Lesotho's economy is based on exports of water sold to South Africa, manufacturing, agriculture, livestock, and to some extent the earnings of laborers employed in South Africa. Lesotho also exports diamonds, wool, mohair, clothing, and footwear. One of Levi's jeans manufacturing facilities is located there. Also in Lesotho is one of Russell Athletics plants. Lesotho is geographically surrounded by South Africa and economically integrated with it as well. The majority of households subsist on farming or migrant labor, primarily miners who remain in South Africa for 3 to 9 months. The western lowlands form the main agricultural zone. Almost 50% of the population earns some income through crop cultivation or animal husbandry, with over half the country's income coming from the agricultural sector.

Water is Lesotho's only significant natural resource. It is utilised through the 21-year, multi-billion-dollar Lesotho Highlands Water Project (LHWP), which began in 1986. The LHWP is designed to capture, store, and transfer water from the Orange River system to South Africa's Free State and greater Johannesburg area, which features a large concentration of South African industry, population, and agriculture. Completion of the first phase of the project has made Lesotho almost completely self-sufficient in the production of electricity and generated approximately $24 million annually from the sale of electricity and water to South Africa. The World Bank, African Development Bank, European Investment Bank, and many other bilateral donors financed the project. Lesotho has taken advantage of the African Growth and Opportunity Act (AGOA) to become the largest exporter of garments to the US from sub-Saharan Africa. Exports totaled over $320 million in 2002. Employment reached over 50,000, marking the first time that manufacturing sector workers outnumbered government employees.

Lesotho has nearly 6,000 kilometers of unpaved and modern all-weather roads. There is a short freight rail line linking Lesotho with South Africa that is owned and operated by South Africa.