Lao People’s Democratic Republic: Staff Report for the 2007 Article IV Consultation—Informational Annexes
Author: International Monetary Fund
Publication Date:
07 Nov 2007
eISBN:
9781451822588
Language:
English
Keywords:
ISCR; CR; government; resource; government strategy; growth; resource revenue; government plan; health sector financing Strategy; reform program; General government; government of Lao P.D.R.; Commercial banks; Government finance statistics; Poverty reduction strategy; Gentral government
Download PDF (308.9 KB)

The staff report for the 2007 Article IV Consultation on the Lao People’s Democratic Republic (PDR) explains economic performance. Growth is robust and increasingly reliant on large export-oriented mining and hydropower projects. The economic outlook is promising, but the outcome clearly depends on the government’s policy response to the emerging resource bonanza. The current fiscal regimes for the resource sector have several sound features, but some improvements are needed to align them to best international practices.

Abstract

The staff report for the 2007 Article IV Consultation on the Lao People’s Democratic Republic (PDR) explains economic performance. Growth is robust and increasingly reliant on large export-oriented mining and hydropower projects. The economic outlook is promising, but the outcome clearly depends on the government’s policy response to the emerging resource bonanza. The current fiscal regimes for the resource sector have several sound features, but some improvements are needed to align them to best international practices.

Annex I. Lao P.D.R.: Fund Relations

(As of May 31, 2007)

I. Membership Status: Joined 7/05/61; Article XIV

II. General Resources Account:

article image

III. SDR Department:

article image

IV. Outstanding Purchases and Loans:

article image

V. Latest Financial Arrangements:

article image

VI. Projected obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs):

article image

VII. Implementation of HIPC Initiative

Lao P.D.R. is eligible for assistance under the HIPC Initiative. However, to date the authorities have indicated that they do not want to avail themselves of this facility.

VIII. Safeguards Assessments

A safeguards assessment of the Bank of Lao P.D.R. (BoL) was completed in April 2003 with respect to the PRGF arrangement approved in 2001. The main findings, recommendations, and progress thereon, were reported in Country Report No. 03/308 and Country Report No. 05/8. Progress on safeguards recommendations has been slow. The authorities indicated that they were not in a position to implement an earlier agreement to undertake a joint-audit of the BoL’s 2003 and 2004 accounts by the state auditor and an international audit firm. These audits have subsequently been completed by the state auditor, but the joint-audit issue remains unresolved.

IX. Exchange Rate

In September 1995, Lao P.D.R. adopted a managed floating exchange rate system. From October 1997, commercial banks have been encouraged to follow the parallel market closely. From October 27, 2003, the commercial bank exchange rate is calculated by the BoL as the weighted average of the previous day’s commercial banks’ and interbank market rates. The BoL provides this reference rate to the commercial banks, who then set their own rates, keeping them close to the parallel market rates. The foreign currency and precious metal decree (No.02/BoL, August 29, 2003) is under review.

X. Exchange and Payments System

Lao P.D.R. no longer maintains restrictions on the making of payments and transfers for current international transactions under the transitional arrangements of Article XIV, Section 2, but maintains restrictions imposed for the preservation of national or international security, which have been notified pursuant to Decision No. 144-(52/51), and a restriction subject to Fund approval under Article VIII (tax payment certificates are required for some transactions). A joint LEG/MFD mission in August 2004 conducted a review of the exchange system to establish the remaining measures that would facilitate Lao P.D.R.’s acceptance of the obligations under Article VIII, including the elimination of an exchange restriction on the making of payments and transfers for current international transactions. During the 2007 Article IV consultation, the authorities informed staff that they would consider the elimination of the exchange restriction during the WTO accession process (expected to take place by 2010 under the current government plan).

XI. Last Article IV Consultation Discussions

The last Article IV consultation discussions were held in Vientiane during November 7–18, 2005. The staff report (Country Report No. 06/399) was discussed by the Executive Board on March 8 2006 and was published on November 7, 2006.

