategic Plan 2005- 201 5 wh ich was approved by Cabinet.

2 1,299 23,709

1 PRSC -2 Prior Action: Preparation and endorsement by key stakeholders o f the basic education 1 components o f the costed education sector plan.

Form E

Capacity Building for Local Government Administration

(b) 10,894 I (c) 13,576 I (d) 16,063

106. Leadership o f the decentralization reform has been assigned to the Ministry o f Local Government and Chieftainship (MoLGC) which has the responsibility to oversee and coordinate the establishment o f an effective and efficient decentralized local government system. Subsequent to local government election in 2005 when the local authorities were established, substantial effoi-ts have been made and continue to be made to implement the reform. However,

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this i s yet to be guided by a clearly defined implementation agenda. Notwithstanding, Lesotho Vision 2020? Local Government Act 1997, Public Sector Improvement Reform Program (PSIRP), in addition to the Constitution outline the need for decentralization reform. T o strengthen i t s operations, MoLGC has prepared a Strategic Plan (2009-2013). The Plan identifies decentralization as one o f the four main pr ior i ty areas with a priori ty statement - ’ to enable local governments to be responsible for service delivery and development within their jurisdiction’.

107. The decentralization reform program has a focus o n improving decentralized service delivery and decision making with the a im of reducing poverty. Decentralization for improved service delivery i s premised on certain key elements wh ich include: the legal and pol icy framework which assigns functions to the local level; pol i t ical and administrative accountability which deals with election o f representatives and autonomy for decision making; f iscal measures (resource envelope for devolved functions to local authorities); and decentralised human resources to administer the devolved functions. These are expected to be anchored o n institutional arrangements at the central level for re form coordination. These key elements guided the discussions and development o f National Decentralization Act ion Plan (NDAP). The N D A P has been prepared and endorsed by Cabinet. A t present, an Inter-ministerial Work ing Group i s preparing an implementation strategy for the plan, including fiscal decentralization.

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Box 2: The Proposed PRSC and Good Practice Principles on Conditionality

Principle 1: Reinforce Ownership The proposed PRSC supports implementation o f Lesotho’s development program as laid out in i t s Interim National Development Framework (INDF). The INDF will guide planning and resource allocation, particularly in light of f iscal challenges resulting from the global economic crisis and projected declines in SACU revenues. It bridges the period between the end of the PRS and the adoption of a comprehensive national Development Plan in 2012. The GOL has also prepared a Growth Strategy which lays down short and medium term approaches to achieve broad-based, sustainable growth as set out in the Vision 2020. It has prepared a PAF, which provides a basis for monitoring the program o f overall budget support. The PAF consists o f a number o f relevant, monitorable, time-bound, and realistic targets related to priority policy objectives. Prior actions and triggers to be supported by the PRSC have been selected from the PAF.

Principle 2: Agree up front with the Government and other financial partners on a coordinated accountability framework Al l missions have been held jointly and joint aide memoires have been prepared and agreed with the Government. The broad principles of budget support were agreed in May 2006 and are identified in the May 2006 Joint Budget Support Aide Memoire. The first joint review was carried out in October 2008 and the second joint review was carried out in November 2009. It has been agreed that subsequent reviews wil l be carried out jointly in Octoberhlovember each year, to fit in with the Government’s budget preparation timeline. Disbursements of budgetary support wi l l be based on a positive outcome o f this review.

Principle 3: Customize the accountability framework and modalities o f Bank support to country circumstances The joint budget support review wil l be aligned to the country’s budget cycle and wil l be held in OctoberMovember each year. Disbursements are expected to be made for the following budget year starting in April.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement One of the principles of the joint budget support i s that the PAF should consist o f a few monitorable and realistic indicators. The triggers and actions for the proposed PRSC represent only those actions that wi l l be critical for achieving the program’s project development objectives and the various outcomes.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance- based financial support In order to improve predictability o f budgetaiy support from donors, the JBS framework requires donors to indicate levels of budgetary support that they are planning to disburse well in advance of the start of the fiscal year, such that the amounts can be included in the Budget submitted to Parliament. Once the main annual PAF review in Octoberhlovember has been concluded, al l the JBS donors in Lesotho wil l indicate to the Government how much they are planning to disburse in the following fiscal year. Government in turn uses this information during the budget preparation process.

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VI. OPERATION IMPLEILIENTATION

A. POVERTY AND SOCIAL IMPACT

108. The poverty and social impacts of the reforms supported by the operation are expected to be favorable overall. The benefits are expected f rom direct j o b creation in the private sector and improvement in service delivery, particularly to the poor in rural areas. A greater proportion o f the population living in the highlands i s stricken with poverty than those living in the lowlands. Populations l iv ing in the highlands re ly heavily o n livestock and subsistence farming. In the recent past, men would find employment as mine workers in South Africa. However, increasing unemployment in the mining sector has led to able-bodied men returning to the rural areas and engaging in subsistence farming. Given that farming alone cannot provide sustainable l ivelihoods in the rural sector which i s confirmed by recent analysis o f the household survey data, an increasing number o f households are relying on more than one source o f income in the rural areas. Jobs in the non-farming sector, in particular in manufacturing and petty trading are becoming an important source o f income. Improved business environment and better industrial infrastructure are expected to boost the private sector and create jobs. The operation supports reforms that will create more wage jobs in the private sector.

109. The effects o f H I V I A I D S have taken a larger to l l in the poorer areas o f Lesotho, especially the highlands. N o t only may it be dif f icult to receive medicine, but also poverty stricken households have poorer nutr i t ion and greater food insecurity. When fami ly members fall ill or die, girls are expected to care for the sick and orphaned siblings. In families stricken with illness and/or poverty, children become an additional, or sole, source o f l ivelihood. School Principals have noticed that those who need to repeat upper classes tend to be orphans as they do not attend school regularly. The increase in the program o f support to the OVCs i s expected to lead to an overall reduction in the social burden associated with caring fo r the OVCs. The creation of new sites providing ARV treatment i s expected to increase the coverage o f ART to affected people. Most o f the beneficiaries are expected to be under-privileged who wil l be able to lead a better l i fe with the availability o f treatment.

110. Increasing access to secondary schools for the large cohort o f pr imary school leavers (as a result o f the completion o f the free primary school cycle) will provide better income earning opportunities to these students when they enter the labor market.

11 1. Improvements and further reforms in public finance management envisaged in the program have an indirect poverty and social impact through creating the conditions for improved governance and provision o f publ ic services.

