VZCZCXRO2993
RR RUEHBZ RUEHDU RUEHJO RUEHRN
DE RUEHMR #0297/01 1421534
ZNR UUUUU ZZH
R 221534Z MAY 07
FM AMEMBASSY MASERU
TO RUEHC/SECSTATE WASHDC 2981
INFO RUCNSAD/SADC COLLECTIVE
RUEHMR/AMEMBASSY MASERU 3346

UNCLAS SECTION 01 OF 02 MASERU 000297 
 
SIPDIS 
 
SIPDIS 
 
DEPT ALSO FOR AF/S 
DEPT ALSO FOR AF/EPS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN PGOV EAGR KCRM EAID LT
SUBJECT: LESOTHO MAY 2007 ECONOMIC ROUNDUP: DIAMONDS, CORN, FISCAL 
POLICY, AND LAUNDERING 
 
 
MASERU 00000297  001.2 OF 002 
 
 
¶1.  SUMMARY: 
 
 
 
-  Analyst: Fiscal Policy and Tax Base Key in Lesotho; 
 
-  Diamond Mining in Lesotho: Implications; 
 
-  Money Laundering Task Force Meets in Maseru; and 
 
-  Lesotho's Maize and Sorghum Harvest Fails. 
 
 
 
END SUMMARY. 
 
 
 
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Analyst: Fiscal Policy and Tax Base Key in Lesotho 
 
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¶2.  On April 18, Standard Bank Lesotho hosted an economic 
briefing by Mr. Jan Duvenage, a representative from Standard 
Bank South Africa's Economics Division for African Research.  He 
evaluated the country's fiscal policy, concluding that Lesotho's 
fiscal policy is crucial for macroeconomic stability and growth 
given the Lesotho Loti's peg to the South African Rand. 
Duvanage asserted that although Lesotho has maintained a sound 
fiscal policy and healthy foreign current reserves, the country 
is too dependant on South African Customs Union (SACU) revenue 
sharing payments which are not permanent, making the country 
vulnerable to external shocks.  Therefore, the country should 
broaden its tax base and improve its tax administration to 
reduce this dependence.  Also, an increase in capital 
expenditures is needed to develop infrastructure essential for 
economic growth. 
 
 
 
¶3.  Highlighting Lesotho's fiscal surpluses from 2003 to present 
(largely attributed to increased revenue sharing payments from 
the SACU), he noted that Lesotho's foreign debt had fallen from 
81% of GDP to 47.2% of GDP between 2002 and 2006.  Nevertheless, 
Duvenage maintained that Lesotho's fiscal policy still needs 
improvement due to its narrow tax base, weak tax administration, 
and service delivery constraints.  He cited the underdevelopment 
of financial markets, low rates of capital expenditure, and the 
high levels of wage payments due to a large civil service (14% 
of GDP compared to the Sub-Saharan average of 6.1%) as factors 
holding back Lesotho's growth. 
 
 
 
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Diamond Mining in Lesotho: Implications 
 
--------------------------------------- 
 
 
 
¶4.  Recent diamond prospecting licenses granted for Lesotho's 
Kolo and Mothae regions underscore the growth in the nation's 
mining industry following the recent find of the world's 15th 
largest uncut stone in Lesotho.  Lesotho's two existing diamond 
mines, located at Letseng and Liqhobong, have already 
substantially impacted the nation's economic output and 
currently account for 7% of GDP.  Diamond production rose by 
83.7% in 2005 and 103.8% in 2006, and the sub-sector is expected 
to continue to grow as mines progress towards full production 
levels. 
 
 
 
¶5.  The industry is already having a macroeconomic impact. 
Diamonds exports have improved Lesotho's balance of payments, 
and the nation's net foreign reserves currently equal US$564 
million, providing five months of import cover.  The GOL's 8% 
royalty from mining dividends also has an important impact on 
government finance.  On the labor front, unskilled mine labor in 
typically recruited locally, while professional staff is 
recruited nationwide, helping to mitigate Lesotho's high 
unemployment rate. 
 
 
MASERU 00000297  002.2 OF 002 
 
 
 
 
¶6.  The rebounding mining industry is likely to enhance the 
welfare of local communities in mining regions through 
employment opportunities and access to infrastructure such as 
roads, water, and electricity.  However, it is uncertain how 
effective governmental measures intended to reduce poverty will 
be.  Skills development, technology transfer, and corporate 
social responsibility will remain issues for the industry as it 
continues to grow. 
 
 
 
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Money Laundering Task Force Meets in Maseru 
 
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¶7.  The International Organization of Supreme Audit 
Institutions' (INTOSAI) task force on international money 
laundering held its fifth meeting in Maseru on April 24-25, 
¶2007.  The task force's main objectives are to: 1) promote 
international cooperation in the fight against money laundering; 
2) monitor and report on the extent of international cooperation 
on money laundering issues; 3) share strategies for combating 
money laundering; and 4) create anti-money laundering training 
opportunities.  The INTOSAI task force is made up of nine 
countries, including: the United States, Peru, the United 
Kingdom, Fiji, Lesotho, Russia, Papua New Guinea, Egypt, and 
Libya.  (NOTE:  According to GOL officials, a representative 
from the U.S. General Accounting Office participated in this 
event.  However, Embassy Maseru received no briefing or country 
clearance request.  END NOTE.) 
 
 
 
¶8.  Lesotho's "Bill on Money Laundering," drafted in 2004, has 
still not been passed into law.  Thus, Lesotho still has no 
legal framework regarding money laundering.  While Lesotho's 
active participation in INTOSAI's money laundering task force is 
a positive step, the nation's potential progress on money 
laundering issues appears doubtful without a legal 
anti-laundering framework in place. 
 
 
 
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Lesotho's Maize and Sorghum Harvest Fails 
 
----------------------------------------- 
 
 
 
¶9.  According to a pre-harvest assessment conducted by Lesotho's 
Disaster Management Authority and sponsored by the World Food 
Program, Lesotho's domestic agricultural production in 2007 will 
meet only 15-20% of the basic food needs of the country.  The 
study states that a 25% or greater increase in the price of 
maize, a basic staple in Lesotho, is expected.  The country is 
expecting a decrease of 14% in maize area harvested and a 10% 
decrease in the maize yield, leading to a 39% total decrease in 
maize production.  Also, 42% less sorghum is expected to be 
produced this year than last.  The problem is most severe in the 
northern lowlands - a traditional breadbasket region for Lesotho. 
MURPHY