Lesotho - Current economic position and prospects

RESTRICTED Report No. AE-20a This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The 4ank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PrOSPECTS OF LESOTHO September 27, 1971 Eastern Africa Department BQUIVALENTS Currency US $1 Rand 0.714 Rand1 = US $ 1.40 Weights and Measures 1 Short ton = 2,000 lbs. 1 Short ton 0.907 Metric tons 1 Metric ton = 1.102 Short tons. 1 Mile = 1.609 Kilometers 1 Kilometer = 0.621 Miles 1 Square mile = 2.590 Square kilometers 1 Square kilometer = 0.386 Square miles 1 Million Imperial gallons per day 0.053 Cub a meter per (Imgd) second (/sec) FISCAL YEAR The government's fiscal year ends on March 31. THE MISSION This report is based on the findings of a mission, which visited Lesotho in February 1971. The mission consisted of: Willem Maane - Chief of Mission and Chief Economist Hans Reichelt - Economist Richard G. Grimshaw - Agricultural Economist F. D. T. Reid - Transport Economist Mr. R. G. Grimshaw was responsible for preparing the annex on agriculture. TABLE OF CONTENTS Paze No. BASIC DATA MAP SUMMARY AND CONCLUSIONS ..................... i I. INTRODUCTION ................................ I Political Background ................... 1 The Country ............................ 2 The Population ......................... 2 Economic Ties with South Africa ........ 3 Land Tenure ............................ 5 II. ECONOMIC DEVELOPMENTS ....................... 7 A. The Economy as a Whole .................. 7 Summary of Trends ................. 7 National Accounts ... ....... 0 .... . 9 Employment ............................. 12 Wages ......................... ........ 12 B. Government Policies ..................... 13 C. The Sectors .................... ....... 17 Agriculture ............................ 17 Manufacturing Industries ............... 19 Electricity ............................ 21 Tourism ................................ 21 Mining ................................. 22 Water Resources ........................ 23 Education .............................. 24 Tras............................. D. Internal Financial Situation ............ 28 Overall Budgetary Position and Financing ............................ 28 Recurrent Revenue ...................... 29 Current Expenditures ................... 31 Capital Expenditures ................... 32 Outlook for the Budget ................. 33 Money and Banking ...................... 35 E. External Trade and Payments ............. 37 Servicing of Public Debt ............... 38 Creditworthiness ....................... 39 ANNEX: Agriculture in Lesotho APPENDIX: Statistical Tables LESOTHO BASIC DATA Area: 11,716 square miles, or 30,3L4 square km. Population: 1966 census: De facto 852,000 De jure /1 969,000 1971 estimate: De facto about 950,000 De jure A about 1,100,000 Rate of growth: Between 2 and 2.5 percent Density /2 : Overall average 80 per square mile, or 30 per square km.. Arable land 550 per square mile, or 210 per square km. Political Status Independent since October 1966 Member of the British Commonwealth Economic Association Member of the Sterling Area and the Southern Africa Customs Union Gross National Product (1966/67) Total: R 53.8 million ($ 75.3 million) Per Capita: R 63 ($ 88) Percent of GNP (1966/67) Gross fixed investment 9.9% Gross national savings -15.4% Government current revenue 8.7% Exports of goods and services 13.2% 1 Including migrant workers /2 De facto population Basic Data (Continued) Percent of GDP at factor cost (1966/67) Agriculture, forestry, fishing 68.2% Mining and quarrying 2.1% Manufacturing 0.7% Construction 1.7% Public utilities 0.6% Resale and wholesale trade 4.3% Government administration 8.5% Welfare services 6.4% Other services 7.5% Prices No price indices available Commercial Bank Statistics End of December Advances (R million) 2.0 2.7 Deposits (R million) 9.6 10.2 Public Sector Operations (R million) (Central Government only) 1968/62 1969170 1970/71 Current revenue .7 9.0 9.1 Current expenditure 11.2 11.4 11.4 Current deficit -5.6 -2.4 -2.3 Capital expenditure 3.2 1.8 2.4 U.K. grant-in-aid 4.8 2.0 2.0 U.K. development aid 1.5 0.8 1.4 IDA disbursements 1.1 0.1 - Other financing 1.4 1.3 1.3 External Public Debt Total debt at December 31, 1970 $ 7.5 million Total debt service (1971) $ 313,000 External Trade ($ million) I 7 1968 196 Exports of goods 5.9 . 5.7 Imports of goods 33.3 33.5 33.5 Basic Data (Continued) Commodity Concentration of Exports (Average 1967-1969) Live animals 27% Wool 23% Mohair 11% Diamonds 22% IF Position ($ million) April 19.71 Total gross position 5.0 Drawings 0.6 Bank/IDA Operations ($ million) Comitted Disbursed 1966 IDA credit for roads .1 .1 目 MILE: LESOTHO T .,5 Fý u T. E E L E T i I i iti FE E T - - - - - - - - - LEA< iBE 13 u T H U T H f: I,. I C- - il 4 -21 t T '-TE iANEN-m i.1 Oj K H -:5 T L 0 N G H-: T L-: i bý MASE U Ni E M j vep,..'e, H N E K 4 4/ I PA--HALES H-ÆK i, n Tý T 4FRIC.% REPUBLIC F L E T H ............... -f T L 5 T 4 F R A i I.,. JUNE 1971 IBRD-3506 CURRENT ECONOMIC POSITION AND PROSPECTS OF LESOTHO Summary and Conclusions i. The Kingdom of Lesotho is a small and mountainous country complete- ly surrounded by the Republic of South Africa. It achieved independence in 1966 and has been ruled since then by the Prime Minister, Chief Jonathan, and his party. Elections in 1970 were followed by disturbances and violence and, although peaceful on the surface, the country is still in a state of emergency. ii. Lesotho is poorly endowed with natural resources and until recent- ly has shown little prospects for economic development. A large portion of its labor force is unable to find productive employment th the country, and about half of the male labor force is at any one time working mostly on short-term contract, in South Africa. iii. The country has close economic ties with South Africa. Together with South Africa, Botswana and Swaziland it belongs to the Southern Africa Customs Area, and the South African currency is Lesotho's currency and legal tender. Movements of good and funds between the members of the customs and monetary area are, in principle, free. South Africans hold key positions in the country's manufacturing and service industries. Lesotho derives sub- stantial benefits from its cooperation with South Africa although the close ties to its powerful neighbor probably hamper the maneuverability of the government in its economic policies. iv. GNP at market prices is estimated at R 54 million or about $90 per capita of the resident population. Agriculture is by far the most im- portant sector in the economy, contributing about two thirds of GDP and employing about 85 percent of the labor force. v. Government recurrent and capital expenditures remained at about a constant level since independence and the recurrent budget persisted in deficit which had to be financed through grants-in-aid from the U.K. The recurrent deficits have declined in recent years from a peak of R 6.6 million in 1967/68 to R 2.3 million in 1970/71 owing to the substantial increase in revenue from customs duties and excise taxes since 1969/70. The mission expects further improvements in the budgetary position which should allow the government to balance its recurrent budget in about 1974/75 and to gener- ate some budget savings to help finance capital programs thereafter. vi. The government's first development plan, published in December 1970, and covering the five-year period 1970/71 to 1974/75, states as the main policy objective to create 10,000 to 15,000 new jobs in order to provide employment for the rising population and to halt the increasing migration of labor to South Africa. The emphasis of the public investment program is on agriculture, roads and education, and the Malibamatso project, a scheme to export water to South Africa. Many of the projects listed in the plan are not clearly defined and have not reached the stage of preparation. The gov- ernment recognizes the tentative character of the plan, and calls it "pre- paratory and exploratory". One of the most important preparatory steps to - ii - be undertaken is the building of an administrative framework for planning and implementation. The plan is exploratory in that it recognizes that much investigation is still needed to determine the development potential and in- vestment needs in different sectors. vii. An important goal of government policy is to increase the pro- ductivity of agriculture which for a long time to come will remain the most important sector of the economy. In addition, government hopes that manu- facturing, tourism and diamond mining will expand substantially, mainly with the help of foreign private capital. A parastatal development corporation (the Lesotho National Development Corporation) was set up a few years ago to attract foreign investment in these fields. viii. Government's capital expenditures in the recent past have averaged about R 2 million a year. The plan envisages a substantial rise to about R 6 million, excluding the investment in the Malibamatso scheme which alone will call for a total investment of about R 80 million over four to five years, starting from 1973/74. The identification and prepara- tion of suitable projects has in the past been the major bottleneck in the government's investment program and it would be a remarkable achievement if the government's absorptive capacity rose fast enough to achieve such an expansion of public investments. ix. Government's capital expenditures have until now been financed mainly through British grants and loans. Some contributions have also come from other bilateral donors and from international agencies including the International Development Association. This pattern is likely to con- tinue and public capital inflow is likely to increase once more projects suitable for foreign finance are prepared. x. The government's creditworthiness depends on its budgetary po- sition. As long as the recurrent budget is in deficit Lesotho should ideally receive all of its public foreign capital in grant form or with a very high grant element. Finance on conventional terms is justified only for large projects which yield a revenue to government higher than the re- sulting debt service payments and where the loans can be guaranteed by organizations associated with the project, other than government. I. INTRODUCTION Political Background 1. The Kingdom of Lesotho, a former British protectorate, obtained internal self-government in May 1965 and full independence in October 1966. The government was set up as a constitutional monarchy with the King (Para- mount Chief) as Head-of-State and a Parliament, consisting of a Privy Coun- cil, a Senate and a National Assembly. The three members of the Privy Coun- cil are the Prime Minister and two nominees of the King. The Senate consists of the twenty-two Principal Chiefs of the country and eleven nominees of the King. The sixty members of the National Assembly are elected from single member constituencies by universal suffrage. The Executive, although form- ally vested in the King, is a Cabinet which is responsible to the National Assembly. 2. Since independence, political power has rested with the Prime Min- ister, Chief Leabua Jonathan, and his Basotho National Party which, in April 1965, had won thirty-one of the sixty seats in the National Assembly. In January 1970, the first post-independence elections were held, and allegedly won by the chief opposition party, the Basotho Congress Party. Apart from disputes about the powers of the King and the traditional chiefs, an impor- tant issue among the political parties was that of Lesotho's relations with South Africa. While both parties disapprove of South Africa's apartheid policy, the National Party favors close cooperation with South Africa, whereas the Congress Party favors closer relationships with other indepen- dent African states and wants to lessen South Africa's influence in Lesotho. Before the results were fully known, however, the Prime Minister annulled the election, claiming that the results had been influenced by acts of violence and intimidation by the opposition. He also suspended the consti- tution and disbanded the Parliament. The leaders and many members of the opposition party were jailed, the King left the country, and the British government broke off relations and suspended its aid program. Many govern- ment services were crippled, because a large number of civil servants who were members of, or sympathized with, the opposition were dismissed. 3. Although the political difficulties have not yet been resolved, the country has gradually become peaceful. With their leader restricted and many prominent members still detained, the Basotho Congress Party is not obviously active. The Prime Minister has announced that some time in the future new elections will be held and the Parliament reinstated, but this is not likely to happen soon. In October 1970, he declared that the country would have to take a five-year holiday from politics. Mean- while, the Cabinet governs and legislates by decree. The British govern- ment resumed "normal relations" in June 1970 and its financial assistance in August. In November '970, the King, who enjoys great popularity among the people, re-urned from abroad after he had undertaken to stay out of politics. -2- The Country 4. Lesotho is a small, landlocked country (11,716 square miles), com- pletely surrounded by the Republic of South Africa. About one quarter of the country in the west and south is "lowland" country, varying in height from 5,000 to 6,000 feet. The rest is mountainous, with peaks reaching to over 11,000 feet. Only about 15 percent of the country is suited for crop cultivation. Most of the arable land is in the lowlands. The mountains are suitable only for grazing. Rainfall averages about 29 inches a year, which is normally enough for farming and grazing. From time to time, how- ever, extended droughts cause crop failures and loss of cattle. The last severe droughts were in 1969 and 1970. During the winter, the weather in the mountains is usually too severe for grazing, and much of the cattle is then moved to the lowlands. Although frost also occurs in the lowlands, it is possible to grow a variety of wintercrops. 5. Pressure on the land (para 10), primitive methods of cultivation, and uncontrolled grazing have over the years led to serious erosion problems. About half of the cultivated area is in various degrees affected by erosion. It has been estimated that every year perhaps as much as two percent of the country's soil washes away. If erosion continues unchecked, Lesotho may be- come unsuitable for any cultivation within two or three generations. 6. Apart from its eroding soil, Lesotho has few other known natural resources. The only abundant natural assets are water in the mountains and beautiful scenery, but both have hardly been exploited. In addition, there is some small-scale diamond digging. A project is now being developed to export large quantities of water to South Africa (para 68). Foreign tourist enterprises have plans to build holiday resorts in the mountains, and the country's tourism potential is certainly worth investigating. Three mining companies are exploring more promising diamond areas and UNDP has started a mineral survey (paras. 64 and 65). The Population 7. In 1966, the latest census year, the country had a resident popula- tion of 852,000 persons. In addition, 117,000 people were temporarily ab- sent, most of them employed in South Africa. Of the total resident popula- tion in 1966, only about 2,300 were non-Africans. The Basotho authorities have never permitted alienation of land and European settlement; therefore, the few non-Africans are mainly government servants, traders and missionaries. 8. According to previous censuses, Lesotho's resident population has grown at an average annual rate of only 1 percent between 1911 and 1956, but the increase was much faster between 1956 and 1966; namely, by 2.9(per- cent a year. Although the results of earlier censuses should be used with -3 - caution 1/, the difference in growth rates in the two periods is striking. It seems likely that in the earlier period South Africa permanently absorbed a substantial portion of Lesotho's population increase. The much faster population growth between 1956 and 1966, can undoubtedly partly be explain- ed by the fact that since 1951 movement across the border has become sub- ject to increasing control, which made Basotho settlement in South Africa difficult. 9. There are no reliable estimates of birth and death rates. For planning purposes, the government assumes a natural rate of increase of 2.5 percent a year. The United Nations, however, use a lower figure of 2 per- cent 2/. It is difficult to tell which estimate is the more realistic. With a growth of 2 percent a year since 1966, Lesotho's resident population would amount to 941,000 in 1971; with a growth of 2.5 percent, 964,000. 10. The population growth has brought increasing pressure on the lim- ited land resources. While for the country as a whole, the average density is about 80 people per square mile (30 per square kilometer), there are now about 550 persons per square mile of arable land. The average family hold- ing of crop land has over the years declined in size, and is now no larger than 5 to 6 acres. With the increasing shortage of land and limited employ- ment opportunities, there is a strong case for family planning in Lesotho. However, the government's present official position is that the question of family size should be left to the families concerned. It feels that it would be difficult to give official support to family planning, and that in any case social and religious feelings would preclude acceptance by the pop- ulation on any significant scale. Nevertheless, the International Organi- zation of Planned Parenthood operates on a private basis a small number of "Basotho Family Planning Clinics", which are said to have some success. Economic Ties with South Africa 11. Lesotho has close economic ties with South Africa. Together with South Africa, Botswana and Swaziland, it belongs to the Southern Africa Cus- toms Union, and uses the currency of South Africa -- the rand -- as its do- mestic currency and legal tender. Lesotho has no central bank of its own. South African notes are imported as needed by the commercial banks for circulation within Lesotho. Funds can move freely between the four coun- tries of the Customs Union. 