## 1laoea2019002

## Source details

**Canonical URL:** [1laoea2019002](https://www.imf.org/-/media/files/publications/cr/2019/1laoea2019002.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2019/1laoea2019002.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2019/1laoea2019002.pdf.json)

---

### Belt and Road Initiative (BRI) — recent context and fiscal implications
- GDP growth slowed to 6.3 percent in 2018 from 6.8 percent in 2017, as agricultural and industrial production declined mainly due to natural disasters.
- Inflation remained below 3 percent in 2018.
- Fiscal deficit declined to 4.4 percent of GDP in 2018 from 5.5 percent in 2017, driven by lower capital spending.
- Government issued bonds to commercial banks equivalent to identified payment arrears for past infrastructure projects (3.1 percent of GDP as of 2018).
- Current account deficits widened in 2018 due to mega-projects and disaster-related imports; electricity exports grew.
- International reserves declined to around one month of imports, below staff’s assessment of adequate reserves (4‒6 months of prospective imports).
- Kip depreciated by about 3 percent against US dollar in 2018; parallel market premium hovered around two percent in 2018.
- Credit growth declined; share of foreign currency-based lending stable at around 50 percent while foreign currency share in deposits increased gradually to around 54 percent.
- Caps on banks’ deposit and lending rates (introduced in 2015) were lifted in early 2019.

### Outlook and macro risks
- Medium-term growth projected to rise close to 7 percent, supported by private investment, electricity exports, and completion of the Kunming-Vientiane railway project.
- Projected credit growth of about 11.8 percent in 2019 as interest rate caps lift and NPL resolution progresses.
- Headline inflation projected to remain moderate.
- Large current account deficits expected to persist; gross international reserves expected to remain between one and two months of imports.
- Fiscal deficit expected to decline to 4.3 percent of GDP in 2019 with measures to improve revenue administration and optimize spending; under current policies fiscal deficit expected to remain close to 4 percent of GDP and public debt over 50 percent of GDP by 2025.
- Risks tilted to the downside:
  - External: high debt with low reserves, high dollarization, balance sheet mismatches; potential sharper than expected slowdown in China; lower demand from Thailand and Vietnam reducing electricity exports; market reactions to global financial tightening affecting rollovers and issuances.
  - Domestic: delays in tax and PFM reforms leading to ad-hoc expenditure adjustments; possible re-emergence of spending arrears; vulnerabilities to natural disasters.
  - Macro-financial: sudden slowdown raising NPLs and weakening banks; sudden liquidity tightening causing a credit crunch; sudden exchange rate devaluation weakening balance sheets.

### BRI-specific findings and risks
- Official bilateral lending from China rose from US$100 million (IMF DSA 2007) to about US$3.8 billion in 2018, accounting for 42 percent of total public and publicly guaranteed debt in 2018.
- Chinese investments and PPPs contributed to rising FDI inflows from China.
- Major BRI projects concentrated in energy and transportation (e.g., Nam Ou power projects and railways).
- Kunming-Vientiane railway estimated cost: around US$5.9 billion; authorities’ contribution: US$708 million (US$480 million to be borrowed from China and US$228 million from the budget).
- Large-scale BRI projects can bridge infrastructure gaps and boost growth, trade, and financial flows, but carry significant fiscal and contingent liability risks if project cashflows are insufficient.
- Official data suggest absence of direct government guarantees on most projects, but indirect contingent liabilities could emerge given government equity ownership in PPPs.
- Potential government responses to insufficient project cashflows: restructure agreement terms, forgo part of equity ownership, mobilize additional investment to use project capacity, or other actions.
- Immediate priority: strengthen institutional capacity to manage debt and contingent liabilities; improve debt and fiscal policy, debt management capacity, project selection, and assessment of macroeconomic implications.
- Harmonize legal issues relating to PPP contracts, enhance investment protection mechanisms, and improve procurement governance.

### Fiscal and public investment management
- Near-term recovery needs from 2018 natural disasters estimated at about 3 percent of GDP (US$520 million) to be spent over the next five years.
  - Government emergency assistance: US$12 million.
  - Reprioritized planned capital investment: US$57 million.
  - Financing from development partners: US$81 million.
  - Remaining to be met by reprioritizing capital spending over 2020–23: US$370 million.
- Moratorium on new projects provides opportunity to rigorously assess project pipeline and select high social-impact and disaster-mitigating projects.
- Recommend Public Investment Management Assessment (PIMA) to support capital spending efficiency.
- Under staff’s suggested policy scenario:
  - Fiscal consolidation of an average 0.4 percent of GDP annually could reduce the fiscal deficit to two percent of GDP and bring public debt below 50 percent of GDP by 2025.
  - Spending on social development and infrastructure requires an additional 0.7 percent of GDP annually.
  - Revenue mobilization of 2.2 percent of GDP by 2025 is expected to meet consolidation and additional spending needs.
- Policy scenario assumes no additional reductions in expenditures beyond current baseline measures.

### Policy recommendations to manage BRI-related and broader fiscal risks
- Tax revenue mobilization:
  - Timely approval and implementation of the Medium-Term Revenue Strategy (MTRS: 2021‒25).
  - Simplify and broad-base VAT and Corporate Income Tax (CIT); over 80 percent of the corporate tax base estimated to be exempt.
  - Review tax exemptions and build capacity to estimate forgone revenue for transparency and informed decision making.
  - Implement customs and tax administration strategic plans and rollout of automated tax revenue information system (TaxRis); support automation with improved data gathering, risk-based administration, and trainings.
- Public Financial Management:
  - Implement multi-year PFM reform strategy; develop commitment controls and quarterly spending ceilings to reduce spending arrears risk.
  - Develop and implement medium-term fiscal frameworks and align spending with Sustainable Development Goals (SDGs).
- Debt management:
  - Consolidate Ministry of Finance oversight under the new Public Debt Management Law (2018); develop a 5-year strategy for debt management.
  - Upgrade debt recording systems and conduct detailed assessments of direct and contingent exposures from large projects.
  - Evaluate and target infrastructure projects with high growth and social returns and prioritize concessional financing where possible.
- Build resilience to natural disasters:
  - Develop a disaster recovery framework with institutional arrangements, policies, financing mechanisms, and accelerate reconstruction programs with development partner support.

### Natural disasters — exposure, damages, and financing
- Exposure: increased frequency and impact of floods; July 2018 tropical storm and Xe-Pian Xe-Namnoy dam collapse (Attapeu); August 2018 northern flooding.
- Estimated total recovery needs from 2018 natural disasters = about 3 percent of GDP (US$520 million).
  - PDNA: total damage and loss = approximately 2 percent of GDP (US$371 million); short-term recovery and reconstruction needs = approximately 0.8 percent of GDP (US$154 million); long-term needs include infrastructure upgrades and disposal of unexploded ordinances.
- PDNA sectoral totals (in millions of US dollars):
  - Social sectors total needs: 41
  - Productive sectors total needs: 47
  - Infrastructure sectors total needs: 286
  - Cross-cutting issues total needs: 145
  - Total Needs: 520
- Financing and gaps:
  - National Contingency Fund (annual appropriation US$12 million); State Reserve Fund (annual appropriation US$37 million).
  - Government emergency assistance in 2018 = US$12 million; reprioritization in 2019 = US$57 million; development partners provided US$81 million; remaining financing gap = about US$370 million.
- Fiscal risk mitigation instruments:
  - National Financial Protection Strategy under development with a three-tiered approach (contingency reserves; contingent credit; insurance/cat bonds).
  - Lao P.D.R. committed to participating in SEADRIF and secured premium financing of US$5 million.

### External position, reserves, and exchange rate policy
- External position in 2018 assessed as substantially weaker than fundamentals and desirable policies.
- Current account projected to remain around -12 percent of GDP over the short to medium term (staff/DSA projections show -12.0 percent in 2018; -12.1 percent in 2019 (Proj.); -12.0 percent in 2020 (Proj.) in some tables and -11.4 percent in DSA baseline narratives).
- Gross official reserves:
  - 2015: 987 (millions of U.S. dollars)
  - 2016: 815
  - 2017: 1,016
  - 2018: 873
  - 2019 (Proj.): 1,087
  - 2020 (Proj.): 1,458
- Reserve coverage (months of prospective goods and services imports, excluding large resource projects):
  - 2015: 1.7
  - 2016: 1.3
  - 2017: 1.5
  - 2018: 1.2
  - 2019 (Proj.): 1.3
  - 2020 (Proj.): 1.7
- Authorities assess reserve adequacy by excluding FDI-related imports and consider about 3 months of non-FDI related import coverage adequate, compared with IMF assessment of 4–6 months of coverage of total imports.
- Recommendations:
  - Increase exchange rate flexibility gradually.
  - Improve liquidity forecasting and advance provisioning for seasonal FX pressures, supported by faster fiscal tightening and greater exchange rate flexibility.
  - Avoid aggressive short-term exchange rate adjustments to prevent balance sheet deterioration.
  - Consider widening FX trading band, strengthen FX trading infrastructure, and develop the spot market.

### Debt sustainability (DSA) — key findings and scenarios
- DSA risk ratings:
  - Risk of external debt distress: High.
  - Overall risk of debt distress: High.
- Public and public guaranteed debt (percent of GDP):
  - 2015: 53.1
  - 2016: 54.2
  - 2017: 55.8
  - 2018: 57.2
  - 2019 (Proj.): 58.0
  - 2020 (Proj.): 56.2
  - 2021 (Proj.): 55.5
  - 2022 (Proj.): 54.7
  - 2023 (Proj.): 53.9
  - 2024 (Proj.): 53.3
- PV of PPG external debt-to-GDP ratio (selected):
  - 2017: 42.2
  - 2018: 43.5
  - 2019: 43.1
  - 2020: 40.7
  - 2021: 39.3
  - 2022: 37.9
  - 2023: 36.2
  - 2028: 27.7
- DSA stress tests highlight vulnerability to:
  - Shock to exports (including China slowdown).
  - One-time 30 percent depreciation of kip/U.S. dollar.
  - Large contingent liabilities from PPPs (PPP shock included: 29.4 percent of GDP) and banking sector recapitalization (5 percent of GDP shock), plus 0.5 percent of GDP for potential discovery of arrears and 4 percent of GDP for implicit SOE-related guarantees — combined contingent liability shock magnitude included: 38.9 percent of GDP.
- Customized scenario — power sector related debt:
  - Excluding an on-lent portion equivalent to 10 percent of total public debt improves debt ratios over the projection period but debt-service-to-revenue ratio continues to breach thresholds for most of the projection period.
- Policy priorities from DSA:
  - Rebuild fiscal space; adopt clear guidelines for sovereign debt issuance and guarantees; assess risks from contingent liabilities; improve debt management; prioritize concessional financing for high-return projects; implement PIMA.

### Financial sector structure, risks, and reforms
- Banking system:
  - Except for a few state-owned banks, system remains relatively well capitalized but with low profitability.
  - Official aggregate NPLs around 3 percent of gross loans (official data), with significant variation across banks.
  - Credit gap close to zero due to slowdown, legacy NPLs, and natural disasters.
  - Dollarization:
    - Foreign currency deposits share of broad money:
      - 2015: 44.4 percent
      - 2016: 47.6 percent
      - 2017: 48.9 percent
      - 2018: 49.4 percent
      - 2019 (Proj.): 49.4 percent
- Recommended financial sector reforms:
  - Implement risk-based supervision; finalize and adopt risk-based supervision manual; transition to IFRS accounting and reporting standards; identify NPLs based on solid accounting standards and provision appropriately.
  - Publish Financial Soundness Indicators per IMF methodology and adhere to timeline for Basel II transition.
  - Design prompt corrective action, crisis management, and resolution frameworks; strengthen bank balance sheets through diagnostics, loss recognition, and recapitalization; enhance external examinations of systemically important banks and prepare contingency plans including a financial safety net.
  - Improve access to finance for SMEs, simplify regulatory environment, facilitate SME financial literacy and tailored products, and support female entrepreneurs.
  - Reduce foreign currency lending risk: consider limits on banks’ net open positions, regulations on foreign currency lending, and raising foreign exchange reserve requirements as liquidity buffers.

### Economic diversification, SMEs, and competitiveness
- Growth decomposition:
  - Lao P.D.R. averaged 6.5 percent growth over the past thirty years, driven mainly by capital accumulation and large private investments into mining and hydropower.
  - Contribution of human capital limited; skills shortages cited as a top obstacle.
- Export composition:
  - Mining and electricity are major drivers; electricity’s contribution to export growth has risen as economy rebalances from mining to electricity-driven exports.
  - Exports expected to become less diversified as major mines cease operations by 2022, making electricity the dominant export.
- SME landscape:
  - Up to 99 percent of registered businesses are SMEs; they employ up to 82 percent of workforce.
  - SMEs contribute about 16 percent to GDP and nearly 13 percent of exports.
  - Less than 30 percent of SMEs can access long-term bank credit; 2018: 20 percent of small firms and 45 percent of medium-sized firms had a bank loan or line of credit.
  - Microfinance (2017): combined assets about US$450 million (about 3 percent of GDP); total loan portfolio about US$88 million at end-2017.
  - Informality: 2016 World Bank Enterprise Survey—77 percent of firms face competition from informal firms.
- Policy recommendations:
  - Invest in human capital; reduce barriers to doing business; implement Trade Facilitation Agreement; improve logistical services and adjacent infrastructure to realize railway benefits; simplify regulatory environment and improve access to finance for SMEs; tailor training for female entrepreneurs.

### Gender gaps and potential growth gains
- Women earn on average 80 percent of men’s wages.
- Blinder-Oaxaca decomposition: education, sector, experience explain only 23 percent of the 20 percent gender wage gap; more than 73 percent unexplained.
- Simulations (dynamic general equilibrium model):
  - Closing educational gap (girls 9.2 years; boys 10 years): requires additional 0.26 percentage points of GDP in spending; higher income tax and VAT revenue collections of 0.12 percent of GDP offset part; wage gap decreases by 1.4 percentage points; long-run GDP gains at least 1.3 percent.
  - Promoting women’s participation (reducing returns to experience gap and workplace discrimination): wage gap falls almost 12 percentage points; government revenues increase by 1.2 percent of GDP; output grows by 1.3 percent in the long run.
  - Promoting formal sector (10 percent increase in share of formal production): tax revenues rise about 2.6 percent of GDP; total output increases by eight percent in real terms in long run.
  - Combined scenario (education + participation + formalization): wage gap decreases almost 14 percentage points; equal LFP rates; tax revenues increase by 2.9 percent of GDP; at least a 10 percent increase in long-run GDP.
- Policy priorities: promote girls’ education, reduce barriers to female LFP, raise formal employment by reducing regulatory barriers and improving access to finance.

