Press Release No. 13/383
October 2, 2013

An IMF mission team led by Mr. Ashvin Ahuja visited Vientiane to conduct the 2013 Article IV consultation discussions with the Lao P.D.R. during August 28–September 12. The mission met with the Lao authorities, donors, private sector representatives and other stakeholders. Consistent with the mandate of the IMF, the mission focused on an assessment of macroeconomic and financial sector developments and outlook for the Lao P.D.R. economy.

At the conclusion of the mission, Mr. Ahuja issued the following statement:

“Since the global financial crisis, the Lao economy has been growing at an average annual rate of 8 percent, supported by brisk credit expansion and robust foreign direct investment (FDI) inflows. The country has also made significant progress toward achieving the Millennium Development Goals (MDGs).

“Real GDP growth was about 8 percent in 2012, buoyed by domestic demand. Headline inflation is accelerating, as a result of rising fresh food prices. Credit growth—partly driven by public spending—raises concerns about the health of the banking system. The current account deficit has deteriorated significantly, which is a product of a currency appreciation in real terms, a growing fiscal deficit, and strong domestic demand. International reserves need to be built up for precautionary needs. Ongoing fiscal expansion has exacerbated vulnerabilities.

“A tightening of macroeconomic policies is urgently needed to reduce vulnerabilities, replenish international reserves and engineer a soft landing. Fiscal policy needs to be put back on a consolidation path during the next few years. This will require improving tax collection by broadening the tax base and eliminating exemptions while rationalizing expenditure to concentrate on priority social spending and investments. The kip should move in line with market conditions and external developments. The credit and broad money (M2) growth targets should be lowered. Financial sector supervision should be strengthened and regulatory measures put in place to reduce leverage. If these policies can successfully be put in place, it would help to achieve high, sustainable growth over the medium term.”

The mission’s findings will be reflected in the 2013 Article IV Staff Report which will be discussed by the IMF Executive Board in coming months.

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Press Release No. 13/31
January 31, 2013

Mr. Naoyuki Shinohara, Deputy Managing Director of the International Monetary Fund (IMF), issued the following statement in Vientiane at the conclusion of his visit to Lao People’s Democratic Republic (P.D.R.):

“I wish to thank the Government of the Lao P.D.R. and the officials I met during my visit for their gracious hospitality and productive discussions. In particular, I wish to thank Deputy Prime Minister Somsawat Lengsavad, Vice President of the National Assembly Dr. Xaysomphone Phomvihane, Minister of Finance Phouphet Khamphounvong, Minister of Planning and Investment Somdy Duangdy, and Bank of the Lao P.D.R. (BOL) Governor Somphao Phaysith for their warm welcome and frank exchange of views.

“In my meetings with the government, I commended them for their work in creating conditions for robust economic growth and for acceding successfully to membership in the World Trade Organization. The progress made by the Lao authorities in achieving the Millennium Development Goals is also laudable, particularly on poverty reduction and rural development.

“Our discussions focused on how to broaden and sustain this growth, ensure macroeconomic and financial stability, and take full advantage of regional and global integration. While near-term economic prospects for Lao P.D.R. remain favorable, strong credit growth and low international reserves coverage have emerged as sources of vulnerability. To safeguard macroeconomic and financial stability, actions are needed to expand the fiscal space, especially by increasing revenues, while maintaining fiscal sustainability; bring credit growth down to a healthier level and safeguard international reserves; build a well-supervised and sound financial system; and promote private sector-led economic growth to enhance competitiveness in the non-resource sector.

“Lao P.D.R.’s economy has shown much resiliency during these turbulent times and has great potential in the years ahead. The IMF will continue to work closely with the authorities to provide high-quality policy advice to enhance stability and growth. The recent opening of the Technical Assistance Office for Lao P.D.R. and the Republic of the Union of Myanmar in Bangkok also enhances the possibilities for further deepening of cooperation in important areas of capacity building.

“During my stay in Vientiane, I also participated in a roundtable discussion, co-organized with the National Economic Research Institute and Faculty of Economics and Business Management of National University of Lao P.D.R., at which we shared views with leaders of the National Assembly and academics on recent developments in the Lao economy, as well as regional and global trends. I also had an opportunity to visit the World Education Laos Office and the Cooperative Orthotic and Prosthetic Enterprise Center, which are having a meaningful impact on the lives of the underprivileged in Lao P.D.R.

“Once again, I would like to thank the authorities and the people of Lao P.D.R. for their warm hospitality, and look forward to continuing our cooperation.”

