Chapter

VI Fiscal Adjustment

Author(s):
Ichiro Otani, and Chi Pham
Published Date:
May 1996
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The systemic reform, which accelerated following the introduction of the NEM in 1985, has dramatically changed the importance and operation of the budgetary process in the Lao P.D.R. With the emergence of a market economy, the budget has assumed a major role in bringing about macroeconomic stability by mobilizing domestic revenue, restraining expenditure, and channeling foreign assistance.

On the structural side, the lax system was overhauled to meet the needs of a nascent market economy; expenditures were prioritized; and fiscal management was enhanced by integrating central and provincial budgets into the national budget. However, major weaknesses still remained in the areas of tax administration, expenditure control, and public investment programming and execution.

Overall Fiscal Policy

Over the period 1988–94, public finance improved considerably, notably with the reduction of overall fiscal imbalances.18 In particular, the current account balance swung from a deficit of 1 percent of GDP in 1988 to a surplus of almost 1 percent of GDP in 1993/94, facilitated by a combination of tax reform and current expenditure restraint. The ensuing public sector saving was utilized to finance increased capital spending. Thus, during 1988–94, the overall budget deficit (excluding grants) declined from nearly 20 percent of GDP to 11 percent of GDP (Table 9 and Chart 4).19 During this period, the Government's dependence on external assistance remained at about 5 percent of GDP.

Chart 4.General Government Budget Balance

(In percent of GDP)

Source: IMF staff estimates.

1Commitment basis.

Table 9.General Government Budget
198419851986198719881989199019911991/9211992/931993/941994/95
(In billions of kip)
Revenue4.910.318.520.128.535.661.074.785.6113.3135.8169.6
Tax1.71.41.82.021.527.437.654.460.885.9106.7136.7
Nontax3.38.916.718.17.18.123.320.324.927.329.132.9
Expenditure8.319.626.529.575.0106.4143.4151.1174.4170.5258.9290.8
Current4.19.514.816.028.039.969.982.099.5104.9127.1151.0
Without wages(0.6)(2.5)(4.8)(5.1)(11.3)(19.6)(35.6)(36.7)(37.0)(44.1)(56.1)(66.5)
Capital4.310.211.713.547.066.573.669.174.965.6131.8140.0
Overall balance
(commitment basis)-3.4-9.3-8.0-9.4-46.5-70.8-82.5-76.4-88.7-57.3-123.1-121.0
Arrears clearance (net)2-5.9-5.0-6.8-15.7
Overall balance (cash basis)-3.4-9.3-8.0-9.4-46.5-70.8-88.4-81.4-95.6-72.9-123.1-1211.0
Grants1.52.01.71.212.616.923.032.634.031.367.352.5
Other foreign resources2.17.56.68.432.666.060.329.647.227.150.658.0
Domestic financing-0.1-0.2-0.2-0.21.3-12.15.119.314.314.55.210.5
(In percent of GDP)
Revenue15.913.614.99.612.28.39.910.310.511.912.213.3
Tax5.41.91.40.99.16.46.17.57.49.09.610.7
Nontax10.511.813.58.73.01.93.82.83.02.92.62.6
Expenditure27.026.021.314.132.024.923.420.921.417.923.222.8
Expenditure (exchange rate adjusted)77.472.541.032.139.326.224.321.822.118.123.322.8
Current13.312.511.97.611.99.411.411.312.211.011.411.8
Capital13.713.59.46.420.015.612.09.69.26.911.810.9
Overall balance (cash basis; excluding grants)-11.1-12.4-6.5-4.5-19.8-16.6-14.4-11.3-11.7-7.8-11.0-9.5
Grants4.82.61.30.65.44.03.74.54.23.36.04.1
Other foreign resources6.610.05.34.013.915.59.84.15.82.94.54.5
Domestic financing-0.3-0.2-0.2-0.10.6-2.80.82.71.81.50.50.8
Current balance (excluding grants)2.61.13.01.90.2-1.0-1.5-1.0-1.70.90.81.5
Source: Lao authorities.

