News Brief: IMF Completes First Review of Lao P.D.R.'s PRGF Program and Approves US$5.6 Million Credit

February 25, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the first review of the performance of the Lao People's Democratic Republic under a three-year Poverty Reduction and Growth Facility (PRGF1 — see Press Release No. 01/18). This enables the immediate release of a further SDR 4.53 million (about US$5.6 million) from the arrangement, which would bring total disbursements under the IMF-supported program to SDR 9.06 million (about US$11.3 million).

After the IMF Executive Board's discussion on Lao P.D.R., Deputy Managing Director and Acting Chairman, Eduardo Aninat, made the following statement:

"The Lao authorities have made significant progress in strengthening macroeconomic stability and laying the groundwork for further structural reforms. Corrective action to arrest the fiscal slippages that emerged in mid-2001 helped contain pressures on the exchange rate and preserve the hard-won stabilization gains.

"Fiscal policy is appropriately focused on strengthening tax administration, making customs duties a national tax, and enhancing public expenditure management. These measures should improve budget discipline and permit a reduction in domestic arrears, while making room for higher allocations to social services. Further reforms are needed, however, including the establishment of an information database to help monitor implementation of the poverty reduction strategy and measures to promote the accountability of the different levels of government.

"The temporary use of direct credit controls is appropriate during the early stages of state bank reform to maintain monetary stability and limit potential losses of these banks. Central bank financing of the budget deficit and of state-owned commercial banks should be avoided in order to prevent a resurgence of inflationary pressures.

"The authorities are advised to implement immediately the restructuring plans for the state commercial banks, especially measures to strengthen the quality of new loans. In this regard, the temporary use of foreign expertise, including for credit risk management, is essential for improving the performance of the state-owned banks.

"Regarding state enterprise reforms, the priority being given to the restructuring of the large debtors is appropriate, as this will facilitate the resolution of nonperforming bank loans. Moreover, an adjustment in tariffs will enable the key utility companies to cover their costs and move toward commercializing their operations.

"Lao P.D.R.'s weak statistical base needs to be strengthened, especially in the areas of external trade, external debt, and government finances," Mr. Aninat said.

1 On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility, was renamed the Poverty Reduction and Growth Facility, and its purposes were redefined. It is intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.


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