LESOTHO: GOL DISCUSSES TRADE COMPLEXITIES FACING LDC'S

UNCLAS SECTION 01 OF 02 MASERU 000072

SIPDIS

SENSITIVE
SIPDIS

DEPT ALSO FOR AF/EPS, AF/S;
PASS TO USTR

E.O. 12958: N/A
TAGS: ETRD ECIN ECON BEXP BTIO PREL LT
SUBJECT: LESOTHO: GOL DISCUSSES TRADE COMPLEXITIES FACING LDC'S


MASERU 00000072 001.2 OF 002



1. (U) SUMMARY. Government of Lesotho (GOL) officials and
local business leaders discussed a range of national economic
challenges publicly and in private meetings with Ambassador
Nolan, Charge, Deputy USTR Ambassador Allgeier, and AUSTR Liser
prior to, and on the margins of, a February 27-29 Least
Developed Countries (LDC) Trade Ministerial Meeting in Maseru.
Lesotho's Prime Minister, Trade Minister, and others discussed
the country's international negotiating position, supply side
constraints, increased competition and declining foreign orders
in the textile sector, potential loss of tax revenue, and lack
of diversification. When coupled with the recent revelation
that a major U.S. retailer (Target) would eliminate its
Lesotho-based orders by 2009, the messages constituted a
sobering reminder of the complexities facing Lesotho and other
LDCs in benefiting from the current trading system and
preference programs like AGOA, as well as future opportunities
resulting from the Doha Development Agenda Round (DDA) talks.
END SUMMARY.

--------------
Mosisili Sets the Tone
--------------


2. (U) Lesotho Prime Minister Pakalitha Mosisili inaugurated
the Least Developed Countries (LDCs) Ministerial Meeting on
February 28 by declaring that LDCs share many of the same
challenges and opportunities, despite the diverse mix of nations
that comprise the LDC trade-negotiation block. Mosisili listed
a number of hurdles - such as external debt and lack of private
sector development - as common to most LDCs, and he called on
the LDC trade representatives to negotiate common positions
which directly addressed the unique needs and aspirations of
LDCs.


3. (U) Offering Lesotho as a specific example of a typical LDC,
PM Mosisili cited a number of challenges including the potential
loss of revenue due to tariff cuts, a lack of industrial
diversification, and a low national savings rate. He also
highlighted a recent rise in food prices as a significant
problem for net food importers such as Lesotho. The Prime
Minister concluded by drawing attention to Lesotho's eventual
goal - achieving full integration into the worldwide trading
system; a difficult challenge, according to Mosisili, due to
supply-side constraints and other limitations.

--------------
"Serious Problems Ahead"
--------------


4. (SBU) Ambassador Nolan called on Trade Minister Lebesa on
February 25 in order to discuss general trade issues in advance
of the LDC Ministerial Meeting. In the course of the
discussion, Lebesa revealed a letter written by the U.S.
retailer Target to the CGM Industrial Corporation, one of
Lesotho's largest textile manufacturers. According to the
letter, Target was withdrawing from Lesotho due to "political
instability," comparing the situation in Lesotho to Kenya or
Pakistan. Lebesa vigorously protested Target's assessment,
complaining that such an inaccurate characterization could give
other companies pause in filling orders from Lesotho. The
letter's message notwithstanding, Lebesa labeled lower labor
costs in competitive nations as the true motivation for Target's
pullout.


5. (SBU) During a private meeting with D/USTR Ambassador
Allgeier (joined by Charge, AUSTR Liser, and econoff) on
February 27, Lesotho Trade Minister Popane Lebesa expanded on
the issues he had raised with Ambassador Nolan, warning that he
saw "serious problems ahead." The reasons, according to Lebesa,
were many fold: supply-side constraints, potential losses in
customs tax revenue due to lower tariffs (expected to comprise
60% of total national revenue in 2008),and significantly
increased competition in the textiles sector from lower
labor-cost countries such as India and Bangladesh. Not
uniformly downbeat, Lebesa sounded a note of optimism regarding
the LDC Maseru Ministerial meeting and potentially subsequent
benefits for Lesotho. However, the point delivered was clear:
Lesotho faced significant obstacles and greatly appreciated
any/all U.S. support.