In 1992, the fiscal year was changed to October 1-September 30. 1991/92 (October-September) was included for purposes of comparison.

Minus sign indicates net payment for clearing arrears.

Source: Lao authorities.

In 1992, the fiscal year was changed to October 1-September 30. 1991/92 (October-September) was included for purposes of comparison.

Minus sign indicates net payment for clearing arrears.

Initial Weakness of Fiscal Policy

Until 1989, when the SAF-supported program was put in place, fiscal policy had not been effective because available information on the budget was insufficiently accurate, owing primarily to the severe underestimation of many of its components. Several factors contributed to this underestimation. First, the large exchange rate overvaluation understated government expenditures, particularly capital spending, which was mostly foreign financed.20 Second, substantial subsidies (estimated at about 7 percent of GDP in 1987) on consumer goods purchased by civil servants were financed out of the profits of the Lao Food Corporation. Third, while the budget presentation did not show any direct recourse to credit from the domestic banking system, state enterprises had, in fact, borrowed heavily from the banking sector to help finance their compulsory transfers to the budget; this borrowing made the overall revenue performance of the Government appear rosier than it actually was while intensifying pressures on monetary aggregates. Fourth, debt-service payments did not reflect the payments made to the nonconvertible area, which amounted to about 1 percent of GDP in 1987.

The correction of fiscal imbalances was far from smooth during 1984–88, the period immediately preceding the adjustment and reform supported by the SAF arrangement. Revenue performance was initially weak, owing to a worsening of the financial position of state enterprises—which provided between two thirds and three fourths of total revenue—and a poor outturn of other taxes. Meanwhile, expenditures soared because of price and exchange rate adjustments and large wage increases. Later, in 1986–87, fiscal accounts improved significantly, reflecting substantial improvements in the financial position of enterprises following the price liberalization.

In 1988, however, the overall fiscal performance deteriorated sharply. While the tax reform of March 1988 contributed to a sharp increase in the ratio of revenue to GDP to some 12 percent, the ratio of expenditure to GDP more than doubled to 32 percent. This latter increase reflected the more than doubling of current and capital expenditures in 1988. The Government's adoption of a large wage increase in the public sector to replace food coupon payments following the price liberalization pushed current expenditure to almost 12 percent of GDP (compared with 8 percent of GDP in 1987). Meanwhile, the January 1988 devaluation of the official exchange rate—which was used to record government transactions—caused foreign-financed capital expenditure to increase sharply to about 20 percent of GDP from some 6 percent of GDP in 1987. Reflecting these developments, the overall budget deficit soared to 20 percent of GDP in 1988 from 5 percent of GDP in 1987 (Table 9 and Chart 4).

Fiscal Consolidation of 1989–1993/94

The fiscal situation improved significantly during 1989–1993/94,21 as the Government pursued an adjustment policy under programs supported by the SAF and the ESAF. Total revenue recovered steadily from some 8 percent of GDP in 1989 to 12 percent of GDP in 1993/94. Concurrently, total expenditure in relation to GDP declined from about 25 percent in 1989 to some 23 percent in 1993/94.22 As a result, the current account balance recorded a surplus of 1 percent of GDP in 1993/94, a major turnaround from the persistent deficits in preceding years (Table 9 and Chart 4).

Tax Reform

The tax reform thus far has gone through two stages.23 In the first stage, which culminated in a package of measures promulgated in March 1988, the reform aimed at correcting the most serious structural distortions stemming from the almost exclusive reliance on the practice of transferring operating surpluses of the public enterprises to the budget. In the second stage, which began in June 1989, the reform has corrected some earlier problems associated with the design of the new tax regime and introduced additional taxes in accordance with the needs of a market economy.

Reform of 1988

The crucial element of the March 1988 reform was the replacement of the state enterprises' transfers to the budget by profit and turnover taxes. The profit tax was first levied on manufacturing enterprises with rates ranging from 20 percent to 85 percent while the turnover tax, with rates ranging from 1 percent to 15 percent, was levied on service enterprises.24 The reform also included the introduction of taxes on export profits at rates varying from 50 percent to 80 percent. Finally, the maximum rate of the import tax was reduced from 200 percent to 70 percent, while its taxable base was revalued to reflect the exchange rate realignment. Following the reform, the share of tax revenue in total revenue rose from 9 percent during 1987—88 to 76 percent in 1988–89, and then to 79 percent in 1993/94 (see Table 10).

