## External Sector Risks for Laos’ Economy ## Source details **Canonical URL:** [External Sector Risks for Laos’ Economy](https://www.imf.org/-/media/files/publications/cr/2017/cr1753.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1753.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1753.pdf.json) --- ### Context - Lao P.D.R. is a small, landlocked economy with rapid growth driven by capital intensive investments in the energy sector. - Progress on the Millennium Development Goals has been made, but poverty remains high and inequality has increased. - Authorities anchored inflation to a stable exchange rate and reduced the fiscal deficit in FY 13/14 and FY 14/15, but fiscal progress was reversed in FY 15/16. - Accumulated vulnerabilities: high public debt, a progressively overvalued real exchange rate, and pockets of weakness in the banking sector. - The economy has few buffers and is vulnerable to: - a rapid deterioration in the external environment; - a sustained deterioration in the fiscal position; - a rapid reversal of foreign capital flows. ### Developments, Outlook, and Risks — Key Findings - Real GDP growth: - 2014: 8 percent - 2015: 7½ percent - 2016 (expected): around 7 percent - A real-time coincident indicator shows activity slowing in 2016. - Headline inflation: - 2015: around 1 percent - October 2016: around 2 percent - Core inflation remains below 1 percent. - Current account deficit: - 2015: 16.8 percent of GDP (fell by 4 percentage points of GDP from the prior year) - Non-resource current account deficit (excluding mining and hydropower): remains high at 7½ percent of GDP (fell by only 1 percent of GDP) - Gross international reserves: low at 1½ months of imports and 34 percent of foreign currency liabilities in the banking sector. - Nominal exchange rate maintained within a very narrow band with respect to the US dollar; de facto classification is a stabilized arrangement. - Credit growth: - Declined in 2014–15, recovered to around 25 percent in mid-2016 (acceleration mostly in foreign currency lending). - Commercial bank net foreign assets (NFA) have declined sharply, suggesting dollar credit increasingly funded by non-core foreign sources. - BIS reporting institution claims on banks in Laos: - Q3 2015: approximately 10 percent of GDP (compared to 1 percent of GDP in 2012). Baseline projections (selected) - GDP growth: - 2017–18: expected to moderate to 6.8 percent - Medium-term: rise to around 7 percent, supported by resumption of resource-related FDI (mainly hydropower) - Inflation: expected to remain moderate at around 3 percent. - Fiscal deficit: - Baseline assumes rise to around 6 percent of GDP in FY 15/16. - Medium-term: improve gradually to 5 percent of GDP as revenues recover and expenditure is contained. - Current account: will widen slightly to support hydroelectric and railway projects financed by private capital inflows, then narrow in 2021 as project-related imports fall and electricity exports come on line. - Gross international reserves: expected to remain low at around 1½ months of imports. - Credit growth: projected to remain at around 20 percent in 2016–17. Main risks to the outlook - Fiscal risks: - Sustained reversal in fiscal consolidation and weak revenue growth would raise the public debt ratio and worsen the external position. - DSA places Laos’ public and publicly guaranteed (PPG) external debt at high risk of debt distress. - Banking sector risks: - Undercapitalized state-owned banks account for around 45 percent of the banking system by assets; risks include deposit flight and abrupt exchange rate depreciation undermining solvency. - Dollarization and currency mismatches: - Balance sheet mismatches in the non-bank private sector estimated conservatively at about 4 percent of GDP. - A kip depreciation of 30 percent would add another 4 percent of GDP to bank and nonbank private sector liabilities. - About 60 percent of public debt is denominated in US dollars. - External shocks: - Thin reserves cushion leaves the exchange rate vulnerable to reversal in private capital flows or rapid terms-of-trade deterioration. - A sharp slowdown in China would affect commodity and agriculture exports and tourist arrivals; disorderly global financial unwinding could reduce FDI and cause capital flow reversals. ### Fiscal Policy: Rebuilding Fiscal Buffers — Diagnosis and Requirements - FY 15/16 overall deficit expected to rise to 5.9 percent of GDP from 2.7 percent of GDP in FY 14/15. - Drivers: large decline in tax and non-tax revenue; absence of one-off sale of state assets (about 1 percent of GDP in 2015); current expenditure rose due to higher interest payments and transfers. - PPG debt ratio: - Reached 65.8 percent of GDP at end-2015 (from 62.5 percent at end-2013). - Concessionality of debt: - 12.8 percent of debt on commercial terms at end-2015 (about 3 percent at end-2013). - DSA: Laos assessed at high risk of external debt distress. Fiscal consolidation objective and requirements - Anchor fiscal policy to reduce public debt ratio to 55 percent of GDP by 2021 to lower debt distress rating from high to moderate. - Including cost of public bank recapitalization, achieving this requires: - Maintaining an average overall fiscal deficit of around 3½ percent of GDP over the next five years. - A non-mining fiscal deficit not greater than 4½ percent of GDP over the next five years. - Cost of recapitalizing public banks estimated at about 1.8 percent of GDP. - Requirement: strong and permanent revenue and expenditure measures so adjustment does not fall on priority social and capital expenditures. Recommended revenue and expenditure measures - Tax policy and administration: - Revise exemption regime: conduct a tax expenditure study; centralize administration and issuance of exemptions; ensure regular reporting. - Unify the VAT rate between Special Economic Zones (SEZs) and the rest of the economy. - Gradually increase excise rates on automobiles and other luxury goods; introduce a land tax or property tax on buildings. - Improve tax administration: improve compliance of large and medium taxpayers; restructure the tax department; establish a full Large Taxpayer Office (LTO); bring district tax offices under the Director General of the Tax Department; implement point-of-sale (POS) recording and strengthened bookkeeping for presumptive taxpayers. - Public financial management: - Restrain non-capital spending through civil service reform to lower the public sector wage bill. - Curtail non-essential expenditures and off-budget capital spending; eliminate fiscal arrears. - Implement a Treasury Single Account (TSA). - Medium-term frameworks: - Develop a medium-term fiscal framework with a revenue strategy. - Conduct a public expenditure review to identify efficiency gains and protect essential social spending. - Develop a medium-term debt strategy. ### Banking Sector — Vulnerabilities and Recommended Actions Findings and risks - Public banks make up almost half the system and are undercapitalized. - NPLs in public banks have risen from 2 percent to 8 percent. - Staff estimate the capital adequacy ratio (CAR) has fallen to around 3 percent. - Weak accounting standards mean NPLs could be significantly understated. - Some domestic private banks are below mandated capital levels (non-systemic). - Rapid rise in dollar lending, financed by foreign borrowing, presents additional macrofinancial risks. - Dollarization (current levels): - 45 percent of deposits in foreign currencies. - 48 percent of private credit in foreign currencies. Recommended actions and measures - Urgent repair of bank balance sheets: - Eliminate forbearance. - Ensure all banks meet the mandatory minimum CAR of 8 percent. - Recapitalizing public banks should be a first priority; potential recapitalization costs estimated at US$ 250 million (1.8 percent of 2016 GDP). - Introduce regulations to better account for NPLs. - Improve supervision: - Maintain moratorium on new bank licenses. - Adopt risk-based supervision; collect corporate and household balance sheet information (with safeguards). - Develop crisis management framework: - Contingency plan, resolution authority, emergency liquidity assistance framework, and communications strategy. - Address foreign currency lending risks: - Consider macroprudential tools, including further raising foreign currency reserve requirements (currently at 10 percent), setting limits on loan-to-deposit ratios for foreign currency lending, or additional unremunerated reserve requirements in foreign currency. - Reduce dollarization via market-based measures: - Remove caps on kip lending and deposit rates. - Strengthen deposit insurance for local currency deposits. - Promote kip usage (e.g., lower cost services, larger spread between foreign currency and kip reserve requirements). - Gradually introduce a small measure of exchange rate flexibility. ### Exchange Rate Policy and Reserve Adequacy Findings - Reserve coverage metrics are significantly lower than desirable for a tightly managed exchange rate and a highly dollarized financial sector. - Current regime allows the kip/US dollar exchange rate to move within a band of plus or minus 5 percent per year. - IMF staff recommendation: use regime flexibility to gradually let the kip/US dollar exchange rate depreciate in line with market forces, combined with tighter fiscal policy, to support a buildup of reserves towards at least 4 months of import cover. - Low inflation offers an opportunity to let the kip depreciate gradually with limited impact on price stability. Reserve adequacy figures (end-2015; millions of US dollars) - Bank of Lao imports c.i.f.: 5,233 - IMF imports c.i.f.: 7,533 - Gross International Reserves (GIR): 987 (both Bank of Lao and IMF figure) - GIR in months of imports (Bank of Lao basis): 2.3 - GIR in months of imports (IMF basis): 1.6 - GIR in months of imports adjusted for FDI-related imports (Bank of Lao basis): 6.4 - Implied FDI-related imports: 1,804 Preconditions and sequencing for greater exchange rate flexibility i. Develop functioning local financial markets: interbank money market, interbank foreign exchange market, government debt market. ii. Actively manage liquidity and steer market interest rates: remove caps on deposit rates and intermediation spreads; use open market operations and exchange rate intervention. iii. Develop institutional framework for monetary policy: clear mandate and operational independence for the central bank; technical capacity for transparent, forward-looking monetary strategy. iv. Develop foreign exchange market and systems to manage exchange rate risk: improve market participants’ risk management; enhance prudential and supervisory frameworks; cautiously develop derivatives. Transitional approach - Allow controlled and limited flexibility early on, e.g., gradually allowing the exchange rate to float within the 5 percent plus or minus band. Authorities’ view - Authorities consider reserves adequate though agree a higher level would further safeguard stability. - Central