1/ There is, for instance, some evidence of under-enumeration in 1956, so that the actual growth rate between 1956 and 1966 may be lower than the implied rate of 2.9 percent. 2/ Total Population Estimates for World, Regions, and Countries each Year 1950-1985, U.N. ESA/P/WP.34, October 16, 1970. - 4 - 12. Under the Customs Union, there is also, in principle, free move- ment of goods between the four countries. Quantitative restrictions may be imposed, however, on agricultural pr,7ducts if their trade is regulated by marketing boards in one of the four countries. In these cases, trade may be limited only on an equitable basis, that is the arrangements must apply equally to all producers in the customs area. The first customs agreement, which remained in force from 1910 to February 1970, provided for this free interchange in goods, and for the application of the South African customs and excise tariffs for all goods, except certain alcoholic beverages which could be taxed locally. South Africa collected the customs and excise revenue, and returned annually a fixed share -- 1.31 percent -- to its three partners. Until 1965, Lesotho's share in the total pool remained unchanged at 0.89 percent. In 1965, however, the British government reallocated the 1.31 percent total share among the three countries to bring their allocations more in line with the relative share of their im- ports. Since over the years Lesotho's imports had increased much less than those of Botswana and Swaziland, Lesotho's share was then decreased to 0.47 percent. Although under the old agreement any member had the power to change the common external tariffs, in practice only South Africa changed them, since there was no provision for a joint formulation of policy. 13. The allocation of 1.31 percent of total customs and excise revenue to the three countries was based on trade statistics for the period 1906-1908. In recent years, however, it became increasingly clear that the three coun- tries were receiving much too small a share, because their imports had in- creased much faster than the imports of the Customs Area as a whole. In 1969, a new Customs Union Agreement between South Africa, Botswana, Lesotho and Swaziland was negotiated which has been in force since March 1970. The revenue sharing provisions of this agreement were retroactive to April 1969. The new agreement is a great improvement for Botswana, Lesotho and Swaziland. All customs, excise, and sales duties collected in the customs area are paid into the Consolidated Revenue Fund of South Africa, and redistribution of the fund is determined by the countries' actual annual share of imports, and production and consumption of excisable and sales duty goods. The pro rata share of Botswana, Lesotho and Swaziland is multiplied by a factor 1.42, which is intended to represent compensation by South Africa to its three partners for the disadvantages of being in a customs union with a more developed partner, for the price-raising effects of tariffs primarily designed to protect South African industries, and for loss of fiscal autonomy. The new arrangements provide Lesotho with substantially increased revenues (para 84). 14. Also in other respects the new customs agreement is an improvement over the old one. The most important improvement for Botswana, Lesotho and Swaziland is that for the first time the three countries will be able to give their industries some degree of protection from competition originating in the other countries of the customs area, another exception to the rule of "free trade" in the customs area. For a maximum of eight years, any of the three countries may now after appropriate consultations, impose addi- tional duties to protect new industries. In addition, the three countries may specify "industries of major importance" to their economies, in which -5- case South Africa undertakes not to reduce customs duties on competing im- ports from outside the customs area, or, if necessary, to give "sympathetic consideration" to proposals by the smaller countries to increase common du- ties. Under the new agreement, the member countries may enter into individ- ual trade agreements with countries outside the customs area, provided that tariff concessions granted shall apply only to imports consumed in the mem- ber country concerned. 15. Lesotho's economic ties to South Africa go far beyond the mone- tary and customs area arrangements. South Africa is the main market for Lesotho's exports and nearly all of Lesotho's imports are supplied by its powerful neighbor. Only few of the merchandise exports are consumed in South Africa; three of the four most important single export commodities, wool, mohair and diamonds are re-exported overseas. Lesotho's young tourist industry depends nearly entirely on the South African market. The trade statistics do not provide a country-by-country breakdown of mer- chandise imports, but imports from outside South Africa are probably negli- gible. Also most of the service industries in Lesotho are South--African owned. South African companies and individuals dominate not only banking, insurance and foreign trade but also internal wholesale and retail business. In the government service, South African nationals, most of them sponsored by the South African government under the official technical assistance pro- gram, occupy a number of key positions and constitute probably the largest contingent among the expatriate civil servants and advisors. Traditionally, South Africa has provided employment to a substantial portion of Lesotho's labor force. At any one time, nearly 50 percent of the male labor force and a much higher proportion of those aged 18-40, and about 10 percent of the female labor force are working in South Africa. There is no doubt that Lesotho derives significant benefits from its rich neighbor. On the other hand, it is equally clear that the maneuverability of the government in its economic policies is de facto severely hampered by the country's close ties to South Africa. The relations to South Africa remain, therefore, a deli- cate political issue, internally as well as externally. Land Tenure 16. In Lesotho, the authorities have never permitted alienation of land and rural settlement by foreigners. All land, whether agricultural or urban, belongs to the nation with the King as trustee. The King con- trols the exploitation and distribution of land, although he has dele- gated much of his authority to his subordinates, the chiefs, sub-chiefs and headmen. According to Lesotho law, the chiefs allocate to heads-of-family land sufficient for the families' subsistence needs. Animals may be grazed on the mountain pastures and on the arable land after the harvest. The chiefs also grant occupancy rights for urban living. Such occupancy rights have in the past also been granted to foreigners, mainly to missions for their churches, schools and clinics, and to traders for their shops and stores. 17. This system of land tenure is typical, and adequate, for a trad- itional agricultural economy where there are few additional needs to be - 6 - satisfied beyond pure subsistence needs. Buz it is inimical to the develop- ment of a modern market economy. It prevents the farmer from using his land as security to finance the purchase of implements, seed, fertilizer, etc. This, in turn, prevents him from increasing his production beyond his own and his family's subsistence requirements. What is more, as he has no security of tenure, he is reluctant to make any permanent land improvements. Also, as pastures are not allowed to be fenced, proper pasture management and livestock husbandry is virtually impossible. Uncontrolled breeding has caused a steady decline in the quality of livestock, and the preference of the Basotho people for quantity rather than quality has led to serious over- stocking which is a major cause of soil erosion. 18. In contrast to the expatriate traders, who apparently consider the occupancy rights granted by chiefs sufficiently secure to establish them- selves in Lesotho, foreign industrial investors seem to have been deterred by the inability to secure land on freehold or long lease. The government, realizing this and wanting to make a beginning with industrial development, established in 1963 the Basutoland Factory Estates Development Company (BAFED). BAFED was granted a 50-year lease on a sixty-acre site in Maseru to be developed into an industrial estate. BAFED was thus able to provide pro- spective industrialists a reasonable security of tenure. Owing to organiza- tional difficulties, however, it was not very successful. In 1967, it was reorganized and absorbed by the government-owned Lesotho National Development Corporation (LNDC). LNDC has been successful in attracting a number of in- dustries, and has recently acquired a second area for industrial development. LNDC has gradually moved in other fields where traditional land rights inter- fere with development. Acting as an intermediary between the government and investors, it has acquired long-term leases for housing and the building of hotels. According to the Deeds Registry Act of 1968, urban sites may be registered by the Law Office, in which case the occupancy right virtually changes into a freehold title. Also, according to legislation introduced in 1967, LNDC represents the nation with respect to mineral rights and is entitled to grant prospecting and concession rights to companies and indi- viduals. A further interesting development with respect to housing is that the government intends to enact legislation providing for the possibility of transferable leasehold. Such legislation will permit building societies to make housing loans in Lesotho. 19. It is possible that in the long run the development of new con- cepts with respect to urban land tenure will have some effect on the atti- tude towards rural land. As long as the institution of chieftainship re- mains, however, evolution will be slow since the right to allocate land is the basis of the power of the chiefs. Nevertheless, there are already in- stances of progressive chiefs who have allowed pooling of individual land holdings by farmers who wanted to form cooperatives. Also, it has become increasingly difficult for chiefs to dispossess farmers of their holdings. In case of a dispute, the farmer can bring his case before the court and, in order to stem arbitrary acts by chiefs, the Ministry of the Interior has made a beginning with registering individual holdings. Another important evolution is that it has gradually become accepted that the farmer who -7- wants to grow winter crops has the right to fence his lInd to keep out roam- ing cattle. Changing the attitude towards communal grazing on the mountin pastures seems to be more difficult. The government is painfully aware that in order to check erosion, drastic changes would be necessary, but it has so far not been able to achieve much. The government has, however, committed itself to introduce grazing regulations for the Malibamatso catchment area to ensure the preservation of the grass cover. If these regulations could be successfully enforced, it may become a precedent for introducing similar regulations in other mountain areas. II. ECONOMIC DEVELOPMENTS A. The Economy as a Whole Summary of Trends 20. Economic indicators for Lesotho are scarce and unreliable. Never- theless, the picture conveyed by the statistics is one of poverty and stag- nation, reflecting the country's poor natural resources and lack of devel- opment in the past. GNP per capita 1/ is probably in the neighborhood of $90. About two-thirds of GDP is accounted for by traditional agriculture where farming practices are primitive and yields low. Employment. opportuni- ties are very limited. Probably not more than 20,000 persons find wage em- ployment within Lesotho (para. 26). Almost half of the male labor force is at any one time away from home and employed in South Africa, which has created serious social problems. Government expenditures are low, but the government is still not able to cover current expenditures by domestic rev- enue and has to rely on budget support from Britain (para. 84). Although production statistics are virtually nonexistent, some impression of growth trends may be gathered from the selected indicators in Table 1. 1/ de facto population. - 8 - Table 1: SELECTED ECONOMIC INDICATORS 1962 1966 1967 1968 1969 1970 Value of exports (million rand) Live animals 0.4 0.5 1.2 1.2 0.6 Wheat, beans and pulses 0.3 0.2 0.5 0.3 0.6 Wool .. .. 0.9 0.9 0.9 Mohair .. .. 0.4 0.4 0.5 Diamonds 0.3 0.7 1.0 0.4 1.2 Other exports .. 0.2 0.1 0.1 0.3 Total .. .. 4.2 3.4 4.1 Exported quantities (mill.lbs.) Wool 8.5 9.4 9.0 10.2 10.2 Mohair 1.5 2.4 2.2 2.5 2.5 Value of imports (million rand) .. 22.9 23.8 23.9 23.9 Basotho employed in South African goldmines and collieries (1000 persons; end period) 53.2 81.6 70.7 77.9 82.2 88.7 School enrollment (1000 pupils) Primary schools 155 167 168 179 181 192L' Secondary schools 2.2 3.4 3.2 4.1 5.0 6.0/a 62/63 66/67 67/68 68/69 69/70 70/71 Government budget (million rand) Current expenditure 6.6 10.7 11.9 11.2 11.4 11.4 Domestic revenue 3.8 4.7 5.3 5.7 9.0 9.2 Capital expenditure 1.2 2.6 3.2 3.3 1.8 2.4 Indicates no comparable data available /a Estimate Sources: Annual Statistical Bulletins; Government budgets; Reports South African Wool Commission and Mohair Board. 21. It would appear that whatever growth has taken place has come from increased remittances by migrant workers and, before independence, from in- creased government spending. If the trend in number of Basotho employed in the South African gold and coal mines is representative of all Batosho em- ployed in South Africa, the number working in South Africa might have increased - 9- by 6 to 7 percent a year between 1962 and 1970 1/. Given some increase in the minimum wage in South Africa, remittances might have increased by some 8 percent a year and might now account for nearly 20 percent of GNP. The increase in government spending up to 1967 was the result of efforts by the British administration to prepare Lesotho for independence and to build up a local administration. After independence, however, the government, which wanted to reduce the country's dependence on British budgetary aid, has not allowed any increase in expenditure. National Accounts 22. The last year for which consistent national account estimates are available is 1966/67 2/. National account estimates had been prepared earlier for 1964/65 and 1965/66. The published figures indicate an increase in GDP of 9 percent between 1964/65 and 1965/66, and of 27 percent between 1965/66 and 1966/67. Owing to differences in methodology, however, valid comparisons from year to year are not possible. The increases between 1964/65 and 1966/ 67 were for the main part the result of different valuations of subsistence agriculture, and, to some extent, of salary increases of civil servants around independence. Table 2 gives the origin and use of resources in 1966/ 67. Some of the data, however, are no more than rough estimates, in partic- ular those relating to rural households, consumer expenditures, and the over- all balance of payments. 1/ Occurrences of drought in Lesotho usually cause accelerated migration to South Africa. This happened in 1966 and probably again in 1970. It is therefore quite likely that in those years increased revenue from remittances is partly offset by decreased agricultural production. 2/ Some national account estimates for 1967/68 have been used in Lesotho's First Five Year Development Plan (para. 32). These estimates, however, contain substantial inconsistencies, and after consultation with gov- ernment officials, the mission decided to use the 1966/67 estimates as an illustration of the economic framework. In any case, the situation will not have changed much since 1966/67. - 10 - Table 2: NATIONAL ACCOUNTS, ORIGIN AND USE OF RESOURCES, 1966/67 Million rand Percent Origin: Compensation of employees 12.0 15.1 Gross operating surplus 2.2 2.8 Contribution rural households 31.1 39.1 Income from property 2.3 2.9 GDP at factor cost 47.6 59.9 Indirect taxes less subsidies 1.9 2.4 GDP at market prices 49.5 62.3 Net factor income from abroad 4.3 5.4 GNP at market prices 53.8 67.7 Imports of goods and services 25.3 31.8 Factor income paid abroad 0.4 0.5 Total 79.5 100.0 Use: Private consumption 52.8 66.4 Public consumption 10.2 12.8 Gross fixed capital formation 5.3 6.7 Changes in stocks 0.3 0.4 Domestic expenditure 68.6 86.3 Exports of goods and services 7.1 8.9 Factor income from abroad 4.7 5.9 Net errors and omissions -0.9 -1.1 Total 79.5 100.0 Source: Bureau of Statistics, National Accounts 1966/67. 23. GDP at market prices is estimated at R 49.5 million, or $81 per capita. Because of substantial remittances by Basotho working in South Af- rica, GNP at market prices is higher. According to the official statistics, GNP at market prices was R53.8 million in 1966/67 or $88 per capita. The estimate (R 4.7 million) for workers' remittances, however, represents only the remittances recorded by recruitment bureaus and the post office. It is almost certain that the total flow of remittances, in money or in kind, is much larger than the official estimate. According to South African esti- mates 1/, total earnings of Basotho workers in South Africa may amount to about R 50 million (about as much as Lesotho's own GDP!), of which perhaps R 10 million is sent to Lesotho in one way or another. GNP per capita may then amount to almost $100. 