Lesotho hangs on to US trade deal by a thread
Eligibility depends on reforms being implemented after poll
US President Donald Trump may hold the reins of the African Growth and Opportunity Act, but the fate of Lesotho’s export industry is in the hands of the mountain kingdom’s politicians.
Lesotho’s eligibility to remain exempt from duties on exports to the US under the act is under a cloud because it has failed to implement many of the reforms recommended by the Southern African Development Community’s commission of inquiry into the August 2014 coup that forced the country’s prime minister into exile.
The US has made Lesotho’s eligibility contingent on the implementation of the reforms, which involve structural and systemic changes in the defence sector and government.
But work on implementing the reforms has stalled since the suspension of Lesotho’s parliament in the wake of prime minister Pakalitha Mosilili losing a vote of no confidence against him in early March and the subsequent call for an early election, which has been scheduled for June 3.
One of the few SADC recommendations to have been implemented is the removal of Lesotho Defence Force commander Lt-Gen Tlali Kamoli, who stepped down at the end of last year. Kamoli was accused of leading the coup attempt against former prime minister Thomas Thabane. Lesotho has also released, on open arrest, 23 army officers detained on suspicion of mutiny.
Other reforms on governance and an investigation into the killing of former army commander Maaparankoe Mahao have not been implemented.
Lesotho last faced the possibility of being kicked out of Agoa in December when then US president Barack Obama decided to affirm the nation’s eligibility — despite its failure to implement the reforms recommended by SADC.
According to media reports in Lesotho, a secretariat has been created to administer constitutional and civil service reforms as per the recommendations, but that has been put on hold until after the election.
Agoa was signed into law by president Bill Clinton in 2000 with the objective, according to the US trade department, of expanding US trade and investment with sub-Saharan Africa, to stimulate economic growth, to encourage economic integration, and to facilitate subSaharan Africa’s integration into the global economy.
Agoa is critical to Lesotho’s textile and garment industry, which employs more than 30 000 people in 50 companies, 29 of which are dependent on exports to the US.
FNB economist Jarred Sullivan said the trade deal was a critical component of Lesotho’s export market, particularly clothing and textiles.
Should Lesotho be excluded from Agoa its manufacturing sector would be likely to take a big knock as international competitiveness would be diminished and job losses inevitable.
The effects would be likely to extend to the tertiary sector, especially retail, because consumer spending prospects would be reduced, Sullivan said.
“With Agoa we anticipate Lesotho’s GDP growth to be 3.5% this year. Without Agoa, growth is envisaged to be significantly less considering that a number of jobs will be shed in the manufacturing sector,” said Sullivan.
Julie McKay, spokeswoman for the US embassy in Maseru, said Lesotho was included on the list of nations approved by Obama and therefore remains eligible for Agoa.
However, changes made to the legislation when it was extended for a further 10 years allow the US government more flexibility when it comes to reviewing countries on a continuous basis.
This meant the US could conduct “out-of-cycle” reviews on a country’s eligibility at any time in addition to the review done at the end of each year. LEAN TIMES: The recent rains are likely to lead to lower food costs for Lesotho cowherds Tlala Phadi and Mohlala Molapo
McKay said despite the progress, further work was needed to ensure there was a “culture of accountability and rule of law in Lesotho”.
“Regardless of the outcome of Lesotho’s upcoming election, it is important that Lesotho move forward with the full implementation of the SADC recommendations,” said McKay.
Lesotho Agoa specialist Moroesi Akhionbare said the possibility of an out-of-cycle review created uncertainty. Neither garment buyers nor producers in Lesotho could operate efficiently because of the uncertainty, amid indications that Lesotho may lose its eligibility.
Lesotho’s exports to the US fell significantly in January compared to last year, Akhionbare said.
The US accounts for at least half of Lesotho’s exports.
Rand Merchant Bank country risk analyst Lisa Brown said it would make little sense for the US to suspend Lesotho’s eligibility as it would put unnecessary stress on the nation’s economy when it does not have the political leadership to deal with the matter.
“The uncertain and unstable political environment is the biggest economic risk to Lesotho. The lack of political leadership weakens the country’s resilience to unpredictable and unfavourable external economic conditions, whether from US trade policy, budget support from the EU or a larger than expected slowdown in the South African economy in 2017-18,” she said.
Because the government was the main player in the economy, it already had to balance reducing spending — especially its wage bill and debt-servicing costs — while under revenue constraints. It also had to maintain enough stimulus to ensure growth and liquidity.
Brown said Lesotho’s currency would be likely to take a severe knock if it were barred from participating in Agoa. The loti is pegged to the rand and if the rand fluctuates, he believes Lesotho will have to use its dollar reserves to maintain its position — reserves dependent on exports to the US.
“If the rand fluctuates — like it is — and if they don’t have dollar reserve to maintain the peg, they are going to see a very stressed economy.”
A glimmer of light for Lesotho is the revenue it earns from its membership — together with South Africa, Swaziland, Namibia and Botswana — of the Southern African Customs Union. According to the February 2016 International Monetary Fund Lesotho review, Lesotho derived R4.5-billion (about 16% of its GDP), from its membership of the union last year, and this is set to increase.
Sullivan said the commencement of phase two of the Lesotho Highlands Water Project, which is estimated to cost more than R20-billion, should provide a significant boost to Lesotho’s construction sector.
Other positive developments included advancements in the mining sector which should provide support to transport, consumer spending and the financial services sector.
He said the easing of drought conditions was likely to result in a lower inflation profile. Lower food costs would provide some relief to consumers.
Brown said an increase in SACU receipts and mining royalties could sustain growth over the next year. An additional bonus would be the country maintaining its Agoa status through the year.
But Akhionbare said it would be difficult to expect the US government to continue to extend eligibility given the number of fruitless attempts it has made to introduce reforms in the kingdom.
The criteria for eligibility were enshrined in the Agoa Act, and the US government would be seen to be flouting its own legislation if it turned a blind eye to Lesotho’s failure to comply, she said.
It would set a bad precedent, Akhionbare said.
“I am sure the minister of
Without Agoa, jobs will be shed in manufacturing Lesotho must establish a culture of accountability
trade and industry is doing his best to influence the US government differently, but he does not have much ammunition to offer, in terms of compliance with SADC recommendations.
“Remember that the [US government] contributes funds towards SADC as a regional body charged with dealing with such political problems,” Akhionbare said.
But Sullivan said FNB’s view was that Lesotho would maintain its Agoa eligibility due to those reforms that had been made.
Although the risk of Lesotho losing its Agoa status remained, the US was likely to wait for more clarity on reform measures after the elections.
Brown said there were a number of possible scenarios, including that the US chose to temporarily suspend Lesotho from Agoa until it made the necessary reforms — but should this last for a protracted period, it would still have a negative impact on the textile industry.