bank calculates reserves at end-2015 at 6.4 months of imports due to excluding FDI-related imports; using broader import figures gives reserve adequacy around 2 months of imports. - Authorities see tightly managed exchange rate as temporary and agree more flexibility desirable in the medium term conditional on preconditions. ### Structural Constraints, Competitiveness, and Inclusion Findings - Structural constraints: narrow export base in natural resources (mining and hydropower), weak business climate, eroding competitiveness, governance issues, limited access to finance, institutional inefficiencies, education and skills gaps, inadequate infrastructure. - Labor and human capital: - Over two-thirds of the population remains in agriculture with the lowest productivity in the region. - Highest rate of adult functional illiteracy in the region: 33 percent urban and 66 percent rural. - Majority of labor in Special Economic Zones is foreign. - Financial inclusion limited: access to financial institutions about one-third of the population; Laos has the third-lowest level of financial access in ASEAN. - Health outcomes lag: need to reduce malnutrition and maternal mortality. Policy priorities to address constraints and inclusion - Improve business environment and infrastructure to attract and retain investment and diversify production and exports. - Promote small and medium-sized enterprises. - Continue WTO commitments and further ASEAN integration. - Increase financial inclusion by expanding supply of financial services (ATMs, branches, accounts), financial literacy programs, and delivering services through microfinancial institutions. - Invest in rural infrastructure, education and training, and basic health outcomes. ### Debt Sustainability — DSA Findings and Policy Implications Reclassification and core implication - Risk rating: reclassified from "moderate" to "high" for external debt distress (2016–36). - Urgent need to tighten fiscal policy, strengthen public financial management, and develop a comprehensive medium-term debt management strategy. External public debt indicators (end-2015) - Indicative thresholds vs. end-2015 values (Present value of debt, as a percent of): - GDP: 40 — 40.1 - Exports: 150 — 95.5 - Revenue: 250 — 218.1 - Debt service, as a percent of: - Exports: 20 — 5.2 - Revenue: 20 — 11.9 Stock of External PPG Debt at End-2015 (In Billions of U.S. Dollars; As a Share of Total External Debt; In Percent of GDP) - Total: 6.5 ; 100 ; 51.7 - Multilateral: 1.5 ; 22.8 ; 11.8 - Bilateral: 4.2 ; 64.4 ; 33.3 - Commercial 1/: 0.8 ; 12.8 ; 6.6 - Note: 1/ Commercial debt includes Thai bond issuance. - About 60 percent of total external PPG outstanding debt was contracted in U.S. dollars (currency share rose from about 51.1 percent at end-2014 to 59.8 percent at end-2015). Public sector debt and projections - PV of public sector debt: estimated at 54.1 percent of GDP in 2015. - Public sector debt stock: estimated at 65.8 percent of GDP at end-2015. - Projection: expected to rise to 70.3 percent of GDP by 2018 before declining over the long run. - Bank recapitalization estimate: at least about US$250 million (1.8 percent of GDP) could add to the debt burden if realized. - Exchange rate risk: a one-off 30 percent depreciation shock would cause breach of indicative thresholds for PV of debt-to-GDP, PV of debt-to-revenue, and debt service-to-revenue over a prolonged period. Policy recommendations (explicit) - Contract external borrowing on concessional terms as much as possible. - Recalibrate fiscal policy to rebuild fiscal buffers through stronger revenue mobilization and expenditure rationalization. - Adopt clear guidelines for issuance of sovereign debt and guarantees. - Strengthen debt management capacity: develop a comprehensive medium-term debt management strategy and institute regular DSA to inform borrowing decisions. - Favor concessional external borrowing, especially as Lao P.D.R. transitions from concessional to market-based terms. ### Adjustment Scenario (Box 5) — Policy Package and Projected Outcomes Policy assumptions and recommended measures - Resumption of fiscal consolidation: bring fiscal deficit to 3½ percent of GDP on average, including additional 1.8 percent of GDP cost of recapitalizing public banks. - Gradual exchange rate adjustment: real exchange rate would adjust by 23 percent over 5 years through nominal depreciation and productivity growth. - Banking sector reforms: strengthen state-owned banks’ management and recapitalization. - Structural reforms to boost competitiveness and productivity. Key projected macroeconomic outcomes (Alternative Scenario Projections; yearly sequences) - Real GDP Growth: 7.5, 6.9, 5.8, 6.2, 7.2, 7.9, 8.1 - Inflation (CPI, annual average): 2.4, 2.0, 2.1, 2.3, 2.6, 2.9, 3.1 - Current account (percent of GDP): -16.8, -17.1, -15.1, -13.7, -12.8, -12.3, -12.1 - Fiscal deficit (percent of GDP): 2.7, 5.9, 5.7, 3.5, 3.4, 3.2, 3.2 - Public debt (percent of GDP): 65.8, 67.8, 66.9, 64.5, 61.2, 58.0, 55.0 - Reserves (months of imports): 1.5, 1.9, 2.2, 2.5, 2.9, 3.5, 4.2 Expected benefits - Lower public debt-to-GDP ratio targeted at 55 percent of GDP (including 1.8 percent of GDP recapitalization cost). - Smaller current account deficit over the medium term. - Accumulation of international reserves (months of imports rising from 1.5 to 4.2). - Realignment of the REER by 23 percent over 5 years. - Stronger banking sector and higher medium-term growth with improved resilience. ### Authorities’ Views and Policy Commitments Fiscal stance and tax policy - Authorities agreed fiscal deficit should be put on a downward trend to reduce fiscal risk and contain growth in public debt. - Future borrowing will remain mainly on concessional terms and oriented towards necessary investments. - Plan to revise Investment Promotion and Special Economic Zones laws; review exemptions, particularly for vehicles and construction materials. - Plan to introduce a land tax in 2017 and revise some tax rates. - Large taxpayers to be managed centrally; POS recording expected to improve tax compliance; recruitment of more tax personnel cited. Banking system views and actions - Authorities emphasized that, despite pockets of weakness, the banking system as a whole is stable and sound. - Public disclosure of audited statements of all banks will be enforced in 2017. - Considering upgrading accounting requirements in line with IFRS; upgrading bank licensing fit and proper criteria; aware of foreign currency lending risks and considering macroprudential measures. - View interest rate caps as temporary to broaden access to credit until a well-functioning financial market is developed. Exchange rate and reserves - Authorities consider level of reserves adequate though agree a higher level would further safeguard stability. - Central bank’s end-2015 reserve calculation (excluding FDI-related imports) gives 6.4 months of imports; using broader import figure yields around 2 months. - View tightly managed exchange rate as temporary; agree more flexibility desirable in medium term conditional on preconditions. Authorities’ macro targets (authorities’ statement) - Real GDP growth projected: 6.9 percent in 2016 (authorities) and 7 percent in 2017 (authorities’ projection). - Core inflation in 2016: 1 percent; Headline inflation 2016: 1.6 percent. - Current account deficit (first three quarters of 2016): declined to 8.5 percent of GDP. - International reserves at end-September 2016: USD 998.59 million, equivalent to 6.44 months of imports. - Overall fiscal deficit in FY2015-16 rose to 6.9 percent. - Authorities’ medium-term budget plan projects a declining fiscal deficit for 2016-20 with an average of 4.06 percent of GDP and commitment to bring down public debt to 60 percent of GDP by 2020. ### Statistics, Capacity, and IMF Engagement Data shortcomings and capacity constraints - Serious shortcomings in national accounts, government finance, and external sector statistics hamper surveillance; largely due to lack of capacity. - IMF technical assistance and TAOLAM involvement on national accounts, prices, GFS, external sector statistics, and banking supervision. - National accounts: move toward new annual expenditure measure and QNA; new benchmark based on 2012 supply and use expected to be released by end-2016. - Price statistics: new base year 2015 applied since July 2016; CPI basket expanded to 485 items and covers all 18 provinces. - GFS: timeliness and coverage weak; off-budget activities not included; GFS Advisor appointed to TAOLAM September 2014. - Monetary and financial statistics: classification and valuation need strengthening; SRFs not introduced; latest monetary data reported to STA refer to December 2010. - External sector statistics: room to improve balance of payments and external debt statistics and to compile international investment position; new ITRS implementation ongoing. IMF and development partner engagement - Periodic staff visits and TA missions (selected): - Natural resource revenue administration: Completed December 2013. - Tax administration: Completed January 2014. - Bank-supervision and regulations: Completed December 2013; November 2014. - Monetary policy implementation: Ongoing. - Crisis management: Completed June 2014. - Relations with ADB: active loans/grants US$761.8 million as of end-2015; disbursed US$356.9 million. Recommendation - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. *IMF staff summary from "1. External Sector Risks for Laos’ Economy" (cr1753).