## _cr07360 ## Source details **Canonical URL:** [_cr07360](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07360.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07360.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07360.pdf.json) --- ### Executive summary — key findings - Real GDP growth: 7½ percent in 2006, driven by the resource sector; non-resource sector growth: 4½–5 percent with signs of slowdown. - Inflation (June 2007): Headline 3½ percent y-o-y; core 2 percent y-o-y. - Gross international reserves: $460 million by end-June 2007 (4.6 months of non-resource imports and 62 percent of foreign currency liabilities, including deposits). - Reserve and broad money growth: 38 and 30 percent by end-2006; 45 and 39 percent by end-May 2007. - 2005/06 overall cash deficit: 3¾ percent of GDP; non-resource deficit: 5 percent of GDP. - Debt assessment: total external public debt stock end-2006: US$2.4 billion (70 percent of GDP); NPV external public debt: US$1.7 billion. - Debt sustainability: DSA indicates a high risk of debt distress, though debt service remains manageable; outcome highly sensitive to policy response and concessionality of new borrowing. ### Recent developments — macro and structural - External sector and reserves: - Current account deficit narrowed markedly in 2006 due to strong resource exports and tourism. - Gross international reserves: $460 million by end-June 2007. - Fiscal: - 2005/06 overall cash deficit: 3¾ percent of GDP (4½ percent in 2004/05). - Net domestic financing declined by about 1½ percent of GDP (equivalent to all resource revenues). - First eight months of 2006/07: overall cash surplus; net domestic financing declined (equivalent to almost 90 percent of resource revenues); external financing and grants below target. - Monetary: - Rapid monetary expansion driven by rising official international reserves; BoL net domestic assets declined; banking system net domestic assets declined as credit to private sector dwindled. - Structural reforms — mixed progress: - New commercial banking law effective April 2007; implementing regulations under preparation. - Two major SOCBs still carry high NPLs (about 60 percent of loans on older portfolios). - 12 largest SOEs undergoing restructuring are together generating profits, though some remain loss-making and heavily indebted. - 2006 state budget law envisages centralization of tax, customs, and treasury administration; VAT implementation plan for late 2008/09 under preparation. - Trade and investment climate: - Tariffs on most imports from AFTA members being reduced and expected to be below 5 percent by 2008. - WTO accession preparatory work in progress. - 2005 Enterprise Law (registration system, one-stop shop) yet to be implemented. ### Outlook — resource sector impact and medium-term projections - Staff estimates for resource sector contribution: - Could contribute 3 percentage points to annual GDP growth in the next five years and 1 percentage point thereafter. - Could generate an annual average external surplus of 7 percent of GDP in the next five years. - Could raise fiscal resource revenues up to about 3 percentage points of GDP in 2008, declining thereafter with reserves depletion. - Revenues from electricity companies expected to remain around ½ percent of GDP over the next decade. - Medium-term projections under a proactive policy response: - Real GDP annual growth: about 6½ percent. - Inflation: kept below 5 percent. - International reserves: strengthened to about five months of non-resource imports. - Risks: - Upside: additional proven mineral reserves; construction of more hydropower plants. - Downside: adverse commodity price shocks; delays in hydropower construction; relaxation of stabilization policy; delays in reforms. ### Alternative policy-response scenarios (Box 2) - Proactive policy response: - Government smoothes spending, saves a large portion of resource revenues, pursues fiscal consolidation of non-resource budget, mobilizes non-resource revenues, and upgrades BoL capacity. - Outcome: GDP annual growth stabilizes around 6½ percent; inflation stays below 5 percent. - Reactive policy response: - Government spends all resource revenues; BoL delays monetary tools; inflationary pressures emerge; appreciation undermines competitiveness; reforms progress slowly. - Outcome: GDP growth initially near 8 percent, then decelerates to 4–5 percent; non-resource exports weaken; risk of higher inflation and fiscal pressure. ### Debt sustainability — core results and scenarios - End-2006 aggregates: - Total External Debt: 2,371 (millions of U.S. dollars); 100.0 percent share. - Total Multilateral: 1,738; 73.3 percent of external debt. - AsDB: 938; 39.6 - IDA: 617; 26.0 - IMF: 26; 1.1 - Total Bilateral: 633; 26.7 percent of external debt. - Russia: 382; 16.1 - China: 100; 4.2 - Japan: 76; 3.2 - Indicative threshold comparisons (End-2006): - NPV of debt in percent of GDP: End-2006 48; indicative threshold 30. - NPV of debt in percent of Exports: End-2006 135; threshold 100. - NPV of debt in percent of Revenue: End-2006 377; threshold 200. - Debt services in percent of Exports: End-2006 4; threshold 15. - Debt services in percent of Revenues: End-2006 11; threshold 25. - Scenario outcomes: - Proactive (baseline): debt indicators improve substantially over projection period but remain at high risk of debt distress; NPV debt-to-GDP projected to fall below 20 percent by 2027 and cross the 30 percent threshold by 2014. - Reactive (alternative): debt distress risk deteriorates; debt indicators remain well above thresholds under stress tests; NPV debt-to-revenue could remain unsustainably high and debt service indicators rise. - Concessionality: - About 75 percent of external public debt are concessional loans from multilateral creditors. - Staff recommends future external financing rely on grants and highly concessional borrowing (grant element over 40 percent where possible). ### 2007/08 budget framework — staff findings and approved budget assessment - Staff projections and suggestions: - Revenues to remain strong, mainly from resource revenues. - Program current expenditures cautiously (especially wages) to reduce net domestic financing. - Shore up non-resource revenues ahead of VAT by avoiding ad hoc exemptions, reviewing leasing/concession terms, expediting centralization, and bringing large taxpayer units and main customs offices under central control. - 2007/08 Preliminary Budget Plan (In percent of GDP) — selected key figures (source layout preserved): - Revenue: 12.7 12.4 13.2 13.4 13.2 13.4 - Of which: resource revenues: 1.2 2.1 2.3 2.9 2.6 2.6 - Grants: 2.1 1.8 1.3 1.3 1.0 1.1 - Expenditure: 18.5 17.8 15.7 15.7 16.3 15.1 - Domestically financed expenditure: 12.6 11.5 11.3 12.2 12.4 11.1 - Overall balance: -3.7 -3.7 -1.3 -2.7 -2.1 -0.6 - Non resource balance: -4.9 -5.7 -3.6 -5.6 -4.7 -3.2 - Domestic financing: -1.3 -0.1 -1.3 -0.4 0.0 -1.6 - Foreign financing: 5.0 3.7 2.5 3.1 2.1 2.2 - Note: "1/ The National Assembly has approved the gross domestic borrowing based on the aggregate parameters, but the final fiscal numbers are still under discussion." - Approved 2007/08 budget — preliminary assessment: - Approved by National Assembly in early July 2007. - Underlying fiscal stance more expansionary than anticipated; current and domestically financed expenditures will increase sharply, appropriating virtually all revenues available. - Net domestic financing expected to decline by equivalent of about 15 percent of resource revenues. - Staff warns that full implementation would exacerbate the country’s risk of debt distress and recommends lower but better targeted subsidies and transfers. ### Policy priorities and recommendations - Fiscal policy and resource revenue management: - Safeguard fiscal consolidation within an integrated medium-term fiscal framework that accounts for resource revenue volatility. - Urgent expert advice to develop a sound and transparent resource management regime; consider reserve fund design with on-budget treatment and clear operating rules. - VAT implementation planned for late 2008/09; VAT should be revenue-enhancing; eliminate discretionary tax relief; align corporate tax rates regionally; simplify personal, excise, and land taxes. - Monetary and exchange-rate policy: - Contain monetary expansion by reducing BoL’s net domestic assets and further reducing net domestic financing of the deficit. - Introduce a standing deposit facility (remunerated banks’ deposits) to mop up liquidity until market-based instruments are developed. - Develop market-based liquidity instruments (treasury bills) and the interbank market; enhance BoL liquidity forecasting to incorporate fiscal operations. - Continue managed float; build BoL capacity to smooth exchange rate fluctuations and develop interbank foreign exchange market. - Banking, SOE reform, and financial sector supervision: - Fully implement the new banking law; put implementing regulations and supervisory framework in place; prepare for eventual FSAP. - Expedite recapitalization of SOCBs including strategic investors; condition public guarantees on viable business plans. - Strengthen enforcement of prudential rules and avoid forbearance; improve compliance with foreign currency exposure limits. - Structural and trade policy: - Improve investment climate to reduce high cost of doing business; advance WTO accession and AFTA commitments. - Continue trade facilitation reforms: simplify business start-up, property acquisition, eliminate redundant licensing, streamline customs clearance. - Data and statistics: - Improve compilation of balance of payments, broaden external debt coverage, prepare and disseminate bank soundness indicators, and enhance interagency cooperation. - External financing: - Exercise extreme prudence in future external borrowing; rely on grants and highly concessional loans. ### Data, surveillance, and technical assistance - Priority statistical improvements: - National accounts (move toward 1993 SNA recommendations; improve surveys and deflators). - Government finance statistics (migrate to GFSM2001; include social security fund and off-budget activities). - Monetary statistics (sectorization, valuation, classification, reconciliation). - Balance of payments (customs trade data, services and income coverage, FDI flows, grants coverage). - Technical assistance since 2004: multiple STA, FAD, MFD, LEG missions on government finance, money and banking statistics, tax and customs administration, public expenditure management, banking supervision, and legal drafting. - IMF consultation timing: recommended next Article IV consultation on a standard 12-month cycle. *Source: IMF staff report content from _cr07360_.