Press Release No. 13/472
November 26, 2013

On November 15, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Lao P.D.R.

Lao P.D.R. continued to make progress towards achieving the Millennium Development Goals (MDGs) and became a member of the World Trade Organization (WTO) in 2013. Over the past year, however, the economy has been overheating from expansionary macroeconomic policies. The fiscal deficit is estimated to have widened to 6½ percent of GDP, mainly from a doubling of public sector employee compensation and higher capital spending. Government liquidity is tight, and wage and other arrears of 2–3 percent of GDP have emerged. Monetary policy has been accommodative, and credit growth remains vigorous. Real GDP growth is projected at 8¼ percent this year, led by investment and private consumption, and consumer price inflation is projected to rise to 7½ percent by year-end. The current account deficit is expected to remain close to 30 percent of GDP, and despite strong foreign direct investment inflows, international reserves—amounting to US$0.5 billion (0.8 month of prospective imports) in June 2013—are very low.

While medium-term growth prospects remain favorable, based on robust natural resource exports and post-WTO expansion in the non-resource sectors, heightened vulnerabilities have subjected the outlook to considerable uncertainty. A recent tightening of public employee compensation and public investment should reduce the headline fiscal deficit to 4 percent of GDP in 2014, although the current account deficit is expected to remain high owing to an overvalued real effective exchange rate, and reserve levels would remain inadequate for precautionary needs. After years of rapid credit expansion, banks’ asset quality could deteriorate. If policies remain expansionary, near-term pressures on the balance of payments and inflation could escalate, further depleting international reserves, and putting at risk the sustainability of future growth and the authorities’ objective to achieve middle-income status by 2020.

Executive Board Assessment2

The Executive Directors commended the authorities for their impressive economic growth record and the significant progress made toward achieving the MDGs. While medium-term economic prospects remain broadly favorable, expansionary macroeconomic policies have led to a sharp deterioration of fiscal and external balances. To address growing vulnerabilities, Directors emphasized the immediate need to further tighten fiscal and monetary policies to support the exchange rate anchor, replenish international reserves, build up fiscal buffers, and guide the economy toward a soft landing.

Directors stressed that fiscal consolidation is central to restoring macroeconomic stability. They agreed that a more ambitious tightening, anchored by a nonmining fiscal deficit of no more than 5 percent of GDP, would help to restore the fiscal space necessary for adequate capital and human development spending, and would safeguard debt sustainability. Directors welcomed the authorities’ intention to restrain the increase in public sector compensation in 2014, and recommended that future increases be implemented at a more measured pace. A medium-term budget strategy and continued improvements in tax collection would be important components of any fiscal consolidation effort. Directors further underscored that cautious assessment of large-scale projects and strengthening of public debt management capacity will be required to mitigate debt sustainability risks.

Directors recognized that the authorities’ commitment to a stabilized exchange rate within a reasonably wide and adjustable band has contributed to increased confidence and to de-dollarization over time. They emphasized that the exchange rate anchor requires lower broad money and credit growth, and in this context they urged the authorities to mop up excess liquidity, accelerate the unwinding of quasi-fiscal lending, and raise policy interest rates. Noting that the exchange rate is assessed to be overvalued, and given inadequate reserves, Directors recommended that the kip be allowed to move in line with market conditions with a view toward replenishing international reserves.

Directors noted that years of rapid credit expansion and possible currency mismatches on bank balance sheets pose risks to financial sector stability. They underscored the need for further efforts to strengthen financial supervision, improve compliance with macroprudential regulation, and raise banks’ capital. Directors encouraged the authorities to participate in an FSAP, and to use Fund technical assistance to address supervisory weaknesses and strengthen financial stability and crisis management frameworks. They welcomed efforts to strengthen the anti-money laundering and combating the financing of terrorism regime.

Directors welcomed Lao P.D.R.’s recent WTO accession, which should facilitate greater economic diversification. They encouraged further efforts to enhance the business climate, upgrade economic and financial statistics, and improve health and education infrastructure, which would contribute to more inclusive and broader-based growth and would support the authorities’ goal of attaining middle-income status by 2020.

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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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