B. IMPLEMENTATION, MONITORING AND EVALUATION

112. The institutional arrangements for the implementation o f the operation fa l l within the framework of the JBS. The proposed arrangements seek to ensure oversight and buy in at the poli t ical level. A dedicated team of officials f rom Department o f Development Planning in the M F D P and the Bureau o f Statistics will monitor progress in implementation o f the overall budget

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support program. This team acts as the Secretariat for JBS implementation and monitoring. At the Ministerial level, dedicated teams o f relevant officials responsible for implementation and monitoring o f activities3' will monitor implementation o f P A F activities and collect data to verify achievement o f P A F indicators and report to the Secretariat. The JBS Secretariat i s headed by Department o f Development Planning and will report, on a quarterly basis, to the Improvement and Reform Steering Committee (IRSC). Representatives o f the DPs are members o f the IRSC, ensuring that they are also aware o f the progress being made in implementation in between the annual jo in t reviews. The Chairperson o f the IRSC will, in turn, report, through Minister, MFDP, to the Budget Committee. The P A F progress report will be submitted by the Principal Secretary, M F D P to the Committee o f Principal Secretaries as they are responsible for delivering on these indicators. This will be the forum for ini t ial discussions towards the required remedial actions where problems exist. The Principal Secretary, MFDP, will also pursue these discussions bilaterally with affected MinistriedAgencies for implementation o f the required actions. Briefings to development partners envisaging budget support will be provided at regular intervals.

113. The P A F wil l be the basis for monitoring and evaluation o f the program. An annual progress report submitted by end-August o f each year will be fol lowed by a jo in t annual review o f progress, based on the PAF, to analyze progress towards agreed triggers and targets. The main objective o f this review i s to come to a jo in t view o n performance, which will serve as the basis for commitments for the fol lowing financial year.

C. FIDUCIARY ASPECTS

Public Fin an cia1 Man agemen t System

114. Lesotho's fiduciary framework i s adequate overall to receive the proceeds o f the Credit and Grant, particularly in light o f the adoption o f a comprehensive P F M reform program and the implementation progress made. Implementation o f the P F M reform program i s currently being supported by DfID, EU, and Ireland. The support wil l be deepened under the auspices o f the JBS.

1 15, An assessment o f P F M based o n the PFM Performance Measurement Framework (PMF) has recently been conducted jo in t ly by the Government and i t s key DPs and a draft report has been prepared. The assessment notes that although longstanding weaknesses in budget execution, the internal control framework and financial reporting identified in the previous assessment continue, some progress i s clearly being made. The assessment also notes that there are many bui l t- in features o f the new system that are designed to address problems in the areas o f expenditure commitments, authorization o f expenditure and reconciliation o f accounts32.

1 16. Progress has been made in a number o f areas, including deepening o f the MTEF, drafting of the Public Financial Management and Accountabil ity Bill, launching o f IFMIS, preparation o f outstanding public accounts up to 2006/07, auditing o f public accounts and adoption o f new procurement regulations. The PRSC will support continued implementation o f reforms under the Government's PSIRP.

3 ' These teams are from within the ministries responsible for implementation o f the PAF activities 32 The Assessment does not take into account the possible improvements that may be achieved as a result o f the recent introduction o f the integrated financial management and information system.

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D. DISBURSEMENT AND AUDITING

117. U p o n effectiveness, expected in April 2010, a single tranche o f SDR 16.2 m i l l i on (US$25.0 m i l l i on equivalent) will be disbursed to the Government o f Lesotho. The PRSC-2 wil l fo l low the Bank’s disbursement procedures for Development Pol icy Lending. In particular, the Credit a d Grant proceeds will be disbursed against satisfactory implementation o f the development pol icy program and not t ied to any specific purchases and n o procurement requirements will be needed.

118. U p o n receipt o f separate withdrawal applications for the Credit and Grant f rom the Government, IDA will disburse the Credit and Grant proceeds to a United States Dol lar denominated account maintained by the Central Bank o f Lesotho (CBL) and forming part o f the off icial foreign exchange reserves o f Lesotho. Within t w o business days, the C B L will credit the lo t i equivalent o f the Credit and Grant proceeds to the consolidated account maintained on behalf o f the Government o f Lesotho for budget execution. The Accountant General will be noti f ied accordingly. The C B L will not impose any charges or commissions on the Government for these transactions. The conversion f rom United States Dollars to l o t i will be based o n the prevail ing exchange rate o n the date that the funds are credited to the consolidated account. The Government, through the M F D P will - (i) provide a written confirmation to the Bank within 30 days, that an amount equivalent to the Credit and Grant proceeds f rom the Bank has been credited to the consolidated account, with an indication o f the exchange rate applied; (ii) provide evidence that the lo t i equivalent o f the Credit and Grant proceeds was’recorded as financing for Government budget; and (iii) ensure that the lo t i equivalent o f the Credit and Grant proceeds i s subject to controls to ensure its use for eligible budgeted public expenditures only. The administration o f this Credit and Grant shall be the responsibility o f MFDP.

1 19. Auditing: The budgeted public expenditure partially financed b y the lo t i equivalent o f the Credit and Grant proceeds i s subject to external audit by the Auditor-general under the normal auditing arrangements applicable to the Government. The Association will have access to these audit reports.

E. ENVIRONMENTAL ASPECTS

120. The program i s not expected to have any direct significant environmental consequences. Infrastructure improvements to enhance the quality and coverage o f primary and secondary education do not involve the construction o f new schools immediately. Needed improvements wil l take place in existing schools. The Ministry o f education, in collaboration with the National Environment Secretariat (NES), has prepared the necessary environmental instruments in anticipation o f potential adverse impacts f rom the construction o f these schools. N e w secondary schools may be constructed in 2-3 years time. Improvements in the business climate are likely, however, t o lead to increased business activity, some o f which may have potentially negative impacts o n the environment, such as those involved in industrial production. In addition, the proposed trade facil i tation measures are intended to contribute to j o b creation in export sectors, in particular the textile industry, posing additional challenges for the management o f industrial pollution. Adequate capacity for handling and expediting the clearance processes, and monitoring and enforcement to deal w i t h potential adverse pol lut ion arising f r o m increased investment activities i s lacking currently and needs to be strengthened.