* ### Executive Summary ...................................................................................................... ### _cr07360 - Executive Summary ### Introduction - Lao P.D.R.’s recent economic performance: growth robust, inflation declined, international reserves risen, poverty declined. - Increasing role of export-oriented large mining and hydropower projects (the resource sector) strengthening public finances and the balance of payments. - Emerging pressures: monetary growth and exchange rate appreciation as resource-sector net inflows outpace non-resource sector net imports. - Outcome depends on government policy response and reform effort. ### Recent Developments - Real sector - Real GDP growth: 7½ percent in 2006, driven by the resource sector. - Non-resource sector growth: 4½–5 percent, with signs of an incipient slowdown (slower non-resource import growth, decline in credit to the private sector). - Inflation and exchange rates - Headline and core inflation: 3½ and 2 percent y-o-y in June 2007. - Kip nominal exchange rate: continued appreciation against the U.S. dollar; depreciation against the Thai baht in 2006; combined with lower inflation contained real appreciation. - External sector and reserves - Current account deficit narrowed markedly in 2006 due to strong resource exports and tourism receipts. - Gross international reserves: $460 million by end-June 2007 (4.6 months of non-resource imports and 62 percent of foreign currency liabilities, including deposits). - Fiscal developments - 2005/06 overall cash deficit: 3¾ percent of GDP (4½ percent in 2004/05). - Non-resource deficit: remained at 5 percent of GDP in 2005/06. - Net domestic financing declined by about 1½ percent of GDP (equivalent to all resource revenues). - First eight months of 2006/07: overall cash surplus and low non-resource deficit; net domestic financing declined (equivalent to almost 90 percent of resource revenues); external financing and grants below annual target. - Monetary developments - Reserve and broad money growth: reached 38 and 30 percent by end-2006; accelerated to 45 and 39 percent by end-May 2007. - Monetary expansion driven by rapidly rising official international reserves; BoL net domestic assets declined; banking system net domestic assets declined as credit to private sector dwindled. - Structural reforms: mixed progress - Banking system: new commercial banking law effective April 2007; implementing regulations under preparation; a domestic private bank and a SOCB for agricultural policy lending started operations; a reputable international bank acquired majority stake in a small private bank. - SOCBs: management changes and prudent lending lowered NPLs on new lending, but two major SOCBs still carry high NPLs (about 60 percent of loans); recapitalization plan slower than anticipated. - SOEs: 12 largest SOEs undergoing restructuring are together generating profits, though some still loss-making and heavily indebted; no direct subsidies but sizable onlending to national airline in 2006. - Public finance management: 2006 state budget law envisages centralization of tax, customs, and treasury administration and reform of inter-governmental fiscal relations; some changes to be implemented in 2007/08; detailed VAT implementation plan for late 2008/09 under preparation. - Trade and investment climate - Tariffs on most imports from AFTA members being reduced and expected to be below 5 percent by 2008. - WTO accession preparatory work in progress. - 2005 Enterprise Law (registration system, one-stop shop) yet to be implemented; SME policy framework implementation strategy still under preparation. ### Outlook - Resource sector impact (staff estimates) - Could contribute 3 percentage points to annual GDP growth in the next five years and 1 percentage point thereafter. - Could generate an annual average external surplus of 7 percent of GDP in the next five years. - Could raise fiscal resource revenues up to about 3 percentage points of GDP in 2008, starting to decline gradually thereafter with proven mineral reserves depletion. - Revenues from electricity companies expected to remain around ½ percent of GDP over the next decade due to low pre-tax profits from heavy debt service burden. - Medium-term projections under a proactive policy response - Real GDP annual growth: about 6½ percent, increasingly driven by non-resource sector growth. - Inflation: kept below 5 percent. - International reserves: strengthened to about five months of non-resource imports. - Risks to outlook - Upside: additional proven mineral reserves and mine development; construction of more hydropower plants. - Downside: adverse commodity price shocks; delays in hydropower construction; relaxation of stabilization policy stance; delays in implementing economic and institutional reforms, particularly fiscal. - Debt outlook - Debt Sustainability Analysis indicates a high risk of debt distress, though debt service remains manageable. - Debt outlook highly sensitive to macroeconomic conditions and policy response. - A proactive policy response would bring debt indicators below thresholds faster than a reactive response; under a reactive scenario, a combined shock could create debt service problems. - Sensitivity to concessionality of newly contracted debt: future external financing should continue to rely on grants and highly concessional borrowing. ### Policy Discussions - Key challenges identified - (i) Sustaining macroeconomic stability. - (ii) Ensuring an appropriate and transparent use of resource revenues. - (iii) Accelerating banking and SOE reform and broadening sources of growth. - A. Sustaining macroeconomic stability — Fiscal policy - Staff projects 2006/07 overall deficit could fall to 1¼ percent of GDP (about 2 percentage points of GDP below this year’s target and the 2005/06 outcome). - Projected non-resource deficit for 2006/07: 3½ percent of GDP (1¼ percentage points lower than 2005/06). - Expected reduction in net domestic borrowing: about 1¼ percent of GDP (equivalent to about one-half of projected resource revenues). - Foreign-financed capital expenditure likely to fall short of target. - Staff urged minimizing outlays carried over into the next fiscal year and careful monitoring of unpaid obligations. - A. Sustaining macroeconomic stability — Monetary and exchange-rate policy - Pressures on monetary expansion from rising reserves likely to continue, posing inflation risk. - Authorities intend to keep money growth under control by further reducing domestic financing of the deficit. - Staff advised BoL not to relax prudential requirements to expand credit to the private sector. - Staff recommended introduction of a standing deposit facility (remunerated banks’ deposits) to mop up liquidity until market-based instruments and the interbank market are developed. - Managed float regime has worked well; nominal exchange rate level in line with fundamentals; authorities to allow market conditions to prevail and plan to develop the interbank foreign exchange market. - B. Managing resource revenues - Urgent need for expert advice to develop a sound and transparent regime as part of a medium-term fiscal framework. - Expenditure decisions should be taken within an integrated fiscal framework that accounts for resource revenue volatility. - C. Broadening sources of growth and structural reforms - Need to accelerate restructuring of state-owned banks and enterprises. - Need to improve the investment climate and achieve greater trade integration to raise and sustain broad-based growth. - Continued technical assistance from World Bank, AsDB, and FAD on fiscal and banking matters; VAT implementation planning and public expenditure management reforms underway. ### Staff Appraisal (summary points extracted from text) - Strong economic performance but mixed progress on structural reforms. - Resource-sector developments create both opportunities and policy challenges. - Priority policy actions include: safeguarding fiscal consolidation within a medium-term framework; containing monetary expansion and strengthening monetary instruments; designing transparent resource revenue management; accelerating banking and SOE reforms; and improving the investment climate. *Source: Executive Summary, _cr07360_.* ### 13. Staff discussed the broad outline of the budget framework for 2007/08 and ### _cr07360 - 13. Staff discussed the broad outline of the budget framework for 2007/08 and ### Budget framework for 2007/08 — staff findings and policy recommendations - Staff projects revenues will continue strong, mainly driven by resource revenues. - Staff suggested: - Program current expenditures cautiously (especially wages) aiming to reduce net domestic financing further to help confront a potential revenue impact of commodity price volatility. - Shore up non-resource revenues ahead of the introduction of the VAT by: - avoiding ad hoc exemptions and closely monitoring exemptions under the investment law; - reviewing outdated terms of leasing and concession contracts on state property; - expediting the process of centralizing administration; - bringing the large taxpayer units in the provinces and the main regional customs offices under central government control. - With foreign financed capital expenditures declining further in line with an expected reduction in foreign assistance, the overall deficit could be reduced by about ¾ percent of GDP in 2007/08, with a more gradual reduction in the non-resource deficit. - Authorities agreed a stepped-up effort to strengthen tax and customs administration is required and indicated they were enhancing monitoring of exemptions; centralization is politically sensitive and can only be done gradually. - Authorities face a balance between raising expenditure (including public wages) and setting aside some resource revenues. A contingency reserve fund created under the new budget law could be used for this purpose; details on its operation were under discussion. ### 2007/08 Preliminary Budget Plan (In percent of GDP) — key figures - Revenue: 12.7 12.4 13.2 13.4 13.2 13.4 - Of which: resource revenues: 1.2 2.1 2.3 2.9 2.6 2.6 - Grants: 2.1 1.8 1.3 1.3 1.0 1.1 - Expenditure: 18.5 17.8 15.7 15.7 16.3 15.1 - Of which: domestically financed expenditure: 12.6 11.5 11.3 12.2 12.4 11.1 - Current: 9.3 9.5 9.5 9.9 10.3 9.2 - Capital and onlending: 7.5 7.4 5.2 6.4 5.1 5.0 - Of which: domestically financed: 1.2 1.4 1.4 1.6 1.7 1.5 - Of which: foreign financed: 5.8 6.4 4.4 5.3 3.9 4.0 - Others including contingencies and discrepancies: 1.6 1.0 1.0 1.2 0.9 0.9 - Overall balance: -3.7 -3.7 -1.3 -2.7 -2.1 -0.6 - Non resource balance: -4.9 -5.7 -3.6 -5.6 -4.7 -3.2 - Domestic financing: -1.3 -0.1 -1.3 -0.4 0.0 -1.6 - Foreign financing: 5.0 3.7 2.5 3.1 2.1 2.2 - Note: "1/ The