LESOTHO: AGOA ELIGIBILITY REVIEW

UNCLAS SECTION 01 OF 04 MASERU 000554 SIPDIS SIPDIS DEPT FOR AF/S, AF/EPS (JANET POTASH); PASS TO USTR FOR CONNIE HAMILTON E.O. 12958: N/A TAGS: ECON ETRD LT SUBJECT: LESOTHO: AGOA ELIGIBILITY REVIEW REF: STATE 132189 MASERU 00000554 001.2 OF 004 ¶1. In response to REFTEL, Embassy Maseru submits the following updated AGOA country eligibility information. ¶2. TPSC SUBCOMMITTEE ON AGOA IMPLEMENTATION COUNTRY ELIGIBILITY RECOMMENDATIONS 2007 STATE SUBMISSIONS Country: Lesotho Current AGOA Status: Eligible Country Background Summary: The Kingdom of Lesotho, a landlocked southern African nation slightly smaller than Maryland, has a population of approximately 1.88 million inhabitants. In 2006, Lesotho achieved a record growth rate of 6.2% due to the doubling of diamond output and rising public investment. With a per capita gross national income of $1,110, Lesotho's market-based economy is closely tied to that of its larger neighbor, South Africa, though its export sector is heavily dependent on apparel exports to the United States under the African Growth and Opportunity Act (AGOA). With a prevalence rate of approximately 23%, Lesotho has one of the world's highest rates of HIV/AIDS infection. The Government of Lesotho (GOL) is focusing on structural and institutional reforms and increased investment with the support of a $362.5 million grant from Millennium Challenge Corporation (MCC). The GOL seeks to address the country's credit weakness, low level of development, and poor business environment. Improvements in the country's development will depend on the impact of reforms, infrastructure enhancements, increasing private sector activity, and diversification of government revenue streams and the nation's industrial export base. Following Lesotho's February 2007 National Assembly election, a political impasse developed between the governing LCD and opposition parties regarding the distribution of parliamentary seats and other issues. While international and domestic monitors observed Lesotho's polling process to be peaceful and free, opposition parties allege that the LCD unfairly manipulated Lesotho's complex Mixed Member Proportional (MMP) parliamentary system through the use of political alliances. This ongoing political impasse serves as the backdrop to ongoing economic developments in the Mountain Kingdom. Comments on Eligibility Requirements ¶I. Market-based Economy ¶A. Major Strengths Identified - The Ministry of Trade and Industry, in partnership with the Lesotho Revenue Authority, launched a "one-stop-shop" facility in September 2007 to improve the local business climate in the export sector. The facility will provide integrated services to businesses including export and import coordination and a new simplified and computerized licensing regime. It is hoped that this facility helps reduce "red tape" in Lesotho's private sector. - Lesotho welcomes investment from all countries of the world, including the United States. The country has been an ardent supporter of a possible U.S./SACU Free Trade Agreement, which it perceives as an opportunity to solidify the benefits of AGOA and thereby present a more secure climate for investment. - The outlook of the mining sector is positive. Letseng Diamonds, which began commercial production in 2004, is due to double capacity in 2008. Liqhobong Mine, under the ownership of the Letsing Group, began production in 2006, and a third mine is expected to open in 2008. This sector has contributed to higher GDP growth and the diversification of Lesotho's export base. - Following a precipitous decline upon the expiration of Multi-Fiber Agreement at the close of 2003, Lesotho's textile sector gradually recovered and now employs a workforce of over 40,000 individuals. Lesotho's garment industry is now successfully positioning itself as an "ethical clothing manufacturer" with international buyers. New investments from South Africa's largest clothing retailer -- a result of government tax incentives introduced in 2006 - are also promising. Annual garment exports currently stand at $387 million. Manufacturing accounted for 15.2% of GDP in 2006, of which 6.6% of GDP was accounted for by the garment sector. - Lesotho signed a compact with the Millennium Challenge Corporation (MCC) worth $362.5 million in July 2007. The compact is aimed at projects that will attempt to eliminate extreme poverty and promote private sector development. Specifically, the compact will assist in the improvement of the water supply for domestic and industrial use (including for the textile sector),strengthen health sector infrastructure, and provide support for institutional and structural reforms in the MASERU 00000554 002.2 OF 004 private sector. These initiatives will be supplemented by an $8.1 million World Bank private sector competitiveness and economic diversification project. The World Bank project aims to improve Lesotho's business environment by streamlining procedures for starting a business and facilitating commercial bank loans to the private sector. To aid in industrial diversification, the project will finance training centers to teach textile workers to produce greater value added products and conduct pilot projects in the fields of in tourism and agriculture. ¶B. Major Issues/Problems Identified - Lesotho's current weak business environment constrains private sector-led development. Lesotho ranks 114 out of 175 countries on the World Bank's global ranking of the ease of conducting business. - Infrastructure bottlenecks, such as factory space and waste water treatment facilities, constrain expansion of the manufacturing sector and development of fabric mills. - Lesotho's textile industry has experienced a continuing erosion of its competitiveness in recent years. This erosion has resulted in a reduction of production output and prices. In conversations with seven local factories, managers noted decreases in orders under AGOA ranging from 40% to 65% between 2004 and 2007. A decreasing general demand for textile products in the United States also exerted a downward pressure during this same period. Many employers in the textile industry reported changing employees from fulltime status to short-term contracts to reduce wages costs. These trends indicate the sector's high vulnerability to global competition - competition which will only increase as more quotas are removed on Chinese textiles next year. - The HIV/AIDS prevalence rate, currently estimated at 23%, poses a major challenge to Lesotho's long-term growth prospects. II. Political Reforms/Rule of Law/Anti-Corruption ¶A. Major Strengths Identified - Domestic and international observers concluded that the February 2007 national election was free and peaceful. The governing Lesotho Congress for Democracy (LCD) party won reelection, claiming 61 of 80 constituency-based seats in the National Assembly. Through a pre-election alliance with the National Independent Party (NIP),the LCD