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IMF Country Report No. 12/286
LAO PEOPLE’S DEMOCRATIC REPUBLIC
2012 ARTICLE IV CONSULTATION
October 2012
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 2012 Article IV consultation with Lao People’s Democratic Republic, the following documents have been released and are included in this package:
Staff Report for the 2012 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on July 5, 2012, with the officials of Lao on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on August 16, 2012. 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.
Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank.
Informational Annex prepared by the IMF.
Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its August 31, 2012 discussion of the staff report that concluded the Article IV consultation.
Statement by the Executive Director for Lao People’s Democratic Republic.
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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© 2012 International Monetary Fund
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LAO PEOPLE’S DEMOCRATIC REPUBLIC
STAFF REPORT FOR THE 2012 ARTICLE IV CONSULTATION
August 16, 2012
Key Issues
Context. Against the backdrop of generally sound policies and abundant natural resources, Lao P.D.R. has made impressive progress in developing its economy and reducing poverty. The key challenge going forward is to ensure that economic policy frameworks stay ahead of the curve to achieve sustainable and broad-based growth.
Outlook and risks. Economic performance remains strong with growth projected at 8.3 percent in 2012 before slowing modestly in the medium term. Spillovers from the global environment are expected to be modest, allowing policies to focus on reducing homegrown risks from rapid credit growth and inadequate reserve coverage.
Monetary policy was appropriately tightened in 2011 but has been passive since, inflation has been contained, and the exchange rate has been stable despite liberalization of foreign exchange transactions. Further tightening remains necessary to reduce credit growth and replenish reserves.
Financial sector indicators reportedly remain sound, but this masks underlying vulnerabilities from rapid credit growth. Financial sector supervision should be strengthened and prudential measures deployed to maintain banking sector soundness.
Fiscal policy has been broadly appropriate, but rapid civil service wage growth could crowd out higher priority spending. The debt distress rating has improved to moderate risk.
Building broad-based and inclusive growth. Structural reforms to improve the business climate and trade integration are progressing as the authorities aim to complete entry conditions for WTO accession by year-end.
Approved By
D. Cowen and M. Miyazaki
Mission team: D. Botman (Head), N. Duma, T. Feridhanusetyawan N. Ha, T. Severo (all APD), and S. Kalra (Resident Representative). Mission Dates: June 26–July 5, 2012
Contents
INTRODUCTION
ECONOMIC CONTEXT
A. Growth is Strong and Macroeconomic Policies Have Been on the Right Track
B. The Outlook is Favorable, but Domestic Risks are Elevated
MAINTAINING MACROECONOMIC STABILITY
A. Monetary Policy: Supporting Sustainable Development by Slowing Credit Growth
B. Financial Sector: Strengthening Supervision to Support Soundness
C. External Stability: Building a Reserve Cushion for Dealing with Adverse Shocks
D. Fiscal Policy: Creating Buffers for Future Spending
BUILDING BROAD-BASED AND INCLUSIVE GROWTH
STAFF APPRAISAL
BOXES
1. Reserve Adequacy and Risks to External Stability
2. The Conduct of Monetary Policy in Lao P.D.R.
3. Exchange Rate Assessment
FIGURES
1. Real and External Sector Developments and Outlook
2. Monetary Developments
3. Resource Sector Developments and Outlook
4. Fiscal Sector Developments and Outlook
TABLES
1. Medium-Term Macroeconomic Framework, 2009–17
2. Balance of Payments, 2009–13
3. General Government Operations, 2009/10–2012/13
4. Monetary Survey, 2009–13
5. Millennium Development Goals: Progress in Lao P.D.R.
6. Financial Soundness Indicators, 2007–11.
7. Risk Assessment Matrix (RAM)
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LAO PEOPLE’S DEMOCRATIC REPUBLIC
STAFF REPORT FOR THE 2012 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITYANALYSIS1
August 16, 2012
Approved By
David Cowen and Masato Miyazaki (IMF) Andrew D. Mason and Jeffrey D. Lewis (IDA)
Prepared By
International Monetary Fund
International Development Association
Following the improvement in the country’s CPIA rating, Lao P.D.R.’s risk of debt distress is reclassified from high to moderate, as all external debt distress indicators stay below policy-dependent indicative thresholds during the forecasting period under baseline assumptions, although thresholds are breached in the presence of certain shocks.2 In addition, debt service ratios remain comfortably within the policy-dependent indicative thresholds even under stress conditions, due to the high level of concessionality of official borrowing. The new risk classification will have important implications for Lao P.D.R.’s borrowing capacity. While the composition of concessional funds is expected to be skewed away from grants and towards loans, the overall envelope of external resources available to the country should increase.
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LAO PEOPLE’S DEMOCRATIC REPUBLIC
STAFF REPORT FOR THE 2012 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX
August 16, 2012
Prepared By
Asia and Pacific Department
(In consultation with other Departments)
Contents
I. FUND RELATIONS
II. IMF-WORLD BANK COLLABORATION
III. RELATIONS WITH THE ASIAN DEVELOPMENT BANK
IV. STATISTICAL ISSUES
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Public Information Notice (PIN) No. 12/121
FOR IMMEDIATE RELEASE
October 18, 2012
International Monetary Fund
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Washington, D. C. 20431 USA
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Fax 202-623-6772
