P R 200716Z JAN 09
FM AMEMBASSY MASERU
TO SECSTATE WASHDC 3982
SADC COLLECTIVE
DEPT OF TREASURY WASHINGTON DC
CIMS NTDB WASHDC
INFO AMEMBASSY MASERU

UNCLAS MASERU 000015 
 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB PGOV USTR KTDB OPIC LT
SUBJECT: LESOTHO 2009 INVESTMENT CLIMATE STATEMENT 
 
REF: 08 STATE 123907 
 
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Summary 
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¶1. Embassy Maseru submits the following information for 
Lesotho's 2009 Investment Climate Statement. Lesotho is open to 
foreign direct investment (FDI) and generally treats foreign 
investors well. With most investment originating from East Asia, 
FDI in Lesotho is primarily channeled into export-oriented 
manufacturing, specifically textiles and apparel for the U.S. 
market. Lesotho's investment climate is favorable with regards 
to currency conversion, monetary transfer policies, and lack of 
undue burdens to investors. The main weakness of the investment 
climate is an under-developed legal framework for investors and 
the need for land reform. Lesotho has maintained an inviting 
posture with regards to FDI overall. 
 
------------------------------ 
Openness to Foreign Investment 
------------------------------ 
 
¶2. Lesotho is largely open to FDI and treats foreign investors 
well. However, the country's FDI policy and legal framework are 
not well developed enough to enhance transparency and 
consistency. Lesotho has been more successful than most other 
least-developed countries in attracting FDI - predominantly 
export-oriented investment. Foreign investors in the apparel 
industry have created new jobs, particularly for females, and 
contributed to poverty reduction. Current business taxation 
regulations only partially address investor needs. The 
Government of Lesotho (GOL) is under pressure to revise relevant 
laws affecting investors in various sectors. 
 
¶3. The Lesotho Revenue Authority (LRA), through support from the 
United States Department of Treasury Office of Technical 
Assistance, is working on capacity-building in tax laws and 
application of those laws to address the bad practices that 
arise from a lack of codified standards and a staff with 
inadequate knowledge of how to interpret and apply tax laws. 
 
¶4. Ninety percent of FDI flows into export-oriented 
manufacturing. FDI in manufacturing alone has created 45,000 
jobs. The single largest investment is believed to be around $90 
million in capital infrastructure by the Taiwanese Nien Hsing 
Group. Lesotho's export-oriented FDI gives it an advantage that 
needs to be built on. Foreign firms in Lesotho are highly 
concentrated in a very narrow range of products such as knit 
apparel and jeans. Foreign affiliates have also invested small 
amounts in footwear, electrical products, electronics, 
television assembly, food processing, and other manufacturing 
products such as plastics and umbrellas. 
 
¶5. The telecommunications sector in Lesotho has also attracted 
FDI. The consortium of ESKOM Zimbabwe's Econet Wireless 
International and Mauritius Telecom have a 70% share of Lesotho 
Telecom. Lesotho has a high penetration of telephony relative to 
per capita income. Such services have been extensively 
modernized and expanded in recent years. 
 
¶6. FDI in air transportation has not been successful. Lesotho 
Airways is now managed and handled by South African Airways for 
flights from Maseru to Johannesburg, and tourism has not been 
exploited, especially in activities aimed at protecting the 
natural environment and ecological attractions. 
 
¶7. FDI in diamond mining has been revived by the reopening of 
Lets'eng Diamonds which is a partnership between a South 
African-owned company and GOL. The mine employs about 70 people, 
90% of whom are Lesotho nationals. A European mining company and 
GOL operate another mine, Liqhobong, and the Kao kimberlite pipe 
in Butha Buthe district. These South African companies are also 
prospecting the Kolo mine in the southern area of the country. 
In its attempt to attract FDI to the mining industry, the GOL 
has offered a number of concessions, including VAT exemptions on 
inputs used during construction, and exemptions from withholding 
taxes on dividends and interest payments. In return, Lesotho is 
granted 8% of gross sales royalties, 12.5% equity interest in 
the company, and a further 12.5 % share of dividends. 
 