National Assembly has approved the gross domestic borrowing based on the aggregate parameters, but the final fiscal numbers are still under discussion." ### Approved 2007/08 budget — preliminary assessment - The 2007/08 budget was approved by the National Assembly in early July 2007, two months after the mission ended. - Preliminary assessment indicates the underlying fiscal policy stance is more expansionary than anticipated. - Non-resource revenues are broadly in line with staff projections; resource revenues are somewhat higher owing mainly to price differences. - Current (mostly wages and subsidies) and domestically financed expenditures will increase sharply, appropriating virtually all revenues available. - Net domestic financing is expected to decline by the equivalent of about 15 percent of resource revenues. - The approved budget, if fully implemented, will exacerbate the country’s risk of debt distress. - Staff believes lower but better targeted and prioritized subsidies and transfers could make the budget outcome consistent with the authorities’ medium term fiscal objectives. ### Medium-term fiscal strategy — reform areas and recommendations - Non-resource revenue mobilization: - Authorities committed to centralize tax and customs administration and start implementing a VAT in 2008/09. - VAT should be designed to be revenue-enhancing to help offset a possible, albeit moderate, reduction in trade taxes under trade agreements. - Staff suggested eliminating discretionary tax relief, aligning corporate tax rates with those of neighboring countries, and simplifying the personal, excise, and land tax structure. - The 2007/08 budget includes a general commitment to review the tax system, specifically mentioning review of land and property taxes and fees. - Reform on inter-governmental fiscal relations: - Progress encouraging. Plans developed with World Bank and other donors’ assistance aim to pool all shared revenues under central administration and distribute to provinces with a simple sharing rule. - Expenditure assignments not finalized; staff advised to ensure clarity and adopt transfers based on objective criteria. - Staff recommended calculating the expenditure bonus given to provinces that exceed revenue collection targets on the basis of non-resource revenues only, and eventually abolishing it. - Strengthening public expenditure management: - Significant progress towards a new chart of accounts. - Need for a time-bound plan for establishment of the national treasury and introduction of a single treasury account. - Developing an integrated medium-term fiscal framework: - Expenditure decisions need a multiyear context, account for volatility and uncertainties associated with resource revenues, and align expenditures to the National Socio-economic Development Plan (NSEDP). - Future budgets should include such a framework. ### Monetary and exchange rate policy — issues and recommendations - Monetary expansion: - Staff shares authorities’ concern about the inflationary risk posed by ongoing rapid monetary expansion. - Authorities plan to reduce monetary expansion through a targeted reduction in BoL’s NDA (led by further reduction in net domestic financing of the deficit) and tight limits on SOCBs’ credit expansion. - Staff suggested introducing a standing deposit facility (remunerated banks’ deposits) to help mop up liquidity. - Staff recommended against lowering policy interest rates, raising SOCBs’ lending ceilings, or relaxing prudential regulations because SOCBs’ overall financial condition is still very weak and low loans-to-deposits ratios reflect collateral realization difficulties and complex bankruptcy procedures. - Staff supported broadening liquidity management tools and developing the interbank market. Suggested BoL should: - enhance its liquidity forecasting framework by incorporating explicitly detailed fiscal operations; - start developing market-based instruments for managing liquidity using treasury bills; - start discussions with the ministry of finance on a new financial arrangement to share the net cost of monetary operations. - Exchange rate policy: - Authorities believe the exchange rate should reflect market conditions. - Current managed float framework has helped smooth exchange rate movements and strengthen the reserve position; official exchange rate determined on basis of market outcome for the preceding day and current nominal exchange rate level is deemed to be in line with economic fundamentals. - Authorities have not received complaints about loss of competitiveness owing to continued nominal appreciation but are concerned about potentially large exchange rate adjustments given increasing exposure to commodity price volatility. - Authorities agreed upward pressures on the kip are likely to continue but had no intention to intervene. Most private foreign exchange transactions are channeled through one major SOCB; BoL sets reference rates based on market clearing rate of the previous day. - Authorities committed to develop a well functioning interbank foreign exchange market and to build up BoL’s intervention capacity for smoothing purposes. ### Ensuring an appropriate and transparent use of resource revenues - Current fiscal regimes for the resource sector have several sound features, but improvements needed to align with best international practices. - Staff stressed importance of a transparent and standardized fiscal regime across concessions; many existing concessions negotiated case-by-case without full disclosure of fiscal terms, complicating fiscal administration and giving rise to governance concerns. - While a comprehensive framework is developed, staff suggested adhering to the IMF’s Guidelines on Resource Revenue Management and participating in the Extractive Industries Transparency Initiative. - Staff suggested authorities re-evaluate taking equity stakes in resource projects due to potential financial costs, conflicts of interest, and unpredictability; taxation can be designed to generate equivalent and more predictable revenues than dividends. - Regarding utilization of resource revenues, authorities are considering ways to set aside some resource revenues for future use. Use of a reserve fund could be considered provided that: - the size of contributions and conditions for withdrawals be decided within an integrated medium-term fiscal framework; - all expenditures are on-budget; - clear operating rules ensure transparency, good governance, and proper accountability. ### Accelerating banking and SOE reform and broadening sources of growth - Banking system and regulatory priorities: - Full implementation of new banking legislation should intensify competition; implementing regulations must be in place and supervisory/regulatory framework strictly enforced. - Need to assess soundness of banking system, develop standard soundness indicators, and prepare for an eventual Financial Sector Assessment Program (FSAP). - Limited information indicates restructuring of two major SOCBs (that share about 55 percent of the market) needs acceleration; these banks still carry sizable NPLs, have negative capital, and are heavily exposed to foreign exchange risk. Authorities expect to conclude restructuring by 2010. - Prudential requirements broadly in line with Basel I, but some regulations lack clear definitions and important regulatory concepts; enforcement and avoidance of forbearance need improvement, particularly for SOCBs. Most commercial banks are not complying with foreign currency exposure limits. - Anti-money laundering decree approved in March 2006; full implementation constrained by lack of an operational financial intelligence unit. - SOE reform: - Further progress in SOE reform is essential to strengthen the banking sector. - Authorities have turned around combined financial outcome of largest SOEs under restructuring, but attention needed for enterprises with weak financial situations or high leverage. - Reliance on subsidies has virtually stopped and requests for sovereign guarantees have become less common; staff advised future budgetary support be limited and conditional on a viable business plan. - Promoting broad-based growth: - Investment climate: NSEDP identifies need to improve legal and regulatory framework to promote private sector initiative and attract FDI. Enterprise law approval and steps such as accelerating investment approval and dialog with private sector are positive, but more is needed to reduce cost of doing business, enhance transparency, and combat corruption. - Trade integration: Staff encouraged continuation of WTO accession efforts and action on trade reform areas identified in the Diagnostic Trade Integration Study (simplify procedures for starting business and acquiring property, eliminate redundant trade licensing, streamline customs clearance). ### Staff appraisal — summary judgments and priorities - Lao P.D.R.’s recent economic performance and progress in reducing poverty have been impressive; favorable export commodity prices and growing resource sector boosted growth and strengthened the balance of payments. - Resource bonanza induced appreciation of the kip, which together with prudent fiscal policy helped contain demand pressures and lower inflation to historical lows. - Progress in banking and SOE reform and some investment climate improvements have occurred, but delays in implementing key strategies and laws remain. - Economic outlook promising but requires measures to maintain stability and accelerate reform to avoid the "resource curse" and mitigate risks including debt distress. - Staff supports authorities’ commitment to fiscal consolidation and debt sustainability over the medium term, but the 2007/08 budget, if fully implemented, would be inconsistent with medium-term objectives. - Staff encourages containing expenditures and identifying measures to return to fiscal prudence; timely introduction of the VAT, tax system review, stepped-up revenue administration, expenditure management, and intergovernmental fiscal reform should help fiscal consolidation. - Expenditure decisions should be taken within an integrated medium-term fiscal framework that makes explicit a deficit reduction path and accounts for volatility and uncertainties of resource revenues. - Given risk of debt distress, future external financing should continue to rely on grants and concessional loans. - Expert advice urgently required to develop a sound and transparent resource management framework; authorities should weigh direct taxation versus equity participation and consider saving some resource revenues until an integrated fiscal framework is available. - Rapid monetary expansion warrants tight control of BoL NDA and bank credit to the private sector; BoL’s