### AML/CFT, statistics, and capacity development
- AML/CFT:
  - National Risk Assessment completed in 2017‒18.
  - Lao P.D.R. removed from the AML/CFT grey list in 2017.
  - Next full FATF assessment scheduled for 2020; preparations underway with interagency coordination and MoUs.
  - Recommendation: continue interagency coordination and use TA from development partners to support 2020 FATF assessment.
- Statistics and data:
  - Authorities started publishing fiscal data on government operations as part of e-GDDS; e-GDDS participant since November 22, 2018; National Summary Data Page launched November 27, 2018.
  - Progress moving to BPM6; first nationwide IIP enterprise survey in 2018 with repeat underway.
  - Debt statistics reporting strengthened but debt recording software needs upgrade.
  - Monetary and financial statistics require improved coverage and consistency; BOL began disseminating 7 of 12 core FSIs but liquidity and market risk indicators are missing.
  - Table of Common Indicators Required for Surveillance (as of June 29, 2019) lists latest observations and dates for key series (exchange rates, reserves, monetary aggregates, CPI, fiscal data, external current account, trade, GDP, gross external debt).

### Authorities’ views and commitments
- Authorities recognize high public debt and commit to continued strong fiscal consolidation.
- Actions already taken:
  - Clearing outstanding expenditure arrears related to past investment projects.
  - Reforms in PFM and revenue mobilization.
  - Spending on natural disaster recovery to be reallocated from existing investment funds and not add to debt stock.
- Targets and commitments:
  - Fiscal deficit of about 2 percent of GDP could be achieved by 2025.
  - Measures include improving revenue administration, spending optimization, reduction in civil service employment, and rationalization of capital spending.
- Authorities support gradual exchange rate flexibility subject to interbank and domestic debt market reforms and emphasize economic diversification and SME development as long-term priorities.

*Source: IMF staff summary of Lao People’s Democratic Republic country material.*

### 1. Belt and Road Initiative ________________________________________________________________________8

### 1. Belt and Road Initiative

### Recent economic and financial context
- GDP growth slowed to 6.3 percent in 2018 from 6.8 percent in 2017, as agricultural and industrial production declined mainly due to natural disasters.
- Inflation remained below 3 percent in 2018.
- Fiscal deficit declined to 4.4 percent of GDP in 2018 from 5.5 percent in 2017, driven by lower capital spending.
- The government issued bonds to commercial banks equivalent to identified payment arrears for past infrastructure projects (3.1 percent of GDP as of 2018).
- Current account deficits widened in 2018 due to mega-projects and disaster-related imports; electricity exports grew.
- International reserves declined to around one month of imports, below staff’s assessment of adequate reserves (4‒6 months of prospective imports).
- The kip depreciated by about 3 percent against US dollar in 2018; parallel market premium hovered around two percent in 2018.
- Credit growth declined; share of foreign currency-based lending stable at around 50 percent while foreign currency share in deposits increased gradually to around 54 percent.
- Caps on banks’ deposit and lending rates (introduced in 2015) were lifted in early 2019.

### Outlook and risks
- Medium-term growth projected to rise close to 7 percent, supported by private investment, electricity exports, and the completion of the Kunming-Vientiane railway project.
- Projected credit growth of about 11.8 percent in 2019 as interest rate caps lift and NPL resolution progresses.
- Headline inflation projected to remain moderate.
- Large current account deficits expected to persist; gross international reserves expected to remain between one and two months of imports.
- Fiscal deficit expected to decline to 4.3 percent of GDP in 2019 with measures to improve revenue administration and optimize spending; under current policies fiscal deficit expected to remain close to 4 percent of GDP and public debt over 50 percent of GDP by 2025.
- Risks tilted to the downside:
  - External risks: high debt with low reserves, high dollarization, balance sheet mismatches; potential sharper than expected slowdown in China; lower demand from Thailand and Vietnam reducing electricity exports; reactions to global financial tightening affecting rollovers and issuances.
  - Domestic risks: delays in tax and PFM reforms could lead to ad-hoc expenditure adjustments; possible re-emergence of spending arrears; vulnerabilities to natural disasters.
  - Macro-financial risks: sudden slowdown could raise NPLs and weaken the banking system; sudden liquidity tightening could cause a credit crunch; sudden exchange rate devaluation could weaken balance sheets.

### BRI-specific findings and risks (Box 1)
- Over the past decade, official bilateral lending from China increased from US$100 million (IMF DSA 2007) to about US$3.8 billion in 2018, accounting for 42 percent of total public and publicly guaranteed debt in 2018.
- Chinese investments and PPPs have contributed to rising FDI inflows from China.
- Most major BRI projects are in energy and transportation (e.g., Nam Ou power projects and railways).
- Kunming-Vientiane railway estimated cost: around US$5.9 billion; authorities’ contribution: US$708 million (US$480 million to be borrowed from China and US$228 million from the budget).
- Large-scale BRI projects can bridge infrastructure gaps and boost growth, trade, and financial flows, but carry significant fiscal and contingent liability risks if project cashflows are insufficient.
- Official data suggest absence of direct government guarantees on most projects, but indirect contingent liabilities could emerge given government equity ownership in PPPs.
- Potential government responses to insufficient project cashflows include restructuring agreement terms, foregoing part of equity ownership, mobilizing additional investment for project capacity utilization, or other actions.
- Institutional capacity to manage debt and contingent liabilities needs strengthening; improving debt and fiscal policy, debt management capacity, project selection, and assessment of macroeconomic implications is an immediate priority.
- Harmonizing legal issues relating to PPP contracts, enhancing investment protection mechanisms, and improving procurement governance are crucial.

### Fiscal and public investment management implications
- Near-term recovery needs from 2018 natural disasters estimated at about 3 percent of GDP (US$520 million) to be spent over the next five years.
  - Government emergency assistance: US$12 million.
  - Reprioritized planned capital investment: US$57 million.
  - Financing from development partners: US$81 million.
  - Remaining to be met by reprioritizing capital spending over 2020–23: US$370 million.
- Improving efficiency of public investment is a priority; the moratorium on new projects provides opportunity to rigorously assess the project pipeline and select high social-impact and disaster-mitigating projects.
- A Public Investment Management Assessment (PIMA) is recommended to support capital spending efficiency goals.
- Under staff’s suggested policy scenario:
  - Fiscal consolidation of an average 0.4 percent of GDP annually could reduce the fiscal deficit to two percent of GDP and bring public debt below 50 percent of GDP by 2025.
  - Spending on social development and infrastructure requires an additional 0.7 percent of GDP annually.
  - Revenue mobilization of 2.2 percent of GDP by 2025 is expected to meet consolidation and additional spending needs.
- Current policy baseline includes expenditure measures (wage bill and capital investment reductions); the policy scenario assumes no additional reductions in expenditures.

### Policy recommendations to manage BRI-related and broader fiscal risks
- Tax revenue mobilization:
  - Timely approval and implementation of the Medium-Term Revenue Strategy (MTRS: 2021‒25) is a priority.
  - Simplify and broad-base VAT and Corporate Income Tax (CIT); over 80 percent of the corporate tax base estimated to be exempt.
  - Review tax exemptions and build capacity to estimate forgone revenue for transparency and informed decision making.
  - Implement customs and tax administration strategic plans and rollout of automated tax revenue information system (TaxRis); support automation with improved data gathering, risk-based administration, and trainings.
- Public Financial Management:
  - Implement multi-year PFM reform strategy; develop commitment controls and quarterly spending ceilings to reduce spending arrears risk.
  - Develop and implement medium-term fiscal frameworks and align spending with Sustainable Development Goals (SDGs).
- Debt management:
  - Consolidate Ministry of Finance oversight under the new Public Debt Management Law (2018); develop a 5-year strategy for debt management.
  - Upgrade debt recording systems and conduct detailed assessments of direct and contingent exposures from large projects.
  - Evaluate and target infrastructure projects with high growth and social returns and prioritize concessional financing where possible.
- Build resilience to natural disasters:
  - Develop a disaster recovery framework with institutional arrangements, policies, financing mechanisms, and accelerate reconstruction programs with development partner support.

*Source: IMF staff summary of Lao People’s Democratic Republic country material.*

### 13. The authorities recognized the high level of public debt and highlighted their

### 13. The authorities recognized the high level of public debt and highlighted their commitment towards continued strong fiscal consolidation

### Fiscal consolidation, public debt, and expenditure management
- The authorities recognized the high level of public debt and highlighted their commitment towards continued strong fiscal consolidation.
- Efforts already reflected in the reduction of the fiscal deficit in 2018 despite it being a challenging year.
- Actions taken:
  - Clearing the outstanding stock of expenditure arrears related to past investment projects.
  - Putting in place various reforms in the areas of PFM and revenue mobilization.
  - Specified that spending on the recovery needs from the natural disasters in 2018 will be reallocated from the existing investment funds and will not add to the existing stock of debt.
- Targets and commitments:
  - A fiscal deficit of about 2 percent of GDP could be achieved by 2025.
  - Commitment supported by efforts to improve revenue administration and spending optimization, including reduction in the size of the civil service employment and further rationalization of capital spending.
- Authorities noted the IMF’s policy recommendations will be taken into consideration and are generally already in line with the government’s commitment to maintaining financial sustainability, fiscal consolidation, and debt management.

### Box 3 — Lao P.D.R.: Profit Tax Incentives (findings and policy advice)
- Findings on tax incentives and profit tax revenue:
  - Lao P.D.R.’s profit tax revenues and productivity are the lowest compared to other countries in the region, while its profit tax rate is relatively high.
  - The Law on Investment Promotion provides tax holidays ranging between 7‒15 years, depending on the business activity and location of the business.
  - The duration of the tax holidays offered in Special Economic Zones is negotiable.
  - Additional incentives include exemptions from import duties for raw material, equipment, spare parts and vehicles directly used for production and exemptions from export duties for general goods and products.
  - Up to 80 percent of the profit tax base could be exempt.
- Methodology notes:
  - Precise data on the size of the exempt sector is unavailable; corporate tax base approximated using industry-specific value added and an estimated share of total value-added subject to profit tax.
  - Corporate tax base calculated only for the non-resource and non-agriculture sectors.
  - The standard profit tax rate of 24 percent is applied to the adjusted value added in the non-resource sector to calculate potential revenue.
  - ORBIS data on firms in the ASEAN region used to approximate the share of value added typically subject to tax; estimates show, on average, about 42 percent of the total value added is taxable.
- Quantitative result:
  - Potential profit tax revenue is about 80 percent higher than the actual revenue collections, implying a revenue gap of 4.5 percent of GDP, on average.
- Policy recommendations:
  - Adopt a rules-based tax incentives system to make the investment framework more predictable.
  - Conduct a comprehensive review of tax incentives with a view of moving to a rule-based system of granting tax incentives.
  - Consistently monitor and quantify forgone revenue due to tax incentives and report those as part of the national budget to improve transparency and accountability.

*Source: IMF staff calculations.*

### External position, reserves, and exchange rate policy
- Assessment of external position:
  - The overall external position is assessed to be substantially weaker than the fundamentals and desirable policies.
  - The current account is expected to remain in deficit with high external debt and weak reserve coverage.
- Reserve adequacy and policy metrics:
  - An import coverage of around 4‒6 months is considered adequate for Lao P.D.R. per the IMF's adequacy metrics.
  - The authorities' objective is to limit currency fluctuations of kip against US dollar within ±5 percent per annum.
  - The Bank of Lao P.D.R. (BOL) sets a daily official reference rate for kip to US dollar calculated based on the weighted average of the previous day's rate, the estimation of the FX demand and the international market rate.
- Authorities’ view on reserve adequacy:
  - Authorities assess reserve adequacy by excluding imports related to FDI, arguing large FDI projects keep their foreign exchange earnings outside the country.
  - They consider coverage of about 3 months of non-FDI related imports adequate, compared with the IMF’s assessment of 4–6 months of coverage of total imports.
  - Over the long term, economic diversification and export receipts, including from tourism, expected to strengthen the reserve position.
  - Authorities agree with a gradual approach to increasing exchange rate flexibility and note the need for reforms in interbank and domestic debt markets as preconditions.

### Monetary and exchange rate policy recommendations
- Modernizing monetary governance:
  - New legal framework: BOL Law, Commercial Bank Law, and Law on Payment Systems adopted in 2018.
  - Implementation should be supported by developing regulations, manuals, staff training, and TA from development partners.
  - Rolling out a payment clearing infrastructure for the banking system to improve transaction efficiency.
- Rebuilding reserves:
  - Structural reforms for economic diversification to strengthen reserve position over the long term.
  - Immediate priorities: improve BOL's liquidity forecasting and advance provisioning for seasonal FX pressures, supported by faster fiscal tightening and greater exchange rate flexibility.
  - Avoid aggressive short-term exchange rate adjustments to prevent rapid deterioration in balance sheets from currency mismatches and FX risks.
  - BOL may consider possible widening of the FX trading band, strengthening FX trading infrastructure, and developing the spot market.
- Developing the debt securities market:
  - Standardize issuance of government securities with a pre-specified target and a regular auction schedule.
  - Develop infrastructure of government securities trading, develop a benchmark yield curve, publish an auctions calendar, and establish consistent coordination between BOL and MoF.