45

121. In this regard, i t will be important for the Government to continue to strengthen the legal and institutional framework for environmental impact assessment, monitoring and enforcement. The Environment A c t 2001 has a number o f sections specifically pertaining to Environmental Assessment (EA), and requires submission o f EAs and Environment and Social Impact Assessment to the Authority, currently the National Environment Secretariat (NES). An Environment Bill (2007) i s under consideration, and would establish a National Environment Council and Department o f Environment, with Assistant Environment Officers to be appointed at the Distr ict level. I t i s envisaged that the establishment o f the National Environmental Council wil l strengthen the institutional framework and enhance NES’ role in monitoring and enforcement o f environmental legislation in the country.

122. In order to strengthen the analytical foundations for the continued building o f environmental management capacity at both the national and local levels, i t i s proposed that the Bank prepare in close collaboration w i t h the NES a Country Environmental Analysis focusing o n these issues, the recommendations o f which may be incorporated into the planned PRSC-2 and 3.

F. RISKS AND MITIGATION

123. Impact of the global economic crisis. T w o distinct macro risks exist. First, the recovery o f the South Afr ican economy could be slower than anticipated and the rebound o f SACU revenues could be’ delayed. This wou ld put enormous pressure o n what already i s a tough fiscal adjustment process wh ich can undermine fiscal sustainability and/or jeopardize necessary social and capital expenditure. Second, the Government may not fully implement the required program o f fiscal consolidation. The run-up to the local elections in 2010 and the National Assembly elections in two years may lead to unplanned expenditures. Mit igating these risks depends on Lesotho’s capacity to adjust to the shocks and the Government’s abil ity to manage the impact o f the shocks. Significant levels o f government deposits accumulated at the Central Bank during the years o f S A C U revenue boom and high levels o f international reserves at the Central Bank (almost double the level required to maintain parity with the rand) provide a cushion f rom the short tenn fiscal and external shocks. Bank and the Fund, through their respective programs, will work w i th the Government to identify ways to make this fiscal adjustment work through expenditure cuts, efficiency gains and revenue diversification. Predictable and timely budget support through the PRSC series and f rom other development partners, including the IMF will also help mitigate the risks.

124. Capacity risks. The systemic problem o f capacity in Government continues to pose a risk for the program and may cause delays in the implementation o f some measures, especially in public sector reform. To mitigate this potential coordination failure, implementation arrangements for the PRSC seek to ensure oversight and buy in at the poli t ical level. Capacity building initiatives underway with support f rom other Development Partners, particularly in the area o f publ ic financial management reform will also mitigate this risk;

125. Lesotho also faces the challenge associated w i th the poli t ical willingness to push for legislative reforms, especially with the upcoming local and pol i t ical elections.

46

HI I I

18 I I I I

e I

0 Ip,

Annex 2: Letter o f Development Policy

Thursday, March 04, 2010

Ms. Obiageli Katryn EZEKWESILI Vice President, Africa Region 181 8HStreet, NW Washington, D.C. 20433 UNITED STATES OF AMERICA

Fax: +I 202 477 6391

Dear Ms. Ezekwesili,

Letter of Development Policy for the Poverty Reduction Support Grant and Credit (PRSC-21

1. I write on behalf of the Government of Lesotho to request approval of the second Poverty Reduction Support Credit and Grant (PRSC-2) in the amount of U S 2 5 million of which US$ 20 million is a credit and the balance a grant, from the International Development Association (IDA).

2. You will recall that the Government of Lesotho concluded a Memorandum of Understanding (MoU) with international cooperating partners on General Budget Support (GBS), amongst whom the World Bank is a key member. The World Bank approved the first Poverty Reduction Support Credit to support the Government's efforts in poverty reduction. Its disbursement was made in 2009. The proposed PRSC-2 would therefore constitute a continuation in the said support and would further contribute towards reducing poverty through increased economic growth and employment generation and reduction in social vulnerability.

5 1

3. The Government of Lesotho launched a Poverty Reduction Strategy in 2004, whose timeline ended in March 2007. Despite its implementation over the three-year period, very little impact was made on poverty due to among others inadequate financial resources to implement the strategy in all its aspects. Furthermore, while the strategy had defined the level of economic growth that would be required to make an impact on poverty, it had omitted an important element of defining how the growth would be achieved which is a pre-requisite for sustainable economic growth and poverty reduction. As a result, little focus was placed on the sectors and activities that would promote economic growth. In recognition of this therefore, the Government embarked on the preparation of a Growth Strategy, which has identified the potential growth sectors and the requisite activities for the development of these sectors. A National Development Framework was also developed to address the poverty reduction issues that were covered by the Poverty Reduction Strategy and to guide the planning process while a more comprehensive Five-year National Development Plan is being developed for implementation starting in April 2012.

Mac roeco n o m ic Pe rfo r ma n ce

4. The global economic slowdown has significantly put a downward pressure on economic growth in Lesotho. The past decade witnessed the emergence of two large export oriented sectors - garment and clothing industry and diamond mining - which together account for roughly 20 percent of GDP and 72 percent of total exports. It is these two industries that are most vulnerable to global recession. Falling demand in the United States, which is the recipient of almost 95 percent of Lesotho's garments, has already impacted negatively on the industry as exports in this sector fell by 11 percent in 2008. Given that the US economy is forecasted to contract by a further 1.6 percent in 2009, Lesotho garment exports are likely to witness another year of negative growth. Furthermore, as a result of credit crunch some of the garment manufacturers are already facing difficulties obtaining trade credit for input financing from foreign banks and their parent companies in Asia.

5. 'In 2008 economic growth is estimated to have fallen to 4.2 per cent from 5.1 per cent in 2007, slipping to 1.9 per cent in 2009 before recovering slightly in 2010. The slowdown has been due, in part, to the global financial and economic crisis but high inflation driven by soaring food and oil prices in 2008 has also played a role.

6. The sharp drop in commodity prices has reduced demand for labor in South Africa and put pressure on remittances, a key source of rural income for Lesotho. Exports to key developed country markets have also contracted due to the global slump. The downturn in the United States in particular has impacted clothing and textiles exports, with 42 000 jobs at risk. The government, however, has continued to strengthen capacity in the textiles sector while exploring other market opportunities, particularly in Europe and regionally and diversifying products. It has also introduced an importlexport scheme with the support of the African ExporVlmport (AFREXIM) Bank.