* ### 1. External Sector Risks for Laos’ Economy ____________________________________________________ 20 ### 1. External Sector Risks for Laos’ Economy ### Context - Lao P.D.R. is a small, landlocked economy with rapid growth driven by capital intensive investments in the energy sector. - Progress on the Millennium Development Goals has been made, but poverty remains high and inequality has increased. - The authorities anchored inflation to a stable exchange rate and reduced the fiscal deficit in FY 13/14 and FY 14/15, but fiscal progress was reversed in FY 15/16. - Accumulated vulnerabilities: high public debt, a progressively overvalued real exchange rate, and pockets of weakness in the banking sector. - The economy has few buffers and is vulnerable to: - a rapid deterioration in the external environment; - a sustained deterioration in the fiscal position; - a rapid reversal of foreign capital flows. ### Developments, Outlook, and Risks Findings on recent developments - Real GDP growth: - 2014: 8 percent - 2015: 7½ percent - 2016 (expected): around 7 percent - A real-time coincident indicator shows activity slowing in 2016. - Headline inflation: - 2015: around 1 percent - October 2016: around 2 percent - Core inflation remains below 1 percent. - The current account deficit: - 2015: 16.8 percent of GDP (fell by 4 percentage points of GDP from the prior year) - Non-resource current account deficit (excluding mining and hydropower): remains high at 7½ percent of GDP (fell by only 1 percent of GDP) - Gross international reserves: low at 1½ months of imports and 34 percent of foreign currency liabilities in the banking sector. - The nominal exchange rate has been maintained within a very narrow band with respect to the US dollar; de facto classification is a stabilized arrangement. - Credit growth: - Declined in 2014–15, recovered to around 25 percent in mid-2016 (acceleration mostly in foreign currency lending). - Commercial bank net foreign assets (NFA) have declined sharply, suggesting dollar credit increasingly funded by non-core foreign sources. - BIS reporting institution claims on banks in Laos: - Q3 2015: approximately 10 percent of GDP (compared to 1 percent of GDP in 2012). Baseline outlook and projections - GDP growth: - 2017–18: expected to moderate to 6.8 percent - Medium-term: rise to around 7 percent, supported by resumption of resource-related FDI (mainly hydropower) - Inflation: expected to remain moderate at around 3 percent. - Fiscal deficit: - Baseline assumes rise to around 6 percent of GDP in FY 15/16. - Medium-term: improve gradually to 5 percent of GDP as revenues recover and expenditure is contained. - Current account: will widen slightly to support hydroelectric and railway projects financed by private capital inflows, then narrow in 2021 as project-related imports fall and electricity exports come on line. - Gross international reserves: expected to remain low at around 1½ months of imports. - Credit growth: projected to remain at around 20 percent in 2016–17. - Adjustment scenario (Box 5): resumption of fiscal consolidation, greater exchange rate flexibility, bank recapitalization and structural reforms would lower short-term growth but strengthen medium-term growth and reduce near-term vulnerabilities. Main risks to the outlook - Domestic fiscal risks: - A sustained reversal in fiscal consolidation and weak revenue growth would raise the public debt ratio and worsen the external position. - Debt Sustainability Analysis (DSA) places Laos’ public and publicly guaranteed (PPG) external debt at high risk of debt distress. - Banking sector risks: - Undercapitalized state-owned banks account for around 45 percent of the banking system by assets; risks include deposit flight and abrupt exchange rate depreciation undermining solvency. - Dollarization and currency mismatches (Box 3): - Balance sheet mismatches in the non-bank private sector estimated conservatively at about 4 percent of GDP. - A kip depreciation of 30 percent would add another 4 percent of GDP to bank and nonbank private sector liabilities. - About 60 percent of public debt is denominated in US dollars. - Other domestic risks: - Continued erosion of competitiveness from the kip’s real appreciation, weak productivity, and low private investment could damage growth and nascent non-commodity exports. - External risks (Box 1): - Thin reserves cushion leaves the exchange rate vulnerable to reversal in private capital flows or rapid terms-of-trade deterioration. - A sharp slowdown in China would impact commodity and agriculture exports and tourist arrivals; disorderly global financial unwinding could reduce FDI and cause capital flow reversals. Authorities’ view - Authorities broadly concurred with the near-term outlook and risks. - Emphasized importance of more inclusive and diversified growth and the role of large FDI inflows into hydro and energy sectors. - Noted fixed foreign currency price and quantity contracts for electricity exports mitigate some exchange rate risks. - Considered risks to inflation and balance sheets from greater exchange rate flexibility warranted caution. ### Policy Discussions — Overview - Key policy challenge: safeguard macroeconomic stability and create conditions for sustainable medium-term growth. - Policy priorities: - Resume growth-friendly fiscal consolidation to rebuild buffers. - Address banking sector weaknesses. - Prepare for greater exchange rate flexibility and accumulate reserves. - Gradually allow the exchange rate to depreciate in line with market forces. - Structural reforms to integrate the agrarian population into more productive activities and increase financial inclusion. ### A. Fiscal Policy: Rebuilding Fiscal Buffers Recent fiscal developments - FY 15/16 overall deficit expected to rise to 5.9 percent of GDP from 2.7 percent of GDP in FY 14/15. - Drivers of deterioration: - Large decline in tax and non-tax revenue. - Reduction in non-tax revenue due to absence of one-off sale of state assets (which had supported revenue by about 1 percent of GDP in 2015). - Capital expenditure fell; current expenditure rose due to higher interest payments and transfers. - PPG debt ratio: - Reached 65.8 percent of GDP at end-2015 (from 62.5 percent at end-2013). - Increase driven by domestic treasury bills and bonds, higher borrowing from Thailand and China for power generation projects, and issuance of sovereign bonds in the Thai market. - Concessionality of debt: - 12.8 percent of debt on commercial terms at end-2015 (about 3 percent at end-2013). - DSA: Laos assessed at high risk of external debt distress (deterioration from previous borderline moderate/high risk). - Vulnerabilities: high proportion of public debt denominated in foreign currencies exposes the public balance sheet to large exchange rate depreciation. Fiscal consolidation objective and requirements - Anchor fiscal policy to reduce public debt ratio to 55 percent of GDP by 2021 to lower debt distress rating from high to moderate. - Including cost of public bank recapitalization, achieving this requires: - Maintaining an average overall fiscal deficit of around 3½ percent of GDP over the next five years. - A non-mining fiscal deficit not greater than 4½ percent of GDP over the next five years. - Cost of recapitalizing public banks estimated at about 1.8 percent of GDP. - Requirement: strong and permanent revenue and expenditure measures so the adjustment does not fall on priority social and capital expenditures. Recommended revenue and expenditure measures - Tax policy and administration: - Objective: boost tax-to-GDP ratio. - Measures: - Revise exemption regime: conduct a tax expenditure study; centralize administration and issuance of exemptions; ensure regular reporting. - Unify the VAT rate between Special Economic Zones (SEZs) and the rest of the economy. - Revenue measures: gradually increase excise rates on automobiles and other luxury goods; introduce a land tax or property tax on buildings. - Improve tax administration: improve compliance of large and medium taxpayers; restructure the tax department; establish a full Large Taxpayer Office (LTO); bring district tax offices under the Director General of the Tax Department; carefully manage planned IT investments; implement point-of-sale (POS) recording and strengthened bookkeeping for presumptive taxpayers. - Public financial management reforms: - Restrain non-capital spending through civil service reform to lower the public sector wage bill. - Curtail non-essential expenditures and off-budget capital spending; eliminate fiscal arrears. - Implement a Treasury Single Account (TSA) to reduce off-budget spending and strengthen control over expenditure. - Medium-term fiscal and debt management framework: - Develop a medium-term fiscal framework with a revenue strategy to modernize tax and customs policy, legal framework and administration. - Conduct a public expenditure review to identify efficiency gains and protect essential social spending. - Develop a medium-term debt strategy to anticipate and manage financing challenges as Laos moves towards middle-income country status. *IMF staff summary from "1. External Sector Risks for Laos’ Economy" (cr1753).* ### 12. Authorities’ views. The authorities agreed that the fiscal deficit should be put on a ### 12. Authorities’ views. ### Fiscal stance and tax policy - Authorities agreed that the fiscal deficit should be put on a downward trend to reduce fiscal risk and contain growth in the public debt. - Future borrowing will remain mainly on concessional terms and oriented towards necessary investments. - Exemptions: - Plan to revise two laws: Investment Promotion and Special Economic Zones. - Review application of exemptions, particularly for vehicles and construction materials. - Tax policy: - Plan to introduce a land tax in 2017. - Plan to revise some rates on existing taxes. - Tax administration: - Large taxpayers to be managed centrally; planned transfer of this function from provincial offices to the central tax office. - Expectation that POS recording of transactions would help improve tax compliance. - Recruitment of more personnel for the tax office was cited. ### Ensuring a sound banking system — findings and risks - Structural weaknesses and key indicators: - Public banks make up almost half the system and are undercapitalized. - NPLs in public banks have risen from 2 percent to 8 percent. - Staff estimate the capital adequacy ratio (CAR) has fallen to around 3 percent. - Weak accounting standards mean NPLs could be significantly understated. - International evidence: ROA 0.2 percent and ROE 0.6 percent could be consistent with NPLs above 10 percent. - Recently mandated caps on local currency deposit and lending rates likely contributed to reverse progress in de-dollarization. - Some domestic private banks are below mandated capital levels (these are not systemic). - Rapid rise in dollar lending, financed by foreign borrowing, presents additional macrofinancial risks. ### Banking system — recommended actions and measures - Urgent repair of bank balance sheets: - Eliminate forbearance. - Ensure all banks meet the mandatory minimum CAR of 8 percent. - Recapitalizing public banks should be a first priority; potential recapitalization costs estimated at US$ 250 million (1.8 percent of 2016 GDP). - Introduce regulations to better account for NPLs to clarify recapitalization estimates and restructuring options. - Improve supervision: - Maintain moratorium on new bank licenses. - Quickly improve supervision, including adopting risk-based supervision in the medium-term. - Collect corporate and household balance sheet information (with appropriate safeguards). - Develop crisis management framework: - Contingency plan for the banking sector in the event of financial distress. - Strengthen institutional setup for crisis management with resolution authority. - Establish a sound emergency liquidity assistance framework with appropriate safeguards, a bank resolution framework, and a communications strategy. - Address foreign currency lending risks: - Consider macroprudential tools, including further raising foreign currency reserve requirements (currently at 10 percent), setting limits on loan-to-deposit ratios for foreign currency lending, or additional unremunerated reserve requirements in foreign currency. - Reduce dollarization (current levels): - 45 percent of deposits in foreign currencies. - 48 percent of private credit in foreign currencies. - Recommended market-based measures: remove caps on kip lending