## _cr09284

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### Executive summary — overview and outlook
- Over the past five years, the Lao P.D.R. economy performed well, supported by large FDI inflows into mining and hydropower, trade and retail services, light manufacturing, and nascent tourism.
- The global crisis has begun to bite: the largest impacts are on the mining sector and delays in hydropower projects; foreign currency inflows have slowed considerably.
- Growth is expected to moderate but remain fairly robust, supported by large projects in train, strong mineral exports, and expansionary policies.
- Inflation is expected to remain low and stable, assuming no significant pick up in commodity prices.
- The external position is weakening, with international reserves steadily declining.
- Overly expansionary fiscal and credit policies pose a risk to macroeconomic stability.

### Recent macroeconomic developments and near-term outlook
- 2008 performance and recent deterioration:
  - Real GDP growth moderated only slightly despite severe flooding; construction and mining picked up the slack.
  - Inflation eased from its mid-year peak as food and fuel prices abated, aided by currency appreciation.
  - International reserves increased by $100 million to $636 million (3.4 months of prospective imports) in 2008; later movements included a decline from end-June 2008 through end-April 2009.
  - Banking sector reform continued; dollarization declined to about 50 percent (70 percent in 2003).
  - Foreign currency inflows to current and capital accounts have slowed; the decline in copper prices lowered exports and depressed mining financial performance.
  - Profit tax collection from the mining sector was marked down from $120 million to $80 million; the $40 million loss represents 0.7 percent of GDP.
- Growth and inflation projections:
  - Economic activity projected to grow at around 4½ percent in 2009.
  - Inflation expected to remain low and stable, predicated on currency stability and relatively weak economic growth.
- Key risks (selected):
  - External: weaker global recovery could further depress demand for tourism, garments, and other exports; FDI in mining and hydropower could be adversely affected.
  - Domestic: excessively expansionary policies could precipitate a decline in international reserves, depreciation pressure on the kip, and rapid return to high dollarization.
  - Continued strong credit growth could fuel inflation later; the next 18 months are particularly challenging.

### Selected macroeconomic figures and medium-term indicators
- Real GDP growth (2006–2014 series in table): 8.4, 7.5, 7.2, 4.6, 5.4, 8.4, 6.7, 7.4, 7.3
- Real GDP growth excluding resource projects (2006–2014 series): 5.4, 6.5, 4.1, 3.1, 3.0, 5.4, 5.7, 6.3, 6.5
- Consumer prices (end-period, 2006–2014 series): 4.7, 5.6, 3.2, 3.3, 3.3, 3.5, 3.2, 3.1, 3.0
- Overall fiscal balance (percent of GDP, 2006–2014 series): -3.0, -2.9, -2.0, -7.8, -5.7, -5.4, -4.4, -3.5, -2.8
- Current account balance (percent of GDP, 2006–2014 series): -10.3, -15.8, -16.5, -15.4, -8.1, -12.4, -13.1, -16.0, -20.1
- Gross official reserves: 228; 238; 336; 536; 636; 536 (selected historical series, in millions of U.S. dollars)
- Reserve coverage (months of prospective imports): 3.3; 2.8; 3.2; 3.9; 3.4; 3.0 (selected series)

### Fiscal developments, financing pressures, and staff recommendations
- Fiscal pressures and outlook:
  - In the absence of additional measures, the overall budget deficit (including off-budget operations) is projected to widen to 7.8 percent of GDP in FY2008/09 (2 percent of GDP in 2007/08).
  - Most of the increase is explained by a surge in expenditure of 5.2 percentage points of GDP in 2008/09, with about 1.8 percentage points as off-budget spending.
  - Total revenues (excluding grants) are projected to decline by 1.3 percentage points of GDP relative to 2007/08; the estimated revenue shortfall relative to budget amounts to 2.1 percent of GDP.
  - Without additional external financing, substantial bank financing on the order of 4 percent of GDP would be required to finance the deficit.
  - The budget plan for 2009/10 would still require a domestic financing requirement of some 2.7 percent of GDP assuming no further run down in government deposits or other unidentified financing.
- Staff fiscal recommendations:
  - Implement an adjustment of some 1–1½ percentage points of GDP through a combination of revenue and expenditure measures over the remainder of 2008/09 to eliminate the financing gap (though this would still imply a sizeable loss in international reserves).
  - Short-term savings: deferred hiring, compression of non-priority current spending, rolling-back fuel transfers, reviewing and cutting nonessential domestically financed capital expenditure.
  - Bring all fiscal operations and associated financing on-budget; curtail BoL financing of extra-budgetary operations.
  - Seek additional revenue measures and donor support while safeguarding social spending.
  - 2009/10 budget should target a larger and more permanent reduction in the deficit, including lowering domestically financed capital expenditure in line with realistic revenue estimates.

### Monetary, credit, exchange rate policy recommendations and assessments
- Recent monetary and credit developments:
  - Credit growth accelerated to 85 percent in December 2008 and remained above 80 percent through March 2009; credit growth rose to 63 percent by June 2008 earlier in the year.
  - The share of kip lending increased to 40 percent (30 percent June 2007).
  - Broad money growth has been more muted due to decline in net foreign assets.
  - The kip-U.S. dollar bilateral exchange rate remained broadly stable since September 2008; in real effective terms the kip appreciated by more than 20 percent over the past 12 months (April).
- Staff monetary and exchange-rate recommendations:
  - Immediate policy tightening is required to reduce pressure on the external position.
  - Fiscal adjustment should aim to eliminate the domestic financing gap and halt the rise in quasi-fiscal liabilities; off-budget operations and their financing should be brought on budget.
  - Strong signals should be sent to banks to rein in credit growth, including through a significant increase in the required reserve ratio.
  - BoL lending should be limited to temporary liquidity support for banks and BoL advances and loans to lower levels of government curtailed.
  - Maintain exchange rate stability as a nominal anchor until market-based monetary policy instruments can be implemented.