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Statement by Sanjay Kalra
IMF Resident Representative
Vientiane, November 23, 2012

1. Excellencies, ambassadors, distinguished participants, ladies and gentlemen. It is my great pleasure to represent the International Monetary Fund (IMF) at this Round Table Implementation Meeting for Lao P.D.R. I would like to thank the Government of Lao P.D.R. and the co-organizers of this meeting for the opportunity to speak to you today. Let me also take this opportunity to welcome the recent agreement of the General Council of the World Trade Organization (WTO) for Lao P.D.R. to join the organization.

2. This round table meeting comes at a time when prospects for global growth have deteriorated and downside risks to the global economy are more elevated than they were earlier this year, as noted at the IMF/World Bank Annual Meetings in Tokyo last month. I would like to focus my comments on the opportunities and challenges for Lao P.D.R. against the backdrop of these shifting global prospects. In doing this, I would like to draw on the close engagement that the IMF has with Lao P.D.R., in particular through the annual Article IV Consultation discussions. I would like to note here that, in addition to this policy advice, the IMF provides extensive technical assistance to Government of Lao P.D.R. in several areas within its mandate and offers training opportunities to Lao official at its institutes in Asia, Europe, and the U.S. The recent opening of the Technical Assistance Office for the Lao P.D.R. and the Republic of the Union of Myanmar in Bangkok enhances the possibilities for further deepening of cooperation in these important areas of capacity building.

3. As many of you know, the Executive Board of the IMF concluded the 2012 Article IV Consultation with Lao P.D.R. on August 31, 2012. Overall, at this meeting, the Board commended the Lao P.D.R. authorities for their sound policies, which have contributed to impressive economic growth, reduction in poverty, lower inflation, and improved debt dynamics. Rapid economic growth over the last decade has allowed significant progress towards achieving several of the Millennium Development Goals (MDG) targets. With respect to the external debt sustainability analysis, the Board concluded that Lao P.D.R. now faces a moderate risk of debt distress from a high risk previously. The projected strong performance of the economy, fundamental improvements in institutional capacity, together with recent fiscal consolidation led to this upgrade in the country’s risk rating. The Board also welcomed the authorities’ reform efforts to achieve sustainable and inclusive growth. Structural reforms have been accelerated in some areas in the context of commitments under the ASEAN Economic Community and the prospect of WTO accession. However, while macroeconomic policies have remained generally sound, low reserve coverage and rapid credit growth amid high lending rates have emerged as sources of vulnerability. Mr. Chairman, allow me now to elaborate.

I. Recent Economic Developments and Outlook

4. Real GDP growth in 2011 was strong. At 8 percent, this was a bit higher than the average of 7 percent per annum over the last decade and among the highest in the region. The higher growth was achieved despite policy tightening, global uncertainty, and natural disasters in Lao P.D.R. and its main trading partner, Thailand. Growth is expected to remain at the range of 8–8½ percent in 2012, including on account of substantial activity related to the Asia-Europe meetings. Inflation has moderated to 3¾ percent (12-month) in September 2012, reflecting lower food and fuel price pressures, and favorable base effects. The current account deficit widened to about 21½ percent of GDP in 2011. At the same time, gross international reserves declined by US$51 million to US$677 million (a little over 2 months of imports of goods and services) at end-2011. Recent data suggest that the level of reserves has declined further. Meanwhile, the kip has remained broadly stable against the U.S. dollar and the Thai baht.

5. As regards policies, the fiscal deficit in FY2012 (October-September) is estimated to have moderated to 2½ percent of GDP from 3 percent in FY2011. Meanwhile, on the monetary policy front, policies have loosened recently. Private sector credit growth was over 30 percent (12-month) at end-2011 and rose further to 46 percent in June 2012. In addition, Bank of Lao (BOL) lending to local governments has continued. Rapid private sector credit, together with weak supervision, potentially contains the seeds of problems in the banking system in the years to come.

6. Going forward, growth can be expected to remain strong in 2013 and over the medium term on the back of strong contributions from the mining and hydropower sectors, as a result of which per capita income could rise noticeably over the next five years. With sound policies, inflation can be contained to reasonable levels and the reserve cover can be built to more comfortable levels, reducing the country’s vulnerability to external shocks.

7. This outlook is subject to several risks, mostly from domestic economic management.

  • On the external front, the global growth outlook is weak and subject to significant downside risks. For Lao P.D.R., experience from the time of the onset of the global financial crisis suggests that spillovers from global growth have been moderate, although substantial policy stimulus at the time likely contained the fallout. Moderate spillovers from the global economy may well remain the baseline going forward, given limited integration with global markets, continued supportive growth in the main trading partners, and with most hydropower contracts committed for the long term. The main channel of contagion from slower global growth would be through lower gold and copper export prices.
  • On the domestic front, there are several important sources of vulnerabilities. First, in the financial sector, rapid expansion of the financial sector in recent years raises concerns about banking sector soundness and a possible emergence of contingent fiscal liabilities in future years. As noted before, despite some slowdown in 2011, credit growth is on the rise again in 2012, putting recent stability gains at risk. Second, the level of international reserve cover currently provides inadequate protection against external and internal risks. Third, the level of public sector debt remains elevated, notwithstanding the recent reduction in the risk of debt distress. Off-budget capital spending remains indicative of weak spending controls that could give rise to additional contingent liabilities.