### Financial sector structure, risks, and recommended reforms
- Current financial system characteristics:
  - Except for a few state-owned banks, the banking system remains relatively well capitalized but with low profitability.
  - Official data indicate aggregate NPLs continues to be around 3 percent of gross loans, but significant variation across banks is expected.
  - The credit gap in the economy is close to zero due to economic slowdown, legacy of past NPLs, and natural disasters in 2018.
  - SMEs’ limited access to finance constrains diversification (Appendix IV).
- Financial sector policy recommendations:
  - Addressing risks:
    - Implement risk-based supervision as a multi-year effort.
    - Finalize and adopt the risk-based supervision manual and gradually transition to IFRS accounting and reporting standards.
    - Identify NPLs based on solid accounting standards and provision appropriately.
    - Publish Financial Soundness Indicators (FSIs) as per the IMF's methodology.
    - Adhere to the timeline for transition towards the Basel II framework.
    - Provide clear guidance and communication on forthcoming regulatory changes.
  - Crisis management and prompt corrective action:
    - Carefully design and draft prompt corrective action, crisis management, and resolution framework.
    - Strengthen bank balance sheets via diagnostics, loss recognition, and recapitalization.
    - Enhance external examinations of systemically important banks and prepare contingency plans, including a well formulated financial safety net to supplement the new Commercial Bank Law.
  - Improving access to finance:
    - Continue reforms to enable SMEs to drive diversification and growth.
    - Simplify regulatory environment for SMEs to enable formalization, facilitate SME financial literacy and access to finance through specialized products, and tailor training programs for female business owners.
  - Reducing foreign currency lending risk:
    - In addition to limits on banks’ net open positions and regulations on foreign currency lending, consider raising foreign exchange reserve requirements as a liquidity buffer in the event of sudden tightening.

### Financial soundness and credit conditions (selected metrics noted)
- Aggregate NPLs around 3 percent of gross loans (official data).
- Credit gap is close to zero due to economic slowdown, legacy NPLs, and natural disasters in 2018.
- Selected indicators and trends in the banking system (2017–2018):
  - Nonperforming loans to total gross loans (NPL) and NPLs net of provisions to capital shown in national data (figures presented in source charts).
  - Earnings and profitability indicators depict low profitability across banks.

### Promoting competitiveness, inclusive growth, and human capital
- Development and diversification findings:
  - Over the past decade, significant progress transitioning from mining to renewable energy-driven growth, but spillovers to the rest of the economy have been limited.
  - Poverty and inequality indicators plateauing.
  - Growth accounting shows heavy reliance on capital investments; contribution of labor consistently low and human capital contribution decreasing over time.
  - Skills shortage is ranked as one of the top barriers to doing business; other barriers include burdensome legal and regulatory systems, high informality, access to land, access to finance, and fragmented investment management.
- Policy directions:
  - Bolster diversification of exports, especially among SMEs, by reducing barriers and improving access to credit.
  - Frontload complementary reforms to reap benefits from the Lao-China mega-railway project: simplify regulatory environment, improve adjacent infrastructure, logistical services, and trade facilitation networks (Appendix IV).

### Gender gaps and potential growth gains
- Current gender-related findings:
  - Labor force participation rates are relatively equitable, and women increasingly run their own businesses, but gender gaps persist in formal employment and education attainment.
  - Women are more likely to engage in unpaid family work and earn, on average, 20 percent less in hourly wages than men.
  - Lower rates of secondary school completion and high adolescent fertility rates contribute to gender gaps.
- Quantified potential impact:
  - Closing gender gaps in educational attainment, reducing barriers to female labor force participation, and promoting formal employment would help reduce gender inequality in earnings, boost tax revenues and generate additional 10 percent in long-run GDP growth (Appendix V).
- Policy recommendations:
  - Align spending priorities with SDGs, especially in health and education, to advance inclusive development objectives and strengthen budget accountability mechanisms.

### Anti-corruption, AML/CFT, and statistical capacity
- Corruption and governance:
  - Lao P.D.R. ratified the UN Convention against Corruption in 2009 and adopted key legislation including Anti-Corruption Law, Law on Criminal Procedure, AML/CFT legislation, decrees on asset declaration and financial monitoring of public servants.
  - Perception-based indicators continue to point to significant corruption vulnerabilities; need for more effective and impartial implementation of anti-corruption efforts.
  - Reducing corruption vulnerabilities could be aided by moving to a rules-based tax incentive system and reforms to strengthen fiscal governance, monetary governance, and banking supervision.
- AML/CFT progress:
  - Progress in implementing new AML/CFT legislation.
  - Lao P.D.R. removed from the AML/CFT grey list in 2017.
  - Next full assessment against the FATF standard scheduled for 2020; will focus on effectiveness as well as technical compliance.
  - National Risk Assessment completed in 2017‒18 identified key weaknesses; supervision begun in three high-risk sectors; interagency coordination mechanisms and data-gathering MoUs in place; a few AML cases are in the pipeline for legal action.
- Statistical improvements:
  - Authorities started publishing fiscal data on government operations as part of e-GDDS.
  - Progress in moving to the IMF’s BPM6 methodology.
  - Upcoming new International Investment Position survey expected to improve balance of payments accounts including private debt estimates.
  - Debt statistics reporting has strengthened but recording of debt data can be improved, including by upgrading current debt management software.
  - Authorities making strides in improving national accounts' timeliness, breadth, and frequency with TA support (Appendix VI).

### Authorities’ views (summarized)
- Agree on the need to increase gross international reserves; assess reserves excluding FDI-related imports and consider about 3 months of non-FDI related import coverage adequate.
- Emphasize long-term role of economic diversification and export receipts, including tourism, to strengthen reserves.
- Support gradual approach to exchange rate flexibility subject to reforms in interbank and domestic debt markets.
- Attribute slowdown in credit growth to economic slowdown, flooding, and lower government expenditure.
- Note actions in financial sector:
  - Strengthening risk-based supervision implemented based on IMF advice.
  - New Commercial Bank Law passed in 2018 with provisions for crisis management and bank resolution.
  - Financial soundness indicators developed and disseminated starting in 2018.
  - No plans to raise foreign exchange reserve requirements in the near term given credit slow-down.
  - Some state-owned banks are being restructured to help reduce NPLs.
  - SMEs prioritized for inclusive growth with strategies to improve access to finance, including for women, and the overall regulatory environment.
- Emphasize diversifying the economy as a key policy goal; transition from resource-based economy to agriculture, services, and manufacturing will be gradual.
- Agree that addressing gender inequality is vital and note disparities larger in rural areas; midterm review of progress towards SDGs shows improvements in several indicators.

*Source: IMF staff calculations.*

### 25. Progress is being made in implementing the new legislation on AML/CFT. The

### 25. Progress is being made in implementing the new legislation on AML/CFT. The

### AML/CFT implementation
- National Risk Assessment completed in 2017‒18.
- Interagency coordination mechanism and data gathering MoUs are in place to support preparations.
- Authorities are confident that, with implementation frameworks already in place and preparations underway, the next full assessment against the FATF standard scheduled for 2020 could be completed satisfactorily.
- Recommendation: Continue interagency coordination and use technical assistance from development partners to support the 2020 full FATF assessment.

### Growth prospects and risks
- Finding: Long-term growth prospects remain strong but with significant downside risks.
- 2018: Growth slowed mainly due to natural disasters.
- Medium-term growth drivers: private investment, electricity exports, completion of the Kunming-Vientiane railway project.
- Downside risks:
  - External developments, including a sharper than expected slowdown in China.
  - Market reactions to global financial tightening affecting exports and financing flows.
  - Slower than anticipated implementation of committed structural reforms.
  - Weather-related shocks.
- Recommendation: Provision appropriately for weather-related shocks and accelerate implementation of structural reforms.

### Fiscal consolidation and public financial management (PFM)
- Objective: Reach a fiscal deficit of 2 percent of GDP by 2025 through strong fiscal consolidation.
- Recommendation: Shift the composition of consolidation from expenditure compression to revenue generation to enable more social development spending.
- Ongoing reform priorities:
  - Implementing a well-defined MTRS.
  - Simplifying and broad-basing tax legislation.
  - Automating tax administration systems.
- Recommendation: Review forgone revenues due to current tax exemptions as part of re-building the revenue base.
- Align spending priorities with SDGs to advance inclusive development and strengthen budget accountability mechanisms.

### Debt vulnerabilities and public investment
- Finding: Debt levels are high and vulnerabilities highlighted in the DSA stem from:
  - Risks to exports.
  - Depreciation of the currency.
  - Large exposures to PPPs.
  - Potential recapitalization needs of a few state-owned banks.
  - Aftermath from potential natural disasters.
- Government commitment: Assess and target infrastructure projects with high social returns and finance these at concessional terms to the extent possible.
- Policy needs:
  - Effective implementation of the new Public Debt Management Law (2018).
  - Develop a debt management strategy supported with strong institutional capacity building.
  - Strengthen the public investment framework, including legal and institutional frameworks for PPPs.
- Sector-specific notes:
  - Intergovernmental PPAs, large export receipts, and a growing power exports market help mitigate risks related to power sector loans.
  - Recommendation: Actively diversify the power sector export market and continuously assess and monitor fiscal risks from PPPs.
- Recommendation: Step up and frontload complementary reforms to reap benefits from the mega-railway project, including simplifying regulatory environment, improving adjacent infrastructure, logistical services, and trade facilitation networks.

### Monetary governance, liquidity management, and reserves
- Finding: The overall external position is assessed to be substantially weaker than fundamentals and desirable policies.
- Current account: Expected to remain in deficit with high external debt and weak reserve coverage.
- Policy recommendations:
  - Increase exchange rate flexibility.
  - Boost productive investments to increase competitiveness and diversification.
  - Improve liquidity forecasting and advance provisioning for seasonal FX pressures, supported by fiscal tightening and greater exchange rate flexibility to help improve reserves.
  - Modernize the monetary governance framework supported by regulations, clear guidance, and a proactive communication strategy to implement newly adopted laws.
  - Establish a consistent coordinating mechanism between the central bank and the Ministry of Finance to enable development of the domestic securities market.

### Financial sector reforms and resilience
- Priority reforms:
  - Implement risk-based supervision.
  - Design prompt corrective action, crisis management, and resolution frameworks.
  - Transition towards the Basel II framework to build buffers.
- Currency and liquidity measures:
  - Implement various regulations to mitigate risks related to lending in foreign currency.
  - Consider raising foreign exchange reserve requirements to act as a liquidity buffer in case of sudden tightening.
- Communication and predictability:
  - Provide clear guidance on forthcoming regulatory changes and actively communicate policy motivation and expected outcomes.
- Support SME development:
  - Simplify the regulatory environment for SMEs.
  - Facilitate SME financial literacy and access to finance through specialized products.
  - Tailor training programs for female business owners to enable SMEs to become drivers of diversification and growth.

### Inclusive growth, human capital, and anti-corruption
- To spread benefits of growth, priorities include:
  - Consistent investment in human capital and skills training.
  - Reducing regulatory burden on SMEs.
  - Easing trade regulations.
  - Improving access to finance.
  - Greater participation of women in the formal economy.
- Governance reforms:
  - Strengthen fiscal and monetary governance supported with comprehensive legal and institutional reform strategies, automation efforts, and improving economic statistics to increase access, transparency, and efficiency of public service delivery.
  - Implement anti-corruption measures and continue the AML/CFT agenda.
- Recommendation: Continue interagency coordination in preparation for the 2020 full FATF assessment and use technical assistance from development partners to support reform agendas.

*IMF Staff Appraisal excerpt*

### 32. It is proposed that the next Article IV consultation be held on the standard 12-month

### 32. It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

### Resource-Based Growth and Inflation
- Real GDP growth:
  - 2015: 7.3
  - 2016: 7.0
  - 2017: 6.8
  - 2018: 6.3
  - 2019 (Proj.): 6.4
  - 2020 (Proj.): 6.5
- CPI (annual average):
  - 2015: 1.3
  - 2016: 1.8
  - 2017: 0.7
  - 2018: 2.0
  - 2019 (Proj.): 3.1
  - 2020 (Proj.): 3.3
- CPI (end year):
  - 2015: 0.9
  - 2016: 2.5
  - 2017: 0.1
  - 2018: 1.5
  - 2019 (Proj.): 2.9
  - 2020 (Proj.): 3.1
- Export composition and contributions:
  - Mining and electricity are major drivers of export growth; electricity’s contribution to export growth has risen as the economy rebalances from mining to electricity-driven exports.
- Flooding effects:
  - Damage from flooding added to large imports but had minimal impact on core inflation.

### Fiscal Consolidation and Social Development
- Fiscal balances (In percent of GDP):
  - Fiscal Balance (Overall):
    - 2010–2018 trend shows consolidation accelerated, but quality remained low due to underperforming revenues and spending compression.
  - Selected annual overall balance (Table 1):
    - 2015: -5.6
    - 2016: -5.1
    - 2017: -5.5
    - 2018: -4.4
    - 2019 (Proj.): -4.3
    - 2020 (Proj.): -4.1
- Government revenue and expenditure (In percent of GDP):
  - Revenue and Grants:
    - 2015: 20.2
    - 2016: 16.0
    - 2017: 16.1
    - 2018: 15.5
    - 2019 (Proj.): 15.8
    - 2020 (Proj.): 15.9
  - Expenditure:
    - 2015: 25.8
    - 2016: 21.1
    - 2017: 21.6
    - 2018: 19.9
    - 2019 (Proj.): 20.1
    - 2020 (Proj.): 20.0
  - Net acquisition of nonfinancial assets:
    - 2015: 10.4
    - 2016: 5.7
    - 2017: 9.1
    - 2018: 7.5
    - 2019 (Proj.): 7.0
    - 2020 (Proj.): 7.2
  - Expense (current):
    - 2015: 15.4
    - 2016: 15.4
    - 2017: 12.5
    - 2018: 12.5
    - 2019 (Proj.): 13.1
    - 2020 (Proj.): 12.8
- Composition issues:
  - Fiscal consolidation has relied on spending compression while revenues underperform.
  - Social spending indicators (latest available): government social assistance, health, and education spending remain below peers (Lao P.D.R. vs LIDCs and ASEAN averages).
  - Health indicators: number of infant deaths per 1,000 and life expectancy at birth indicate room for improvement relative to ASEAN and LIDCs.
  - Education: lower secondary school completion rates show Lao P.D.R. below many regional comparators.

