Based on IMF Country Report No. 25/267: Kingdom of Lesotho – 2025 Article IV Consultation
Lesotho’s 2025 IMF Article IV Consultation presents a clear and urgent message: the country stands at a crossroads where strong revenues and favourable fiscal outcomes contrast sharply with weak implementation capacity, stalled reforms, and growing external risks. The consultation highlights that although Lesotho recorded an exceptional fiscal surplus of 9% of GDP in FY24, driven largely by record SACU transfers and sharply higher water royalties, these windfalls mask long-standing structural challenges that law-makers, policymakers, and economic stakeholders can no longer afford to postpone. The IMF emphasises that Lesotho’s growth model, heavily reliant on public spending and a narrow export base, has failed to deliver rising living standards. Per capita income has fallen by 14% since 2016, unemployment remains high, and poverty levels are stubbornly elevated. Against this backdrop, the country now faces significant shocks from outside its borders: tariff uncertainty from the United States threatens the textile sector, while reductions in US development assistance, particularly USAID’s health programmes, pose immediate socio-economic and fiscal risks.
The central thread running throughout the IMF report is that Lesotho’s primary constraint is not a lack of fiscal resources but rather a lack of institutional capacity to use those resources productively. In both FY24 and FY25, the budget dramatically increased capital spending allocations, but actual implementation fell far short due to weak public financial management systems, inefficient procurement, inadequate project appraisal frameworks, and poor inter-ministerial coordination. As a result, even though the government has access to revenue windfalls, it cannot convert them into well-executed infrastructure projects, job creation, or long-term economic growth. The IMF warns that forcing capital expenditure beyond the state’s current capacity would simply waste resources and risk returning Lesotho to a familiar cycle of arrears, inefficiency, and fiscal instability. For the medium term, the Fund recommends maintaining fiscal surpluses while focusing reforms on capacity-building, governance, and efficient project execution.
The report also identifies an urgent need for legislative reform. Several key bills, most notably the Public Financial Management and Accountability Bill, the Public Debt Management Bill, and regulations required to operationalise the 2023 Procurement Act, remain stalled in Parliament. These legal instruments are essential for modernising Lesotho’s fiscal architecture, controlling expenditure, strengthening accountability, and enforcing procurement discipline. Without them, the government cannot credibly implement a medium-term fiscal framework, enforce fiscal rules, or properly manage the rising risks associated with state-owned enterprises. The IMF further stresses that legislative amendments to enhance the autonomy of the Central Bank of Lesotho remain outstanding, limiting the Bank’s ability to safeguard the exchange-rate peg to the South African Rand, an anchor of macroeconomic stability. Strengthening the legal framework around the CBL is also vital for improving financial-sector oversight, AML/CFT compliance, and governance.
The consultation highlights serious governance and fiscal-risk concerns arising from SOEs and contingent liabilities. The Lesotho Electricity Company faces financial distress; a number of PPP and contractual disputes, represent billions of maloti in potential liabilities; and the civil-service pension fund remains underfunded. These risks require a strengthened legal framework for SOE governance, transparent reporting obligations, and a comprehensive fiscal-risk management strategy. Failure to address these issues could rapidly reverse recent improvements in Lesotho’s debt trajectory. While debt is currently assessed as sustainable with a moderate risk of distress, the country has only limited space to absorb future shocks. This reinforces the importance of enacting the debt-management legislation and maintaining disciplined borrowing practices, especially as SACU revenues normalise and external conditions become less favourable.
Beyond fiscal and debt considerations, the IMF emphasises that lasting economic improvement depends on structural and legal reforms that create a conducive environment for private-sector growth. Lesotho’s business environment continues to be constrained by regulatory obstacles, slow and unpredictable licensing processes, restrictive immigration and work-permit laws, and governance vulnerabilities that discourage foreign investment. The report notes that job-rich growth will not materialise unless the legal and institutional framework governing investment, licensing, financial access, and competition is modernised. Improvements to the rule of law, anti-corruption enforcement, dispute-resolution mechanisms, and business-registration systems are necessary to diversify the economy, reduce dependence on textiles, and expand opportunities in new sectors such as horticulture, tourism, and renewable energy.
Although the macroeconomic environment is bolstered by strong reserves and a stable exchange-rate peg, the IMF underscores that these strengths cannot compensate for delayed reforms. The government is encouraged to establish a Stabilisation Fund, supported by enabling legislation, to prudently manage windfall water royalties and SACU revenues. Such a fund would help protect the budget against volatility, ensure intergenerational equity, and anchor long-term fiscal discipline. Transparent governance rules, independent oversight, and integration with the medium-term fiscal framework will be essential to the fund’s credibility and success.
In sum, the 2025 Article IV Consultation paints a picture of a country presented with a rare opportunity. Lesotho has unprecedented fiscal space, strong buffers, and renewed revenue streams that could, with the right legal and institutional reforms, unlock long-term, private-sector-driven growth. But the risks of inaction are equally significant. Without the passage of key legislation, without strengthened SOE oversight, without improvements in procurement and project management, and without reforms to the broader business environment, Lesotho risks squandering its current windfalls and remaining trapped in a cycle of low growth, high unemployment, and economic vulnerability. The IMF’s message is clear: the law must evolve alongside fiscal policy. Only through a reinvigorated reform agenda, rooted in legal certainty, institutional accountability, and strategic governance, can Lesotho reshape its economic future.