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

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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,

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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

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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