### Banking Sector, Credit, and External Vulnerabilities
- Credit and monetary aggregates (annual percent change; Table 1 and Table 4):
  - Reserve money:
    - 2015: 6.6
    - 2016: -1.4
    - 2017: 9.5
    - 2018: 5.0
    - 2019 (Proj.): 14.8
  - Broad money:
    - 2015: 14.7
    - 2016: 10.9
    - 2017: 12.2
    - 2018: 8.4
    - 2019 (Proj.): 16.7
  - Bank credit to the economy:
    - 2015: 16.8
    - 2016: 20.9
    - 2017: 10.8
    - 2018: 3.0
    - 2019 (Proj.): 11.8
  - Bank credit to the private sector:
    - 2015: 19.3
    - 2016: 22.0
    - 2017: 14.2
    - 2018: 4.7
    - 2019 (Proj.): 13.2
- Interest rates and dollarization:
  - Lending and deposit rates show a persistent lending-deposit spread; caps on interest rates remained distortionary.
  - Dollarization metrics:
    - Foreign currency deposits share of broad money (Dollarization rate):
      - 2015: 44.4 percent
      - 2016: 47.6 percent
      - 2017: 48.9 percent
      - 2018: 49.4 percent
      - 2019 (Proj.): 49.4 percent
- Non-performing loans (NPLs) and banking sector indicators:
  - NPLs built up during the slowdown; sample bank NPL levels (latest data available by bank vary: 2012–2017).
  - Loan-to-deposit ratio (Commercial banks; In percent):
    - Total and split by foreign currency and local currency show a generally high and persistent loan-to-deposit ratio (2010M6–2018M12 series, with values in the 60–110 range depending on series).
  - Commercial banks’ foreign asset and liability positions show banks are a large net foreign debtor (series in trillions of Kip with negative net foreign assets during 2010–2018).
- External sector balances and exposures:
  - Current account balance (in millions of U.S. dollars; Table 1 and Table 2a):
    - 2015: -3,220
    - 2016: -1,752
    - 2017: -1,816
    - 2018: -2,170
    - 2019 (Proj.): -2,311
    - 2020 (Proj.): -2,543
  - Current account balance (percent of GDP):
    - 2015: -22.4
    - 2016: -11.0
    - 2017: -10.6
    - 2018: -12.0
    - 2019 (Proj.): -12.1
    - 2020 (Proj.): -12.0
  - Exports and imports (in millions of U.S. dollars; Table 1):
    - Exports:
      - 2015: 3,753
      - 2016: 4,409
      - 2017: 5,110
      - 2018: 5,295
      - 2019 (Proj.): 6,037
      - 2020 (Proj.): 6,535
    - Imports:
      - 2015: 6,728
      - 2016: 5,904
      - 2017: 6,546
      - 2018: 6,903
      - 2019 (Proj.): 7,597
      - 2020 (Proj.): 8,298
  - Gross official reserves:
    - 2015: 987 (millions of U.S. dollars)
    - 2016: 815
    - 2017: 1,016
    - 2018: 873
    - 2019 (Proj.): 1,087
    - 2020 (Proj.): 1,458
  - Reserve coverage (months of prospective goods and services imports, excluding large resource projects):
    - 2015: 1.7
    - 2016: 1.3
    - 2017: 1.5
    - 2018: 1.2
    - 2019 (Proj.): 1.3
    - 2020 (Proj.): 1.7

### Improving the Investment Climate and Competitiveness
- Doing Business and competitiveness indicators:
  - Doing Business (Distance to frontier score; 2017) shows low scores across several indicators relative to CLMV average, including Starting a business, Dealing with construction permits, Getting electricity, Registering property, Getting credit, Protecting minority investors, Paying taxes, Trading across borders, Enforcing contracts.
  - Global Competitiveness Index (2014-15; score 1-7):
    - Lao P.D.R. scores below CLMV average on many pillars including Infrastructure, Institutions, Macro environment, Health and primary education, Higher education, Goods market efficiency, Labor market efficiency, Financial market development, Technological readiness, Market size, Business sophistication, Innovation.
- Infrastructure and public capital stock:
  - Capital stock and infrastructure quality (latest available): Lao P.D.R. ranks worse than ASEAN and LIDCs on quality of overall infrastructure, air transport, roads, ports, railroads.
- Policy implications:
  - Improving infrastructure and addressing non-trade barriers could boost competitiveness, investment climate, and long-run reserve buffer accumulation to better weather external shocks.

### Medium-Term Projections and Macro Framework
- Medium-term output and prices (Table 5):
  - Real GDP growth 2019–2024:
    - 2019 (Proj.): 6.4
    - 2020 (Proj.): 6.5
    - 2021 (Proj.): 6.7
    - 2022 (Proj.): 6.8
    - 2023 (Proj.): 6.8
    - 2024 (Proj.): 6.8
  - Consumer prices (annual average) 2019–2024:
    - 2019 (Proj.): 3.1
    - 2020 (Proj.): 3.3
    - 2021–2024 (Proj.): 3.1 each year (2021: 3.1; 2022: 3.1; 2023: 3.1; 2024: 3.1)
  - GDP per capita (in U.S. dollars):
    - 2015: 2,212
    - 2016: 2,417
    - 2017: 2,555
    - 2018: 2,674
    - 2019 (Proj.): 2,783
    - 2020 (Proj.): 3,042
    - 2021 (Proj.): 3,263
    - 2022 (Proj.): 3,499
    - 2023 (Proj.): 3,751
    - 2024 (Proj.): 4,019
- Public and external debt indicators (Table 5):
  - Public and public guaranteed debt (percent of GDP):
    - 2015: 53.1
    - 2016: 54.2
    - 2017: 55.8
    - 2018: 57.2
    - 2019 (Proj.): 58.0
    - 2020 (Proj.): 56.2
    - 2021 (Proj.): 55.5
    - 2022 (Proj.): 54.7
    - 2023 (Proj.): 53.9
    - 2024 (Proj.): 53.3
  - External debt (percent of GDP):
    - 2015: 94.2
    - 2016: 89.0
    - 2017: 92.6
    - 2018: 92.9
    - 2019 (Proj.): 90.0
    - 2020 (Proj.): 84.9
    - 2021 (Proj.): 82.5
    - 2022 (Proj.): 80.5
    - 2023 (Proj.): 78.6
    - 2024 (Proj.): 76.5

### Key Tables and Quantitative Highlights (selected)
- Table 1 (Selected Economic and Financial Indicators, 2015–2020) summary:
  - Real GDP growth, CPI, fiscal aggregates, money and credit, balance of payments, reserves, exchange rate, and nominal GDP presented with estimates and projections for 2015–2020 (see figures above for select series).
- Table 2a / 2b (Balance of Payments, 2015–24):
  - Current account, merchandise trade balance, exports/imports (f.o.b./c.i.f.), services, income, transfers, capital and financial account flows, FDI, portfolio and other investment, public sector disbursements and amortization, errors and omissions, overall balance, gross official reserves, and reserve coverage (months of imports) for 2015–2024 in levels and percent of GDP.
- Table 3a / 3b (Central Government Operations, 2015–24):
  - Detailed revenue and grants, tax breakdown (Income and profit taxes, VAT, excise, import duties, royalties), nontax revenues (including dividends), grants, total expenditure breakdown (current expenditure, compensation of employees, transfers, interest payments, other recurrent), net acquisition of nonfinancial assets (domestic vs externally financed), net lending/borrowing, net incurrence of liabilities (domestic and foreign), primary balance, fiscal balance, and nominal GDP across 2015–2024.
- Table 4 (Monetary Survey, 2015–19):
  - Bank of Lao P.D.R. net foreign assets and net domestic assets, reserve money, currency in circulation, deposits, monetary survey aggregates (net foreign assets, net domestic assets, credit to the economy, broad money), growth rates, loan/deposit ratios, dollarization rate, gross reserves, and other monetary indicators.
- Table 5 (Medium-Term Macroeconomic Framework, 2015–24):
  - Consolidated medium-term projections of output, prices, public finances, money and credit, balance of payments, capital and financial account, debt indicators, and gross official reserves.
- Table 6 (Sustainable Development Goals):
  - Selected SDG indicators for Lao P.D.R. and comparators (poverty, social assistance coverage, undernourishment, urban slums, maternal mortality, births attended by skilled personnel, under-five mortality, pupil-teacher ratio, secondary enrollment, women in parliament, access to electricity, account ownership, GDP per capita growth, CO2 emissions per unit of GDP PPP) with data points and notes on data sources.

*Source: Lao People’s Democratic Republic staff report figures and tables as presented in the IMF chapter.*

### Appendix I. Risk Assessment Matrix

### Appendix I. Risk Assessment Matrix

### Risk assessment framework and likelihood definitions
- The Risk Assessment Matric (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of the IMF staff).
- Relative likelihoods:
  - “low” = probability below 10 percent
  - “medium” = probability between 10 and 30 percent
  - “high” = probability between 30 and 50 percent
- “Short term” = risk could materialize within 1 year.
- “Medium term” = risk could materialize within 3 years.
- The RAM reflects staff views as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

### Major risks, potential impacts, and policy responses
- Large natural disasters
  - Potential impact:
    - Over the short term, re-channel donor funding to recovery efforts.
    - Longer term: identify and explicitly integrate risks into fiscal frameworks and budget planning; build policy and financial buffers to enhance resilience to shocks; enhance preparedness and invest in infrastructure that can better cope with natural hazards.
- Sharp tightening of global financial conditions; Sharper-than-expected increases in U.S. interest rates
  - Potential impact:
    - FX deposit outflow, foreign reserves fall further, exchange rate pressure and the parallel market rate widening.
    - External and public debt indicators are susceptible to a sudden depreciation of the kip/U.S. dollar exchange rate given the considerable share of foreign currency denominated debt.
    - Market reactions, especially in the Thai capital market, are important for rollovers and any future issuance.
  - Policy response:
    - Build up foreign reserve to buffer against external shocks.
    - Allow for greater exchange rate flexibility.
    - Where appropriate release limited short-term liquidity to troubled banks.
    - Expedite work on a crisis management framework.
    - Maintain fiscal consolidation path.
- Weaker-than-expected global growth (US, EU, China)
  - Potential impact:
    - A sharper than expected slowdown in China — Lao P.D.R.’s largest trading partner and FDI investor — may reduce exports and decelerate FDI flows.
    - Lower demand from Thailand and Vietnam may reduce electricity exports.
  - Policy response:
    - Allow greater exchange rate flexibility to absorb external shocks.
    - Continue with structural reforms to diversify exports and trading partners.
- Macro-financial spillovers from low credit growth and high NPLs
  - Potential impact:
    - Possible credit crunch if banks cut back on lending while adjusting to NPLs.
    - Contingent fiscal liabilities related to recapitalization; possible need for liquidity support; pressure for further exchange rate depreciation.
  - Policy response:
    - Tighten accounting standards for assessing and provisioning for NPLs.
    - Improve timely reporting and dissemination of FSIs.
    - Implement risk-based supervision.
    - Continue to strengthen financial regulations and supervision with a view to ensuring financial stability.
    - Enhance external examinations of systemic banks and preparation of contingency plans including a well formulated financial safety net.
- Insufficient fiscal consolidation and realization of contingent liabilities
  - Potential impact:
    - Impacts the debt sustainability outlook.
    - Lack of fiscal space for necessary social and infrastructure spending.
    - Delays overall economic reforms.
    - Contingent liabilities arising from the large PPP capital stock.
  - Policy response:
    - Rationalize public expenditures while preserving social and infrastructure spending.
    - Continue to improve PFM framework including PIMA and implement the MTRS.
    - Strengthen tax administration and automation.
    - Negotiate financing on concessional terms to the extent possible.
    - Allow the exchange rate to adjust to absorb external shocks.
    - Improve assessment and monitoring of PPPs.

*Source: IMF staff.*

---

### Appendix II. External Sector Assessment

### Overall assessment (2018)
- The external position in 2018 was substantially weaker than that consistent with medium-term fundamentals and desirable policy settings.
- The current account deficit and external debt levels are expected to remain high with reserve coverage below adequate levels.
- Fiscal consolidation and gradual depreciation would help stabilize external debt, build reserves, and improve external competitiveness.
- Prudent debt management and efforts to boost tax revenue should continue and financing on concessional terms should be negotiated to the extent possible.

### External sustainability
- The Debt Sustainability Analysis (DSA) continues to assess Lao P.D.R.’s external risk rating as high (2019 Debt Sustainability Analysis).
- Standardized DSA stress tests indicate that a shock to exports, depreciation of the currency, and large contingent liabilities from PPPs worsen debt sustainability.
- Over the medium term, debt ratios are projected to remain above their policy thresholds, albeit trending downwards, assuming revenue administrative efforts, optimization of recurrent spending and a slowdown in capital spending.
- Negative net foreign assets position: US$ 20 billion or 159 percent of GDP at the end-2016.

### Current account
- The current account deficit is projected to remain around 12 percent of GDP over the short to medium term reflecting a relatively stronger demand for infrastructure related imports, reconstruction needs and oil.
- EBA-lite CA model estimates:
  - CA norm = a deficit of 9.1 percent of GDP in 2018
  - CA gap = -3.4 percent of GDP
  - Policy gap = -1.1 percent of GDP
  - This translates into a REER gap of 14.4 percent.
- Additional model results:
  - Actual CA = -12.0%
  - Cyclically adjusted CA = -11.6%
  - Cyclically adjusted CA Norm = -8.1%
  - Elasticity = -0.24
  - REER model gap = 23.1 percent
  - REER policy gap = 5.3%

### REER and nominal exchange rate
- The REER has gradually depreciated since the beginning of 2017, almost solely due to a depreciation of the nominal effective exchange rate (NEER) with trading partners.
- The nominal exchange rate has depreciated by about 3 percent against the U.S. dollar in 2018.
- The EBA-Lite REER model produces a larger REER gap than the CA model (23.1 percent).
- Staff assessment: the external position in 2018 was substantially weaker than that consistent with medium-term fundamentals and desirable policy settings.

### Capital flows and policy measures
- Lao P.D.R. has continued to attract sizable capital inflows mainly due to large infrastructure projects and PPPs.
- FDI flows = 7.7 percent of GDP in 2018 (averaging 8 percent of GDP over the past 5 years).
- Bonds equaling US$ 740 million were issued by the government and corporates in 2018.
- Inflows are projected to slowdown as projects reach completion over the next three years.
- Risks to a further slowdown include tightening of global financial conditions or a slowdown in China.