¶8. Generally, the GOL continues to recognize the need for the 
Kingdom to be competitive in regional and international markets. 
To achieve this goal, the government has embarked on structural 
reforms that aim at improving the investment climate. 
Initiatives include private sector competitiveness programs 
under the Millennium Challenge Corporation and the World Bank, 
as well as modernizing customs processes through technical 
assistance from the USAID Southern Africa Global Competitiveness 
Hub. Specific activities include modernizing bank payment 
systems; introducing national ID's; creating credit facility for 
manufacturers; and modernizing land tenure systems. Customs 
processes will include minimizing the number of procedures 
required to clear consignments, both for export and import 
clearance purposes. 
 
¶9. The Ministry of Trade and Industry also introduced a "One 
Stop Shop" where all services required for the issuance of 
licenses and exports are housed under one roof. This has reduced 
the number of days to start a business from 92 days to 30 days. 
The Ministry is committed to developing this facility further to 
increase efficiency and expedite the procedures and processes 
needed to compete in the exporting business. Developments will 
extend to simplifying and expediting the issuance of work and 
residence permits to reduce the turnaround time. 
 
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The Origin of Foreign Investors 
------------------------------- 
 
¶10. Lesotho's apparel sector is entirely East Asian and South 
African-owned and currently employs about 45,000 people. Two 
factories are under Taiwanese ownership, two are owned by Hong 
Kong, one is Singapore-owned, and eight are owned by South 
African firms. South African FDI is present in footwear 
factories, four electronic firms, Sun Hotels, air travel, 
insurance and telecommunications, financial services, and mining. 
 
¶11. Lesotho's performance in attracting FDI has been creditable 
by regional standards. It is commendable that the bulk of FDI is 
channeled into the manufacturing sector and most of that 
investment goes into export activity. FDI entry in business and 
consumer services is now restricted in the case of small scale 
retail and personal services businesses. No foreign ownership or 
even board directorship by a non citizen is permitted at any 
level in these restricted businesses. However, there are 
foreign-owned small retail businesses which were established 
before the present restrictions. These restrictions on 
small-scale services and manufacturing businesses are 
instruments of immigration control. Lesotho is sensitive to the 
entry of small business owner-operators from abroad, especially 
from China and West Africa. If such businesses were established, 
this would officially be perceived as an unwelcome level of 
economic migration. 
 
¶12. Many trading businesses and all substantial manufacturing 
businesses are open to FDI. Nevertheless the relevant trading or 
industry license is required and must be renewed annually. 
 
¶13. In most aspects of "normal business," foreign investors are 
on an equal footing with Basotho investors. An exception is the 
prohibition on ownership of land lease titles by foreign 
investors. Lesotho has no legal provisions that discriminate 
among home countries. It is a member of SADC, but this does not 
lead to preferential treatment for investors from these 
countries. 
 
¶14. Lesotho's standards of treatment and protection of specific 
interest to foreign investors are good in practice, but the 
legal framework guaranteeing these norms is weakly developed. 
There is no foreign investment law. Bilateral Investment 
Treaties (BITs) have been concluded with only two countries, the 
United Kingdom in 1981, and Germany in 1985. 
 
-------------------------------- 
Conversion and Transfer Policies 
-------------------------------- 
 
¶15. Lesotho has traditional foreign exchange controls but is 
also controlled by its membership in the Southern Africa Common 
Monetary Area (CMA). The CMA is comprised of Lesotho, Namibia, 
South Africa and Swaziland. Under the CMA the South African rand 
is legal tender in Lesotho. Under CMA rules the loti should be 
exchanged at par with the rand and the rand/loti peg must be 
maintained. Lesotho must hold reserves in rand and other foreign 
currencies. There are no exchange controls between Lesotho and 
South Africa but CMA members agree to have exchange controls 
with third parties. 
 