liquidity management tool kit needs upgrading. Early introduction of a standing deposit facility could precede open market operations using treasury bills. - Current exchange rate policy has served Lao P.D.R. well; nominal exchange rate in line with fundamentals. Building BoL capacity to smooth fluctuations, developing a foreign exchange market, and strengthening reserves should help manage risks but not substitute for sound policies and deeper reform. - Renewed impetus required for banking and SOE reform: ensure full banking law implementation, strictly enforce strengthened regulatory framework, expedite SOCB recapitalization including strategic investors, and condition public guarantees on viable business plans. *Source: _cr07360 - 13. Staff discussed the broad outline of the budget framework for 2007/08 and* ### 29. Enhancing trade integration and improving the investment climate will help ### 29. Enhancing trade integration and improving the investment climate will help ### Trade integration and investment climate - Preparations to join WTO should be sustained. - Reaping the full benefits of trade integration will require more efforts to reduce the high cost of doing business and improve the business climate more generally. ### Data and financial sector statistics - Macroeconomic and financial data need to be improved to support policy decision making and effective surveillance. - Priority areas: - Improving the compilation of the balance of payments. - Broadening the coverage of external debt. - Preparing and disseminating bank soundness indicators. - Closer interagency cooperation would be advisable. ### IMF consultation timing - It is recommended that the next Article IV consultation with Lao P.D.R. take place on the standard 12-month cycle. ### Competitiveness (Box 1) - Real effective exchange rate (REER) developments in recent years have not affected competitiveness significantly. - Following a long upward trend, the trade-weighted REER remained broadly stable in 2006. - The relative price of nontradables and tradables (domestic REER) has fluctuated within a narrow range in recent years. - Non-resource exports have grown on average by 8 percent per year since 2001. - Garment exports, the most important non-resource exports, have maintained their market share in EU countries. - Factors mitigating the impact of real appreciation on exports: - The bulk of Lao P.D.R.’s exports are commodities that are not too sensitive to exchange rate fluctuations because of their low domestic cost components. - There is a high degree of dollarization. - Garments exports have maintained market share because of EU preferential treatment. - Cost-side features and constraints: - The non-resource sector has benefited from low labor costs but confronts a high cost of doing business and poor governance. - Average wages are flexible and the lowest in the region. - Lao P.D.R. ranks No. 159 among 175 countries in the World Bank’s 2006 doing business indicators. - Starting up a business takes more than three times the regional average. - Securing property rights takes twice the regional average. - Lao P.D.R. ranks No. 140 among 157 countries in the Heritage Foundation’s Index of Economic Freedom. - Lao P.D.R.’s ranking in the Corruption Perception Index by Transparency International deteriorated to No. 111 in 2006 from No. 77 in 2005. ### Key macroeconomic assumptions: Proactive Scenario - 2002–06 Average - Real GDP growth (percent): 6.6 - Inflation (percent): 10.1 - Exports growth (percent): 20.6 - Revenue (percent GDP): 11.8 - Primary deficit (percent GDP): 2.6 - Grant element of new borrowing: ... - 2007–12 Average - Real GDP growth (percent): 7.2 - Inflation (percent): 4.4 - Exports growth (percent): 10.6 - Revenue (percent GDP): 13.4 - Primary deficit (percent GDP): -0.1 - Grant element of new borrowing: 41.1 - 2013–27 Average - Real GDP growth (percent): 6.4 - Inflation (percent): 4.5 - Exports growth (percent): 11.2 - Revenue (percent GDP): 13.7 - Primary deficit (percent GDP): 1.3 - Grant element of new borrowing: 43.7 ### Key macroeconomic assumptions: Reactive Scenario - 2002–06 Average - Real GDP growth (percent): 6.6 - Inflation (percent): 10.1 - Exports growth (percent): 20.6 - Revenue (percent GDP): 11.8 - Primary deficit (percent GDP): 2.6 - Grant element of new borrowing: ... - 2007–12 Average - Real GDP growth (percent): 6.3 - Inflation (percent): 7.3 - Exports growth (percent): 8.7 - Revenue (percent GDP): 12.6 - Primary deficit (percent GDP): 0.9 - Grant element of new borrowing: 41.1 - 2013–27 Average - Real GDP growth (percent): 4.5 - Inflation (percent): 9.0 - Exports growth (percent): 7.6 - Revenue (percent GDP): 9.9 - Primary deficit (percent GDP): 2.8 - Grant element of new borrowing: 42.3 *Source: IMF staff text.* ### Box 2. Alternative Policy-Response Scenarios ### Box 2. Alternative Policy-Response Scenarios ### Proactive policy response - The government smoothes spending and saves a large portion of resource revenues for future use, while pursuing fiscal consolidation of the non-resource budget. - Continues efforts to mobilize non-resource revenues to compensate a loss in mineral revenues following the depletion of proven reserves, and optimizes the generation of resource revenues. - Prudent fiscal policy stance, together with an enhanced BoL capacity to conduct monetary policy, help contain the monetary impact of rising resource external surpluses. - Inflationary pressures are subdued and the real exchange rate appreciates only moderately. - The prevailing macroeconomic stability, coupled with improvements in the investment climate, including banking and SOE reform as envisaged in the NSEDP, raises private investment contributing to higher non-resource exports and output growth. - Outcome: - GDP annual growth stabilizes at around 6½ percent. - Inflation stays below 5 percent. ### Reactive policy response - The government spends all revenues attending to urgent domestic expenditures, keeping its net position with the banking system unchanged. - The BoL takes time in developing monetary management tools and inflationary pressures emerge, exacerbating the appreciation of the exchange rate and adversely affecting the competitiveness of non-resource exports. - Efforts to enhance the business environment advance only gradually and SOCBs and SOEs continue fragile posing a fiscal risk. - GDP growth dynamics: - GDP growth initially increase to nearly 8 percent, buoyed by higher consumption stimulated by government expenditures. - Soon thereafter non-resource exports start to weaken. - The BoL loosens monetary policy in an attempt to counter declining activity and maintain consumption. - The government continues to borrow externally, while avoiding recourse to domestic financing. - After an initial rapid growth, real GDP decelerates to 4–5 percent. *Source: Box 2. Alternative Policy-Response Scenarios, IMF staff report content.* ### introduction in late 2008. ### _cr07360 - introduction in late 2008. ### Fiscal and public financial management reforms - Establish a strong tax and customs administration. - The government plans to centralize tax and customs administration. - Establish a strong national treasury. - A new Treasury decree was drafted with the aim of establishing a national treasury. - Review center-province relations. - Budget law was approved in 2006, and its operational details, including revenue and expenditure responsibilities, are under preparation. - Maximize grant financing and concessional borrowing. - The government intends to borrow commercially for a hydro project. ### Structural issues and financial sector - Expedite the restructuring of the state-owned commercial banks. - Little progress. Only the first tranche of the recapitalization bonds has been issued, and there is no active search for strategic partners. - Strengthen the trade and investment climate. - Some progress in trade liberalization, but limited progress in improving the investment climate. - Improve the quality of economic statistics. - Some progress, but signified improvements required. ### Millennium Development Goals indicators (selected highlights and numeric series) - Target 1 Eradicate extreme poverty and hunger - Population below $1 a day (%) series (selected points): 53.0 .. 38.4 31.3 28.1 25.8 .. .. .. .. 25.8 (2003)[26.5] - Poverty gap at $1 a day (%) series (selected points): .. .. 6.3 .. 6.1 .. .. .. .. 6.1 (2002) - Percentage share of income or consumption held by poorest 20% series (selected points): .. 7.6 7.6 .. 8.1 .. .. .. .. 8.1 (2002) - Prevalence of child malnutrition (% of children under 5): .. 40 .. .. .. .. .. .. 40 (2001) - Population below minimum level of dietary energy consumption (%) series (selected points): 29.0 28.0 28.0 22.0 .. 22.0 .. .. .. 22.0 (2003)[14.5] - Target 2 Achieve universal primary education - Net primary enrollment ratio (% of relevant age group) series (selected points): 61.4 70.0 80.2 81.4 82.8 85.0 84.4 .. .. 84.4 (2004)[100] - Percentage of cohort reaching grade 5 (%) series (selected points): 53.3 55.4 .. 54.3 62.3 64.1 62.6 .. .. 62.6 (2003)[100] - Youth literacy rate (% ages 15-24) series (selected points): 70.1 74.0 .. 78.6 79.3 80.0 78.5 .. .. 78.5 (2004)[100] - Target 3 Promote gender equality - Ratio of girls to boys in primary and secondary education (%) series (selected points): 75.3 77.8 81.1 82.0 .. 83.1 .. .. .. 83.1 (2003)[100] - Ratio of young literate females to males (% ages 15-24) series (selected points): 76.2 80.1 .. 90.4 .. .. 90.0 .. .. 90.0 (2004)[100] - Proportion of seats held by women in national parliament (%) series (selected points): 6 9 9 21 21 23 23 23 23 23 (2006) - Target 4 Reduce child mortality - Under 5 mortality rate (per 1,000) series (selected points): 163 134 .. 105 100 91 83 .. .. 83 (2004)[54.3] - Infant mortality rate (per 1,000 live births) series (selected points): 120 105 .. 90 87 82 65 .. .. 65 (2004) - Immunization, measles (% of children under 12 months) series (selected points): 32 68 67 50 55 42 36 .. .. 36 (2004) - Target 5 Improve maternal health - Maternal mortality ratio (modeled estimate, per 100,000 live births) series (selected points): 650 650 .. 650 .. .. .. .. 650 (2001)[162.5] - Births attended by skilled health staff (% of total): .. .. .. 19.4 .. .. .. .. .. 19.4 (2001) - Target 6 Combat HIV/AIDS, malaria and other diseases - Prevalence rate of HIV, females (% ages 15-24): .. .. .. 0.1 .. 0.1 .. .. .. 0.1 (2003)[0.0] - Contraceptive prevalence rate (% of women ages 15-49): .. 25.1 .. .. .. .. .. .. .. 32.0 (2000) - Number of children orphaned by HIV/AIDS: .. .. .. 280 .. .. .. .. .. 280 (2001) - Incidence of tuberculosis (per 100,000 people) series (selected points): .. .. 166.7 161.8 .. 157.2 .. .. .. 