Lesotho's economy: earnings from across one border

Where Lesotho's money comes from

The economy is built around South Africa. The US Commercial Service's market overview for Lesotho, published in 2025, says it buys approximately 85% of its imports for final consumption from South Africa and earns most of its foreign exchange through the customs union, water exports and remittances. The loti, introduced in 1980 and divided into 100 lisente, is pegged at par to the rand, and the rand circulates freely beside it; Lesotho, South Africa, Namibia and Eswatini form the Common Monetary Area, and the Central Bank of Lesotho sets its policy rate to defend the peg. The World Bank reports that the bank raised the rate to 6.75% in May 2026 for that purpose.

The customs union matters most to the state's own accounts. Members of the Southern African Customs Union, Lesotho, Botswana, Namibia, South Africa and Eswatini, trade without tariffs among themselves and share a common external tariff set centrally, so Lesotho does not fully control its own tariffs; Wikipedia's article on the country makes that point against the United States' accusation in 2025 that Lesotho taxed American goods at almost 100%. The BTI's 2026 report records how strongly the receipts move the budget: a fiscal deficit of 5.7% of GDP in 2022 turned into a surplus of 6.1% in 2023, driven by customs union revenues that more than doubled. The World Bank put the surpluses at 9.5% of GDP in 2024 and 3.1% in 2025 and expected a deficit of 0.4% in 2026 as customs revenue declined. Public debt fell to 53.1% of GDP in 2025, from 54.7% in 2024.

Growth has been low. The World Bank's 2026 overview says growth averaged 0.5% over the previous decade, and it classifies Lesotho as a lower-middle-income country with gross national income per head of $1,280 in 2025. The economy grew 2.8% year on year in the first quarter of 2026, led by business services, finance, hotels and restaurants, communications and utilities, while manufacturing contracted and mining remained under pressure. Inflation averaged 4.3% in 2025.

How water became Lesotho's export

The idea is older than independence. In the early 1950s the high commissioner, Sir Evelyn Baring, asked for a survey of the territory's water, which the Lesotho Highlands Development Authority describes as the only natural resource the country had in abundance, and the Cape Town engineer Ninham Shand designed the Oxbow scheme: a high dam, a power station and a tunnel through the Maloti to send water to the goldfields of the Orange Free State. South Africa turned it down, a drought in the mid-1960s revived interest, feasibility studies ran from 1978, and on 24 October 1986 the foreign ministers of Lesotho's military government and of apartheid South Africa, Colonel Thaabe Letsie and Pik Botha, signed the treaty in Maseru.

The treaty divides the costs. South Africa pays for everything connected with the transfer of water, including construction, operation, maintenance and compensation of displaced people; Lesotho pays for the hydroelectric component. It also sets a formula for royalties, laid out in a manual of three volumes, and payment began when the water in Katse reached 1,993 metres in September 1996. Water delivery began on 22 January 1998.

Dates and dimensions are from the Trans-Caledon Tunnel Authority, Britannica and the Development Authority. The first phase cost R16.4 billion, and the second, which adds Polihali and a 38-kilometre tunnel to Katse, was estimated at R32.6 billion, borrowed on South Africa's side off budget. The Tunnel Authority puts the yearly transfer at about 780 million cubic metres and Polihali's addition at 465 million, which would bring the total to about 1,245 million cubic metres.

What Lesotho earns has grown with the volumes. The Development Authority calculated the project's contribution to economic activity in 2002 at 5.4% of GDP. Wikipedia's account of the project gives royalties of R780 million as of 2015, about 5% of state income outside taxes, and its article on the country gives approximately US$70 million from the sale of electricity and water in 2010. Writing in The Conversation in March 2026, John Aerni-Flessner of Michigan State University put the royalties at almost R4 billion, or US$240 million, a year, about 15% of the government's total budget, and noted that talks to renegotiate the 1986 treaty were set to begin in April 2026, 40 years after it was signed. The first phase, through the 'Muela station, made Lesotho almost completely self-sufficient in producing electricity, in Wikipedia's account.

The project's costs fell on the highlands. Some displaced households have disputed their compensation for two decades: the BTI's 2026 report cites five households moved for the Mohale Dam who say they were never paid, and protests in June 2023 over compensation for Polihali. Freedom House records that the Seinoli Legal Centre sued the project in 2023 over its lack of transparency. Aerni-Flessner adds that many communities within sight of the reservoirs still lack access to the water.

Why garment factories depend on American trade law

Lesotho's clothing industry grew on preferential access to the United States. Under the African Growth and Opportunity Act, factories sewed for Gap, Levi Strauss, Wal-Mart and other American brands; Wikipedia's articles on the country record that employment passed 50,000 in mid-2004, the first time manufacturing workers outnumbered government employees, and that the industry exported goods worth US$487 million in 2008, mainly to the United States. Employment fell to about 45,000 by mid-2011 under competition from other producers. In 1990, 92% of textile employees were women. In 2007 the average textile wage was US$103 a month against a legal minimum of US$93.

