## sipea2025141 - 1.  For decades, Lesotho has operated a public sector led growth and employment model that

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### Overview and key findings
- Lesotho has one of the highest public expenditure to GDP ratios in the region at 53 percent.
- Public sector wages account for 17 percent of GDP (2024 estimates) and 72 percent of tax revenue.
- GDP per capita fell 14 percent between 2016 and 2023.
- Over half of the economy’s formal workers are public sector employees and they earn, on average, over four times the median private sector wage (ILOSTAT, Lesotho 2023 SIP).
- Mega projects (most recently LHWP-II) have been the primary growth engine but are capital intensive and source most workers and inputs from abroad, yielding small local employment spillovers.
- Key GDP contributors such as water exports and diamond mining generate little employment.
- Sub-Saharan African growth is noted as less job intensive than elsewhere (IMF 2024).

### Labor market, poverty, and remittances
- Unemployment rate estimated at 16 percent in 2024 versus 6 percent in Sub-Saharan Africa and 5 percent for EMDEs (ILOSTAT).
- Labor force participation is 60 percent (versus more than 70 percent for sub-Saharan Africa).
- Of those participating, nearly 80 percent are informally employed.
- Nearly four in ten people live in extreme poverty on less than $2.15 per day (World Bank 2025).
- Remittances exceed 20 percent of GDP annually and play an essential humanitarian role but are limited in driving jobs-rich, balanced growth (World Bank 2025).

### External environment and sectoral risks
- Textiles employment has declined from a peak of 60,000 workers to around 30,000 currently.
- Textiles account for near 10 percent of GDP in exports to the United States.
- AGOA may not be extended upon expiration in September and potential steep tariffs on exports to the United States are under discussion.
- Possible large cuts to official development assistance include potential cancellation of the Millennium Challenge Compact (MCC).
- Geoeconomic fragmentation could reduce growth in key trading partners, notably South Africa.

### Primary challenges and reform potential
- The primary challenge is lack of labor demand; the private sector is small, undiversified, and constrained.
- Macro-structural concentration: economy dominated by a small number of peripheral product clusters (textiles, diamonds, wool, some machinery manufacturing, limited food and beverage manufacturing).
- Micro-level firm constraints include limited financial access, corruption, policy instability, and informal sector practices.
- Labor supply mismatch exists, particularly for key skills and for women and youths.
- A sustained multi-year reform agenda is required.

### Quantified reform scenario and job creation potential
- A feasible reform scenario incorporating macro-fiscal reform could increase growth by 1.5 percentage points (2025 Article IV upside scenario).
- Using median elasticity between growth and job creation for sub-Saharan Africa (IMF 2024), a 1.5 percentage point growth increase could be associated with the creation of 4,800 jobs per year.
- If comprehensive reforms boost job-intensity of growth to levels seen outside the region, the same 1.5 percentage point growth increase could create 14,000 jobs per year.
- This higher job-creation path would rapidly be enough to counteract jobs lost through recent shocks.

### Macro-structural barriers to job creation
- Lesotho’s product space (2023) is centered on the textile cluster with few centrally located, well-connected sectors; many large sectors (raw diamond mining, wool) are peripheral and upstream with limited opportunities to move into related industries.
- Structural transformation evidence is weak: industry’s share of value added has not increased proportionally with employment growth; services employment increased while services’ share of value added fell.
- Manufacturing labor intensity (international 2019, 2-digit sectors): textiles are among the most labor-intensive industries internationally; food and beverage and machinery manufacturing are above average; manufacturing of raw materials (relevant to diamonds) is one of the least labor intensive.

### Promising sectors and constraints
- Industries Without Smokestacks (modern services, high value agriculture, agro-processing) identified as potential job- and export-oriented opportunities.
- Tourism potential constrained by inadequate infrastructure (poor road and electricity access), limited and expensive air connectivity, long indirect bus routes, no passenger train services, costly/unreliable visa process, reliance on South African traveler statistics, and political influences on infrastructure decisions (UN 2023).
- Agro-processing potential (horticulture, rosehip oil, natural cosmetics, honey, food processing) constrained by rural infrastructure deficiencies (insufficient irrigation, quality roads, rural logistics hubs, cold chain storage), lack of ISO-certifying laboratory, absence of a functioning e-commerce platform due to an incompatible national payments system.
- Development partners (MCC, GIZ, African Development Bank) are supporting industry standards and funding a local standards lab to be built in coming years.