and deposit rates; strengthen deposit insurance arrangements for local currency deposits; introduce measures to promote the use of kip (e.g., lower cost and convenient services for kip use, larger spread between foreign currency and kip reserve requirements). - Gradually introduce a small measure of exchange rate flexibility to help reduce dollarization. ### Authorities’ views on the banking system - Authorities emphasized that, despite pockets of weakness, the banking system as a whole is stable and sound. - Public disclosure of audited statements of all banks will be enforced in 2017 to enhance transparency. - Considering upgrading accounting requirements in line with IFRS. - Upgraded fit and proper criteria for bank licensing to safeguard against AML/CFT risks. - Aware of foreign currency lending risks and are considering additional macroprudential measures. - View interest rate caps as a way of broadening access to credit and emphasized these were temporary until a well-functioning financial market is developed. ### Strengthening international reserves and exchange rate policy — findings - Reserve coverage metrics are significantly lower than desirable for a tightly managed exchange rate and a highly dollarized financial sector. - Current regime allows the kip/US dollar exchange rate to move within a band of plus or minus 5 percent per year. - IMF staff recommendation: use regime flexibility to gradually let the kip/US dollar exchange rate depreciate in line with market forces, combined with tighter fiscal policy, to support a buildup of reserves towards at least 4 months of import cover. - Low inflation offers an opportunity to let the kip depreciate gradually with limited impact on price stability. ### Reserve adequacy figures (end-2015; millions of US dollars, as presented) - Bank of Lao imports c.i.f.: 5,233 - IMF imports c.i.f.: 7,533 - Gross International Reserves (GIR): 987 (both Bank of Lao and IMF figure) - GIR in months of imports (Bank of Lao basis): 2.3 - GIR in months of imports (IMF basis): 1.6 - GIR in months of imports adjusted for FDI-related imports (Bank of Lao basis): 6.4 - Implied FDI-related imports: 1,804 ### Preconditions and sequencing for greater exchange rate flexibility — recommended sequence i. Develop functioning local financial markets: - Smooth functioning of the interbank money market, the interbank foreign exchange market, and the government debt market. ii. Actively manage liquidity and steer market interest rates: - Remove caps on deposit rates and intermediation spreads. - Use open market operations and exchange rate intervention to affect market interest rates. - Active liquidity management based on stable and low excess reserves. iii. Develop the institutional framework for monetary policy: - Clear mandate and operational independence for the central bank to pursue price stability. - Develop technical capacity for a transparent, forward-looking monetary strategy. - Clear and effective framework for monetary control. - Framework for forecasting and managing banking system liquidity. iv. Develop the foreign exchange market and introduce systems to manage exchange rate risk: - Market participants to develop internal risk management and information systems to measure foreign exchange risk. - Prudential and supervisory frameworks to monitor direct and indirect exposure. - Cautious development of derivatives to support hedging and market development. ### Exchange rate flexibility — transitional approach - Allow controlled and limited flexibility early on, e.g., gradually allowing the exchange rate to float within the 5 percent plus or minus band, to reduce one-way currency bets, stimulate foreign exchange market development, and support the accumulation of international reserves. ### Authorities’ views on reserves and exchange rate policy - Authorities consider the level of reserves to be adequate, though they agree a higher level would further safeguard stability. - The central bank calculates reserves at end-2015 at 6.4 months of imports due to a different estimate of trade flows and the exclusion of imports related to FDI projects. - Using the central bank’s overall import figure (not excluding FDI imports) puts reserve adequacy at around 2 months of imports. - Authorities recognize risks associated with the managed exchange rate but see benefits in stability; they view the tightly managed exchange rate as a temporary arrangement and agree more flexibility is desirable in the medium term, conditional on preconditions being in place. ### Promoting competitiveness, diversification and inclusion — findings - Structural constraints limit growth potential and increase vulnerability: - Narrow export base founded on natural resources (mining and hydropower). - Weak business climate and eroding competitiveness. - Rank in ease of doing business well below ASEAN peers. - Concerns: governance, access to finance, institutional efficiency, education and skills, inadequate infrastructure. - Labor and human capital: - Over two-thirds of the population remains in agriculture with the lowest productivity in the region. - Large skills gap impedes movement to manufacturing or services. - School enrollment is high, but outcomes are low. - Highest rate of adult functional illiteracy in the region: 33 percent urban and 66 percent rural. - Majority of labor in Special Economic Zones is foreign. - Health outcomes lag: need to reduce malnutrition and maternal mortality. - Financial inclusion: - Access to financial institutions limited to about one-third of the population. - Laos has the third-lowest level of financial access in ASEAN (only Cambodia and Myanmar rank lower). - Microfinance sector serves mainly agricultural clients, supervised by the Bank of Lao, but makes up less than 1 percent of assets in the overall financial system. ### Policies to address structural constraints and inclusion - Improve business environment and infrastructure investment to attract and retain investment and diversify production and exports. - Promote small and medium-sized enterprises. - Continue WTO commitments and further ASEAN integration. - Increase financial inclusion through: - Expanding supply of financial services (ATMs, branches, accounts). - Financial literacy programs (examples cited: Bangladesh and India). - Deliver financial services and information through microfinancial institutions. - Invest in rural infrastructure, education and training, and basic health outcomes. ### Authorities’ views on structural constraints - Authorities agreed there are significant structural constraints to growth: narrow production and export base, low fiscal revenue, and lack of inclusive growth. - Support for new laws on Investment Promotion and Special Economic Zones aimed at reducing red tape. - New regulations on Public Private Partnerships expected to help finance new infrastructure. - Agreed further efforts necessary to improve the business environment and promote SMEs. ### Statistics and data capacity - Weak data, particularly in external sector and financial statistics, impose significant constraints on surveillance; shortcomings largely due to lack of capacity. - Development partners (including the Fund) have devoted significant resources to capacity development in statistics for Laos. - Authorities expressed interest in joining the e-GDDS and bringing statistical quality, coverage and dissemination in line with ASEAN peers. *Source: IMF staff summary of "12. Authorities’ views."* ### 27. Economic setting. Growth is expected to slow to under 7 percent as the economy faces ### 27. Economic setting. Growth is expected to slow to under 7 percent as the economy faces ### Economic outlook - Growth is expected to slow to under 7 percent as the economy faces headwinds from a less favorable external environment and a slow-down in agriculture. - Inflation has risen slightly but is expected to remain contained. - Private sector credit growth will remain between 15 and 20 percent, concentrated in construction and services. - In the medium-term growth is expected to rebound slightly to around 7 percent, supported by hydro-electric projects and transportation investments. - The external position is assessed to be vulnerable to shocks and requires strengthening. ### Risks - Domestic risks: - A sustained reversal in fiscal consolidation would lead to a further increase in public debt, a loss in confidence and a deterioration of the external position. - Weakness in the banking system, coupled with high dollarization, could lead to deposit flight and pressure on the exchange rate. - Continued erosion of competitiveness from the kip’s real appreciation, coupled with weak productivity and low investment, could threaten growth. - External risks: - The thin reserves cushion and a tightly managed exchange rate make Laos vulnerable to a deterioration in the terms of trade or a reversal of capital flows. - A slowdown in China would affect FDI, exports and growth. ### Resuming fiscal consolidation - Anchor fiscal policy on a goal of reducing the public debt ratio to 55 percent of GDP by 2021 to: - lower the debt distress rating in the DSA to moderate; and - help build fiscal buffers. - Required actions: - sustained efforts to increase revenue and rationalize expenditure; - initiatives on tax administration, exemptions and new taxes are welcome; - revision of the exemption regime and the efficiency and composition of expenditures to achieve a growth-friendly consolidation. - Institutional framework: - formulate a comprehensive medium-term fiscal framework, including a medium-term revenue strategy, a medium-term debt strategy and a public investment review, to allow sustained multi-year execution. ### Putting the debt ratio on a downward trajectory - The DSA assesses Laos’ external PPG debt to be at high risk of debt distress (a deterioration from last year’s Article IV consultation). - High proportion of public debt in foreign currency increases vulnerability to exchange rate changes. - Transition to a lower debt ratio should: - emphasize concessional financing; - adopt clear guidelines for issuance of sovereign debt and guarantees and use of such borrowing. - Concerns: - continued issuance of foreign currency sovereign bonds in the Thai market on non-concessional terms, and use of part of the proceeds for current spending, appears in conflict with desirable debt management practices. ### Addressing banking sector risks - Authorities have improved supervision and risk detection; plan to restructure public banks is welcome. - Recommended actions: - move rapidly to address bank weakness, including prompt recapitalization of state-owned banks; - further improve supervision to reduce amplification of external shocks through the banking system; - address foreign currency lending risks through additional macroprudential measures to reduce balance sheet risks; - develop the crisis management framework for central bank contingencies. - Financial market development: - early removal of interest rate caps is important to develop