### Reserve coverage
- Gross official reserves = US$873 million (end-2018), covering around 1.2 months of imports.
- Reserve adequacy metrics for low income countries suggest optimal level of reserves for Lao P.D.R. is around 4 - 6 months of imports.
- Current exchange rate regime: keeping the kip broadly stable against the U.S. dollar.
- Given the low level of reserves the currency could come under further depreciation pressures.
- Over the medium-term, import coverage is projected to slowly increase but remain inadequate from higher import needs related to reconstruction in the short term and capital goods in the medium term.
- Staff assessment: reserve coverage is below adequate levels suggested by IMF adequacy metrics.
- Authorities’ methodology: assesses reserve coverage to be higher (over three months of imports) by excluding imports related to FDI.

*Source: IMF staff estimates and national authorities.*

---

### Appendix III. Coping with Natural Disaster Risks

### Exposure and recent events
- Lao P.D.R. is exposed to natural disasters compounded by climate change, environmental degradation, rapid economic growth, and urbanization.
- Increased frequency and impact of floods in recent years.
- July 2018: heavy rainfall from a tropical storm resulted in flooding across the country and the collapse of Xe-Pian Xe-Namnoy dam (Attapeu Province).
- August 2018: another tropical storm caused flooding in the northern part of the country.

### Damage, losses, and recovery needs (2018 disasters)
- Estimated total recovery needs from 2018 natural disasters = about 3 percent of GDP (US$520 million).
- Post-Disaster Needs Assessment (PDNA) estimates:
  - Total damage and loss to social, productive, and infrastructure sectors = approximately 2 percent of GDP (US$371 million).
  - Short-term recovery and reconstruction needs = approximately 0.8 percent of GDP (US$154 million).
  - Long-term needs include infrastructure upgrades and disposal of unexploded ordinances.
- PDNA note: Needs are estimated higher than the sum of damage and losses because of (i) “Build Back Better” and (ii) resumption of production, service delivery, and access to goods and services.
- PDNA sectoral totals (in millions of US dollars):
  - Social sectors: Damage 7, Losses 1, Damage and Losses 8, Needs short 27, medium 9, long 4, Total Needs 41
  - Productive sectors: Damage 19, Losses 129, Damage and Losses 148, Needs short 31, medium 13, long 3, Total Needs 47
  - Infrastructure sectors: Damage 121, Losses 95, Damage and Losses 216, Needs short 81, medium 87, long 118, Total Needs 286
  - Cross-cutting issues: Damage 15, Losses 21, Damage and Losses 109, Total Needs 145
  - Total: Damage 147, Losses 225, Damage and Losses 371, Needs short 154, medium 130, long 235, Total Needs 520

### Economic and fiscal effects
- Floods contributed to slowing real GDP growth in 2018: 6.3 percent in 2018 from 6.8 percent in 2017.
- Inflation remained below 3 percent despite disruptions.
- Current account deficit remained high, driven in part by disaster-related imports.
- Fiscal deficit consolidated as revenues underperformed and part of planned capital investment was diverted towards reconstruction funding.
- A comprehensive Post-Disaster Needs Assessment estimates total damage and loss from recent flooding and dam collapse to be about 2 percent of GDP.
- Natural disasters affect debt sustainability through damaging long-term growth and increasing borrowing for reconstruction needs from damage to infrastructure and capital.

### Government preparedness, financing, and gaps
- Government approach to disaster risk management includes disaster preparedness, investments in risk reduction and residual risk financing; gaps remain in financial resources, institutional and implementation capacity.
- Main sources of financing for natural disasters:
  - National Contingency Fund (annual appropriation US$12 million)
  - State Reserve Fund (annual appropriation US$37 million; can accumulate over the years)
  - Social Welfare Fund
- State Budget Law 2015: If 50 percent of the National Contingency Fund has been spent, it will be replenished from the State Reserve Fund.
- Government allocations and partner contributions for 2018–2019 response:
  - Government emergency assistance in 2018 = US$12 million for public works, transportation, and agriculture and forestry sectors.
  - Reprioritization in 2019 = US$57 million in planned capital investment for infrastructure repair.
  - Development partners provided US$81 million for various projects.
  - Remaining financing gap = about US$370 million.
- Authorities are drafting detailed action plans for recovery and reconstruction and reviewing project pipelines to select high impact projects aimed at increasing resilience to disaster shocks.
- Several development partners are providing TA and financing.

### Fiscal risk mitigation and instruments
- Natural disaster shocks add pressure on fiscal sustainability (see Debt Sustainability Analysis).
- Government tendency: reprioritize expenditure from capital expenditure towards disaster recovery.
- With World Bank support, a National Financial Protection Strategy against Disaster and Climate Risks is under development with a three-tiered approach:
  - Tier 1 (low severity, high frequency): contingency reserves in the budget and reserve disaster funds.
  - Tier 2 (medium-risk layer): contingent credit provided by development partners.
  - Tier 3 (low frequency, high severity): financial instruments such as insurance or catastrophe bonds.
- Lao P.D.R. has committed to participating in the first regional catastrophe risk pool under the Southeast Asia Disaster Risk Insurance Facility (SEADRIF).
  - Government of Lao P.D.R. has secured premium financing of US$5 million for joining the pool through the Southeast Asia Disaster Risk Management Project supported by the World Bank.

### SEADRIF (Box summary)
- SEADRIF: an ASEAN+3 Finance Ministers’ and Central Bank Governors’ initiative to strengthen financial resilience against climate and disaster shocks.
- Proposed regional catastrophe risk pool (Lao P.D.R. and Myanmar) will act as a reinsurance-backed disaster liquidity facility providing immediate financing after eligible natural disasters.
- Countries join by paying an insurance premium; pay-outs and triggers are predetermined.
- The pool retains some risk via joint reserves (country premium contributions and donor contributions) and transfers excess risk to international reinsurance markets.
- Underpinned by a near real time flood risk monitoring and assessment tool combining hydromet modelling with satellite technology.
- Government secured premium financing = US$5 million.

*Source: IMF staff; Post-Disaster Needs Assessment; World Bank.*

### Appendix IV. Economic Diversification

### Appendix IV. Economic Diversification

### A. Growth Decomposition
- Lao P.D.R. averaged 6.5 percent growth over the past thirty years, driven mainly by capital accumulation and large private investments into mining and hydropower since the mid-2000s.
- Contribution of human capital to growth has been limited despite a young and growing labor force.
- Major FDI projects show weak linkages to the rest of the economy and are not necessarily supported by local supply chains.
- World Bank 2016 Business Survey: shortages of skilled labor cited as one of the three major obstacles to doing business in Lao P.D.R.
- Poverty reduction: strong initial impact (1990–2005) but poverty levels remain mostly unchanged since 2005, unlike Vietnam and Cambodia which showed more lasting progress.
- Government objective (next five-year plan): rebalance from resource-based to diversified growth by investing in human capital and improving competitiveness (Table 1 summarizes historical economic policy orientation across planning periods including 1976–2020).

### B. Export Diversification
- Export concentration:
  - Mining exports (gold and copper) rose rapidly after 2005.
  - Electricity exports rose sharply since 2015.
- Export diversification levels remain low and relatively flat compared to ASEAN-5 and world averages (Figure 1).
- Natural resource abundance associated with lower export diversification (Giri, Quayyum, and Yin, 2019).
- Exports are expected to become even less diversified as major mines cease operations by 2022, making electricity the dominant export.
- Heavy reliance on external electricity demand, especially from Thailand, increases vulnerability to external demand shocks.
- Environmental vulnerabilities in the electricity sector have been highlighted by recent natural disasters (see Appendix III).
- Strategic infrastructure and regional integration:
  - 8th Five-year Plan focuses on becoming the “Battery of Asia” by boosting power exports.
  - 9th Five-year Plan envisions transforming Lao P.D.R. from land-locked to land-linked; Lao-China Railway is centerpiece.
  - Potential railway benefits: regional transit trade, tourism, logistical services, agricultural exports, integration into regional manufacturing supply chains.
  - Realizing benefits requires frontloading complementary reforms: simplify regulatory environment, improve adjacent infrastructure, logistical services, and trade facilitation.
  - Timely, coordinated reforms will help generate sufficient cashflows for the railway to meet associated debt service payments (see Box 1).

### C. SME Landscape, Financing and Informality
- SME importance and contribution:
  - Up to 99 percent of registered businesses are SMEs and they employ up to 82 percent of the total workforce.
  - SMEs contribute about 16 percent to GDP and nearly 13 percent of exports.
  - ASEAN peers: SMEs contribute between 23 and 58 percent of GDP and 10 to 30 percent of exports (for comparison).
- SME Development Plan 2016–2020 targets (base year indicators from national economic survey):
  - Employment by SMEs: 0.82 → 0.85 (2013→2020)
  - SMEs access to finance: 0.20 → 0.30
  - SME contribution to export: 0.13 → 0.20
  - SMEs that receive assistance from experts: 0.04 → 0.10
  - Number of days to register new businesses: 67 (2016) → 25 (target)
  - SMEs using computers for admin and service purposes: 0.06 → 0.15
- Key challenges for businesses and SMEs:
  - Burdensome regulatory systems, high informality, limited access to land and finance.
  - Fragmented investment management, low-quality basic infrastructure, high logistics costs, limited ICT access.
  - High non-trade barriers to trade; burdensome customs and regulatory requirements disproportionately affect SMEs.
  - Limited use of innovation and advanced technologies leads to low value added and poor quality standards.
- Gender and SME ownership:
  - At least 30 percent of SMEs are owned by women.
  - Women-owned businesses tend to be smaller, more informal, and have less access to finance than male-owned businesses.
- Access to finance:
  - Less than 30 percent of SMEs can access long-term bank credit; ASEAN average is about 50 percent.
  - 2018: 20 percent of small firms and 45 percent of medium-sized firms had a loan or line of credit from a bank, mostly short-term.
- Microfinance:
  - 2017: microfinance industry grew by 11 percent year-on-year with combined assets about US$ 450 million (about 3 percent of GDP) and total loan portfolio about US$ 88 million at end-2017.
  - Up to 4,000 village banks provide small loans in rural areas.
  - Typical bank lending rates: up to around 11 percent per annum; MFI lending rates could be as high as 30 percent.
- Informality:
  - 2016 World Bank Enterprise Survey: 77 percent of firms face competition from informal firms (up from 42 percent in 2012).
  - About 60 percent of adults use informal financial services (FinMark).
  - High informality constrains firms’ access to formal finance, capital investment, uptake of technology, and participation in business support programs.

### D. Policy Recommendations
- Broad policy directions:
  - Invest in human capital: leverage Public Financial Management reform programs and sector-specific strategies in health and education to strengthen human capital investment.
  - Reduce barriers to doing business: simplify and automate tax and regulatory systems, coupled with coordinated reform efforts and institutional capacity building.
  - Reduce non-tariff barriers to trade: implement the Trade Facilitation Agreement (TFA) ratified in 2015 to reduce non-tariff barriers and facilitate SME exports.
  - Improve logistical services and adjacent infrastructure: prioritize and accelerate supporting infrastructure and logistical services to realize benefits from the mega-railway project.
- SME-specific recommendations:
  - Learn from ASEAN peers’ experiences in new technologies and innovation for SMEs.
  - Simplify the regulatory environment to enable formalization.
  - Facilitate SME financial literacy and SME-specific loan products.
  - Enhance financial literacy at the secondary education level.
  - Tailor training programs for female business owners.

*Prepared by Naoya Adachi, Mariya Brussevich, and Anousa Kounnavong (APD).*

### 3. Women earn significantly less than men in Lao P.D.R.. Despite relatively high female LFP

### 3. Women earn significantly less than men in Lao P.D.R.. Despite relatively high female LFP

### Key findings on gender earnings and decomposition
- Women earn, on average, only 80 percent of their male counterparts’ wages.
- Using the Blinder-Oaxaca method to decompose the hourly gender wage gap:
  - Workers’ educational attainment, sector of employment, and experience explain only 23 percent of the observed 20 percent gender wage gap.
  - More than 73 percent of the gender gap in hourly wages are unexplained, pointing to other factors not included in control variables (years of education, years of experience, sector of employment, residence in urban or rural location, number of children in the household, and province are control variables).
- Barriers to education and labor force participation (LFP) faced by women can lead to significant aggregate productivity losses; reducing barriers to female LFP can lead to more efficient allocation of labor and significant output and welfare gains.

### Model and simulation setup
- A dynamic general equilibrium model is used to estimate effects of economic policies on output and gender inequality.
- The model analyzes three reform types:
  - (i) measures that reduce the gender gaps in educational attainment;
  - (ii) measures that reduce barriers to women’s participation in the labor market;
  - (iii) measures that increase the share of the formal sector in the economy.
- The model is calibrated using micro and macro data to match key features of Lao P.D.R.’s economy, including size of the formal and informal sectors, tax revenues, government spending, returns to education and experience, fertility rates, and overall income inequality.
- Households decide consumption, savings, and labor supply in formal and informal labor markets; females face lifecycle barriers including barriers to education, entering the labor force, and workplace discrimination.

### Simulation results — Reducing the gender gap in educational attainment
- Baseline: based on 2012–2013 Lao P.D.R. Expenditure and Consumption Survey:
  - Girls receive 9.2 years of education on average.
  - Boys receive 10 years of education on average.
- Current government spending on education: 2.94 percent of GDP (World Development Indicators database).
- Closing the educational gap (assuming a perfectly linear relationship between years of education and spending) would require an additional 0.26 percentage points in spending.
- Partially offsetting revenue: higher income tax and VAT revenue collections of 0.12 percent of GDP as more women enter the labor force.
- Impact on wage gap: the gender wage gap would decrease by 1.4 percentage points.
- Long-run GDP gains: closing gender education gaps could reach at least 1.3 percent due to higher human capital and higher LFP.

### Simulation results — Promoting women’s participation in the workplace
- Policies simulated: closing the gap in returns to experience between women and men and eliminating residual workplace discrimination. Examples include:
  - implementation of the law on gender equality promotion scheduled for ratification in 2019;
  - investment in girls’ education;
  - launching awareness campaigns on gender inequality especially in rural areas;
  - promoting access to child and elderly care with government and international donors’ support (community-based child care programs could be especially effective in rural areas).
- Impact on wage gap: decrease of almost 12 percentage points as women’s wages rise and men’s wages decline.
- Fiscal and output effects:
  - Government revenues would increase by 1.2 percent of GDP.
  - Output would grow by 1.3 percent in the long run.

