LESOTHO: LOCAL STAFF COMPENSATION LOSES GROUND

UNCLAS SECTION 01 OF 02 MASERU 000130

SIPDIS

DEPARTMENT FOR AF/EX DIRECTOR, AF/EX BUDGET DIRECTOR, HR/OE/CM, AND AF/S
PRETORIA FOR FMO

E.O. 12958: N/A
TAGS: AFSN ECON AMGT KICA LT
SUBJECT: LESOTHO: LOCAL STAFF COMPENSATION LOSES GROUND

REF: A) MASERU 319; B) STATE 30757; C) STATE 51729

MASERU 00000130 001.2 OF 002



1. SUMMARY: Recent economic, labor, and commercial reporting
and U.S. Mission Maseru's LE Staff Compensation Questionnaires
provide growing evidence that post's LE staff compensation plan
is not sufficiently competitive in the local market to
effectively recruit and retain qualified staff. Since 2005, the
mission's annual salary adjustments have been far below
inflation and the increases offered by comparable organizations
in Lesotho. The same factors have also eroded the purchasing
power of salaries and the value of benefits to local staff. The
situation is most evident at higher level grades, where
competition for qualified staff is most fierce, driven in
particular by an influx of international NGOs to support a
national AIDS emergency. Cost of living increases for LES have
shot up over the past year, exacerbated by skyrocketing prices
for food, fuel, and utilities (over 10 percent annual inflation,
higher during the first quarter of 2008); increasing interest
rates; and the devastation of an HIV/AIDS pandemic which drains
resources from virtually every U.S. Mission family. We need
additional resources for salaries to sustain our most important
resource, our local staff. END SUMMARY.

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The Macro Economic Context
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2. Lesotho is a small landlocked country completely surrounded
by South Africa - a nation on which its economy is highly
dependent. This position makes the country extremely vulnerable
to external shocks, especially changes in the prices of imports
from its only neighbor. After sluggish economic growth in
recent years, real GDP growth surged to an average of 7% between
2006 and 2007, largely driven by revived diamond mining and
recovery in the garment industry. Poverty remains high and
Lesotho has the third highest prevalence rate of HIV/AIDS in the
world (23% among the general population, over 40 percent among
adults between the ages of 18 and 25). Life expectancy has
dropped from more than 50 years to under 40 years in the past
seven years.

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Spiking Inflation in Lesotho
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3. Due to a drought-induced decline in cereal production and
surging oil prices, there is strong upward pressure on food
prices and overall inflation. The Consumer Price Index (CPI),
Lesotho's primary inflation measure, stood at 10.6% in February
2008 (a record high since 2002)--a 75% increase since December

2006. But more importantly, food prices have risen by 15% year
on year, and staples such as grain have been even harder hit.
Food comprises 39.8% of Lesotho's CPI basket, so price changes
in this basket component have a great influence on the overall
inflation rate. Electricity rates for residential end-users
increased by 12% in April 2008, although the country's utility
had requested a 40% increase to compensate for declining supply
and the cost of related inputs and imports.

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Inflationary Pressure from South Africa
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4. In February 2008, inflation in South Africa leaped to 9.4%
compared to the same month the previous year, exceeding the
target band by 3.4%. As 80% of Lesotho's imports come from
South Africa, these undesirable inflation developments have a
multiplier effect in Lesotho, adding to the country's already
unfavorable inflationary environment. Interest rates in Lesotho
generally reflect the South African prime rate plus a premium
for perceived additional risk in the Mountain Kingdom. The
South African Reserve Bank, for example, recently raised its key
repo rate to 11.5%, which resulted in a hike of interest rates
to the current 15%. This caused Lesotho's prime lending rate
to rise to 17% although actual access to credit is a near
impossibility for most Basotho. The Monetary Policy Committee
has hinted that further interest rate hikes could be in store
should the power utility Eskom receive approval to double its
tariffs.


5. These adverse price and interest rate developments are
accompanied by hikes in fuel prices, a recent 300% raise in toll
taxes at border crossings, and the continuing adverse economic
effects of the high prevalence of HIV/AIDS. All of these
factors reduce our local staff's spending power as their
earnings are eroded by inflation, higher debt payments, and
medical and funeral expenses for those infected or affected by
HIV/AIDS. Increased toll fees will also result in higher prices
of imports as business will pass the 300% toll tax increase on
to consumers. Given the fact that current price pressures
emanate mainly from food and fuel, consumer spending is likely

MASERU 00000130 002.2 OF 002


to slow, which will have an effect on the overall economy.
Increasing interest rates are forecast to have the same effect.

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Prevailing Labor Market
Practices: We're Falling Behind
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6. In response to prevailing economic conditions, most local
employers competing for skilled labor have improved their
compensation plans. For the past three years, Embassy Maseru's
main comparators (i.e., the Central Bank, the Lesotho
Electricity Corporation, the Lesotho Telecommunications
Authority, Lets'eng Diamonds, and various commercial banks) have
competed successfully for skilled labor by offering attractive
compensation and benefit packages, some of which include housing
and vehicle allowances.


7. From 2005, a basic salary survey of seven of Embassy Maseru's
comparators in labor market indicated that post's salaries,
especially at the higher grades, remained significantly below
the mean. At these higher grades, for example, the survey
indicated that several senior locally engaged staff (LES) earn
30% less than their local counterparts. Competition has not
been confined to the domestic labor market, and therefore
salaries in Lesotho have also been influenced by higher salaries
offered in South Africa. Lesotho's new Millennium Challenge
Account board of directors has approved a compensation plan for
dozens of new employees that will vastly exceed the U.S.
Mission's LCP and compete favorably with the country's top
employers. Further, the GOL's FY2008 budget introduced a 20%
percent pay hike across the entire civil service.

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Comment: Now is the Time to Act on Local Compensation
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8. COMMENT: Embassy Maseru kindly requests the AF Bureau to
favorably consider increased financial resources to post to more
closely align its local compensation levels to prevailing labor
market rates, and to also support the transition of the
mission's pension plan from a domestic underperformer to a
regional program already in utilized by Pretoria, SA constituent
post, and Mbabane. At this critical juncture of unparalleled
Mission growth, associated with two new Presidential Initiatives
(MCC and PEPFAR),the program and service support required to
sustain Mission efforts to ensure their success rests largely on
LES. Our inability to attract and retain LES severely
diminishes the prospects for this success. The financial and
operational costs of staff attrition are considerable and
require immediate attention. Thank you for your support. END
COMMENT.
NOLAN