local financial markets and reduce dollarization. ### Exchange rate flexibility and reserves - Medium-term objective: put conditions in place to adopt more exchange rate flexibility. - Sequencing of reforms should include: - developing local financial markets; - actively managing liquidity to affect market interest rates; - developing the framework for monetary policy; - developing the foreign exchange market and tools to manage exchange rate risk. - Policy note: - allowing some limited exchange rate flexibility during the process will support accumulation of reserves and promote development of foreign exchange risk management and the foreign exchange market. - Reserves: - A higher buffer of international reserves is needed given the high current account deficit, the tightly managed exchange rate, dollarization and balance sheet mismatches in the non-bank private sector. ### Addressing structural constraints - Improve the business environment and upgrade skills and human capital to: - support investment and productivity growth; - diversify exports; and - help Laos take advantage of growing export opportunities in the region. - Enhance financial inclusion to support macro-financial stability and growth. ### Statistics and surveillance - The collection and dissemination of economic and financial statistics continues to require improvement. - Sustained effort is required to secure progress; staff welcomes the authorities’ commitment to improving statistics. ### Recommendation - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Key box findings (selected) - Box 1 (External sector risks): - High dollarization and a relatively open capital account expose Lao P.D.R. to international financial volatility and the global monetary cycle; developments in China are a key risk. - Box 2 (Credit cycle): - Credit-to-GDP rose from around 9 percent of GDP in 2007 to around 50 percent by end-2014. - The credit gap was 10 percent of GDP in 2012. - The credit cycle is currently in the repair/recovery phase. - Box 3 (Dollar credit cycle and currency mismatches): - Laos’ total net FX exposure according to BIS data is around 4.2 percent of GDP: 1.2 percent of GDP for banks and 3 percent of GDP for the non-bank private sector. - Balance sheet data from BCEL and BFL show FX assets in total around 1 percent of GDP larger than liabilities. - Estimates suggest net FX liabilities would rise by 3.8 percent of GDP (2.7 percent of GDP for banks and 1.1 percent of GDP for the nonbank private sector) following a 30 percent kip/dollar depreciation, aggregating total currency mismatches to around 8 percent of GDP. - Gross foreign reserves held at the Bank of Lao would rise from 7 to around 8.6 percent of GDP due to valuation effects under that scenario. - Policy recommendations include gradual use of exchange rate bands, expedited market-based de-dollarization, and enhanced monitoring of banks’ net open positions and cross-border flows. - Box 4 (External sector assessment): - The kip is estimated to be overvalued by between 20 and 40 percent. - The macroeconomic balance approach indicates a 20 percent overvaluation. - The equilibrium real exchange rate approach indicates a 38 percent overvaluation. - As of December 2015, reserves were equivalent to about 1 month of prospective imports of goods and services, about 13 percent of broad money, 30 percent of foreign currency deposits and about 8 percent of GDP—levels significantly below traditional metrics. *IMF staff summary of Lao P.D.R. economic setting and policy recommendations as presented in the source content.* ### Box 5. Lao P.D.R.: Adjustment Scenario ### Box 5. Lao P.D.R.: Adjustment Scenario ### Summary - An adjustment scenario with recommended policies would result in lower growth in the near term, but more robust and sustainable growth in the medium-term. - The scenario would lead to a less risky path for the economy and greater resilience to external shocks through lower debt, a smaller current account deficit, and accumulation of reserves. ### Policy assumptions and recommended measures - Resumption of fiscal consolidation: Sustainable fiscal and expenditure measures would bring the fiscal deficit to 3½ percent of GDP on average, sufficient to lower the debt to GDP ratio to 55 percent of GDP, including the additional 1.8 percent of GDP cost of recapitalizing public banks. - Gradual exchange rate adjustment: The real exchange rate would adjust by 23 percent over 5 years, through both nominal depreciation and productivity growth, realigning the REER with long-term fundamentals. - Banking sector reforms: Strengthening of state-owned banks management and recapitalization. - Structural reforms: Measures to boost competitiveness and long-term productivity. ### Key projected macroeconomic outcomes (Alternative Scenario Projections) - Real GDP Growth (yearly sequence): 7.5, 6.9, 5.8, 6.2, 7.2, 7.9, 8.1 - Inflation (CPI, annual average, yearly sequence): 2.4, 2.0, 2.1, 2.3, 2.6, 2.9, 3.1 - Current account (in percent of GDP, yearly sequence): -16.8, -17.1, -15.1, -13.7, -12.8, -12.3, -12.1 - Fiscal deficit (percent of GDP, yearly sequence): 2.7, 5.9, 5.7, 3.5, 3.4, 3.2, 3.2 - Public debt (in percent of GDP, yearly sequence): 65.8, 67.8, 66.9, 64.5, 61.2, 58.0, 55.0 - Reserves (in months of imports, yearly sequence): 1.5, 1.9, 2.2, 2.5, 2.9, 3.5, 4.2 ### Expected benefits of the adjustment scenario - Lower public debt-to-GDP ratio targeted at 55 percent of GDP (including 1.8 percent of GDP recapitalization cost). - Smaller current account deficit over the medium term. - Accumulation of international reserves (increase in months of imports from 1.5 to 4.2 in the projection sequence). - Realignment of the REER by 23 percent over 5 years to reflect fundamentals. - Stronger banking sector through management strengthening and recapitalization of state-owned banks. - Higher medium-term growth and improved resilience to external shocks. *Sources: National authorities; and IMF staff calculations.* ### 1. Eradicate extreme poverty and hunger Proportion of population below the national poverty line ### 1. Eradicate extreme poverty and hunger Proportion of population below the national poverty line ### Selected MDG indicators (Lao P.D.R.) - Employment-to-population ratio: 84.977.7no target - Prevalence of underweight children under five years of age: 442722 - Prevalence of stunting in children under five years of age: 484434 - Proportion of pupils starting grade 1 who reach grade 5: 487095 - Literacy rate in the age group of 15–24 years: 7173.199 - Number of girls per 100 boys enrolled in: - Primary: 7991100 - Lower secondary: 7089100 - Upper secondary: 6783100 - Tertiary: 4277100 - Share of women in wage employment: 3834no target - Under–five mortality rate: 1707970 - Proportion of one-year-old children immunized against measles: s335590 - Proportion of births attended by skilled birth personnel: 144250 - Maternity mortality rate (per 100,000 live births): 796357260 - HIV prevalence among general pop. (percentage): 0.10.28less than 1 - Proportion of land areas covered by forests (percentage): 49.140.365 - Consumption of ozone-depleting substances (mt): 43.32.50 Sources for these indicators: United Nations and Government of Lao P.D.R. ### Debt sustainability: overall assessment and key findings - The risk of Lao P.D.R. facing external debt distress has risen from moderate to high. - Drivers of deterioration: - Higher initial external PPG debt stock and projected debt flows to support public investment. - Some external debt indicators breach policy-dependent indicative thresholds for some years, indicating limited buffers to adverse shocks. - Present value (PV) of public sector debt-to-GDP ratio breaches the benchmark for some years. - Large share of foreign-currency-denominated debt implies that a large and sudden exchange rate depreciation could significantly raise indicator levels. - Mitigating factors: - Revenues from large resource projects are expected to mitigate risks over the long term. - High concessionality of official borrowing helps reduce the external debt service burden in the near term, but concessionality is projected to decline over time. ### External public debt indicators (end-2015) - Indicative thresholds vs. end-2015 values (Present value of debt, as a percent of): - GDP: 40 — 40.1 - Exports: 150 — 95.5 - Revenue: 250 — 218.1 - Debt service, as a percent of: - Exports: 20 — 5.2 - Revenue: 20 — 11.9 - Lao P.D.R.: Stock of External PPG Debt at End-2015 (In Billions of U.S. Dollars; As a Share of Total External Debt; In Percent of GDP) - Total: 6.5 ; 100 ; 51.7 - Multilateral: 1.5 ; 22.8 ; 11.8 - Bilateral: 4.2 ; 64.4 ; 33.3 - Commercial 1/: 0.8 ; 12.8 ; 6.6 - Note: 1/ Commercial debt includes Thai bond issuance. - Composition and other facts: - Nominal stock of PPG external debt: US$5.4 billion at end-2013 → about US$6.5 billion at end-2015. - PV of PPG external debt: 39.8 percent of GDP at end-2013 → 40.1 percent at end-2015 (above the 40 percent indicative threshold). - Bilateral creditors account for 64.4 percent of total external PPG debt at end-2015 (mainly China, Russia, Thailand, Japan, and Korea). - Sovereign bond outstanding at end-2015: US$838 million, 12.8 percent of total external PPG debt. - Currency composition of external PPG debt (Percent of total): - USD: 59.8 - CNY: 12.8 - SDR: 9.4 - JPY: 6.6 - EUR: 4.3 - THB: 4.1 - Others: 2.9 - About 60 percent of total external PPG outstanding debt was contracted in U.S. dollars (currency share rose from about 51.1 percent at end-2014 to 59.8 percent at end-2015). ### Fiscal and financing context - Total domestic PPG debt: rose from 11.6 percent of GDP in 2013 to about 14.1 percent of GDP at end-2015. - Total domestic and external PPG debt: 65.8 percent of GDP at end-2015 (up from 62.5 percent at end-2013). - The rise in debt was driven in part by heavy investment in power generation projects to export energy. ### Macroeconomic assumptions (comparison and baseline averages) - Comparison with 2014 DSA (average over the 20 years projection period): - GDP growth: 2014 DSA 6.6 — 2016 DSA 6.3 - GDP deflator in U.S. dollar terms (percent): 2014 DSA 1.5 — 2016 DSA 2.1 - Non-interest current account deficit: 2014 DSA 10.6 — 2016 DSA 11.3 - Primary deficit: 2014 DSA 1.9 — 2016 DSA 2.8 - Box 2: Baseline scenario (2016–36) — selected assumptions: - Real GDP growth is projected to average 6.8 percent during 2016–21; moderate to 6.3 percent on average during 2016–36. - Inflation (GDP deflator in USD terms) projected to average about 2.1 percent in 2016–36. - Non-interest current account deficit: estimated to have narrowed to about 14.3 percent of GDP in 2016 and expected to average 11.3 percent of GDP in the longer term. - External financing assumptions: - New disbursements from IDA expected to be US$70 million (multilateral). - This DSA assumes a US$480 million loan from China to build the Lao-China railway (bilateral). - Incorporates historical and projected sovereign bond issuance in the Thai market and assumes continuous