¶16. Lesotho has partly liberalized the capital account. Controls 
on the current account were abolished in 1998 while limited 
controls on the capital account were adopted in 1993. 
 
¶17. Commercial banks have been delegated authority to undertake 
current account transactions and Lesotho acceded to Article VIII 
of the International Monetary Fund. However dividends payments 
still require Central Bank approval. The Central Bank maintains 
direct power of approval over foreign exchange requirements for 
all capital account transactions including FDI, capital 
disinvestment, and contracting and servicing offshore debt. 
There has never been a case of blockage of such transfers, and 
shortages of foreign exchange that could lead to blockage are 
highly unlikely given net international reserves of $1 billion 
in 2008, which is equivalent to eight months of import cover. 
Lesotho is a member of the Southern African Common Policy on 
approval of foreign loans. However policies on foreign borrowing 
are not strongly developed on the grounds that there is little 
foreign borrowing by resident businesses. The Central Bank and 
the Lesotho National Development Corporation (LNDC) monitor 
international capital inflows. There are no restrictions on 
converting or transferring funds associated with an investment 
into a freely convertible currency through a legal clearing 
agent. 
 
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Expropriation and Compensation 
------------------------------ 
 
¶18. The constitution provides that the acquisition of private 
property by the state can only occur for specified public 
purposes. Further, the law provides for full and prompt 
compensation. Affected persons may appeal to the High Court as 
to whether the action is legal and compensation is adequate. The 
constitution is silent as to whether compensation may be paid 
abroad in the case of a non-resident. 
 
¶19. In one incident, mining companies filed a case against the 
Lesotho Water Highlands Project, alleging that the plaintiff 
companies hold mineral lease rights located within the 
geographic area of land that was inundated as a result of the 
construction of Katse Dam. The companies claimed that the said 
rights have been unlawfully expropriated by the GOL without any 
compensation. 
 
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Dispute Settlement 
------------------ 
 
¶20. Foreign investors have full and equal recourse to the 
Lesotho courts for commercial and labor disputes. Courts are 
regarded as fair and impartial in cases involving foreign 
investors. Complex commercial cases may be heard by foreign 
judges. Privatization has introduced a number of investment 
agreements and these provide for international arbitration to 
settle disputes. Under the BIT with United Kingdom, an investor 
may take a dispute with the Government to international 
arbitration. The Germany BIT is silent on this issue. 
 
¶21. Lesotho is a member of the Multilateral Investment Guarantee 
Agency and has acceded to the Convention on the Settlement of 
Investment Disputes between States and Nationals of Other States. 
 
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Performance requirements 
------------------------ 
 
¶22. There are no incentives for and no performance requirements 
imposed specifically on foreign investors as a condition of 
investment. 
 
¶23. The principal business taxes in Lesotho are income tax, 
customs and excise duty, and value-added tax. Corporate income 
tax heavily favors investment in manufacturing where income is 
taxed at 0% and there is no withholding tax on dividends paid to 
non-residents from manufacturing profits. Income in all other 
sectors is taxed at 35% and there is a further 25% withholding 
tax on non-resident dividends. Moreover, only industrial 
buildings qualify for depreciation allowances for taxation. 
Building for services, tourism, farming, etc., are not 
depreciable. Infrastructure such as land improvements and site 
services also do not qualify. 
 
-------------------------------------------- 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
¶24. Lesotho has no competition law or overall competition 
regulator. Instead, under the industrial and trading licenses 
system a business can apply for protection from competition for 
up to 10 years. 
 
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Protection of Property Rights 
----------------------------- 
 
¶25. Lesotho respects international intellectual property laws 
and is a member of the World Intellectual Property Organization 
and the African Intellectual Property Organization. Patents are 
rarely issued in Lesotho but trademark protection is often 
sought and granted. Intellectual property protection is 
regulated by the Industrial Property Order and the Copyright Act 
of 1989. The law protects patents, industrial designs, 
trademarks, and grant of copyright. The Law Office is 
responsible for enforcement of copyrights. 
 