XII. Resident Representative

Mr. Philippe Beaugrand assumed the post of resident representative in Vientiane on January 28, 2004.

XIII. Technical Assistance (since 2004)

article image

ANNEX II. Lao P.D.R.: Relations with the World Bank Group1

IMF-Bank Collaboration

The IMF takes the lead in advising the government of Lao P.D.R. (GOL) on macroeconomic policy. The support covers tax, fiscal, monetary, and exchange rate policies, and economic statistical issues. The Bank takes the lead in supporting the GOL in formulating a growth and poverty reduction strategy and implementing structural reform, such as in public finance management, SOE restructuring, private sector development, trade, legal and judicial development, and natural resource management. The Bank and IMF have coordinated their work on some structural areas that have important implications on macroeconomic performance, for example, in areas of the financial sector, public expenditure management, trade policy, and poverty reduction strategy.

IMF and Bank Joint Role in Policy Dialogue

Poverty Reduction Strategy. The Bank and the IMF, together with the UNDP, have provided assistance to the GOL’s process of formulating its medium-term poverty reduction strategy. In 2003, the GOL prepared the first full Poverty Reduction Strategy Paper, called the National Growth and Poverty Eradication Strategy (NGPES). The Bank and the IMF’s Joint Staff Advisory Note (JSAN) of the strategy was presented before IDA and IMF Boards in November 2004. In 2006, the government prepared the Sixth National Socioeconomic Development Plan (NSEDP) 2006-2010 with a strong poverty focus and wide consultations with the Bank, donors and the IMF, key domestic stakeholders in Vientiane and provinces, and presented it to the development partners in November 2006 at the 9th Round Table Meeting with donors.

The Bank is supporting the implementation of NGPES and NESDP through the Poverty Reduction Support Operations (PRSOs). The focus of PRSOs includes public finance management reform, social and infrastructure sectors, regional integration, and private sector development. PRSO-1 ($10 million) was approved in March 2005), followed by PRSO-2 ($8 million) in April 2006, and PRSO-3 ($10 million) in June 2007. The next cycle of PRSO is under discussion and is expected to go to the Bank Board early next year.

Public Expenditure Management. The Bank has provided extensive technical assistance in developing and implementing the government’s multi-year Public Expenditure Management Strengthening Program (PEMSP). The Bank completed a Public Expenditure Review in early 2007, jointly with the IMF, other donors, and GOL and a Public Expenditure Tracking Survey (PETS) for education and health sectors in mid-2007. The Bank is also assisting GOL in the preparation and implementation of the GFS compatible Chart of Accounts, the new Budget Law, especially to improve intergovernmental fiscal relations.

Financial Sector Reforms. The Bank and the IMF have worked closely to support the government in developing and implementing a banking reform program. The Bank has supported restructuring of state-owned commercial banks (SOCBs), and drafting of banking sector legislation.

Trade Policy. The Bank led preparation of the Diagnostic Trade Integration Study (DTIS), jointly with the GOL, and other Integrated Framework donors. A Multi-Donor Trust Fund (to be administered by the Bank) is currently being set up to support the action matrix in the DTIS, and a Trade Facilitation Project is being designed in close collaboration with the IMF to support customs modernization through implementation of ASYCUDA system.

The Bank’s Key Roles in Policy Dialogue

State-Owned Enterprises (SOEs). The SOEs have been a debtor to SOCBs and one of the sources of their NPL problems. The Bank has supported the GOL’s SOE reform and restructuring program, aimed at improving transparency by institutionalizing the reporting and recording of annual performance of all SOEs and international standard audits of large SOEs, at restructuring the largest SOEs to reduce losses or raise profits, and reforming the pricing policy for public utility SOEs in water, power, and telecoms.

Private Sector Development. The Bank supports the development of the private sector, both economy-wide and in the sectors. Main activities include a joint ADB-Bank Investment Climate Assessment of manufacturing and tourism firms, a review of the regulatory procedures and private sector promotion initiatives of local governments, a review of the key business laws, and coordination of the donor working group on macroeconomic and private sector development issues. In addition the Bank conducts policy dialogue to improve the climate for private investment, both domestic and foreign.

