Lao People’s Democratic Republic—Staff Report and Public Information Notice
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2010 Article IV consultation with Lao People’s Democratic Republic, the following documents have been released and are included in this package:
The staff report for the 2010 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on June 15, 2010, with the officials of Lao P.D.R. on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 14, 2010. 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 supplement on the joint World Bank/IMF debt sustainability analysis.
A Public Information Notice (PIN).
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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Prepared by the Staff Representatives for the 2010 Article IV Consultation with the Lao People’s Democratic Republic
Approved by Masato Miyazaki and Dominique Desruelle
July 14, 2010
Mission: Discussions were held in Vientiane during June 2-15, 2010. The staff team met with Prime Minister Bouphavanh, Bank of Lao P.D.R. Governor Khamphounvong, Deputy Minister of Finance Ms. Siphandone, and other senior officials. The team also met with private sector representatives, donors, and the press.
Team: Mr. Almekinders (Head), Mr. Ree, Ms. Maslova (all APD), assisted by Mr. Bingham (Senior Resident Representative), Mr. Ngaosrivathana (country manager), and Ms. Nanthavong and Ms. Nga (country economists). Ms. Vongpradhip and Mr. Phan (both OED) participated in the meetings.
Focus: Discussions centered on (i) short-term challenges posed by pressures on the balance of payments caused by the sharp increase in public investment and rapid credit growth of the past two years; and (ii) the longer-term challenge of sustaining Lao P.D.R.’s strong growth performance that will be addressed in the government’s forthcoming five-year plan (2011-15).
Past surveillance: Directors’ views expressed during the 2009 Article IV Consultation, completed on July 10, 2009, can be found in IMF Country Report No. 09/284. The government’s September 2009 decision to stop direct central bank lending to local governments and the resulting fiscal tightening were in line with Directors’ advice. Directors’ call for a tightening of monetary policy has so far not been acted on.
Exchange regime: The de jure regime is a managed float. The de facto regime is stabilized. On May 28, 2010, Lao P.D.R. accepted the obligations under Article VIII, Sections 2, 3, and 4 (Press Release no. 10/298).
Statistical issues: Serious data shortcomings that hamper surveillance, with the balance of payments and the national accounts most in need of strengthening.
I. Recent Economic Developments and Outlook
II. Macroeconomic Policy Discussions
A. Fiscal Policy
B. Monetary and Exchange Rate Policy
C. Financial Sector Issues
III. Structural Reforms and Other Issues
IV. Staff Appraisal
1. Measures of Reserve Adequacy
2. Credit Booms Around the World: Lessons for Lao P.D.R.?
3. Is the Level of the REER Appropriate?
1. Real and External Sector Developments
2. Fiscal Developments
3. Monetary Developments
4. Monetary and Credit Developments
5. Monetary and External Developments
1. Selected Economic and Financial Indicators, 2005-10
2. Balance of Payments, 2007-15
3. General Government Operations, 2005/06-2010/11
4. Monetary Survey, 2007-10
5. Medium-Term Macroeconomic Framework, 2007-15
6. Financial Soundness Indicators, 2007-15
The Lao P.D.R. economy performed well in 2009, despite the global crisis. Growth, at 7.6 percent, exceeded the average of low-income countries in the region and inflation remained below the regional average. Growth was supported by rapid expansion of the mining and hydropower sectors and expansionary fiscal and monetary policies.
However, the economy continued to exceed its macroeconomic “speed limits,” putting pressure on the balance of payments:
The fiscal deficit rose 4.4 percentage points to 7.2 percent of GDP in FY09 (October 2008-September 2009) propelled by large extra-budgetary investment outlays financed by direct lending from the central bank to provincial governments. In September 2009, the government decided to stop such direct central bank lending. Disbursements on existing loan commitments have continued but are expected to be phased out by September 2010, contributing to a fiscal tightening.
Credit to the private sector continues to grow very rapidly (87 percent y/y in March 2010), driven by the rapid development of the banking system in recent years and accommodative monetary policy.
The central bank continues to operate a stabilized exchange rate regime. The acceleration in the growth of domestic demand and imports related to the expansionary macroeconomic policies have resulted in a decline in banking system net foreign assets which have fallen from US$1 billion in May 2008 to US$670 million in March 2010. Inflation remains relatively contained at 4.9 percent, but real estate and land prices appear to be rising rapidly.
Outlook and Policy Issues
The outlook for GDP growth in 2010 is favorable, but central bank reserves are projected to decline in the absence of further efforts to rein in credit growth, posing risks to external and macroeconomic stability. The projected narrowing of the fiscal deficit to 4.9 percent of GDP in FY2010 would make an important initial contribution to the needed policy tightening. Inflation is likely to remain moderate provided the exchange rate remains stable.
Lao P.D.R.’s medium-term prospects are promising, provided that macroeconomic stability is maintained and progress continues to be made in (i) efforts to strengthen the soundness of the financial system; and (ii) reforms to strengthen the competitiveness of the economy. The legal and regulatory reforms that would accompany WTO membership would greatly assist this process.
The authorities were in broad agreement with the staff’s assessment on the need for a policy tightening and indicated that they would look for ways to balance the government’s support for growth with macroeconomic stability considerations. Concerns about possible spillovers from the sovereign debt problems in Europe were cited as a reason for additional vigilance. The authorities agreed on the need to improve the monitoring of the quality of credit and noted that they would henceforth look at a broader array of indicators of reserve adequacy.
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INTERNATIONAL MONETARY FUND AND INTERNATIONAL DEVELOPMENT ASSOCIATION
LAO PEOPLE’S DEMOCRATIC REPUBLIC
Approved by Masato Miyazaki and Dominique Desruelle (IMF) and Vikram Nehru and Sudarshan Gooptu (IDA)
July 14, 2010
Lao P.D.R.’s risk of debt distress2is still assessed to be high, as two public external debt stock indicators are expected to remain above policy-dependent indicative thresholds over the medium term, notwithstanding the recent downward trend in debt indicators and projected strong growth in the medium term. However, debt service ratios remain comfortably within the policy-dependent indicative thresholds, even under the stress tests, due to the high level of concessionality of official borrowing. Continued prudent debt management, including the management of quasi-fiscal liabilities, as well as cautious assessment and monitoring of large-scale projects will be required to mitigate the risks posed to external and public debt sustainability.
Front Matter Page
INTERNATIONAL MONETARY FUND
LAO PEOPLE’S DEMOCRATIC REPUBLIC
Prepared by the Asia and Pacific Department (In Consultation with Other Departments)