### Firm-level barriers and MSME dynamics
- MSME sector employed an estimated 360,000 people in 2023, with 55 percent of MSMEs owned by women (FinScope, 2025).
- Distribution of MSMEs: almost half in wholesale or retail, 20 percent in agriculture, 17 percent in manufacturing.
- Formalization increased from 18 percent in 2016 to 24 percent in 2023.
- Average monthly turnover: USD $390 in manufacturing firms to USD $1,100 in household firms.
- 82 percent of firms are informal; half of informal firms report small size as primary reason for informality; many would formalize if registration were free, benefits explained, or they had more information.
- Firms face a ‘missing middle’ with limited medium to large firms and many firms owned by South African parents responding to South African conditions.

### Reported obstacles to firm growth and business environment metrics
- Around 40 percent of firms report accessing finance as a major or very severe obstacle.
- Political and governance challenges reported as key barriers: regulation, tax rates, corruption, political instability.
- Lesotho performs relatively strongly on effectiveness of the court system and labor regulations (World Bank B-READY).
- Administrative delays: average of 15 days to obtain an operating license, 73 days to obtain an import license, and 78 days to obtain a construction permit (all above SACU average).
- Firms report difficulties obtaining employment visas and face exchange restrictions.
- Many firms report paying unofficial ‘compliance fees’ for permits and services.
- Transparency International Corruption Perception Index score is 37 out of 100 in 2024, with a steady decline since 2012.
- Government tendering inefficiencies: firms perceive tender requirements as difficult; it takes 152 days for firms to receive payment under government contract (more than twice the sub-Saharan African average).
- Streamlining tax and licensing systems and leveraging digital tools are cited as effective measures to unburden administrative procedures and track compliance (World Bank 2024).

### Informality and formalization incentives
- High informality driven by weak institutional support, limited access to finance, and lack of incentives to formalize.
- Four in five informal firms state they would be willing to formalize if registration were free, they understood clear benefits, or it was less time consuming (FinScope 2025).
- Government announced free registration for youth-led businesses as a step toward incentivizing formalization.
- Formalization becomes more attractive if it enables greater access to finance, social protections, and public procurement opportunities (ILO 2025).

### Electricity access and reliability: key findings
- About 65 percent of businesses experience electricity outages.
- Only about a quarter of Lesotho’s businesses have access to a back-up electricity generator, compared to nearly half of sub-Saharan African firms (World Bank B-Ready).
- Time to obtain an electrical connection: 52 days versus the SACU average of 38 days.
- Consequently, about 30 percent of businesses identified electricity as a major to severe obstacle.
- Electricity prices for businesses in Lesotho are about 0.021USD/kWh, well below the African average of 0.123USD/kwh (Global Petrol Prices).
- LEC imports around 50 percent of the nation’s total electricity demand from South Africa and Mozambique and sells at a loss.
- LEC declared bankruptcy in 2025.
- The USA ITA estimates that only one-fifth of a potential 450 MW is currently utilized.
- Efficiently exploring renewable electricity potential could ensure a stable, plentiful and cheap domestic supply and export capacity.

### Barriers across industries and locations
- Barriers are broadly shared across industries and geographic locations.
- Manufacturing is more constrained by electricity than services, while crime, theft and disorder matter more for services.
- Many barriers are exacerbated in rural areas; access to finance, internet and electricity are even more binding for rural businesses (FinScope 2025).
- Strong correlation of barriers implies that addressing the steepest barriers will benefit a wide swath of Lesotho’s private sector.

### Firm-level impacts (empirical evidence)
- Principal component analysis consolidated barriers into seven key areas: financial constraints, informal competition, corruption, inadequate labor education, weak business environment, inadequate infrastructure and lack of security.
- Regression results (Table 1): a one standard deviation increase in financial constraints in Lesotho is associated with a drop in firm employment growth by 0.5 percent over three years.
- Negative employment effects at the SACU level are found for informal competition, corruption, and inadequate education.
- Conclusion: addressing these barriers is critical to unlocking employment growth in Lesotho.

