Lesotho’s economy showed signs of economic recovery in 2009, following the global financial crisis; however, the impact of floods during early January, 2011 has slowed the pace of the expected recovery. Growth is estimated to have reached 3.1% in 2011 (down by 2.5 percentage points compared to 2010) due to recovery of the manufacturing sector and high demand of diamond exports. Notwithstanding projected higher import requirements and low Southern African Customs Union (SACU) revenue, in the medium-term, growth is forecast to average 4.8%, driven by investment in phase II of the Lesotho Highland project and rehabilitation of infrastructure affected by the floods (Figure 1 and Table 1). Fiscal policy remains dependent on the performance of SACU revenue (in particular, the core SACU revenue, which is non-cyclical) which will average 27% of GDP in the medium-term, much higher than the average of 15% (2010-2011). Lesotho has traditionally relied on SACU revenue to fund close to 60% of its national budget. Lesotho’s share of SACU revenue is expected to decline from M4.9 billion in 2009/10 to M1.7 billion in 2010/2011. The government’s budget of M13.7 billion is based on the assumption of recovery in SACU recovery to M5billion and M4.7 billion in 2012/13 and M4.7 billion in 2013/14.