II. Policy Challenges

8. With this backdrop, the Executive Board suggested that macroeconomic policies be guided by the following considerations:

  • There is an urgent need for tightening monetary policy to help address risks stemming from rapid credit growth. Quasi-fiscal lending to local governments should be phased out, and the pace of monetary expansion reduced through sterilization and higher reserve requirements, consistent with our policy advice at the time of the last Article IV consultation. Relatedly, the level of international reserves needs to be built up to more comfortable levels.
  • The monetary policy framework can be strengthened, especially by avoiding the pursuit of multiple policy objectives. Tensions that result from the pursuit of multiple objectives may have contributed to the low reserves cushion, and can undermine the main nominal anchor (a stabilized exchange rate). Moving to an explicit inflation target range in the medium term can help improve the effectiveness of monetary policy and anchor inflation expectations.
  • Maintaining financial sector stability is contingent on strengthening banking supervision. Enhancing the regulatory and prudential toolkit will help improve the quality of credit while promoting financial deepening.
  • Fiscal policy needs to remain prudent, as a backstop to necessary monetary tightening. In particular, increases in current budgetary spending should not be allowed to crowd out higher priority spending. The progress made in improving fiscal and external sustainability must continue. In particular, in light of heightening pressure on international reserves, off-budget capital spending could be reduced more speedily to help contain the current account deficit. Moreover, the contracting of external loans should only be at terms that can help maintain—and improve—Lao P.D.R.’s hard won, upgraded debt distress rating.
  • Furthers effort is required to ensure that growth is both sustainable and inclusive. In this context, improvements in the business climate, including those under the umbrella of WTO accession and the ASEAN Free Trade Agreement, are key to enhancing competitiveness in the nonresource sector. At the same time, stepped up efforts to strengthen public financial management can create more space for high impact spending.

***

It only remains for me to thank once again the Lao P.D.R. authorities and the organizers of this Round Table for the opportunity to participate in this meeting today. On behalf of the IMF, I would also like to reiterate our continued support for Lao P.D.R. on the road ahead.

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Statement by Mr. Benedict Bingham, IMF Senior Resident Representative
Vientiane, November 03, 2009

1. Once again, it is my pleasure to represent the IMF at this Round Table Implementation Meeting. This meeting is particularly timely given the incipient signs that the global economy is turning the corner, and I would like to thank the Government for the opportunity to discuss the outlook for the Lao economy. I will focus my comments today on an overview of the global economic outlook as well as the opportunities and challenges it may present for Lao P.D.R.

Global Economic Developments and Outlook

2. I start with our latest assessment of global economic developments. There are increasing signs that the global recession has bottomed out, in large part as a result of unprecedented policy actions. Emerging economies appear to be somewhat ahead on the road to recovery, led by a resurgence in Asia, especially China with its front-loaded fiscal stimulus, and supported by stabilization or modest recovery elsewhere. The pick up is being led by a rebound in manufacturing and turn in the inventory cycle, and there have been some signs of gradually stabilizing retail sales, returning consumer confidence and firmer housing markets. As prospects have improved, commodity prices have staged a comeback from lows reached earlier this year, and world trade is beginning to pick up.

3. However, the global economy is far from out of the woods yet. Financial markets remain under strain, and are likely to remain impaired for considerable time to come. Support from public policies will eventually have to be withdrawn, and households in economies that suffered asset price busts will continue to rebuild savings while struggling with high unemployment. As such, the recovery is expected to be slow, with possible setbacks along the way given the global economy’s reduced capacity to absorb new shocks. Moreover, medium-term growth is unlikely to return to the high levels experienced pre-crisis, with implications for emerging and developing economies’ external demand and growth.

4. In our latest projections, world output is projected to expand by about 3 percent in 2010, following a contraction of around 1 percent in 2009. Advanced economies are projected to expand sluggishly (1¼ percent) throughout much of 2010 with unemployment continuing to rise until later in the year. In emerging economies, real GDP growth is forecast to reach almost 5 percent in 2010, driven mostly by China, India and other emerging Asian economies. Stronger global prospects and the turn in the inventory cycle is expected to lift commodity prices, raising income and growth prospects in commodity exporting economies such as Lao P.D.R. and underlying a tick up in inflation.