52

7. By economic categories, diamond mining continues to make a significant contribution to Lesotho’s economic growth following the reopening of LetSeng mine. The share of mining has risen, to 7.4 per cent of GDP in 2008 from less than 1 per cent a decade ago. Activity in this subsector has also contributed to the increase in capital formation, put at 24.3 per cent of GDP in 2007. The manufacturing sector came under pressure in the second half of 2008 as consumer demand in the United States weakened. It is estimated that textiles, footwear and leather products output will contract by 10.7 per cent for the whole year, compared with an increase of 5.1 per cent in 2007. Manufacturing accounted for 13.3 per cent of GDP in 2007, with the most contribution coming from textiles manufacturjng. The share of manufacturing however, fell by an estimated two percentage points in 2008 due to weaker demand as a result of the global financial crisis. To avoid further deterioration in this key industry, the government, through LNDC has injected equity in some of the textile companies and to facilitate trade finance through the establishment of an export guarantee scheme to provide assistance to textile manufacturers.

8. The share of agriculture in GDP has fallen steadily over the years. It was estimated at 8.3 per cent in 2008, down from 11.4 per cent 10 years earlier. Construction activity remained robust in 2008 as a .result of ongoing road projects. Growth in the tertiary sector is projected to fall to 2.5 per cent in 2008, driven by a slowdown in financial intermediation.

9. Lesotho’s financial sector is small and relatively isolated from the global capital markets but the crisis has been felt through its very important links to South Africa. Lesotho’s currency, the loti, is pegged to the South African rand. The strengthening of the Rand has affected Lesotho’s textile exports negatively.

Government Policies and Development Obiectives

I O . The Government’s policy objectives continue to be premised on poverty reduction, combined with the promotion of high, sustainable and broad-based growth and reduction social vulnerability. As indicated earlier, the Government prepared a Growth Strategy that focuses on identifying the key areas that could be supported to promote high economic growth and hence poverty reduction

11. The over-riding objective of Government remains that of attaining an accelerated, shared and sustainable economic growth rate of 6 to 7 percent per annum but the current global economic and financial crisis has made this goal hard to achieve. Other important objectives and policy goals of the Government for the medium and long term, as stated in Vision 2020 include:

a) b) Creating an environment conducive for increased private sector

Scaling up the fight against HIV and AIDS;

investment, rapid job creation and reduction in unemployment;

53

Developing infrastructure so as to make economic opportunities accessible to all segments of the population and to provide the basis for rapid industrialization and job creation; Developing infrastructure and services to promote tourism; Improving the quality of and access to education, skills training and health services for all Basotho; Enhancing food security by improving agricultural productivity and introducing high value cash crops, better farming practices, irrigation, water harvesting, afforestation, and realistic marketing arrangements; Integrating youth, children and gender issues in all Government policies and programs; Promoting efficiency and effectiveness in the delivery of public services through enhanced public financial management, audit of Government operations and use of public-private partnerships; and Consolidating democracy, peace and stability by fighting crime, promoting safety and security and by enhancing the role of Parliament, accountability and transparency through a new Public Financial Accountability Bill that will be introduced in the February sitting of Parliament.

overarching objective is to create income-generating opportunities for unemployed and underemployed members of the labor force by encouraging private sector growth. Core policy components include: (i) responsible macroeconomic management; (ii) appropriate microeconomic policies; and (iii) continued improvements in the reform of the public service; and (iv) reforms aimed at improving the investment climate and competitiveness.

13. Investors are reluctant to locate in countries with large fiscal deficits, increasing debt ratios and declining foreign exchange reserves as these indicators affect expectations and monetary stability. The attainment of positive outcomes based on sound macroeconomic policy and management is a necessary condition for sustained investment and economic, growth. Lesotho will ensure stable fiscal, inflationary and balance of payments positions that will create an appropriate economic environment.

14. The main objectives of the Government's macroeconomic policy are to:

0 provide the basis for sound and consistent macroeconomic

create an attractive macroeconomic environment for the private sector management;

which will support efficient production and generate faster economic growth by attracting both domestic and foreign investment; and

0

0 improve public sector performance by consistently applying the principles of sound public expenditure management (i.e. achieving aggregate fiscal discipline; concentrating public resources on a core set of activities including both poverty-targeted programs and support for a pro-poor growth strategy; and improving operational efficiency).

54

15. The Government of Lesotho remains committed to maintaining a stable macrGeconomic environment, both as a means of ensuring high and sustainable growth and to attract foreign direct investment that would support such growth. As a result, Government took a conscious decision to cap the annual budget deficits at 3 percent of GDP. Indeed since 2003/04 up to 2008/09, excluding grants, the Government has maintained an overall fiscal surplus. The recent global financial and economic recession has however led to a reversal of this performance in 2009/10. The reduction in the revenue receipts from the Southern African Customs Union (SACU) resulting from the decline in the demand for imports into the customs union, has negatively affected the Government’s fiscal position. We therefore begin to see a shift from the, historical surpluses to a deficit in 2009/10.

16. In response, the Government has embarked on a strategy to aggressively reduce expenditures in the immediate and medium-term. The Government’s policy is therefore to maintain annual budgets at the previous year budget outturn levels in order to ensure that all budgeted resources are utilized. The Government however recognizes that it will be difficult to effect the necessary adjustments speedily as there are ongoing commitments that would need to be completed and important social programs that cannot be stopped. The impact of these budget policies will therefore not be obvious immediately, but will lead to a more sustainable fiscal position in the medium- to long- term

PRSC-2 Prior Action: Macroeconomic framework for 2009/10 reflecting ceilings approved by Cabinet, with the fiscal deficit not exceeding 3 percent of GDP

adopted by Cabinet.

17. The Government established in 2008, a one-stop shop with the aim of streamlining the processes for establishment of businesses and facilitation of foreign direct investment. As a follow-up, the Government has continued to work towards improving its operations, particularly with respect to the range of services provided. The services of the one-stop shop have now been extended to include rebate certificates, residence and work permits and industrial licenses. The intention is to include company registration, tariff investigations and trade remedies in the services provided by the one- stop shop. It is expected that a new Companies Bill, that will give legal effect to the proposed investment climate reforms will be presented to Parliament before the end of the current Fiscal Year.

PRSC-2 Prior Action: Extension of One Stop Shop services to include rebate certificates, residence and work permits and industrial licenses

PRSC-2 Trigger: Extension of one-stop shop services to include rebate certificates.

55

18. As part of the Government's efforts to promote industrial development, the Government intends to develop industrial facilities as a key intervention. This will involve upgrading of services to existing industrial locations and building new industrial facilities. Focus will particularly be on the expansion and development of two sites at Ha Nyeye and Ha Tikoe. In the meantime, work continues to identify further sites for future development once work has been completed on the two initial sites.