### Financial sector reform and banking supervision
- Banking sector status and challenges:
  - A donor-supported reform program has been in place since 2003 to strengthen oversight and restructure SOCBs.
  - Bank recapitalization bonds issued for 588 billion kip (1.3 percent of GDP) since September 2005.
  - As of end-2008, one SOCB had positive CAR of 2 percent, while two SOCBs had negative CAR of less than -4 percent.
  - NPLs have been reduced but the banking system remains weak and financial intermediation low.
- Staff recommendations:
  - Strengthen financial position of SOCBs, improve risk management and banking practices guided by international standards.
  - Reinforce BoL oversight capacity, minimize conflicts of interest related to SOCBs, apply strict due-diligence for new licenses, and increase cross-border supervisory collaboration.
  - Full implementation of the commercial banking law; foster an environment for banks to lend to SMEs on commercial terms.
- Authorities’ initiatives:
  - Consideration of floating BoL securities for liquidity management, encouraging interbank market development, and increasing minimum required registered capital to 300 billion kip ($35 million, currently 100 billion).

### Debt sustainability, LIC DSA findings, and policy priorities
- LIC DSA headline:
  - The country "continues to face a high risk of debt distress."
- Key debt figures (end-2008 and projections):
  - External PPG debt nominal stock at end-2008: "US$2.9 billion"
  - External PPG debt as share of GDP at end-2008: "53 percent" (down from "81 percent" at end-2005).
  - NPV of debt at end-2008: "35 percent of GDP" and "91 percent of exports".
  - Domestic public debt at end-2008: "2.1 percent of GDP"
  - Total public debt (domestic + external) at end-2008: "55.2 percent of GDP"
  - Baseline long-term NPV of public external debt: "20 percent of GDP"
- Stress-test vulnerabilities:
  - External debt sustainability is most vulnerable to a depreciation of the nominal exchange rate; a "30 percent depreciation of the kip" would sharply raise debt ratios.
  - A one-time 30 percent real depreciation would raise the NPV of public debt-to-GDP and public debt-to-revenue ratios to "58" and "370 percent", respectively; debt service-to-revenue would rise to "around 22 percent".
  - Historical-average FDI scenario (FDI "2.7 percent of GDP" vs baseline "8.1 percent of GDP between 2009–14") would raise all debt indicators well above indicative thresholds.
- DSA policy recommendations:
  - External borrowing should be obtained on concessional terms and fiscal and quasi-fiscal liabilities carefully managed.
  - Improve debt management capacity and develop a medium-term borrowing strategy; increase disclosure of borrowing plans.
  - Cautious assessment and monitoring of large-scale projects; prudent debt management to mitigate risks to external and public debt sustainability.

### Box 1 — Baseline scenario assumptions (2009–29) — selected assumptions and projections
- Growth and structural change:
  - Real GDP growth is projected to average 6 percent during 2009–11.
  - Over the medium term, growth picks up to a 6½ percent average and nonresource sector growth rises to about 7.5 percent over the second half of the projection period.
- External and FDI assumptions:
  - Exports decline by 21 percent in 2009 mainly because of lower prices for copper; exports increase by 29 percent in 2010 due to the coming online of Nam Theun II.
  - Planned commercial bond issue: US$70 million (backed by royalties from Theun-Hinboun and Houay Ho projects).
- Fiscal policy assumption:
  - Public sector balance expected to post a deficit of nearly 8 percent of GDP in 2008/09 (including off-budget operations).
- Selected numeric examples from projections and assumptions:
  - Exports decline by 21 percent in 2009, increase by 29 percent in 2010.
  - Medium-term baseline FDI assumption: "8.1 percent of GDP between 2009–14".
  - Real GDP growth series reported under “Key macroeconomic assumptions” (examples): 8.4, 7.5, 7.2, 6.8, 0.9, 4.6, 5.4, 8.4, 6.7, 7.4, 7.3, 6.6, 5.0, 7.0, 6.6.

### Authorities’ views and revenue measures (summary)
- Authorities are pursuing additional sources of revenue to make up for the shortfall in mining revenues, including increased donor support.
- In May, the fuel tax structure was amended and other measures will be considered by the National Assembly in its June session.
- Planned revenue measures include adjustments to reference prices on imported vehicles; additional alcohol and cigarette excises; restructuring of taxes and fees on luxury goods.
- Additional measures under consideration: strengthening monitoring of large taxpayers; broadening the tax base through review of deductions and exemptions; continued preparations for full VAT roll-out (planned for January 2010).
- Revenue is projected to rise modestly in 2009/10 as higher collection of income and turnover taxes and planned measures more than offset lower profit taxes from the mining sector.

### Data, statistical capacity, and institutional cooperation
- Data shortcomings hamper surveillance; priority areas for improvement include balance of payments statistics, national accounts, external public debt, and subnational fiscal accounts.
- Recent efforts: compilation of 2008 GDP statistics delayed but expected to be resolved; national accounts statistics compiled on an expenditure basis for 2002–05.
- IMF and AsDB technical assistance and collaboration noted across monetary statistics, government finance statistics, national accounts, and customs administration.
- GDDS subscription and improved data dissemination recommended.

### Selected policy priorities and Executive Board conclusions
- Immediate priority: safeguard macroeconomic stability while supporting growth; prompt and determined tightening of fiscal and monetary policies to support exchange rate stability.
- Fiscal policy: reduce the fiscal deficit, curtail quasi-fiscal operations, bring all fiscal operations on budget, and implement expenditure restraint as the main consolidation source while protecting social spending.
- Monetary/financial sector: BoL to rein in bank credit growth, limit BoL lending to temporary liquidity support, develop indirect instruments, foster interbank market, and strengthen domestic liquidity management and supervision.
- Structural reforms: improve investment climate, reduce regulatory uncertainty, advance trade integration, and further WTO compliance to broaden and diversify growth.
- Data and governance: improve statistical quality and timeliness; strengthen public financial management and recentralize tax, customs, and treasury operations.