Table 10.Structure of Tax Revenue(In percent)
Share in Total RevenueShare in GDP
Average 1984–85Average 1986–87Average 1988–89Average 1990–93/941993/94Budget 1994/95Average 1984–85Average 1986–87Average 1988–89Average 1990–93/941993/94Budget 1994/95
Total revenue14.812.210.211.012.213.3
Tax revenue23.79.676.272.078.680.63.61.27.87.99.610.7
Profit tax3.41.019.713.08.49.70.50.12.11.41.01.3
Income tax0.20.10.13.05.35.00.30.60.7
Agriculture/land tax3.52.24.02.01.62.10.50.30.40.20.20.3
Business licenses0.10.10.10.50.10.1
Turnover tax13.54.728.213.014.714.82.10.62.81.41.82.0
Of which: Public enterprises6.62.921.31.00.42.2
Foreign trade tax2.61.523.425.824.922.10.40.22.42.83.02.9
Import tax2.11.217.314.618.918.00.30.11.81.62.32.4
Export tax0.50.34.911.25.94.10.10.51.20.70.5
Excise tax2.83.75.40.30.50.7
Timber royalties7.315.517.10.91.92.3
Other0.30.10.54.74.44.30.50.50.6
Nontax revenue76.390.423.828.021.419.411.211.12.53.02.62.6
State enterprises67.681.410.08.02.22.39.99.91.00.80.30.3
Other8.79.013.820.019.217.11.31.11.42.22.32.3

Reform of 1989

The June 1989 reform aimed at correcting some of the design problems arising from the 1988 reform and at making substantial progress toward a modern tax system. In place of the system of taxing gross income earned in individual export activities, specific export taxes on a limited number of natural resources (timber, wood products, animals, and certain scrap metals) were introduced, an ad valorem tax of 80 percent on electricity exports was imposed, and other export taxes were abolished.

With respect to the taxation of enterprises, the multiple corporate income tax rates were unified at 45 percent (except for the rate of 60 percent that continued to be applied to commercial bank profits), while the scope of the turnover tax was broadened by using five rates ranging from 3 percent to 20 percent to cover all services (excluding banking and insurance), wholesale trade, and imports. The personal income tax was extended to cover not only the wages and salaries of nationals employed by foreigners but also all salaried workers (including civil servants); the tax set no minimum threshold for taxable income while establishing a progressive tax schedule, with rates ranging from 2 percent to 30 percent. In addition, separate progressive income tax schedules were established for individuals engaged in industrial and commercial activities and for the self-employed, while taxes on agricultural income, rents, and dividends were lowered. Finally, specific ad valorem taxes were imposed on the domestic exploitation of natural resources to promote environmental conservation, and a land tax on the use of nonagricultural land was introduced.

A notable feature of the Lao tax system is that more than 50 percent of government revenues are collected through the enterprises (defined as public and private entities having a physical establishment, employing workers, and producing manufacturing and service activities). In particular, enterprises are subject to two alternative regimes of income declaration and tax imposition: (i) an “ordinary” imposition system, applied to enterprises with turnovers greater than KN 7.2 million a year; and (ii) a “negotiated” imposition system for other enterprises, which provides that a flat tax will be negotiated for taxpayers with unaudited accounts. Enterprises subject to the ordinary imposition system must comply with regular accounting standards and declare monthly turnovers and quarterly profits. This reporting is required not only to compute profit and turnover taxes but also to assess excise taxes on domestic sales and imports. The system is also used to assess income taxes on wage earners, based on the number and the type of workers employed by enterprises.

Reforms of the 1990s

Reforms in the 1990s aimed mainly at improving the structure of the system introduced in 1989. The following were the main additions and modifications:

  • The turnover tax was simplified by reducing the number of rates from five to two (5 percent and 10 percent) in February 1991.