157.2 (2003)[0.0] - Tuberculosis cases detected under DOTS (%) series (selected points): .. 24.0 33.5 40.1 46.3 46.7 55.3 .. .. 55.3 (2004) - Target 7 Ensure environmental sustainability - Forest area (% of total land area) series (selected points): 56.7 .. .. 54.4 .. .. 69.9 .. .. 69.9 (2004) - Nationally protected areas (% of total land area): .. .. .. 16.0 16.0 16.0 16.0 16.0 .. 16.0 (2003) - CO2 emissions (metric tons per capita) series (selected points): 0.1 0.1 0.1 0.2 0.2 0.2 .. .. .. 0.2 (2001) - Access to an improved water source (% of population) series (selected points): .. .. .. 37.0 .. 43.0 51.0 .. .. 51.0 (2004)[74] - Access to improved sanitation (% of population) series (selected points): .. .. .. 30.0 .. 24.0 30.0 .. .. 30.0 (2004)[60] - Target 8 Develop a Global Partnership for Development - Youth unemployment rate (% of total labor force ages 15-24): .. 5.0 .. .. .. .. .. .. 5.0 (1995) - Fixed line and mobile telephones (per 1,000 people) series (selected points): 1.6 3.9 6.1 15.2 21.2 32.0 48.2 .. .. 48.2 (2004)[Increase] - Personal computers (per 1,000 people): .. 1.1 1.6 3.0 3.3 3.5 3.8 .. .. 3.8 (2004)[Increase] ### General indicators (selected figures) - Population (millions): 4.1 4.7 4.9 5.4 5.5 5.7 5.8 5.9 .. 5.9 (2005) - Gross national income ($ billions)1/: 0.8 1.7 1.9 1.7 1.8 2.1 2.5 2.7 .. 2.7 (2005) - GNI per capita ($): 200 370 380 315 318 372 431 440 .. 440 (2005) - Adult literacy rate (% of people ages 15 and over): 56.5 60.6 .. 68.7 66.4 .. 68.7 .. .. 68.7 (2004) - Total fertility rate (births per woman): 6.5 5.5 5.3 5.0 4.8 4.7 4.6 .. .. 4.6 (2004) - Life expectancy at birth (years): 49.7 51.8 52.5 53.7 54.5 54.7 55.3 .. .. 55.3 (2004) - Aid (% of GNI): 17.3 17.6 .. 14.5 15.9 14.7 11.3 .. .. 11.3 (2004) - External debt (% of GNI): 204.3 123.2 .. 150 165.2 .. .. .. 165.2 (2002) - Investment (% of GDP): 13.5 26.0 .. 22.1 .. .. .. .. 22.1 (2001) - Trade (% of GDP) series (selected points): 35.8 60.6 65.2 61.6 62.3 57.4 57.4 58.9 58.9 (2005) ### Regional comparison (selected indicators) - Total population, mid-year (millions) (Lao P.D.R.): 5.9; East Asia & Pacific: 1,304.5; Sub-Saharan Africa: 741.4 - Growth rate (% annual average for period): Lao P.D.R. 2.3; East Asia & Pacific 2.0; Sub-Saharan Africa 2.1 - Urban population (% of population): Lao P.D.R. 20.6; East Asia & Pacific 19.7; Sub-Saharan Africa 35.2 - Total fertility rate (births per woman): Lao P.D.R. 4.6; East Asia & Pacific 4.0; Sub-Saharan Africa 5.3 - National headcount poverty index (% of population): Lao P.D.R. 33.5; Cambodia 35.9; China 4.6 - GNI per capita (US$): Lao P.D.R. 440; Cambodia 380; China 1,740; Thailand 2,750; Vietnam 620; Pacific 1,627; Low-income 580; Sub-Saharan Africa 745 - Public expenditure on health (% of GDP): Lao P.D.R. 1.2; East Asia & Pacific 2.1 - Public expenditure on education (% of GDP): Lao P.D.R. 2.3; East Asia & Pacific 2.0 ### IMF relations, safeguards, and payments system - HIPC Initiative: Lao P.D.R. is eligible for assistance under the HIPC Initiative. However, to date the authorities have indicated that they do not want to avail themselves of this facility. - Fund relations (as of May 31, 2007) highlights: - Membership Status: Joined 7/05/61; Article XIV - Quota: 52.90 SDR million (100.00 percent quota); Fund holdings of currency: 52.90 (100.00) - SDR Department net cumulative allocation: 9.41 SDR million (100.00); Holdings: 9.78 (103.97) - Outstanding ESAF/PRGF arrangements: 17.21 SDR million (32.54 percent quota) - Latest financial arrangements (selected entries): - PRGF approved 4/25/01, expiration 4/24/05, Amount Approved 31.70 (SDR million), Amount Drawn 18.12 (SDR million) - PRGF approved 6/04/93, expiration 5/07/97, Amount Approved 35.19, Amount Drawn 35.19 - SAF approved 9/18/89, expiration 9/17/92, Amount Approved 20.51, Amount Drawn 20.51 - Projected obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs) — forthcoming totals: - 2007: Principal 0.91; Charges/interest 0.09; Total 0.99 - 2008: Principal 2.72; Charges/interest 0.07; Total 2.79 - 2009: Principal 3.62; Charges/interest 0.06; Total 3.68 - 2010: Principal 3.62; Charges/interest 0.04; Total 3.66 - 2011: Principal 3.17; Charges/interest 0.02; Total 3.19 - Safeguards assessments: - A safeguards assessment of the Bank of Lao P.D.R. (BoL) was completed in April 2003 with respect to the PRGF arrangement approved in 2001. - Progress on safeguards recommendations has been slow. - Authorities indicated they were not in a position to implement an earlier agreement to undertake a joint-audit of the BoL’s 2003 and 2004 accounts by the state auditor and an international audit firm. These audits have subsequently been completed by the state auditor, but the joint-audit issue remains unresolved. - Exchange rate and payments system: - In September 1995, Lao P.D.R. adopted a managed floating exchange rate system. - From October 1997, commercial banks have been encouraged to follow the parallel market closely. - From October 27, 2003, the commercial bank exchange rate is calculated by the BoL as the weighted average of the previous day’s commercial banks’ and interbank market rates. The BoL provides this reference rate to the commercial banks, who then set their own rates, keeping them close to the parallel market rates. - The foreign currency and precious metal decree (No.02/BoL, August 29, 2003) is under review. - Lao P.D.R. no longer maintains restrictions on the making of payments and transfers for current international transactions under the transitional arrangements of Article XIV. *Prepared by the Asia and Pacific Department (In Consultation with Other Departments), July 19, 2007.* ### Section 2, but maintains restrictions imposed for the preservation of national or international ### Section 2, but maintains restrictions imposed for the preservation of national or international security ### Exchange restrictions and Article VIII obligations - Exchange restrictions remain in place, with some restrictions notified pursuant to Decision No. 144-(52/51), and a restriction subject to Fund approval under Article VIII (tax payment certificates are required for some transactions). - A joint LEG/MFD mission in August 2004 reviewed the exchange system to identify measures to facilitate Lao P.D.R.’s acceptance of Article VIII obligations, including elimination of an exchange restriction on the making of payments and transfers for current international transactions. - During the 2007 Article IV consultation, the authorities indicated they would consider elimination of the exchange restriction during the WTO accession process (expected to take place by 2010 under the current government plan). ### Article IV consultations and resident representative - Last Article IV consultation discussions: Vientiane, November 7–18, 2005. - Staff report (Country Report No. 06/399) discussed by the Executive Board on March 8 2006 and published on November 7, 2006. - Resident representative: Mr. Philippe Beaugrand assumed the post in Vientiane on January 28, 2004. ### Technical assistance (since 2004) — departmental activities and dates - STA: - Government finance statistics: April–May 2004 - Money and banking statistics: April–May 2004 - National accounts statistics: November–December 2006 - FAD: - Missions on tax policy and administration: October 2004 - Expert on tax administration: March–April 2004, November 2004 - Expert on customs administration: January 2004, June 2004, February 2005, May 2005, March–April 2006, October–November 2006 - Mission on public expenditure management: June–July 2004, October 2004 - Expert on public expenditure management: November 2004, March–April 2005 - Expert on customs law and regulations: March–June 2007 - LEG: - Desk review of the draft Anti-Money Laundering Decree and Regulation on Collecting Information and Reporting on Money Laundering and Terrorism Financing: October 2005 - MFD: - Expert on banking supervision: January–February, May–July, September–October 2004; January–March, April–June, September–December 2005 - Mission on Central Bank audit: May 2005 - Expert on foreign exchange regulations: July–August 2004 - Mission of Article VIII (jointly with LEG): August 2004 ### IMF–World Bank collaboration and Joint Role in Policy Dialogue - IMF lead role: advising the government of Lao P.D.R. (GOL) on macroeconomic policy — tax, fiscal, monetary, exchange rate policies, and economic statistical issues. - World Bank lead role: supporting GOL in formulating growth and poverty reduction strategy and implementing structural reform (public finance management, SOE restructuring, private sector development, trade, legal and judicial development, natural resource management). - Joint coordination areas: financial sector, public expenditure management, trade policy, poverty reduction strategy. ### Poverty Reduction Strategy and PRSO program - NGPES: first full Poverty Reduction Strategy Paper prepared in 2003. - Joint Staff Advisory Note (JSAN) presented before IDA and IMF Boards in November 2004. - Sixth National Socioeconomic Development Plan (NSEDP) 2006–2010 prepared in 2006; presented at the 9th Round Table Meeting with donors in November 2006. - Poverty Reduction Support Operations (PRSOs): - PRSO-1: $10 million, approved March 2005 - PRSO-2: $8 million, April 2006 - PRSO-3: $10 million, June 2007 - Next cycle expected to go to the Bank Board early next year (as of text). ### Public expenditure management and financial sector reforms (World Bank role) - Bank assisted development and implementation of multi-year Public Expenditure Management Strengthening Program (PEMSP). - Public Expenditure Review completed in early 2007 (jointly with IMF, donors, and GOL). - Public Expenditure Tracking Survey (PETS) for education and health sectors in mid-2007. - Bank support for GFS-compatible Chart of Accounts and new Budget Law to improve intergovernmental fiscal relations. - Bank and IMF supported development and implementation of a banking reform program; Bank supported SOCB restructuring and drafting banking sector legislation. ### Nam Theun 2 (NT2) Hydropower Project - World Bank support: IDA partial risk guarantee, IDA grant for environmental and social mitigation, and a MIGA guarantee — all in March 2005. - Decision framework three pillars: (i) viable development policy framework and programs for poverty reduction and social and environmental protection; (ii) sound technical, financial, economic and safeguards design and implementation; (iii) international donor and civil society support for development framework and project. - Project monitoring: progress remains good; expected to be operational in early 2010. ### Bank strategy and lending operations - Country Assistance Strategy (CAS): full CAS presented March 2005; CAS update