1/ Africa Institute, Pretoria. - 11 - 24. Gross fixed capital formation was estimated at R 5.3 million (just over 10 percent of GDP). About two-thirds of this would have been invest- ment by the government and public enterprises, and the rest represents in- vestment by private enterprises, private persons, missions, as well as in- vestment in kind in the rural sector (Appendix Table 2.2). Most of the pub- lic investment was financed by foreign grants and loans (para. 84). Little is known about the way private investments were financed. The investment and balance of payments figures in table 2 indicate a negative savings rate. Gross national savings would have been minus R 8.3 million in 1966/67. The gap between gross national product and domestic expenditures (R 14.8 million) would have been bridged by British budget and capital grants (R 8.4 million), some other official long-term capital inflow (R 1 million), perhaps a small amount of private capital inflow, and for the rest by private remittances, for a large part by missions and other voluntary agencies. Since the en- actment of the new customs agreement the situation with respect: to national savings should have become more favorable. Owing to increased customs rev- enue, the government's budget deficit decreased from R 6 million in 1966/67 to about R 2 million in 1970/71. 25. Table 3 gives estimates of the contribution of the various sectors to GDP. The rural sector is with 68 percent by far the largest productive sector. About two-thirds of agricultural production represents crop culti- vation; the rest is livestock husbandry. Probably less than 30 percent of all agricultural output enters the monetized economy. Subsistence activi- ties therefore account for about half of GDP. The other productive sectors are all very small. Manufacturing output might have more than doubled since 1966/67, but its contribution to GDP will still be insignificant. In the relatively large item "other services" is also included the imputed value of services of non-profit making institutions, such as missions. Table 3: INDUSTRIAL ORIGIN OF GDP AT FACTOR COST, 1966/67 Million Percent Rand of total Agriculture, fishing, forestry 32.5 68.3 Mining, quarrying 1.0 2.1 Manufacturing 0.3 0.6 Construction 0.8 1.7 Public utilities 0.3 0.6 Trade 2.0 4.2 Government administration 4.1 8.6 Other services 6.6 13.9 Total 47.6 100.0 Source: Bureau of Statistics, National Accounts 1966/67. - 12 - Employment 26. Comprehensive statistics on size, distribution and growth of Lesotho's labor force are not available. Extrapolating information gathered through the 1966 population census, the total labor force in 1969 was esti- mated at 430,000 persons, 270,000 men and 160,000 women. Lesotho's economy is unable to absorb this labor force. Recent estimates are that about 130,000 men, or almost half of the male labor force, are on a temporary basis em- ployed in South Africa. Almost 90,000 of them work on 6 to 9 months con- tracts in the gold and coal mines. The rest work with the railways, in commerce and industry, and, probably for shorter periods, on farms. The migrant female labor force is estimated at 20,000 persons, most of them working in domestic services. In addition, there is an unknown, but prob- ably significant number of daily commuters to South African border towns. 27. Laborers for the South African mines are recruited by a number of recruitment bureaus in Lesotho. Basotho laborers, who specialize in shaft sinking, have so far been much in demand. New recruitments for the mines in- creased from 75,000 in 1967 to 97,000 in 1970. The Lesotho government, how- ever, is afraid that with increasing mechanization in the mines, the employ- ment opportunities for Basotho will level off. The government therefore lays a strong emphasis on employment creation in Lesotho in its First Five Year Development Plan. 28. Statistics on Lesotho's present resident labor force are scarce. Rough estimates indicate that about 20,000 persons (15,000 men and 5,000 women) find wage employment. The government employs about 4,000 of them. About 2,500 to 3,000 persons are employed in mining, manufacturing, construc- tion and public utilities. The rest would be employed in the services sec- tor. The great majority of the resident labor force is not in paid employ- ment, but engaged in traditional agriculture. Although the number of people engaged in agriculture is large, the quality of labor is low. The able bod- ied men who are available between contracts are usually not very interested in agricultural work, and much of the farm labor is done by women, children and old men. One of the great impediments to development in agriculture is that there is just no permanent core of male labor. Wages 29. The Department of Labor (part of the Ministry of Finance) is re- sponsible for labor relations in the private sector. However, whatever labor legislation exists - most of it with respect to working conditions -- is hardly enforced. In November 1969, an act was promulgated providing for the establishment of a Wages Advisory Board to advise the government on matters related to wages and working conditions. This act calls also for the setting up of Wage Councils to submit to the government proposals for fixing minimum wages. These bodies, however, have not yet started operations. There are a few trade unions, but these are not very active. Information on wages in the private sector is scanty. The average daily wage for unskilled workers is R 0.60; for skilled workers it is R 1.50 to R 1.75. - 13 - 30. In the civil service, salary scales have remained unchanged since 1965. Annual salaries of professionals and top administrative personnel range from about R 2,200 to R 6,200. In lower clerical grades, however, annual salaries are not more than R 300 to R 1,400. There are a substan- tial number of expatriates in the middle and higher levels of the civil service, and their salaries are topped up by the agencies by whom they are sponsored. The government inherited the salary structure from the British administration, and it recognizes that the salaries for top functions are completely out of line with incomes in the rest of the economy and with what the country can afford. It has therefore announced that wages for top posi- tions will remain frozen at their present levels. B. Government Policies 31. The idea of development planning is quite new to Lesotho. Up to the mid 1960's, the British administration seems to have accepted a low- level stagnation of the rural economy. In the five years before independ- ence, capital expenditure was on the average less than R 1 million a year. Most of it was for social and economic infrastructure and public admin- istration. In October 1965, a mission sent by the British government (Porter Mission) to report on external assistance needed for the develop- ment of the economy, recommended an increase in capital expenditure to R 14 million over a five-year period with an emphasis on infrastructure, agri- culture and education. Lesotho's government, however, disagreed with this emphasis, and proposed more investment in other productive sectors, in par- ticular manufacturing. It proposed a five-year capital expenditure program of R 20 million. The British government did not accept either capital ex- penditure program. It considered Lesotho's requests for capital. aid too high, in particular because they were not backed up by sufficiently prepared projects. The discussion between the governments of Lesotho and Britain on size and direction of development aid, together with the lack of a compre- hensive development plan and the inability of many ministries to prepare projects led to a rather haphazard pattern of capital expenditures after independence with little coordination between different investment activities. 32. The government recognized the need for better development planning. Shortly after independence, it established a Central Planning Office under the Prime Minister. Early in 1970, it was brought under the Ministry of Finance, Commerce and Industry as the Central Planning and Development Office. Its task was to draft a first comprehensive development plan. In the first two years of its existence, however, the Planning Office suffered from staffing problems and could not achieve much. The staffing situation improved late 1968, but because of the political difficulties in 1970, it was not before the beginning of 1971 that the Planning Office was able to publish Lesotho's First Five-Year Development Plan 1970/71-1974/75. 33. The plan summarizes the government's main development targets as follows: - 14 - (a) To attain an average annual rate of growth of gross domestic product of not less than five percent. (b) To achieve a marked increase in productivity in the agricul- tural sector. (c) To promote as far as possible non-agricultural productive activities, putting special emphasis on small-scale indi- genous industries, and to secure the economic, legal and institutional preconditions for a self-sustained develop- ment of these activities. (d) To prepare for the full exploitation of the country's water and mineral resources, and in particular to carry out the first construction phase of the Malibamatso River Project. (e) To accomplish a radical and government controlled develop- ment in education and post-school training related to the needs for economic and social advancement of the country. (f) To create 10,000 - 15,000 new employment opportunities, mainly in non-agricultural activities. (g) To bring about drastic changes in public administration so as to make its functioning more economical and its structure more development oriented. (h) To apply a realistic and systematic localization policy, primarily in the public sector, in accordance with the sup- ply of qualified local personnel. (i) To effect a substantial improvement in social services in general and in health standards in particular. (j) To end the dependence of the government recurrent budget on external aid. (k) To strengthen the economic relation and cooperation between Lesotho and other African countries and in particular with the countries of the Southern Africa Customs Union. 34. In order to achieve the growth and employment objectives, the plan proposes a detailed 5-year public sector capital expenditure program, which is summarized in the table below 1/. 1/ For annual figures and more details see Appendix Table 5.4. - 15 - Table 4: SUMMARY OF PUBLIC INVESTMENT PROGRAM, 1970/71-1974/75 (thousand rand) Agriculture 6,540 Industry 1,200 Mining 542 Commerce and tourism 513 Roads 6,502 Other economic infrastructure 1,713 Education 4,064 Water supply, sewerage, etc. 3,350 Other social infrastructure 1,166 General government services 3,212 Total 28,802 Source: Lesotho First Five-Year Development Plan, 1970/71-1974/75. 35. In addition to this R 28.8 million public investment program, the plan estimates that during the plan period about R 25 million will be spent on the construction of the Malibamatso Water Project (para. 68), and that the Lesotho National Development Corporation will spent some R 3 mil- lion from its own funds, mainly in the form of LNDC participation in foreign private industries to be attracted. 36. The published investment program does not consist of a program of clearly defined projects ready for implementation. Many of the ideas listed have not even reached the stage of preparation. Nevertheless, it should serve as a catalyst within government to promote thinking on devel- opment. The Planning Office recognizes this and calls its plan a "prepara- tory and exploratory plan". 37. One of the most important "preparations" to be undertaken before the government will be able to make the plan work is the building of an administrative frame for planning and implementation. The plan contains various proposals to build up a planning organization within the govern- ment. Besides a number of coordinating and review committees, the most crucial element of the planning framework will be the setting up of sec- toral programming units within the various executive ministries who will be responsible for the preparation and implementation of projects. Lesotho is extremely short of qualified people who can staff these units, and much time and effort will have to be spent finding them. Local talent being very scarce, the government will have to rely on expatriate expertise for a con- siderable length of time. The Planning Office has drawn up a provisional list of technical assistance needs, which it intends to submit to various multilateral and bilateral agencies in order to secure help. - 16 - 38. The plan is "exploratory" in a sense that it recognizes that much investigation and exploration is still needed to determine the development potential and investment needs in different sectors. The amounts allocated to different sectors (Table 4) sh3uld be considered as general indicators, and the size and direction of public investments could therefore alter as the results of preinvestment studies become available. Investment plans in agriculture, for example, could be affected by the outcome of the UNDP feasibility study on water resources (para. 70), which will be published shortly, or by the findings of a UNDP pilot agricultural scheme which has just started operations (Annex, para. 27). Also investment ideas developed after the drafting of the plan could readily be incorporated. An example of this are plans for a substantial dry-land farming project, which is not in the plan, but which evolved as a result of discussions between the gov- ernment and the Bank (para. 45). Investment plans in the mining sector are likely to be changed once the results of explorations by foreign companies and of the recently started UNDP diamond exploration project become avail- able. The government wants to postpone definite plans for roads until the results of a transport survey undertaken by the University of Stellenbosch are known. Similarly, investment needs in education and training will be more precisely defined by a manpower survey which is now being initiated. 39. The emphasis the plan places on the development of productive resources is basically sound. Export of labor to South Africa, which in the past has been the only dynamic element in the economy, is not likely to grow much further. In some of the productive sectors Lesotho has com- parative advantages for development which it has to exploit fully in order to provide employment and income for its rising population. Except for water and diamonds there are no known mineral resources. In agriculture, considerable scope exists for improvements; in crop agriculture even under the present land tenure system. South Africa offers favorable market pro- spects particularly for wheat which in many parts of Lesotho is a more suitable crop than maize, presently the dominant crop. Improvements in animal husbandry depend in part on tenurial changes, and progress is likely to be slow although it is crucial for halting the deterioration of the coun- try through soil erosion. The major thrust of the plan to tackle the em- ployment problem lies in the processing and service industries. Whether the growth and employment targets can be reached or not will to a large extent depend on the readiness of foreign private enterprises to invest in Lesotho. In industry, mining, tourism, etc. the government, apart from pro- viding infrastructure, is not planning any direct investment itself. It relies on favorable investment incentives and the activities of the Lesotho National Development Corporation to attract foreign investors, but not much is known yet about the extent to which they would be interested in estab- lishing themselves in Lesotho. 40. Given the "preparatory and exploratory" status of the plan it would be unrealistic to assume that the investment and development goals mentioned could be reached in the plan period. It will obviously take some time to bring the government's absorptive capacity up to a level that is necessary to raise public capital expenditure from the R 2 million a year in the recent past to the almost R 6 million a year the plan calls for. - 17 - C. The Sectors Agriculture 1/ 41. Lesotho is an agricultural country. Crop agriculture and live- stock rearing provide a main source of livelihood to about 85 percent of the population and contribute about 68 percent to GDP. In the absence of other obvious economic opportunities this situation is not likely to change in the near future. 42. Topography, climate and social attitudes determine the pattern of agriculture. The high mountain areas which cover two thirds of the country are used for grazing cattle and small stock during summer. During winter livestock grazes the foothills and lowlands. These areas also serve for crop production during summer. Production fluctuates from year to year according to rainfall. Methods of production are generally unsophisticated and advanced technologies, like the use of fertilizers and improved seeds are rarely applied. Yields are therefore usually low. 43. The relative economic importance of crops and livestock is shown in Table 5. In the absence of azcurate statistics, particularly for crop production, the figures are based on estimated production at average prices paid by r Table 5: ESTIMATED VALUE OF MAIN AGRICULTURAL PRODUCTS, 1969/70 (thousand rand) Gross Value Commodity to Farmers Maize 4,200 Wheat 3,230 Sorghum 2,080 Peas 850 Beans 600 Live cattle 1,500 Wool 1,500 Mohair 700 Mutton 1,000 Poultry and eggs 1,000 Source: Lesotho Five-Year Development Plan 1970/71 - 1974/75. 1/ For a more detailed discussion of the agricultural sector see Annex. - i8 - 44. Under present management, the livestock population exceeds the carrying capacity of the country. The results are general overgrazing, severe erosion of the foothills and lowlands and declining c7op and live- stock productivity. 45. The land tenure system is a severe obstacle to improving the livestock industry. Cattle are grazed communally and roam aout freely. The application of modern management techniques, such as rotat7onal grazi- which would allow pastures to recover is, therefore, not possib-e. More- over, there is no incentive to improve the quality of the herds and reduce livestock numbers. With t -.rial changes, in the long run two incendent livestock industries coulc aevelop; an extensive livestock industry in the mountains using the high mountain areas during the summer and the low mountain areas during the winter and an intensive livestock industry based on small dairy herds and ox fattening units in the lowlands. Improvements in crop production on the other hand, are possible within the existing tenurial system. There are examples that show that, with proper farm man- agement and the correct package of inputs, individual smallhold'ers are als to achieve satisfactory yields even in years of severe drought. Although the government is experimenting with irrigation in several small schemes, it is concentrating its efforts on raising the productivity of arable dry- land farming. A dryland farming project covering a catchment area of about 290,000 acres and supporting some 75,000 people is now being prepared for finance by the World Bank Group. Unless tenurial changes allowing the con- trol of the livestock industry are introduced, however, any improvements in crop agriculture must remain short lived and will be nullified by the progressing soil erosion. 