### Financial access: barriers and recent developments
- Financial sector structure and behavior:
  - Dominated by four commercial banks—three subsidiaries of South African banks and one state-owned bank—which primarily serve salaried individuals through payroll-based personal loans.
  - Non-bank financial institutions (NBFIs), including MFIs, insurance providers, and SACCOs, play a marginal role in business finance.
  - Capital markets are nascent, with only one equity listing on the Maseru Securities Market.
- Access statistics and business finance use:
  - The text reports: "7 percent of Basotho had financial access in 2021, up from 60 percent in 2011 (Finscope 2024)."
  - Two thirds of firms highlight insufficient operational cash flow as a key challenge (Finscope 2025).
  - Only 17 percent of MSMEs have a formal bank account and only 10 percent receive credit from a formal financial institution in 2023 (Finscope 2025).
  - Most MSMEs rely on mobile money (66 percent) for transactions, and informal mechanisms for saving and credit.
  - 89 percent of firms are not covered for any personal or business risk.
- Supply- and demand-side factors limiting SME lending:
  - Only 22 percent of MSMEs reliably keep financial records and only 18 percent are registered (Finscope 2025).
  - Credit infrastructure weaknesses: only banks and the few largest NBFIs consistently share credit information to the bureau; MSMEs are excluded from credit record coverage.
  - Collateral challenges: lack of asset recognition and enforceability limits securing transactions.
  - Reforms and initiatives: Lesotho Registry of Interest in Movable Assets (LERIMA) launched in 2021; World Bank CAFI project plans to launch a collateral registry, but lenders report usage challenges.
- Firm-side hesitancy and program design issues:
  - Only 11 percent of businesses have a written business plan, and only 35 percent have a business budget (Finscope 2025).
  - Only four in ten firms are aware of support organizations such as BEDCO, with even fewer utilizing services available.
  - 33 percent of firms report "unfavorable rates, collateral, or procedures as main reason for not applying to loans" (B Ready Lesotho 2025).
- Policy and reform responses:
  - Authorities have a comprehensive reform agenda in the National Financial Inclusion Strategy II (2024–28) and (forthcoming) Financial Sector Development Strategy II (2025–30).
  - Key pillars include: strengthening credit infrastructure (e.g., expanding credit bureau coverage to include MSMEs, integrating registries), enhancing public support instruments (e.g., reforming partial credit guarantee schemes, establishing a development finance institution), promoting financial literacy, emphasizing digitization, fintech regulation, and development of inclusive financial products.
  - Recent developments (June 2025): take up rate of the main partial credit guarantee scheme is increasing; banks and NBFIs experimenting with new MSME-focused lending products such as operating loans based on signed government tenders; coordination across system actors appears to be improving.
  - Success will depend on sustained political commitment, effective institutional collaboration, and mobilization of resources from both public and private sectors.

### Worker-level barriers and skills
- Youth and unemployment:
  - Youth unemployment rate is 24.8 percent for 15–24 year olds versus 10.1 percent for sub-Saharan Africa (Figure 8).
  - More than one in three youths are "neither in employment, education or training" (NEET); the rate reaches over 40 percent for young women (ILOSTAT).
  - Youths suffer from the "experience paradox": longer unemployment reduces future employability.
- Gender-specific barriers:
  - 37 percent of young women are unemployed compared to 18 percent of their male counterparts (Figure 8).
  - Labor force participation rates in 2024: 48.7 percent for women versus 67.7 percent for men.
  - High rate of female entrepreneurs relative to sub-Saharan Africa, but businesses tend to be smaller, employ fewer people, operate in less-profitable sectors, and are subject to greater shocks.
  - Maternal mortality was 478 deaths per 100,000 live births in 2020.
  - 71 in every 1,000 girls aged 15–19 gave birth in 2023.
  - Women are far less likely to successfully access bank business loans; they may be required to provide their husband’s name and income statements and are less likely to be approved than men, particularly if unmarried.
- Skills mismatch and governance:
  - In Lesotho, those with advanced levels of education have higher unemployment rates than those with intermediate levels of education (Figure 9), indicating potential skills mismatch.
  - Two-thirds of tertiary graduates studied social sciences and education, while most private and public investment is oriented towards agriculture, manufacturing, tourism, and technology.
  - Lack of robust labor market data; governance around skills development is fragmented.
  - Ministry of Labor lacks influence over training programs; training centers are under-resourced; career guidance is weak.
  - South Africa’s model of inclusive governance in skills development is cited as a regional example, but South Africa’s high youth unemployment warns that supply-side fixes alone are insufficient.