### Simulation results — Promoting employment in the formal sector
- Policy simulated: exogenous increase in demand for formal sector output that induces a 10 percent increase in the share of formal production in the economy.
- Policy actions that could achieve this: reducing regulatory and legal barriers to starting and operating a business; increasing firms’ access to finance.
- Distributional effects: policies affect both men and women but do not produce significant changes in gender wage or employment inequality when education and labor market discrepancies remain unchanged.
- Fiscal and output effects:
  - Substantial gains in tax revenues of about 2.6 percent of GDP, mainly due to higher income and corporate tax collections.
  - Total output would increase by eight percent in real terms over the long run.

### Combined policy scenario
- Simultaneous implementation of: reducing gender gaps in educational attainment, reducing barriers to female LFP, and promoting formal production.
- Combined impacts:
  - Decrease in the gender wage gap of almost 14 percentage points.
  - Equal LFP rates between men and women.
  - Increase in tax revenues by 2.9 percent of GDP.
  - At least a 10 percent increase in GDP growth in the long run.

### Policy implications and recommendations
- Policies reducing gender inequality also boost growth and government revenues.
- Priority policy areas:
  - Promote girls’ education to close education attainment gaps.
  - Reduce barriers preventing women from achieving full labor market participation (including legal reforms, awareness campaigns, and support for child and elderly care).
  - Raise formal employment by reducing regulatory barriers and improving access to finance for firms.
- These policies work in tandem to improve labor allocation efficiency, increase human capital, and reduce labor and production frictions, thereby reducing gender gaps and promoting growth.

*LAO PEOPLE’S DEMOCRATIC REPUBLIC — INTERNATIONAL MONETARY FUND*

### 13. Work with the Asia Pacific Group on money laundering and TA providers to address

### 13. Work with the Asia Pacific Group on money laundering and TA providers to address

### AML/CFT progress
- Ongoing work with the Asia Pacific Group on money laundering and TA providers to address the full range of AML/CFT issues identified in its mutual evaluation report.
- Significant progress made in improving the AML/CFT regime, with the authorities having established the legal and regulatory framework to meet their commitments identified by the Financial Action Task Force (FATF) in 2015.
- Lao P.D.R. was removed from the AML/CFT grey list in 2017 and is no longer subject to the FATF’s monitoring process under its on-going global AML/CFT compliance process.
- The next full FATF assessment is scheduled for 2020; this assessment will focus on implementation as opposed to systems/laws.

### Data and training — overarching assessment
- Macroeconomic statistics have improved; however, more remains to be done to strengthen their quality and timely dissemination while building staff capacity.
- Common capacity development (CD) challenges include operational and resource constraints, lack of strategic prioritization at higher levels, limited time at lower levels to absorb CD resources, and the need for stronger institutional coordination.
- Stronger ownership of methodological implementation processes and results, and greater data sharing culture among and within agencies, would enable quicker progress.

### External and fiscal statistics — progress and needs
- External sector:
  - Gains on compilation and dissemination of new datasets: IIP, external debt.
  - Coverage of source data improved by engaging the Lao Statistics Bureau in data collection.
- Fiscal sector:
  - Headway on compiling quarterly and annual GFS (GFSM 2014 framework) using the latest annual budget execution data.
  - Quarterly GFS disseminated to the IMF and annual GFS published on the authorities’ website.
  - CD continues to assist with compiling and disseminating quarterly public-sector debt statistics.
  - Charts of Accounts being revised jointly with World Bank as a complement to the Bank's work on a new financial management information system.

### Monetary and financial statistics — gaps and recommendations
- Monetary and financial statistics are being compiled but lack consistency and coverage with financial soundness indicators data.
- Needed improvements:
  - Monetary statistics (e.g., data on total bank assets and financial data of nonbank financial institutions) and their timely dissemination.
  - More attention to banks’ balance sheet data to aid analysis of macro-financial linkages.
  - Consider publishing monetary data in the IMF’s standardized reporting format for monetary and financial statistics (SRFs).
- Data dissemination: the authorities have a national country data page as part of the e-GDDS framework.

### Capacity building and training activities
- Training through in-country and regional workshops and courses is ongoing to build capacity on macro-related issues.
- CD for training and analysis is expected to be a long-term process including:
  - Customized courses.
  - Specialized workshops (including during TA missions).
  - Training in methodologies used in surveillance.
- The Macroeconomic Management project organized by CDOT provides a combination of regional and in-country training courses and topical workshops.
  - Five agencies are being provided CD by CDOT: Bank of Lao P.D.R., Ministry of Finance, Lao Statistics Bureau, Ministry of Planning and Investment, and the National Institute for Economic Research.
  - Training includes building macroeconomic and forecasting frameworks to support better macroeconomic policy making.
  - An inter-agency technical committee (the core group) convenes regularly under the guidance of an inter-agency advisory committee (since 2018).
- Looking ahead: stronger inter-connectivity of the macro-framework with the DSA, liquidity forecasting, etc., is needed to build staff policy design capacity.

*Source: 1laoea2019002 - 13. Work with the Asia Pacific Group on money laundering and TA providers to address*

### 8.10 of the Sustainable Development Goals (SDGs).

### 8.10 of the Sustainable Development Goals (SDGs)

### Financial Sector Surveillance
- BOL started to disseminate seven of the 12 core Financial Soundness Indicators (FSI) on their own website; indicators related to liquidity and market risk are not disseminated.
- Underlying financial statements (e.g. balance sheet, income statement, supervisory series) and metadata are missing from BOL dissemination.
- Lao P.D.R. has not yet compiled and submitted to STA financial soundness indicators consistent with the methodology of the IMF FSI Compilation Guide.

### External Sector Statistics (ESS)
- STA is providing TA through the External Sector Statistics Advisor at the IMF Capacity Development Office in Thailand (CDOT) under the Project on the Improvement of ESS in the Asia–Pacific region (funded by the government of Japan).
- Achievements:
  - BOL implemented the first nationwide enterprise survey for the International Investment Position (IIP) in 2018 and is repeating the survey in the current year.
  - Draft IIP and external debt statistics (EDS) statements have been generated for authorities’ internal use and are pending management approval for public dissemination.
- Ongoing work and constraints:
  - TA missions focused on establishing a compilation framework for the IIP and EDS and improving estimation models for key components of the primary and secondary income account.
  - Work on EDS depends on committed support from the Ministry of Finance to provide timely, higher-frequency data and to verify state-owned enterprises’ EDS incurred in the past.
  - The main focus has shifted to improving coverage of trade in goods and services data to address currently understated trade deficits.
  - Lao P.D.R. does not currently provide IIP data to the Fund as required under Article VIII, Section 5 due to the capacity constraints described.

### Data Standards and Quality
- Lao P.D.R. has been an Enhanced General Data Dissemination System (e-GDDS) participant since November 22, 2018 and launched a National Summary Data Page on November 27, 2018.

### Table of Common Indicators Required for Surveillance (as of June 29, 2019)
- Selected latest observation and date received (as presented):
  - Exchange Rates: Observation 02/2019; Date Received 06/04/2019; Frequency: M M M
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Observation 02/28/2019; Date Received 05/10/19; Frequency: M I Q
  - Reserve/Base Money: Observation 02/28/2019; Date Received 05/10/19; Frequency: M I Q
  - Broad Money: Observation 02/28/2019; Date Received 05/10/19; Frequency: M I Q
  - Central Bank Balance Sheet: Observation 02/28/2019; Date Received 05/10/19; Frequency: M I Q
  - Consolidated Balance Sheet of the Banking System: Observation 02/28/2019; Date Received 05/10/19; Frequency: M I Q
  - Interest Rates: Observation 02/28/2019; Date Received 05/10/19; Frequency: M I M
  - Consumer Price Index: Observation 04/30/2019; Date Received 05/17/19; Frequency: M M M
  - Revenue, Expenditure, Balance and Composition of Financing—General Government: Observation 05/10/2019; Date Received 12/31/2018; Frequency: I I I
  - Revenue, Expenditure, Balance and Composition of Financing—Central Government: Observation 05/10/2019; Date Received 12/31/2018; Frequency: I I I
  - External Current Account Balance: Observation Q4 2018; Date Received 06/04/2019; Frequency: Q I I
  - Exports and Imports of Goods and Services: Observation Q4 2018; Date Received 06/04/2019; Frequency: Q I I
  - GDP/GNP: Observation 12/31/2018; Date Received 05/06/19; Frequency: A A A
  - Gross External Debt: Observation 12/31/2017; Date Received 11/28/17; Frequency: A A I
  - International Investment Position: NA NA NA

### Debt Sustainability Analysis (DSA) — Key Findings
- Risk assessments:
  - Risk of external debt distress: High
  - Overall risk of debt distress: High
  - Granularity in the risk rating: Sustainable
  - Application of judgement: No
- Summary of vulnerabilities and mitigants:
  - External and overall debt distress risks assessed as high; under the revised LIC DSF, debt carrying capacity has deteriorated.
  - Most external and total public debt indicators breach their respective indicative thresholds and benchmarks under the baseline scenarios.
  - External debt indicators are most vulnerable to shocks to exports and depreciation of the currency.
  - Public and external debt indicators are most sensitive to the contingent liabilities shock.
  - Low level of reserves and recent natural disasters increase vulnerabilities.
  - Mitigating factors: large share of electricity export earnings under long-term intergovernmental power purchase agreements; strong and growing electricity exports market; market access being maintained; around 65 percent of external debt is concessional; stock of expenditure arrears is declining.
- Immediate priorities recommended:
  - Rebuild fiscal space.
  - Adopt clear guidelines for sovereign debt issuance and guarantees.
  - Assess risks from contingent liabilities.
  - Improve debt management.
  - Assess and target infrastructure projects with high growth and social returns; finance these with concessional financing.
  - Strengthen the business environment and governance to improve investment outlook and diversify growth.
  - Increase export base, maximize proportion of concessional loans, and improve primary deficits to contain the debt burden.

### Public Debt Coverage and Country Classification
- Coverage in the DSA: central government debt, government-guarantees including to State Owned Enterprises (SOEs), and central bank borrowing. Some SOE debt on-lent by the central government is included. No outstanding debt to the IMF.
- Under the Public Debt Management Law (2018), off-budget borrowing not approved by the National Assembly is prohibited; all borrowing must be approved by the National Assembly and the Ministry of Finance negotiates all loans. Directives to implement the law are being defined.
- Non-guaranteed SOE debt is covered in the PPP contingent liability shock.

### Key Public Debt Statistics and Composition (2018)
- Lao P.D.R.’s total public debt is estimated to be 57.2 percent of GDP as of 2018.
- Public debt components:
  - Public domestic debt: 5.8 percent of GDP
  - Public and publicly guaranteed (PPG) external debt: 51.4 percent of GDP
- Domestic debt composition: T-bills and T-bonds mainly held by banking sector and the central bank.
- Resolution of domestic payment arrears related to public infrastructure projects added around 3 percent of GDP to domestic debt in 2018.
- Concessionality and creditor shares:
  - Close to 65 percent of the public external debt is on concessional and semi-concessional terms.
  - China: 43 percent of total PPG external debt (largest bilateral creditor; primarily concessional).
  - ADB and IDA: 14 percent of total PPG external debt (largest multilateral creditors).
  - Estimated outstanding sovereign bond amount at end-2018: US$ 1.6 billion.

### Private External Debt and Contingent Liabilities
- Total private external debt estimated at 41.5 percent of GDP as of 2018.
- DSA shock calibrations and contingent liability composition:
  - Magnitude of contingent liability shock included in DSA: 38.9 percent of GDP. This accounts for potential liabilities from PPPs, realization of potential arrears, and banking system recapitalization needs.
  - PPP shock included: 29.4 percent of GDP (to capture contingent liabilities arising from non-SOE debt in PPPs).
  - A 0.5 percent of GDP shock is included to account for the potential discovery of arrears.
  - A 5 percent of GDP shock is included to capture potential restructuring/recapitalization needs in the banking sector (default LIC DSF minimum).
  - An additional 4 percent of GDP added to the contingent liability shock to cover potential implicit guarantees related to SOE domestic borrowing not explicitly guaranteed by the central government.

### Fiscal Policy and Public Debt Targets
- Policy objective: steady fiscal consolidation aimed at reducing the fiscal deficit to about 2 percent of GDP and public debt below 50 percent of GDP by 2025.
- Authorities have incorporated SDGs in their 5-year development plan.
- Recommendations for achieving SDGs and debt targets:
  - Seek external borrowing on concessional terms and limit commercial-term financing.
  - Prioritize concessional financing for infrastructure with high returns.
  - Maintain moratorium on new capital investment projects pipeline and plan reduction in civil service employment to help consolidation.

### Baseline Macroeconomic Scenario and Assumptions
- Baseline scenario assumptions are consistent with the staff report. Main assumptions:
  - Real GDP growth: growth moderated in 2018 due to floods and natural disasters; expected to recover in 2019 but at a pace somewhat slower compared to previous DSA. Over the medium-term, growth expected to pick up supported by infrastructure improvements, an additional 2,200 MW of power generation from several power projects (expectation of electricity exports to new markets), and completion of the Kunming-Singapore Railway Line.
  - Inflation: headline inflation remained moderate despite disruptions; projected to rise temporarily given pass-through of kip depreciation and higher oil prices.
  - Current account: large deficit in 2018 driven partly by disaster-related and mega-project imports; largely financed by FDI inflows and external debt, keeping international reserves at about one month of imports. Current account deficit projected to remain around 11.4 percent of GDP over the short to medium term.
  - External financing: financing from large creditors currently in place; authorities continue to issue on the Thai capital market. Multilateral financing expected to remain stable but slowly declining; bilateral financing projected to pick up. Continued access to the Thai market over the medium term expected. FDI inflows remain around 7.8 percent of GDP.
  - Fiscal outlook: fiscal consolidation brought fiscal deficit to 4.4 percent of GDP in 2018. Fiscal deficit expected to decline further in 2019 supported by revenue administrative efforts and some optimization of recurrent spending. Capital spending will decline due to temporary suspension of new investment projects to prioritize post-disaster reconstruction. Authorities developed a Medium-Term Revenue Strategy (MTRS: 2021–25) and have commenced introduction of an automated tax revenue information system (TaxRis).
  - Realism of baseline: PPG external debt-to-GDP ratio follows a similar path compared with the DSA from five years ago (2013) given ongoing fiscal consolidation. Projected growth path is in line with a fiscal multiplier of 0.2.