46. The main markets for Lesotho's agricultural cash crops are in South Africa where they are sold on equal footing with produce grown by South African farmers. In this way most of the cash crops, particularly wheat and maize enjoy relatively stable prices. However, this market po- tential is hardly exploited. Lesotho has a substantial deficit in its food balance and also wheat and maize imports exceed exports. Favorable long- term market prospects of wheat offer good opportunities to extend the pro- duction of this crop to areas where maize is now dominant, particularly in the southern lowlands. 47. Wool, mohair and cattle are sold on South African auction floors mostly by South African trading companies. Prices for wool and mohair fluctuate with world market conditions, and prices, particularly for wool, have for some time shown a downward tread. Cattle is sold on the hoof and processed in South Africa for local consumption. Large differentials be- tween prices paid to farmers and obtained on the auctions have prompted the government to consider the establishment of a state owned Livestock Market- ing Corporation. 48. Government's efforts to improve agriculture are hampered by a serious lack of staff, particularly extension workers and demonstrators. One third of the established posts in the Ministry of Agriculture is pre- sently vacant, and the agricultural college does not have the capacity to -19 - provide enough graduates to fill these posts in the near future. On the technician level the Ministry relies heavily on expatriates. Manufacturing Industries 49. Until very recently, manufacturing industries were of no practical importance in Lesotho. The last Census of Production for 1967 records 12 establishments (three of which in the public sector) with a total turnover of less than R 1 million employing just over 500 people. Accordingly, the contribution of the sector to GD3P, 0.6 percent in 1966/67, was very small. 50. Since then, a number of new industries have sprung up, mainly in cooperation between foreign investors and the Lesotho National Development Corporation (LNDC). LNDC has been established by government as a statutory corporation in 1967. Its first investments were in a tyre retreading plant, a candle factory and a carpet weaving plant. Subsequently, LNDC partici- pated in the finance for a furniture factory, a pottery, a brewery for trad- itional beer and a fertilizer mixing plant. At the beginning of 1971, total investments in LNDC sponsored industrial projects amounted to about R 800,000 employing about 200 people. LXDC is negotiating with foreign investors on a number of new manufacturing projocts, which may lead to some more invest- ments in the near future. To accommodate them, LNDC is planning to expand the indust--ial estate at Maseru and to establish a second industrial area at Ficksburg Bridge with the help of a British grant. Total investment for basic services and factory shells in these two industrial areas during the Plan period is estimated at R 1.2 million. LNDC now runs the 90-acre in- dustrial area at Maseru under a 50-year lease agreement, which it has taken over from the former Basutoland Factory Estates Development Corporation (BAFED). 51. LNDC's first investments and part of its operating costs were financed with British aid, amounting to R 150,000. Funds obtained later from other sources, including loans from the Lesotho Post Office Savings Bank (IR 600,000), income from a commercial agreement with the Durban Sugar Exchange (R 400,000 per year) and from mining fees (para. 64), have mainly been used for investments outside manufacturing or are kept on deposit. 52. The initial success of LNDC is due to its efficient management (in part seconded by a South African industrialist) which can act as inter- mediary between foreign investors and the government. It was instrumental in new legislation to attract investment through tax incentives and grant- ing security of land tenure for industries. The incentives offered to in- vestors in "pioneer industries" (this applies also to hotels, casinos and building companies) include a choice between a six-year tax holiday or gen- erous depreciation allowances of up to 145 percent of the initial investment during the first year of operation, and special allowances for t:ax purposes for training and employing Basotho. These incentives are among the most generous in Africa. It remains to be seen whether LNDC will be able to at- tract a sufficient number of new industries to make an ap-preciable contrib- ution to the solution of the employment problem. The performance until now - 20 - has been encouraging considering the young age of the coror-ation, but it is yet too early to predict a possible continuation of the 'iitial successes. Financially, the corporation is likely to have little difficulIties as the substantial income from its comercial activities out of th suar agree- ment is guaranteed, so that the amount of '? 3 million ment_onnd in the Plan as investment from LNDC's own funds will be available. Also, to in- vestors from abroad the provision of local capital is usualy not of primary importance (in the past the ratio of LNDC investment to foreign 4nvestment was 1:29). The open question wIll be whether sufficient prfitabl'e invest- ment opportunities can be identIfied to utilize the available liquid re- sources. 53. Nearly all of the IDDC-sponsored projects are exclusively or predominantly exporting their products, mainly to the South African market. Not being subject to restrictive job reservation laws, Lesotho has a dis- tinct comparative advantage viz-a-viz producers in South Africa. In addi- tion exports from Lesotho can be sold to markets in other African countries which are closed to direct exports from South Africa. There is thus a considerable market potential for manufactured goods from Lesotho. There is also some potential for industries processing agricultural commodities, for example grain milling and meat processing. Although the Southern African Customs Agreement gives Lesotho the possibility to protect infant industries through additional import duties, the scope for purely import- substituting industries is very limited due to the small size of the in- ternal market. 54. A large number of Basotho are working in South Africa because they are unable to find employment at home. This, and the comparatively low wage level, suggest that there is scope particularly for small-scale labor-intensive industries. Only a few of the LNDC projects fall into this category. Several attempts have been made to establish a local handicrafts industry. In 1967, following the report of an I.L.O. expert, the government established a Village Industries Development Organization (VIDO), the func- tion of which was to promote the production and marketing of handicraft articles. After some initial success, VIDO ran into financial difficulties mainly because of bad management, but also because of the large overheads resulting from the extension element in its activities and the political troubles after the 1970 election. VIDO has now been liquidated and its assets have been transferred to the Lesotho Cooperative Handicrafts Society (LCH). LCH will initially concentrate on stimulating the production in village centers, and marketing woven ro4- articles and pottery in addi- tion to some traditional articles like strEw hats and mats. It intends to expand its activities later to leather works, semi-precious stones, silk-screen printing and woodwork. The success of LCH will largely depend on whether the government will be able to recruit efficient management for it which would be able to organize production in village centers scattered over the country. The success of the LDNC-operated carpet weaving and pot- tery enterprises in Maseru, has shown that under good management local labor can be trained and remunerative export markets can be opened up for handi- crafts from Lesotho. - 21 - 55. Only few African businessmen have until now entered the field of manufacturing production and there has been little encouragement from the government to develop local entrepreneurs except by renting out perma- nent workshop shells to a number of craftsmen at the Maseru market. Two more of such craft centers in different locations are to be built during the next few years. The Extension Division of the Ministry of Finance, Commerce and Industry is virtually inactive and the new Lesotho National Development and Savings Bank (para. 99) will concentrate at least initially on agriculture. According to the Development Plan, the Ministry of Finance, Commerce and Industry hopes to secure the assistance of a UNDP adviser to identify small industrial projects and provide technical assistance to potential local industrialists. This, together with a strengthening of the business extension services in the Ministry, the improvement of tech- nical education and the provision of financial assistance may lay the basis for the gradual development of a local entrepreneurship. Electricity 56. The Lesotho Electricity Corporation (LEC) supplies electricity to Mohales Hoek through a diesel generating station, and to Maseru and Leribe through purchases from the South African Electricity Supply Com- mission (ESCOM). Purchases from South Africa started in 1968 and have gradually replaced electricity generated in Lesotho. The last LEC generating station at Mohales Hoek will probably be shut down as soon as ESCOM can supply that area. 57. Electricity consumption increased rapidly during the past years. The Lesotho Electricity Supply Department, the forerunner of LEC, sold 4.2 million KWh in 1966, and sales in 1970 amounted to 8.8 million units. This was accompanied by a gradual reduction in average consumer tariffs from 4.2 cents per unit to 2.7 cents per unit during the same period. 58. The connection to the South African grid has a considerable cost advantage to Lesotho and with increasing consumption, further tariff reductions are likely. This has, at the same time, limited LEC's capital requirements to financing mainly substations and transmission lines. Tourism 59. A beautiful mountain scenery and a pleasant temperate climate are Lesotho's natural tourist attractions. Most of the tourists come from South Africa on short visits particularly on weekends. The flow of tourists greatly increased after October 1970, when Amalgamated Hotels of South Africa opened a 120-room Holiday Inn with a casino at Maseru. The total number of visitors in 1971 is expected to exceed 50,000. LNDC participated in the investment of RL.6 million with a loan of R389,000 which had been provided to LNDC by the Lesotho Post Office Savings Bank. The hotel is now being expanded by another 100 rooms. 60. LNDC is planning to increase the accommodation capacity for tourists. It is establishing a number of mountain lodges in cooperation - 22 - with a local business group and plans to put up serviced caravan sites in different parts of the country. in the longer run, the uPper Maliba- matso valley may be opened up for winter sports once access roads have been built for the water export scheme. 61. Tourism may thus gain in economic importance but it will take many years until it will become a significant industry outside the capital of Maseru. Its direct employment effect will be small but substantial indirect effects would be derived in the long run by stimulating the local. production of food and handicrafts. Since improved investments in tourism may enjoy the same tax and other benefits as investments in manufacturing industries, there is hardl- any direct revenue to government from tourism (except for a casino tax of 20% on gross income minus R100,000 per year). To exploit the potential of tourism in the best long-term interest of the country and to establish policy guidelines the government is considering the commissioning of outside consultants to conduct a comprehensive study of the tourism sector, including a survey of resources and markets. Mining 62. Lesotho's mineral resources with commercial potential are diamonds and water. The water resources are discussed separately. Other minerals are known to exist but are at present not considered worth to be investigated further. The government grants mining rights only to LNDC which issues prospecting and mining licences to companies or indivi- duals. 63. A few hundred Basotho dig for diamonds in the mountain areas of Kao and Liqhobong in the North of Lesotho. With only rudimentary hand tools their registered production during the past five years has averaged about 15,000 to 20,000 carats at an average export value of about R800,000 per year. The government receives 15% tax on the export value. 64. For the last few years a number of international mining groups have been prospecting for diamonds in the northern mountain region. Rio Tinto is investigating the Letseng-la-Terai and Lonrho the Mothae Kimber- lite pipes. Both Rio Tinto and Lonrho have agreed to spend during the time of prospecting at least R250,000 per year each (the prospecting lease is for.a period of two years and extendable under certain conditions). If:a mining company is established, LNDC will get a 25% equity participation financed through a loan from the mining company to be repaid out of future dividends. Income to government will cDsist of a 15% sales tax on the export value of the diamonds or a 50% mining profit tax whichever is the greater. Lonrho together with Newnont Mining Corporation has recently taken out a new prospecting lease for the Kao pipe, and the diggers operat- ing in that area have been compensated and moved to Lemphane. The pro- specting company, Maluti Holdings, agreed to pay to LNDC a prospecting rental of R1 million over three years plus 30% of the net receipts for diamonds sold during the prospecting period. If a mining company is established, LNDC will get a 30% equity participation financed through a loan from the mining company to be repaid out of future dividends. The revenue to government would be similar as in the agreement with Rio Tinto and Lonrho mentioned above. - 23 - 65. LNDC is presently negotiating with an international mining group on a prospecting lease in the Mafeteng district. In addition, in January 1971, UNDP has approved US$513,000 for a three-year Special Fund project for diamonds exploration over 1,800 sq miles outside the present prospecting areas. 66. These exploration and prospecting activities may lead to some large-scale diamond mining. There is a good chance that Rio Tinto may start mining the Letseng-la-Terai pipe. The company has to take a final decision by mid-1971. In the long run diamond mining is likely to contribute more than in the past to the development of the particularly backward mountain region of the country. But the overall employment effect of diamond mining would be relatively small and its main impact would be its contribution to central government and LNDC revenue. Water Resources 67. The high mountains of Lesotho are a rich source of flowing water, but nevertheless large areas of the country suffer frequent droughts which cause considerable fluctuations in agricultural production. Topography and geography limit the opportunities for irrigation (Annex para. 4). Water supplies for direct human consumption in several towns are inadequate. 68. many years, plans have been investigated and discussed to utilize the water resources of the country for the production of hydro- ,ower and for direct export of water to South Africa. Surveys in the early 1950's concentrated on the potential use of the water for hydro- power. In recent years it became apparent that the main potential lay on the water export side by diverting the headwaters of the Malibamatso River, one of the Orange River tributaries, to the northern border. It is to the north of Lesotho where in the Vaal Basin and the Witwaters Rand area most of South Africa's mining and industrial development is concentrated and where a shortage of water has rapidly become apparent. In January 1969, the Governing Council of UNDP approved to finance a Special Fund study on water resources development in Lesotho. The Bank is acting as Executing Agency of the study. The U.K. firm of Binnie & Partners was selected as consultants to study the feasibility of a water export scheme and to prepare an inventory of the water resources of the country. The study costs a total of over $2.7 million of which UNDP is financing $1.9 million. The consul- tants are expected to finish their work in November, 1971., The feasibility study has identified a water export scheme costing about R 80 million and consisting of the construction of a dam below the confluence of the Pelaneng and Malibamatso rivers and a 60 km tunnel northward through the Maluti moun- tains into the Vaal catchment. It would be constructed between 1973 and 1977 and would supply water to South Africa at a rate of 8m3/sec. The gov- ernment of Lesotho has asked the World Bank Group to finance the final design stage of this project. Present information suggests that the generation of hydropower for local consumption could become feasible at some future date and could then be added to the scheme. - 24 - 69. The water export scheme will be an "enclave" project, in that it will show few links with the general economic development of the country. Apart from the construction phase when up to 1900 people will work on the project its employment effect will be negligible but it will con- tribute significantly to government revenue. The net revenue to govern- ment will depend on the investment cost, the terms of finance (which will all have to come from foreign bilateral and multilateral sources) and on the price of water which South Africa will pay. All these factors are still under negotiation. 