6. (SBU) Lebesa expressed ambivalence when referring to
Lesotho's membership in the Southern African Customs Union
(SACU). On one hand, he admitted, membership in SACU brought
the Kingdom significant benefits, including redistributed
customs revenue. However, according to Lebesa, SACU also
represented Lesotho's difficult balancing act because of
commitments to the Union. Lebesa described Lesotho as "not
completely independent," needing to consult with middle income

MASERU 00000072 002.2 OF 002


nations before establishing its position. Responding to
Ambassador Allgeier's statement that true revenue-sharing
customs unions like SACU called for unique solutions, Lebesa
stated that he was pleased to hear that the U.S. was "looking
for solutions."


7. (SBU) Lebesa also voiced significant concern about the
Lesotho textile industry, which comprise about 40 percent of
GDP, according to some estimates. After highlighting the
extreme disparity in labor costs between Lesotho and Bangladesh
(some in Maseru argue that salaries are up to 10 times higher in
Lesotho),Lebesa reiterated the concerns about Target he had
raised earlier in the week with Ambassador Nolan (para 4).

--------------
CGM Factory Visit
--------------


8. (U) One of southern Africa's largest textile manufacturers,
CGM Industrial is a standard-bearer for Lesotho's economic
fortunes following the implementation of the African Growth and
Opportunity Act (AGOA),which provides duty-free export
potential to the U.S. market for Sub-Saharan Africa. (NOTE:
Lesotho's textile and apparel exports under AGOA currently
account for 86 percent of its total exports to the United
States. END NOTE.) Although CGM first established itself as a
supplier to major U.S. based retailers over 20 years ago - long
before AGOA - orders for the company surged under AGOA until
2004, dropping since then due to increased global competition
from the end of global apparel quotas and the anticipated end of
AGOA third-country fabric provisions, according to Krish
Moodley, Production Director at the primary Maseru plant.
During a factory site tour attended by D/USTR Allgeier, AUSTR
Liser, and Embassy Maseru representatives, Moodley explained
that CGM was forced to reduce its employment rolls from 10,000
to 6,500 since 2004 due to declining orders.


9. (U) Moodley indicated to the USTR delegation that while the
recent Target letter announcing the termination of Lesotho
orders was significant, though wholly inaccurate regarding the
domestic political situation, it was also representative of a
larger problem. Moodley cited various reasons buyers regularly
provided for ceasing business with CGM, including longer product
lead times, higher material prices, and political instability.
However, Moodley opined that lower labor costs in countries like
Bangladesh and Cambodia more accurately explained the pullbacks.
Anticipating this trend to continue, Moodley stated that CGM
was examining the European market as well as organizing an
industry delegation to lobby U.S. based stakeholders.

--------------
COMMENT
--------------


10. (SBU) While GOL and private sector leaders in Lesotho
recognize the opportunity offered by the DDA, there is a
palpable sense of insecurity regarding Lesotho's economic
prospects. The principal forces driving this sentiment -
difficult challenges in the textile sector, the possible loss of
customs tax revenue, a lack of foreign and domestic investment -
are unlikely to change substantially in the near term.


11. With respect to the LDC Maseru Declaration (February 28)
and the ongoing DDA talks, Lesotho faces a difficult balancing
act. Leaders here clearly recognize the benefits of free trade
and multilateral solutions, and support the Declaration's
central goal of greater integration of LDCs. However, it is
recognized that implementation of the DDA's Duty Free Quota Free
(DFQF) initiative may exacerbate Lesotho's economic
difficulties. In Lesotho - and possibly other small LDCs -
where the closure of one textile factory could swell the
unemployment rolls by as much as 15 percent, domestic
policy-makers are seeking nuanced solutions that they view as
critical for ensuring continued political and economic
stability. END COMMENT.


12. (U) This cable has been cleared by USTR.
NOLAN