*Source: IMF staff report for Lao P.D.R., including Executive Summary, Authorities’ views, Staff appraisal, LIC DSA, Box 1 assumptions, and Annexes as presented in the source PDF.*

### Executive Summary ......................................................................................................

### EXECUTIVE SUMMARY

### Overview
- Over the past five years, the Lao P.D.R. economy performed well, supported by large FDI inflows into mining and hydropower, trade and retail services, light manufacturing, and nascent tourism.
- The global crisis has begun to bite: the largest impacts are on the mining sector and delays in hydropower projects; foreign currency inflows have slowed considerably.
- Growth is expected to moderate but remain fairly robust, supported by large projects in train, strong mineral exports, and expansionary policies.
- Inflation is expected to remain low and stable, assuming no significant pick up in commodity prices.
- The external position is weakening, with international reserves steadily declining.
- Overly expansionary fiscal and credit policies pose a risk to macroeconomic stability.

### Recent macroeconomic developments and outlook
- 2008 performance:
  - Real GDP growth moderated only slightly despite severe flooding; construction and mining picked up the slack.
  - Inflation eased from its mid-year peak as food and fuel prices abated, aided by currency appreciation.
  - The nonresource current account deficit widened despite robust exports and tourism receipts; international reserves increased by $100 million to $636 million (3.4 months of prospective imports).
  - Banking sector reform continued, but the system remains weak and financial depth low; dollarization declined to about 50 percent (70 percent in 2003).
- Deterioration in 2008–09:
  - Foreign currency inflows to current and capital accounts have slowed; the decline in copper prices lowered exports and depressed mining financial performance.
  - International reserves have fallen from their June 2008 highs in defense of a strong kip.
  - Lower-than-budgeted profit tax collection from the mining sector is placing fiscal revenues under strain.
- Policy stance:
  - Policies have become increasingly expansionary to support near-term growth and long-term development goals.
  - Domestically financed capital expenditure increased rapidly—both on- and off-budget.
  - Credit growth accelerated to 85 percent in December 2008 and has remained above 80 percent through March 2009; direct lending by the Bank of Lao P.D.R. (BoL) supplanted slowing private-sector credit in late-2008.

### Near-term outlook and risks
- Growth projections and inflation:
  - Economic activity projected to grow at around 4½ percent in 2009 supported by projects already in train and strong public investment, with modest drag from weaker tourism and declining rural incomes.
  - Inflation expected to remain low and stable, predicated on currency stability and relatively weak economic growth.
- External position:
  - With expansionary policies, export softness, and lower FDI, the external position is expected to continue weakening.
- Key risks:
  - External: weaker global recovery could further depress demand for tourism, garments, and other exports; FDI in mining and hydropower could be adversely affected.
  - Domestic: excessively expansionary policies could jeopardize macroeconomic stability—particularly a precipitous decline in international reserves, depreciation pressure on the kip, and rapid return to high dollarization.
  - Continued strong credit growth could fuel inflation later; the next 18 months are particularly challenging.

### Medium-term outlook
- Conditional on maintaining macroeconomic stability and accelerating structural reforms, the medium-term outlook is positive:
  - Investments in mining and hydropower would resume as the global crisis works itself out.
  - Broader economic activity would pick up as reforms strengthen the foundations of the economy.
  - The external current account deficit is expected to widen again as investment-related imports rise, but increased FDI and other capital inflows would more than offset this, with international reserve coverage gradually returning to current levels.
  - External debt is projected to remain high, but concessionality will keep public debt service manageable.
  - In the absence of front-loaded fiscal adjustment, public domestic debt would increase significantly, albeit from a low base.
- Select medium-term macroeconomic framework indicators (as presented):
  - Real GDP growth: 8.4, 7.5, 7.2, 4.6, 5.4, 8.4, 6.7, 7.4, 7.3 (2006–2014 series in table)
  - Real GDP growth excluding resource projects: 5.4, 6.5, 4.1, 3.1, 3.0, 5.4, 5.7, 6.3, 6.5 (2006–2014 series in table)
  - Consumer prices (end-period): 4.7, 5.6, 3.2, 3.3, 3.3, 3.5, 3.2, 3.1, 3.0 (2006–2014 series in table)
  - Overall fiscal balance (percent of GDP): -3.0, -2.9, -2.0, -7.8, -5.7, -5.4, -4.4, -3.5, -2.8 (2006–2014 series in table)
  - Current account balance (percent of GDP): -10.3, -15.8, -16.5, -15.4, -8.1, -12.4, -13.1, -16.0, -20.1 (2006–2014 series in table)
  - Gross official reserves: increased by $100 million to $636 million (3.4 months of prospective imports) in 2008; later movements included a decline from end-June 2008 through end-April 2009.

