Lesotho sees growth from diamonds, water

* Trade minister sees growth rising from 4 to 6-7 percent

* Diamond mines, water project key growth areas

* Textile sector exposed to US downturn, likes currency weakness

By Peter Apps

LONDON, July 3 (Reuters) - Lesotho sees its economic growth rising in coming years due to diamond mining and a new water project, its trade minister said on Thursday, although high food prices still pressure the southern African mountain kingdom.

An independent state enclosed entirely within the borders of South Africa, Lesotho has been battling successive harvest failures and one of the world's highest HIV infection rates while relying mainly on textile exports to the United States.

But Propane Lebesa said it was now benefiting from several new diamond mines -- the first of which reopened in 2004 on the site of an already abandoned mine high in the mountains. He said a new lowlands water project was also being developed and would also boost growth.

"We are at 4 percent and we have been growing steadily over the last couple of years and next year we are expecting 5 percent growth, going to six to seven percent in the next two or three years," he told Reuters in an interview at a Commonwealth Africa business summit in London.

While Lesotho's highlands water project exports water to South Africa's commercial heartland around Johannesburg, he said the lowlands project would concentrate on supplying Lesotho itself, using irrigation to boost agriculture.

"We have come to recognize the fact that irrigation is really the answer for us," he said. "The answer is in harnessing the water."



WEAK CURRENCY HELPS

The government had raised subsidies to try to mitigate the impact of high global food prices, he said, but he hoped better agricultural practices would produce a good harvest this year and reduce dependence on expensive maize imports primarily from South Africa.

Mainly Asian owned factories export textile goods to the United States, taking advantage of preferential access under the African Growth and Opportunity Act. It slumped in 2004 on expectations the deal might expire, but it was renewed.

"The sector has more or less stabilised," Lebesa said, although he said there had been some recent job losses. "It has been slightly affected by the downturn in the U.S. economy."

Exporters had benefited from the decline in South Africa's rand ZAR=, down almost 12 percent against the dollar so far this year. Lesotho's maloti currency is pegged to the rand on a one-to-one basis.

Lebesa said the government had also been successful in helping reduce the number of new HIV infections, with the country's infection rate falling from around 30 percent to around 25 percent at present.

Several African countries including Kenya, Uganda and Cameroon have expressed interest in issuing international currency bonds after the success of issues by Gabon and Ghana last year. But Lebesa said Lesotho did not intend to follow.

"I don't think so," he said. "I think we are too small."

(additional reporting by Bate Felix; editing by Victoria Main)