Lao People’s Democratic Republic: Staff Report for the 2017 Article IV Consultation—Informational Annex

2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Lao People's Democratic Republic

Abstract

2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Lao People's Democratic Republic

Fund Relations

(As of December 31, 2017) 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 September 2016, the kip has followed a depreciating trend against the U.S. dollar. Therefore, the de facto exchange rate arrangement was reclassified to a crawl-like arrangement from a stabilized arrangement, effective September 2, 2016. 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 previous 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.

Lao P.D.R. has accepted the obligations under Article VIII, Sections 2(a), 3 and 4 and maintains an exchange system free of restrictions on the making of payments and transfers on current international transactions, except for restrictions imposed solely for security reasons and notified to the Fund under the Decision No. 144-(52/51).

Article IV Consultation

The last Article IV consultation discussions were held in Vientiane during September 19–30, 2016 and were concluded by the Executive Board on January 30, 2017. The staff report (Country Report No. 17/53) was published February 2017.

Technical Assistance

Over the past five years, Lao P.D.R. has received technical assistance in the areas of: banking supervision and interbank market development; monetary operations; customs administration; tax and natural resource revenue administration; tax policy; public financial management; macroeconomic management; price statistics; external sector statistics; government finance statistics; and the national accounts. A Bangkok-based IMF office, TAOLAM, was set up in September 2012 to facilitate technical assistance to Lao P.D.R. (as well as Cambodia, Myanmar and Vietnam) and has provided technical assistance in macroeconomic analysis and forecasting, monetary operations, government finance statistics, external sector statistics, 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 December 4, 2017 to discuss economic issues and outlook and to coordinate the two teams’ work for FY2018. 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. More efforts could be made to reduce external vulnerabilities and restore fiscal sustainability. Improved tax base, tighter fiscal, 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, non-electricity sector, and sustainable development of natural resources. 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 and improving outcomes will raise the growth potential and help reduce inequality. IMF-World Bank collaboration remains good with frequent and productive consultations and engagement between the teams.

Table 1.

Lao P.D.R.: World Bank Group and Fund Planned Activities in Macro-Critical Structural Reform Areas, November 2017–December 2018

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Relations with the Asian Development Bank

The Asian Development Bank (ADB) country partnership strategy (CPS), 2017–2020 for the Lao People’s Democratic Republic is in line with strategic directions of the government’s eighth National Socio-Economic Development Plan 2016–2020. It will support inclusive and sustainable growth through three strategic priorities: (i) infrastructure and private sector development to support employment and income generation, (ii) enhanced human development, and (iii) sustainable natural resource management and climate resilience. Gender equity and governance are crosscutting themes. The focus will shift from sector selectivity toward more value added strategic interventions that build synergies across operations. 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 biannual allocation for 2017–2018 is $236.6 million grant, including $89.0 million from regional set aside and $9.36 million from Disaster Risk Reduction Fund.

As of end-2017, active loans/grants were worth US$769.972 million, of which US$291.951 million had been disbursed. During 2017, contract awards totaled US$95.971 million and disbursement was US$64.506 million. ADB approved two new loan projects and three new technical assistance (TA) projects for a total of US$45.6 million and US$3.8 million in 2017 respectively, including Northern Rural Infrastructure Development Project (additional financing), Trade Facilitation: Improved Sanitary and Phytosanitary Handling in Greater Mekong Subregion Trade Project (additional financing); TA projects related GMS Northern Cross-Border Power Trade and Distribution, Sustainable Rural Infrastructure and Watershed Management Sector Project and Support Economic Policy for Enhancing Productivity and Employment.

Lao P.D.R.: Asian Development Bank Commitments and Disbursements 2005–2017 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 commitment and disbursements were estmiated for 2017.

Statistical Issues

(As of January 17, 2018)

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

(As of December 29, 2017)

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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.

3

FY 2017, May 2016 – April 2017.