VZCZCXRO5544
RR RUEHBZ RUEHDU RUEHJO RUEHRN
DE RUEHMR #0554/01 2761534
ZNR UUUUU ZZH
R 031534Z OCT 07
FM AMEMBASSY MASERU
TO RUEHC/SECSTATE WASHDC 3370
INFO RUCNSAD/SADC COLLECTIVE
RUEHMR/AMEMBASSY MASERU 3769

UNCLAS SECTION 01 OF 04 MASERU 000554 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR AF/S, AF/EPS (JANET POTASH); 
PASS TO USTR FOR CONNIE HAMILTON 
 
E.O. 12958: N/A 
TAGS: ECON ETRD LT
SUBJECT: LESOTHO: AGOA ELIGIBILITY REVIEW 
 
REF: STATE 132189 
 
MASERU 00000554  001.2 OF 004 
 
 
¶1.  In response to REFTEL, Embassy Maseru submits the following 
updated AGOA country eligibility information. 
 
 
¶2.  TPSC SUBCOMMITTEE ON AGOA IMPLEMENTATION 
COUNTRY ELIGIBILITY RECOMMENDATIONS 2007 
STATE SUBMISSIONS 
 
Country: Lesotho 
Current AGOA Status: Eligible 
 
Country Background Summary:  The Kingdom of Lesotho, a 
landlocked southern African nation slightly smaller than 
Maryland, has a population of approximately 1.88 million 
inhabitants.  In 2006, Lesotho achieved a record growth rate of 
6.2% due to the doubling of diamond output and rising public 
investment.  With a per capita gross national income of $1,110, 
Lesotho's market-based economy is closely tied to that of its 
larger neighbor, South Africa, though its export sector is 
heavily dependent on apparel exports to the United States under 
the African Growth and Opportunity Act (AGOA).  With a 
prevalence rate of approximately 23%, Lesotho has one of the 
world's highest rates of HIV/AIDS infection. 
 
The Government of Lesotho (GOL) is focusing on structural and 
institutional reforms and increased investment with the support 
of a $362.5 million grant from Millennium Challenge Corporation 
(MCC).  The GOL seeks to address the country's credit weakness, 
low level of development, and poor business environment. 
Improvements in the country's development will depend on the 
impact of reforms, infrastructure enhancements, increasing 
private sector activity, and diversification of government 
revenue streams and the nation's industrial export base. 
 
Following Lesotho's February 2007 National Assembly election, a 
political impasse developed between the governing LCD and 
opposition parties regarding the distribution of parliamentary 
seats and other issues.  While international and domestic 
monitors observed Lesotho's polling process to be peaceful and 
free, opposition parties allege that the LCD unfairly 
manipulated Lesotho's complex Mixed Member Proportional (MMP) 
parliamentary system through the use of political alliances. 
This ongoing political impasse serves as the backdrop to ongoing 
economic developments in the Mountain Kingdom. 
 
Comments on Eligibility Requirements 
 
¶I. Market-based Economy 
 
¶A. Major Strengths Identified 
 
-  The Ministry of Trade and Industry, in partnership with the 
Lesotho Revenue Authority, launched a "one-stop-shop" facility 
in September 2007 to improve the local business climate in the 
export sector.  The facility will provide integrated services to 
businesses including export and import coordination and a new 
simplified and computerized licensing regime.  It is hoped that 
this facility helps reduce "red tape" in Lesotho's private 
sector. 
-  Lesotho welcomes investment from all countries of the world, 
including the United States.  The country has been an ardent 
supporter of a possible U.S./SACU Free Trade Agreement, which it 
perceives as an opportunity to solidify the benefits of AGOA and 
thereby present a more secure climate for investment. 
-  The outlook of the mining sector is positive.  Letseng 
Diamonds, which began commercial production in 2004, is due to 
double capacity in 2008.  Liqhobong Mine, under the ownership of 
the Letsing Group, began production in 2006, and a third mine is 
expected to open in 2008.  This sector has contributed to higher 
GDP growth and the diversification of Lesotho's export base. 
-  Following a precipitous decline upon the expiration of 
Multi-Fiber Agreement at the close of 2003, Lesotho's textile 
sector gradually recovered and now employs a workforce of over 
40,000 individuals.  Lesotho's garment industry is now 
successfully positioning itself as an "ethical clothing 
manufacturer" with international buyers.  New investments from 
South Africa's largest clothing retailer -- a result of 
government tax incentives introduced in 2006 - are also 
promising.  Annual garment exports currently stand at $387 
million.  Manufacturing accounted for 15.2% of GDP in 2006, of 
which 6.6% of GDP was accounted for by the garment sector. 
-  Lesotho signed a compact with the Millennium Challenge 
Corporation (MCC) worth $362.5 million in July 2007.  The 
compact is aimed at projects that will attempt to eliminate 
extreme poverty and promote private sector development. 
Specifically, the compact will assist in the improvement of the 
water supply for domestic and industrial use (including for the 
textile sector), strengthen health sector infrastructure, and 
provide support for institutional and structural reforms in the 
 