and extension through 2011 submitted June, 2007. - CAS notional lending and non-lending program: about US$128 million in new commitments (credits and grants) between July 1, 2005 to June 30, 2008 (subject to IDA Performance Based Allocation system). - IDA cumulative approvals as of March 15, 2007: US$835.88 million equivalent of IDA credits and grants approved, supporting adjustment operations, rural development, forestry, transport, energy, telecommunications, education, health, industry, capacity building, and risk guarantees. - Average disbursement in the last three years: US$32 million. ### IDA: Commitments and Disbursements to Lao P.D.R., 1977–2006 (key figures, as of March 15, 2007) - Fiscal Year (to June 30) — Committed — Disbursed — Repayments* - 1977–93: 335.21 — 80.7 — 1.5 - 1994: 48.4 — 45.1 — 0.6 - 1995: 19.2 — 31.4 — 0.6 - 1996: 60.7 — 28.6 — 0.6 - 1997: 48 — 65.2 — 0.6 - 1998: 34.7 — 26.5 — 1.3 - 1999: 29.8 — 27.8 — 1.5 - 2000: 0 — 18.1 — 3 - 2001: 41.7 — 29.9 — 3.6 - 2002: 44.8 — 30.5 — 4.9 - 2003: 24.7 — 41.2 — 6.1 - 2004: 35.7 — 46.7 — 7.3 - 2005: 7 — 63.6 — 8.4 - 2006: 37.0 — 36.3 — 8.7 - Total: 835.96 — 644.0 — 48.7 - * Note: repayments include principal repayments and do not include commitment or service charges. ### World Bank non-lending work (selected completed and ongoing items) - Completed FY05–FY06: PRSP – JSAN; Financial Sector Note; CEM - Sources of Growth; Investment Climate Assessment; Integrated PER; Environment Monitor; Rural Sector Strategy; Khammouane Provincial Development Study; Poverty Assessment; Decentralization Study; IDF and sector studies (education, ethnic minorities, monitoring and evaluation). - Ongoing and proposed FY07–FY11: Economic Monitors (2 issues each year); Financial Sector Assessment; Investment Climate Follow-up; ICT Strategy; Investment Climate Assessment 2; Integrated PER (with CFAA, CPAR); Flagship on Natural Resources Management; Environment Monitor; Land Allocation, Planning, and Management; Public Expenditure Tracking Survey; NT2 Revenue Management; Intergovernmental Fiscal Relations and Decentralization; Public Expenditure Tracking Survey (education and health follow-ups); Health Sector Financing Strategy; Social Monitor (Youth Opportunities). ### Relations with the Asian Development Bank (AsDB) - AsDB assistance since 1968; focus broadened over decades to include financial sector, rural development, social development, environment, and poverty reduction. - AsDB Country Strategy and Program (CSP) for Lao P.D.R. 2007–11 aligned with NSEDP 2006–10. - Since 1970, AsDB approved 71 loan and grant financed projects for a total of $1.18 billion — of which 28 projects were currently active — and 224 technical assistance projects for a total of $113.0 million (as of end-December 2006). - In 2006: six new loans and grants approved (two agriculture, two education, two rural finance), and eight technical assistance projects amounting to $4.7 million approved. ### AsDB Commitments and Disbursements, 2001–2007 (In millions of U.S. dollars) - Commitments: 2001: 65; 2002: 43.2; 2003: 34.9; 2004: 54.8; 2005: 87.0; 2006: 60.8; 2007: 56.0 (planned) - Disbursements: 2001: 44.7; 2002: 48.6; 2003: 54.7; 2004: 48.5; 2005: 78.7; 2006: 78.5; 2007: 78.7 (planned) - Source: Data provided by the Asian Development Bank. 1/ Planned figures. ### Statistical issues — assessment and key weaknesses - Overall: macroeconomic and financial data need improvement to support policy decision making and effective surveillance; GDDS metadata not finalized and strategy for statistical improvement not yet in place. - National accounts: - Annual GDP estimates by activity at current and constant 1990 prices broadly follow the 1968 SNA. - Lack of regular surveys and inadequate compilation methods raise coverage and reliability concerns. - October 2002 STA mission recommended establishment of regular surveys and compilation methods in accordance with the 1993 SNA. - SIDA provided technical assistance; LECS 3 (Lao Expenditure and Consumption Survey 2002–03) finalized and released. - STA regional advisor visit Nov–Dec 2006: progress in source data and surveys, remaining weaknesses in deflators, constant price estimates, and expenditures. - Prices: - NSC compiles monthly CPI available on a timely basis. - Latest CPI introduced January 2006 (with December 2005 as reference period) using LECS 2002/03 for consumption basket. - Consumption baskets exclude own consumption; PPI planned for introduction in 2007. - Government finance statistics: - Weak accuracy, coverage, timeliness, and transparency. - Budget Department produces monthly, quarterly, and annual revenue and expenditure statistics; most data on a cash basis. - Data on bank and nonbank financing, including treasury bill operations, need consistency with monetary accounts. - Social security fund and off-budget activities not included in fiscal data. - No data reported for Government Finance Statistics Yearbook or International Financial Statistics. - 2004 government finance statistics mission recommended improvements and roadmap for migration to GFSM2001. - Central government debt compiled by two MOF departments; debt data comprehensive and available by type, with efforts to improve coverage of SOE debt. - Monetary statistics: - April/May 2004 mission identified multiple compilation problems and recommended corrective actions, including: - Improve sectorization of institutional units and uniform treatment across asset and liability sides of commercial bank balance sheets. - Valuation of financial assets/liabilities (e.g., monetary gold at market prices). - Classification of financial instruments (e.g., loan loss provisions, valuation adjustments). - Improve chart of accounts for BoL and commercial banks; prepare "Manual of the Chart of Accounts". - Improve coverage and identification of IMF accounts. - Reconcile accounting data (Accounting Department of BoL) with monetary data sent to APD and STA. - Investigate discrepancies in bank financing between monetary and government finance statistics. - Many recommendations remain unimplemented, including inconsistent sectorization of units. - Balance of payments: - Foreign reserves reported weekly and derived from the monetary survey at prevailing kip per U.S. dollar end-month exchange rate. - BOP statistics need significant improvements in frequency and coverage for: - customs trade data and commodity composition of external trade; - services and income; - actual foreign direct investment flows; - separation of current and capital transfers and coverage of some grants (especially from international NGOs); - reconciliation of fiscal and BOP data on external loans and grants; - monitoring of external debt, especially of state-owned enterprises. - CS-DRMS adopted in 2001 for external debt processing. - New customs procedures (Customs 2000) permitted production of more accurate trade data in October 2000, but customs department has not produced these data regularly. - Improved coordination needed among BoL, NSC, Customs, External Financial Relations Department (MOF), Department of International Cooperation (CPI), and commercial banks. - Japanese government providing technical assistance on some issues. ### Table of Common Indicators Required for Surveillance (as of July 2, 2007) — selected entries - Exchange Rates: Date of latest observation: 07/02/07; Date received: 07/02/07; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: O - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation: April 2007; Date received: 06/06/07; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: O - Reserve/Base Money: April 2007; 06/06/07; M; Q; O - Broad Money: April 2007; 06/06/07; M; Q; O - Central Bank Balance Sheet: April 2007; 06/06/07; M; Q; O - Consolidated Balance Sheet of the Banking System: April 2007; 06/06/07; M; Q; O - Interest Rates: April 2007; 06/15/07; M; M; O - Consumer Price Index: May 2007; 06/06/07; M; M; O - Revenue, Expenditure, Balance and Composition of Financing – General Government: March 2007; 04/25/07; M; M; O - Revenue, Expenditure, Balance and Composition of Financing – Central Government: March 2007; 04/25/07; M; M; O - Stocks of Central Government and Central Government-Guaranteed Debt: Sept 2006; 12/1/06; A; A; O - External Current Account Balance: Q4 2005; 05/03/06; Q; Q; O - Exports and Imports of Goods and Services: Q4 2005; 05/03/06; Q; Q; O - GDP/GNP: 2004; 6/24/05; A; A; O - Gross External Debt: Dec 2006; 05/08/05; A; A; O *Prepared by the staff of the International Monetary Fund and the International Development Association, July 19, 2007.* ### 1. The debt sustainability analysis (DSA) conducted during the 2007 Article IV ### 1. The debt sustainability analysis (DSA) conducted during the 2007 Article IV ### Background - The DSA indicates Lao P.D.R. continues to face a high risk of debt distress, though the current DSA points to an improved outlook compared to the previous DSA. - Recent trends and drivers: - Nominal external PPG debt stocks have increased in absolute terms, but strong GDP growth led the nominal debt-to-GDP ratio to steadily decline since 2002. - All debt service indicators reversed their upward trends in 2006 due to strong GDP and export growth helped by high commodity prices. - Key aggregates (end-2006 / summary): - Total external public debt stock: US$2.4 billion (70 percent of GDP). - Net present value (NPV) of external public debt: US$1.7 billion. - Composition of external public debt (in millions of U.S. dollar; percent share): - Total External Debt: 2,371; 100.0 - Total Multilateral: 1,738; 73.3 - AsDB 938; 39.6 - IDA 617; 26.0 - NDF 50; 2.1 - EIB 46; 2.0 - IFAD 45; 1.9 - IMF 26; 1.1 - OPEC 16; 0.7 - Total Bilateral: 633; 26.7 - Russia 382; 16.1 - China 100; 4.2 - Japan 76; 3.2 - Thailand 28; 1.2 - Sweden (SIDA) 15; 0.6 - France 10; 0.4 - Korea 9; 0.4 - Vietnam 7; 0.3 - Germany 4; 0.2 - Singapore 4; 0.2 - Norway (NORAD) 0.1; 0.0 - Indicative threshold comparisons (Text Table 1; End-2006): - NPV of debt in percent of GDP: Indicative threshold 30; End-2006 48. - NPV of debt in percent of Exports: Indicative threshold 100; End-2006 135. - NPV of debt in percent of Revenue: Indicative threshold 200; End-2006 377. - Debt services in percent of Exports: Indicative threshold 15; End-2006 4. - Debt services in percent of Revenues: Indicative threshold 25; End-2006 11. - Concessionality and risks: - About 75 percent of external public debt are concessional loans from multilateral creditors, primarily the AsDB and IDA. - Debt to bilateral and commercial creditors amounted to approximately US$633 million. - Since the rescheduling agreement with Russia in 2003, Lao P.D.R. had not accumulated external debt payment arrears (excluding a disputed payment due in May 2007 noted