PRSC-2 Prior Action and Trigger: Based on the ongoing Investment Infrastructure Studies, target sites and related

investments identified and approved

19. A key goal of the Government continues to be that of strengthening public financial management and public service. A new Integrated Financial Management Information System (IFMIS) was launched in April 2009, and has been the basis for maintaining Government accounts during this Fiscal Year. The system has also assisted in implementing new planning and budgeting, accounting and reporting, and procurement systems. With the assistance of the system, Government has been able to put together public accounts for 2004/05, 2005/06 and 2006/07 for which auditing has been completed and the relevant reports presented to Parliament. Auditing of the accounts for 2007/08 is being concluded by the Auditor General, and Government is in the process of finalizing the accounts for 2008/09 and it is expected that the auditing will be concluded early in the coming Fiscal Year.

PRSC-2 Prior Action and Trigger: Public accounts for 2004/05 and 2005/06 and 2006/07 audited by the Office of the Auditor General and submitted to Parliament

Public accounts for the financial years 2004/5 and 2005/6 audited by the Office of the Auditor General and submitted to Parliament.

20. As part of integrating planning and budgeting, the MTEF approach, which had initially been piloted in six Ministries, has now been rolled out to all Government Ministries. Budget Framework Papers have been prepared for all Ministries since 2008109. Notwithstanding, there are persistent problems with the implementation of MTEF, mainly arising from low capacity and general appreciation of the process in the line ministries. As part of an exit strategy for the financial and technical assistance provided under the Public Financial Management Program, the Government intends to undertake intensive training programmers for all Public Servants, including senior officials, on the MTEF process.

PRSC-2 Prior Action and Trigger: Development of Budget Framework Papers by all ministries for 2009/10 - 201 1/12

21. In January 2007, the Government launched a new Procurement Manual and procurement procedures as part of the Public Financial Management Reforms. The procurement reforms involved the decentralization of ministerial procurement and the establishment of ministerial procurement units. A recent Country Procurement

56

Assessment revealed several weaknesses that would need to be addressed in order to render the new procurement procedures efficient and transparent. This will involve the revision of the regulations as well as reinforcement of ministerial procurement through training of staff. The G,wernment is in the process of preparing proposal to be presented to the World Bank for technical assistance to build capacity in line ministries for effective implementation of the new regulations, as well as to fine-tune weaknesses that were identified by the CPAR.

PRSC-2 Prior Trigger: Review and revise coverage and provision the CPAR fin dings

22. Despite progress in various areas, many challenges remain. Poverty continues to be widespread with half of the population still living below the poverty line. The HIV and AIDS epidemic is a major threat to Lesotho’s attainment of the Millennium Development Goals, combating poverty and promoting sustainable human development. HIV and AIDS have a IongLterm impact on development. The Government is committed to halving the number of new infections from over 22,000 in 2007 to under 11,000 in 201 1. In addition to intensifying the Know-Your-Status (KYS) Campaign, which encourages voluntary HIV testing, the number of health facilities providing anti-retro viral (ARV) treatment has been increased from 140 in 2008 to 142 in 2009. These will include government, private and mission clinics and hospitals.

PRSC-I Prior Action and Trigger: The number of sites providing ARV treatment, including Government, mission and private/public partnerships increases

23. The HIV/AIDS pandemic has resulted in a growing number of orphans and vulnerable children (OVCs) who need legal protection to safe guard their rights to accessing basic social services. In 2004, the Government undertook a Rapid Assessment, Analysis and Action Planning (RAAAP) exercise on OVC in consultation with key sectors and civil society partners. The exercise has resulted in the development of a comprehensive costed OVC National Action Plan. It is since this time that the Department of Social Welfare in collaboration with the Registrar of Births and Deaths in the Ministry of Local Government has been developing a computerized database to register orphaned children at the district level in all 10 districts. This key initiative will enable Government to budget appropriately based on accurate data at district level and provide basic services that respond to the felt needs of orphaned children. The program for the registration of OVCs will be piloted in 6 districts, with the expectation that once the pilot stage has been completed, registration would continue in the rest of the country. It is expected that this will facilitate development of a comprehensive and inclusive support package for OVCs.

’

PRSC-2 Triggers: Ministry of Local Government completes nationwide registration of OVCs

Ministry of Health and Social Welfare completes design of a support package for o v c s

57

24. The government is committed to providing universal free and compulsory primary education. In this regard, in 2000, free primary education was introduced in Lesotho on an annual incremental basis from standard one. The more global policy principle of the government, guided by the MDGs and Education for All, is that basic education is an integral part of social and economic development and that it is a fundamental human right. It is also seen as an essential pre-condition for mid-level employment and secondary and post-secondary education and training, which is expected to create the practical skills and knowledge that will facilitate rapid and better integration of the population, men, women and children, into a unified society

25. The envisaged economic development for Lesotho is dependent on the availability of highly skilled manpower. To achieve this, the government has adopted a Technical and Vocational Education and Training or skills development strategy and policy which are expected to improve the skills profile of the Lesotho workforce thus promoting economic growth and alleviating poverty through provision of demand-driven training programs. Other priority areas include lifelong learning; early childhood development; and teacher development, supply and management. Cross cutting issues that affect education and training need to be adequately addressed, especially, gender, HIV and AIDS.

26. Government’s efforts are directed towards ensuring adequate resources in the form of trained teachers and infrastructure to be able to continue the implementation of the Free Primary Education Program as well as to provide adequate secondary school facilities to absorb the intake from the primary level. In implementing the ten-year Education Sector Strategy roved in 2005, the Government has prepared a three-year plan, which has guided the medium-term budget process. This plan has been endorsed by stakeholders, including donors and its implementation will require substantial financial resources, for which Government will continue to seek support form development partners.

PRSC-2 Prior Action: Production and endorsement (by stakeholders) of basic education components of a three-year costed education sector plan

PRSC-2 Trigger: Production and endorsement (by cabinef) of a three-year costed plan for the education sector.

27. The Government is in the process of developing a National Monitoring and Evaluation System, which will monitor the implementation of its programs as well as the extent of achievement of its development targets as set out in the Performance Assessment Framework agreed with Budget Support Partners. A data base of all ongoing projects and programmers has already been established. Resources will be set aside to ensure adequate capacity to collect, present and analyze economic and social statistics.