  • Excise taxes were introduced on petroleum products and luxury goods in February 1991.

  • A minimum corporate tax, levied at 1.5 percent of turnover, was established in February 1991 but implemented only in January 1993.

  • A registration tax was introduced in September 1991.

  • A land tax was introduced in December 1992 on agricultural and urban land, as a substitute for the agriculture tax.

  • Timber royalties were restructured in October 1992.

  • Export taxes were eliminated in June 1994.

  • The import tariff system was restructured in January 1995.

Outstanding Issues

Despite the progress achieved so far in restructuring the tax system, revenue performance has remained weak; in addition, the revenue structure is inelastic, the tax base limited, and tax administration highly deficient. In 1993/94, total revenue was still very low, at about 12 percent of GDP, and relied mainly on indirect taxation (Table 10). The turnover and international trade taxes accounted for about 40 percent of total revenue (the largest share), followed by special taxes, such as timber royalties, which provided about 18 percent of total revenue. Taxes on persona) and enterprise income accounted for about 5 percent of total revenue. The share of profit tax, which the 1989 reform had targeted as the tax providing the bulk of total tax revenue, actually declined from 17 percent of total revenue in 1989 to only 8 percent in 1993/94. Against the background of booming private sector activity, this decline clearly indicates widespread tax evasion and serious weaknesses in tax administration.

Low revenue buoyancy and skewed distribution appear to derive neither from flaws in the design of the tax system nor from a failure to introduce needed new taxes, such as a value-added tax (VAT).25 Instead, the cause appears to be weak tax administration, ranging from a lack of control over the provincial authorities' collection procedures to an insufficient inspection of enterprises' tax declarations. Particularly weak is the administration of the turnover taxes on domestic activities and imports (see Box 4), the collection of which is based on the income declaration of enterprises. Although such a system can greatly facilitate tax collection, it is also open to tax evasion unless an appropriate system of cross verification is put in place. Indeed, in the Lao P.D.R., tax verifications and controls are extremely loose; the tax department is severely understaffed; declarations are hardly examined; payment arrears are not pursued; and on-the-spot inspections are rare and ineffective. In addition, because the enterprise accounting system is not widely enforced, too many firms still adhere to simplified accounting, even though their turnover is well beyond the KN 7.2 million threshold. These firms are, therefore, subject not to the ordinary but to the negotiated imposition system, which encourages collusion between taxpayers and tax officers and causes large revenue losses for the Government.

Box 4.Structure of Revenue Collection

The revenue structure of the Lao P.D.R. is characterized by the five principal sources of revenue.

Duties on international trade are collected by the Customs Department and in 1993/94 represented about 25 percent of total revenue. Import duties—which have only a mild protective component (see Box 3)—are collected at five regional customs posts, based on the valuation method of the General Agreement on Tariffs and Trade.1 Import tariffs are ad valorem, and exemptions and rebates are clearly listed in the recently approved Customs Law. Export duties are currently applied only to exports of electricity in the amount of 20 percent of total sales and to a limited number of forestry products not covered by timber royalties.2

Taxes on domestic activities and imports are collected by the Tax Department based on enterprises' declarations. This category represented about 54 percent of total revenue in 1993/94 and comprises the following duties: (i) turnover tax and excise tax on imports; (ii) turnover tax and excise tax on domestic sales; (iii) profit tax; (iv) income tax (including taxes on wages, capital earnings, and rental income); (v) registration tax and other taxes; and (vi) penalties. In 1993/94, provincal authorities provided about 40 percent of the total revenue under this category.

Land tax is collected by the Land Registration Department and provides only a small part of total revenue. The tax, which has recently replaced the agriculture tax, is levied in accordance with the use and location of the land (see Appendix IV for details).

Timber royalties are collected directly by the Budget Department through provincial authorities and represented about 15 percent of total revenue in 1993/94. The amount of royalties is determined in accordance with the quality of wood exported while the total amount of cut wood is determined by an annual nationwide plan. Although recent legislation has regulated new logging permits, the main outstanding issue remains the sustainability of this source of revenue in the medium term, when the exploitation of hydroelectric project areas—which represents the only major source of new logging now being allowed—will be exhausted. In particular, it is still unclear whether royalties on the exploitation of other natural resources, especially lignite, will be able to make up for the expected decrease in timber royalties.