in the source). - Domestic public debt: - At end-2005/06, domestic public debt stock around Kip 560 billion (1¾ percent of GDP). ### Debt Sustainability Outlook — Scenarios and Assumptions - Two scenarios analyzed: - Proactive scenario (baseline): policies implemented in anticipation of adverse effects from the resource boom (save large portion of resource revenue, fiscal consolidation of non-resource budget, improve investment climate as in NSEDP, highly concessional external financing with grant element over 40 percent). - Reactive scenario (alternative): government spends all resource revenues, higher expenditures, slower structural reforms, BoL delayed monetary tools, higher inflationary pressures, continued external borrowing, avoidance of domestic financing. - Key macroeconomic assumptions (Proactive scenario; Text Table 3): - 2002-06 average / 2007-12 average / 2013-27 average - Real GDP growth (percent): 6.6 / 7.2 / 6.4 - Inflation (percent): 10.1 / 4.4 / 4.5 - Exports growth (percent): 20.6 / 10.6 / 11.2 - Revenue (percent GDP): 11.8 / 13.4 / 13.7 - Primary deficit (percent GDP): 2.6 / -0.1 / 1.3 - Grant element of new borrowing: ... / 41.1 / 43.7 - Key macroeconomic assumptions (Reactive scenario; Text Table 4): - 2002-06 average / 2007-12 average / 2013-27 average - Real GDP growth (percent): 6.6 / 6.3 / 4.5 - Inflation (percent): 10.1 / 7.3 / 9.0 - Exports growth (percent): 20.6 / 8.7 / 7.6 - Revenue (percent GDP): 11.8 / 12.6 / 9.9 - Primary deficit (percent GDP): 2.6 / 0.9 / 2.8 - Grant element of new borrowing: ... / 41.1 / 42.3 ### Outlook for External Public and Publicly Guaranteed Debt — Proactive (Baseline) - Overall assessment: - Lao P.D.R. remains at a high risk of debt distress under the proactive scenario, but the debt outlook improves during the projection period. - Projections and milestones: - NPV debt-to-GDP: end-2006 at 48 percent; projected to decline substantially to below 20 percent by 2027; crossing the 30 percent indicative threshold by 2014. - NPV debt-to-exports: projected to decline from 135 percent to below 60 percent toward the end of the projection period. - Debt service ratios: expected to remain well below indicative thresholds throughout the projection period. - Stress test findings (baseline): - Standard stress tests indicate resilience to exogenous shocks under the baseline, with higher but stabilizing ratios below thresholds except for simulations based on historical averages. - Under historical trend simulation, NPV debt-to-GDP and NPV debt-to-exports would stay above thresholds throughout the projection period because historical averages incorporate little impact from recent rapid mining and hydropower development. - Example sensitivity: if both copper and gold prices took the 10-year historical average between 2008–12, the NPV of debt-to-exports ratio would increase by 6 percentage points from the baseline. ### Outlook for External Public and Publicly Guaranteed Debt — Reactive (Alternative) - Overall assessment: - Risk of debt distress deteriorates further under the reactive scenario. - Projections and impacts: - Debt stock indicators based on GDP and exports still expected to decline over time but would approach relevant thresholds only toward the end of the projection period. - Debt service burden in terms of exports would be higher than under the proactive scenario though still at a low level. - NPV of debt-to-revenue ratio would remain at an unsustainable level; debt service burden in terms of government revenue would rise in early years and stabilize around 20 percent toward the end of the projection period. - Stress test findings (reactive): - All stress tests under the reactive scenario result in debt stock indicators well above sustainability thresholds. - Fiscal outlook precarious: NPV of debt-to-revenue could rise to more than twice the threshold level. - Debt service indicators rise significantly; debt service to revenue ratio could exceed sustainable threshold. ### Outlook for Total Public and Publicly Guaranteed Debt - Link to external debt: - Majority of public debt is external; public debt trajectory closely follows external debt. - Proactive scenario projections (public debt): - NPV of public debt-to-GDP: 51 percent at end-2005/06; projected to fall to 20 percent of GDP by 2026/27. - NPV of public debt-to-revenue: 345 percent at end-2005/06; projected to fall to around 120 percent by 2026/27. - Debt service to revenue ratio: currently relatively low due to high concessionality; projected to decline to less than 7 percent by 2026/27. - Reactive scenario projections (public debt): - NPV of public debt-to-GDP: projected to decline only moderately through the projection period. - Debt service to revenue ratio: could rise in the middle of the 2010s if the government fails to increase revenues. ### Key Quantitative Summary (Text Table 5 excerpt; in percent) - Comparison (Proactive / Reactive; selected indicators; averages or points noted): - NPV of debt-to-GDP: Proactive 45 / Reactive 25 / 19 / 27 / 31 / 30 / 33 (table layout in source lists multiple years and averages). - NPV of debt-to-exports: Proactive 140 / Reactive 79 / 58 / 86 / 102 / 98 / 107. - NPV of debt-to-revenue: Proactive 338 / Reactive 192 / 125 / 203 / 313 / 319 / 306. - Debt service-to-exports: Proactive 6 / Reactive 5 / 4 / 5 / 7 / 6 / 6. - Debt service-to-revenue: Proactive 15 / Reactive 12 / 8 / 12 / 21 / 20 / 19. - Note: These figures are presented in the source as a comparative summary of indicators under alternative scenarios and across subperiods. ### Conclusion - Despite improvements under the proactive baseline, Lao P.D.R. continues to face a high risk of debt distress because debt stock indicators remain well-above policy-based indicative thresholds and could increase further depending on future macroeconomic performance and the concessionality of external financing. - The choice of policy response to the resource revenue boom is pivotal: a proactive approach (saving resource revenue, fiscal consolidation, reforms, and highly concessional financing) materially improves long-run debt sustainability relative to a reactive approach (spending resource revenue, slower reforms, higher inflationary pressures), which significantly raises the risk of debt distress under stress scenarios. *Source: Debt sustainability analysis (DSA) conducted during the 2007 Article IV consultation (IMF staff report content provided).* ### 13. Although Lao P.D.R.'s debt ratios continue to improve, the overall debt burden ### _cr07360 - 13. Although Lao P.D.R.'s debt ratios continue to improve, the overall debt burden ### Debt assessment: current situation and risks - Debt ratios continue to improve, but the overall debt burden "remains elevated and the risk of debt distress is high." - Debt-service ratios are expected to remain below the thresholds, "suggesting low risk of a liquidity crisis in the short term." - Debt-stock indicators are expected to remain "significantly above their thresholds for a number of years." - The "most extreme stress test" is defined as "one time 30 percent real depreciation in 2007/08" and "yields highest ratio in 2016/17." ### Projections and scenarios (summary) - Staff projections and simulations present alternative scenarios for 2007-2027, including: - Proactive scenario (baseline). - Reactive scenario (alternative). - Historical scenario. - Most extreme shocks (GDP deflator, Exports). - Across scenarios, NPV of debt-to-GDP and NPV of debt-to-exports ratios remain elevated relative to thresholds for extended periods under baseline and stress scenarios. - Debt-service-to-exports and debt-service-to-revenue ratios remain below their respective thresholds in baseline projections, but rise under stress scenarios. ### Key macroeconomic and balance-sheet facts reported - By end-June 2007, gross international reserves increased to about US$460 million, equivalent to 4.6 months of non-resource imports. - Reserve and broad money growth (by end–May 2007) accelerated to 45 percent and 39 percent, respectively. - Real GDP growth increased to 7½ percent in 2006, driven by the resource sector and NT2 hydropower construction. - The current account deficit narrowed owing to buoyant resource exports and rising tourism receipts, combined with higher FDI and official development assistance inflows. - Fiscal year definition: "The fiscal year ends on September 30." ### Selected quantitative indicators and dynamics (reported behaviors) - Debt-stock indicators (NPV measures) projected to stay above thresholds for many years under baseline and adverse scenarios; stress tests (including a one-time 30 percent depreciation) produce higher peaks (notably around 2016/17). - Debt-service ratios: projected to remain below liquidity-crisis thresholds in the short term but could worsen under shocks. - Tables and figures in the source provide detailed year-by-year projections (2006/07–2026/27 and 2007–2027) for: - NPV of debt-to-GDP ratio. - NPV of debt-to-exports ratio. - NPV of debt-to-revenue ratio. - Debt-service-to-exports ratio. - Debt-service-to-revenue ratio. - Gross financing needs (millions of U.S. dollars). - Key macroeconomic assumptions (Real GDP growth; GDP deflator in US dollar terms; Effective interest rate; Growth of exports/imports). - The staff notes that comprehensive data on private sector external debt are not available and that some projections assume NPV of private sector debt equivalent to face value. ### Policy recommendations and priorities - Adopt sound macroeconomic policies to mitigate debt-distress risk. - Renew impetus on economic reforms to raise growth and export performance of the non-resource sector. - Exercise "an extremely prudent approach for future external borrowing." - Continue to rely on grants or "highly concessional resources" for development needs. - Identify additional measures to maintain fiscal prudence and to sustain medium-term fiscal consolidation and debt sustainability. ### Executive Board context (IMF Article IV, 2007) - IMF Article IV consultation with Lao P.D.R.: staff visit and report led to Executive Board discussion; Managing Director transmitted Board summary to authorities. - Public Information Notice (PIN) No. 07/106: FOR IMMEDIATE RELEASE August 23, 2007; Board concluded Article IV consultation on August 3, 2007. - Executive Directors welcomed robust growth, low inflation, strengthened external position, and progress in banking and SOE reform, while underscoring the need to sustain macroeconomic stability and accelerate reforms to manage the natural resource bonanza and reduce exposure to debt distress. *Source: IMF staff projections, simulations, and Public Information Notice excerpts contained in the provided content unit.