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Lao People's Democratic Republic and the IMF

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Press Release Number 96/23
May 8, 1996
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves Third Annual ESAF Loan for Lao People's Democratic Republic

The International Monetary Fund (IMF) today approved the third annual loan under the enhanced structural adjustment facility (ESAF)1 for the Lao People's Democratic Republic in an amount equivalent to SDR 11.73 million (about $17 million) to support the Government's economic reforms in 1996. The loan is available in two equal semiannual installments; the first of which is due in mid-May.

Background

The Lao P.D.R. is transforming itself from a centrally planned to a market-oriented economy via a medium-term program aimed at strengthening macroeconomic stability while putting in place a wide range of structural measures to improve the efficiency of the domestic economy and to open it up through trade and tariff reform. These adjustment efforts have been supported by the IMF since 1989, and, as a result, the Lao P.D.R. has experienced a strong expansion of private investment and rapid export growth.

Loose monetary conditions in late 1994 and early 1995, however, contributed to a period of sharply rising prices, exchange restrictions, and a weakened exchange rate. From mid-1995, the authorities tightened fiscal and monetary policies. These measures brought inflation back under control and stabilized the exchange rate, which in turn led to a subsequent elimination of exchange restrictions.

The 1996 Program

The focus of the 1996 program is to maintain macroeconomic stability through enhanced fiscal discipline and tight monetary policy. The macroeconomic objectives include maintaining real GDP growth at about 7.5 percent, reducing inflation to about 7.5 percent by end of the period, containing the external current account deficit (excluding grants) to below 14 percent of GDP, and increasing reserves to the equivalent of three months of imports by the end of the year.

To achieve these objectives, the authorities plan to continue to pursue tight fiscal and monetary policies to ensure that inflation substantially decreases, and the exchange rate stabilizes. Fiscal targets for the year include an overall deficit (before grants) of 9.5 percent of GDP. Revenue is set to remain constant at 12.5 percent of GDP as a result of tighter surveillance of customs revenues, increased excise duties on cigarettes and alcohol, and adoption of a market-based exchange rate for tax valuation purposes. Current expenditure will be restrained through tight control over the wage bill and spending on material and supplies. At the same time, the implementation of a public expenditure review will assist the Government in better determining the country's expenditure needs, avoiding projects with little social or economic return, and identifying institutional constraints in the budgetary and planning process. On the monetary side, the authorities aim at containing broad money growth to 23 percent during 1996 through a combination of direct and indirect instruments.

Structural Reforms

After privatizing about 90 percent of public enterprises, the Government has retained 32 strategic enterprises in the public sector, but will operate them on a commercial basis. The remaining enterprises will be privatized by end-1997. A reform of the civil service will focus on retraining and reallocating staff and applying competitive entrance procedures. The management, accounting, and credit practices of state-owned banks will also be strengthened. Beginning in 1996, external audits of all commercial banks will be conducted annually by independent auditors, and, as part of the efforts to strengthen bank supervision, a set of prudential guidelines will be promulgated in the course of 1996.

The authorities also intend to accelerate the strengthening of the legal framework to support the ongoing structural changes in the economy. Priorities for 1996 will be to facilitate the development of a sound financial system, including legislation on negotiable instruments. The framework will also define legal rights to land use, establish parcel boundaries, and provide registration titles through a land titling project.

Addressing Social Issues

The Government intends to encourage a broad geographic base for economic activity so that the benefits will be reaped by all regions of the country. These efforts would be supplemented by the improved provision of essential social and economic infrastructure to enable the poor to strengthen their earning potential. In particular, the public investment program would, in line with available resources, accord greater emphasis to strengthening social services and human resource development.

The Challenge Ahead

Prospects are good for continued growth in the Lao P.D.R. in 1996, with a recovery in its rice production and a buoyant private sector. However, containing demand pressures and accelerating structural reforms will constitute the main challenges facing the authorities.

The Lao P.D.R. joined the IMF on July 5, 1961, and its quota2 is SDR 39.1 million (about $57 million). Its outstanding use of IMF credit currently totals SDR 42 million (about $61 million).


Lao P.D.R.: Selected Economic Indicators

  1993 1994 1995* 1996**

 
(percent change)
Real GDP 5.9 8.1 7.1 7.5
Consumer prices
    account (end of period)
9.0 6.8 25.7 7.5
 
 
(percent of GDP)
Overall fiscal
     balance, excluding
    grants (deficit –)
-7.8 -11.5 -9.7 9.2
External current account balance
     excluding official transfers
    (deficit –)
-11.0 -15.0 -11.4 -13.9
Gross official reserves
     (in months of imports)
1.8 1.3 1.8 3.0

Sources: Lao P.D.R. authorities; and IMF staff estimates.
*Estimate
**Program

 

1. The ESAF (enhanced structural adjustment facility) is a concessional IMF facility for assisting eligible members that are undertaking reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent and are repayable over 10 years, with a 5-1/2-year grace period.

2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.


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