Conclusion

58

28. The global economic situation has impacted negatively on Lesotho's economy. In particular, textiles manufacturing, which has been the lifeline of Lesotho's economy, and the largest private sector employer. It has been affected by the decline in the demand for its exports as a result of the recession in the United States of America. At the regional level, the low demand for imports resulting from declining economic activity has resulted in a decline in the Southern African Customs Union (SACU) revenue, which accounts for over 50 percent of Lesotho's revenue. Consequently, it is projected that the Government will be faced with increasing fiscal deficits in the medium term, up to 2012/13 at which time it is projected that there will be a slight recovery in the performance of the economy. In the meantime, Government will need to mobilize as much resources as possible from alternative sources to finance crucial social and development programs. Most importantly, the Government will be required to identify programs and activities to develop the critical growth sectors with the objective of creating employment, reducing vulnerability and poverty. The Government intends to develop a National Development Plan whose implementation is expected to commence in 2011/12 and which will articulate an investment program intended to meet the above goals. It is against this background that the Government is requesting a second Poverty Reduction Support Credit and Grant to be appraised and negotiated as quickly as possible by the International Development Association of the World Bank.

Thank you for your continued and timely support.

MINISTER OF FINANCE AND DEVELOPMENT PLANNING

cc: Ruth Kigera Country Director

PO Box 12629, Hatfield, 0028 Pretoria SOUTH AFRICA Fax: (202) 676-0858

Mr. Mosito Khethisa P r i n ci p a I Secret a ry Ministry of Finance and Development Planning Maseru Lesotho Fax: +266 22 310157

Office of the Attorney General Lesotho

59

Fax: +266 22 310929

Mr. H. Abu Dagga Country Officer World Bank Liaison Office Maseru Fax: +266 22 217034/5

60

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Annex 4: Lesotho Relations with the IMF

DOCUMENT OF INTERNATIONAL MONETARY FUND AND FOR OFFICIAL USE ONLY

SURA Oil 9 February 23 , 20 10

The Acting Chair’s Summing Up Kingdom o f Lesotho-2009 Article I V Consultation

Executive Board Meeting 10/17 February 22,2010

Executive Directors agreed with the thrust o f the staff assessment and recommendations. They commended the authorities for Lesotho’s recent favorable macroeconomic performance. They observed, however, that government spending has increased rapidly since 2008 and that the country faces significant challenges going forward as the projected decline in Southern Afr ican Customs Un ion (SACU) revenues i s expected to result in large fiscal and external deficits.

Directors agreed that, in order to ensure fiscal sustainability, action will be required on several fronts, and they encouraged the authorities to fo l low through on their medium-term fiscal consolidation plan. First and foremost, i t will be necessary to contain the growth o f non-priority expenditure, including that o f the wage bill, whi le safeguarding spending on vulnerable groups. Directors also called o n the authorities to enhance the efficiency o f public expenditure, improve the quality o f capital spending, and strengthen the mobil ization o f non-SACU revenues. While the emerging fiscal imbalances can be partly financed with a judicious drawdown o f government deposits and the issuance o f domestic debt, Directors encouraged the authorities to a im for a sufficiently frontloaded adjustment.

Directors agreed that Lesotho’s monetary and exchange rate regime under the Common Monetary Area and the peg o f the lo t i to the rand has helped maintain price stability. Achieving external sustainability, however, will require increased productivity and external competitiveness, as well as a prudent fiscal pol icy.

Directors observed that despite strong growth in recent years, considerable challenges remain in reducing poverty, unemployment, and income inequality, which have been exacerbated by the H I V / A I D S pandemic. Directors noted the expected positive impact on medium-term growth prospects o f large infrastructure projects. They stressed that broad-based growth and poverty reduction will require determined efforts to reduce the cost o f doing business and improve the investment climate, in l i ne w i th the authorities’ strategy to advance economic diversification and facilitate private sector development.

Whi le the financial sector has weathered the global financial crisis relatively well, Directors observed that additional efforts are needed to increase access to financial services and to improve regulatory oversight o f nonbank financial institutions. They supported the current

76

efforts to deepen and enhance the efficiency o f the financial sector and to increase access to financial services, especially in the rural areas. Directors also welcomed the actions being taken to strengthen the supervisory role o f the central bank, address remaining vulnerabilities arising f rom weakly supervised nonbank financial institutions, and facilitate the resolution and the prevention o f fraudulent investment schemes. Directors looked forward to the establishment o f the Financial Intelligence Unit as an important step in the implementation o f the anti-money laundering framework.

I t i s expected that the next Art icle IV consultation with the K ingdom o f Lesotho will be held on the standard 12-month cycle.

77

Annex 5: Lesotho at a Glance

Key D e v e l o p m e n t I n d i c a t o r s

Y z o o a )

Population mid-year (mllilons) Surface area (thousand sq km) Population growth ( O h ) Urban population (%of total populat~on)

GNI (Atlas method, US$ billions) GNI per capita (Atlas method US$) GNIpercapita(PPP, international $)

GDP growth ( O h )

GDP percapita growth (%)

( m o s t recent e s t i m a t e , 2003-200a)

Povertyheadcount ratio at $125aday(PPP O h )

Poverty headcount ratio at $2 00 a day (PPP,%) Life expectancyat birth (years) Infant mortality (per I000 live births) Child malnutrition (%of children under 5)

Adult literacy, male (%of ages I 5 and older) Aduit literacy, female (%of ages 15 and older) Gross pnmaryenroilment, male (%of agegroup) Gross primaryenrollment, female (%of age group)

Lesotho

2 0 30 0 5

25

2 2 1,080

I940

4 5 3 9

43 62 43 68 l7

in 114

Access to an improved water source (%of population) 78 36 Access to improved sanitation facilities (%of population)

Sub- Saharan

Africa

800 24,242

2 4 36

761 951

1,869

6 2 3 8

51 73 51 89 27

71 54 99 88

58 31

Lower middle

income

3,435 35,513

10 42

6,543 1,905

4,585

132 9 1

69 38 25

88 77 1P 139

88 55

N e t A i d F l o w s

(US$ millions) Net ODA and official aid Top 3 donors (in 2007)

United States Ireland European Commission

Aid (%of GNI) Aid percapita (US$)

L o n g - T e r m E c o n o m i c T r e n d s

Consumer prices (annual %change) GDP implicit deflator (annual Ohchange)

Exchange rate (annual average, local per US$) Terms of trade index (2000 = xlo)

