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© 2002 International Monetary Fund
March 2002
IMF Country Report No. 02/62
Lao People’s Democratic Republic: 2001 Article IV Consultation and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility-Staff Report; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Lao People’s Democratic Republic
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of a combined discussion of the 2001 Article IV consultation and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility with Lao People’s Democratic Republic, the following documents have been released and are included in this package:
the staff report for the 2001 Article IV consultation and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility, prepared by a staff team of the IMF, following discussions that ended on January 31, 2001, with the officials of Lao People’s Democratic Republic on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on April 6, 2001. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a staff statement of April 23, 2001 updating information on recent developments.
a Public Information Notice (PIN) and a Press Release summarizing the views of the Executive Board as expressed during its April 23, 2001 discussion of the staff report that concluded the Article IV consultation.
a statement by the Executive Director for Lao People’s Democratic Republic.
The document(s) listed below have been or will be separately released.
Selected Issues and Statistical Appendix
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INTERNATIONAL MONETARY FUND
LAO PEOPLE’S DEMOCRATIC REPUBLIC
Staff Report for the 2001 Article IV Consultation and Request for A Three-Year Arrangement Under the Poverty Reduction and Growth Facility
Prepared by the Asia and Pacific Department
Approved by Mario I. Blejer and Shigeo Kashiwagi
April 6, 2001
Discussions for the Article IV consultation and the economic program were held in Vientiane during October 2000 and January 2001.
The team, during some or all of the discussions, comprised Messrs. Winglee (Head), Cheunsomchit, Cook, Marciniak, Pani, and Soueid (all APD), Ms. Brunschwig (PDR), and Mr. Song (MAE). Mr. Blejer (APD) and Mr. Lathouly (OED) joined the concluding discussions. The missions were assisted by Mr. Sidgwick, resident representative, and worked closely with teams from the World Bank and Asian Development Bank.
The missions met with Deputy Prime Minister and Minister of Finance Boun-Nhang Vorachith, Deputy Prime Minister Somsavat Lengsavad, Bank of the Lao P.D.R. Governor Soukanh Mahalath, other ministers and senior officials, and members of the donor community.
In the attached letter dated March 26, 2001, the Government of the Lao P.D.R. requests a three-year arrangement under the Poverty Reduction and Growth Facility for the period January 2001-December 2003 (Attachment II). The government’s program is described in the Memorandum on Economic and Financial Policies for 2001 (MEFP) (Attachment III), and the accompanying Interim Poverty Reduction Strategy Paper (I-PRSP) EBD/01/37).
The authorities have agreed to the publication of the letter of intent, MEFP, I-PRSP, and joint staff assessment.
The principal author of this report was Mr. Winglee with substantial inputs from Messrs. Cook and Marciniak.
Contents
Executive Summary
I. Background and Recent Developments
II. Medium-Term Outlook, Policy Framework, and the I-PRSP
III. Macroeconomic Policies
A. Monetary, Exchange Rate, and Exchange System Policies
B. Fiscal Policy and Reforms
IV. Structural Policies
A. Banking Reforms
B. Enterprise Policies
C. Trade Reform
V. Other Issues
A. External Sector and Balance of Payments Outlook
B. Statistical and Transparency Issues
C. Program Monitoring, Implementation, and Coordination
VI. Staff Appraisal
Text Boxes
1. The Poverty Situation
2. Main Elements of the PRGF-Supported Program, 2001–03
3. Nam Theun 2 Hydroelectric Project
4. Medium-Term Fiscal Framework
5. Main Issues in the Reform of State Banks
Figures
1. Selected Economic Indicators, 1997–2001
Tables
1. Phasing of Disbursements under the PRGF Arrangement
2 Fund Position and Indicators of Fund Credit, 2000–2009
3. Selected Economic and Financial Indicators, 1997–2001
4. General Government Operations, 1996/97–2000/01
5. Monetary Developments, 1997–2001
6. Summary Macroeconomic Framework, 1998–2003
7. Balance of Payments, 1998–2005
8. Debt Stock and Debt Service, 1998–2005
9. Indicators of External Vulnerability, 1998–2000
10. External Financing Needs and Sources, 1998–2003
11. Social and Demographic Indicators
Annexes
I. Fund Relations
II. Relations with the World Bank Group
III. Relations with the Asian Development Bank
IV. Medium-Term Balance of Payments
V. Statistical Issues
VI. Report on Technical Consultation Discussions
Attachments on Three-Year Arrangement Under the Poverty Reduction and Growth Facility
I. Letter of Intent
II. Memorandum on Economic and Financial Policies for 2001
Appendices
I. Main Elements of State-Owned Commercial Bank Restructuring
II. Technical Memorandum on Program Monitoring
Executive Summary
Over the past 18 months, the Lao authorities have acted decisively to reduce inflation from triple- to single-digit levels. Monetary and fiscal policies were tightened along the lines recommended in the 1999 Article IV consultation. At the same time, distortions imposed during the high inflation period, especially limits on key prices and ad hoc trade and exchange controls, are being unwound.
With these positive results, the authorities have now requested a new three-year PRGF arrangement to solidify macroeconomic stabilization and restart structural reform, as part of their strategy, articulated in the Interim Poverty Reduction Strategy Paper, to reduce poverty through growth with equity.
Macroeconomic stabilization will be focused on raising budget revenue through administrative improvements and the introduction of a VAT in 2003, and on tightly controlling central bank credit. Stronger revenue performance together with improved public expenditure management, would allow for more socially-oriented expenditure while avoiding the need for domestic bank financing.
The structural measures will be aimed at strengthening the broad fiscal position and the banking system. State bank restructuring is a key economic reform goal to enable them to properly channel resources for productive investment and resolve their large stock of nonperforming loans. The restructuring framework is based on phased recapitalization linked to operational improvements. Bank specific plans are to be developed in consultation with the World Bank and Asian Development Bank (AsDB) by the first review of the PRGF arrangement. In the interim, state-owned commercial bank credit will be closely monitored to limit its growth and improve repayment performance, and international standard audits will be conducted. In support of strengthening public sector finances, public expenditure management reforms are envisaged, along with significant price actions on two large state enterprises to reduce the current and potential drain on fiscal resources.
The poor quality of economic statistics, especially for national accounts, external debt, public expenditure, and the balance of payments, has complicated analysis and policy formulation. In particular, poor expenditure data are a major constraint on developing a full poverty reduction program and improving governance.
The main risks to the program derive from Lao P.D.R.’s weak track record on macroeconomic stabilization policies. In particular, strengthening stabilization beyond the immediate measures will require reforming the state banks and improving the transparency of public sector finances, which previously have been difficult areas. The staff believes that the authorities’ recognition of the cause and cost of the recent instability and pressures from regional integration will be a major impetus for progress. Nevertheless, close monitoring and substantial technical assistance will be needed to implement the program.
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April 23, 2001
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Public Information Notice (PIN) No. 01/40
FOR IMMEDIATE RELEASE
April 26, 2001
International Monetary Fund
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Washington, D.C. 20431 USA
Telephone 202-623-7100
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Press Release No. 01/18
FOR IMMEDIATE RELEASE
April 23, 2001
International Monetary Fund
Washington, D.C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
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April 23, 2001