roll-over and new bond issuances in the medium term. - Fiscal policy is projected to be neutral in the medium-term; primary deficit is projected to peak (text truncated in source). ### Scenario analysis and implications - Baseline scenario: - PV of external debt-to-GDP ratio is projected to be above the policy-dependent indicative threshold and decline in the medium term. - Forecasts a breach of the indicative threshold for some periods with respect to three indicators: 1. PV of external PPG debt-to-GDP ratio 2. PV of debt-to-revenue ratio 3. Debt service-to-revenue ratio - PV of debt-to-exports and debt service-to-exports remain below thresholds under baseline. - Historical scenario: - Key variables set at 10-year historical averages (higher current account deficit, real GDP growth, and export growth than baseline). - Debt dynamics become unsustainable for all debt indicators; all indicators except debt service-to-exports are projected to breach the policy-dependent indicative thresholds. ### Policy recommendations and priorities - Recalibrate fiscal policy to rebuild fiscal buffers. - Adopt clear guidelines for the issuance of sovereign debt and guarantees to help contain and monitor contingent liabilities. - Strengthen debt management capacity, including: - Developing a comprehensive medium-term debt management strategy. - Regularly performing a debt sustainability analysis to inform borrowing decisions. - Favor concessional external borrowing as much as possible to reduce the debt burden, especially given large share of foreign-currency-denominated debt and the potential for exchange rate shocks. - Take debt sustainability considerations into account when contracting new debt, particularly during the transition from concessional to market-based terms as Lao P.D.R. graduates from LDC status. *Sources: Lao P.D.R. authorities; and IMF and World Bank staff estimates.* ### 4.4 percent of GDP in 2016 and decline gradually to about 3.5 percent of GDP on average over the medium ### cr1753 - 4.4 percent of GDP in 2016 and decline gradually to about 3.5 percent of GDP on average over the medium ### Fiscal outlook and medium- to long-term projections - Primary deficit: 4.4 percent of GDP in 2016 and decline gradually to about 3.5 percent of GDP on average over the medium term. - Long-term primary deficit: expected to average around 2.8 percent as improvements in non-mining revenue collection come on line, while capital expenditure is expected to decline and other expenditure categories are expected to remain constant as a percent of GDP. - Domestic debt: expected to increase over the long-term as the country relies more on domestic funding. - Financing composition: as global interest rates are projected to rise and domestic financial markets deepen, a larger share of financing needs is likely to be satisfied by domestic creditors. ### Kunming–Singapore Railway (Box 3) - Project description: construction of a 420 kilometer single track electrified rail line from Vientiane to the border with China on the North; around 60 percent of the railway line will go through tunnels or on bridges. - Project role: section of the proposed Kunming – Singapore Trans Asian Railway corridor. - Total estimated cost: US$6.7 billion. - Financing plan: - 30 percent of the project will be provided by a joint venture company already formed between Lao P.D.R. and China. - Lao P.D.R. contribution to the joint venture capital: 30 percent (or around US$700 million) in annual installments over the medium term. - Of the US$700 million, US$480 million will be borrowed from China while the remaining funds will be provided by the Budget. - The joint venture company will need to secure the remaining 70 percent of the project costs. - Sovereign guarantee: Lao P.D.R. Ministry of Finance has noted that no sovereign guarantee will be provided. - Economic viability (2012 Feasibility Study): IRR is 4.56 percent and the repayment period of investment is 23 years. - Implementation status: formal start of works announced in December 2015; progress slow due to unresolved property issues and detailed design works; six lots tendered with awards to two Chinese companies; Ministry of Finance envisages start of construction activities at some point during 2017. ### Debt dynamics, stress tests, and vulnerabilities - Exchange rate risk: an abrupt exchange rate depreciation remains the most important risk to sustainability given a large share of foreign currency debt and a very thin international reserves cushion. - Depreciation shock impact: a one-off 30 percent depreciation shock would cause the breach of the indicative threshold of the PV of debt-to-GDP ratio, the PV of debt-to-revenue ratio, and debt service-to-revenue ratio over a prolonged period. - External debt trajectory: while the PV of external PPG debt declines over the projection period, liquidity indicators worsen, as indicated by the increasing debt service ratios. - FDI and transfers shock: an assumed negative shock to FDI inflows––a scenario with net official transfers and net FDI falling in 2016–17 below their historical averages—deteriorates the debt trajectory, forcing Lao P.D.R. to reduce its current account deficit to avoid worsening the external debt position. - Stress test ranking: debt dynamics are markedly worse under stress test scenarios, with the exchange rate depreciation risk having the largest impact. ### Public sector debt projections and benchmarks - PV of public sector debt: estimated at 54.1 percent of GDP in 2015. - Public sector debt stock: estimated at 65.8 percent of GDP at end-2015. - Projection: expected to rise to 70.3 percent of GDP by 2018 before declining over the long run. - Benchmark breach: PV of public sector debt is expected to exceed 56.0 percent of the public debt benchmark for many years in the baseline scenario. - Drivers of breach: faster amortization schedule on existing 2015 debt and a higher projected disbursement schedule necessary to support growth. - Fixed primary balance scenario: assumes an unchanged primary balance from 2016 for the entire projection period; PV of the debt-to-GDP and debt-to-revenue ratios would be higher than the baseline over the projection period. ### Contingent liabilities and recapitalization risk - Bank recapitalization estimate: at least about US$250 million (1.8 percent of GDP) could add to the debt burden if realized. - Sensitivity: PV of public sector debt remains sensitive to a large, abrupt exchange rate depreciation and the realization of contingent liabilities. ### Authorities’ views and policy actions - Authorities’ recognition: broadly agree with the overall assessment, recognizing that the increased public debt puts pressure on the government budget, and the importance of focusing on servicing existing debts rather than creating new debts. - Debt target: government has an explicit debt target for external PPG debt of 50 percent of GDP. - Borrowing policy: steps taken to limit contracting of additional debt to concessional borrowing. - Institutional reform: new legal framework for the contracting and management of public debt is being prepared; Ministry of Finance reorganized to merge management of all debt (domestic and foreign) in one department. - Central bank financing: government has eliminated contracting of central bank financing of off-budget investments. - Authorities’ rationale on external debt: significant part of external debt related to large, commercially viable hydroelectric projects; authorities project energy projects will generate high and stable economic returns upon completion and will supply enough foreign exchange to service debt. - Maturity and revenue profile: relatively long maturity profile of loans and U.S. dollar returns of the exporting sectors are expected to help mitigate risks of debt distress. - Disbursement outlook: authorities anticipate a decrease in disbursements of new funds from some bilateral donors between 2016 and 2022 given that authorities are no longer allowed to start new investment projects not included in budget passed by the National Assembly. - Financing composition shift: borrowing is expected to shift from external to domestic sources over time as domestic debt markets deepen and financing becomes cheaper. *Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1753.pdf* ### 19. Lao P.D.R.’s risk of external debt distress is reclassified from moderate to high, suggesting ### 19. Lao P.D.R.’s risk of external debt distress is reclassified from moderate to high ### Reclassification and core implication - Risk rating: reclassified from "moderate" to "high". - Time horizon referenced: 2016–36. - Core implication: urgent need to tighten fiscal policy, strengthen public financial management, and develop a comprehensive medium-term debt management strategy. ### Breaches of indicative thresholds and fiscal consequences - The following indicators breach their respective policy-dependent indicative thresholds for some years: - PV of external debt-to-GDP ratio. - PV of external debt-to-revenue ratio. - Debt service-to-revenue ratio. - The PV of public sector debt-to-GDP ratio also breaches the benchmark for some years. - Projected increase in debt undermines fiscal space for countercyclical needs and potential banking sector or other contingent costs. ### Exchange-rate and currency-denomination risk - Considerable share of foreign currency–denominated debt implies that a large sudden exchange rate depreciation could significantly raise the level of debt indicators and put debt dynamics on an unsustainable path. - Stress testing referenced in figures and tables includes scenarios where the most extreme shock in some panels corresponds to a One-time depreciation shock and in others to Non-debt flows shocks. - Specific stress scenario mentioned in sensitivity analysis: One-time 30 percent nominal depreciation relative to the baseline in 2017. ### Policy recommendations (explicit) - Contract external borrowing on concessional terms as much as possible. - Recalibrate fiscal policy to rebuild fiscal buffers through: - Stronger revenue mobilization efforts. - Expenditure rationalization. - Adopt clear guidelines for the issuance of sovereign debt and guarantees to help contain and monitor contingent liabilities. - Accelerate strengthening of the debt management function by: - Developing a comprehensive medium-term debt management strategy. - Instituting a regular debt sustainability analysis to inform borrowing decisions. ### Selected stress-test and scenario notes - Figures and tables present alternative scenarios and sensitivity analyses for 2016–36 covering: - Baseline, Historical scenario, and Most extreme shock (the latter defined as the test yielding the highest ratio on or before 2026 in each panel). - Bound tests including shocks to real GDP growth, export growth, US dollar GDP deflator, net non-debt creating flows, combinations of shocks, and a one-time 30 percent depreciation. - Table-based quantities and projections cover detailed series for external debt (nominal), PV of external debt, PV of PPG external debt, PV of public sector debt, debt service ratios, grant element of new borrowing, gross financing needs, and key macroeconomic assumptions over 2013–36. *Source: IMF staff report informational annex for the 2016 Article IV consultation (Lao P.D.R.), figures and tables covering 2016–36.