Press Release: IMF Approves in Principle Three-Year, US$40 Million PRGF Loan for Lao P.D.R.
April 23, 2001
The Executive Board of the International Monetary Fund (IMF) today approved in principle1 a three-year arrangement for Lao (People's Democratic Republic) under the Poverty Reduction and Growth Facility (PRGF)2 for SDR 31.7 million (about US$40.2 million). The Board also approved in principle the release of a first loan under the PRGF arrangement in an amount equivalent to SDR 4.53 million (about US$5.7 million).
In commenting on the Executive Board's decision, the Deputy Managing Director, and Acting Chairman, Eduardo Aninat, made the following statement:
"The government's economic program and Interim Poverty Reduction Strategy Paper (I-PRSP) are aimed at strengthening macroeconomic stability and reducing poverty through growth with equity. Achieving these goals will require prudent monetary and fiscal policies as well as supporting actions to reform state-owned commercial banks (SOCBs), promote private sector activity, and improve public sector finances.
"The authorities will build on recent gains in macroeconomic stabilization through further credit restraint by the central bank and SOCBs, and a prudent fiscal stance. Further strengthening of revenue administration, paving the way for a value-added tax in 2003, and improving public expenditure management, especially in the context of ongoing decentralization, will be essential to maintain fiscal discipline and reduce poverty.
"SOCB reform will be achieved through the development and implementation of bank specific restructuring plans, based on phased and conditional recapitalization. These plans will be supported by measures to improve lending discipline, especially the phasing out of policy lending. Banking reform will be complemented with measures to improve the environment for private sector development and to strengthen the financial performance of state-owned enterprises, starting with an adjustment of their prices to cost recovery levels.
"The government's commitment to trade liberalization and regional integration under the ASEAN Free Trade Area provides an opportunity to accelerate growth, but ambitious reforms to the banking and enterprise sectors will be needed to meet the challenges of greater openness with improved competitiveness.
"The Interim Poverty Reduction Strategy Paper has been prepared in a broad participatory manner and meets the core requirements for developing a full PRSP by August 2002. Attention will have to be given to ensuring the quality of the poverty reduction strategy, identifying its links to the budget, improving data quality, and broadening the participatory process," Mr. Aninat said.
Under the PRGF-supported program, real GDP growth is projected to rise to 7 percent by 2003, while inflation would be reduced to 5 percent. In order to protect the external position, gross official reserves will be raised gradually to 3 months of import coverage. Sustained macroeconomic stability and higher growth with equity are to be the basis of the poverty reduction program. For 2001, macroeconomic performance is expected to be relatively favorable. Real GDP growth will remain at about 5.7 percent and inflation will fall to under 8 percent.
Credit by the central bank and SOCBs will be tightened to maintain the downward pressure on inflation. Credit growth of the latter will be sharply reduced to 17 percent in 2001, a target that will also support better loan quality. The exchange rate will be managed flexibly and the margin between the bank and parallel markets will be kept to under 2 percent. Exchange system controls would continue to be eased.
The overall budget deficit will be kept at about 5 percent of GDP during 2000/01-2000/03. The financing of the budget would rely mainly on external concessional financing, and avoid domestic bank financing. These goals will be supported by reforms to tax administration, focusing on large taxpayers in preparation for the introduction of a VAT in 2003, which would increase the revenue to GDP ratio by 2 percentage points. These additional resources would be available for social spending, including rural development. To more effectively meet these goals, public expenditure management would be reformed, through improving the treasury system and fiscal reporting and accountability.
The program provides for reform of the banking sector, to recapitalize the weak SOCBs conditional on improvements in their performance. The reform plan also aims to enhance governance, and ensure the implementation of a standard accounting framework and loan classification and provisioning requirements, supported by improvements to the environment for SOCBs, including phasing out directed lending and developing bank supervision.
Enterprise policies will have two main stands. For key large state enterprises, the government will initially focus on avoiding losses through price adjustments, while developing more comprehensive reforms during the first year of the program. In addition, it will also formulate measures to promote private sector development.
Trade reforms will be centered on implementing the commitments under the ASEAN Free Trade Area (AFTA), under which by the start of 2005, 95 percent of imports would be free of quantitative restrictions and for those from AFTA members would have tariffs at no more than 20 percent; 87 percent of these would have tariffs of 0-5 percent.
Lao P.D.R. became a member of the IMF on July 5, 1961. Its quota3 is SDR 52.9 million (about US$67 million), and its outstanding use of IMF credit currently totals SDR 31.9 million (about US$40 million).
Sources: Data provided by Lao P.D.R. authorities; and IMF staff estimates and projections.
1 A final decision by the IMF Executive Board is pending discussion of Lao P.D.R.'s interim Poverty Reduction Strategy Paper by the Executive Board of the World Bank. The World Bank board discussion is expected to take place on April 24, 2001.
2 On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was replaced by the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It was 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. At this time for Lao P.D.R., pending the completion of a PRSP, a preliminary framework has been set out in an interim PRSP, and a participatory process is underway. It is understood that all policy undertakings in the interim PRSP beyond the first year are subject to reexamination and modification in line with the strategy that is to be elaborated in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and World Bank, the PRSP will provide the policy framework for future reviews under this PRGF arrangement. 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.3 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.