Nontax revenue is collected at the central level by the State Assets Department (which collects leasing income from privatized state enterprises, concessions, and dividends and other payments from state-owned enterprises) and the Budget Department itself. In 1993/94, nontax revenue represented about 21 percent of total revenue.

1 The system is being gradually implemented. The past valuation method, based on official value estimates by product, may still be applied to some commodities.2 Other duties previously applied to selected agricultural products have recently been abolished. cial authorities provided about 40 percent of the total revenue under this category.

Similar problems—particularly understaffing and, hence, the lack of enforcement—affect the administration of all other taxes. In the case of the land tax, the lack of personnel is compounded by the absence of land titles and registration, which erodes the tax base. Meanwhile, in the provinces, tax collection is made difficult by limited monetization.

Expenditure and Fiscal Management

Improved control of spending was an important element of recent fiscal adjustment. However, the observed changes in expenditure composition would suggest that both recurrent and capital expenditure have not yet been managed in a manner fully consistent with established priorities and long-term planning.

Expenditure Trends

Two major trends have emerged in the expenditure composition. The first is a sharp relative decline in capital expenditure. Public investment dropped continuously from 13.6 percent of GDP in the 1984–85 period to 7 percent of GDP in 1992/93, before recovering to 11 percent of GDP in 1993/94. One reason for this trend is that, as the privatization of state enterprises progressed during the early 1990s, investment activities previously performed by the Central Government were transferred to the private sector.26 The second reason is related to the increasing problems with absorptive capacity, as evidenced by the substantial accumulation of undisbursed foreign financing in the past few years. Because the authorities lacked an effective system of public investment prioritization and monitoring (see below), more public investments were initiated than could actually be implemented. A slowdown in project implementation across the board ensued, causing widespread cost overruns.

The second trend is that the composition of current expenditure has changed markedly in favor of workers' compensation—defined as wages and salaries, and transfers and severance payments. The share of workers' compensation rose from 24 percent of current expenditure in 1985 to 44 percent in 1993/94 (see Chart 5), while current expenditure remained virtually unchanged in terms of GDP. This trend has both a positive and a negative aspect. The positive aspect is that fringe benefits and food subsidies, previously hidden, have been gradually either monetized or expressly recorded as workers' compensation,27 resulting in a more transparent budget. The negative aspect is that the increased share of workers' compensation corresponded to a declining share of materials and supplies, which dropped sharply from 64 percent in 1985 to 34 percent in 1993/94 (Chart 5). This fall adversely affected the necessary operation and maintenance of the existing limited infrastructure.

Chart 5.Structure of Government Expenditure

(In percent)

Sources: Lao authorities; and IMF staff estimates.

Progress in Fiscal Management

The progress that has been made in strengthening fiscal management can be summarized as follows.

First, to increase budget discipline, the Government discontinued its decentralization policy and reverted to fiscal centralization in August 1991. Provincial administrations ceased to run independent budgets, and central government and provincial budgets were consolidated into a single budget document, the finalization of which is subject to guidelines and clearance by the Council of Ministers before its approval by the National Assembly. In 1992, a national budget, covering all revenues and expenditures of the Central Government and the 17 provincial administrations, was prepared for the first lime since 1975.

Second, new budgetary decrees were implemented in early 1993 to streamline budgetary procedures and to conform with the centralization of the budget and the new fiscal year (October-September). Moreover, with the enactment of a new budget law in June 1994, the steps of annual budget preparation were clearly defined, although the new nomenclature for budgetary accounts has yet to be adopted.

Third, budget execution was also centralized, and a new treasury system was established, replacing the previous system of disbursements made at the local level by the provincial branches of the central bank. In the new system, provincial authorities act under the general authority of, and as agents for, the Central Government in the collection of revenues and execution of expenditures. Provincial treasury offices have been established in the principal provinces (eight as of mid-1995) and eventually will be extended to all provinces to coordinate tax collections and payments at the local level.

