LESOTHO MAY 2007 ECONOMIC ROUNDUP: DIAMONDS, CORN, FISCAL

UNCLAS SECTION 01 OF 02 MASERU 000297

SIPDIS

SIPDIS

DEPT ALSO FOR AF/S
DEPT ALSO FOR AF/EPS

E.O. 12958: N/A
TAGS: ECON ETRD EFIN PGOV EAGR KCRM EAID LT
SUBJECT: LESOTHO MAY 2007 ECONOMIC ROUNDUP: DIAMONDS, CORN, FISCAL
POLICY, AND LAUNDERING


MASERU 00000297 001.2 OF 002



1. SUMMARY:



- Analyst: Fiscal Policy and Tax Base Key in Lesotho;

- Diamond Mining in Lesotho: Implications;

- Money Laundering Task Force Meets in Maseru; and

- Lesotho's Maize and Sorghum Harvest Fails.



END SUMMARY.



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Analyst: Fiscal Policy and Tax Base Key in Lesotho

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2. On April 18, Standard Bank Lesotho hosted an economic
briefing by Mr. Jan Duvenage, a representative from Standard
Bank South Africa's Economics Division for African Research. He
evaluated the country's fiscal policy, concluding that Lesotho's
fiscal policy is crucial for macroeconomic stability and growth
given the Lesotho Loti's peg to the South African Rand.
Duvanage asserted that although Lesotho has maintained a sound
fiscal policy and healthy foreign current reserves, the country
is too dependant on South African Customs Union (SACU) revenue
sharing payments which are not permanent, making the country
vulnerable to external shocks. Therefore, the country should
broaden its tax base and improve its tax administration to
reduce this dependence. Also, an increase in capital
expenditures is needed to develop infrastructure essential for
economic growth.




3. Highlighting Lesotho's fiscal surpluses from 2003 to present
(largely attributed to increased revenue sharing payments from
the SACU),he noted that Lesotho's foreign debt had fallen from
81% of GDP to 47.2% of GDP between 2002 and 2006. Nevertheless,
Duvenage maintained that Lesotho's fiscal policy still needs
improvement due to its narrow tax base, weak tax administration,
and service delivery constraints. He cited the underdevelopment
of financial markets, low rates of capital expenditure, and the
high levels of wage payments due to a large civil service (14%
of GDP compared to the Sub-Saharan average of 6.1%) as factors
holding back Lesotho's growth.



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Diamond Mining in Lesotho: Implications

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4. Recent diamond prospecting licenses granted for Lesotho's
Kolo and Mothae regions underscore the growth in the nation's
mining industry following the recent find of the world's 15th
largest uncut stone in Lesotho. Lesotho's two existing diamond
mines, located at Letseng and Liqhobong, have already
substantially impacted the nation's economic output and
currently account for 7% of GDP. Diamond production rose by
83.7% in 2005 and 103.8% in 2006, and the sub-sector is expected
to continue to grow as mines progress towards full production
levels.




5. The industry is already having a macroeconomic impact.
Diamonds exports have improved Lesotho's balance of payments,
and the nation's net foreign reserves currently equal US$564
million, providing five months of import cover. The GOL's 8%
royalty from mining dividends also has an important impact on
government finance. On the labor front, unskilled mine labor in
typically recruited locally, while professional staff is
recruited nationwide, helping to mitigate Lesotho's high
unemployment rate.


MASERU 00000297 002.2 OF 002





6. The rebounding mining industry is likely to enhance the
welfare of local communities in mining regions through
employment opportunities and access to infrastructure such as
roads, water, and electricity. However, it is uncertain how
effective governmental measures intended to reduce poverty will
be. Skills development, technology transfer, and corporate
social responsibility will remain issues for the industry as it
continues to grow.



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Money Laundering Task Force Meets in Maseru

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7. The International Organization of Supreme Audit
Institutions' (INTOSAI) task force on international money
laundering held its fifth meeting in Maseru on April 24-25,

2007. The task force's main objectives are to: 1) promote
international cooperation in the fight against money laundering;
2) monitor and report on the extent of international cooperation
on money laundering issues; 3) share strategies for combating
money laundering; and 4) create anti-money laundering training
opportunities. The INTOSAI task force is made up of nine
countries, including: the United States, Peru, the United
Kingdom, Fiji, Lesotho, Russia, Papua New Guinea, Egypt, and
Libya. (NOTE: According to GOL officials, a representative
from the U.S. General Accounting Office participated in this
event. However, Embassy Maseru received no briefing or country
clearance request. END NOTE.)




8. Lesotho's "Bill on Money Laundering," drafted in 2004, has
still not been passed into law. Thus, Lesotho still has no
legal framework regarding money laundering. While Lesotho's
active participation in INTOSAI's money laundering task force is
a positive step, the nation's potential progress on money
laundering issues appears doubtful without a legal
anti-laundering framework in place.



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Lesotho's Maize and Sorghum Harvest Fails

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9. According to a pre-harvest assessment conducted by Lesotho's
Disaster Management Authority and sponsored by the World Food
Program, Lesotho's domestic agricultural production in 2007 will
meet only 15-20% of the basic food needs of the country. The
study states that a 25% or greater increase in the price of
maize, a basic staple in Lesotho, is expected. The country is
expecting a decrease of 14% in maize area harvested and a 10%
decrease in the maize yield, leading to a 39% total decrease in
maize production. Also, 42% less sorghum is expected to be
produced this year than last. The problem is most severe in the
northern lowlands - a traditional breadbasket region for Lesotho.
MURPHY