### Policy priorities to spur job creation
- Overarching approach:
  - A coordinated, concerted structural reform effort is needed to spur private sector led job creation; focus on "first generation reforms" to unpick barriers to diversification and firm-level growth.
  - Complement structural reforms with labor supply side policies that support job seekers and address skill mismatches.
  - Long-term, multi-year reform effort requiring sustained political and social support, effective consultation, communication, appropriate bundling, sequencing and pacing of reforms, and demonstrable upfront gains.
- Fiscal-structural reforms:
  - Public sector should switch roles to act as an enabler of private sector development rather than a substitute.
  - Improve public sector investment performance by building capacity across the project management cycle to improve capital budget execution, reduce delays, and generate stronger spillovers to the local construction economy.
  - Public procurement should focus on efficiency and transparency; prevention of public sector arrears will improve direct links with private firms.
  - Carefully address distortions from comparatively high public sector wages to reduce crowding out in the labor market.
  - Government programs to spur private sector development should be better coordinated and subject to transparency and evaluation.
- Industrial policy caution:
  - Industrial policies should be approached with caution; structural reforms addressing growth barriers bring larger benefits than "picking winners".
  - Policymakers should avoid directly supporting individual firms or sectors without addressing underlying bottlenecks (access to finance, electricity market failures, business environment weaknesses, infrastructure deficits).
  - Emphasize careful diagnosis of market failures and targeted policy responses.
- Public employment programs:
  - Public employment programs have a checkered history and must be time-limited and carefully designed if used as temporary social support.
  - Key design principles: strong coordination across agencies, time-limited employment with formal transition plans, embedding training and skills development, prioritizing transparency and accountability, and designing evaluation from the start.
  - Such programs are no substitute for deep reforms required to spur durable, private sector led job creation.

*Source: IMF staff analysis as presented in sipea2025141.*

### 1.  For decades, Lesotho has operated a public sector led growth and employment model that

### sipea2025141 - 1.  For decades, Lesotho has operated a public sector led growth and employment model that

### Overview and key findings
- Lesotho has one of the highest public expenditure to GDP ratios in the region at 53 percent.
- Public sector wages account for 17 percent of GDP (2024 estimates) and 72 percent of tax revenue.
- GDP per capita fell 14 percent between 2016 and 2023.
- Over half of the economy’s formal workers are public sector employees and they earn, on average, over four times the median private sector wage (ILOSTAT, Lesotho 2023 SIP).
- Mega projects (most recently LHWP-II) have been the primary growth engine but are capital intensive and source most workers and inputs from abroad, yielding small local employment spillovers.
- Key GDP contributors such as water exports and diamond mining generate little employment.
- Sub-Saharan African growth is noted as less job intensive than elsewhere (IMF 2024).

### Labor market, poverty, and remittances
- Unemployment rate estimated at 16 percent in 2024 versus 6 percent in Sub-Saharan Africa and 5 percent for EMDEs (ILOSTAT).
- Labor force participation is 60 percent (versus more than 70 percent for sub-Saharan Africa).
- Of those participating, nearly 80 percent are informally employed.
- Nearly four in ten people live in extreme poverty on less than $2.15 per day (World Bank 2025).
- Remittances exceed 20 percent of GDP annually and play an essential humanitarian role but are limited in driving jobs-rich, balanced growth (World Bank 2025).

### External environment and sectoral risks
- Textiles employment has declined from a peak of 60,000 workers to around 30,000 currently.
- Textiles account for near 10 percent of GDP in exports to the United States.
- AGOA may not be extended upon expiration in September and potential steep tariffs on exports to the United States are under discussion.
- Possible large cuts to official development assistance include potential cancellation of the Millennium Challenge Compact (MCC).
- Geoeconomic fragmentation could reduce growth in key trading partners, notably South Africa.

### Primary challenges and reform potential
- The primary challenge is lack of labor demand; the private sector is small, undiversified, and constrained.
- Macro-structural concentration: economy dominated by a small number of peripheral product clusters (textiles, diamonds, wool, some machinery manufacturing, limited food and beverage manufacturing).
- Micro-level firm constraints include limited financial access, corruption, policy instability, and informal sector practices.
- Labor supply mismatch exists, particularly for key skills and for women and youths.
- A sustained multi-year reform agenda is required.

