Lao People's Democratic Republic: Staff Report for the 2013 Article IV Consultation

Publication Date: December 20, 2013
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Summary: KEY ISSUES Economic context. Growth was strong in 2012, and the economy is overheating from expansionary macroeconomic policies. The current account deficit has deteriorated significantly, a product of a currency appreciation in real effective terms, a growing fiscal deficit, and strong domestic demand. International reserves are inadequate for precautionary needs. Credit growth has declined, but remains excessive, raising financial stability concerns. Inflation is accelerating, and could become more broad-based. Outlook and risks. Growth is projected at 8¼ percent in 2013 before reverting toward potential of about 7½ percent in the medium-term. Inflation is projected to remain elevated, a result of excess demand. A recent tightening of public wages should reduce the headline fiscal deficit to 4 percent of GDP in 2014, although the current account deficit is expected to remain high. FDI inflows should be vigorous, but reserve levels would remain inadequate. The economy is vulnerable to trading partners’ growth and terms-of-trade shocks, and policy slippage. Banks’ asset quality could also deteriorate. Policy focus. There was broad agreement that policies should be tightened to replenish international reserves and manage a soft landing while building the foundations for broader-based growth. Restoring economic stability is a key priority. Fiscal policy. A comprehensive medium-term budget strategy anchored around a nonmining fiscal deficit target of no more than 5 percent of GDP beginning this fiscal year would ensure debt sustainability and reduce existing vulnerabilities. Further tightening through revenue administration, public employee compensation restraint along with civil service reform, and possibly a VAT rate hike, will be needed. Monetary, exchange rate, and financial sector policies. The USD/kip exchange rate should move more flexibly in line with market conditions with a view toward gradually building up international reserves. Domestic monetary conditions should be tightened to moderate credit growth and inflation. Financial supervision requires strengthening, with prudential measures to reduce leverage and balance sheet mismatches. Building broader-based growth. Efforts to improve the business climate and accelerate legal compliance with the WTO will bolster trade integration and private-sector growth, enhance productivity in the nonresource sector, thereby improving economic resiliency. Public sector financial management reform will improve the quality of public spending. Upgrading health and education infrastructure will help reduce inequality.
Series: Country Report No. 13/369
Subject(s): Article IV consultation reports | Economic growth | Fiscal policy | Monetary policy | Bank supervision | Economic indicators | Debt sustainability analysis | Staff Reports | Press releases | Lao P. D..R.

Publication Date: December 20, 2013
ISBN/ISSN: 9781484319178/1934-7685 Format: Paper
Stock No: 1LAOEA2013001 Pages: 67
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