Lesotho: Ups and downs of a mountain economy

Amber Tript

Spotlight: Lesotho

Despite having a flourishing diamond mining industry, many of Lesotho’s citizens live in poverty in isolated rural communities as subsistence farmers

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Some of the most valuable diamonds in the world have been found in Lesotho. But diamond mining forms only a small part of this mountainous nation’s GDP. Most of its rural population – the majority of people in Lesotho – live in poverty, relying on subsistence farming, remittances sent home by relatives working in South Africa and supplementary income, where available, from labouring or tourism. Moreover, the country has one of the world’s highest HIV infection rates, which sees many people of working age dying prematurely.

The economy is closely linked with that of Lesotho’s much bigger and more economically developed neighbour, South Africa. Many Basotho, particularly young males, work in South Africa and most of the government’s income comes from Southern African Customs Union import tariffs. Economic swings in South Africa are the biggest single influence on Lesotho’s economy.

Measures to diversify the economy have included encouragement of manufacturing, particularly of clothing, textiles, leather goods and footwear, and of tourism, including establishment of a ski resort in the Drakensberg. But the manufacturing sector’s contribution to GDP fell from 22 per cent in 2006 to 12 per cent in 2012. With the support of the International Monetary Fund, economic policy has focused on investment in education, development of the private sector and more effective revenue collection.

Deposits of coal, quartz, agate, galena and uranium have been identified in Lesotho but are not yet commercially viable. However, the mineral that has attracted significant international investment is diamonds. In May 2013, 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.

Diamond mining began in earnest in the 1950s, but only a handful of diamonds were discovered in the first few years. In 1968, large-scale prospecting of the Letšeng diamond pipe began again, but insufficient finds saw the mines close. Soon after the turn of the 21st century, mining began again, with new technology bringing about superior results. Since 2004, the diamond sector has made an increasing contribution to GDP, which has seen the mining and quarrying sub-sector’s share in GDP rise from 0.9 per cent in 2004 to around 4.5 per cent in 2011.

Diamonds have also increased Lesotho’s export earnings, since large-scale production began just over a decade ago, helping boost foreign exchange reserves. In 2011, diamonds accounted for 31 per cent of the country’s total exports, as opposed to just 0.1 per cent in 2002. Mining has also brought significant foreign direct investment into the country. The major players in Lesotho’s mining industry are the foreign companies Gem Diamonds and Firestone Diamonds, both headquartered in London. Gem Diamonds operates the Letšeng mine under the brand Letšeng Diamonds, in which the Lesotho government owns a 30 per cent stake. The government has also retained a 25 per cent stake in Liqhobong mine, with Firestone Diamonds owning the remaining 75 per cent.

Roger Davis, non-executive chairman of Gem Diamonds, says: “Positioned at the very top end of the diamond market, Gem Diamonds’ Letšeng mine consistently produces some of the world’s most remarkable diamonds, making it the highest average dollar per carat kimberlite diamond producer in the world, achieving an average of US$2,540 per carat in 2014. Letšeng’s tenders attract the world’s top diamantaires who continue to pay the highest prices for these exceptional diamonds, allowing Letšeng’s rough production to remain relatively resilient to market fluctuations.”

As a sweetener to local communities, the mines’ operators put aside money to fund projects aimed at improving living standards in the local area. During 2014, Letšeng donated approximately $300,000 towards community investment projects, including educational scholarships and initiatives. A herd boys’ training campaign was also paid for by the mine, which provided outdoor survival skills training, along with the funding for three health posts.

Though somewhat less glamorous than diamonds, sandstone can be found all over the country and is largely exploited by small-scale artisan outfits, but there are a handful of large commercial quarries. Sandstone is a popular domestic building material, which also forms part of the country’s export market. The largest quarry is owned by Lesotho Stone Enterprises. Clay deposits can also be widely found, much of which are used to manufacture bricks for domestic use, as well as for export to South Africa. Large-scale production is expected to increase in Ha Teko and Ha Motloheloa.

Highlands Water Development Project

Another source of income for Lesotho is the Highlands Water Development Project, undertaken jointly with South Africa, which was launched in 1986. The development has made the country self-sufficient in electricity and is providing an income by supplying South Africa with water for its industrial heartland. The project comprises a series of dams and tunnels to take water from the Orange River and tributaries in the Maluti Mountains northwards to the Vaal basin in South Africa. The first phase included construction of a 185-metre dam at Katse – the highest in Africa – and was completed in 1996. The whole scheme is projected to be completed by 2020 and has already provided substantial spin-off benefits of improvements in infrastructure and employment.

Thanks to all of this activity, the economy is continuing to grow, but there is little to suggest anything on the horizon that will drastically improve the fortunes of its isolated rural communities. Remittances have fallen in recent years, thanks to a lack of jobs in South Africa. Around 100,000 Basotho were working in South Africa in the mid-1990s, but that had fallen to 40,500 by 2010.

The African Development Bank Group predicts reasonable growth for this year. Its most recent report on the country says: “The outlook for Lesotho in 2015 remains moderately positive with average growth of 4.4 per cent expected, though there are risks over global demand for diamonds and the renewal of the United States’ African Growth and Opportunity Act, which runs out in 2015.”

Large-scale riots have, in the past, also damaged the economy. The strong growth of the 1990s was interrupted by the outbreak of political unrest in late 1998, which saw major damage to property and loss of an estimated 4,000 jobs. It is yet to be seen whether the election of a new coalition government in February will increase stability.

Gaimin Nonyane, an economist at Ecobank Group, says: “The government needs to promote broad-base growth, decentralise its key services, which are concentrated in Maseru, and ensure that the distribution of its resources to the vulnerable in society is done in an effective manner. There is also a need to strengthen the education system and promote entrepreneurial training.”

She adds that Lesotho’s attraction as an investment destination is growing – helped by its currency being pegged to the rand – and that weak growth in South Africa has seen some investors turn to Lesotho instead. She also points to the country’s almost non-existent financial services sector, which is ripe for development.


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