Fourth, new accounting rules based on the standard double-entry system were introduced nationwide in July 1994. This new accounting framework has been established to attain an accurate recording of state operations and eventually to increase the reliability of general budgetary accounts for policy-making purposes.

Fifth, to improve capital expenditure planning, the multiyear rolling public investment plan has recently been revised, and a public investment management unit is being strengthened under a United Nations Development Program-sponsored project.

Outstanding Issues

Despite the progress achieved thus far, the annual budgetary formulation—from the initial preparation in the line ministries to its finalization at the National Assembly—as well as its execution and control is still in a trial phase. Budget allocation requests by line ministries are largely made by adjusting past expenditure patterns on an incremental basis, with no due regard paid to overall planning. Budget execution, including expenditure monitoring and control, is still somewhat inefficient as the treasury network has yet to be fully established. Finally, budgetary accounts still lack transparency, as budget classifications need to be more standardized and the quality and timeliness of data reporting require improvement.

Over the longer run, the lack of adequate medium-term fiscal planning capacity is one of the major weaknesses of fiscal management. Thus, despite the existence of a five-year public investment framework, the annual budget process hardly reflects medium-term guidelines.

In the absence of a reliable system for monitoring expenditures, the Lao authorities exert limited control. In practice, expenditure control is based on the cash position of the Treasury, as information on the expenditure program becomes available only with a long lag and is too scattered to be taken into account during the ongoing fiscal year. In addition, because line ministries can still exercise some discretion in managing public expenditures, misappropriations of funds and expenditure overruns are frequent.

Civil Service Reform

In late 1989, the Government embarked upon a thorough restructuring of the civil service as part of the process of moving toward a market-based economy. This process continued during 1990–93, with the reform focusing mainly on a reduction of non-military personnel, where numbers had swollen in the late 1980s to over 100,000 persons.28 Beginning in March 1994, the retrenchment was accompanied by an overhaul of the salary structure in accordance with qualifications and performance. The objective of this reform was to attain a pay structure competitive with that of the private sector, which eventually could enable the Government to reward good performers, retain well-qualified personnel, and improve the quality of public service. The results of the reform were encouraging: the number of nonmilitary personnel dropped by about 23 percent between 1989 and 1994, while the budget cost for total workers' compensation was contained to about 6 percent of GDP in 1992/93 and 1993/94.

Box 5.The Salary Reform of April 1994

In April 1994, the Lao Government introduced a revised pay structure for the civil service that was put into effect retroactively from March 1994. The objective was to improve the quality of public administration through a pay structure that rewards good performers and is competitive with that of the private sector.

The salary structure was revised upward for each job category. On average, by weighing the salary by the new personnel distribution among job categories (see below), the average base salary for the whole civil service rose by about 60 percent (by 83 percent for non-military personnel, and by about 43 percent for military personnel).

All existing benefits and allowances (with the exception of children's allowances) were increased, and new benefits and allowances were introduced. On an annual basis, the budgetary cost of benefits and allowances more than doubled from KN 8.6 billion (about 0.8 percent of GDP) before April 1994 to KN 17.4 billion (about 1.6 percent of GDP) after April 1994.

Nonmilitary civil servants were reclassified into the five existing categories (with 15 steps each) according to academic and professional qualifications. The reclassification implied a drastic reduction in the share of personnel in the highest-paid categories, categories 5 and 4, from 7 percent and 17 percent of the total, respectively, to less than 1 percent and 11 percent, respectively, and a higher concentration at the lower end of the salary scale (categories 2 and 1).

In 1993/94, the number of nonmilitary personnel was reduced by about 3,700 (about 5 percent) on a net basis. At the end of September 1994, total nonmilitary personnel were estimated at about 69,000 persons. Furthermore, based on information on severance payments and the approximate magnitude of average payments to retrenched military workers, military personnel may have been retrenched by about 3,000 during 1993/94.