### Quantified reform scenario and job creation potential
- A feasible reform scenario incorporating macro-fiscal reform could increase growth by 1.5 percentage points (2025 Article IV upside scenario).
- Using median elasticity between growth and job creation for sub-Saharan Africa (IMF 2024), a 1.5 percentage point growth increase could be associated with the creation of 4,800 jobs per year.
- If comprehensive reforms boost job-intensity of growth to levels seen outside the region, the same 1.5 percentage point growth increase could create 14,000 jobs per year.
- This higher job-creation path would rapidly be enough to counteract jobs lost through recent shocks.

### Macro-structural barriers to job creation
- Lesotho’s product space (2023) is centered on the textile cluster with few centrally located, well-connected sectors; many large sectors (raw diamond mining, wool) are peripheral and upstream with limited opportunities to move into related industries.
- Structural transformation evidence is weak: industry’s share of value added has not increased proportionally with employment growth; services employment increased while services’ share of value added fell.
- Manufacturing labor intensity (international 2019, 2-digit sectors): textiles are among the most labor-intensive industries internationally; food and beverage and machinery manufacturing are above average; manufacturing of raw materials (relevant to diamonds) is one of the least labor intensive.

### Promising sectors and constraints
- Industries Without Smokestacks (modern services, high value agriculture, agro-processing) identified as potential job- and export-oriented opportunities.
- Tourism potential constrained by inadequate infrastructure (poor road and electricity access), limited and expensive air connectivity, long indirect bus routes, no passenger train services, costly/unreliable visa process, reliance on South African traveler statistics, and political influences on infrastructure decisions (UN 2023).
- Agro-processing potential (horticulture, rosehip oil, natural cosmetics, honey, food processing) constrained by rural infrastructure deficiencies (insufficient irrigation, quality roads, rural logistics hubs, cold chain storage), lack of ISO-certifying laboratory, absence of a functioning e-commerce platform due to an incompatible national payments system.
- Development partners (MCC, GIZ, African Development Bank) are supporting industry standards and funding a local standards lab to be built in coming years.

### Firm-level barriers and MSME dynamics
- MSME sector employed an estimated 360,000 people in 2023, with 55 percent of MSMEs owned by women (FinScope, 2025).
- Distribution of MSMEs: almost half in wholesale or retail, 20 percent in agriculture, 17 percent in manufacturing.
- Formalization increased from 18 percent in 2016 to 24 percent in 2023.
- Average monthly turnover: USD $390 in manufacturing firms to USD $1,100 in household firms.
- 82 percent of firms are informal; half of informal firms report small size as primary reason for informality; many would formalize if registration were free, benefits explained, or they had more information.
- Firms face a ‘missing middle’ with limited medium to large firms and many firms owned by South African parents responding to South African conditions.

### Reported obstacles to firm growth and business environment metrics
- Around 40 percent of firms report accessing finance as a major or very severe obstacle.
- Political and governance challenges reported as key barriers: regulation, tax rates, corruption, political instability.
- Lesotho performs relatively strongly on effectiveness of the court system and labor regulations (World Bank B-READY).
- Administrative delays: average of 15 days to obtain an operating license, 73 days to obtain an import license, and 78 days to obtain a construction permit (all above SACU average).
- Firms report difficulties obtaining employment visas and face exchange restrictions.
- Many firms report paying unofficial ‘compliance fees’ for permits and services.
- Transparency International Corruption Perception Index score is 37 out of 100 in 2024, with a steady decline since 2012.
- Government tendering inefficiencies: firms perceive tender requirements as difficult; it takes 152 days for firms to receive payment under government contract (more than twice the sub-Saharan African average).
- Streamlining tax and licensing systems and leveraging digital tools are cited as effective measures to unburden administrative procedures and track compliance (World Bank 2024).

### Informality and formalization incentives
- High informality driven by weak institutional support, limited access to finance, and lack of incentives to formalize.
- Four in five informal firms state they would be willing to formalize if registration were free, they understood clear benefits, or it was less time consuming (FinScope 2025).
- Government announced free registration for youth-led businesses as a step toward incentivizing formalization.
- Formalization becomes more attractive if it enables greater access to finance, social protections, and public procurement opportunities (ILO 2025).

