Lesotho is tightening its belt once again as the country confronts mounting fiscal pressure driven by a sharp decline in Southern African Customs Union (SACU) receipts and weakening economic performance. The annual growth outlook has been slashed from 3.4 percent to 1.3 percent, reflecting the strain facing the economy.
Presenting the 2025/26 mid-term budget report, Finance and Development Planning Minister Dr Retšelisitsoe Matlanyane said SACU transfers, which make up more than 20 percent of GDP, continue to anchor the revenue base but remain highly volatile. By mid-year, Lesotho had received M4.59 billion, exactly half of its annual SACU allocation, with the full M9.18 billion expected by year-end.
Despite signs of fiscal stability driven by tighter revenue and expenditure controls, the government remains cautious about the heavy dependence on SACU revenues and the growing burden of recurrent spending. The wage bill is expected to remain at 17.2 percent of GDP by year-end.
The country’s capital budget continues to underperform, with key sectors such as mining, manufacturing, exports, and textiles experiencing vulnerabilities. New US tariffs on exports, along with weakened production in mining and textiles, have dealt a major blow to growth prospects. Dr Matlanyane said the revised 1.3 percent growth forecast reflects a more cautious medium-term outlook, with average growth projected at just 1.2 percent.
By mid-year, total revenue stood at M12.87 billion, 43.1 percent of the approved budget. Tax revenue reached M5.21 billion, but VAT collections were lagging due to weak consumer activity and subdued imports. Excise taxes on alcohol and tobacco underperformed, partly due to non-compliance and illicit trade.
The original fiscal framework projected a deficit of 2.5 percent of GDP, but delays in capital spending have helped shift the balance to a projected surplus of M1.65 billion , a figure driven by halted projects rather than improved efficiency.
Water royalties, a critical revenue source, are expected to fall short by M174 million due to extended maintenance on the Muela Tunnel, which reduced water transfers to South Africa. Mining royalties also underperformed, further tightening the fiscal space.
Lesotho’s total public debt has climbed to M22.98 billion, up from M21.94 billion last year. External debt accounts for the bulk of the increase, though exchange-rate gains offset part of the pressure. Domestic debt remains stable and is expected to decline as bonds mature.
Despite the challenges, Dr Matlanyane said government reforms and investments have supported infrastructure development, agriculture, digital transformation, and improvements in social protection.
However, reactions from MPs highlight deep concerns. Hloahloeng MP Katleho Mabeleng warned that volatility in SACU receipts, water royalties, and AGOA revenues threatens the government’s ability to fund essential services. He criticised what he described as “profligate spending,” pointing to the government’s controversial use of the contingency fund to finance the Deputy Prime Minister’s trip to COP30 in Brazil.
Foreign Affairs Minister Lejone Mpotjoane echoed concerns, saying the report reflects sluggish performance across revenue collection, financing, and capital project implementation. He linked some delays to US tariffs and the shutdown of Millennium Challenge Corporation (MCC) projects but noted ongoing initiatives, including Mission 300, a World Bank and African Development Bank-backed effort to expand electricity access across Africa.
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