After a period of financial stability and high growth rates of real production and income during the 1970s, the performance of Lesotho’s economy was until 1987-8 characterized by low growth, rapidly-rising fiscal deficits and substantial deteroriation in the external current account and the overall balance of payments. The economic boom and the good financial performance of the 1970s had its origin in rapidly-increasing remittances from Basotho miners in South Africa and in customs union receipts, the latter due to a new customs union agreement with South Africa in 1969. When these external sources of income stagnated in the 1980s, the country found itself in a few years time in a situation where the economic and financial outlook was very bleak. In the medium term this was due to uncertainties arising from political and economic instability in South Africa, in particular with respect to future migrant remittances. Furthermore, since 1984 South Africa has brought up the issue of changes in the customs union arrangement to reduce the burden on its budget, which would effectively reduce Lesotho’s revenue. The situation forced the government to cope with the internal problem and the long-term structural weakness of the economy, which has made the country heavily dependent on exports of labour.
The country’s natural resources are limited, and technical and managerial skills needed for industrial development are scarce. As a result, the production and export base is very small. In addition, the institutional infrastructure is deficient in many respects. One major problem is the lack of incentives for the private sector, particularly for improvements in the agricultural sector. The traditional land tenure system has led to inefficient land utilization, which has encouraged overgrazing and continued soil erosion impedes growth in productivity. In the public sector, including the parastatals, the government is