*Source: IMF staff analysis as presented in sipea2025141.*

### 19. Despite its natural endowments, reliable and accessible electricity is another private-sector

### 19. Despite its natural endowments, reliable and accessible electricity is another private-sector bottleneck.

### Electricity access and reliability: key findings
- About 65 percent of businesses experience electricity outages.
- Only about a quarter of Lesotho’s businesses have access to a back-up electricity generator, compared to nearly half of sub-Saharan African firms (World Bank B-Ready).
- Time to obtain an electrical connection: 52 days versus the SACU average of 38 days.
- Consequently, about 30 percent of businesses identified electricity as a major to severe obstacle.
- Electricity prices for businesses in Lesotho are about 0.021USD/kWh, well below the African average of 0.123USD/kwh (Global Petrol Prices).
- LEC imports around 50 percent of the nation’s total electricity demand from South Africa and Mozambique and sells at a loss.
- LEC declared bankruptcy in 2025.
- The USA ITA estimates that only one-fifth of a potential 450 MW is currently utilized.
- Efficiently exploring renewable electricity potential could ensure a stable, plentiful and cheap domestic supply and export capacity.

### Barriers across industries and locations
- Barriers are broadly shared across industries and geographic locations.
- Manufacturing is more constrained by electricity than services, while crime, theft and disorder matter more for services.
- Many barriers are exacerbated in rural areas; access to finance, internet and electricity are even more binding for rural businesses (FinScope 2025).
- Strong correlation of barriers implies that addressing the steepest barriers will benefit a wide swath of Lesotho’s private sector.

### Firm-level impacts (empirical evidence)
- Principal component analysis consolidated barriers into seven key areas: financial constraints, informal competition, corruption, inadequate labor education, weak business environment, inadequate infrastructure and lack of security.
- Regression results (Table 1): a one standard deviation increase in financial constraints in Lesotho is associated with a drop in firm employment growth by 0.5 percent over three years.
- Negative employment effects at the SACU level are found for informal competition, corruption, and inadequate education.
- Conclusion: addressing these barriers is critical to unlocking employment growth in Lesotho.

### Financial access: barriers and recent developments (Box 1)
- Financial sector structure and behavior:
  - Dominated by four commercial banks—three subsidiaries of South African banks and one state-owned bank—which primarily serve salaried individuals through payroll-based personal loans.
  - Non-bank financial institutions (NBFIs), including MFIs, insurance providers, and SACCOs, play a marginal role in business finance.
  - Capital markets are nascent, with only one equity listing on the Maseru Securities Market.
- Access statistics and business finance use:
  - The text reports: "7 percent of Basotho had financial access in 2021, up from 60 percent in 2011 (Finscope 2024)."
  - Two thirds of firms highlight insufficient operational cash flow as a key challenge (Finscope 2025).
  - Only 17 percent of MSMEs have a formal bank account and only 10 percent receive credit from a formal financial institution in 2023 (Finscope 2025).
  - Most MSMEs rely on mobile money (66 percent) for transactions, and informal mechanisms for saving and credit.
  - 89 percent of firms are not covered for any personal or business risk.
- Supply- and demand-side factors limiting SME lending:
  - Only 22 percent of MSMEs reliably keep financial records and only 18 percent are registered (Finscope 2025).
  - Credit infrastructure weaknesses: only banks and the few largest NBFIs consistently share credit information to the bureau; MSMEs are excluded from credit record coverage.
  - Collateral challenges: lack of asset recognition and enforceability limits securing transactions.
  - Reforms and initiatives: Lesotho Registry of Interest in Movable Assets (LERIMA) launched in 2021; World Bank CAFI project plans to launch a collateral registry, but lenders report usage challenges.
- Firm-side hesitancy and program design issues:
  - Only 11 percent of businesses have a written business plan, and only 35 percent have a business budget (Finscope 2025).
  - Only four in ten firms are aware of support organizations such as BEDCO, with even fewer utilizing services available.
  - 33 percent of firms report "unfavorable rates, collateral, or procedures as main reason for not applying to loans" (B Ready Lesotho 2025).
- Policy and reform responses:
  - Authorities have a comprehensive reform agenda in the National Financial Inclusion Strategy II (2024–28) and (forthcoming) Financial Sector Development Strategy II (2025–30).
  - Key pillars include: strengthening credit infrastructure (e.g., expanding credit bureau coverage to include MSMEs, integrating registries), enhancing public support instruments (e.g., reforming partial credit guarantee schemes, establishing a development finance institution), promoting financial literacy, emphasizing digitization, fintech regulation, and development of inclusive financial products.
  - Recent developments (June 2025): take up rate of the main partial credit guarantee scheme is increasing; banks and NBFIs experimenting with new MSME-focused lending products such as operating loans based on signed government tenders; coordination across system actors appears to be improving.
  - Success will depend on sustained political commitment, effective institutional collaboration, and mobilization of resources from both public and private sectors.