Population. mid-year (millio ns) GDP (US5 millions)

Agriculture Industry

Services

Household final consumptiofl expenditure Generai gov't finai consumption expenditure Gross capital formation

Exports o f goods and services Imports o f goods and services Gross savings

Manufacturing

isao

93

6 4 5

0 4 72

'57 415

0 8

13 431

22 4 24 2

7 7 53 4

0 0 5 215 37 0

210 113 1 34 5

1990 2000

0 9 37

14 1 3 9

14 D

-64 3.8 87 79

11 6 6 1 11 6 2 4

2 6 6 9 72 D O

16 19 54 1 746

(%of GDP) 24 9 t 2 3 34 4 316 146 140

40 7 56 1

139 3 85 0 35 9 410 59 9 43 1

181 34 2 P 3 2 133 4 43 5 22 4

2 0 0 8 2

0 0

19 19 a

6 5 65

D 7 0 6

8 3 150

2 0 1582

7 9 38 2 192 53 9

69 0 52 5 32 9

59 2 1 0 5 42 3

Aged is t r ibu t ion , 2007

Mae Femaie

75-73

6 0 4 4

4 5 d 9

30-34

1 5-1 9

O d

1 0 5 0 5 10

pucenl d tdai wulatim

Under-6 mortality rate (per 1,000) I 1 8 0 160 1 4 0 120 1 0 0 80 6 0 40 20

0

1 3 3 0 1995 2 0 0 0 2007

~ L e E O l h o O S u b b a h a r a n AfnCa

I Growth of GDP and GDP per capita ( O h )

9 5 05

-C GOP - GDP per capita

1980-90 1990-2 0 00 2 0 00-0 8 (average annual gro wth %)

2 1 , 16 0 8 2 7 4 0 3 1

2 8 19 -3 2 4 9 4 3 4 2 8 5 8 6 7 3 4 0 2 4 3 2

14 18 11 9 7 3 6 1 6 1 4 9 -0 1 10

4 9 9 7 0 2 3 5 2 1 0 7

Note Figures in italics are for years otherthan those specified 2008 data are preliminary % Aid data are for 2007

Development Economics, Development Data Group (DECDG)

indicates data are not available

78

Balance of Payments and Trade

(US% miilronsj Total merchandise exports (fob) Total merchandise imports (cif) Net trade in goods and services

Current account balance as a Oh of GDP

Workers' remittances and compensation of employees (receipts)

Reserves including gold

Central Government Finance

(% of GDPJ Current revenue (including grants)

Current expenditure

Overall surplusldeficit

Highest marginal tax rate (Oh)

Tax revenue

Individual Corporate

External Debt and Resource Flows

(US$ miiiions) Total debt outstanding and disbursed Total debt sewice Debt relief (HIPC MDRI)

Total debt (Oh of GDP) Total debt service (Oh of exports)

Foreign direct investment (net inflows) Portfolio equity (net inflows)

2000 2008 Governance indicators, 2000 and 2007

Voice and accountabillly

Poiitical 5tablIlty

Regulaloy quality

Rule of law

Control of Corrup!ion

0 2 0 0 7 Country's percentile rank (0 -100) n2000 higher values imply better ralings

212 870 769 1,790 -516 -860

-1 53 152 -20 5 9 6

252 126

459 923

2000101 208109

51 4 46 5 40 4

-2 1

672 62

90 1 11 2

118 0

66 8 58 2 47 4

4 4

745 33 -

47 1 2 1

92 0

Composit ion of total external debt, 2007

, 2 9 3

US$ million^

Private Sector Development 2000 2008

Time required to start a business (days) Cost to start a business (Oh of GNI per capita) Time required to register property (days)

40 - 3 7 8 - 101

Ranked as a major constraint to business 2000 2007

Access tolcost of financing 54 1 Crime 45 9

(Oh of managers surveyed who agreed)

Stock market capitalization (Oh of GDP) Bank capital to asset ratio (Oh) 1 4 6

Note Figures in italics are for years other than those specified 2008 data are preliminar) indicates data are not available -indicates observation is not applicable

Development Economics Development Data Group (CECDG)

Technology and Infrastructure

Paved roads (% of total) Fixed line and mobile phone

High technology exports subscribers (per 100 people)

(Oh of manufactured exports)

Environment

Agricultural land (Oh of land area) Forest area (Oh of ,and area) Nationally protected areas (Oh of land area)

Freshwater resources per capita (cu meters) Freshwater withdrawal (billion cubic meters)

CC2 emissions per capita (mt)

GDP per unit of energy use (2005 PPP (5 per kg of oil equivalent)

Energy use per capita (kg of oil equivalent)

World Bank Group portfol io

(US% rniaonsj

IBRD Total debt outstanding and disbursed Disbursements Principal repayments Interest payments

IDA Total debt outstanding and disbursed Disbursements Total debt service

IFC (fiscalyearJ Total disbursed and outstanding portfolio

Disbursements for IFC own account Pomolio sales, prepayments and

repayments for IFC own account

of which IFC own account

MlGA Gross exposure New guarantees

2000 2007

18 3

2

0 3

77 0 2

2,707 0 1

2000

59 10 4 3

183 8 4

0 0 0

0

24 0

21

0 0

77 0 3 0 2

2,607

2007

4 0 4 0

293 14 8

0 0 0

0

0 0

1/26/10

79

Mi I lenni um Development Goa Is W t h selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +'- 2 years)

G o a l 1: h a l v e t h e r a t e s f o r e x t r e m e p o v e r t y a n d m a l n u t r i t i o n Poverty headcount ratio at $1.25 a day (P P P I % o f population) Poverty headcount ratio at national povertyiine (%of population) Shareof incomeorconsumptionto the poorest qunitile (Oh) P revaience o f malnutrition (%of chlldren under 5)

G o a l 2 : e n s u r e t h a t c h i l d r e n a re a b l e t o c o m p l e t e p r i m a r y s c h o o l i n g Primaryschool enrollment (net.%) Primarycompletion ra te (%of relevant age group) Secondaryschooi enrollment (gross, %) Youth literacyrate (%o f people ages 15-24)

1990

72 58 25

G o a l 3 : e l i m i n a t e g e n d e r d i s p a r i t y i n e d u c a t i o n a n d e m p o w e r w o m e n Ratio o f girls to boys in primaryand secondaryeducation (%) W m e n employed in the nonagricultural sector (%o f nonagncuitural employment) Proportion o f seats held bywomen in national parliament (%)

