2016 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR LAO PEOPLE’S DEMOCRATIC REPUBLIC
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 2016 Article IV consultation with Lao People’s Democratic Republic, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its January 30, 2017 consideration of the staff report that concluded the Article IV consultation with Lao People’s Democratic Republic.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on January 30, 2017, following discussions that ended on September 30, 2016, with the officials of Lao People’s Democratic Republic on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 6, 2017.
A Debt Sustainability Analysis prepared by the staffs of the IMF and the International Development Association (IDA).
An Informational Annex prepared by the IMF staff.
A Statement by the Executive Director for Lao People’s Democratic Republic.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
Context. Growth remains strong, although it has slowed as the economy faces headwinds from major trading partners, low metals prices and a slowdown in agriculture. Inflation has risen slightly but remains contained. Domestic risks include a sustained reversal of fiscal consolidation, high public debt and weak public banks. On the external front, a tightly managed and overvalued exchange rate, low reserves and dollarization make Laos vulnerable to terms of trade shocks or capital flows reversals.
Main policy recommendations.
Policies should focus on increasing buffers, preparing for exchange rate flexibility in the medium-term, and addressing structural constraints to boost medium-term growth.
Fiscal policy: Resuming fiscal consolidation will support sustainability, increase fiscal space, help contain the current account deficit and accumulate reserves.
Monetary and financial policy: Building capital buffers in banks and improving regulation and supervision will increase resilience to shocks. Removing caps on interest rates will support efficient allocation of credit, market development and de-dollarization. Accumulating international reserves will help address external risks.
Exchange rate and markets: Developing local money, foreign exchange and government debt markets to support the implementation of an active monetary policy framework, and developing the institutional framework for monetary policy, will allow for increasing exchange rate flexibility in the medium-term. Allowing limited flexibility in the short-term will support the accumulation of reserves, foreign exchange market development and risk management.
Structural policies: Addressing constraints in the ease of doing business, upgrading human capital and financial inclusion will help support diversification, competitiveness, and more inclusive growth.
Mr. Markus Rodlauer and Ms. Yan Sun
Discussions took place during September 19–30, 2016. The staff team comprised G. Bannister (Head), S. Rafiq and H. Nishizawa (all APD), J. Dunn (Resident Representative) and N. Ha (Resident Representative’s office) and Ms. Sereevoravitgul (TAOLAM). Ms. Omany, Ms. Pharakhone and Ms. Savannarideth of the IMF Laos office worked with the staff team. Mr. Omar (Executive Director) and Mr. Nguyen (OED) joined the concluding meetings. Ms. Jamasali and Ms. Zhuang assisted in the preparation of this report.
DEVELOPMENTS, OUTLOOK, AND RISKS
A. Fiscal Policy: Rebuilding Fiscal Buffers
B. Ensuring a Sound Banking System
C. Strengthening International Reserves and Exchange Rate Policy
D. Promoting Competitiveness, Diversification and Inclusion
1. External Sector Risks for Laos’ Economy
2. Unlocking the Credit Cycle and Its Phases
3. Dollar Credit Cycle, Dollarization and Private Currency Mismatches: How Large Are Risks?
4. External Sector Assessment
5. Adjustment Scenario
1. Poverty Has Fallen, but Inequality Has Risen and Financial Inclusion Remains Low
2. Growth Continues to Moderate and Inflation Is Contained
3. External Vulnerabilities Remain Elevated
4. External Linkages Are Concentrated in Regional Partners
5. Fiscal Consolidation Has Been Reversed
6. Financial Conditions Have Tightened But Remain Accommodative
1. Selected Economic and Financial Indicators, 2011–17
2. Balance of Payments, 2014–21
3. General Government Operations, 2013/14–2021
4. Monetary Survey, 2013–16
5. Medium-Term Macroeconomic Framework, 2013–21
6. Financial Soundness Indicators, 2009–15
7. Millennium Development Goals Indicators
Front Matter Page
LAO PEOPLE’S DEMOCRATIC REPUBLIC
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS1
January 6, 2017
Markus Rodlauer (IMF) John Panzer (IDA)
International Monetary Fund
International Development Association
The risk of Lao P.D.R. facing external debt distress has risen from moderate to high.2 External debt distress indicators are more elevated than in the 2014 DSA, owing to the higher initial external PPG debt stock and projected debt flows to support public investment. Some external debt indicators breach the respective policy-dependent indicative thresholds for some years, indicating limited buffers in the case of adverse shocks. Also, the present value (PV) of public sector debt-to-GDP ratio breaches the benchmark for some years. Given the considerable share of foreign-currency-denominated debt, a large and sudden exchange rate depreciation could significantly raise the level of those indicators, putting debt dynamics on an unsustainable path. Though revenues from large resource projects are expected to mitigate risks over the long term, external borrowing should remain on concessional terms as much as possible to reduce the debt burden. The deterioration of the debt distress risk rating suggests the urgent need to recalibrate fiscal policy to rebuild fiscal buffers, adopt clear guidelines for the issuance of sovereign debt and guarantees to help contain and monitor contingent liabilities, and strengthen the debt management capacity, including developing a comprehensive medium-term debt management strategy and regularly performing a debt sustainability analysis to inform borrowing decisions.
Front Matter Page
LAO PEOPLE’S DEMOCRATIC REPUBLIC
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX