This DSA was prepared jointly by the IMF and World Bank, in consultation with the Asian Development Bank (AsDB). The debt data underlying this exercise were provided by the Lao P.D.R. authorities.
The low-income country debt sustainability framework (LIC DSF) recognizes that better policies and institutions allow countries to manage higher levels of debt, and thus the threshold levels for debt indicators are policy-dependent. In the LIC-DSF, the quality of a country’s policies and institutions is measured by the World Bank’s Country Policy and Institutional Assessment (CPIA) index and classified into three categories: strong, medium, and weak. Lao P.D.R.’s policies and institutions, as measured by the CPIA, averaged 3.253 over the past three years. Since it is the first year that Lao P.D.R. is above the threshold of “medium performers” (3.25) and the breach is less than 0.05, Lao P.D.R. is still classified in the “weak performer” category according to the “Staff Guidance Note on the Application of the Joint Fund-Bank Debt Sustainability Framework for Low-Income Countries (www.imf.org/external/np/pp/eng/2010/012210.pdf).” Therefore, the relevant indicative thresholds for this category are: 30 percent for the PV of debt-to-GDP ratio, 100 percent for the PV of debt-to-exports ratio, 200 percent for the PV of debt-to-revenue ratio, 15 percent for the debt service-to-exports ratio, and 25 percent for the debt service-to-revenue ratio. These thresholds are applicable to public and publicly guaranteed external debt.
The Soviet-era debt owed to the Russian Federation has been under negotiation since 2007. The Lao P.D.R. authorities are seeking debt relief comparable to what was granted to other LICs. The authorities reported that negotiations continue.
As of end-2010, China signed 24 loan agreements with Lao P.D.R., amounting to US$1.35 billion. Of this total amount about US$958 million remained undisbursed. Apart from the fact that they include a US$90 million loan for a hydro project, staff has no information on the projects associated with the loan agreements signed with China, the approximate disbursement schedules, and the currency composition of the debt.
Lao P.D.R. will host the Asia-Europe Summit in November 2012, and has contracted various FDI-financed projects to develop hotels and other infrastructure that will be used for this event.
The most extreme stress test is defined as the bound test resulting in the most extreme deterioration of the debt burden indicator after 10 years.
Government debt records cannot be easily reconciled with creditor statements. Moreover, debt data of state-owned enterprises is not readily available. Lao P.D.R. is currently installing the DMFAS debt recording system, which is expected to improve the quality of debt records going forward.
Viable projects are projects in which the rate of return exceeds the cost of financing or the net present value of future income exceeds the net present value of borrowing.