### Fiscal developments and staff recommendations
- Fiscal trends and pressures:
  - Fiscal consolidation earlier in the decade reflected rising budget revenue; the outlook for mining revenues has weakened.
  - Quasi-fiscal liabilities have begun to increase; off-budget operations relate to hosting the SEA Games in December 2009 and the 450-year anniversary of the capital city.
  - The BoL has financed extra-budgetary operations of lower levels of government.
  - Profit tax collection from the mining sector was budgeted at $120 million, subsequently marked down to $80 million; the $40 million loss represents 0.7 percent of GDP.
- Fiscal outlook and financing:
  - In the absence of additional measures, the overall budget deficit (including off-budget operations) is projected to widen to 7.8 percent of GDP in FY2008/09 (2 percent of GDP in 2007/08).
  - Most of the increase is explained by a surge in expenditure of 5.2 percentage points of GDP in 2008/09, with about 1.8 percentage points as off-budget spending.
  - Total revenues (excluding grants) are projected to decline by 1.3 percentage points of GDP relative to 2007/08; the estimated revenue shortfall relative to budget amounts to 2.1 percent of GDP.
  - Without additional external financing, substantial bank financing on the order of 4 percent of GDP would be required to finance the deficit.
  - The budget plan for 2009/10 looks equally difficult; even with reduction in off-budget operations and some revenue measures, a domestic financing requirement of some 2.7 percent of GDP would be needed assuming no further run down in government deposits or other unidentified financing.
- Staff policy advice on fiscal policy:
  - A modest easing in 2008/09 may have been warranted, but current fiscal stance poses risks to macro stability and sustainability given rapid growth in quasi-fiscal liabilities and the sizeable domestic financing requirement.
  - An adjustment of some 1–1½ percentage points of GDP through a combination of revenue and expenditure measures over the remainder of 2008/09 would be required to eliminate the financing gap, though this would still imply a sizeable loss in international reserves.
  - Short-term savings could include deferred hiring, compression of non-priority current spending, rolling-back fuel transfers, and reviewing and cutting nonessential domestically financed capital expenditure.
  - The remainder of the adjustment could come from bringing forward revenue measures planned for 2009/10.
  - The 2009/10 budget should target a larger and more permanent reduction in the deficit—including lowering domestically financed capital expenditure in line with realistic revenue estimates—to close the financing gap, limit the increase in public debt, and eliminate the nonresource current fiscal deficit.
  - All fiscal operations and associated financing should be placed on budget.
  - In light of the need to safeguard social spending, additional revenue measures and donor support should continue to be sought.

### Monetary and credit recommendations
- Immediate policy tightening is required to reduce pressure on the external position:
  - Fiscal adjustment should aim to eliminate the sizeable domestic financing gap and halt the rise in quasi-fiscal liabilities. Off-budget operations and their financing should be brought on budget; Bank of Lao P.D.R. advances and loans to lower levels of government should be curtailed. The 2009/10 budget should target a larger and more permanent adjustment.
  - Strong signals should be sent to banks to rein in credit growth, including through a significant increase in the required reserve ratio. This would help take pressure off international reserves and avoid building future contingent liabilities of state-owned commercial banks (SOCBs) given continued weaknesses in risk management and slowing economic activity.

### Structural reforms and medium-term priorities
- Policy consensus:
  - Discussions broadly agreed on the medium-term structural reform agenda to strengthen the banking sector and improve the business climate.
  - Over the longer term the priority is to strengthen the underpinnings of the economy through financial sector development, sound banking sector practices and supervision, and creating an economic environment conducive to broader based private sector-led growth.
- Risks to medium-term prospects:
  - Risks to external stability derive mostly from lower mineral prices.
  - Continued acceleration of domestically financed public investment would increase the nonresource current account deficit and place sustained pressure on the external position.
  - Postponement of necessary structural reforms—especially banking sector strengthening and creating an enabling environment for private-sector led growth—could reduce growth prospects, delay government withdrawal from economic activity, and hinder a reduction in public debt ratios.

*Source: Executive Summary, IMF staff report for Lao P.D.R.*

### 14.      Authorities’ views: Additional sources of revenue are being pursued to make up for

### _cr09284 - 14.      Authorities’ views: Additional sources of revenue are being pursued to make up for

### Authorities’ fiscal stance and revenue measures
- Additional sources of revenue are being pursued to make up for the shortfall in mining revenues, including increased donor support.
- In May, the fuel tax structure was amended and other measures will be considered by the National Assembly in its June session.
- Efforts to strengthen customs collections on petroleum and automobile imports (70 percent of customs’ revenue) are underway, with positive initial results.
- Development needs call for maintaining budgeted expenditure; however, in light of current difficulties a notification has been sent to ministries, spending units, and lower levels of government to carefully consider new spending, while safeguarding necessary expenditures.
- There is no scope to reduce wages and benefits, but postponement of non-essential spending, such as new office furniture, is under consideration.
- While there may be a slight increase in the debt stock over the near term due to exceptional circumstances, the government’s policy of maintaining the debt on a downward path will continue over the medium term.
- Financing of off-budget operations by the BoL is currently being reviewed and will likely decline going forward; debt service payments related to off-budget operations will be incorporated in future budgets.

### Planned and contemplated revenue measures
- Planned measures include:
  - adjustments to the reference prices applied to imported vehicles;
  - imposition of additional alcohol and cigarette excises;
  - restructuring of taxes and fees on luxury goods.
- Additional measures under consideration include:
  - strengthening the monitoring of large tax payers;
  - broadening the tax base through a review of deductions and exemptions;
  - continued preparations for a well-designed full roll-out of the VAT.

### Revenue outlook
- Revenue is projected to rise modestly in 2009/10, as higher collection of income and turnover taxes as well as planned measures more than offset even lower profit taxes from the mining sector.

### Monetary developments and BoL operations
- Authorities’ actions and outcomes:
  - Strong signals from the BoL to increase lending resulted in a rapid expansion of credit.
  - Credit growth rose to 63 percent by June 2008, with the share of kip lending increasing to 40 percent (30 percent June 2007).
  - Credit growth accelerated to 85 percent in December 2008 and has remained broadly stable through April 2009, with a rising share of new lending going to finance quasi-fiscal operations.
  - Broad money growth has been more muted, tempered by the decline in net foreign assets.
- Authorities’ view: Achieving the growth target requires greater bank lending; new banks and market-based mechanisms signaled monetary easing and led to the desired increase in credit growth.
- Authorities’ view: The loan-to-deposit ratio remains low at around 50 percent. Nonperforming loans (NPLs) have ticked up only slightly due to problems in one private bank. The BoL is keeping a close watch over NPLs and has instructed banks to follow prudential regulations.
- Authorities’ view: The economic slowdown has necessitated BoL direct lending and issuance of BoL bonds to finance capital expenditure; these operations should be viewed as temporary.