Forestry Development. The GOL is involved in a continuing process of reforming its forestry sector and improving the implementation of forestry programs and projects. The Bank is trying to ensure that the GOL’s objectives and strategy for forestry are consistent with the NGPES, Rural Development Program, and Agriculture Development Strategy.

The Nam Theun 2 Hydro-power Project. The Bank has supported the project through an IDA partial risk guarantee, an IDA grant for environmental and social mitigation, and a MIGA guarantee, all done in March 2005. The World Bank decision to support the project was based on a “decision framework” with the following three pillars: (i) Lao P.D.R. establishing and implementing a viable development policy framework, characterized by concrete performance, and national programs for poverty reduction and social and environmental protection; (ii) the technical, financial, economic and implementation aspects of the project, as well as the design and implementation of safeguards policies, being sound; and (iii) wider understanding and broader support from the international donor community and global and local civil society for Lao P.D.R.’s development framework and the project. The Bank is supporting and monitoring the implementation of the NT2 project, and its progress remains good; it is expected to be operational in early 2010.

Bank Strategy and Lending Operations

Country Assistance Strategy (CAS). The full CAS was presented to the Bank’s Board in March 2005, and the CAS update (and extension through 2011) was submitted to the Board in June, 2007. The CAS selectively targets key NGPES priorities, including: (i) sustaining growth through linking to and capitalizing on regional opportunities and better natural resource management; (ii) improving social outcomes through strengthening financial management and service delivery capacity; (iii) strengthening management capacities, partnerships, and monitoring for NGPES implementation; and (iv) implementing the NT2 program as a model for supporting sustainable growth, improving social outcomes, and building key development capacities. The CAS consists of a lending and non-lending program, with a notional amount of about US$128 million in new commitments (credits and grants) between July 1, 2005 to June 30, 2008 (subject to the IDA Performance Based Allocation system).

Lending operations

As of March 15, 2007, a total amount of US$835.88 million equivalent of IDA credits and grants had been approved. This included support for adjustment operations, rural development, forestry, transport, energy, telecommunications, education, health, industry, capacity building, and risk guarantees. In the last three years, IDA support has focused on the CAS objectives, with an average disbursement of US$32 million.

IDA: Commitments and Disbursements to Lao P.D.R., 1977–2006

(In millions of U.S. dollars; as of March 15, 2007)

article image

Note: repayments include principal repayments and do not include commitment or service charges.

The World Bank’s Main Non-Lending Work

(Recently completed and ongoing)

article image

ANNEX III. Lao P.D.R.: Relations with the Asian Development Bank2

The Asian Development Bank (AsDB) has extended development assistance to Lao P.D.R. since 1968. In the 1970s and 1980s, AsDB assistance was focused mainly on economic growth projects involving infrastructure development in the transport and energy sectors, as well as agriculture. AsDB has been active in the development of the financial sector since the latter part of the 1980s, and broadened its assistance to Lao P.D.R. to include rural development, social development and environment in the 1990s. AsDB has focused its activities on poverty reduction since the late 1990s.

AsDB’s new Country Strategy and Program (CSP) for Lao P.D.R. for 2007-11 is anchored in and closely aligned to the Lao P.D.R.’s 6th National Socioeconomic Development Plan, 2006-10 (NESDP). A results-based strategy, the CSP focuses on promoting sustainable pro-poor sustainable growth, strengthening governance, developing government’s capacity, improving social inclusiveness and gender, enhancing regional cooperation and integration, managing the environment, and supporting private sector (including banking) developments. These strategic focuses are shaped by the country’s specific requirements and capabilities after extensive stakeholder consultations. The CSP is designed to achieve high impact and sustainable development results and to contribute to the government’s Millennium Development Goals and sector-specific commitments as set out in NSEDP, with specific goals, targets, and progress indicators for AsDB interventions.