70. In addition to the feasibility study of the water export scheme the consultants are also preparing a country-wide inventory report on the availability and requirements of water which will permit government to fol- low up on potential schemes for the development of the water resources, in- cluding for agricultural, industrial and domestic uses. The government is now drafting a water and land law and a water corporation law. Education 71. Formal education was introduced into Lesotho by the missionary societies of the Paris Evangelical, the Roman Catholic and the Anglican Churches more than one hundred years ago. These missions still run nearly all primary and secondary schools and all the primary teacher training colleges. Government controls directly only four (out of 1,124) primary and one (out of 27) secondary schools. It supports most of the other schools through budgetary grants. Government recurrent expenditures on education as proportion to total government recurrent expenditures increased from 17 percent in 1964/65 to 20 percent in 1969/70 and is now higher than in most other African countries although on a per-capita basis it is still very low (Table 6). Table 6: GOVERNMENT RECURRENT EXPENDITURES ON EDUCATION IN AFRICA, 1969 per capita per capita as % of government G.N.P. Country (US$) recurrent expenditures (US$) Lesotho 3 20 90 Botswana 5 20 100 Swaziland 9 17 180 Mauritius 7 13 190 Sudan 3 10 90 Malawi 2 18 67 Zambia 13 16 400 - 25 - 72. The educational activity of the mission is alledged to have given Lesotho one of the highest literacy rates in Africa (48% in 1966) 1/, but the system needs to be co-ordinated and made more responsive to the economic needs of the country. In 1969, a UNESCO mission reported on the education system in Lesotho and suggested a number of priority projects and admin- istrative reforms. 73. Primary schools suffer from high wastage (90%) and low attend- ance rates, low teaching standards, a high proportion of children above school age and inadequate buildings and equipment. Close to 200,000 pupils are presently enrolled. To accelerate the flow of students through the schools the government has recently announced to introduce automatic promotion which, however, is not enforced. At the same time it intends to establish a central primary teachers training college to improve the qual- ity of the teaching staff. Revised syllabuses are gradually being introduced to relate education more to conditions in Lesotho. 74. Secondary education (about 6000 mostly boarding students are presently enrolled) has the traditional academic bias although greater emphasis is now given on mathematics and sciences. A math/science teaching center is being constructed at Maseru. 75. Lesotho hosts the University of Botswana, Lesotho and Swaziland (UBLS) on a c.npus at Roma, 21 miles southeast of Maseru. The University offers 4-year degree courses in arts and sciences and 3-year diploma courses -a agriculture (in Swaziland) to a total of about 460 students. During the dast five years several commissions have studied the role of UBLS in the edu- cational systems in the three countries and have proposed certain changes. These changes should give the university a more "developmental role" adjust- ing the education offered more to the existing and projected manpower re- quirements by introducing a wide range of sub-degree and extension work, and by coordinating more closely with the three governments. A number of steps have already been taken in this direction. One of them is the "devolution" of the part I (first two years) courses to campuses to be established in Botswana and Swaziland. Bilateral donors have agreed to finance these proj- ects. Another step is the establishment of polytechnical training institu- tions (below university level) in the three countries. This is still under discussion, and the role the university will take in it is not yet deter- mined. 76. The Lesotho Artisan Training Center (LATC) in Maseru, which can look back to a history of 70 years, offers three-year technical training courses in building and mechanical trades. The entrance level to LATC has recently been raised from primary school to junior certificate (3 years of secondary school) in order to improve the standards of the graduates. The capacity of 120 students is at present not fully utilized. Most of 1/ This rate is largely ficticious as it is based on only two years of primary school attendance. The actual adult literacy rate is probably just over 30%. - 26 - the graduates of this institution are absorbed by government. With a continuing development of the private sector the demand for skilled craftsmen will no doubt increase. LATC in its present form is not likely to produce the number and quality of skilled craftsmen required. Also,, there is no local institution for training middle level technicians. Nearly all of them have now to be imported from South Africa. Government therefore intends to upgrade LATC to a polytechnical school possibly in cooperation with the university. A manpower survey which is now being initiated will assist government in determining the structure of the future polytechnical school. 77. The only instituLion in Lesotho providing formal education in agriculture is the Lesotho Agricultural College which offers 2-year courses leading usually to appointments as extension works in government service (Annex, para. 40). The College has been provided with good buildings and equipment through bilateral assistance. Higher level agricultural person- nel are trained in 3-year diploma courses at the Swaziland Agricultural College and University Center (Annex, para. 41). Transport 78. The basic transport system comprises about 1,150 miles of roads and tracks, a short length of railway line connecting Maseru, the capital, with the South African railway system and seven airports and airfields served by scheduled air flights. In addition there are several landing strips served by charter or private aircraft. Due to the topography of the country air transport plays a small but important part in the movement of people and supplies. 79. The country's main links with South Africa are by road to the north, west and south, and by rail from Maseru to the west. Accurate figures of volumes of traffic are unavailable but the country's ex- port/import trade is probably handled largely by road traffic using the many roads which connect the country with the South African road network. 80. Internally, Lesotho is poorly served by roads many of which become impassable in the wet months. Formidable mountain ranges and river valleys run north and south in the central and eastern parts of the country and seriously inhibit the development of links with the east. Internal land communications are therefore difficult, and pack animal tracks play a significant role. The road system consists of a main highway along the southern, western and northern boundarcs of the country with feeder roads and pack animal tracks leading off it. It is divided in three classes. Class A, about 520 miles, are main roads of which IDA in 1966, financed the bituminization of about 100 miles. Class B, about 37 miles, consist of narrow roads and tracks; both these classes are administered by the Roads Division of the Ministry of Works. In addition there are Class C roads, about 600 miles, which are maintained by traders with a 50% contri- bution, up to R 10 per mile per annum, from the central government. This system of individual road maintenance is however gradually dying out as more and more roads are taken over by government. - 27 - 81. The government has prepared a tentative 5-year plan of road development which is subject to revision in the light of a transport study presently being undertaken by the Transport Research Center of the Univer- sity of Stellenbosch. The tentative program involves expenditures of R 6.5 million over the Plan period. It consists of the continuation of road im- provement and construction in the Maseru area and the following other roads: (a) Ficksburg Bridge to Mapoteng Junction. This short length of gravel road which links the South African road system with that of Lesotho, is to be improved to bitumen standard to provide for high traffic volumes. (b) (i) Tsoaing to Mafeteng and (ii) Masianokeng to Roma which are to be upgraded to bitumen standard to cater for increasing traffic volumes. (c) Mohale's Hoek to Semonkong. Part of this road, from Mohale's Hoek to Ribaneng store, has already been completed to gravel standard to serve agricultural needs in the area. It is proposed to complete the road to Semonkong. (d) Access roads to the Malibamatso River Project which will be needed to serve the project when construction starts, probably in 1972. (e) Leribe to Butha - Buthe. This road, an extension north- wards of the road constructed under the IDA Credit mentioned above, is taking an increasing amount of traffic. (f) Mafeteng to Mahale's Hoek and Quthing, which is an extension southwards of the IDA financed road and is needed to serve increasing agricultural development in the area. (g) Gravelling and improving existing main roads. (h) Continuation of track improvements under the "Food Aid" program. These tracks are intended to improve administration and health services in remote areas which they serve. The economic justification of these tracks has not been estab- lished and an evaluation should be carried out before any more construction work is done so that the burden which will be created to maintain the tracks is known. 82. The economic studies which have been carried out in the prepara- tion of this plan are insufficient and it is intended that the list of roads be reviewed in the light of the transport survey of Stellenbosch University. It is expected that this study, which is economically oriented, may alter the present tentative plan. Subsequent feasibility studies will be - 28 - carried out by the Central Planning and Development Office which has re- sponsibility for coordinating development requirements and allocating priorities. The government has asked the UN to provide a transport econo- mist to work with that office. This request is currently under considera- tion. 83. Even though the 5-year plan is still tentative the government has approached the UK government for financial and technical assistance for it. The UK has indicated that it will view such a request favorably. D. Internal Financial Situation Overall Budgetary Position and Financing 84. At independence, the government inherited from the British administration a situation in which current expenditures were more than twice as high as current revenue. Up to the end of the 1950's the current budget was more or less in balance; expenditures were tailored to domestic revenue at a very low level of about R3 million a year. In order to prepare the country for independence by building up a local administra- tion and improving government services, the British administration started around 1960 to increase current expenditures. Since because of Lesotho's poverty the scope for fiscal measures was limited, the British government agreed to provide annual grants-in-aid to support the budget, a policy which was also followed in the other two former High Commission Terri- tories, now Botswana and Swaziland. After independence, the British government continued to provide budget support. Up to 1968/69, grants- in-aid financed about half of Lesotho's current budget. Since 1969/70, however, Lesotho has received greatly increased revenue from the new customs agreement. Its budget deficit decreased from about R6 million to slightly over R2 million, and the British government decreased its grants-in-aid correspondingly. Before and after independence, the larger part of the government's capital budget was also financed by grants and loans from Britain. Other external sources included a $4.1 million IDA credit in 1966 for roads, disbursements of which were made during 1966/67- 1969/70, and various small grants and loans from public and private aid organizations, such as the Swedish International Development Authority, OXFAM, Freedom from Hunger Campaign and others. Recently, domestic financial institutions have on a small scal!e started contributing to government financing. Since 1968/69, the Post Office Savings Bank has made a number of small loans totalling R320,000, and Standard Bank has provided a loan of R124,000. Table 6 gives a summary of the government's budgetary position from 1962/63 to 1970/71. - 29 - Table 6: CENTRAL GOVERNMENT BUDGETARY POSITION 1966/67-1970/71 (million rand) 1962/63 1966/67 1967/68 1968/69 1969/70 1970/71 Current revenue 3.8 4.7 5.3 5.7 9.0 9.1 Current expenditure 6.6 10.7 11.9 11.2 111.4 11.4 Current deficit 2.8 6.0 6.6 5.6 2.4 2.3 Capital expenditure 1.2 2.6 3.2 3.2 1.8 2.4 Financing deficit 4.0 8.6 9.8 8.8 4.2 4.7 Financed by U.K. grants-in-aid 2.9 5.5 5.3 4.8 2.0 2.0 U.K. development grants 0.8 2.2 1.4 1.5 0.8 1.4 Other U.K. sources 0.3 0.7 0.9 0.5 0.2 0.3 I.D.A. - 0.2 1.5 1.1 0.1 - Other external sources - 0.1 0.6 0.5 0.5 0.6 Domestic financing (incl. residual) - -0.1 0.1 0.4 0.6 0.4 Source: Treasury Annual Reports and information provided by the Ministry of Finance 85. Temporary financial difficulties arose in the beginning of 1970 when, after the political difficulties in Lesotho, the British government suspended its aid program (R 3 million budget aid for 1970/71 and R 7.7 million capital aid for the period 1969/70-1971/72). In the first quarter of fiscal 1970/71, the government cut the budget allocations to ministries by 10 percent. Expenditures were met by the first payment by South Africa of Lesotho's share in the customs pool, by making use of the overdraft facility with Standard Bank and some use of cash balances. In July 1970, the British aid program was resumed, and budget allocations were restored. For the fiscal year 1970/71 as a whole the temporary suspension of British aid has had no great effect on the current budget, but it has slowed down the preparation and execution of capital projects. Recurrent Revenue 86. Table 7 indicates the recent development and the structure of government recurrent revenue. - 30 - Table 7: CENTRAL GOVERNMENT RECURRENT REVENUE, 1966/67-1970/71 (million rand) Provisional 1966/67 1967/68 1968/69 1969/70 1970/71 Direct taxes 1.2 1.3 1.5 1.7 1.9 of which Basic tax 0.8 0.9 0.9 0.9 1.0 Graded tax 0.0-- 0.0 0.1 0.1 0.2 Income & company tax 0.4 0.4 0.5 0.6 0.6 Development levy - - 0.0 0.1 0.2 Licenses & duties 0.4 0.4 0.4 0.5 0.5 Earnings of ministries and departments 0.9 0.9 1.1 1.0 1.2 Other local revenue 0.6 0.8 0.7 0.8 0.8 Total local revenue 3.1 3.4 3.7 4.0 4.4 Customs and excise 1.6 1.9 1.9 5.0 4.7 Total 4.7 5.3 5.6 9.0 9.1 Note: Details may not add up due to rounding Ia 0.0 indicates less than R50,000. Source: Treasury Annual Reports and information provided by the Ministry of Finance. 87. The large increase in customs and excise receipts after the new customs agreement became operative in 1969 is very striking. Customs and excise receipts now provide more than half of total revenue. Lesotho's share for 1969/70 and 1970/71 was provisionally determined on the basis of Lesotho's estimated imports in 1968. The coverage of import statistics has not been very reliable. The Office of Customs and Excise in the Ministry of Finance is now improving the coverage, on the basis of which a readjustment will be made. It seems likely that Lesotho's customs and excise receipts will show a substantial further increase in the near future (para. 92). In spite of the stagnant economy, local revenue in- creased from R3.1 million in 1966/67 to R4.4 million in 1970/71. Although some of the increase was due to new tax measures such as higher graded tax rates in 1968/69 and the introduction in 1969/70 of a development levy - 31 - payable by income tax payers, most of it was the result of improved tax collection. The earnings of ministries and departments represent for a large part revenue from public utilities and post and telecommunication services, which are channelled through the budget, as are the expenditures on these services. Current Expenditures 88. No official functional analysis of the government's current expenditures is available, but some indication may be gathered from table 8 in which the mission has regrouped the various budget headings into a number of expenditure categories. Table 8: SUMMARY OF CENTRAL GOVERNMENT RECURRENT EXPENDITURES 1966/67 - 1970/71 (million rand) Provisional 1966/67 1967/68 1968/69 1969/70 1970/71 Agriculture 0.9 1.0 0.9 1.0 1.1 Social Serv'ces 2.8 3.3 3.4 3.2 3.1 Health 0.9 1.1 1.1 1.0 0.9 Education 1.9 2.2 2.3 2.2 2.2 Infrastructure 1.9 1.4 1.3 1.2 1.4 Public works 1.4 0.9 0.8 0.8 1.0 Other 0.4 0.5 0.5 0.4 0.4 Internal Security 1.2 1.3 1.5 1.6 1.7 Police force 0.9 1.0 1.2 1.3 1.4 Prisons 0.3 0.3 0.3 0.3 0.3 General Administration 3.0 3.6 2.9 3.1 3.0 Consolidated Fund Services 1.0 1.3 1.2 1.2 1.1 Public debt service 0.2 0.2 0.2 0.2 0.2 Other /a 0.8 1.1 1.0 1.0 0.9 Total 10.7 11.9 11.2 11.4 11.4 /a For a large part pension obligations to former British officials. Source: Treasury Annual Reports and information provided by the Ministry of Finance. - 32 - 89. Since independence, it has been a deliberate policy of the government to keep expenditures down in order to lessen the country's dependence on British budget support. Since 1967/68, the total of current expenditures has not increased at all, and because of price increases, expenditures in real terms must have declined. Total expend- itures provide only a bare minimum of essential government services. The level of expenditures per head is only half of that in Botswana and one- third of that in Swaziland, both countries where the level of current expenditures is not very high either. Expenditures for the largest pro- ductive sector, agriculture, have only been about R1 million a year, or 9 percent of total expenditures, which reflects the lack of development in that sector. The expenditures for education (20 percent of the total) consist for a