Leo.Co.Ls ... please click on the antivirus link above and update your av software ... Lesotho economy: Cloth cuts 12 January 2006 Focusing on global trade negotiations, debt relief and increased foreign aid as a means of kick-starting the African economy is all very well, but it does not mean that regional governments can afford to ignore reforms at home. This is very apparent from a recent IMF study of Lesotho and specifically the competitiveness of its exports. The country has enjoyed exceptional export growth since the late 1990s, chiefly because of the rise in clothing exports to the US under the Africa Growth and Opportunity Act (AGOA). Thus Lesotho's clothing exports to the US grew more from US$100m in 1998 to US$450m in 2004--an average annual growth rate in excess of 50%. Clothing industry employment grew seven-fold from 7,400 at the start of the 1990s to 50,000 in 2004, making the sector the country's largest employer. Over the past year, however, the industry has run into increasingly serious problems, some external--such as the phasing out of textile quotas under the Uruguay Round Agreement on Textiles and Clothing (ATC) in January 2005--and some domestic. The latter include the appreciation of the loti, which is pegged to the South African rand, and worsening domestic bottlenecks that are starting to undermine production and competitiveness. Foreign trade preferences--chiefly AGOA--were the catalyst that sparked Lesotho's remarkable industrial resurgence in 2000. Foreign investors, mostly from Taiwan, exploited AGOAs third-party fabric provision, under which Lesotho can import fabric inputs from non-AGOA states, including Taiwan, and export the finished product duty- and quota-free to the US. This gave producers in Lesotho a 30% cost advantage over their non-AGOA competitors. However, with the abolition of the ATC a year ago Lesotho's competitiveness is being rapidly eroded. It is losing market share in the US market to Asian exporters, especially China, while export prices for clothing have fallen by 10-15%. There are three main international threats to the industry: * The all-important third-party provision under AGOA is due to be phased out in 2007, meaning that to retain duty-free entry to the all-important US market Lesotho-based manufacturers will have to source textile fabric inputs from other African AGOA countries, where prices are higher and quality lower than in Asia, which is the currently the main supplier. * The safeguards imposed by the US in May 2005, restricting growth in Chinese clothing imports to a maximum of 7.5% annually, will lapse in mid-2008. * Multilateral tariff cuts under Doha will erode existing preferences in the US and EU markets. These adverse external forces could be ameliorated if Lesotho took effective steps to reverse its deteriorating domestic competitiveness. While membership of the Common Monetary Area with South Africa, Namibia and Swaziland, has undoubted advantages, it has also meant that the loti--pegged t