* ### 2. IMF ### 2. IMF ### Work Program and Technical Assistance - Periodic staff visits by IMF HQ team and resident representative based in Hanoi: July 2014 – June 2015. - Technical Assistance missions and status: - Natural resource revenue administration: Completed December 2013. - Tax administration: Completed January 2014. - Bank-supervision and regulations: Completed December 2013; November, 2014. - Consumer prices/producer prices: Completed February 2014. - National accounts statistics: Completed March 2014. - Monetary policy implementation: Ongoing. Implementation throughout FY15. - Crisis management: Completed June 2014. - TAOLAM (Technical Assistance Office for Lao P.D.R. and Myanmar) regular assistance and implementation throughout FY15 in: - External sector statistics compilation. - Strengthening fiscal reporting, Government Finance Statistics (GFS). - Public financial management – implementation of the cash-based IPSAS. - Macroeconomic framework (regular staff visits which started in October 2013; implementation throughout FY15). ### Relations with the Asian Development Bank (ADB) - ADB Country Partnership Strategy (CPS) 2012–2016 aligned with government’s Eighth Five-Year National Socio-Economic Development Plan, 2016-2020, focusing on: - Priority sectors: agriculture, natural resources and rural development; education; energy; water and other urban infrastructure and services. - Crosscutting concerns: private sector development, gender equity, public sector management, regional cooperation and integration. - CPS aims: larger operations over longer periods; synergies with Greater Mekong Subregion (GMS) strategic framework 2012–22; increased responsiveness to emerging issues. - New CPS 2017–2021: under preparation. - ADF allocation: US$116.6 million for biennial period 2015–16 (based on CPA finalized in 2014). - CPA exercise for 2017–18: endorsed by ADB management in October 2016. - As of end-2015: - Active loans/grants: US$761.8 million. - Disbursed: US$356.9 million. - 2015 contract awards: US$67.7 million. - 2015 disbursement: US$65.8 million. - ADB approvals in 2015: - Three new loan projects totalling US$95 million. - Three new technical assistance (TA) projects totalling US$1.7 million. - New projects include: Health Sector Governance Program, Second GMS Corridor Town Development Project, Vientiane Sustainable Urban Transport Project. - TA projects include: Second Technical Vocational Education Project, Support for Governance and Capacity Development, Northern Rural Infrastructure Development Project – Due Diligence of Additional Financing. - Lao P.D.R.: Asian Development Bank Commitments and Disbursements 2005-2015 (In millions of U.S. dollars): - Commitments series (2005–2016 2/): 87.0, 60.7, 47.4, 46.6, 81.2, 55.3, 53.2, 73.6, 51.0, 102.6, 80.1, 67.7, 64.3 - Disbursements series (2005–2016 2/): 78.7, 76.8, 74.8, 56.9, 75.9, 61.5, 73.2, 68.6, 76.4, 78.9, 65.8, 47.2 - Source: Data provided by the Asian Development Bank. - Notes: - Starting from 2006, the commitments and disbursements included both loans and grants. - The commitments and disbursements were estimated for 2016. ### Statistical Issues — Assessment of Data Adequacy for Surveillance (As of December 6, 2016) - General: - Data provision has serious shortcomings that significantly hamper surveillance, especially national accounts, government finance, and external sector statistics. - Shortcomings mostly due to lack of capacity; IMF conducting TA and training programs covering national accounts, prices, government finance, monetary and financial statistics, and external sector statistics. - National Accounts (NA): - Annual estimates of GDP by activity at current and constant prices (base year=2002), broadly following SNA 1993. - Participation in IMF STA project to implement SNA and ICP funded through JSA; TA received to improve annual NA and develop quarterly national accounts (QNA). - Methodology improvements made; movement toward new annual expenditure measure of GDP and preliminary GNI series. - Progress on new quarterly GDP series. - Compilation of a new benchmark GDP figure based on a supply and use table for 2012 carried out with World Bank expert; new benchmark and some back series expected to be released by the end of 2016. - Price Statistics: - Monthly CPI compiled. - New base year of 2015 (December 2015=100) applied since July 2016. - Changes: items in basket increased from 245 to 485 items; all 18 provinces covered instead of 12. - Updated weights based on 2012 Lao Social Indicator Survey (LSIS). - Major change in weights: Food and Non-Alcoholic Beverages from 36.5 percent to 46.1 percent. - Full list of updated weights not yet disclosed. - 2015 Population Census launched in October 2016. - 2015 Statistical Year Book available in October 2016. - Lao Labor Survey planned to start in November 2016 with ILO support and finish in July 2017. - Enterprise Survey design underway; completion expected December 2016. - Government Finance Statistics (GFS): - GFS remain weak; timeliness of fiscal reporting needs significant improvement. - Off-budget activities are not included and have expanded rapidly. - Annual budget and outturn data formats do not follow international standards for GFS. - Except for annual data in Official Gazette, no fiscal data are disseminated in country. - STA appointed a GFS Advisor to TAOLAM in September 2014 (activities funded by government of Japan). - Advisor focus: assist Ministry of Finance (MoF) to upgrade compilation and dissemination procedures in line with GFSM 2014; improve timely data dissemination to the IMF; reduce fiscal data discrepancies. - Advisor initiated discussions with MoF and line ministries to gather information on extra-budgetary funds to compile consolidated GFS for central government sector. - Monetary and Financial Statistics: - Classification of monetary data by institutional sector and financial instrument and valuation principles need strengthening. - Latest monetary data reported to STA refer to December 2010. - Standardized Report Forms (SRFs) not yet introduced. - External Sector Statistics: - STA appointed an External Sector Statistics (ESS) Advisor to TAOLAM in February 2014. - Significant room to improve balance of payments and external debt statistics and to compile international investment position. - Recent engagement limited to participation in regional topical workshops on ESS. - Missions assisted reconciling discrepancy between imports data published by Bank of Lao and imports derived from partner countries’ data in Direction of Trade Statistics; use of minimum prices to value vehicles and petroleum imports might explain some differences. - Greater hands-on TA from TAOLAM could accelerate progress. - Several balance of payments components missing due to lack of source data. - BOL balance of payments compilers designed an FDI survey questionnaire in context of World Bank’s LAOSTAT-Strengthening the National Statistical System Project. - Coordination on FDI needed; European Union has also appointed an expert to assist on FDI statistics. - Implementation of new international transactions reporting system (ITRS) is ongoing; testing of new ITRS expected by June 2015. - BOL does not yet compile an international investment position statement. ### Data Standards and Quality - Lao P.D.R. is currently not a General Data Dissemination System (GDDS) participant. - Government expressed intention to collaborate with IMF to move macroeconomic statistics closer to international standards, including joining GDDS. - No Data ROSC mission has been conducted. - Lao P.D.R. does not produce official Financial Soundness Indicators (FSIs) yet. ### Lao P.D.R.—Table of Common Indicators Required for Surveillance (As of December 6, 2016) — Selected entries (dates preserved) - Exchange Rates: Date of Latest Observation 11/29/16; Date Received 11/29/16; Frequency of Reporting D; Frequency of Publication D; Frequency of Data D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation 08/11/ 2016; Date Received 11/02/16; Frequency of Reporting M; Frequency of Publication I; Frequency of Data Q. - Reserve/Base Money: 08/11/2016; 11/02/16; M; I; Q. - Broad Money: 08/11/2016; 11/02/16; M; I; Q. - Central Bank Balance Sheet: 08/11/ 2016; 11/02/16; M; I; Q. - Consolidated Balance Sheet of the Banking System: 08/11/ 2014; 11/02/16; M; I; Q. - Interest Rates: September 2015; Date Received 11/02/16; M; M; M. - Consumer Price Index: 10/24/ 2016; Date Received 11/09/16; M; M; M. - Revenue, Expenditure, Balance and Composition of Financing — General Government: 05/22/ 2016; Date Received 09/13/16; I; I; I. - Revenue, Expenditure, Balance and Composition of Financing — Central Government: 05/22/ 2016; Date Received 09/13/16; Q; I; M. - Stocks of Central Government and Central Government-Guaranteed Debt: 05/18/2016; Date Received 08/04/16; NA; NA; NA. - External Current Account Balance: 09/16/ 2016; Date Received 11/02/16; Q; I; I. - Exports and Imports of Goods and Services: 10/21/ 2014; Date Received Q1/16; Q; I; I. - GDP/GNP: 09/30/15; Date Received 07/11/16; A; A; A. - Gross External Debt: 05/18/ 2016; Date Received 08/04/16; A; A; I. - International Investment Position: NA; NA; NA; NA; NA. ### Statement by Authorities — Recent Economic Developments and Outlook; Fiscal Policy (Statement by Marzunisham Omar, Hung Vinh Nguyen, Phengphaivanh Sitpraxay — January 30, 2017) - Authorities’ view: - Gratitude for mission team; broad agreement with staff’s assessment and policy advice on strengthening fiscal buffers, containing external risks, enhancing financial sector resilience, and undertaking structural reforms. - Will take staff’s recommendations into account to support implementation of National Socio-Economic Development Plan (NSEDP) 2016-20. - Recent economic developments and outlook (authorities’ reporting): - Real GDP growth: projected 6.9 percent in 2016 (growth drivers: increased investments in infrastructure, real estate development, trade and manufacturing, higher hydropower generation, tourism receipts). - 2016 growth lower than 7.5 percent recorded in 2015 due to decline in exports, slowdown in major trading partners, and lower agricultural output from poor weather. - Core inflation in 2016 stood at 1 percent (based on the average of actual monthly data in 2016). - Headline inflation 2016: 1.6 percent. - Current account deficit declined to 8.5 percent of GDP for the first three quarters of 2016. - International reserves at end-September: USD 998.59 million, equivalent to 6.44 months of imports. - Overall fiscal deficit in FY2015-16 rose to 6.9 percent (Lao fiscal year runs from October 1 to September 30; starting in 2017 fiscal year will coincide with calendar