large part of subsidies to religious missions who for the most part, run the country's education system. Lesotho has no army, but the expenditures for the police force are relatively high and have been increasing in recent years. Part of it is paid for by South African grants. Service payments on public debt are relatively low, and take up only 2 percent of the current budget. Capital Expenditures 90. Table 8, which gives the government's capital expenditure from 1966/67-1970/71, is indicative of the very low level of development effort in that period. The only substantial item is the IDA-financed road (R 2.9 million) which was constructed between 1966 and 1969. The capacity of the different ministries to prepare and execute projects has been minimal in the past, and Lesotho has so far not been able to absorb the capital aid that was offered. The government recognizes this deficiency, and, as said in para. 37, has indicated in its development plan that it will set up programming units in the various ministries to improve the situation. - 33 - Table 9: CENTRAL GOVERNMENT CAPITAL EXPENDITURES, 1966/67-1970/71 (million rand) 1966/67 1967/68 1968/69 1969/70 1970/71--- Productive activities 0.64 0.54 0.65 0.66 Agriculture 0.64 0.47 0.60 0.60 Mining, industry - 0.07 0.05 0.06 Infrastructure 1.14 2.23 2.02 0.73 Roads 0.75 1.70 1.55 0.37 Other 0.39 0.53 0.47 0.36 Social Services 0.37 0.12 0.23 0.21 Education 0.18 0.07 0.12 0.13 Health 0.19 0.05 0.11 0.08 Administration 0.43 0.28 0.35 0.17 Total 2.58 3.17 3.25 1.78 2.40 /a Provisional total; no details available yet. Source: Treasury Annual Reports and information from the Ministry of Finance Outlook for the Budget 91. Table 10 gives an illustration of the possible future development of Lesotho's budgetary position. Table 10: PROSPECTS OF CENTRAL GOVERNMENT RECURRENT BUDGET (million rand) Average Average 1967/68- 1969/70- 1968/69 1970/71 1971/72 1972/73 1973/74 1974/75 Local revenue 3.6 4.2 4.5 4.9 5.3 5.8 Customs revenue 1.9 4.9 5.9 6.9 7.0 7.8 Total revenue 5.5 9.1 10.4 11.8 12.3 13.6 Current expenditure 11.5 11.4 11.9 12.5 13.1 13.7 Deficit on current account -6.0 -2.3 -1.5 -0.7 -0.8 -0.1 Source: 1967/68-1970/71, Ministry of Finance 1971/72-1974/75, Mission estimates -34 - 92. It seems likely that in the future Lesotho's budgetary position will continue to improve. The current budget deficits may disappear within about three years, and thereafter Lesotho may be able to generate sore bud- get savings to help finance its capital Programs. The main cause of this is the expected increase in domestic revenue. The government has announced in its development plan that it will continue to improve its local tax collection. In addition, some new tax measures are announced, such as the introduction of rates and land rents in urban areas, a steeper progression of income tax rates, and an increase of road user taxes. This may increase local taxes from R 4.4 million in 1970/71 to almost R 6 million by 1974/75. Receipts from customs and excise taxes are expected to increase substan- tially in the near future, because better trade reporting is likely to show imports higher than was thought, and possible investments by mining com- panies may lead to an increase in imports. It is not unlikely that rev- enues from this source will increase from about R 5 million in 1969/70 to almost R 8 million by 1974/75. 93. Rather arbitrarily, the mission has estimated the future increase in current expenditures at 5 percent a year. In the recent past, current expenditures did not increase at all. In its development plan, the govern- ment states its determination to limit increases to 2.5 percent a year. However, in view of the expected increase in revenue, it might be difficult to ignore requests by the various ministries to spend more, and, given the present low level of government services, this might be desirable. With a 5 percent increase in current expenditures and given the projected increase in revenue, the current budget deficits are likely to disappear within three or four years. 94. In the longer run, the Malibamatso Water Scheme may lead to a further improvement of Lesotho's budgetary position. If construction of the nearly R 80 million project starts in 1973, then related imports will cause additional customs revenue of R 5 to R 6 million rand in total, spread out over over 3 to 4 years from 1975/76 on. After completion in 1977, proceeds from water sales would provide an income for the government the amount of which will depend on the detailed arrangments for the project. 95. The future level of the government's capital expenditures is more difficult to estimate. In the last two years, capital expenditures were not much more than R 2 million a year, mainly because of a lack of projects and delays in implementation. According to the development plan, capital expenditures would average almost R 6 million a year during 1970/71-1974/75. The capital budget for 1971/72 gives a figure of R 5.8 million, but given the state of preparation of the proposed 7-ojects it is highly doubtful that this level will be reached; R 3 million is a more realistic estimate. How- ever, there are several investment possibilities in the offing, in particu- lar in agriculture and education, and if the government succeeds in improv- ing its capability to prepare and implement projects, a future capital ex- penditure level of some R 6 million a year does not seem unrealistic. This level, however, does not include the investments for the Malibamatso project. - 35 - 96. The prospects of financing a level of capital expenditures of some R 6 million a year appear to be quite good. For fiscal 1971/72, the British government has promised C 1.5 million (R 2.57 million) capital aid in the form of grants and soft loans. It has not yet committed itself for future years, but assuming that it does not lower its present level of capital aid, an amount of R 3.5 million a year would then have to be found by the Lesotho government. Voluntary agencies may be expected to continue to provide about R 0.5 to R 1 million annually for smaller capital works, and commercial loans raised locally or in South Africa, may provide another R 0.5 million a year for self-liquidating projects. This would leave about R 2 to R 2.5 million a year yet to be found. How- ever, international organization and several bilateral aid-donors have expressed their willingness to make substantial amounts available on soft terms, provided suitable projects can be prepared. Lesotho's problem at the moment is how to put the aid that is offered to good use. Money and Banking 97. Lesotho has no central bank of its own and uses the currency of South Africa - the Rand - as its domestic currency. There is no information on the amount of currency in circulation. Commercial banking functions are performed by two foreign banking groups -- the Standard Bank Limited and Barclays Bank D.C.O. -- which are incorporated in the United Kingdom, but operated from their regional head offices in South Africa. Standard Bank Limited acts as a banker to the government. The government has an R 0.6 million overdraft facility, which however it rarely uses. Available banking statistics reveal that deposits at any one time are about four times larger than advances, which demonstrates the lack of "bankable" investment opportunities in Lesotho. Usually, the banks invest their surplus funds in South Africa. Most of the business advances in Lesotho have been to expatriate traders. So far, the commercial banks have refrained from financing Basotho businesses. Lack of adequate collateral would have been the main bottleneck. - 36 - Table 11: SELECTED ASSETS AND LIABILITIES OF THE BANKING SYSTEM (million rand) 1969 1970 Dec. Mar. June Sep Dec. Cash on hand 0.5 0.1 0.2 0.3 0.6 Advances 2.0 2.1 2.1 2.5 2.7 of which: Government 0.1 0.1 0.1 0.1 0.1 Personal accounts 0.8 0.9 0.7 1.0 0.8 Business accounts 1.1 1.1 1.2 1.4 1.8 Deposits 9.6 9.3 9.0 8.9 10.2 of which: Current 3.0 2.2 2.2 2.2 2.3 Savings 3.4 3.6 3.6 3.6 3.6 Time 3.1 3.5 3.3 3.1 4.2 Note: Details may not add up due to rounding Source: Data provided by the Bureau of Statistics 98. Other financial institutions operating in Lesotho include the Post Office Savings Bank (POSB), branches of several South African building societies, and in agriculture the Finance and Marketing Cooper- ative Union of Lesotho (FMCUL), the Agricultural Development Fund (ADF) and several small credit unions. The POSB was established in April 1966 to replace the South African Post Office Savings Bank which operated in Lesotho. It acts as a depository for small local savers. At the end of 1970, total deposits amounted to about R 1 million. All its funds have been invested in Lesotho. By the end of 1970, its investments included R320,000 in loans to the Government, a R600,000 loan to LNDC, which this corporation had passed on to the Holiday Inn, and about R75,000 on call with the Standard Bank Limited. The South African building societies have also accepted savings deposits in Lesotho, but have so far not invested there. According to South African law, they will only be able to do so after the Government of Lesotho enacts legislation which would provide for the possibility of transferable leasehold (para. 18). The Government is expected to act soon. 99. The FMCUL, the ADF and the various smaller credit unions have been organized, mainly by foreign private sponsors, to provide possibili- ties for obtaining credit by small local businessmen and farmers. Because of management problems these institutions were generally not very success- ful. In order to provide better credit facilities for local businesses and farmers, the Government has in March 1971 passed legislation to set up the Lesotho National Development and Savings Bank. The Government has asked UNDP and the World Bank to help provide a manager for this bank. Not much is known yet about the new Bank's initial financing needs. It - 37 - will seek incorporation of the present agricultural credit institutions, and the legislation provides for the possibility of a merger with the Post Office Savings Bank. E. External Trade and Payments 100. Comprehensive balance of payments statistics are not available. Only statistics for exports and imports have been compiled, but the published statistics are far from complete. Collection of trade statistics has been difficult since until recently Lesotho did not maintain customs posts along its border. Whatever is available is based on questionnaires sent to traders. Both exports and imports are likely to be considerably underestimated. Only in 1970 has the government started establishing a number of customs posts, since more accurate import figures are now needed to compute Lesotho's share in the customs and excise revenue of the customs area. No comprehensive information is available on payments for and receipts from services, nor on private capital flows. By the nature of the monetary arrangements within the customs area, Lesotho cannot have either a surplus or deficit on its overall balance of payments. Unless it is offset by special balance of payments assistance, any external disequili- brium is absorbed through monetary contraction or expansion. 101. The incomplete foreign trade data provide the following picture for recent years (table 12). - 38 - Table 12: ESTIMATES OF EXPORTS AND IMPORTS OF GOODS, 1966-1969 (million rand) 1966 1967 1968 1969 Exports: Live animals and foodstuffs 0.7 1.8 1.6 1.3 Wool and mohair /a 1.3 1.3 1.2 Diamonds 0.7 1.0 0.4 1.2 Other 0.2 0.1 0.1 0.3 Total 7a 4.2 3.4 4.1 Imports: Foodstuffs, beverages, tobacco 7.1 5.4 5.5 6.7 Crude materials 0.4 0.4 0.4 0.3 Mineral fuels, etc. 1.0 1.6 1.2 1.4 Machinery and transport equipment 2.0 2.5 2.6 2.8 Other manufactured goods 9.8 10.7 11.3 9.9 Other imports 2.6 3.2 2.9 2.8 Total 22.9 23.8 23.9 23.9 Trade deficit n.a. 19.6 20.5 19.8 /a No comparable figures available Source: Annual Statistical Bulletin 1969 102. The table suggests that Lesotho has substantial trade deficits, which are covered by remittances from migrant workers, private and official grants and, to a small extent, loan capital. However, apart from official capital inflow (para. 84) not much is known about the other monetary flows. Servicing of Public Debt 103. Lesotho's external public debt, i.e. debt repayable in foreign currency, is very low; it amounted to $7.5 million (R 5.3 million) by the end of 1970 (Appendix table 4.1). Lesotho's total public debt is slightly higher than its external public debt, because it includes debts repayable in Rand (table 13). - 39 - Table 13: PUBLIC DEBT AS OF MARCH 31, 1970 ($ million) Principal Type of loan and date concluded Outstanding Loans from U.K. Treasury 3.46 Intercolonial loans 1953-1959 1.22 Exchequer loans, 1961-1970 1.95 Electricity loan, 1967 0.29 Loans from U.K. banks, 1968 0.57 IDA credit, 1966 4.10 Loans raised locally 0.91 Local banks 0.66 Teachers' Provident Fund 0.25 Total 9.04 Source: Ministry of Finance Apart from the IDA credit for roads, all loans were for self-liquidating projects such as public utilities and post and telecommunications, and were contracted at commercial interest rates. 104. Servicing of the public debt amounts to $325,000; it will in- crease to $380,000 in 1976, after which year it will decrease to $230,000 in 1990. Because of its monetary arrangements, it is not relevant to express Lesotho's debt service obligations as a percentage of exports. In 1970/71, debt service on public debt amounted to slightly over 2 per- cent of current revenue. Creditworthiness 105. Since the government is able to draw on the foreign exchange earnings of the whole monetary area to service its external debt, its creditworthiness depends on its budgetary position. So far, the gov- ernment has relied on British budget support to cover current account deficits. The budget deficits are expected to decline in the near future, but it may take another three to four years before the government will be able to finance its current expenditures from its own resources. About 1975/76, however, Lesotho's budgetary position is likely to improve con- siderably, first because of higher customs revenue from imports for the !falibamatso Water Project, and later because of revenue from water sales. Nevertheless, in view of the country's poverty, and in order not to over burden future budgets, borrowing for not directly revenue earning projects, - 40 - such as for traditional agriculture, education or roads, should be on the softest terms possible. Also, as long as the government is not in a position to generate any budget savings, most public capital expenditures will have to be financed 100 percent externally. The government may be able to raise some small loans locally, but it will need them for small investments in public utilities, post and telecommunications, etc. Self- liquidating projects, such as the Malibamatso project, the revenues from which would exceed the cost of debt service, could be financed on conven- tional terms. ANNEX AGRICULTURE IN LESOTHO A. Present Position 1. Agriculture contributes about 68 percent to gross domestic prod- uct and supports 85 percent of the population. As the population continues to expand and the capacity to absorb Basotho,in other sectors or in South Africa is limited, even greater demands will be made on agriculture to pro- vide employment. Much of the agricultural output is produced for home con- sumption, but in general the Basotho farmer is moving out of what is normally considered true subsistence farming, and as such is probably more cash ori- ented and price responsive than other famrers in developing countries of Eastern and Southern Africa. 2. Lesotho has a total area of 7.5 million acres of which only one million acres is estimated to be cultivatable. The main concentration of arable farming is in the lowlands and foothills of western Lesotho. Other cultivations take place in the valleys of the mountain region. Mountainous terrain covers about 5 million acres. Traditionally, livestock graze the higher mountain zones during the summer months, and the lowland and foot- hill zones during the cold winter months. The expanding human and livestock populations result in smaller unit holdings in the arable areas, the crop- ping of non-arable lands particularly in the mountains, and extreme over- grazing in virtually all parts of the country. Although no official esti- mates have been made, it is obvious that the rate of gully and sheet erosion is accelerating, resulting in a general deterioration in livestock and crop productivity. Crops 3. Lesotho's major crops are maize, wheat, sorghum, peas and beans. Table 1: PRODUCTION OF MAIN CROPS, 1969/70 Estimated Average Annual Gross Acreage Yield Production Value ('000) (lbs/acre) (short tons 000) (R'000) Maize 420 500 105 4,200 Wheat 215 600 65 3,230 Sorghum 185 500 46 2,080 Peas 47 400 9 850 Beans 30 400 6 600 Source: Lesotho Five-Year Development Plan 1970/71 - 1974/75. ANNEX Page 2 They are grown under dry-land farming conditions mainly by individual small- holders (holdings average 5 acres), but also under share cropping systems, or cooperative production programs. The growing season varies depending on climate and locality, but generally in the lowlands, maize, sorghum and beans are summer crops and wheat and peas winter crops. Wheat and peas are summer crops in the mountains. Very little double cropping is undertaken, although with the introduction of shorter maturing varieties it could become more feasible. 4. Efforts have been made to establish small irrigation schemes, but although crop yields under irrigation appear promising, the economics of production have not yet been clearly established. A recent survey carried out by engineering consultants suggests that approximately 25,000 acres out of 1 million acres of arable land could at some stage be brought under ir- rigation. Such development would require heavy investments, but would affect only a small portion of the population. 