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Transparency of the Regulatory System 
------------------------------------- 
 
¶26. The judicial system is fair and competent in commercial 
matters and the government is willing to supplement the bench 
with foreign judges in specialized cases. 
 
¶27. Generally there is adequate regard in the courts for equal 
treatment of foreign investors who are in dispute with national 
parties or the government. 
 
¶28. Company law is based on the Companies Act of 1967 which 
provides reasonable standards for most purposes but is believed 
to be incomplete and complex. Technical improvements were 
incorporated in a 1998 draft of a new company law and were 
circulated to stakeholders but a new law has not been introduced. 
 
¶29. The regulatory framework for utilities is modern, but it is 
outdated for mining. Lesotho mining legislation gives authority 
to grant titles to the King and Principle Chiefs upon the 
recommendation of a Mining Board. Financial services regulation 
is also up to date but the industrial and trading license system 
is archaic. Industrial licensing long ago lost its original 
purpose of protecting start-up firms from competition. Trading 
licenses are required for 44 types of business. Some enterprises 
can require up to four licenses for one location. 
 
¶30. Telecommunication: Lesotho's Telecommunications Authority is 
the sector's independent regulator. The authority sets 
conditions for entry of new competitive operators. Currently it 
allows Lesotho Telecom to maintain a monopoly for fixed-line and 
international services. 
 
¶31. Banking and other financial services: Banking regulations do 
not give power to the Central Bank to give directions as to 
interest rates, exchange rates, margins, or the spread of 
services offered. This is because of the currency peg with South 
Africa and hence Lesotho has lost its leverage on monetary 
policy. This creates a low political risk environment for 
banking investment. 
 
--------------------------------------------- ----- 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----- 
 
¶32. Lesotho has three foreign-owned banks: First National Bank, 
Ned Bank and Standard Bank, which bought a 70% share in 
state-owned Lesotho Bank. According to a recent IMF report, the 
banks in Lesotho are well capitalized and very liquid. However, 
credit provision is very low and this is going to be addressed 
through structural reforms under the private sector development 
component of the Millennium Challenge Corporation Compact. 
Industrial and commercial credit are provided by Lesotho 
National Development Corporation (LNDC). LNDC's mandate is to 
promote and facilitate foreign investment. 
 
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Political Violence 
------------------ 
 
¶33. Following the February 2007 general elections there were 
civil disturbances that led to a few stay-aways and protest 
rallies by opposition parties in 2008. Political tensions 
between governing and opposition parties still exist but the 
national political atmosphere is generally calm. 
 
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Corruption 
---------- 
 
¶34. Investors reported that corruption is not a significant 
factor for foreign investors. Anti-corruption legislation was 
passed in 1999 and is being implemented through the creation of 
an autonomous anti-corruption unit. 
 
---------------------- 
OPIC Insurance Program 
---------------------- 
 
¶35. OPIC insured one American-owned company: Seaboard 
Corporation's joint venture with Lesotho Flour Mills. Seaboard 
started operations in 1998 and currently employs about 300 
people. OPIC can encourage United States investors to consider 
exploring new investment opportunities in other sectors. 
 
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Labor 
----- 
 
¶36. Lesotho's Labor Code Order of 1992 regulates terms of 
employment and conditions and for worker health, safety, and 
welfare. It was amended in 2004 to include HIV/AIDS policies in 
the workplace. Union organization is permitted. There is a 
full-time and independent Directorate of Industrial Dispute 
Prevention and Resolution. Statutory minimum wages are fixed 
annually by the Ministry of Labor and Employment with 
recommendations from a tripartite Wages Advisory Board. Minimum 
wage setting is sensitive to the textile and garment industry's 
need to maintain competitiveness. 
 
