Lesotho’s economy: Diamonds are forever

Katie Silvester

Despite having mines that have yielded some of the largest diamonds in the world, the industry does not provide enough jobs, forcing many of Lesotho’s men to seek work in South Africa’s mines 

Lesotho harbours some of the world’s finest diamond mines. In May this year, a 164-carat diamond worth £6 million was discovered in the country’s Letšeng mine, the same site that yielded the 14th largest diamond ever found two years earlier. But diamonds have not brought Lesotho great riches or much-needed job openings. Although mining contributes a significant amount to the country’s GDP, the mountain kingdom remains a low-income country, albeit with a growth rate of 4.4 per cent a year for the last decade. 

Not all the income from diamond mining remains in the country either, as most of the major players in Lesotho’s mining industry are foreign-owned companies. But Gaimin Nonyane, an economist at Ecobank Group, believes that the sector remains strong despite problems with adverse weather, which can sometimes halt production. “Diamond mining is also prone to shocks in the global market, as was the case during the 2008-09 crisis, when diamond prices slowed significantly as consumers’ demand for luxury goods weakened,” says Nonyane, who was based in Lesotho for several years. 

Many people engage in subsistence farming, though only five per cent of families grow enough food to feed their families. In the last 30 years, Lesotho has had to import more and more of its food because of land degradation, overstocking of livestock and lack of investment. In 1980, 80 per cent of the country’s food needs were met through cereal production, compared to just 30 per cent today. 

With the decline of traditional farming, Lesotho has found success in manufacturing, primarily in the clothing industry, which has provided large-scale employment for women. In 2008, manufacturers joined together to agree minimum standards in working conditions in their factories to create a ‘sweat-free’ tag, distinguishing the African nation’s offering from that of competitors in Asia. Lesotho has also taken advantage of the African Growth and Opportunity Act, which sees it being able to supply the US market without having to pay trade tariffs. As a result, brands like Foot Locker, Gap and Timberland have outsourced their manufacturing to Lesotho. 

Thanks to its unusual geographical position – landlocked and bordering South Africa on all sides – Lesotho has strong economic ties to its much larger neighbour. Lack of job opportunities in Lesotho see many of the country’s men migrate sporadically to South Africa, usually to work on temporary contracts in its mining industry. They then send money home to relatives, with remittances being a significant contributor to Lesotho’s GDP. Economic fluctuations in South Africa have a huge influence on Lesotho’s own economy, with the Lesotho loti (LSL) currently pegged one-to-one to the South African rand. 

Nonyane says: “Given the exchange rate link between the two countries, and the country’s relatively small level of foreign exchange reserves, the Lesotho economy is not yet at the stage where it can be economically independent from South Africa. It’s crucial for the Lesotho government to strengthen its trade partnership with South Africa in the foreseeable future.” 

Other growth areas in Lesotho include construction, with real estate seeing expansion in urban areas – two shopping centres have recently sprung up in the capital, Maseru. But the country has struggled to attract much-needed foreign direct investment beyond the companies already established in its diamond industry. Compared to larger African countries, there is little to attract new companies to invest in Lesotho. The exception is South Africa, which has interests in Lesotho’s mining, transport and textile industries, as well as the Highlands Water Project (see box on ‘Liquid assets’, opposite). The government is trying to attract foreign investment in tourism with abundant opportunities to build ski resorts and mountain lodges. 

Heyrick Bond Gunning, MD of the Salamanca Group, advises companies about the risks associated with investing in new markets. 

“From a security point of view, it’s a pretty benign place,” he says. “There are sometimes demonstrations that can turn violent on the fringes, but we advise clients that these are easy to avoid. It’s quite quiet, though, there’s not much of a thriving buzz about the place. Lesotho’s never going to be a huge hub. But the diamond fields are some of the best in the world.” 

Despite being a low-income country, Lesotho has developed into something of a welfare state, with a left-leaning government offering free primary school education and health care. Grants are also available for the most vulnerable in society. But to lift the poorest truly out of poverty, investments in infrastructure and education are a must. 

“The country’s poor terrain, its weak institutions and poor delivery of services, among other things, undermine its ability to lift the poorest out of poverty. The poorest people live in mountainous areas with limited access to proper health care, education and utilities,” says Nonyane. 

“There should also be a focus on improving the country’s physical infrastructure,” she adds, “with an aim to attract much-needed investment.”


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