Lao P.D.R. is a key actor in the Greater Mekong Sub-Region (GMS) program as a land-link among the other GMS member countries. The AsDB will aim to explore various options to maximize the benefits to Lao P.D.R. from sub-regional cooperation. To enhance the development impact of projects and ensure their close monitoring, AsDB’s interventions will focus primarily on the poor northern region provinces and along the East-West economic corridor, which links Thailand to Savannakhet and Vietnam.

Since 1970, the AsDB has approved 71 loan and grant financed projects for a total of $1.18 billion—of which 28 projects were currently active—and 224 technical assistance projects for a total of $113.0 million (as of end-December 2006).

In 2006, six new loans and grants were approved (comprising two for agriculture, two for education, and two for rural finance, of which one loan each in education rural finance were programs to support sector reforms). In addition, eight technical assistance projects amounting to $4.7 million were approved.

Table 1.

Lao P.D.R.: AsDB Commitments and Disbursements, 2000–06

(In millions of U.S. dollars)

article image
Source: Data provided by the Asian Development Bank.

Planned figures.

ANNEX IV. Lao P.D.R.: Statistical Issues

The macroeconomic and financial data needs to be improved to support policy decision making and effective surveillance. In this regard, a multisector STA mission visited Vientiane during October 2002 to facilitate the preparation of the General Data Dissemination System (GDDS) metadata. It recommended greater coordination between the various agencies responsible for compiling macroeconomic statistics, including the formation of an inter-agency working group. While a GDDS coordinator has been appointed, the authorities have yet to finalize the GDDS metadata and a strategy for statistical improvement. Two STA missions took place in April/May 2004 in the areas of government finance statistics and monetary and financial statistics. Economic and financial data are published in periodic reports by the National Statistical Center (NSC) and the Bank of Lao P.D.R. (BoL). An expert on national accounts provided assistance in late 2006.

National accounts

National accounts consist of annual estimates of GDP by activity at current and constant 1990 prices, broadly following the System of National Accounts 1968 (1968 SNA). The lack of regular surveys to collect comprehensive data on current economic activities and the use of inadequate compilation methods raise questions about the coverage and reliability of the GDP estimates. The estimates rely heavily on data on production or volume indicators collected by line ministries. The October 2002 multisector STA mission recommended that the authorities establish a system for collecting data on current economic activities based on regular surveys and implement compilation methods in accordance with the System of National Accounts 1993 (1993 SNA). The Swedish International Development Agency (SIDA) is providing technical assistance to the NSC to improve the national income accounts. With SIDA support, the Lao Expenditure and Consumption Survey 2002-03 (LECS 3) has been finalized and released. An STA regional advisor visited Vientiane in November/December 2006 as part of APD staff visit to update the assessment of the quality of national accounts statistics. The advisor assessed that there had been progress in improving the quality of source data, including implementing annual enterprise and household surveys, but weaknesses remained in estimates for deflators, constant price estimates, and expenditures.

Prices

The NSC compiles a monthly CPI that is available on a timely basis. The latest CPI was introduced in January 2006 (with December 2005 as the reference period), using the results of the 2002/03 Lao Expenditure and Consumption Survey (LECS) for deriving a consumption basket. Similar to earlier CPI series, the consumption baskets only include goods and services purchased in the market, and own consumption is not reflected in the basket weight. The NSC is planning to introduce a producer price index (PPI) in 2007.

Government finance

Government finance statistics are weak and there is scope to significantly improve their accuracy, coverage, timeliness, and transparency. The Budget Department produces monthly, quarterly, and annual revenue and expenditure statistics. Most data are recorded on a cash basis. Expenditure data by economic type are compiled by central government and the provinces. Data on bank and nonbank financing of the budget, including treasury bill operations, need to be made consistent with the monetary accounts. The social security fund and off-budget activities are not included in fiscal data. Annual budget and outturn data are not disseminated according to an international standard, which complicates fiscal analysis. A government finance statistics mission in 2004 recommended improving the quality of fiscal statistics and developed a roadmap for eventual migration to GFSM2001. No data are being reported for publication in the Government Finance Statistics Yearbook or International Financial Statistics.