* ### introduction of a VAT and a review of the tax system, coupled with stepped-up efforts to ### _cr07360 - introduction of a VAT and a review of the tax system, coupled with stepped-up efforts to ### Fiscal policy, tax reform, and VAT introduction - Authorities are accelerating preparations for the introduction of a VAT; implementation is scheduled to be in late 2008 or early 2009. - Tax administration strengthening measures: - Reinforce the central tax department. - Reorganize the tax and customs departments on a functional basis. - Integrate large provincial customs offices into the national administration. - Tax policy and revenue measures: - Streamline tax policy and broaden the taxpayer base by limiting ad hoc tax exemptions and rate reductions, and fighting tax evasion. - Step up clearance of budget arrears, especially arrears on capital expenditures. - Fiscal consolidation aims: - Reduce the budget deficit over the medium term through improved revenue performance and tighter expenditure controls. - Continue restraining expenditure to compensate for budget slippages from project grants. ### Resource management and external financing - Directors recommended developing a sound and transparent resource management framework with appropriate expert assistance to ensure a level playing field and attract investor interest. - Net benefits of taking an equity stake in future resource projects should be closely evaluated because of associated financial risks and potential conflicts of interest with government’s dual role as regulator and shareholder. - Authorities encouraged to participate in the Extractive Industries Transparency Initiative. - Future external financing should continue to rely on grants and concessional loans. ### Monetary policy, liquidity management, and exchange rate - BoL policy stance and objectives: - Maintain low and stable inflation and manage a floating exchange rate regime. - Tight control over the BoL’s net domestic assets will continue to be the main anchor of monetary policy. - Monetary developments and tools: - M2 increased by 30 percent in 2006, above the targeted 18 percent, driven mainly by a short-term increase of net foreign assets of 53.3 percent. - BoL stands ready to tighten monetary policy with available tools should inflationary pressures emerge. - Plans to develop market-based instruments for managing liquidity using domestic securities and sale of foreign exchange. - Directors supported upgrading BoL liquidity management instruments, introducing a standing deposit facility until instruments using treasury bills are in place, developing the interbank money market, and avoiding quasi-fiscal costs of managing liquidity. - Exchange rate and reserves: - Directors considered the exchange rate policy appropriate and in line with macroeconomic fundamentals; they shared concern about the risk of large exchange rate fluctuations. - Recommended strengthening international reserves, building BoL capacity to smooth fluctuations, and developing a well-functioning foreign exchange market. - Authorities feel comfortable with exchange rate competitiveness and the level of reserves; interventions have aimed at smoothing transitory fluctuations. ### Financial sector, banking supervision, and SOE reform - Banking law and reforms: - National Assembly adopted the commercial bank law in December 2006; promulgated in January 2007. - Authorities urged to fully implement the banking law, strictly enforce prudential regulations, and strengthen bank supervision. - State-owned banks and recapitalization: - Authorities encouraged to expedite recapitalization of state-owned commercial banks, including by involving strategic investors. - Two restructured state-owned commercial banks (Banque Pour le Commerce Exterieur Lao and Lao Development Bank) have registered some profits since 2004 and 2005, respectively. - Agriculture Promotion Bank (APB) is being restructured under the Rural Finance Sector Development Program Loan. - Nonperforming loans and supervision: - Taking over NPLs has improved banks’ balance sheets, but authorities note the banking sector remains fragile. - Work closely with IFIs to implement recommendations addressing banks’ management and supervision weaknesses. - SOE reform and public guarantees: - Deepening SOE restructuring would help strengthen the banking sector. - Extension of public guarantees on SOEs’ borrowing should be conditioned on the viability of business plans as SOEs’ reliance on the budget is reduced. ### Investment climate, trade integration, and WTO accession - Legal and institutional reforms: - New enterprise law (2005) and new foreign investment law (2004) to facilitate trade and foreign investment. - Second Lao Business Forum launched March 15, 2007 to discuss private sector issues and government plans to improve the business environment. - FDI and sectoral composition: - Approval of foreign investment in 2006 rose to around US$2.6 billion from US$1.2 billion in 2005. - Foreign participation largely in mining and hydropower, accounting for more than two-thirds of the total value of FDI. - Trade facilitation: - Import and export procedures simplified; all goods can be freely imported by declaration at customs except four product groups subject to control (fuel, vehicles, cement, steel bars) and goods restricted for health and security reasons. - Authorities will continue trade liberalization consistent with WTO accession commitments and ASEAN Free Trade Agreement (AFTA) obligations. - Directors: more decisive steps to reduce the high cost of doing business to reap full benefits of trade integration. ### Economic outlook and macroeconomic performance - Growth and inflation: - Real GDP growth: 2003 6.1; 2004 6.4; 2005 7.1; 2006 7.6; 2007 proj. 7.1 (all percentages as reported in the table). - CPI (annual average): 2003 15.5; 2004 10.5; 2005 7.2; 2006 6.8; 2007 proj. 4.0. - Authorities estimated real GDP growth in 2005/06 at 8.1 percent (text) driven mainly by mining and hydropower. - Outlook for 2006/07: real GDP growth expected to increase to about 7.5–8.0 percent; CPI inflation expected to decline to 4 percent by end-2007. - Current account and reserves: - Current account balance (in percent of GDP): 2003 -8.1; 2004 -14.3; 2005 -20.2; 2006 -13.3; 2007 proj. -22.9. - Directors recommended strengthening international reserves. Text projected gross official international reserves to reach five months of import coverage in 2006/07. - Public finances (in percent of GDP) 1/: - Revenue: 2003 10.9; 2004 11.0; 2005 11.4; 2006 12.7; 2007 proj. 13.2. - Grants: 2003 2.1; 2004 1.1; 2005 1.7; 2006 2.1; 2007 proj. 1.3. - Expenditure: 2003 18.6; 2004 15.5; 2005 17.5; 2006 18.5; 2007 proj. 15.7. - Overall balance (including grants): 2003 -5.6; 2004 -3.4; 2005 -4.4; 2006 -3.7; 2007 proj. -1.3. - Domestic financing: 2003 0.4; 2004 -0.2; 2005 0.2; 2006 -1.3; 2007 proj. -1.3. - External financing: 2003 5.1; 2004 3.6; 2005 4.2; 2006 5.0; 2007 proj. 2.5. - Money and credit (annual percent change) 2/: - Reserve money: 2003 28.5; 2004 12.9; 2005 17.6; 2006 38.2; 2007 proj. 20.4. - Broad money: 2003 15.5; 2004 21.5; 2005 7.7; 2006 30.1; 2007 proj. 24.8. - Bank credit to the economy 3/: 2003 1.3; 2004 12.6; 2005 26.8; 2006 4.2; 2007 proj. 16.0. - Interest rates (end of period): - On three-month kip deposits: 2003 14.0; 2004 7.5; 2005 5.5; 2006 5.5. - On short-term kip loans: 2003 22.4; 2004 16.0; 2005 17.8; 2006 14.0. - Balance of payments and trade: - Exports (percent change): 2003 21.6; 2004 11.0; 2005 29.4; 2006 54.1; 2007 proj. 1.3. - Imports (percent change): 2003 9.6; 2004 40.9; 2005 23.4; 2006 14.8; 2007 proj. 37.0. - Trade Balance (in percent of GDP): 2003 -11.3; 2004 -19.0; 2005 -19.4; 2006 -11.3; 2007 proj. -22.1. - Gross official reserves (in millions of U.S. dollars): 2003 214; 2004 226; 2005 238; 2006 336; 2007 proj. 437. - Reserves (in months of prospective goods and services imports) 4/: 2003 3.2; 2004 3.0; 2005 2.8; 2006 3.6; 2007 proj. 4.3. - External public debt and debt service: - External public debt (in percent of GDP): 2003 89.1; 2004 83.2; 2005 77.1; 2006 69.0; 2007 proj. 63.0. - Net present value of debt (in percent of exports): 2003 204.6; 2004 198.9; 2005 168.9; 2006 134.5; 2007 proj. 140.4. - External public debt services (in percent of exports): 2003 6.7; 2004 7.5; 2005 7.7; 2006 4.0; 2007 proj. 6.1. - Exchange rate indicators: - Official exchange rate (kip per dollar; end of period): 2003 10,434; 2004 10,357; 2005 10,767; 2006 9,655. - Nominal effective exchange rate (2000=100): 2003 71.6; 2004 67.7; 2005 67.3; 2006 68.6. - Real effective exchange rate (2000=100): 2003 94.1; 2004 96.1; 2005 99.1; 2006 104.5. - Selected levels: - Nominal GDP (2006 est.): $3,437 million. - Population (2006 est.): 6.0 million. - GDP per capita (2006 est.): $ 572.8. - Memorandum: Nominal GDP (calendar year; in billions of kip): 2003 22,597; 2004 26,539; 2005 30,705; 2006 34,581; 2007 proj. 38,569. ### Data, statistics, and surveillance - Directors and authorities emphasized improving macroeconomic and financial data to support surveillance and decision-making. - Priority data improvements: - Balance of payments. - Government finances. - External debt. - Bank soundness indicators. - SOEs financial statements and provincial fiscal operations. - Enhance national accounts accuracy based on SNA 1993 framework. ### Policy recommendations and implementation priorities (summary) - Implement VAT as scheduled in late 2008 or early 2009 and accelerate tax administration reforms. - Develop an integrated medium-term fiscal framework that accounts for resource revenue uncertainties. - Continue to rely on grants and concessional loans for external financing. - Build a transparent resource management framework; carefully evaluate equity stakes in resource projects and consider participation in the Extractive Industries Transparency Initiative. - Maintain tight control of BoL’s net domestic assets and upgrade liquidity management instruments; introduce a standing deposit facility and develop the interbank money market. - Strengthen international reserves and BoL capacity to smooth exchange rate fluctuations; develop a well-functioning foreign exchange market. - Accelerate banking and SOE reform, implement banking law fully, strictly enforce prudential regulations, strengthen supervision, and expedite recapitalization of state-owned commercial banks with strategic investors where appropriate. - Reduce the high cost of doing business to maximize benefits from trade integration and WTO accession. - Improve collection and compilation of key macroeconomic and financial statistics. *Source: Lao P.D.R. 2007 Article IV consultation materials as presented in _cr07360.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07360.pdf_