The overall impact of the new salary structure and the civil service reform on the 1993/94 budget was limited. In particular, wages and salaries (including base salaries and benefits) rose by about 27 percent, from KN 44.1 billion (4,7 percent of GDP) in 1992/93 to KN 56.1 billion (5 percent of GDP) in 1993/94. Over the same period, transfers (which include pensions, allowances, and contingencies) increased by about 24 percent from KN 12.6 billion (1.3 percent of GDP) to KN 15.6 billion (1.4 percent of GDP).

The budgetary impact of these increases was dampened by four major factors. First, the retrenchment of nonmilitary civil service personnel by some 5 percent resulted in a savings equivalent to about 10 percent of the wage bill under the old salary scale. Second, the savings derived from the retrenchment of military personnel was nearly as significant as that derived from the retrenchment of nonmilitary civil servants. Third, the reclassification of civil servants implied a downgrading of most personnel. Fourth, the increased salary structure was in effect only for the last seven months of the fiscal year 1993/94.

Reform of 1989

The civil service reform was initiated in 1989 for two main reasons. First, administrators trained under the former centrally planned economic system were unable to keep up with the needs of a market-oriented economy. As a result, staff redundancies were evident in some areas, while there was a lack of qualified personnel and a high need for retraining in others. Second, the civil service staff was too large, given the need to reduce state control of the economy.

During the early stage, the reform succeeded in drastically reducing personnel across the board, as an estimated 19 percent of all civil service employees were retrenched between 1989 and 1992.

Reform of 1994

In March 1994, the retrenchment program was modified, as new legislation substantially changed pay structures and job classifications (see Box 5). The reform encompassed three main elements: (i) a restructuring of job classifications according to professional and academic experience, which implied, on average, a downgrading of existing personnel; (ii) a large upward revision of the salary scale in accordance with the new job classifications; and (iii) the further net retrenchment of about 3,500 persons in 1994.

Despite the sizable increase in average pay of about 80 percent, the budgetary impact of the reform was contained by the overhaul of job classifications, which called for a drastic drop in the share of personnel in the highest-paid categories, and by the net retrenchment. As a result, workers' compensation, including wages and salaries and transfers (pensions, allowances, and contingencies), rose from about 6 percent in 1992/93 to only 6.4 percent of GDP in 1993/94.29 To maintain fiscal discipline in the medium term, the Government is expected to limit hiring strictly and continue the retrenchment of personnel. To this end, it will strengthen the monitoring of civil service reform, particularly by establishing a specific monitoring unit at the Ministry of Finance to record the hiring, retrenchment, and reallocation of civil servants.

As detailed later in this section, comparisons with earlier periods are biased by the use of an overvalued exchange rate.

The impact of the exchange rate overvaluation on revenues was of minor importance because it affected only foreign exchange receipts by public enterprises, such as the state electricity company, and other minor items, such as overflight rights.

In 1992, the fiscal year was changed to October 1-September 30.

The 1993/94 expenditure figure had a strong upward bias, given the large carryovers of major projects from previous years.

In the coming years, the tax system is expected to be reformed further with IMF technical assistance.

Both taxes were applied first only on domestic activity.

The introduction of a VAT should be preceded by a substantial strengthening of the enterprise accounting standards, which is not foreseeable in the near future.

The Government henceforth concentrated on infrastructure expenditure rather than on directly productive activities. This shift is reflected in the increased share of public expenditure in the transportation and communications sector (61 percent of the total in 1993/94, compared with 37 percent in 1985, as shown in Chart 5), and in the corresponding decline of the share of the industry, mining, and energy sector (from 15 percent in 1985 to 8 percent in 1993/94). Among the recently emerging sectors are education, with a 5 percent share in 1993/94, compared with 3 percent in 1985, and health, with about a 2 percent share, compared with a virtually nonexistent share in 1985. These shares, however, remain rather low by international standards if measured in terms of GDP, particularly in view of the very low social indicators of the Lao P.D.R.

For instance, some payments in kind to workers previously recorded among materials and supplies were transferred to wages and salaries in 1992/93.

There are no firm figures on military personnel in the late 1980s.

Budget costs were limited also because the reform, coming at midyear, had only a seven-month impact on the 1993/94 budget.

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