¶37. In 2001, Lesotho ratified both the ILO Convention 182 on the 
Prohibition and Elimination of the Worst Forms of Child Labor 
and Convention 138 on the Minimum Age of Employment. The Labor 
Code Order of 1992 and its subsequent amendments are the 
principal laws governing terms and conditions of employment in 
Lesotho. 
 
¶38. The Labor Code Order of 1992 requires every non-citizen 
employee or self-employed person to have a work permit. A work 
permit is issued by the Labor Commissioner, who must be 
satisfied that no qualified Lesotho citizen is available for the 
position. The statutory maximum duration of a work permit is two 
years. 
 
------------------------------------ 
Foreign Direct Investment Statistics 
------------------------------------ 
 
¶39. Comment: The first Private Capital Flows (PCF) Survey was 
done in 2006. Before 2006 the LNDC provided estimates based on 
deal approvals. This data sometimes included planned projects 
which had not been executed. As a result, data provided before 
2006 is incomplete and inaccurate, and it did not indicate the 
magnitude, the composition, or the sectors within which capital 
was flowing. 
 
¶40. At this time, the 2007 PCF report is still at the printers 
and the Central Bank would not release the data to the post 
because it is not considered official until the Minister of 
Finance and Development Planning approves it. The 2008 survey is 
still ongoing. The compilation of PCF data currently has a one 
year lag. End comment. 
 
¶41. Lesotho's FDI statistics for 2006 are estimated as follows: 
 
FDI Stock 
(in Million Maloti)  1,213.03 
(in Million USD)       152.20 
 
Stock as % of GDP       11.8 
 
GDP in Million USD   1,288.46 (2006 GDP at current prices) 
 
--------------------------------------------- ---------- 
2006 Direct Investment Capital Flows by Industry Sector 
--------------------------------------------- ---------- 
 
                     In millions of USD  % of GDP 
Mining and Quarrying          16.44       1.28 
Manufacturing                 88.86       6.90 
Building and Construction      2.26       0.20 
Wholesale and Retail Trade     7.94       0.62 
Transport and Communications  35.97       2.79 
Finance and Insurance          0.15       0.01 
Real Estate and Business       0.21       0.02 
Total Capital Flows          152.20      11.81 
 
--------------------------------------------- ------------ 
2006 Direct Investment Capital Flows by Country of Origin 
--------------------------------------------- ------------ 
 
                  In millions of USD   % of GDP 
South Africa                80.28         6.23 
Taiwan                      55.94         4.34 
Netherlands                  3.58         0.28 
China                        1.47         0.11 
United States                8.22         0.64 
Singapore                    2.15         0.17 
Belgium                      0.12         0.01 
United Kingdom               0.43         0.03 
Total Capital Flows        152.20        11.81 
 
----------------------------- 
2006 Direct Investment Abroad 
----------------------------- 
 
Stock in Million Maloti       361.04 
Stock in Million USD           45.30 
Percentage of GDP               3.52 
 
--------------------------------------------- --- 
2006 Direct Investment Abroad by Industry Sector 
--------------------------------------------- --- 
 
Sector           in M Maloti     in M USD    %GDP 
 
Manufacturing        361.74      45.39       4 
Building & Const.      0.04       0.005      0 
Wholesale & Retail    -1.63     - 0.20 
Transport & Comm.      0.88       0.11       0 
 
Total Claims Abroad  361.03      45.30       4 
 
--------------------------------------------- ---------- 
2006 Direct Investment Abroad by Country of Destination 
--------------------------------------------- ---------- 
 
Country         in M Maloti  in M USD    % GDP 
 
South Africa      97           12.28        1 
Taiwan           253.82        31.85        2 
United States      9.31         1.17        0.1 
Total Abroad     361.04        45.30 
 
Sources: 
 
FDI: Central Bank of Lesotho; Report on Private Capital Flows 
Survey 2006 
 
GDP: Bureau of Statistics; 1998-2007 National Accounts 
Publications 
 
Exchange rate period; 2006 average 1USD = M 7.97 
 
 
NOLAN