123

G o a l 4 : r e d u c e u n d e r - 6 m o r t a l i t y b y t w o - t h i r d s Under-5 mortality rate (per 1,000) Infant mortaiityrate (per I 0 0 0 live births) Measles immunization (proportion o f one-yearolds immunized.%)

G o a l 5 : r e d u c e m a t e r n a l m o r t a l i t y b y t h r e e - f o u r t h s Maternal mortality ratio (modeled estimate, per 130.000 live births) Births attended by skilled health staff (%o f totai) Contraceptive prevalence (%of women ages 15-49)

0 2 81 80

23

G o a l 6 : h a l t a n d b e g i n t o r e v e r s e t h e s p r e a d o f H I V / A I D S a n d o t h e r m a j o r d i s e a s e s Prevalence o f HIV (%of population ages 15-49) Incidence o f tuberculosis (per 'QO.000 people)

0.8 184

Tuberculosis cases detected under DOTS (C)

G o a l 7 : h a l v e t h e p r o p o r t i o n o f p e o p l e w i t h o u t s u s t a i n a b l e a c c e s s t o b a s i c n e e d s Access to an improved water source (%of population) Access to improved sanitation facilities (%o f popuiation) Forest area (%of total land area) Nationally protected areas (%of total land area) C 0 2 emissions (metric tons percapita) GDP perunit o f energyuse (constant 2005 P P P $ per kg of oil equivalent)

G o a l 8 : d e v e l o p a g l o b a l p a r t n e r s h i p f o r d e v e l o p m e n t Telephone mainlines (per 130 people) Mobile phonesubscribers (per130 peopie) Internet users (per 130 people) Personal computers (per 0 0 people)

Educat ion i nd i ca to rs (Oh)

50 ::: 25 E 2000 2002 2004 20062007

Measles immun iza t i on (Oh o f I -year o lds )

100 1

1990 1 9 9 5 2000 2007

OLesalho OSub-Saharan A h a

0 2

0 8 0 0 0 0

L e s o t h o

1995 47 6

49 2 15

30

52 5

0 2 81

83

5 0

142 323

63

77 33 0 2

10 0 0

0 0

2 0 0 0

68 0

150

78 60 30

137 5 1

4

'Q7 84 74

60 30

23 9 553

78

77 34

0 2

12 11

0 2

2 0 0 7 43.4

3.0 16.6

72 78 37

w4

24

,84 68 85

960 55 37

23.2 637

-6

78 36 0.3 0.2

2.7 22 7

3 5 0.1 0.3

I ICT ind i ca to rs (per 100 people)

lo I 20 . -

P - 10 .

2000 2002 2004 20062007

OFixed + mobile Subscnbem P i l l ien le l use15

Note Figures in italics are fo r years otherthan thosespecified indicates data are not available 126i13

Development Economics Development Data Group (DECDG)

80

81

MAP SECTION

Malut i

Mtns.

ThabanaThabanaNtlenyanaNtlenyana3,482 m)3,482 m)

MakhekaMakheka(3,461 m)(3,461 m)

SeqoqoSeqoqo(3,394 m)(3,394 m)

Thaba-Thaba-PhafanePhafane

(3,250m)(3,250m)

ThabaThabaPutsoaPutsoa

(3,095 m)(3,095 m)

MachacheMachache(2,885 m)(2,885 m)

T H A B A - T S E K AT H A B A - T S E K A

Q A C H A’ S N E KQ A C H A’ S N E K

Q U T H I N GQ U T H I N G

M O H A L E ’ SM O H A L E ’ SH O E KH O E K

M A F E T E N GM A F E T E N G

M A S E R UM A S E R U

L E R I B EL E R I B E

B E R E AB E R E A

B U T H A -B U T H A -B U T H EB U T H E

M O K H O T L O N GM O K H O T L O N G

MatsiengMatsieng

RomaRoma

MapotengMapoteng

PekaPeka

MaputsoeMaputsoe

PitsengPitseng

MantsonyaneMantsonyane

SemonkongSemonkong

TsoloaneTsoloane

MekalingMekaling MountMountMoorosiMoorosi

SekakeSekake

SehlabathebeSehlabathebe

MashaiMashai

MokoengMokoeng

LibonoLibono

SinxondoSinxondo

RankoRanko

MazenwoodMazenwood

MafetengMafeteng

Mohale’s HoekMohale’s Hoek

QuthingQuthing

Thaba-TsekaThaba-Tseka

MokhotlongMokhotlong

Butha-ButheButha-Buthe

LeribeLeribe

TeyateyanengTeyateyaneng

Qacha’sQacha’sNekNek

MASERUMASERU

T H A B A - T S E K A

Q A C H A’ S N E K

Q U T H I N G

M O H A L E ’ SH O E K

M A F E T E N G

M A S E R U

L E R I B E

B E R E A

B U T H A -B U T H E

M O K H O T L O N G

Matsieng

Roma

Mapoteng

Peka

Maputsoe

Pitseng

Mantsonyane

Semonkong

Tsoloane

Mekaling MountMoorosi

Sekake

Sehlabathebe

Mashai

Mokoeng

Libono

Sinxondo

Ranko

Mazenwood

Mafeteng

Mohale’s Hoek

Quthing

Thaba-Tseka

Mokhotlong

Butha-Buthe

Leribe

Teyateyaneng

Qacha’sNek

MASERU

SOUTH AFRICA

SOUTH AFRICA

Ora

nge

Orange

Caledon

Moh

okar

e

To Fouriesburg

To Senekal

To Clocolan

To Ladybrand

To Himeville

To Matatiele

To Matatiele

To Sterkspruit

To Zastron

To Zastron

To Dewetsdorp

Malut i

Mtns.

Drakensberg M

tns.

ThabanaNtlenyana3,482 m)

Makheka(3,461 m)

Njesuthi(3,446 m)

Mont-aux-Sources(3,282 m)

Seqoqo(3,394 m)

Thaba-Phafane

(3,250m)

ThabaPutsoa

(3,095 m)

Machache(2,885 m)

27°E 28°E 29°E

27°E 28°E 29°E

30°S

29°S

30°S

29°S

LESOTHO

0 40302010

0 10 20 30 Miles

50 Kilometers

IBRD 33434

SEPTEMBER 2004

LESOTHO

SELECTED CITIES AND TOWNS

DISTRICT CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

DISTRICT BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.