Chapter two: Country background and context 38 81. Lesotho’s exercise of its political and economic policies is challenged by its location as a classic enclave of South Africa. When shocks occur in the South African economy, the negative effects are transmitted to Lesotho. Because of its size, Lesotho is also unable to compete with a highly sophisticated economy such as that of South Africa. Additionally, Lesotho relies on South Africa for many critical services like banking, medical referrals and higher education. 82. Lesotho has the third-highest adult HIV prevalence in the world, standing at 23.2 per cent. According to the NAC (2008), there are an estimated 62 new infections and about 50 deaths each day. The scourge of HIV and AIDS is therefore a major threat to the survival of the country, given its small population of 1.8 million and its slow population growth rate of 0.1 per cent. HIV and AIDS is drastically undermining efforts to promote good governance in all sectors, as it reduces the supply of a skilled workforce in the public and the private sectors. 83. The high incidence of HIV and AIDS in Lesotho has become a major cause of poverty. Although the economic consequences of the pandemic have not been analysed fully, preliminary estimates point to the fact that the costs to the economy and the public sector are quite high. 84. Declining productivity and the reduction in arable land pose challenges for food security. Lesotho, as noted, is a predominantly rural economy with about 76 per cent of the population dependent on agricultural land. Low incomes and the HIV and AIDS pandemic have combined to worsen food insecurity among the Basotho. Lesotho produces only 30 per cent of the food required to feed its population in a normal year. The agricultural sector is vulnerable to the vagaries of the weather; hence the country needs additional food assistance in drought years. 85. One of the major constraints facing Lesotho is its poor and inadequate infrastructure. There are no good roads in most of the districts and inadequate infrastructure constrains investment and growth, especially in remote mountain areas. The Country Self-Assessment Report (CSAR) indicates that, even in the capital city, the neglect of the railhead at Maseru Station is hampering the development of sandstone quarrying and other manufacturing sectors. 86. Lesotho is not likely to escape the effects of the current global economic crisis. As the West feels the impact of the recession, aid flows will contract and this will ultimately have an impact on various countries that are very reliant on aid. Low-income countries, of which Lesotho is one, are considered the most vulnerable among the developing countries, as they are more integrated in the world economy through trade, foreign direct investment (FDI) and remittances. Future prospects 87. Economic interlocking of Lesotho into South Africa has many positive consequences such as macroeconomic stability and single-digit inflation. In addition, some of the wealth created in South Africa is carried into Lesotho through migrant remittances. Lesotho also benefits from the revenues of a single customs union. Therefore, while being surrounded by the highly modernised economy of South Africa exposes Lesotho to the risks of overdependence, this can be turned into an opportunity by means of shrewd economic strategy and an indefatigable determination to succeed in the context of adversity and inequality. The regional integration arrangement is undoubtedly the most optimal for Lesotho in the light of its size and its geographic location inside South Africa. The