The dependence has twice shown itself in contractions. The global slowdown cut textile exports and jobs in 2009, when GDP growth fell to 0.9%. The BTI's 2026 report records that the secondary sector contracted by 8.2% in 2023, mainly because of reduced orders from the United States. Then, on 2 April 2025, the United States set a tariff of 50% on imports from Lesotho, on the claim that Lesotho taxed American goods at almost 100%; Wikipedia's account records that orders were cancelled and factories closed within weeks, that the government declared a state of economic emergency, and that the rate was reduced to 15% on 1 August 2025. The World Bank's overview of 2026 notes an extension of the trade act to December 2028 and describes the textile sector as constrained.

What the diamond mines produce

Diamonds come from kimberlite pipes in the highlands. The pipes at Letšeng-la-Terae in Mokhotlong were found on 14 December 1957 by the geologist Peter Nixon. De Beers mined there from 1977 to 1982, in Britannica's dates, and closed the mine; Letšeng Diamonds holds a mining lease granted by the government in 1999, and production resumed in 2003. The mine is known for large stones: the Lesotho Promise, a 603-carat white diamond, came from it in August 2006. Earlier, in 1967, a Mosotho woman found the 601-carat Lesotho Brown in the mountains.

Production is spread over Letšeng, Mothae, Liqhobong and Kao. Wikipedia's article on the country gives an estimated 240,000 carats worth US$300 million from the four mines in 2014. The state takes a share of ownership: the BTI's 2026 report records a 30% government stake in ventures such as Storm Mountain Diamonds at Kao, which produced a large pink diamond in April 2023. Taxation has been contested. Diamond exporters are zero-rated for value-added tax, so Revenue Services Lesotho refunds them about LSL 40 million a month; a 2021 amendment to make diamond exports exempt, saving an estimated LSL 2 billion a year, was opposed by the Chamber of Mines, which pointed to the losses at Liqhobong.

How migrant work shaped Lesotho's households

For a century Lesotho's main export was labour. Basotho went to work in South Africa's mines from the late nineteenth century, Britannica calls Basutoland the classic labour reserve of southern Africa, and Wikipedia's economic history counts over 100,000 Basotho working in South African industries in 1982. The Encyclopedia of the Nations gives 60% of active male wage earners working in South Africa in 1996. Britannica traces the decline that followed: remittances contributed some two-thirds of gross national product in 1990, one-third by the mid-1990s and about a quarter in the early twenty-first century, while the share of working men employed in South Africa fell from about a quarter in the mid-1990s to about a fifth in the early 2000s. Some migrants who had lived in South Africa before 1996 and voted in its 1994 election became eligible for permanent residence there.

Women's migration ran on a different track. Basotho women went to South Africa for work before the 1950s, and South Africa's pass laws were extended to women in 1952, after which female migration declined. Basotho women did not work in the mines, and the garment industry that grew from the 1980s employed mainly young women. The result, in Wikipedia's figures, is an economy in which women are more likely than men to reach secondary school but men earn 1.5 times as much.

What farming still provides

In the nineteenth century the Basotho sold grain to the South African mining towns, and Britannica describes farmers using new techniques to produce substantial surpluses. By the early twentieth century land shortages had made the territory a net importer of food. Today only about a tenth of the land is arable, yet most rural households farm for their own consumption. The main crops are maize, sorghum, wheat, beans and peas, and wool and mohair are produced for export. Britannica records a steady decline in agricultural production since the mid-1960s that no development project has reversed, and drought has repeatedly destroyed summer harvests and livestock.

Development lending now targets that sector. The World Bank's Smallholder Agriculture Development Project II, co-financed by Japan and IFAD, reported 106,983 farmers adopting climate-smart practices on 65,213 hectares in its 2026 overview, and the Bank lists ten operations in Lesotho totalling $453 million.

Who has work and who is poor

Estimates of unemployment differ by source and definition. The BTI's 2026 report gives 16.5%, the US Commercial Service's overview of 2025 30.1%, and the BTI cites a Bureau of Statistics report of 2023 putting youth unemployment at nearly 34%. Formal jobs are few: the labour force survey for 2024 found informal work accounting for roughly 84% of employment, and the Commercial Service describes the government as the main player in the national economy.

Poverty has fallen slowly and unevenly. The Bureau of Statistics figures cited by the BTI show the rural poverty rate barely moving, from 61.3% in 2002 to 2003 to 60.7% in 2017 to 2018, while urban poverty fell from 41.5% to 28.5% over the same period. The Commercial Service gives 49.7% of the population below the poverty line and a Gini coefficient of 0.541 in its 2025 overview, and GDP per head of $1,106 in 2024. Old-age pensions are paid without contribution to citizens aged 70 and over, and the BTI records the payments moving to mobile money. Heavy snow in July 2023 held up pension payments in remote areas; the geography article describes the mountains the state has to reach.