LAO People’s Democratic Republic: Staff Report for the 2016 Article IV Consultation—Informational Annex
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International Monetary Fund. Asia and Pacific Dept
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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.

Abstract

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.

Fund Relations

(As of October 31, 2016)

Membership Status: Joined on July 5, 1961.

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans: None

Latest Financial Arrangements:

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Projected Payments to the Fund2

(SDR Million; based on existing use of resources and present holdings of SDRs):

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Exchange Rate Arrangement

The de jure arrangement is a managed float. Since January 2015, the kip has stabilized within a 2 percent band against the U.S. dollar. Therefore, the de facto exchange rate arrangement was reclassified to stabilized from a crawl-like arrangement, effective January 22, 2015. The authorities’ objective is to limit currency fluctuations vis-à-vis major currencies, including the U.S. dollar and Thai baht, within ±5 percent per annum. The Bank of the Lao P.D.R. (BOL) sets a daily official reference rate, which is calculated as a weighted average of the previous day’s interbank rates. Commercial banks and foreign exchange bureaus are required to maintain their buying and selling rates within ±0.25 percent of the BOL’s daily reference rate for the U.S. dollar. For the euro and baht, the buying and selling rates may not exceed a margin of 0.5 percent. For other currencies, a margin of 2 percent applies.

On May 28, 2010, Lao P.D.R. accepted the obligations under Article VIII, Section 2, 3, and 4, following the elimination of one restriction subject to Fund jurisdiction under Article VIII arising from a requirement to obtain tax payment certificates for some transactions. Lao P.D.R. now maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions, except for restrictions imposed solely for the preservation of national or international security notified to the Fund pursuant to Decision No. 144-(52/51).

Article IV Consultation

The last Article IV consultation discussions were held in Vientiane during October 16–28, 2014 and were concluded by the Executive Board on January 14, 2015. The staff report (Country Report No. 15/45) was published February, 2015.

Technical Assistance

Over the past three years, Lao P.D.R. has received technical assistance in the areas of: banking supervision and interbank market development; customs, tax and natural resource revenue administration; price statistics; external sector statistics; government finance statistics; and the national accounts. A Bangkok-based IMF office was set up in September 2012 to facilitate technical assistance to Lao P.D.R. as well as Myanmar, and has provided technical assistance in macroeconomic analysis and forecasting, monetary operations and public financial management.

Resident Representative

Jonathan Dunn assumed the Resident Representative post for Vietnam and Lao P.D.R., based in Hanoi, on October 16, 2015.

IMF-World Bank Collaboration

The World Bank and the IMF country teams for Lao P.D.R. met on October 1, 2016 to discuss economic issues and outlook and to coordinate the two teams’ work for FY2015. The teams were led by Mr. Evgenij Najdov (Senior Country Economist, Macro and Fiscal Management Global Practice, World Bank), and Mr. Geoffrey Bannister (IMF Mission Chief for Lao P.D.R.).

The teams agreed that although Lao P.D.R. has made progress on macroeconomic stabilization, significant vulnerabilities remain. While fiscal consolidation has been initiated, more efforts could be made to reduce external vulnerabilities and restore fiscal sustainability. Tighter fiscal and monetary policies, a more flexible exchange rate and strengthened banking supervision will be needed to build international reserves and ensure macrofinancial stability. In the longer run, a key challenge is to promote inclusive growth and poverty reduction through more diversification into non-resource sectors and sustainable development of natural resources. Much progress has been made in recent years on product and labor market openness and poverty reduction. Further trade integration will improve the business climate, and promote private investment and institutional reform. Upgrading health and education infrastructure will raise the growth potential and help reduce inequality.

Table 1.

Lao P.D.R.: World Bank Group and Fund Planned Activities in Macro-Critical Structural Reform Areas, October 2013–December 2017

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Relations with the Asian Development Bank

The Asian Development Bank’s (ADB) current Country Partnership Strategy (CPS) 2012–2016 is aligned with the government’s Eighth Five-Year National Socio-Economic Development Plan, 2016-2020. It promotes inclusive and sustainable growth and poverty reduction through (i) engagement in four priority sectors (agriculture, natural resources and rural development; education; energy; and water and other urban infrastructure and services); and (ii) more effective private sector development, gender equity, public sector management and regional cooperation and integration as crosscutting concerns. The CPS aims to maximize efficiency and sustainability through larger operations implemented over a longer period; maximize synergies with the implementation of Greater Mekong Subregion (GMS) strategic framework 2012–22; and also increase responsiveness to emerging issues in a rapidly changing economy. The new CPS 2017–2021 is under preparation. The performance-based allocation of the Asian Development Fund (ADF), based on the country performance assessment (CPA) finalized in 2014, provided Lao P.D.R. with an ADF allocation in the amount of US$116.6 million for the biennial period 2015–16. The CPA exercise for the next allocation period (2017–18) was endorsed by the ADB’s management in October 2016.

As of end-2015, active loans/grants were worth US$761.8 million, of which US$356.9 million had been disbursed. During 2015, contract awards totaled US$67.7 million and disbursement was US$65.8 million. ADB approved three new loan projects and three new technical assistance (TA) projects for a total of US$95 million and US$1.7 million in 2015 respectively, including Health Sector Governance Program, Second GMS Corridor Town Development Project and Vientiane Sustainable Urban Transport Project; TA projects related to Second Technical Vocational Education Project, Support for Governance and Capacity Development, and Northern Rural Infrastructure Development Project – Due Diligence of Additional Financing.

Lao P.D.R.: Asian Development Bank Commitments and Disbursements 2005-2015 1/

(In millions of U.S. dollars)

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Source: Data provided by the Asian Development Bank.

Starting from 2006, the commitments and disbursements included both loans and grants.

The commitments and disbursments were estimated for 2016.

Statistical Issues

Lao People’s Democratic Republic—Statistical Issues Appendix

As of December 6, 2016

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

(As of December 6, 2016)

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

Any reserve assets that are pledged of otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency, but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency, but settled by other means.

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

Foreign and domestic bank, 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.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

1

Extended Credit Facility (ECF), formerly PRGF.

2

When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

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