Recent economic development and immediate macro-economic outlook

Over the past decade, Lao P.D.R has made good progress in economic reforms. The government has taken various measures to transform the country towards a more market-oriented economy under its New Economic Mechanism, which has the broad support of the international community, particularly the Bretton Woods institutions and the Asian Development Bank. In the first half of the 1990s, real GDP growth averaged 7-8 percent, per capita income increased significantly and inflation remained largely in single-digits.

However, the economy was adversely affected by the crisis that swept through a number of Asian countries in the second half of 1997. The most badly hit areas were the public finances and balance of payments. Government revenue declined significantly and capital inflow through private investment slowed substantially. Exports declined and the kip depreciated ten-fold against the US dollar and inflation reached three digits.

While agriculture remains the dominant sector of the economy, the other engines of growth now include manufacturing, construction and services. Meanwhile, significant foreign investment in hydropower has also increased with the better prospects for exporting energy to the neighboring countries.

The real sector of the economy particularly the agricultural sector performed well, especially during the early stages of the crisis, when global prices of rice and a number of other major crops remained high. For this reason, the agriculture sector continued to do well despite the crisis as the demand for some of the agricultural products increased markedly, especially from Thailand. Moreover, investments in public infrastructure in the rural sector paid off as they provided a strong impetus to growth in agriculture with many rural fanners being given increased direct access into the markets during this difficult period. Thus despite the negative spill-over effects of the Asian financial crisis, the real growth of the economy was maintained at reasonable levels due to favorable performance by the agriculture sector. However, the pre-crisis socio-economic development targets have yet to be achieved and the authorities continue to face many challenges in improving the economic conditions and welfare of the people of Lao P.D.R.

Since October 1999, the exchange rate has stabilized within the range of around 7,500 kip to 8,500 kip to a US dollar and remained stable relative to the Thai baht. Likewise, the inflation rate also declined sharply and has continued to fall to single digits in recent months.

Macro-economic Stabilization

The measures undertaken by the authorities which contributed to the macro-economic stabilization consisted of fiscal consolidation, for example, enhancement of revenue collection, curbing government overdraft from the central bank and cautious management of public expenditures. At the same time, increased use of open market operations such as the sale of central bank bills, treasury bills and high interest bearing certificates of deposit were used to absorb excess liquidity in the economy.

The government will continue its fiscal discipline and tight monetary policy stance over the medium term as spelled out in the MEFP. However, there is still the need to mobilize greater resources towards productive and priority social sectors amidst the tight fiscal condition. Therefore, the government has been striving to increase revenue through various measures including the strengthening of tax administration.

The main objective of monetary policy of the government for 2001 and in the medium term has been to further reduce the inflation rate to be in line with its major trading partners. Recognizing the fact that high level of dollarization in the Lao economy has limited the central bank’s capacity to implement monetary policy, the central bank is now putting emphasis on strict control of its credit to the government and closely supervising the lending of commercial banks.

Structural reforms

Although there has been some setback in the reforms of the state-owned enterprises recently, a lot of progress has been made in the structural reforms of the state-owned commercial banks (SOCBs). The consolidation of seven SOCBs into three major banks were completed in early 1999 and the restructuring of these banks has been continuing with technical assistance from the AsDB since latel997.

The authorities recognize that those banks are still weak compared with international standards and thus the SOCBs reforms will be one of the major structural goals under the PRGF program with assistance from the World Bank and the AsDB. Similarly, the authorities are committed to undertake further reforms to introduce a market-based legal and institutional framework for the SOEs.

Interim Poverty Reduction Strategy Paper

Since Lao P.D.R remains one of the poorest countries in the world, poverty reduction is one of the key elements in the government’s overall development strategy. The I-PRSP was prepared with wide participation by and consultation with the local private sector, NGOs and the international community. A more refined PRSP will be prepared to take account of comments and suggestions received as well as experiences gained with the I-PRSP and the joint staff assessment. The overall strategy of the government is to promote sustainable growth with equity so as to graduate from the group of least developed countries by the year 2020.

Trade Reform

As a member of ASEAN, the authorities are committed to meet their commitments under the ASEAN Free Trade Area (AFTA) by 2008. The licensing requirements for all exports (except for mining and timber products) have been revoked completely with effect from March 2001. The authorities have been coordinating with the European Union, Japan and the United States to seek better access for their products both under the general system of preference and under normal trade relations. Lao P.D.R is also in the process of seeking accession to the WTO.

Statistical Issues

Although there have been improvements in statistical data recently, the authorities recognize that there are still many areas that need further improvements to ensure the quality of data used for policy formulation and for dissemination to the general public information. Therefore, the Lao authorities would welcome receiving assistance from the donor community to provide suitable training to the local personnel and develop the necessary processes to enhance their capacity in this area.

Conclusion

Despite the numerous difficulties of the past three years, the Lao authorities have achieved significant results towards stabilizing the economy. The authorities do realize that there remains much to be done before the country can expect sustained economic growth over the medium term. They are therefore committed to implement the necessary measures under the PRGF.

The authorities hope that Executive Directors will consider the proposed program favorably to ensure strong and sustained economic development in Lao P.D.R, which would be necessary to support its efforts at reducing poverty in the country.