### Staff assessment of monetary policy
- Staff views:
  - While some quantitative easing may have been justified, credit growth has been excessive, posing risks to macroeconomic stability and banking system soundness and fiscal sustainability.
  - Credit growth should be reined in, including through curtailment of BoL quasi-fiscal operations and by sending a clear signal to banks, including through a sizeable increase in the required reserve ratio.
  - BoL lending should be limited to temporary liquidity support for banks.

### Exchange rate and external position
- Exchange rate developments:
  - Since September 2008 the bilateral kip-U.S. dollar exchange rate has remained broadly stable despite slowing foreign exchange inflows.
  - In real effective terms, the kip has appreciated by more than 20 percent over the past 12 months (April), reflecting a significant strengthening relative to the Thai baht.
  - Increased flexibility has been introduced in the foreign exchange market, though the trading band around the daily reference rate remains narrow.
- Authorities’ view:
  - Strong capital flows led the kip to appreciate—this aided in bringing down inflation and fostered home-grown de-dollarization.
  - Top priority is given to exchange rate stability. A flexible approach has been adopted, with the kip fluctuating within a “soft target” five percent band in either direction relative to major trading partners on an annual basis.
  - Buying and selling are aimed at smoothing excess volatility. Vigilance will be maintained over both the exchange rate and reserves in view of ongoing global instability. Little change in reserve coverage is expected over the course of the year.
- Staff view:
  - Maintaining foreign exchange market stability requires swift and determined tightening of fiscal and monetary policies.
  - Any sizeable adjustment of the exchange rate in the current economic environment could trigger a reversal of recent gains in de-dollarization.
  - Exchange rate stability is consistent with current CGER-like estimates which continue to indicate that the exchange rate is broadly in line with its medium-term equilibrium level.

### Strengthening policy frameworks and institutions
- Staff recommendations:
  - Align policy implementation with institutional mandates.
  - With the BoL focused on monetary policy, develop indirect policy instruments, foster a working interbank market, and strengthen domestic liquidity management.
  - Continue progress in public financial management, including recentralization of tax, customs, and treasury operations (including the Treasury Single Account).
  - Reduce vulnerability to resource revenues through broadening of the tax base and move toward a medium-term budget framework.
- Authorities’ actions and intentions:
  - Progress on de-dollarization and banking system strengthening support increased use of indirect instruments in the future.
  - Consideration is being given to floating BoL securities for the sole purpose of liquidity management.
  - The BoL is encouraging banks to use the interbank market and to act as lender of last resort; results remain modest due to lack of quality collateral.
  - Consideration is being given to new facilities such as foreign exchange swaps.
  - Recentralization efforts are focusing on revenue sharing and budget allocation norms, and VAT roll-out is planned for January 2010.
  - A new chart of accounts and budget nomenclature were incorporated into the 2008/09 budget process; work aimed at full implementation is ongoing.

### Financial sector reform and supervision
- Banking sector reform status:
  - A donor-supported reform program aimed at strengthening banking oversight and restructuring SOCBs has been in place since 2003.
  - The two largest SOCBs have met financial targets set in the Governance Agreement which opened the door for bank recapitalization—capital adequacy of the SOCBs has increased and is positive for the first time in recent years, but remains well below the statutory minimum.
  - Bank recapitalization bonds have been issued for 588 billion kip (1.3 percent of GDP) since September 2005.
  - As of end-2008 (latest available data), one SOCB had positive CAR of 2 percent, while the remaining two SOCBs had negative CAR of less than -4 percent.
  - NPLs have been reduced through a series of work out and write-offs. Profitability has recently improved.
- Staff views and recommendations:
  - Financial intermediation remains low and the banking sector weak.
  - The financial position of the SOCBs needs to be strengthened to support private sector development and sustained growth.
  - Risk management and banking practices guided by international standards should be strived for.
  - Oversight capacity of the BoL needs to be strengthened, conflicts of interest related to SOCBs minimized, strict due-diligence in the granting of new licenses exercised, and cross-border supervisory collaboration increased.
  - Full implementation of the commercial banking law will provide a transparent and rules-based legal framework for banking activity.
  - A key developmental challenge is to create an environment in which banks can safely lend to small and medium enterprises on strictly commercial terms.
- Authorities’ view on supervision and licensing:
  - The BoL has stepped up onsite examinations and offsite supervision, although capacity-related challenges remain.
  - Improvements in banking practices will be supported by increased competition from new banks and investments by strategic partners—talks are progressing with a strategic foreign partner for the largest SOCB.
  - Bank licensing is conducted in a two-phase framework of pre- and post-entry surveillance following proper screening.
  - Consideration is being given to increasing the minimum required registered capital to 300 billion kip ($35 million, currently 100 billion).
  - The necessary laws and regulations associated with the 2006 Banking Law have been issued; however, a draft implementing decree is needed to fill identified gaps in subordinate legislation.