### Worker-level barriers and skills
- Youth and unemployment:
  - Youth unemployment rate is 24.8 percent for 15–24 year olds versus 10.1 percent for sub-Saharan Africa (Figure 8).
  - More than one in three youths are "neither in employment, education or training" (NEET); the rate reaches over 40 percent for young women (ILOSTAT).
  - Youths suffer from the "experience paradox": longer unemployment reduces future employability.
- Gender-specific barriers:
  - 37 percent of young women are unemployed compared to 18 percent of their male counterparts (Figure 8).
  - Labor force participation rates in 2024: 48.7 percent for women versus 67.7 percent for men.
  - High rate of female entrepreneurs relative to sub-Saharan Africa, but businesses tend to be smaller, employ fewer people, operate in less-profitable sectors, and are subject to greater shocks.
  - Maternal mortality was 478 deaths per 100,000 live births in 2020.
  - 71 in every 1,000 girls aged 15–19 gave birth in 2023.
  - Women are far less likely to successfully access bank business loans; they may be required to provide their husband’s name and income statements and are less likely to be approved than men, particularly if unmarried.
- Skills mismatch and governance:
  - In Lesotho, those with advanced levels of education have higher unemployment rates than those with intermediate levels of education (Figure 9), indicating potential skills mismatch.
  - Two-thirds of tertiary graduates studied social sciences and education, while most private and public investment is oriented towards agriculture, manufacturing, tourism, and technology.
  - Lack of robust labor market data; governance around skills development is fragmented.
  - Ministry of Labor lacks influence over training programs; training centers are under-resourced; career guidance is weak.
  - South Africa’s model of inclusive governance in skills development is cited as a regional example, but South Africa’s high youth unemployment warns that supply-side fixes alone are insufficient.

### Policy priorities to spur job creation
- Overarching approach:
  - A coordinated, concerted structural reform effort is needed to spur private sector led job creation; focus on "first generation reforms" to unpick barriers to diversification and firm-level growth.
  - Complement structural reforms with labor supply side policies that support job seekers and address skill mismatches.
  - Long-term, multi-year reform effort requiring sustained political and social support, effective consultation, communication, appropriate bundling, sequencing and pacing of reforms, and demonstrable upfront gains.
- Fiscal-structural reforms:
  - Public sector should switch roles to act as an enabler of private sector development rather than a substitute.
  - Improve public sector investment performance by building capacity across the project management cycle to improve capital budget execution, reduce delays, and generate stronger spillovers to the local construction economy.
  - Public procurement should focus on efficiency and transparency; prevention of public sector arrears will improve direct links with private firms.
  - Carefully address distortions from comparatively high public sector wages to reduce crowding out in the labor market.
  - Government programs to spur private sector development should be better coordinated and subject to transparency and evaluation.
- Industrial policy caution:
  - Industrial policies should be approached with caution; structural reforms addressing growth barriers bring larger benefits than "picking winners".
  - Policymakers should avoid directly supporting individual firms or sectors without addressing underlying bottlenecks (access to finance, electricity market failures, business environment weaknesses, infrastructure deficits).
  - Emphasize careful diagnosis of market failures and targeted policy responses.
- Public employment programs:
  - Public employment programs have a checkered history and must be time-limited and carefully designed if used as temporary social support.
  - Key design principles: strong coordination across agencies, time-limited employment with formal transition plans, embedding training and skills development, prioritizing transparency and accountability, and designing evaluation from the start.
  - Such programs are no substitute for deep reforms required to spur durable, private sector led job creation.

*Source: IMF staff summary of "sipea2025141 - 19. Despite its natural endowments, reliable and accessible electricity is another private-sector bottleneck."*

---


_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025141.pdf_