Budget planning, execution, reporting, and cash management require significant upgrading, as noted by the October 2002 FAD mission on public expenditure management. Moreover, greater decentralization in 2000/01 further complicated the timely reporting of fiscal data from lower government levels, as monitoring systems are weak and skilled staff limited. This continues to hamper the accurate reporting of various items to the central budget, such as timber-related royalty payments.

Central government debt data are compiled by two departments of the MOF; external debt by the External Financial Relations Department and domestic debt by the Budget Department. Debt data are comprehensive and available by type of debt holder and instrument. Efforts are being made to further improve coverage, particularly relating to SOE debt.

Monetary statistics

The latest monetary and financial statistics mission in April/May 2004 identified a number of problems in the compilation of monetary statistics and made further recommendations for (i) improvement in the sectorization of various institutional units (e.g., nonfinancial public enterprises) and uniform treatment of sectors on both asset and liability sides of the commercial bank balance sheet; (ii) valuation of financial assets and liabilities (e.g., valuing monetary gold at market prices); (iii) classification of financial instruments (e.g., classifying loan loss provisions as other liabilities and valuation adjustments as part of shares and other equity); (iv) improvement in the chart of accounts for BoL and commercial banks, including preparation of a “Manual of the Chart of Accounts”; (v) improvements in the coverage and identification of IMF accounts; (vi) reconciliation of differences between the accounting data (from the Accounting Department of the BoL) with monetary data sent to APD and STA (compiled by the Economic Research Department using source data from the Operations Department of the BoL); and (vii) on investigation of discrepancies in bank financing between monetary and government finance statistics. Many of the recommendations of the mission have yet to be implemented, including those to rectify the inconsistent sectorization of units on the asset and liability sides of the commercial bank balance sheet.

Balance of payments

Data on foreign reserves are reported weekly and derived from the monetary survey at the prevailing kip per U.S. dollar end-month exchange rate. Balance of payments statistics need significant frequency and coverage improvements in the following areas: (i) customs trade data; (ii) the commodity composition of external trade; (iii) services and income; (iv) actual foreign direct investment flows; (v) separation of current and capital transfers as well as coverage of some type of grants, especially from international nongovernment organizations; (vi) the reconciliation of fiscal and balance of payments data on external loans and grants; and (vii) monitoring of external debt, especially of state owned enterprises. In 2001, the ministry of finance adopted the Commonwealth Secretariat-Debt Recording and Management System (CS-DRMS) for processing and maintaining external debt data.

New customs procedures (the Customs 2000 system) and equipment permitted (with FAD technical assistance) production of more accurate trade data in October 2000. However, for a range of technical reasons, the customs department has not yet produced these data on a regular basis. Fund missions have emphasized that this problem needs to be urgently addressed. In order to produce accurate balance of payments updates on a regular basis, there is a need to improve the coordination between the agencies involved in BOP compilation, for example., the BoL, the NSC, the Customs and the External Financial Relations Departments of the Ministry of Finance, the Department of International Cooperation of the Committee of Planning and Investment, and the commercial banks. The Japanese government is providing technical assistance to address some of these issues.

Lao P. D. R.: Table of Common Indicators Required for Surveillance

(as of July 2, 2007)

article image

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA)

Data often reported with a delay of 2 months.

1

Prepared by the staff of the World Bank. Contact person: Ms. Ekaterina Vostroknutova, Economist, Poverty Reduction and Economic Management Department, East Asia and Pacific Region, email: evostroknutova@worldbank.org.

2

Prepared by the Asian Development Bank.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Lao People's Democratic Republic: 2007 Article IV Consultation: Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Lao People's Democratic Republic
Author: International Monetary Fund
Volume/Issue:
Volume 2007: Issue 360
Publisher:
International Monetary Fund
ISBN:
9781451822588
ISSN:
1934-7685
Pages:
74
DOI:
https://doi.org/10.5089/9781451822588.002