### Structural reform, growth diversification, and trade integration
- Background and authorities’ position:
  - Over the years, good progress has been made in opening the economy to private sector activity.
  - Recent legislative initiatives—such as the Enterprise Law, Mining Law, and draft Investment Law—are steps toward reducing discretionary regulation, leveling the playing field, and codifying business practices.
  - The government is committed to furthering the transition to a market-based economy through a legalistic approach, drafting new WTO-compliant laws and regulations.
  - The Investment Law will be considered by the National Assembly in its June session; implementation will proceed in line with WTO accession preparations.
- Staff recommendations:
  - Improve the business climate by establishing a transparent legal and regulatory environment and furthering trade integration.
  - Swift revision of local laws and regulations to be WTO compliant would demonstrate strong government commitment.
  - Priority should be given to productivity gains to protect competitiveness and avoid potential Dutch disease associated with large resource-related flows.
- WTO accession note:
  - The work program for WTO accession is becoming more challenging in light of increasingly stringent demands placed on Lao P.D.R. by member countries for granting accession.

### Data and statistical capacity
- Staff views:
  - Macroeconomic and financial data shortcomings hamper surveillance and impair policy formulation.
  - Priority should be placed on strengthening balance of payments statistics to better manage inflows and identify vulnerabilities.
  - Greater use of direct surveys, improvements in collection and compilation methodologies, and increased comprehensiveness would enhance national accounts reliability.
  - Recent efforts to improve fiscal statistics should continue, especially broadening coverage to include off-budget activities and SOE debt.
  - Enhanced coordination among statistical agencies is required; GDDS subscription would greatly enhance data dissemination.
- Authorities’ view:
  - Progress continues despite some data delays. Compilation of 2008 GDP statistics and monetary accounts experienced delays due to increased workloads and a new chart of accounts; these are expected to be resolved shortly.
  - National accounts statistics have recently been compiled on an expenditure basis for 2002–05. Continued work will require increased funding to complete required surveys.
  - Further gains to national accounts statistics require improvements in metadata.

### Staff appraisal: macroeconomic assessment and policy priorities
- Key staff conclusions:
  - Over the past five years, the Lao P.D.R. economy has performed well due to strong resource-related FDI, a booming global economy, and stable macroeconomic conditions, with reforms supporting the transition toward a market-based economy.
  - The impact on growth from the global crisis will likely be somewhat less than in other countries of the region, but policies are straining the external position.
  - Overly expansionary fiscal and credit policies, in the context of sharply lower foreign currency inflows, are placing downward pressure on international reserves.
  - Quasi-fiscal liabilities are mounting due to increasing off-budget operations financed in part by the BoL and rising contingent liabilities in the banking sector fueled by rapid credit expansion.
- Policy priorities recommended by staff:
  - Protect macroeconomic stability through fiscal adjustment and the reining in of credit growth.
  - Most of the required fiscal adjustment will likely need to come from the expenditure side, despite welcome revenue measures.
  - Curtail quasi-fiscal operations of the BoL and place all fiscal operations on-budget.
  - Send a strong signal to banks to tighten lending.
  - Prompt and determined tightening of fiscal and monetary policies is crucial to foreign exchange market stability to protect the external position and allow the exchange rate to continue to serve as a nominal anchor until market-based monetary policy instruments can be implemented.

*IMF staff report content as provided in the source PDF.*

### 35.      The global crisis has brought to the fore the need for strengthening policy

### _cr09284 - 35.      The global crisis has brought to the fore the need for strengthening policy

### Policy frameworks and fiscal management
- Policy implementation should be aligned with institutional mandates, and efforts to increase capacity should continue.
- Monetary policy conduct would be enhanced by:
  - development of indirect instruments,
  - fostering a working interbank market,
  - strengthening domestic liquidity management.
- Fiscal front:
  - ongoing recentralization and public financial management efforts are welcome.
  - Vulnerability to resource revenues could be reduced through a broadening of the tax base.
  - Budget planning would be strengthened by a move toward a medium-term expenditure framework.
- Recommendation:
  - It is recommended that Lao P.D.R. remain on the 12-month consultation cycle.

### Banking sector and SOCB reform
- SOCB reform efforts are yielding results, but the banking sector remains weak.
- Positive developments:
  - decline in nonperforming loans,
  - return to positive capital adequacy.
- Remaining needs:
  - further strengthening of the financial position of SOCBs,
  - improved risk management and banking practices.
- Supervisory recommendations:
  - BoL oversight capacity should be reinforced in light of the growing number of banks,
  - conflicts of interest should be mitigated.
  - Full implementation of the banking law would provide a framework for sound commercial banking activity.

### Structural reforms and growth
- Bold structural reforms are key to sustaining strong growth during the transition to a market economy.
- Priority reform areas:
  - improving the investment climate,
  - advancing trade integration,
  - establishing a transparent and rules-based environment to reduce regulatory uncertainty,
  - furthering WTO compliance to promote a level playing field.
- Expected outcome:
  - These reforms will enable private sector participation and broaden sources of growth, thereby reducing resource dependence.

### Real and external developments (highlights from figures)
- Growth has remained strong, supported by large investments in the resource (mining and hydro) sector.
- Inflation has come down as food and fuel prices abated, aided by currency appreciation.
- Recent movements in the current account have been driven mostly by the resource sector.
- Reserves have come down in recent months, and coverage has dipped below 4 months of imports.
- Monetary developments highlights:
  - Private credit growth has surged with increasing lending to local government and SOEs.
  - M2 growth has been more muted, restrained by the decline in NFA.
  - Slowing foreign currency inflows and the desire to keep the kip strong has led to a decline in GIR.
  - Banks remain liquidity rich, despite the rising loan-to-deposit ratio.

### Fiscal developments (highlights from figures and tables)
- The fiscal deficit is projected to widen due to revenue shortfalls and a large increase in planned spending.
- The sizeable public sector debt will tick up, with an increase in domestic debt.
- Weaker copper prices are expected to halt the trend increase in resource-related revenue.
- The wage bill and locally financed capital spending are set to increase sharply in 2008/09.

