LESOTHO: INCREASING FOOD AND COMMODITY PRICES IMPACT

UNCLAS MASERU 000148 SIPDIS DEPT ALSO FOR AF/S, EEB/TPP/ABT,ATP (JANET SPECK) E.O. 12958: N/A TAGS: EAGR EAID ETRD ECON EFIN PGOV PREL LT SUBJECT: LESOTHO: INCREASING FOOD AND COMMODITY PRICES IMPACT ECONOMY REF: State 39410 ¶1. SUMMARY: As Lesotho is a food deficit country which imports about 80% of its commodities from South Africa, rising international food prices have a strongly negative impact on Basotho households. The structure of Lesotho's economy and, in particular, its heavy reliance on South Africa, leaves the country highly vulnerable at the micro- and macro-economic levels to the recent rise in food and fuel prices. Rising commodity prices dim the nation's prospects of matching its 2007 seven-percent GDP growth rate again in 2008. END SUMMARY. -------------- Effects of Rising Food Prices -------------- ¶2. Lesotho is a food deficit country which imports about 80% of its food supply from South Africa. The GOL estimates the nation's 2008 cereal requirements at 256 thousand metric tons, of which 219 thousand tons will be imported commercially and 30 thousand tons will be provided through international donor or GOL food programs. Changes in regional food production dynamics have exerted an upward pressure on prices. While South Africa remains a reliable source of cereal crops, Zimbabwe, previously a strong grain producer in the Southern African region, is now unable to support Lesotho. ¶3. Rising food inflation has a disproportionately negative impact on Basotho consumers, given that most households in Lesotho spend a preponderance of their income on food products. Consequently, a change in the price level has had a greater influence on the overall change in the average price level of goods and services. Lesotho's overall inflation rate now stands at 12%, mainly driven by food and fuel price increases. -------------- Effects of Rising Commodity Prices -------------- ¶4. The structure of Lesotho's economy leaves the country highly vulnerable at the micro- and macro-economic levels to the recent rise in food and fuel prices. The increase in crude oil prices has raised import prices, and given Lesotho's reliance on imports, general prices in the domestic economy. The increase in consumer prices has already created a loss in real wages, increasing pressure on workers to demand higher wages. Increased labor costs are passed on the consumers in a wage-price spiral. The increase in crude oil prices has also complicated the nation's monetary policy, as the Lesotho Loti's peg to the South African Rand does not allow the GOL flexibility to deal with these developments through unilateral monetary policy actions. ¶5. Furthermore, South African monetary authorities responded to similar inflation by hiking interest rates, which drives up Lesotho's interest rates even more sharply. As result, credit has declined in Lesotho's private sector, leading to a fall in aggregate consumption and investment, and consequently, poor economic growth prospects. As the South African Monetary Policy Committee has already warned of possible further rate hikes at its next sitting in June, this dynamic may get worse for Lesotho before it gets better. ¶6. The rise in fuel prices has also led the government to allow a 35% increase in taxi fares, which, coupled with a four-fold increase in border-crossing fees, has hit commuters hard. In addition, an increase in the price of paraffin oil used for cooking and lighting has exerted stress on poor households. -------------- Not a Good Sign for Growth -------------- ¶7. COMMENT: As Lesotho's economy is so reliant on imports, changes in global commodity prices affect the country quickly. Also, the remoteness of much of the country's population means that a great deal of fuel is used to deliver products. Rising food and fuel prices dim the nation's prospects of matching its 2007 seven percent GDP growth rate again this year. END COMMENT. MURPHY