ECONOMIC REPORT

UNCLAS SECTION 01 OF 03 MASERU 000335

SIPDIS

AIDAC
SIPDIS

DEPARTMENT PLEASE PASS TO USTR, ATTN: WILLIAM JACKSON

E.O. 12958: N/A
TAGS: ECON EAID PGOV LT
SUBJECT: ECONOMIC REPORT


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1. SUMMARY:

--Letseng Diamond Mine sold to Gem Diamond Mining Company;
--More Mining Licenses Granted;
--Law Society Appeals to Chief Justice;
--Standard Bank and Lesotho Bank Announce Merger;
--Lesotho Textiles Make a Comeback.

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LETSENG DIAMOND MINE SOLD TO GEM MINING COMPANY
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2. Uncertainty over the future of Letseng Diamond Mine in the
mountain district of Mokhotlong was dispelled with last week's
announcement that South Africa's mining holding company, JCI,
has sold 100 per cent of Letseng Investment Holding to Gem
Diamonds Mining of Africa for Maloti 879 million (USD 122
million). The Chief Executive of Gem Diamonds, which began
operations in July 2005, is Clifford Elphick, who has worked for
Anglo American, and was Managing Director of E. Oppenheimer and
Son from 1990 until the end of 2004.


3. A March 24 Financial Mail report by Brendan Ryan suggested
that black empowerment mining company Matotzi Resources faced
insolvency, and that its only salvation was becoming a
subsidiary of JCI, which owns 58 per cent of the company.
According to the report, Matotzi had made an attributable loss
of Maloti 31.7 million (USD 4 million) during the six months
ending in September 2005. JCI had however undertaken to provide
financial support to fund any resulting cash shortfalls.


4. Between them, Matotzi and JCI owned 76 per cent through a
Lesotho registered company, Letseng Investment Holdings. The
GOL owns 26 per cent of the mine. The original deal stipulated
that the government could renegotiate its shareholding in the
mine after five years of operation , which expires this year.

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MORE MINING LICENSES GRANTED
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5. The Lesotho government has granted diamond prospecting
licenses to two companies based in Canada and South Africa. The
Canadian company, Motapa Diamonds, has been granted exclusive
rights to explore the Mothae kimberlite which is located 6.5
kilometers north-west of the Letseng diamond mine along a
structural lineament common to both kimberlites. The site is
expected to yield diamonds of a similar value to those of
Letseng. Note. In 2005 the mine made a find of four flawless
diamonds weighing 112, 105, 76 and 71 carats each. End Note.


6. Prior investigations of Mothae indicate a grade of
approximately 2.8 carats per hundred tons, although no reliable
information on diamond value has been obtained.


7. Angel Diamonds (Pty) Ltd., a subsidiary of Thabex
Exploration was on June 13 granted a two-year prospecting
license over the Kolo kimberlite by Lesotho's Commissioner of
Mines. Thabex Exploration is listed of the Johannesburg Stock
Exchange, and has a diversified portfolio of exploration
projects in alluvial and kimberlite deposits in South and
Southern Africa.


8. The kimberlite is based in the Mafeteng district, forty
kilometers south of the capital, Maseru. The two year period is
extendable by a year. In the event of successful prospecting,
Thabex is expected to make 20 per cent of its shareholding in
Angel Diamonds available to the Lesotho government.

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LAW SOCIETY APPEALS TO CHIEF JUSTICE OVER OFFICIAL CAR SCHEME
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9. The Law Society of Lesotho has appealed to the Chief Justice
and other members of the Bench to dissociate themselves from a
scheme through which a South African vehicle leasing company,
Imperial Fleet Services, has offered Mercedes Benz vehicles
previously allocated to judges of the high court for a residual
value of Maloti 4,000.00 (about USD 590.00).


10. Imperial Fleet Services, a South African company that
leases GOL vehicles, made a first offer of Mercedes Benz and
Camry vehicles previously leased to government to the officials
who were assigned the vehicles at a residual value of about

MASERU 00000335 002.2 OF 003


Maloti 4,000.00 (about USD 590.00) in the case of Mercedes Benz,
and an average of Maloti 2,000.00 (about USD 295.00) in the case
of Toyota Camrys in May this year.


11. Speaking in a Radio Lesotho phone-in program last month,
the Government Secretary, Mr. Tlohang Sekhamane, said the scheme
had been negotiated by government as an incentive to retain good
quality officials, and Imperial to better its chances of getting
another contract. The present contract has been renewed by a
year until December, 2006. He said the scheme would also
benefit holders of statutory positions including judges of the
high court, members of the public service commission, the
teaching service commission, the Independent Electoral
Commission and the Attorney General and the Director of Public
Prosecutions, among others.


