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Lao P.D.R.’s economy rebounds in 2004, but risks linger

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
February 2005
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The Lao People’s Democratic Republic’s economy rebounded in 2004 from a number of shocks in 2003, including a drought and the regional impact of the Severe Acute Respiratory Syndrome (SARS). Macroeconomic stability has been restored and poverty has continued to decline, the IMF said in its regular economic assessment. Annual inflation, which had surged into double digits in 2002, has fallen gradually since mid-2003. The IMF’s Executive Board welcomed the improved economic management but urged faster progress in mobilizing domestic revenue, improving public expenditure management, restructuring state-owned banks and enterprises, and promoting private sector activity.

Despite some advancement of key structural reforms, the Board stressed more needed to be done, particularly in the fiscal area, given the country’s substantial expenditure needs and high public debt. The immediate priority was to address risks to the 2004/05 budget outlook stemming from ambitious revenue targets and substantial increases in wage expenses. The Board encouraged the authorities to strengthen revenue administration by recentralizing tax and customs administrations, and by introducing a valueadded tax in early 2007. It also stressed the importance of improving accountability and monitoring of public spending.

For more information, refer to Public Information Notices No. 05/2 (Lao P.D.R.) and 05/6 (Azerbaijan) on the IMF’s website (www.imf.org).

Lao P.D.R.20012002200320042005
EstimatesProjections
(percent change)
Real GDP growth15.85.85.36.07.0
Inflation (period average)7.810.615.511.27.8
(percent of GDP)
Overall government budget balance
(including grants)-4.4-4.0-5.8-3.9-4.1
External public debt68.973.291.784.481.4
Data: IMF staff report.

Monetary policy has been restrained over the past year, but the recent rapid expansion of state bank credit could potentially undermine monetary discipline. On exchange rate policy, the Board considered the country’s flexible exchange rate system appropriate as long as interventions remain limited to smoothing operations.

The government completed its National Growth and Poverty Eradication Strategy for accelerating growth and improving the living conditions of the poor. These efforts will likely require continued support from the international community. The present arrangement with the IMF under the Poverty Reduction and Growth Facility was approved in April 2001 and extended by one year to April 2005.

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