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IMF Country Report No. 18/84
LAO PEOPLE’S DEMOCRATIC REPUBLIC
2017 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR LAO PEOPLE’S DEMOCRATIC REPUBLIC
March 2018
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 2017 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 February 26, 2018 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 February 26, 2018, following discussions that ended on December 13, 2017, 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 February 7, 2018.
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
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© 2018 International Monetary Fund
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LAO PEOPLE’S DEMOCRATIC REPUBLIC
STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION
February 7, 2018
Key Issues
Context. Growth remains robust, supported by electricity exports, construction and services. Inflation is contained as food prices have fallen. High public debt and fiscal deficits pose a key risk, while negative macrofinancial feedbacks through the banking system could propagate external shocks. The authorities are moving to implement reforms consistent with past advice, including the integration of the Sustainable Development Goals (SDGs) in their 5-year plan, but further reforms are needed.
Main Policy Recommendations
Policies should focus on reducing fiscal and banking system vulnerabilities and rebuilding buffers to ensure sustainable growth while putting in place the conditions for exchange rate flexibility in the future and for diversification and more inclusive growth. Key elements of the policy strategy include:
Fiscal Policy: Anchor the public debt ratio at 50 percent of GDP and implement revenue reforms to lower the public deficit to about 2½ percent of GDP on average over the next five years, while reorienting expenditure toward public investment and social spending.
Monetary and Exchange Rate: Allow the exchange rate to depreciate gradually to help regain competitiveness and accumulate reserves, while removing interest rate caps. Begin reforms of the interbank and public debt markets to support movement to a more flexible monetary framework and reduce dollarization.
Banking System. Reduce foreign currency lending risks, identify NPLs and strengthen capital buffers. Put in place prompt corrective action and crisis management frameworks.
Structural Reforms. Develop the framework for public infrastructure while facilitating private investment. Improve education and health outcomes, particularly for women and children. Upgrade statistics for economic policymaking and tracking the attainment of the SDGs.
Approved By
Markus Rodlauer and Ms. Yan Sun
Discussions took place during November 29–December 13, 2017. The staff team comprised G. Bannister (Head), S. Rafiq, A. Oeking, and V. Long (all APD), Y. Sugayama (MCM) and J. Dunn (Resident Representative). The mission team was assisted greatly by A. Kounnavong, L. Pharakhone, and V. Savannarideth in the Lao P.D.R. Resident Representative Office. Ms. Villa and Mr. Sanoubane (OED) joined the concluding meetings. Mr. Rattanasena and Ms. Gjonbalaj assisted in preparation of this report.
CONTENTS
CONTEXT
DEVELOPMENTS, OUTLOOK, AND RISKS
POLICY DISCUSSIONS
A. Putting Debt on a Sustainable Path While Meeting Development Needs
B. Safeguarding Macro-Financial Stability and Fostering Market Development
C. Promoting Competitiveness and Inclusive Growth
STAFF APPRAISAL
BOXES
1. Adjustment Scenario
2. Fintech Comes Through the Budget
3. Welfare and the Sustainable Development Goals
FIGURES
1. Growth Remains Robust and Inflation is Contained
2. External Sector Vulnerabilities High but Being Ameliorated
3. Fiscal Consolidation Efforts Have Been Reversed
4. Fiscal Policy Needs Re-Orienting to Become More Pro-Growth
5. Fiscal Policy Should be Used to Distribute the Gains of Growth
6. Financial Conditions Have Loosened
7. Bank Profitability Remains Weak Due to High NPLs
8. Credit Expansion Has Raised Concentration Risks and Squeezed Capital Buffers
9. Increased Foreign Borrowing and Interest Rate Caps Risk Re-Dollarizaition
10. Income and Gender Inequality Remain Very High
TABLES
1. Selected Economic and Financial Indicators, 2013–18
2. Balance of Payments, 2014–22
3. General Government Operations, 2014–2022
4. Monetary Survey, 2015–18
5. Medium-Term Macroeconomic Framework, 2013–22
APPENDICES
I. External Sector Assessment
II. Risk Assessment Matrix
III. De-Dollarization in Lao P.D.R.
IV. 2017–2019 Surveillance Agenda
V. Rebasing of the National Accounts
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LAO PEOPLE’S DEMOCRATIC REPUBLIC
STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS1
February 7, 2018
Approved By
Markus Rodlauer (IMF) John Panzer (IDA)
Prepared by Staff of the International Monetary Fund and International Development Association
Lao P.D.R. faces a high risk of debt distress, based on an assessment of public external debt.2 The assessment of high risk is reinforced by vulnerabilities related to the existence of currency mismatches and private external debt. Public external debt distress indicators are less elevated than in the 2016 DSA due to the rebasing of GDP, but the debt service-to-revenue ratio breaches its respective threshold in 2019, and remains well above this mark for the full projection period. In addition, several threshold breaches under stress tests reinforce the importance of building buffers for adverse shocks. The present value (PV) of the total public debt-to-GDP ratio also breaches its benchmark. Given the high share of foreign-currency-denominated debt, a large and sudden exchange rate depreciation could raise the level of several indicators significantly, including private external debt, placing debt dynamics on an unsustainable path. Though revenues from large resource projects and U.S. dollar returns of the exporting sectors are expected to mitigate risks over the long term, external borrowing should remain on concessional terms to reduce the debt service burden. There remains an urgent need to recalibrate fiscal policy to rebuild fiscal buffers, adopt clear guidelines for the issuance of sovereign debt and guarantees to help contain debt related risks, and improve debt management, including by developing a comprehensive medium-term debt management strategy and regularly performing a debt sustainability analysis to inform borrowing decisions.
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LAO PEOPLE’S DEMOCRATIC REPUBLIC
STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX
February 7, 2018
Prepared By
Asia and Pacific Department
(In consultation with other departments)
CONTENTS
FUND RELATIONS
IMF-WORLD BANK COLLABORATION
RELATIONS WITH THE ASIAN DEVELOPMENT BANK
STATISTICAL ISSUES
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Press Release No. 18/103
FOR IMMEDIATE RELEASE
February 23, 2018
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