5. Dry-land farming, therefore, will always have to be the mainstay of agricultural development in Lesotho. Accurate production estimates for dry-land areas are difficult to obtain owing to insufficient statistical data; however, agricultural statistics compiled over the years do suggest trends on which further developments can be based. In general, it is agreed that where a particular crop has been correctly planted and fertilized, good results can be obtained even in years of drought. The major crops are dis- cussed in the following paragraphs. 6. Maize is the staple diet of the Basotho people, and as such is grown over wide areas of Lesotho. Yields vary from 800-1000 lbs per acre in the northern lowlands to perhaps only 300 lbs per acre in the drier southern lowlands and as little as 100 lbs per acre in some of the high mountain areas. However, when grown in the correct area, at the right time, with optimum inputs, maize may yield over 2000 lbs per acre. In the 1970 drought, yields were recorded of 1600 lbs per acre on some of the co- operative farms. There is, therefore, sufficient evidence to suggest that maize should only be grown in those areas (Central and Northern Lowlands) which are ecologically and climatically suitable. The government is at- tempting to follow such a policy and it would appear that it met with some success in 1970 when definite efforts were made under the dr3ught relief scheme to limit supply of maize seed to more suitable growing areas. If continued efforts were made at reducing maize production in the south, higher profits could be made through sale of other crops, particularly wheat, which have good markets in South Africa. Even though this might increase imports of maize which now run at a rate of some 20,000 short tons per year, this policy would have a net benefit to the economy. 7. Sorghum production is increasing particularly in the Southern Lowlands and the dry Orange River Valley. Yields run at some 500 lbs/acre, but could be improved by the introduction of better seeds, particularly the shorter stemmed hybrids. The 1970 drought, together with Government policy, has caused a marked substitution of maize for sorghum in these drier areas. ANNEX Page 3 8. Wheat is grown as a winter crop in the lowlands and foothills, and as a summer crop in the mountains. It is becoming increasingly popu- lar as it is more drought resistant than maize, can be grown in wide areas of the country, and when grown properly can produce good yields and rea- sonable incomes to the producer. Much of the mountain wheat is grown for subsistence and generally remains in the area because of the high cost of transport. Wheat grown in the lowlands is nearly all exported to South Africa where it has an assured market. Prices to the producer are con- trolled by the South African Wheat Industry Control Board. With expected increases in demand for wheat in South Africa, Lesotho is well placed as a supplier, particularly as South Africa itself has only limited areas for wheat production. However, it should be noted that in those areas which produce wheat for export the quality should be improved. Much of the wheat is still thrashed by oxen on the ground and is sold as ungraded dirty wheat. Existing yields average about 600 lbs per acre, but under better management they could go up to 1200 lbs to 1600 lbs per acre. 9. Peas are grown as a summer crop in the mountains and a winter crop in the lowlands. The crop grows well in Lesotho and is used partly for subsistence and partly as a cash crop, sold to the South African mar- ket. As with most crops there is considerable scope for yield improvements (presently yields being about 400 lbs/acre). 10. Beans are principally a cash crop. They are produced in the low- lands and foothills and are sold to the South African market., 11. Other crops, including vegetables and potatoes, have opportunities for expansion. Small irrigated gardens are being encouraged as communal ventures and are meeting comparative success. Markets are available for these perishable crops within Lesotho as well as South Africa. Livestock Production 12. Although the estimated value of livestock production is only about half the value of crop production, the livestock industry in Lesotho domi- nates agriculture. In the long-term it will have a profound detrimental affect on the country's economy unless brought under control. The major livestock are cattle, sheep and goats. Livestock are grazed on a communal basis, and crop residues, unless conserved, are recognized as communal feed after harvesting. Under present cultural practices the country is grossly overstocked particularly in small stock. Table 2 indicates stock numbers by type. ANNEX Page 4 Table 2: ESTIMATED STOCK NUMBERS BY TYPE, 1970 Cattle - 470,000 Sheep - 1,500,000 Goats - 820,000 Horses - 67,000 Donkey and Mules - 46,000 Source: 1969 Livestock Census. 13. Owing to the complete lack of grazing control, the mountain pas- tures are rapidly deteriorating under the increasing stock numbers and in- creasing use of mountain land for cultivation. Because of more intensive crop cultivation in the lowlands and a general deterioration of oxen strength, more cattle are being kept. The result is that livestock of all classes are loosing condition and are being forced into areas where strict control would be necessary to avoid irreversible damage to land through gully and sheet erosion. 14. Cattle are held in Lesotho mainly for draft purposes. Although no data are available, it would appear that the national herd has a high proportion of oxen compared to female stock. This is because as stock are exported alive (about 15,000 per annum) further stock, mainly males, is brought in to replace those exported (often at the rate of 1 mature ox for 2 immature males). Mortality is low, about 3-4 percent, and it is estimated that one percent are slaughtered locally. Milk production is negligible, although the Government is making efforts at improving the national herd through the use of Brown Swiss bulls. Any benefits from this program are virtually lost due to uncontrolled servicing by unimproved bulls. It is even questionable whether the Brown Swiss is the best breed for Lesotho conditions. It is generally agreed that the cattle to sheep ratio in the mountains is unfavorable and that more cattle could be kept in the mountain areas. 15. Sheep are bred in Lesotho as wool sheep and over the last years a considerable amount of new Merino stock, in the form of selected rams, have been imported. Lesotho wool is well known for its fineness and the South African Wool Board has done much to promote the improvement of the sheep industry. Sheep stud farms have been set up to produce good quality rams, and efforts have been made to cull the "black" sheep. However, the culling is not effective, and consequently the quality of Lesotho wool, except for wool from the wool associations (see para. 16), is deteriorating. The annual export of wool is about 10 million lbs. The share of "colored" wool is increasing and in 1969, 30 percent of the national wool clip was colored. The price paid by the trader for colored wool is about 6 cents per lb compared to 15 cents for the mean grade for pure Merino wool. Fur- ther steps should be taken to improve the marketing of wool to ensure better returns to local producers. The total amount paid to the farmers in 1969 was R. 874,000, compared to the value of the same wool on the South African Auction Floors of R. 1,941,000. ANNEX Page 5 16. Wool improvement has been brought about by the formation of wool associations. There are 35 currently operating. These associations market their wool clip directly. They also practice improved management techniques and use a much higher percentage of good rams. As yet, they represent only 4 percent of the national wool clip. The average net return to the producer for wool sold through the associations was 13 cents per lb in 1969 as com- pared to an average of 8.5 cents per lb paid to the producer by the traders. 17. An estimated 100,000 - 150,000 sheep are slaughtered annually for domestic consumption. 18. Goat numbers continue to increase and the production of mohair is now running at about 2.5 million lbs per annum. In 1969, farmers re- ceived for mohair clip R. 470,000. This compared to a value of over R. 1 million at the coast. The demand for good quality mohair is expanding. Intensive efforts are being made to cull the poorer type rams, and good quality Angora rams are being imported to improve the national goat herd. The clip is sold through the South African Mohair Board. 19. Poultry production is expanding rapidly with the help of a suc- cessful FAO/UNICEF-sponsored Food and Nutrition Program. There are now some 60,000 improved poultry compared to 5,000 in 1965. Lesotho has become self-sufficient in eggs and imports from South Africa have virtually ceased. Eggs are marketed through a number of egg circles. Most of the eggs are produced by small producers who use modern techniques, including the feed- ing of commercial premixed poultry feeds. The development of the poultry sector does indicate the response by the Basotho to a good market and to services provided by the government. B. Agricultural Trade 20. Lesotho imports a greater value of agricultural products than it exports. During 1966 to 1969, agricultural imports mainly maize and wheat, were valued at an average of R. 5.3 million per year representing about 22 percent of total imports, while agricultural exports, mainly live animals, wool and mohair, had an average annual value of R. 3.1 million representing about 78 percent of total export. The following table shows crop and livestock exports from 1966 to 1969. The yearly fluctuations are due to erratic weather conditions, but the low level of crop inputs makes them larger than necessary. Better production techniques coupled with better services for supply of inputs could greatly mitigate the effects of droughts. ANNEX Page 6 Table 3: AGRICULTURAL EXPORTS, 1966-1969 (R'000) 1966 1967 1968 1969 Cattle 464 1202 1101 579 Sheep 60 32 102 68 Other live animals 18 8 39 - Wool 1861/1 881 873 874 Mohair 943/1 377 425 470 Hides and skins 94 98 79 46 Wheat 57 33 179 426 Peas and bean 124 462 161 219 Other crops 5 35 24 19 Total 3626 3128 2983 2701 /1 Prices shown at export value f.o.b. auction floors. 1967 onwards shown as farm gate value. Source: Annual Bulletin of Statistics, 1969. 21. All the crops have assured and expanding markets in South Africa. The livestock products, except for wool, are also likely to be in increasing demand, and export values can be expected to improve. If the management of sheep can be improved, and the marketing through wool associations be fur- ther exploited, then the value to the producer of sheep products could hold at existing levels. 22. Food and livestock imports have fluctuated from R. 4.6 million to R. 6.4 million during 1966-1969. The major imports have been wheat, maize and their respective products, amounting to nearly 50% of total food and livestock imports. If development of Lesotho's agriculture can be re- vigorated then these imports can be reduced. however, it should be noted that since there is a favorable market for most of Lesotho's products in South Africa, which market is likely to remain strong for the foreseeable future, production policy ought to be oriented towards maximum farmer returns even if this would lead to increases in food imports of particular products, for example maize. C. Government Policies 23. Government recurrent expenditure for agriculture runs at approx- imately R. 1 million per annum. Capital expenditure is solely dependent on external aid and has been mainly confined to the improvement of existing facilities and to some small pilot developments in conservation and irriga- tion. 24. Government policies for the five year period 1970/71 to 1974/75 can be summed up as aiming at a general improvement of crop and livestock productivity, through the strengthening and expansion of existing services ANNEX Page 7 to the farmer. Under the existing husbandry techniques the land is wort than fully utilized. The depletion of soil fertility ind incieafe i erosion will reduce productivity unless existing husbandry methods are in proved. The Government proposes to increase crop and livestock productiv- ity by 75% and 50% respectively. There is no doubt that improvements are possible both in livestock and crop production. A few individuals and coop- eratives have demonstrated by quick dramatic production increases that the Basotho farmers are responsive to modern techniques. It will, however, take time for the government to introduce institutional changes and to im- prove its services for the farmers, so that the overall increases in pro- duction as envisaged in the Plan are not likely to be achieved during the Plan period. Considering the tentative character of the whole Plan the targets for individual agricultural products and the project listed may be regarded only as a general indication and outline of the task ahead. Proj- ects now mentioned in the Plan may be dropped as more information becomes available and new projects may be included. Crop Development 25. The government envisages that nearly half of the capital expend- iture for crop production during the plan period is to go for irrigation. This emphasis on irrigation in government planning developed during the last few years when a series of droughts has seriously affected agricul- tural production in Lesotho. A considerable amount of further study is needed to establish clearly the economics of irrigation in the country. In the meantime, quicker results are likely to be achieved through improve- ments in dry-land farming. Dry-land Farming 26. The main effort of the Ministry of Agriculture has been in the lowlands, and has been aimed at slowing down the alarming rate of erosion. In the 1950's this was in the form of construction of conservation bunds, grass water ways etc. Unfortunately, other services were not offered to the farmer so that with increasing population and static yield levels more land was taken into cultivation, including the grass water ways. The result has been bad gully formation, which the conservation division of the Ministry of Agriculture is now attempting to control. Any future developments must take account of adequate conservation protection and adequate farmer services. 27. UNDP is currently developing a 5,000 acre project in the Leribe District to determine and demonstrate ways and means of increasing produc- tivity in Lesotho. In addition, it will provide training facilities for farmers in the area and Ministry of Agriculture staff. 28. The government, realizing that dry-land arable farming must be improved as rapidly as possible is now preparing plans for a fully inte- grated development project covering about 290,000 acres in the Little Caledon River catchment area around Roma. The project area which supports some 16,000 farm families (about 75,000 people) consists of about 180,000 acres suitable for crop production and about 50,000 acres suitable for livestock production. The balance is unproductive land. The project would consist of a package of farm inputs, including improved credit, marketing and extension services, to- gether with infrastructures, particularly roads and soil and water conservation works. If viable, it will be submitted to the World Bank Group with a request for financial assistance. ANNEX Page 8 Livestock Development 29. The future of the livestock industry will depend on two major factors: (a) the improvement of arable practices in the lowlands and foothills of Lesotho; and (b) the control of the mountain pastures. 30. Livestock are traditionally dependent on mountain grazing in the summer months, and foothill and lowland grazing in the winter months. In the long term, the high mountains during the summer and the lower mountain areas during the winter may together be able to support an extensive mountain livestock industry. Medium and long-term trends in the foothills and low- lands indicate that with population increases, these lower arable areas will have difficulty in supporting the total livestock population during winters. Although the improvement of dry-land agriculture in the lowland will in the short term alleviate sub-nutrition of existing livestock, it will be necessary to switch here to intensive livestock rearing, that is to small dairy herds, smallholder ox fattening units, possibly using feeder stock from the mountains, and a declining number of work oxen. 31. To bring stock rates in the mountains into balance with the ecology, it will be necessary to reduce the sheep and goat population drastically. This reduction may have to be by perhaps as much as 700,000 sheep and goats (equivalent to a 30 percent reduction). Changes in tenure, pasture management and stock numbers should first be encouraged among the existing wool association members under the guidance of livestock special- ists from the Ministry of Agriculture. D. Constraints to Development 32. As in most developing countries the major constraints to improv- ing agricultural production are tenurial, institutional and technical. The government recognizes the need to remove thse constraints but finds it difficult, particularly in respect to land tenure. Land Tenure 33. All land rights are held by the King and administered by the chiefs in trust for the Basotho Nation. Every family has the right to request enough land for its subsistence needs. Thus with an increase in population farm holdings are becoming smaller. Traditionally, individuals had rights to their lands only during the summer when crops were grown. After the harvest the chiefs opened all land in their areas for communal grazing. This system is gradually being relaxed. In the major arable areas of the lowlands some farmers, including progressive chiefs, are recognizing the tenurial constraints and some unofficial land tenure ANNEX Page q reform is taking place. For example it is not accepted in some places that farmers are growing winter crops and in two small irrigation schemes at Thaba Phatsoa and Leshoele the participants have pooled their holdings. Thus, there are indications that tenurial changes could take place. How- ever, much crop improvement can be undertaken within the existing system and within the arable areas the tenure system is not the prime constraint. 