2009 Index of Economic Freedom

Quick Facts

Population:

• 2.0 million

GDP (PPP):

• $2.9 billion
• 7.2% growth
• 3.9% 5-year compound annual growth
• $1440 per capita

Unemployment:

• 45.0%

Inflation (CPI):

• 8.0%

FDI Inflow:

• $57.0 million

Lesotho's economic freedom score is 49.7, making its economy the 151st freest in the 2009 Index. Its score decreased by 2.5 points from last year, primarily reflecting increases in government spending and declining financial freedom. Lesotho is ranked 31st out of 46 countries in the Sub-Saharan Africa region.

Lesotho does not rank very strongly in any category but is on par with the world average in monetary freedom and business freedom. Struggling with political instability, Lesotho needs more investment and dynamic entrepreneurial activity and still suffers from a lack of investment freedom, financial freedom, and freedom from corruption. The average tariff rate remains high, and non-tariff barriers to trade are significant. Regulation is oppressive, and business operations are badly impeded by red tape and corruption. Government spending is high because of increases in government salaries, and property rights are not secured by an independent judiciary.

Background Back to the top

Lesotho is surrounded by and economically integrated with South Africa. It sells water and electricity to South Africa, and a number of households depend on work in South African mines. Half of the population earns income from agriculture, but the agricultural sector accounted for only 17 percent of GDP in 2005. Lesotho's HIV/AIDS rate is one of the world's highest. Lesotho became independent in 1966, but instability in the 1990s led to military intervention by South Africa and Botswana. An interim authority overhauled the government and oversaw elections in 2002. Lesotho is a constitutional monarchy with King Letsie III as the ceremonial head of state. Prime Minister Bethuel Pakalitha Mosisili is the head of government and holds executive authority. Mosisili's party won a parliamentary majority in the February 2007 election.

Business Freedom 61.7 Back to the top

The overall freedom to start, operate, and close a business is impeded by Lesotho's burdensome regulatory environment. Starting a business takes an average of 40 days, compared to the world average of 38 days. Obtaining a business license requires more than twice the world average of 225 days, and fees are high.

Trade Freedom 57.0 Back to the top

Lesotho's weighted average tariff rate was 16.5 percent in 2006. Import bans and restrictions, non-transparent and arbitrary import licensing, domestic preference in government procurement, subsidies, and corruption add to the cost of trade. Ten points were deducted from Lesotho's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 63.1 Back to the top

Lesotho has a high income tax and a moderate corporate tax. The top income tax rate is 35 percent, and the top corporate tax rate for all companies other than those in manufacturing or farming is 25 percent; a 10 percent rate applies to all manufacturing and agricultural companies. Other taxes include a value-added tax (VAT) and a tax on dividends. In the most recent year, overall tax revenue as a percentage of GDP was 42.9 percent.

Government Size 36.2 Back to the top

Total government expenditures, including consumption and transfer payments, are high. Despite efforts to channel public spending toward development projects, rising government salaries and pensions and various social programs remain the primary areas of government expenditure. In the most recent year, government spending equaled 46.1 percent of GDP.

Monetary Freedom73.1 Back to the top

Inflation is high, averaging 7.1 percent between 2005 and 2007. Although many prices are freely determined in the market, the government influences prices through state-owned enterprises and utilities, especially in agriculture. A tradition of direct government involvement limits private-sector development, and privatization of agricultural parastatals has made little headway. Ten points were deducted from Lesotho's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom30.0 Back to the top

Foreign investors generally receive national treatment. The government recognizes that it needs to do more to attract foreign investment, but political instability and a lack of transparency are deterrents. Enforcement of commercial legislation can be slow, and local unrest often leads to the destruction of property owned by foreign businesses. Residents and non-residents may hold foreign exchange accounts with some restrictions. Some payments and transfers are subject to prior government approval and limitations. Many capital transactions face restrictions or quantitative limits, and real estate purchases abroad require government approval.

Financial Freedom40.0 Back to the top

Lesotho has a small and underdeveloped financial system that is closely tied to South Africa through the Common Monetary Area. Much of the population lacks adequate access to banking services. The high cost of credit continues to hinder entrepreneurial activity and the development of a vibrant private sector. South African ownership of commercial banks is extensive. The central bank has promoted competition with only limited success. Financial supervision remains insufficient. The insurance sector has significant South African participation and one state-dominated company. Capital markets are rudimentary, and there is no stock exchange in Lesotho.

Property Rights40.0 Back to the top

Private property is guaranteed, and expropriation is unlikely. The judiciary is independent and has generally carried out its role effectively, even during the years of military rule, but draconian internal security legislation gives considerable power to the police and restricts the right of assembly and some forms of industrial action. The government received international praise in 2006 for enacting a law to ensure the access of married women to property rights.

Freedom From Corruption33.0 Back to the top

Corruption is perceived as significant. Lesotho ranks 84th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption and lack of transparency remain major problems. Fallout continues from a scandal that began in the early 1990s and involved corrupt government officials and bribe-paying corporations engaged in constructing the multimillion-dollar, World Bank-funded Lesotho Highlands Water Scheme to transport water to South Africa.

Labor Freedom62.7 Back to the top

Lesotho's relatively burdensome labor regulations hinder employment and productivity growth. The non-salary cost of employing a worker is low, and dismissing a redundant employee is relatively easy. Restrictions on the number of work hours remain rigid.