Lao P.D.R.’s Economic Outlook

5. The impact of the global slowdown on Lao P.D.R. has been somewhat smaller than in neighboring countries. This is not only due to low exposure to global financial markets, but also the boost provided by a sizable fiscal expansion and by one-off events such as the SEA Games. While growth is expected to remain robust, coming in among the highest in the region, after China, India and Bangladesh, it is still expected to slow due to the impact of lower foreign currency inflows, softer tourism and falling commodity prices on economic activity. Projects already in train and strong public investment are expected to support growth in the range of 4½–5 percent in 2009–2010.

6. Given recent positive global developments, especially in the Asia region, risks to growth which were previously to the downside are probably coming into balance. On the one hand, the support provided by one-off public investment projects and the SEA Games will gradually wind down and will need to be supplanted by private investment. Continued strains in global financial markets could hold back investment, especially in capital intensive resource sector projects, leading growth lower. On the other hand, strengthening global demand and rising commodity prices could bring a return of foreign investment, boosting growth.

7. Let me pause here and emphasize a key point: while risks to growth are somewhat balanced, risks to macroeconomic stability as a result of excessively loose policies remain. Public investment has soared, fueling credit growth through July of nearly 100 percent year-on-year. In a dollarized economy such as Lao P.D.R., spending of such a magnitude may ultimately weaken the external position through placing downward pressure on the exchange rate. In such a case, the government can either allow the exchange rate to depreciate, or intervene, selling dollars, to keep the exchange rate from depreciating. However, both policy options entail significant risks, as rapid depreciation could lead to a swift re-dollarization and further pressure on the exchange rate, while intervention would deplete precious foreign reserves which could be used to shield the economy in the case of an external shock. The fact that both policy options have significant risks attached to them is what lies behind our recommendation to rein in policies to a level which preserves macroeconomic stability.

Navigating Unsettled Waters with Low Visibility

8. It goes almost without saying that policy making in a highly uncertain global environment is much more difficult than during boom times. In our view, as noted in the recent Article IV Staff Report, policies over the past 12 months or so have been somewhat overly expansionary, skewed toward maintaining growth despite heightened risks and vulnerabilities. While fully supporting the government of the Lao P.D.R.’s commendable long-term goals of poverty reduction and graduating from low-income status, it is important to remind ourselves that attaining these goals requires that macroeconomic stability be maintained.

9. Against this background, the key near-term priority is to put in place a set of well-coordinated and realistic policies which ensure that macroeconomic stability is preserved. This will not only protect the gains which have been achieved in recent years, but also set the stage for continued growth and poverty reduction over the years to come. The still-unsettled global environment implies that policy making will need to remain flexible, and vulnerabilities both present and potential will need to be carefully assessed and managed.

10. To this end, we would suggest that policies be guided by the following considerations:

• Fiscal policy: The official budget for FY2009/10 may need to be reviewed, as revenue targets appear ambitious, while expenditure plans may not fully cover stated commitments. While the intention to tighten to fiscal stance is fully in line with our recommendation, the budget deficit target may not be achievable without additional measures. Specifically, tax revenues could be about 1 percent of GDP lower than budgeted, while domestically financed expenditure (including identified off-budget operations) is likely to be some 2 percent of GDP higher. In such an event, domestic financing in excess of 2 percentage points of GDP would be required.

• Monetary and exchange rate policy: Notwithstanding the welcome announcement to curtail new BoL direct lending, renewed efforts are needed to contain the current pace of credit expansion. Excessive growth of credit—which reached 95 percent in July and in large part reflects the loose fiscal position—could put downward pressure on the exchange rate and weaken the external position, especially if deposit mobilization or foreign currency inflows slow. Lending by state-owned commercial banks is particularly high, especially in view of their still-weak balance sheets and need for recapitalization.

• Banking sector: In light of very high credit growth, tightening liquidity and slower economic activity, the banking sector warrants close monitoring. While SOCBs have increased their exposure to the construction sector and public-sector related activities, some smaller new entrants are also expanding their loan books rapidly, entering into the low-collateral retail and SME lending segments which are more vulnerable to dips in economic activity. A sudden reversal of deposits could heighten liquidity risks, especially given limited instruments for managing liquidity, and possibly reverse recent gains in deepening banking sector intermediation.

11. So far I have focused on near-term challenges, which is probably appropriate given that the global economy is struggling to emerge from the most significant slowdown in many decades. However, it is equally appropriate to remind ourselves of the importance of the broader structural reform agenda to achieving sustained growth and poverty reduction. Maintaining momentum on key reforms, especially those aimed at improving the overall business climate, will not only foster greater private-sector participation, but also improve competitiveness and bolster investor confidence.

12. Let me thank you once again for this opportunity to participate in these discussions. On behalf of the IMF, let me reiterate our continued commitment to providing Lao P.D.R. with the best possible policy advice and support in these still-unsettled times.

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