12. According to the petition signed by the society president,
Advocate Zwelake Mda, "It is the considered opinion of the
Society that this arrangement smacks of a corrupt association
between the Government and Imperial Fleet Services in that,
inter alia:

a) The government is a party to a contract pursuant to which
the vehicles are rented out to it by Imperial;

b) The fate and continuance of this contract (which itself is
dogged by controversy) is depended on the favorable disposition
of the government;

c) The marked value of the vehicles is way far above the paltry
amount of Maloti 4,000 at which the vehicles are offered to
those whose remit is to decide the fate of the said contract.
The Society contends that where people hold offices of trust and
discharge functions of public benefit, they dare not benefit
privately. Consequently the view that the Judiciary would be
falling into a bottomless pit of corruption if it became party
to this scheme. The society thus humbly and with due respect
urges you and your Honorable brethren not to be attracted to
this unfortunate scheme".


13. Meanwhile the leaders of three political parties have sent
a similar note of protest to the heads of diplomatic missions
accredited to Lesotho. Dated July 4, the letter refers to "the
illicit and unprocedural acquisition of government property - in
the form of Mercedes Benz and Toyota Camry vehicles - by the
current ministers and principal secretaries".


14. The letter refers to a recent European Union commemoration
event where the Lesotho government was specifically asked to
step up the fight against corruption, purportedly by the EU
delegate to Lesotho. According to the letter, the Foreign
Minister had responded by saying that the GOL expects diplomats
to help in that fight. The letter points to the acquisition of
the vehicles as an incident in which government officials have
abused their privileged positions for personal gain "through
corrupt acquisition".


15. The letter is signed by Dr. Khauhelo Raditapole, leader of
the Basotholand African Congress, BAC; Mr. Kelebone Maope,
leader of the Lesotho People's Congress; and Mr. Ntsukunyane
Mphanya, leader of the Mahatammoho a Poelano Alliance, who call
on the diplomatic missions to bring the matter to the attention
of their governments and organizations.


16. The Commissioner General of the Lesotho Revenue Authority,
Dr. Charles Jenkins has confirmed that the government officials
who acquired the vehicles did not have to pay Value Added Tax
(VAT) on the purchase. He was responding to initial public
speculation on whether the new owners would have paid tax on the
amount at which the vehicles had been offered to them, or on the
book value of the vehicles, and subsequent reports that the
officials had evaded tax when acquiring the vehicles.


17. Dr. Jenkins cited a law abolishing double taxation on
registered goods when the VAT was introduced in 2003. According
to the law, VAT is only paid on new vehicles, and not on second
hand vehicles. He said documentation relating to the said
vehicles revealed that Imperial Fleet Services had paid tax to
the South African government upon importation of the vehicles,
which tax was subsequently claimed from the South African
Revenue Service, SARS by the Lesotho Revenue Authority.

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STANDARD BANK AND LESOTHO BANK ANNOUNCE MERGER
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18. Two of Lesotho's four major commercial banks, Standard Bank
and Lesotho Bank have announced that they will start operating
under one name, Standard Lesotho Bank starting over the weekend
of July 15 to July 17. The South African Standard Bank bought
eighty per cent shareholding in Lesotho Bank, previously owned
by the government in 1999. The new bank was called Lesotho Bank
99, and has been operating as a separate entity since.


19. According to the Managing Director of Standard Bank, Collin
Addis, the merger is intended to ensure a more efficient
business model that meets the needs of its customers. He said
following the merger, customers of the two banks would be able
to make transactions and apply for replacement of automated
teller machine cards and check books at existing branches of
either bank.


20. He said the benefit to the GOL was that it would now own
its 20 per cent shareholding in an expanded entity.

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LESOTHO TEXTILES MAKE A COMEBACK
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21. Lesotho's largest employer, the textile industry is
reported by the UN Integrate Regional Information Networks to be
making a comeback following the closure of seven factories with
a loss of nearly 10,000 jobs at the end of 2005. According to
Andy Salm, Regional Textile and Apparel Specialist for ComMark
Trust, a non-governmental organization that monitors the
industry in Southern Africa, all the factories that had been
closed have reopened, and the number of jobs that had shrunk
from 50,000 to 40,000 have now climbed back to around 47,000.


22. Salm attributes the continued commitment of textile
industrialists in Lesotho to the engagement of the Lesotho
government in addressing the problems encountered by the
industry. He points out that the minister of Industry, Mpho
Malie is receptive to working with the industry, and comes
together with key players every two weeks to work out issues
that may exist. Lesotho has further made concerted efforts to
develop strong relationships with buyers and "clear red tape",
which has contributed to turning around the industry.


23. According to Salm, another reason why Lesotho has caught
the attention of buyers stems from the efforts of the government
to build on an image of ethical choice. He cited the Apparel
Lesotho Alliance to Fight Aids (ALAFA),a recently launched
HIV/AIDS education and treatment network for industry workers
as an example of a move to enhance the industry's growing
reputation as a socially responsible source of clothing for
famous brands.
PERRY