### Key statistics and projections (selected exact figures)
- GDP and prices (percentage change)
  - Real GDP growth: 6.4, 7.1, 8.4, 7.5, 7.2, 4.6
  - CPI (annual average): 10.5, 7.2, 6.8, 4.5, 7.6, 0.2
  - CPI (end year): 8.6, 8.8, 4.7, 5.6, 3.2, 3.3
- Public finances (in percent of GDP)
  - Revenue: 11.0, 11.8, 12.4, 14.0, 14.3, 13.0
  - Of which: Resources: 0.3, 0.8, 2.0, 2.7, 3.3, 2.8
  - Grants: 1.1, 1.7, 2.0, 1.7, 1.3, 2.1
  - Expenditure: 15.1, 18.2, 17.4, 18.6, 17.7, 22.9
  - Current (includes contingency and discrepancy): 8.6, 10.3, 10.3, 10.5, 10.7, 12.9
  - Capital and net lending: 6.4, 7.9, 7.2, 8.1, 7.0, 9.9
  - Overall balance (including grants): -2.9, -4.6, -3.0, -2.9, -2.0, -7.8
  - Domestic financing: -0.7, 0.2, -1.1, -0.9, -1.1, 5.4
  - External financing: 3.6, 4.4, 4.0, 3.8, 3.0, 2.4
- Money and credit (annual percent change; at end-March 2009)
  - Reserve money: 12.9, 18.0, 37.2, 58.8, 20.2, 32.0
  - Broad money: 22.8, 7.7, 30.1, 38.7, 18.3, 16.7
  - Bank credit to the economy: 9.0, 7.6, -9.1, 21.0, 84.6, 82.3
- Balance of payments and reserves
  - Exports (in millions of U.S. dollars): 535, 697, 1,133, 1,321, 1,639, 1,293
  - Imports (in millions of U.S. dollars): 1,056, 1,270, 1,589, 2,156, 2,816, 2,517
  - Current account balance (in millions of U.S. dollars): -424, -492, -367, -660, -887, -884
  - Current account balance (in percent of GDP): -16.9, -17.8, -10.3, -15.8, -16.5, -15.4
  - Gross official reserves (in millions of U.S. dollars): 228, 238, 336, 536, 636, 536
  - In months of prospective goods and services imports: 3.3, 2.8, 3.2, 3.9, 3.4, 3.0
- External public debt and debt service
  - External public debt (in millions of U.S. dollars): 2,109, 2,203, 2,351, 2,521, 2,931, 3,085
  - External public debt (in percent of GDP): 84.1, 79.8, 65.7, 60.5, 54.5, 53.9
  - External public debt service (in percent of exports): 7.1, 7.4, 3.6, 4.0, 4.2, 6.9
- Exchange rate
  - Official exchange rate (kip per U.S. dollar; end-of-period): 10,357; 10,767; 9,655; 9,341; 8,466; 8,519
  - Memorandum GDP at current market prices:
    - In billions of kip: 26,549; 29,369; 35,983; 39,874; 46,700; 48,955
    - In millions of U.S. dollars: 2,509; 2,761; 3,577; 4,170; 5,374; 5,721

### Medium-term framework (selected projections)
- Real GDP (2006–14): 8.4, 7.5, 7.2, 4.6, 5.4, 8.4, 6.7, 7.4, 7.3
- Consumer prices (end-period; 2006–14): 4.7, 5.6, 3.2, 3.3, 3.3, 3.5, 3.2, 3.1, 3.0
- Public finances (in percent of GDP; selected years)
  - Revenue: 12.4, 14.0, 14.3, 13.0, 13.3, 13.4, 14.1, 14.5, 14.9
  - Expenditure: 17.4, 18.6, 17.7, 22.9, 21.1, 20.8, 20.4, 20.1
  - Overall balance: -3.0, -2.9, -2.0, -7.8, -5.7, -5.4, -4.4, -3.5, -2.8
- Balance of payments (selected)
  - Current account balance (in millions of U.S. dollars; 2006–14): -367, -660, -887, -884, -493, -813, -925, -1,233, -1,686
  - Gross official reserves (in millions of U.S. dollars; 2006–14): 336, 536, 636, 536, 512, 595, 736, 939, 1,184
  - Exports (2006–14): 1,133; 1,321; 1,639; 1,293; 1,671; 1,935; 2,199; 2,414; 2,684
  - Imports (2006–14): 1,589; 2,156; 2,816; 2,517; 2,381; 2,977; 3,397; 3,911; 4,667

*Prepared by the staffs of the International Monetary Fund and the International Development Association; Joint IMF/World Bank Debt Sustainability Analysis 2009 (June 24, 2009).*

### 1. The LIC DSA for Lao P.D.R. indicates that the country continues to face a high

### _cr09284 - 1. The LIC DSA for Lao P.D.R. indicates that the country continues to face a high

### Risk assessment and headline finding
- The country "continues to face a high risk of debt distress."
- High concessionality of official borrowing keeps debt service ratios relatively contained, but:
  - "Public external debt stock indicators are expected to remain at or above policy-dependant indicative thresholds throughout half of the projection period under the baseline."
  - Debt indicators "could increase further in the event of weaker macroeconomic performance or greater accumulation of nonconcessional debt."
- "The global financial crisis has lowered growth prospects due to delays in investment projects and softer external demand, and the external position has weakened."
- "The fiscal position is under strain, as are international reserves."