year). - Money supply grew at an appropriate pace; exchange rate stable within +/- 5 percent range against the US dollar. - Banking system sound; NPL ratio as of end-September 2016: 3.03 percent (slightly higher than targeted but manageable and lower compared to 2015). - Authorities’ 2017 projections and commitments: - Real GDP growth expected: 7 percent in 2017 (drivers: increased agriculture production, completion of hydropower projects, higher foreign investments). - Inflation expected to remain low and below 5 percent. - Current account deficit projected to narrow in the medium term following hydropower project completions and increases in exports and tourism receipts. - Authorities remain positive on sustained FDI inflows and strongly commit to structural reforms to enhance business environment and improve efficiency of public investments. - Target official reserves coverage: equivalent of 5 months of imports. - Authorities’ risk acknowledgement and prudential commitments: - Downside risks: limited fiscal space, accumulated public debt stock, undercapitalized state-owned banks, and uncertain external environment. - Commit to exercising vigilance and prudence in policy implementation. - Fiscal policy specifics: - Authorities recognize importance of increasing fiscal buffers to enhance resilience. - Medium-term budget plan projects a declining fiscal deficit for 2016-20, with an average of 4.06 percent of GDP (noted as close to staff’s adjustment scenario). - Commitment to bring down public debt to 60 percent of GDP by 2020. - Development of “Strategic Public Financial Management Plan toward 2025”, expected adoption by mid-2017. - Drafting a law on public debt to strengthen public debt management and limit off-budget payment. *Source: cr1753 - 2. IMF (PDF chapter/section).* ### 7. On domestic revenue mobilization, measures are being taken to improve revenue ### 7. On domestic revenue mobilization, measures are being taken to improve revenue ### Domestic revenue mobilization - Measures aim to improve revenue collection and broaden the tax base in line with the recently approved five-year budget plan. - Revenue collection will be strengthened by: - enforcing compliance of tax and duty exemptions and VAT deductibles; - removing tax exemptions for vehicles and construction materials for public investment projects; - focusing on large taxpayers and taxes on vehicles, petrol and luxury goods. - The authorities are reviewing existing tax rates to ensure they remain appropriate. - Taxes on vehicles and luxury goods are expected to generate higher revenue as they are now based on market prices instead of baseline prices as was the previously the case. - Tax administration improvements include: - (i) the central tax office will now be responsible for large taxpayers while the provincial offices will focus on small and medium enterprises; - (ii) the central and local authorities are closely working to reduce tax and other revenue leakages, while transfer of revenue to central budget from local authorities will also be audited and monitored closely; and - (iii) the authorities will modernize its approach to tax collection from businesses, e.g. through non-cash payment, which will enable closer monitoring. ### Expenditure rationalization and SOE/PPP management - Authorities are committed to pursue expenditure rationalization and enhancements to public spending efficiency, including: - (i) rationalizing investment incentives; - (ii) upgrading a decree on public procurement to be a law; - (iii) containing current spending by reforming the civil service to lower the public sector wage bill; and - (iv) improving monitoring of contingent liabilities, particularly from public-private partnerships (PPPs). - Recent and planned SOE and PPP actions: - the authorities recently reformed the SOE committee and are currently drafting a decree on PPPs; - restructuring and privatization of some SOEs will be continued, namely the Enterprise of Telecommunications Lao (ETL), the Lao Airline Company and two state-owned banks; - the state’s share in the ETL has been reduced to 49 percent from 100 percent. ### Public debt and borrowing - The authorities commit to keep public debt on a sustainable path. - Non-concessional borrowings increased in recent years, but were used to support the construction of hydropower projects which will contribute to generating foreign currency income to support repayments. - Future borrowings would remain mainly on concessional terms and oriented towards necessary investments. - Under current legislation, external borrowings require government’s detailed consideration of specific amount and concessionality. ### Monetary and exchange rate policy - The managed float exchange rate regime is viewed as effective in anchoring inflation given limited effectiveness of monetary policy due to dollarization and cash-based economy. - Authorities aim to minimize volatility and maintain exchange rate stability, while improving market monitoring and building up reserves. - While staff argued that greater exchange rate flexibility would help build-up reserves, the authorities consider the current level of reserves to be adequate. - To improve the exchange rate policy framework: - the central bank has since the end of 2016 started carrying out foreign exchange rate auctions with commercial banks and big exchange rate bureaus; - the central bank will continue efforts to spur development of the domestic forex derivative market by taking a lead role in operating forward, future and swap arrangements. ### Monetary operations, payments, and currency management - The authorities will continue to manage the growth of broad money in line with supporting growth and price stability. - Efforts to enhance effectiveness of monetary policy and promote use of Lao Kip include: - strengthening the transmission mechanism; - developing payment systems and the inter-bank money market; - introducing a liquidity management framework. - At the end of 2015, the authorities introduced the ad-hoc interest rate policy to provide commercial banks with guidance to lower the cost of lending in Lao Kip to more appropriate levels to promote greater access to credit by SMEs; this temporary arrangement is expected to have positive effects on productive sectors. - The authorities are strictly enforcing the Foreign Currency Management Law to limit use of foreign currencies and promote Lao Kip, including issuing a guidance at the end of 2016 to support transactions for vehicle retail sales to be made via bank transactions and in Lao Kip only for cash payments. ### Capacity building and statistics - The authorities recognize the importance of capacity building and appreciate ongoing Fund TA. - Resources have been devoted to developing economic models to support policy evaluation and formulation and to improving the quality of statistics towards meeting international standards. ### Financial stability - Policies are being implemented consistent with the “Lao Strategic Financial System Development Plan 2016- 2020 and Vision toward 2030” to maintain a stable and sound banking system, including: - improving the central bank’s legal framework to strengthen risk-based supervision and transition towards adoption of most Basel-core principles and the Basel II standard; - restructuring state-owned banks and enhancing transparency of their operations; - upgrading accounting standards in line with the International Financial Reporting Standards; - revising guidelines for bank licensing in line with AML/CFT standards; and - developing the crisis management framework. - The authorities are drafting a master plan and action plan for BASEL II implementation. - They are considering additional macroprudential measures to curtail potential risks from a rise in funding from non-core foreign sources. - At the end of 2016, the authorities introduced amendments to regulations related to overseas funding of commercial banks to support domestic lending as well as improve tracking records of funding flows and ensure the repayment ability of the banks. - Authorities appreciate Fund TA on on-site and off-site supervision manuals and World Bank TA to improve banking supervision tools and relevant regulation frameworks. - The authorities are improving compilation of financial soundness indicators, which have benefitted from Fund/Bank TA. ### Structural reforms and human development - Structural reforms remain a policy priority to improve quality of life, enhance the business environment to attract more FDI, and diversify the economy for sustainable development. - Human development priorities: - continue improvement and prioritization of education and health care; - on health care, continue focus on improving maternal health, early childcare, and nutrition in line with improving quality of public health services; - on education, enhance quality of primary education in rural areas and promote technical and vocational training to address skill mismatches and promote specialization. - The authorities are working with the World Bank to improve efficiency of public investments in education and health care. - Infrastructure and investment incentives: - prioritize public infrastructure projects in roads, railways, bridges, and transmission lines; - completion of key hydropower projects in the near term will help meet energy needs and enhance business climate and competitiveness; - regulatory improvements to attract investment include amending the investment law in early 2016 to allow targeted and time-bound tax exemptions for businesses investing in rural areas and allowing a lower tax rate for investments in the special economic zone while preparing to upgrade a decree on special economic zone to be a law in 2017. - Measures to safeguard natural resources and increase financial inclusion: - suspending licenses for new mining projects and export of unprocessed wood; - introduction of “BCEL Community Money Express” in 2015 to allow microfinance institutions to utilize commercial banks’ branches to expand outreach to rural areas; - close to completing a draft national financial inclusion strategic plan for 2016-20. ### Conclusion and commitments - The Lao authorities are implementing the new NSEDP to address remaining bottlenecks to graduate from the least developing country list by 2020 and to meet the Sustainable Development Goals. - Economic expansion is expected to bring durable reduction in poverty and substantial improvements in socio-economic conditions. - Authorities are committed to maintain macroeconomic and financial stability, promote sustainable and inclusive growth, and stand ready to implement any measures deemed appropriate. - Planned intensified efforts include improving efficiency of public service delivery, reforming public financial management, strengthening banking regulatory and supervisory framework, and enhancing the business environment. *IMF country report content (cr1753) provided in the source PDF.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1753.pdf_