MASERU 00000554  002.2 OF 004 
 
 
private sector.  These initiatives will be supplemented by an 
$8.1 million World Bank private sector competitiveness and 
economic diversification project.  The World Bank project aims 
to improve Lesotho's business environment by streamlining 
procedures for starting a business and facilitating commercial 
bank loans to the private sector.  To aid in industrial 
diversification, the project will finance training centers to 
teach textile workers to produce greater value added products 
and conduct pilot projects in the fields of in tourism and 
agriculture. 
 
¶B. Major Issues/Problems Identified 
 
-  Lesotho's current weak business environment constrains 
private sector-led development.  Lesotho ranks 114 out of 175 
countries on the World Bank's global ranking of the ease of 
conducting business. 
-  Infrastructure bottlenecks, such as factory space and waste 
water treatment facilities, constrain expansion of the 
manufacturing sector and development of fabric mills. 
-  Lesotho's textile industry has experienced a continuing 
erosion of its competitiveness in recent years.  This erosion 
has resulted in a reduction of production output and prices.  In 
conversations with seven local factories, managers noted 
decreases in orders under AGOA ranging from 40% to 65% between 
2004 and 2007.  A decreasing general demand for textile products 
in the United States also exerted a downward pressure during 
this same period.  Many employers in the textile industry 
reported changing employees from fulltime status to short-term 
contracts to reduce wages costs.  These trends indicate the 
sector's high vulnerability to global competition - competition 
which will only increase as more quotas are removed on Chinese 
textiles next year. 
-  The HIV/AIDS prevalence rate, currently estimated at 23%, 
poses a major challenge to Lesotho's long-term growth prospects. 
 
II. Political Reforms/Rule of Law/Anti-Corruption 
 
¶A. Major Strengths Identified 
 
-  Domestic and international observers concluded that the 
February 2007 national election was free and peaceful.  The 
governing Lesotho Congress for Democracy (LCD) party won 
reelection, claiming 61 of 80 constituency-based seats in the 
National Assembly.  Through a pre-election alliance with the 
National Independent Party (NIP), the LCD controled a further 21 
proportional representation seats, bringing its majority to 82 
out of the parliament's 120 total seats.  Lesotho's largest 
opposition party, the All Basotho Convention (ABC), won 17 
constituency-based seats and garnered a further 10 proportional 
seats through its alliance with the Lesotho Workers Party.  The 
allocation of proportional seats remained a point of contention 
in the nation's political environment. 
-  Lesotho law prohibits arbitrary arrest and detention, but 
opposition figures credibly claimed that the security forces 
violated these principals in the aftermath of July 2007 attacks 
on ministerial residences in Maseru. 
-  The judiciary was independent in practice. 
-  The GOL, through its Directorate on Corruption on Economic 
Offences (DCEO), continued to pursue corruption cases on the 
embezzlement of government resources in various government 
departments and the private sector. This includes a 2007 case of 
the Principal Secretary of Justice who stands accused of 
undermining public procurement regulations and deliberately 
using her position for personal benefit.  There was also a case 
launched by the DCEO concerning a travel agency accused of 
inflating ticket fares for government officials in a kickback 
scheme.  In August 2007, the High Court convicted the company of 
defrauding the government of $212,000 
 
¶B. Major Issues/Problems Identified 
 
-  According to the Transparency International, corruption was a 
problem. 
-  Corruption among police and security forces was a problem; 
however the government continued its reform efforts. 
-  Lengthy pretrial detention remained a problem due to a 
serious backlog of cases and an overall lack of resources within 
the Ministry of Justice and Human Rights. 
 