controled a further 21 proportional representation seats, bringing its majority to 82 out of the parliament's 120 total seats. Lesotho's largest opposition party, the All Basotho Convention (ABC),won 17 constituency-based seats and garnered a further 10 proportional seats through its alliance with the Lesotho Workers Party. The allocation of proportional seats remained a point of contention in the nation's political environment. - Lesotho law prohibits arbitrary arrest and detention, but opposition figures credibly claimed that the security forces violated these principals in the aftermath of July 2007 attacks on ministerial residences in Maseru. - The judiciary was independent in practice. - The GOL, through its Directorate on Corruption on Economic Offences (DCEO),continued to pursue corruption cases on the embezzlement of government resources in various government departments and the private sector. This includes a 2007 case of the Principal Secretary of Justice who stands accused of undermining public procurement regulations and deliberately using her position for personal benefit. There was also a case launched by the DCEO concerning a travel agency accused of inflating ticket fares for government officials in a kickback scheme. In August 2007, the High Court convicted the company of defrauding the government of $212,000 ¶B. Major Issues/Problems Identified - According to the Transparency International, corruption was a problem. - Corruption among police and security forces was a problem; however the government continued its reform efforts. - Lengthy pretrial detention remained a problem due to a serious backlog of cases and an overall lack of resources within the Ministry of Justice and Human Rights. III. Poverty Reduction ¶A. Major Strengths Identified - In 2004, Lesotho enacted a Poverty Reduction Strategy (PRS) aimed at providing broad-based improvements in the standard of living and welfare of the Basotho people. This is planned to be achieved through rapid and sustained economic growth, creating more employment income opportunities and empowering the poor and the vulnerable to access basis services. According to the PRS, MASERU 00000554 003.2 OF 004 growth should be driven by the private sector and facilitated by appropriate government policies. Lastly, the PRS is to deepen democracy and improve public sector performance. - Strategies for sustainable broad-based economic growth include attracting domestic investment and foreign direct investment beyond the garment sector in order to add value to local products and expand the economic base, especially in the tourism industry. Free primary education, introduced in 1999, was extended to the seventh and final grade in 2006. To accommodate increased intake, the government has built 108 new primary schools since 2000. Seventeen of these were inaugurated by the Prime Minister in February 2007. The government also introduced an affordable text book rental plan for secondary schools. A similar rental plan was introduced in primary schools in 2003. ¶B. Major Issues/Problems Identified - As observed during the IMF Article IV Consultations in August 2007, preliminary results from the PRS review process show that despite relatively good growth, PRS indicators were not positive, indicating that the country has been unable to achieve broad-based sustainable growth. Fitch Rating's 2006 Sovereign Credit Rating ranked Lesotho at "BB-" for its foreign long-term currency rating and at "B" for its short-term foreign rating. However, Fitch indicated that the country is much less developed than its peers in the "BB" group. Lesotho's per capita income of $1,100 falls far short of the "BB" rating group median of $2,500. Lesotho's Human Development ranking was at 149 out of 177 countries in 2006, largely due to high prevalence rate of HIV/AIDS (23% prevalence among the total population). - The strong growth rate, largely spurred by a boom in the mining sector, will have a low impact on poverty due to limited employment opportunities in the sector. - The country lacks data essential for monitoring and evaluating PRS implementation. - Poverty is still widespread, and the unemployment rate hovers around 40%. IV. Workers' Rights/Child Labor/Human Rights ¶A. Major Strengths Identified - The Constitution recognizes the right to form independent trade unions to protect workers' rights and provides for sound labor relations and fair employment practices. - The Constitution prohibits slavery or servitude and forced labor. - In June 2006, Lesotho's Parliament amended the 1982 Labor Code to include an HIV/AIDS workplace policy. - Lesotho ratified ILO Conventions 182 on the Worst Forms of Child Labor and 138 on Minimum Age in 2001. - Lesotho is participating in two regional U.S. Department of Labor programs to reduce child labor. These programs are under the "Towards Eliminating Child Labor" and the "Reducing Exploitative Child Labor in Southern Africa" initiatives. - The law provides for freedom of speech and of the press, and the government generally respected those rights. - The law provides for freedom of assembly and association, and the government generally respected those rights. - The law provides for freedom of religion, and the government generally respected this right. ¶B. Major Issues/Problems Identified - According to the Ministry of Labor, employers in the retail sector frequently violate the labor code. Common problems include violations of the rules governing ordinary hours of work, overtime pay, and public holidays. Health and safety violations were also common in locally-owned establishments. Employers of locally-owned establishments often do not keep records of employees' salaries to facilitate legally required inspections. The labor code also prohibits essential employees such as civil servants from joining or forming unions, but allows them to form staff associations. - The law limits workers' right to strike and requires a number of procedures before strike action is authorized. - Child labor is common in the informal sector. - While child labor laws covered all sectors, there are no provisions for children working in the agricultural sector. - There were credible allegations that security forces tortured persons and that police at times used excessive force. - Prison conditions remained poor. - Domestic violence remained a serious problem. - Parallel observance of customary law severely restricted women's inheritance and property rights. - The law does not specifically prohibit trafficking in persons. There were no official statistics available on the issue of trafficking. - Although child labor does not exist in the formal sector, an increase in the number of youth orphaned by the HIV/AIDS MASERU 00000554 004.2 OF 004 pandemic has placed young children at risk of "survival" employment within the informal sector. ¶V. International Terrorism/U.S. National Security ¶A. Major Strengths Identified None ¶B. Major Issues/Problems Identified None NOLAN