### Key Macroeconomic Assumptions: 2018–24 (average) — Selected Figures
- Real GDP growth (in percent): Baseline 6.6; Previous DSA 6.9
- Inflation (percent change, y/y): Baseline 3.0; Previous DSA 3.0
- Primary fiscal balance (in percent of GDP): Baseline -2.4; Previous DSA -2.9
- Overall fiscal balance (in percent of GDP): Baseline -4.0; Previous DSA -4.6
- Current account (in percent of GDP): Baseline -11.4; Previous DSA -11.6
- FDI (in percent of GDP): Baseline 6.8; Previous DSA 11.8

*Source: 1laoea2019002 - 8.10 of the Sustainable Development Goals (SDGs).*

### 8. The new LIC DSF determines the debt sustainability thresholds by calculating a composite

### 1laoea2019002 - 8. The new LIC DSF determines the debt sustainability thresholds by calculating a composite

### Debt carrying capacity and applicable thresholds
- The CI score based on both the 2019 April WEO and 2018 October WEO data corresponds to a "weak" rating for Lao P.D.R.
- Under the previous DSF, debt-carrying capacity was determined by the World Bank’s CPIA:
  - CPIA average for 2014–16: 3.29 (classified as medium policy performance).
  - CPIA average for 2015–2017: 3.22 (indicator has deteriorated marginally).
- Debt carrying capacity classification is weaker under the new LIC DSF, resulting in lower thresholds:
  - PV of PPG external debt-to-GDP threshold decreased from 40 to 30 percent.
  - PV of PPG external debt-to-exports decreased from 150 to 140 percent.
  - Debt service-to-exports decreased from 20 to 10 percent.
  - Debt service-to-revenue decreased from 20 to 14 percent.
  - Indicative threshold for PV of total public debt-to-GDP: 35 percent.

### Standardized stress tests and vulnerabilities
- Major shocks that the DSF highlights as weakening external debt metrics:
  - Shock to exports (including a sharper than expected slowdown in China).
  - One-time 30 percent depreciation shock of kip/U.S. dollar.
  - Large contingent liabilities from PPPs and banking sector recapitalization needs.
  - Lower demand for electricity reducing export receipts.
- Key implications from stress tests:
  - Export shocks affect export-based ratios and underscore need to diversify from a resource-based economy.
  - The 30 percent depreciation shock deteriorates external and public debt service indicators due to considerable foreign currency–denominated debt.
  - Combined contingent liability shock from PPPs and recapitalization keeps all four external debt ratios above their respective benchmarks throughout the projection period.

### Market-financing risk indicators
- Lao P.D.R. has been accessing the Thai capital market regularly since first issuance in 2013 to finance infrastructure.
- Market-financing module results:
  - Lao P.D.R. has a low liquidity risk based on the gross financing need being below the 14 percent benchmark.
  - There is no Emerging Market Bond Index (EMBI) or equivalent spread available for Lao P.D.R.
  - Table entries in the source indicate an EMBI value of 570 (noted in the exercise materials).

### Natural disasters: losses, reconstruction needs, and fiscal impact
- 2018 natural disaster (floods and dam collapse) impacts:
  - Direct damage and losses: 2 percent of GDP.
  - Total recovery needs: 3 percent of GDP (US$520 million).
  - Short-term recovery and reconstruction needs: 0.8 percent of GDP (US$154 million).
  - Real GDP growth slowed to 6.3 percent in 2018 (from 6.8 percent in 2017).
  - Fiscal deficit estimate revised up to 4.4 percent in 2018 (from tax exemptions to affected businesses).
  - Fiscal deficit in 2019 revised up to 4.3 percent due to ongoing reconstruction efforts.
  - Government emergency assistance: LAK 100 billion (US$11.7 million) in 2018; LAK 500 billion (US$57 million) in 2019.
  - Developing partners allocated approximately US$81.1 million; remaining gap approximately US$370.2 million expected to be met by reprioritizing capital spending over 2020-23.
  - Government joined regional catastrophe risk insurance pool and secured premium financing of US$5 million through WB support.
- Tailored disaster test:
  - Includes US$520 million (3 percent of GDP) reconstruction needs from the PDNA.
  - Debt ratios deteriorate significantly compared with the baseline, highlighting need to build fiscal and external buffers.

### External and public debt projections (baseline and trends)
- External PPG debt indicators in the baseline:
  - All but one external PPG debt indicators breach their policy relevant thresholds in the baseline.
  - PV of external debt-to-GDP ratio remains above its threshold in the near term then trends downwards and goes below the threshold over the projection period.
  - Debt service-to-exports ratio hovers around the threshold.
  - Debt service-to-revenue ratio expected to remain above its threshold during the projection period given large debt service payments and low revenues.
- PV of total public debt-to-GDP:
  - Remains above the public debt benchmark throughout the projection period but is projected on a downward trend.
  - Under the baseline, PV of public debt falls from 50.2 percent of GDP in 2018 to 45.6 percent of GDP by 2028.

### Assessment of risk rating and mitigating factors
- Debt distress assessment:
  - The DSA under the new LIC DSF framework suggests the risk of external debt distress is high and the overall risk of debt distress is high.
  - Vulnerabilities: shock to exports, currency depreciation, exposure to PPPs, banking sector recapitalization needs, potential natural disasters, and liquidity risks given debt service-to-exports and debt service-to-revenue ratios well above thresholds.
- Mitigating factors:
  - Large export-oriented electricity sector: Over 90 percent of electricity exports are under intergovernmental PPAs that cover 25–30 years of export earnings.
  - Total share of electricity sector in total stock of PPP investments: around 75 percent.
  - Government equity shares in export-oriented PPPs range primarily between 15‒25 percent (with two projects around 60 percent).
  - Long-term PPAs and project cashflows support access to affordable long-term financing; many SOL projects have guaranteed off-taker arrangements.
  - A large share of debt remains mostly concessional; there are no external payment arrears; stock of domestic arrears is declining.
  - Market access to the Thai capital market is being maintained with favorable terms.
  - Authorities are reviewing tax exemptions in power sector and implementing Medium-Term Revenue Strategies (MTRS) to strengthen revenues.
  - Potential upside if projected fiscal adjustment plans materialize beyond the conservative baseline.

### Policy recommendations and institutional measures
- Fiscal and debt management:
  - Build policy buffers: increase domestic revenues and foreign reserves.
  - Continue structural reforms to improve growth potential and resilience, including economic diversification.
  - Effective implementation of new Public Debt Management Law and a 5-year public debt management strategy with institutional capacity building.
  - Be cautious about borrowing that leads to rapid debt buildup; prioritize infrastructure projects with high social and growth impact; finance on concessional terms where possible.
  - Regularly assess fiscal risks of PPPs and develop legal and institutional frameworks for PPPs; consider a Public Investment Management Assessment (PIMA) to set priorities for public investment reform.
- Financial sector and reserves:
  - Remain vigilant of potential vulnerabilities in the banking system and monitor banks’ balance sheets as they conform to new regulations.
  - Strengthen foreign exchange buffers given lumpy external debt repayments and low level of foreign reserves.
- Revenue and taxation:
  - Review current tax exemptions for power projects, wind down tax-exemption periods, and implement the MTRS to strengthen revenues.

### Authorities’ views
- Authorities acknowledge the high debt burden and report measures to reduce risks:
  - Suspending new investment projects, new Procurement Law, and intentions to borrow on concessional terms.
  - Stock-taking and prioritization of existing projects.
  - New Public Debt Management Law consolidates Ministry of Finance oversight over debt via budgeting and project approval processes.
  - Review of power sector related debt and moratorium on new hydropower projects.
  - Expectation that revenues from existing projects will be stable and cover related debt service.
  - Diversification of electricity export markets underway with negotiations for PPAs with Vietnam, Cambodia, and Myanmar.
  - Expect stronger revenues and dividends on expiry of tax-exemption periods.
  - Authorities view contingent liability calibrations in DSF as on the higher side and reiterate that debt is on a sustainable path given their measures.

### Customized scenario — power sector related debt
- Context and assumptions:
  - Government participation in large power-exporting IPPs is via equity through SOEs holding equity shares ranging between 15 and 60 percent.
  - Over 70 percent of total power generation capacity is exported to the guaranteed Thai market; Thailand is the main off-taker via EGAT.
  - Completed mega IPP projects with long-term PPAs and strong cashflows support access to long-term affordable financing.
- Customized treatment in the scenario:
  - The on-lent portion of PPG debt to two power sector SOEs with export exposures to EGAT and guaranteed by PPAs have been excluded from public debt — equivalent to 10 percent of total public debt.
  - Forthcoming disbursements are adjusted down by 10 percent to reflect continued on-lending covered by PPAs.
- Results:
  - Debt ratios improve significantly over the projection period once this portion of power sector related debt is excluded.
  - Debt-service-to-revenue ratio continues to breach its threshold for most of the projection period, but reviewing tax exemptions and implementing MTRS are expected to strengthen revenues and improve outlook.
  - Note: conservative assumption — total on-lending to power sector from central budget is 35 percent of total external public debt, so exclusion of 10 percent is cautious.

*IMF staff summary based on the chapter text.*

### Box 2. Customized Scenario – Power Sector Related Debt (Concluded)

### Box 2. Customized Scenario – Power Sector Related Debt (Concluded)

### Indicators and scenario overview
- Figures present indicators of public debt under alternative scenarios for 2018–28, including:
  - Baseline, Historical scenario, Most extreme shock (the stress test that yields the highest ratio in or before 2028), and user-defined/customized stress tests.
- Notes on stress-test presentation:
  - "The most extreme stress test is the test that yields the highest ratio in or before 2028. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most extreme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented."
- Shares of marginal debt in the public DSA can include:
  - External PPG medium and long-term; Domestic medium and long-term; Domestic short-term.
- Public DSA notes:
  - "The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections."
- External DSA notes:
  - "All the additional financing needs generated by the shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA. Default terms of marginal debt are based on baseline 10-year projections."

### Key projections and indicators (selected values preserved exactly)
- External debt (nominal) 1/ (in percent of GDP; historical and projections):
  - 2017: 92.6
  - 2018: 92.9
  - 2019: 90.0
  - 2020: 84.9
  - 2021: 82.5
  - 2022: 80.5
  - 2023: 78.6
  - 2028: 65.3
  - 2038: 45.9
- Public and publicly guaranteed (PPG) share of external debt (percent of GDP):
  - 2017: 49.6
  - 2018: 51.4
  - 2019: 50.8
  - 2020: 47.9
  - 2021: 46.4
  - 2022: 44.7
  - 2023: 42.8
  - 2028: 33.9
  - 2038: 37.8
- Change in external debt (aggregate):
  - 2017: 3.7
  - 2018: 0.3
  - 2019: -2.9
  - 2020: -5.1
  - 2021: -2.4
  - 2022: -2.0
  - 2023: -1.9
  - 2028: -3.5
  - 2038: -2.0
- Identified net debt-creating flows (selected):
  - 2017: -5.3
  - 2018: -1.4
  - 2019: -1.2
  - 2020: -0.4
  - 2021: -0.8
  - 2022: -0.7
  - 2023: -0.2
  - 2028: -0.4
  - 2038: -1.5
- Non-interest current account deficit (percent of GDP):
  - 2017: 8.5
  - 2018: 9.8
  - 2019: 9.6
  - 2020: 10.1
  - 2021: 9.4
  - 2022: 9.2
  - 2023: 8.0
  - 2028: 7.6
  - 2038: 4.4
- Net FDI (negative = inflow) (percent of GDP):
  - 2017: -9.9
  - 2018: -7.8
  - 2019: -7.6
  - 2020: -7.1
  - 2021: -6.7
  - 2022: -6.4
  - 2023: -6.1
  - 2028: -5.3
  - 2038: -4.4
- Endogenous debt dynamics (contribution, percent of GDP):
  - 2017: -3.9
  - 2018: -3.3
  - 2019: -3.2
  - 2020: -3.4
  - 2021: -3.5
  - 2022: -3.5
  - 2023: -2.1
  - 2028: -2.7
  - 2038: -1.5
  - Contribution from nominal interest rate (selected): 2017: 2.2; 2018: 2.2; 2019: 2.4
  - Contribution from real GDP growth (selected): 2017: -5.7; 2018: -5.5; 2019: -5.7
- Residual (percent of GDP):
  - 2017: 9.0
  - 2018: 1.6
  - 2019: -1.7
  - 2020: -4.7
  - 2021: -1.6
  - 2022: -1.3
  - 2023: -1.7
  - 2028: -3.0
  - 2038: -0.5

### External debt sustainability indicators (selected)
- PV of PPG external debt-to-GDP ratio:
  - 2017: 42.2
  - 2018: 43.5
  - 2019: 43.1
  - 2020: 40.7
  - 2021: 39.3
  - 2022: 37.9
  - 2023: 36.2
  - 2028: 27.7
  - 2038: 31.1
- PV of PPG external debt-to-exports ratio:
  - 2017: 120.2
  - 2018: 126.8
  - 2019: 118.9
  - 2020: 113.4
  - 2021: 107.8
  - 2022: 102.5
  - 2023: 97.6
  - 2028: 81.3
  - 2038: 104.9
- PPG debt service-to-exports ratio:
  - 2017: 7.4
  - 2018: 9.6
  - 2019: 11.2
  - 2020: 11.6
  - 2021: 10.1
  - 2022: 9.8
  - 2023: 10.0
  - 2028: 9.0
  - 2038: 8.2
- PPG debt service-to-revenue ratio:
  - 2017: 17.9
  - 2018: 22.8
  - 2019: 27.9
  - 2020: 28.3
  - 2021: 24.6
  - 2022: 23.9
  - 2023: 24.1
  - 2028: 19.7
  - 2038: 13.8