III. Poverty Reduction 
 
¶A. Major Strengths Identified 
 
-  In 2004, Lesotho enacted a Poverty Reduction Strategy (PRS) 
aimed at providing broad-based improvements in the standard of 
living and welfare of the Basotho people.  This is planned to be 
achieved through rapid and sustained economic growth, creating 
more employment income opportunities and empowering the poor and 
the vulnerable to access basis services.  According to the PRS, 
 
MASERU 00000554  003.2 OF 004 
 
 
growth should be driven by the private sector and facilitated by 
appropriate government policies.  Lastly, the PRS is to deepen 
democracy and improve public sector performance. 
-  Strategies for sustainable broad-based economic growth 
include attracting domestic investment and foreign direct 
investment beyond the garment sector in order to add value to 
local products and expand the economic base, especially in the 
tourism industry.  Free primary education, introduced in 1999, 
was extended to the seventh and final grade in 2006.  To 
accommodate increased intake, the government has built 108 new 
primary schools since 2000.  Seventeen of these were inaugurated 
by the Prime Minister in February 2007.  The government also 
introduced an affordable text book rental plan for secondary 
schools.  A similar rental plan was introduced in primary 
schools in 2003. 
 
¶B. Major Issues/Problems Identified 
 
-  As observed during the IMF Article IV Consultations in August 
2007, preliminary results from the PRS review process show that 
despite relatively good growth, PRS indicators were not 
positive, indicating that the country has been unable to achieve 
broad-based sustainable growth.  Fitch Rating's 2006 Sovereign 
Credit Rating ranked Lesotho at "BB-" for its foreign long-term 
currency rating and at "B" for its short-term foreign rating. 
However, Fitch indicated that the country is much less developed 
than its peers in the "BB" group.  Lesotho's per capita income 
of $1,100 falls far short of the "BB" rating group median of 
$2,500.  Lesotho's Human Development ranking was at 149 out of 
177 countries in 2006, largely due to high prevalence rate of 
HIV/AIDS (23% prevalence among the total population). 
-  The strong growth rate, largely spurred by a boom in the 
mining sector, will have a low impact on poverty due to limited 
employment opportunities in the sector. 
-  The country lacks data essential for monitoring and 
evaluating PRS implementation. 
-  Poverty is still widespread, and the unemployment rate hovers 
around 40%. 
 
IV. Workers' Rights/Child Labor/Human Rights 
 
¶A. Major Strengths Identified 
-  The Constitution recognizes the right to form independent 
trade unions to protect workers' rights and provides for sound 
labor relations and fair employment practices. 
-  The Constitution prohibits slavery or servitude and forced 
labor. 
-  In June 2006, Lesotho's Parliament amended the 1982 Labor 
Code to include an HIV/AIDS workplace policy. 
-  Lesotho ratified ILO Conventions 182 on the Worst Forms of 
Child Labor and 138 on Minimum Age in 2001. 
-  Lesotho is participating in two regional U.S. Department of 
Labor programs to reduce child labor.  These programs are under 
the "Towards Eliminating Child Labor" and the "Reducing 
Exploitative Child Labor in Southern Africa" initiatives. 
-  The law provides for freedom of speech and of the press, and 
the government generally respected those rights. 
-  The law provides for freedom of assembly and association, and 
the government generally respected those rights. 
-  The law provides for freedom of religion, and the government 
generally respected this right. 
 
¶B. Major Issues/Problems Identified 
 
-  According to the Ministry of Labor, employers in the retail 
sector frequently violate the labor code.  Common problems 
include violations of the rules governing ordinary hours of 
work, overtime pay, and public holidays.  Health and safety 
violations were also common in locally-owned establishments. 
Employers of locally-owned establishments often do not keep 
records of employees' salaries to facilitate legally required 
inspections. The labor code also prohibits essential employees 
such as civil servants from joining or forming unions, but 
allows them to form staff associations. 
-  The law limits workers' right to strike and requires a number 
of procedures before strike action is authorized. 
-  Child labor is common in the informal sector. 
-  While child labor laws covered all sectors, there are no 
provisions for children working in the agricultural sector. 
-  There were credible allegations that security forces tortured 
persons and that police at times used excessive force. 
-  Prison conditions remained poor. 
-  Domestic violence remained a serious problem. 
-  Parallel observance of customary law severely restricted 
women's inheritance and property rights. 
-  The law does not specifically prohibit trafficking in 
persons.  There were no official statistics available on the 
issue of trafficking. 
-  Although child labor does not exist in the formal sector, an 
increase in the number of youth orphaned by the HIV/AIDS 
 
MASERU 00000554  004.2 OF 004 
 
 
pandemic has placed young children at risk of "survival" 
employment within the informal sector. 
 
¶V. International Terrorism/U.S. National Security 
 
¶A. Major Strengths Identified 
 
None 
 
¶B. Major Issues/Problems Identified 
 
None 
NOLAN