35. The future development of the livestock industry in the mountain areas is wholly dependent on tenurial changes. Under the existing system, the government is unable to exert control over stock numbers and the result is an increase in the size of the sheep and goat flocks with a consequent detrimental effect on the natural pastures. A few years ago, efforts were made at controlled grazing of certain areas with some success. However, due to political problems the controlled grazing schemes ceased to function. New efforts should be made, particularly in those areas where Wool Associa- tions are active. These Associations would be prepared to accept changes in tenure and could control livestock numbers. A system could be set up whereby Hountain Range Associations could be formed with full tenurial rights to grazing areas, within which the government could initially con- centrate its services to improve the management practices on both flocks and pasture. Government Institutions and Services 36. It is the government's intention to strengthen and expand its services to the farmer, although it realizes that Lesotho, being a small country with limited resources, cannot afford to have over-elaborate orga- nizations. However, the present institutions and services in the agricul- tural sector are far from adequate and are a serious constraint to future development. The Ministry of Agriculture, Cooperatives and Marketing 37. The Ministry has in the past been mainly concerned with land con- servation, animal husbandry and more recently with irrigation. Its present establishment is for 511 posts at various levels. Currently, 171 posts are unfilled of which 166 are at a field level. Table 5 shows the current staff situation. ANNEX Page 10 Table 5: STAFFING POSITION OF THE MINISTRY OF AGRICULTURE, COOPERATIVES AND MARKETING, JANAURY 1971 Superscale and Technical Technical Professionals level Assistants Posts Vacan- Posts Vacan- Posts Vacan- filled cies filled cies filled cies Divisions: Livestock 7 - 21 2 52 32 Crop 2 1 5 2 45 26 Land use and extension - 1 18 12 86 41 Research and seeds 1 - 2 - 4 2 Farmer training 1 - 12 4 4 - Agricultural College 1 - 7 3 - - Nutrition - - 6 - 18 13 Soil conservation /1 5 1 6 2 15 10 Cooperatives and marketing 1 1 7 8 6 9 Information - - 2 - 6 - Total 18 4 86 33 236 133 /1 Including farm machinery and workshop training section. Source: Ministry of Agriculture, Cooperatives and Marketing. 38. The lack of staff at the lower levels which includes the agricul- tural extension workers and demonstrators is particularly serious. The gov- ernment intends to reinstate some of the staff who were dismissed during the recent political upheaval in order to alleviate the position. Even so there will be a shortage which the Lesotho Agricultural College will be unable to make good. Staff Training 39. The Lesotho Agricultural College has a capacity for 60 men and 24 women students. The men are given a two year certificate level agricultural training, and the women a two year course in home economics. Since most of the women are not given employment after graduating, the government is now considering training the women in agriculture, particularly since the majority of farms in Lesotho are operated by women. 40. The Swaziland Agricultural College offers 3-year diploma courses, and 5 Basotho graduate from the College each year. Ten Basotho are trained at degree level courses outside Africa. 41. The government is now giving serious thought to training at even lower levels (demonstrator level) in order to make up the shortfall in agri- cultural staff. Some of the four existing, presently underutilized, farmer training centres may be used for this purpose. ANNEX Page 11 Marketing 42. The Basotho farmer is mainly dependent on some 200 traders for the sale of his crop. In recent years, the Wool Associations have been exporting directly to the auctions at the coast. Also, some farmers have been marketing crops on a cooperative basis. 43. Under the 1964 Agricultural Marketing Act, the Minister of Agri- culture has wide powers to enforce regulations in respect to trading which could be beneficial to the farmers. The government is endeavoring to im- prove the current situation and as a first step has enacted legislation for a Livestock Marketing Corporation to be partly owned by the Lesotho National Development Corporation. The Livestock Marketing Corporation will have the sole right to import and export livestock and livestock products. It will appoint agents also among the cooperatives and thereby will eliminate the speculators who currently control the live cattle exports from Lesotho. A marketing board for grain may also be established in conjunction with a new maize mill at Leribe. 44. The government is aware that the traders do offer considerable services especially in the more remote areas. It is not the intention of the government to replace the traders with a government imposed marketing organization but rather to control pricing practices and to encourage farmer co-operative marketing to compete with existing traders. 45. All produce from Lesotho is marketed in South Africa either for internal consumption or for re-export. Because of the various control boards in South Affica, the Basotho farmers have the benefit of one of the highest priced markets in Eastern and Southern Africa, and are able to enjoy similar protection benefits as given to the South African farmers. Thus, except for the export of wool and mohair which are dependent on world demand, the Basotho farmer can enjoy stable and high commodity prices for the majority of his produce. Supply of Inputs 46. Farm inputs are mainly supplied by traders. However, during the past three years, the Finance and Marketing Cooperative Union of Lesotho (FmCUL) has expanded its sales of farm inputs through 12 stores in certain areas of the country. In 1969/70, its gross sales were R. 345,000 compared to R. 169,000 in 1967/68. FMCUL sells mainly seeds, fertilizers, pesticides and poultry feeds. It also purchases a small proportion of the grain and legume crops produced in the country. The limited use of improved seed varieties and of fertilizer is still a major constraint. Farmers are generally aware of possible benefits through better seeds and more fertil- izer, but lack of finance and credit facilities have hampered progress. The government has in recent years carried out a seed and fertilizer sub- sidy scheme at R. 0.5 per 100 lbs. The scheme, which is supported through bilateral aid, has worked successfully and a continuation is envisaged. ANNEX Page 12 47. There is a conspicuous lack of credit for the purchase of farm inputs. 130 thrift and credit societies have been registered as coopera- tives in Lesotho. Some societies are in financial difficulty owing to bad debt servicing and poor management. The only other major source of credit is the Agricultural Development Fund which is administered directly by the Ministry of Agriculture. Whereas the FMCUL makes loans only to cooperatives, the ADF lends to farmers associations (unregistered cooperatives), indivi- duals and to special schemes, such as Leshoele and Thaba-Phatson irrigation projects. During the 1968/69 season, ADF lent R. 17,000, of which during the same year only R. 5,000 was recovered. As in most developing countries credit has failed because of poor management, political interference and lack of other services such as marketing, distribution of inputs, exten- sion, etc. 48. The government has recently passed legislation for the establish- ment of a National Development Bank (NDB) and has asked the World Bank to assist in recruiting a manager. NDB is to have an initial equity capital of R. 500,000 fully to be subscribed by government. Its prime function is to finance the medium-term capital requirements of agriculture. The ADF will be incorporated in the NDB. 49. Farmers rely mainly on ox ploughing. Due to the increasing area of land under cultivation and the decreasing amount of animal feed, oxen are becoming weaker, and are unable to plough the lands in time for planting. The Basotho are aware of this and tractor mechanization is becoming more common. There are 500 tractors working in the country owned individually or by cooperatives. The government also runs a tractor hire service called LEMA. This service is designed to assist farmers, partic- ularly in problem areas, and to supplement private contract services. The government intends to encourage private or cooperative ownership and to increase LEMA's tractor fleet. APPENDIX STATISTICAL TABLES Table No. 1.1 De facto population, 1891 - 1966 1.2 De facto African population by sex and age group, 1966 2.1 Industrial origin of GDP at factor cost, 1966/67 2.2 Gross fixed capital formation, 1966/67 3.1 Estimates of foreign trade, 1966-1969 3.2 Exports of selected commodities, 1965-1969 4.1 External public debt outstanding, December 31, 1970 4.2 Estimated service payments on external debt outstanding, including undisbursed, 1971-1990 5.1 Central government recurrent revenue, 1966/67-1970/71 5.2 Central government recurrent expenditure, 1966/67-1970/71 5.3 Central government capital expenditure, 1966/67-1969/70 5.4 Five-year development plan, capital expenditure by sector, 1970/71-1974/75 6.1 Lesotho Post Office Savings Bank assets and liabilities, 1968-1970 6.2 Lesotho National Development Corporation assets and liabilities 1969-1970 Table 1.1: DE FACTO POPULATION, 1891 - 1966 (thousand persons) Census African Other Total 1891 218.5 0.6 219.1 1904 347.9 0.9 348.8 1911 402.9 1.6 404.5 1921 497.0 1.8 498.8 1936 560.5 1.8 562.3 1946 561.9 2.0 563.9 1956 639.5 2.2 641.7 1966 850.0 2.h 852.L Source: Bureau of Statistics Table 1.2: DE FACTO AFRICAN POPULATION BY SEX AND AGE GROUP, 1966 (thousand persons) Age Grou Males Females Total 00 - lb 185 185 370 15 - 29 71 117 188 30 - 4h 43 75 118 45 - 59 41 56 97 60 - 74 22 36 58 75 and over 51 19 Total 367 483 850 Source: 1966 Population Census Report. Table 2.1: INDUSTRIAL ORIGIN OF GDP AT FACTOR COST, 1966/67 (thousand Rand) Industry: Agriculture, forestry, fishing 32,485 Mining, guarrying 979 Manufacturing 317 Construction 805 Retail and wholesale trade 2,033 Transport and communications 430 Public utilities 273 Welfare services 3,05 Financial and professional services 650 Government administration 4,059 Domestic services 387 Property income 2,332 Total 47,605 Table 2.2: GROSS FIXED CAPITAL FORMATION, 1966/67 (thousand Rand) Classification by industry: Agriculture, mining, quarrying 925 Manufacturing 81 Building and construction 985 Electricity and water 188 Retail and wholesale trade 531 Transport and communications 228 Government administration 653 Education 1,414 Health 74 Hotel services 10 Banking, finance and other services 138 Unallocated 118 Total 5,345 Classification by type of capital good: Land development 204 Residential building 1,616 Other building and works 2,416 Transport equipment 510 Plant, machinery and equipment 599 5,345 Source: Bureau of Statistics, National Accounts 1966/67. Table 3.1: ESTIMATES OF FOREIGN TRADE, 1966-1969 (thousand rand) 196 1967 1968 16 Exports Cattle 464 1,202 1,101 579 Sheep and other animals 78 40 141 68 Wheat 57 33 179 426 Peas and beans 124 462 161 219 Other foodstuffs 5 35 24 19 Wool 1,861 /a 881 873 874 Mohair 943 Ta 377 425 470 Hides and skins 94 98 79 46 Diamonds 697 1,017 376 1,174 Other 64 23 21 194 Total 4,387 4,168 3,380 4,069 Imports Foodstuffs and livestock 6,431 4,584 4,624 5,500 Beverages and tobacco 626 863 837 1,243 Crude materials 353 441 388 337 Mineral fuels and lubricants 1,036 1,605 1,153 1,399 Animal and vegetable oils 174 154 126 89 Chemicals 1,280 1,740 1,702 1,541 Manufactured goods 9,759 10,698 11,331 9,880 Machinery and transport equipment 2,038 2,495 2,557 2,839 Other 1,220 1,220 1,220 1,079 Total 22,917 23,800 23,938 23,907 a 1966: Value at auction floors in South Africa; from 1967 on: Estimated value at farm gate in Lesotho. Source: Anrmal Statistical Bulletin 1969 Table 3.2: EXPORTS OF SELECTED COMMODITIES, 1965-1969 1965 196 1967 198 1969 Cattle ('000 head) 11.9 13.0 13.4 18.4 15.3 Sheep and goats ('000 head) 10.7 9.1 5.4 16.5 25.9 Wheat ('000 bags of 200 lb.) 122.9 33.0 5.7 22.0 109.5 Wool (million lbs.) 9.5 9.4 9.0 10.2 10.2 Mohair (million lbs.) 2.2 2.4 2.2 2.5 2.5 Diamonds (1000 carats) .. 12.5 21.7 11.9 29.8 Source: Annual Statistical Bulletin, 1969 Table 4.1: EXTERNAL FUBLIC DEBT OUTSTANDING, /a DECEMBER 31, 1970 (Debt repayable in foreign currency; thousand US$) Debt outstanding Disbursed Including only undisbursed Total external public debt b Privately held debt Financial institutions 16 7:22 South Africa 18 E8 United Kingdom 367 5-74 Loans from international organizations - IDA X4,100 4 Loans from governments - United Kingdom b 2,5302 /a Debt with an original or extended maturity of over one year /b Net of accumulated sinking fund of $ 598,000 Source: Statistical Services Division, Economics Department, June 9, 1971 Table 4.2: ESTIMATED SERVICE PAYMENTS ON EXTERNAL DEBT OUTSTANDING, INCLUDING UNDISBURSED, 1971-1990 (thousand US$) Year Outstanding Service payments debt /a Amortization Interest Total 1971 7,496 135 178 313 1972 7,324 138 169 307 1973 7,146 145 161 306 1974 6,959 185 182 367 1975 6,728 172 174 346 1976 6,506 209 167 376 1977 6,282 222 152 374 1978 6,051 183 125 308 1979 5,857 188 101 289 1980 5,658 188 95 284 1981 5,468 194 89 283 1982 5,274 200 83 283 1983 5,074 206 76 283 1984 4,868 213 57 270 1985 4,655 221 49 270 1986 4,434 305 141 346 1987 4,129 244 33 277 1988 3,885 220 29 249 1989 3,665 206 26 232 1990 3,459 198 24 222 /a At the beginning of the year; net of accumulated sinking fund. Source: Statistical Services Division, Economics Department, June 9, 1971 Table 5.1: CENTRAL GOVERNMENT RECURRENT REVENUE, 1966/67-1970/71 (million rand) 1966/67 1967/68 1968/69 1969/10 1270/71 Z- Direct taxes 1.2 1.3 15 d L of which Basic tax 0.8 0.9 0.9 0.9 1.0 Graded tax 0.0 /b 0.0 0.1 0.1 0.2 Income and company tax 0.4 0.4 0.5 0.6 0.6 Development levy - - 0.0 0.1 0.2 Licenses and duties 0.4 0.4 0.4 0.! 0.5 Earnings of minis- tries and depart- ments 0.9 0.9 1.1 1.0 1.2 Other local revenue 0.6 0.8 . O.8 0.8 Total local revenue 3.1 3.4 3.7 4.0 4.4 Customs and excise 1.61 19 5. Total 4 9. /a Provisional b 0.0 indicates less than R 50,000 Note: Details may not add up due to rounding Source: Treasury Annual Reports and information provided by the Ministry of Finance Table 5.2: CENTRAL GOVERNNNNT RECURRENT EXPENDITURE, 1966/67-1970/71 (million rand) 1966/67 1967/68 1968/69 1969/70 1970/71 / Agriculture 0.9 1.0 0.9 1.0 1.1 Social Services 2.8 2 3 Health 0.9 1.1 1.1 1.0 0.9 Education 1.9 2.2 2.3 2.2 2.2 Infrastructure 1. 1. 1.2 1.L Public works 1.6 0.9 0.8 0.8 1.0 Other 0.4 0.5 0.5 0.4 0.4 Internal Security 1.2 1.3 1.5 1.6 1 Police force 0.9 1.0 1.2 1.3 1 Prisons 0.3 0.3 0.3 0.3 0.3 General Administration Consolidated Fund Services 1.0 1.3 1.2 1.2 1.1 Public debt service 0.2 0.2 0.2 0.2 0.2 Other /b 0.8 1.1 1.0 1.0 0.9 Total 10.7 11.9 11.2 11.4 11.4 /a Provisional /b For a large part pension obligations for former British officials Source: Treasury Anrmal Reports and information provided by the Ministry of Finance Table 5.3: CENTRAL GOVERNMENT CAPITAL EXPENDITURE, 1966/67-1969/70 (million rand) 1966/67 1967/68 1968/69 169/70 Productive Activities 0.6 0.5h ).65 0.66 Agriculture 0. 0.=7 0.60 Mining - - 0.00 La 0.01 Industry 0.00 0.07 0.05 0.04 Infrastructure 1.12.223 2.02 0. U Roads 0.75 1.70 1. 0.37 Airfields 0.01 0.02 0.03 0.02 Water, sewerage 0.21 0.12 0.15 0.24 Electricity - 0.29 0.12 0.01 Post, telecommnications 0.18 0.10 0.16 0.09 Social Services 0 0.12 0.2j 0.21 Education 0.18 0.07 0.12 0.13 Health 0.19 0.05 0.11 0.08 Administration 0.-U 0.28 0. 0.17 Total 2.58 3.17 3.25 1.78 /a 0.00 indicates less than R 5,000 Note: Details may not add up due to rounding Source: Ministry of Finance Table 5.4: FIVE-YEAR DEVELOPMENT PLAN, CAPITAL EXPENDITURE BY SECTOR, 1970/71-1974/75 (thousand rand) 1970/71 1971/72 1972/73 1973/74 l97L/75 Productive activities 602 2.359 1,932 2,053 1,849 Agriculture and cooperatives 502 1,322 1,521 1,634 1,561 Industry (LNDC factory area development) 100 550 150 200 200 Commerce - 142 76 23 23 Tourism - 54 65 65 65 Mining - 291 120 131 - Economic infrastmcture 87 1 Roads ni 1,67798 Civil Aviation 17 155 22 22 22 Electricity 70 70 70 70 70 Post and telecom- munications 270 275 86 22 17 Plant pool - 100 355 - - Social infrastructure 2 14 2,959 2,283 1,28 Education and train- ing 231 776 1,581 1,211 265 Health 160 137 214 162 157 Water supply, sewerage, sanitation 249 471 1,075 811 744 Sports - - 70 80 100 Minor urban services 3 26 19 19 19 Geneial government services 1~~ 1 $( 0 O Police, prisons 16181 191 159 172 Office buildings 190 359 201 465 252 Public service housing 105 308 5h 5h 55 Other 78 71 109 37 25 Total 2,639 6,130 7,462 7,147 5,424 Source: Lesotho First Five-Year Development Plan, 1970/71-1974/75 Table 6.1: LESOTHO POST OFFICE SAVINGS BANK ASSETS AND LIABILITIES, 1968-1970 a (thousand rand) 1968 1962 1970 Assets Investment at cost 1,015 1,015 995 Cash on hand 47 11 4 Interest due 12 15 17 Miscellaneous 2 4 22 Total 1,076 1,045 1,038 Liabilities Balance due to depositors 1,041 992 963 Sundry creditors 12 12 14 Reserve fund 23 41 61 Total 1,076 1,045 1,038 Details of investments National Industrial Credit Corporation (South Africa) 180 - - Lesotho Government 20-year loans 175 320 320 LNDC 4 to 12-year loans - 233 600 Local banks fixed deposits and cash on call 660 462 75 Total 1,015 1,015 995 /a As at December 31 * Source: Post Office Savings Bank, Annual Reports and Accounts Table 6.2: LESOTHO NATIONAL DEVELOPMENT CORPORATION ASSETS AND LIABILITIES 1969-1970 /a (thousand rand) 1969 1970 Assets 81 755 Fixed Assets 6 14 Industrial and residential land, at cost - 6 Furniture and equipment, net of depreciation 6 8 Investments 71 471 Shares in private companies 71 72 Loans to Amalgamated Hotels - 389 Maseru Tyre Company - 10 Current Assets 4 270 Sundry debtors - 68 On fixed deposit 75 At call - 115 Cash 4 12 Liabilities 81 755 Accumulated Funds 80 35 U.K. grants for running expenditure 44 79 U.K. grants for investments 71 72 Net profits (losses) (15) 205 Long Term Loans 389 From Post Office -TF9 Current Liabilities 1 11 Sundry Creditors 1 11 /a As of March 31 Source: Lesotho National Development Corporation, Annual Statements of Accounts