VZCZCXRO7435
RR RUEHBZ RUEHDU RUEHJO RUEHRN
DE RUEHMR #0148 1401102
ZNR UUUUU ZZH
R 191102Z MAY 08
FM AMEMBASSY MASERU
TO RUEHC/SECSTATE WASHDC 3693
INFO RUCNSAD/SADC COLLECTIVE
RUEHMR/AMEMBASSY MASERU 4112

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