### Key macroeconomic assumptions (selected)
- Real GDP growth (in percent):
  - 2017: 6.8
  - 2018: 6.3
  - 2019: 6.4
  - 2020: 6.5
  - 2021: 6.7
  - 2022: 6.8
  - 2023: 6.8
  - 2028: 6.5
  - 2038: 5.4
  - Average (projection block): 7.6 and 6.6 appear in table as projection averages
- GDP deflator in US dollar terms (change in percent):
  - 2017: 0.4
  - 2018: -0.1
  - 2019: -0.8
  - 2020: 4.1
  - 2021: 2.0
  - 2022: 1.9
  - 2023: 1.8
  - 2028: 1.8
  - 2038: 1.8
- Effective interest rate (percent) 4/:
  - 2017: 2.6
  - 2018: 2.5
  - 2019: 2.8
  - 2020: 2.4
  - 2021: 2.2
  - 2022: 2.1
  - 2023: 3.9
  - 2028: 2.2
  - 2038: 2.0
- Growth of exports of G&S (US dollar terms, in percent):
  - 2017: 14.3
  - 2018: 3.7
  - 2019: 11.6
  - 2020: 9.7
  - 2021: 10.6
  - 2022: 10.2
  - 2023: 9.1
  - 2028: 7.6
  - 2038: 5.8
- Government revenues (excluding grants, in percent of GDP):
  - 2017: 14.5
  - 2018: 14.5
  - 2019: 14.6
  - 2020: 14.8
  - 2021: 15.0
  - 2022: 15.1
  - 2023: 15.3
  - 2028: 15.6
  - 2038: 17.6

### Public sector debt (baseline scenario, selected)
- Public sector debt (percent of GDP):
  - 2017: 55.8
  - 2018: 57.2
  - 2019: 58.0
  - 2020: 56.2
  - 2021: 55.5
  - 2022: 54.7
  - 2023: 53.9
  - 2028: 50.0
  - 2038: 42.8
- Change in public sector debt (percent of GDP):
  - 2017: 1.6
  - 2018: 1.4
  - 2019: 0.8
  - 2020: -1.7
  - 2021: -0.7
  - 2022: -0.8
  - 2023: -0.8
  - 2028: -0.8
  - 2038: -0.6
- Identified debt-creating flows (percent of GDP):
  - 2017: 1.8
  - 2018: 1.3
  - 2019: 0.8
  - 2020: -1.7
  - 2021: -0.7
  - 2022: -0.8
  - 2023: -0.8
  - 2028: -0.9
  - 2038: -0.6
- Primary deficit (percent of GDP):
  - 2017: 4.1
  - 2018: 2.7
  - 2019: 2.4
  - 2020: 2.5
  - 2021: 2.4
  - 2022: 2.3
  - 2023: 2.2
  - 2028: 1.8
  - 2038: 1.2
- Revenue and grants (percent of GDP):
  - 2017: 16.1
  - 2018: 15.5
  - 2019: 15.8
  - 2020: 15.9
  - 2021: 16.0
  - 2022: 16.1
  - 2023: 16.3
  - 2028: 16.6
  - 2038: 18.4
- Automatic debt dynamics (percent of GDP):
  - 2017: -2.3
  - 2018: -1.3
  - 2019: -1.7
  - 2020: -4.3
  - 2021: -3.1
  - 2022: -3.1
  - 2023: -3.0
  - 2028: -2.6
  - 2038: -1.9
- PV of public debt-to-GDP ratio:
  - 2017: 48.7
  - 2018: 49.9
  - 2019: 50.6
  - 2020: 49.2
  - 2021: 48.7
  - 2022: 48.1
  - 2023: 47.6
  - 2028: 44.0
  - 2038: 36.2
- PV of public debt-to-revenue and grants ratio:
  - 2017: 303.0
  - 2018: 322.3
  - 2019: 321.0
  - 2020: 309.8
  - 2021: 304.2
  - 2022: 298.5
  - 2023: 291.6
  - 2028: 265.1
  - 2038: 197.0
- Debt service-to-revenue and grants ratio 3/:
  - 2017: 32.3
  - 2018: 42.3
  - 2019: 32.6
  - 2020: 38.4
  - 2021: 30.0
  - 2022: 29.7
  - 2023: 31.9
  - 2028: 33.8
  - 2038: 18.5
- Gross financing need 4/:
  - 2017: 9.3
  - 2018: 9.2
  - 2019: 7.6
  - 2020: 8.6
  - 2021: 7.2
  - 2022: 7.1
  - 2023: 7.4
  - 2028: 7.4
  - 2038: 4.7

### Sensitivity analysis and tailored stress tests (high-level)
- Sensitivity tables present results for 2018–28 for key indicators (PV of debt-to-GDP, PV of debt-to-exports, debt service-to-exports, debt service-to-revenue), across:
  - Alternative Scenarios (A1: key variables at historical averages)
  - Bound Tests (B1: Real GDP growth; B2: Primary balance; B3: Exports; B4: Other flows; B5: Depreciation; B6: Combination)
  - Tailored Tests (C1: Combined contingent liabilities; C2: Natural disaster; C3: Commodity price — marked n.a. where not applicable; C4: Market financing)
- Examples of stress outcomes (selected table cells preserved exactly):
  - PV of debt-to-GDP ratio (percent): Baseline sequence cited as 44 43 41 39 38 36 34 31 30 29 28 (2018–2028 in table header).
  - Tailored test C1 (Combined contingent liabilities) produces higher PV ratios in the sensitivity tables (e.g., values such as 46 61 58 56 55 54 53 50 48 47 45 in one row).
  - Bold values in sensitivity tables indicate breaches of thresholds or benchmarks.

### Drivers of debt dynamics and realism tools (visual summaries referenced)
- Drivers of debt dynamics section separates contributions to debt change into:
  - Residual; Price and exchange rate; Real GDP growth; Nominal interest rate; Current account + FDI; Change in PPG debt.
- Realism tools illustrate fiscal adjustment paths and possible real GDP growth paths under alternative fiscal multipliers (Multiplier = 0.2, 0.4, 0.6, 0.8) with bars for annual projected fiscal adjustment (in percentage points of GDP) and lines for growth paths (in percent).

*Sources: Country authorities; and staff estimates and projections.*

### 1.  Our Lao authorities would like to express their gratitude to the mission team for the

### Our Lao authorities would like to express their gratitude to the mission team for the

### Introduction
- Authorities appreciate the comprehensive assessment and constructive policy dialogue during the Article IV consultation and generally agree with staff’s assessment of the outlook, risks, and policy priorities.
- Commitment to carefully consider recommendations when formulating policies and pursuing reforms to achieve a more sustainable, broad-based and inclusive economic growth.
- Lao PDR passed the first step towards graduation from Least Developed Country (LDC) status as assessed by the UN Committee for Development Policy in March 2018 and aims to achieve formal graduation from LDC status in 2024.

### Economic developments and outlook: Sustaining growth while reducing vulnerabilities
Key developments in 2018
- Real GDP growth: 6.3 percent in 2018 (moderated from the previous year).
- Inflation: average of 2.0 percent in 2018 (from about 0.8 percent a year earlier).
- Fiscal deficit: narrowed to 4.4 percent of GDP in 2018 (from 5.5 percent in 2017).
- Public debt: remains elevated; risk of external debt distress is high.
- Broad money growth: 8.4 percent.
- Credit growth to the private sector: 4.7 percent in 2018.
- Banking system: total assets grew by 6.5 percent and deposits by 8.3 percent in 2018.
- Current account deficit: about 8.0 percent of GDP as of end-2018.
- International reserves: about 3.2 months of non-FDI related imports.

Near-term outlook and drivers
- 2019 GDP projection: 6.7 percent supported by electricity generation, construction and tourism.
- Inflation for 2019: expected to remain manageable at around 3.0 percent.
- Growth drivers: completion of several hydropower plants, Vientiane-Vangvieng expressway, Lao-China railway, Visit Laos-China Year 2019, and an 8-point government program (Prime Minister Order No. 12/PM) to stimulate domestic production and services.
- Fiscal consolidation objective: steady decline in the fiscal deficit to 2.0 percent of GDP by 2025.
- Authorities emphasize rebuilding fiscal and external buffers and reducing vulnerabilities amid global uncertainties and natural disaster risks.

### Sustaining fiscal consolidation and reforms towards a sustainable public debt path
Revenue mobilization measures
- ICT adoption in tax administration, including electronic tax payments through the banking system for road taxes (resulted in about six-fold increase in road tax receipts).
- Electronic payment rollout for land, VAT and income taxes.
- Introduction of the Tax Revenue Information System (TaxRIS) for systematic monitoring of revenue collection.
- Organizational improvements at central and district levels and systematic training for tax officials.
- Enterprise survey completion and strengthening of a nationwide-linked revenue database.
- Review of tax laws to address revenue leakages; Customs Department monitoring of imports of key commodities.
- Strict implementation of tax exemptions based on the Law on Investment Promotion.
- Development of a Medium-Term Revenue Strategy with FAD support.

Expenditure management and public financial management
- Adoption of a comprehensive multi-phase Public Financial Management strategy supported by development partners.
- Reductions in civil recruitment to contain the public wage bill.
- Reprioritization of planned capital spending for post-disaster reconstruction; temporary suspension of new investment projects and assessment of on-going projects’ impact and rates of return.
- Centralization and streamlining of budget management to improve efficiency and transparency.

Debt management and fiscal governance
- Recognition that more than half of public external debt is on concessional and semi-concessional terms, with a shifting composition due to recent bond issuances in the Thai capital market.
- Noted role of hydropower export earnings and long-term power purchase agreements in supporting portions of external debt.
- Adoption of a temporary moratorium on new projects to improve debt carrying capacity.
- 2018 Public Debt Management Law: enhances a rule-based regime for contracting and guaranteeing public debt and consolidates oversight responsibility within the Ministry of Finance to facilitate medium-term debt management strategy formulation.
- Continued pursuit of targeted, high social and growth return infrastructure financed from concessional loans.

### Monetary policy, exchange rate regime, and external sector
Monetary policy stance and institutional reforms
- Bank of Lao P.D.R (BOL) to continue prudent monetary policy under a managed floating exchange rate regime with exchange rate fluctuation within a band to maintain low inflation and a stable macroeconomic environment.
- Policy rate and reserve requirement ratios were maintained in 2018 given manageable inflation.
- Modernization of monetary governance: new legislations on the BOL, Commercial Bank and the Payment Systems passed in 2018; implementing regulations and guidance being rolled out.

De-dollarization and local currency promotion
- Measures to promote greater use of the Lao Kip and facilitate de-dollarization, including a Lao Kip promotional campaign and strict enforcement of legislation that domestic transactions be based in Lao Kip.
- Expectations that manageable inflation, stable exchange rate, and improvements in mobile banking services will encourage greater use of Lao Kip.

Exchange rate flexibility and market development
- Authorities see merit in gradually introducing greater exchange rate flexibility over the medium term when preconditions are in place.
- Preconditions include deepening the interbank market and developing domestic debt and foreign exchange derivative markets.
- Ongoing efforts to develop the debt securities market and monetary operations, including improving liquidity forecasting.

International reserves
- Authorities view the level of international reserves as broadly adequate after adjusting for FDI-related imports, but recognize benefits of increasing gross international reserves to build external resilience.
- Large FDI projects tend to maintain foreign exchange earnings abroad; medium-to-long-term increases in export earnings and tourism receipts can further fortify reserve position.

### Strengthening and modernizing the financial system
Regulation, supervision, and crisis management
- Amendments to laws and regulations to align with international best practices; Commercial Bank Law includes provisions for crisis management and bank resolution.
- BOL drafting prompt corrective action, crisis management and resolution framework to implement the Commercial Bank Law.
- Establishment of the Payment and Settlement Supervision Department and issuance of the Payments System Law.

Risk-based supervision and accounting standards
- Progress in strengthening risk-based supervision; a risk-based supervision manual has been formulated and is being pilot tested.
- Movement toward Basel II supervision and development of an accounting system in line with IFRS.
- Revision of regulation on FX lending to allow banks to provide FX loans to customers with or without FX income, subject to the Law on the Management of Foreign Currency to manage FX lending risks.

State-owned banks and non-performing loans
- Restructuring of state-owned banks expected to help reduce non-performing loans.
- Government evaluating past public projects to identify payment obligations and issuing bonds to commercial banks in exchange for overdue loans related to these projects.
- Development and regular dissemination of financial soundness indicators.

International cooperation
- BOL will continue active engagement with international partners for technical assistance and exchange of lessons to develop a sound and modern financial system.

### Structural transformation, competitiveness, and inclusion
Economic diversification and human development
- Commitment to gradual diversification from a resource-based economy toward contributions from agriculture, services and manufacturing.
- Continued improvements to legal framework, business climate, and addressing bottlenecks to doing business.
- Programs to improve education and health to enhance poverty reduction, raise productivity and help achieve key SDGs; assessment of gender inequality as part of development and inclusive growth promotion.

Infrastructure and connectivity
- Emphasis on public infrastructure (road, bridges, railways and power transmission lines) as crucial for transformation from land-locked to land-linked economy to invigorate investments, raise exports and promote rural development.

SME development
- SME sector covers 98 percent of all enterprises and is a priority to promote broad-based growth.
- Ministry of Industry and Commerce formulating an SME development plan and providing advisory services.
- BOL drafting an SME credit policy, seeking funding resources to establish an SME fund, and improving the payment system to facilitate SME growth.

Governance, AML/CFT, and data
- Strengthening of governance: Public Procurement Law and Law on Public Investment to promote transparency and rules-based public spending and investment.
- Progress on AML/CFT legislation implementation; National Risk Assessment completed in 2017-18.
- Interagency coordination mechanisms and MoUs for data gathering in place to support preparation for full FATF-standard assessment in 2020.
- Continued improvement in quality and availability of economic data, with IMF assistance contributing to better data compilation and release by government agencies.

### Concluding remarks: Policy priorities and commitments
- Authorities committed to prudent macroeconomic policies and continuing the reform agenda to build durable, sustainable and inclusive growth.
- Priority areas:
  - Fiscal consolidation and improved debt management to place public finances on a sustainable path.
  - Monetary and exchange rate policies to provide a stable macroeconomic environment.
  - Financial policy to strengthen and modernize the financial sector.
  - Gradual, well-considered economic transformation with attention to social cohesion.
  - Improved governance and transparency practices, including approval to publish the IMF press release after the Article IV mission.
- Authorities express gratitude for IMF technical assistance and policy advice and look forward to continued engagement.

*Source: Lao PDR authorities’ statement during the Article IV consultation.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2019/1laoea2019002.pdf_