### Background and key assumptions
- External PPG debt stock at end-2008:
  - Nominal stock: "US$2.9 billion at end-2008, or 53 percent of GDP, down from 81 percent at end-2005."
  - Share of exports of goods and nonfactor services: declined "from an estimated 241 percent at end-2005 to around 143 percent currently."
  - NPV of debt at end-2008: "35 percent of GDP or 91 percent of exports."
- Composition of PPG external debt:
  - "Around 69 percent of PPG debt in Lao P.D.R. is held by multilateral creditors, mainly the Asian Development Bank (AsDB—39 percent) and International Development Association (IDA—23 percent)."
  - "About 29 percent is held by bilateral creditors—mainly Russia, China, Thailand, and Japan."
  - "The remaining 2 percent of PPG external debt comprises external debt incurred by public entities on nonconcessional terms and guaranteed by the government."
- Domestic public debt:
  - "At end-2008, the stock of recorded domestic public debt amounted to 2.1 percent of GDP."
  - "Total public debt, including both domestic and external, stood at 55.2 percent of GDP."
  - Baseline medium-term domestic debt stabilization: "around 8–9 percent of GDP in the medium and long term."
- Baseline growth and investment assumptions:
  - "In 2009–11, growth would remain robust (averaging 6 percent)."
  - Medium-term FDI assumption: "8.1 percent of GDP between 2009–14" (baseline) versus historical average "2.7 percent of GDP" (alternative historical-average scenario).
  - Baseline assumption: global crisis delays near-term investment pipeline by two years but leaves future planned projects' construction unaffected.

### Debt indicators and thresholds (end-2008)
- Indicative thresholds for "weak performer" CPIA category:
  - NPV of debt-to-GDP: "30 percent"
  - NPV of debt-to-exports: "100 percent"
  - NPV of debt-to-revenue: "200 percent"
  - Debt service-to-exports: "15 percent"
  - Debt service-to-revenue: "25 percent"
- Lao P.D.R. end-2008 indicators (as reported):
  - NPV of debt, as a percent of GDP: "35"
  - NPV of debt, as a percent of Exports: "91"
  - NPV of debt, as a percent of Revenue: "255"
  - Debt service, as a percent of Exports: "4"
  - Debt service, as a percent of Revenue: "12"

### External debt sustainability analysis — baseline and sensitivities
- Baseline path:
  - "Public external debt stock indicators remain at elevated levels over the medium term, declining to the indicative thresholds only toward the middle of the projection period."
  - NPV of public external debt "picks up slightly over the medium term before declining steadily to 20 percent of GDP over the longer term."
  - Debt service ratios "fall continually and remain below indicative thresholds throughout, despite falling concessionality."
- Main vulnerabilities (stress tests and scenario results):
  - "External debt sustainability is most vulnerable to a depreciation of the nominal exchange rate."
  - A "30 percent depreciation of the kip would lead to a sharp jump in the NPV of debt-to-GDP and debt-to-revenue ratios, which would remain above the respective debt stock thresholds through most or all of the projection period."
  - "Lower export growth (by one standard deviation in 2010–11) would push the NPV of debt-to-exports up to double its baseline level over the first half of the projection period and in excess of indicative thresholds throughout."
  - Alternative (historical-average) scenario driven by lower FDI:
    - Historical-average FDI "2.7 percent of GDP" vs baseline "8.1 percent of GDP between 2009–14" implies substantial additional debt financing.
    - "All debt indicators would rise steadily over the projection period and remain more than 50 percentage points above indicative thresholds" under that scenario.

### Public sector debt sustainability
- PPG debt path under baseline:
  - PPG debt "is expected to rise over the medium term reflecting a deterioration of the fiscal position and rising quasi-fiscal liabilities."
  - Domestic debt rises "from 2 percent of GDP in 2008 to around 8–9 percent of GDP in the medium term and stabilizes at that level in the long term."
  - As fiscal adjustment is pursued, "PPG debt declines to around 35 percent of GDP."
- Sensitivity to exchange rate (public debt):
  - "A one-time 30 percent real depreciation of the kip exchange rate would raise the NPV of public debt-to-GDP and public debt-to-revenue ratios to 58 and 370 percent, respectively."
  - The impact on the debt service-to-revenue ratio would rise "to around 22 percent"; the impact is "more sustained over the longer term."
- Alternative scenarios:
  - With key variables at historical averages, "the NPV of the public debt-to-GDP ratio remains elevated over the longer term."
  - "Assuming that the primary balance from 2009 is maintained throughout the projection period would lead to a severe increase in debt ratios" (noted as likely overstating risks).

### Conclusions and policy recommendations
- Core conclusion:
  - "While Lao P.D.R. has made progress in reducing its external and public debt burden, it still faces a high risk of debt distress."
  - Near-term deterioration driven by "the global crisis" and longer-term pressures from "current and planned large-scale investments in hydropower and mining projects that will only deliver returns over the medium term."
  - Outlook "is particularly sensitive to large swings of the exchange rate."
- Policy recommendations and priorities:
  - "External borrowing should be obtained on concessional terms and fiscal and quasi-fiscal liabilities should be carefully managed."
  - "Continued prudent debt management as well as cautious assessment and monitoring of large-scale projects will be required to mitigate the risks posed to external and public debt sustainability."
  - "Fiscal risk could arise if these projects fail to generate the expected returns, including to the government’s own equity stakes."
  - "Improving debt management capacity and developing a medium-term borrowing strategy for the government, including for resource sector activity, as well as greater disclosure of borrowing plans, would substantially enhance the assessment of debt sustainability."

### Notable exact figures and statistics (selected)
- External PPG debt nominal stock at end-2008: "US$2.9 billion"
- External PPG debt as share of GDP at end-2008: "53 percent"
- External PPG debt as share of GDP at end-2005: "81 percent"
- NPV of debt at end-2008: "35 percent of GDP" and "91 percent of exports"
- Exports ratio end-2005: "241 percent"; currently "around 143 percent"
- PPG debt holders: Multilateral "69 percent" (AsDB "39 percent", IDA "23 percent"); Bilateral "29 percent"; Other "2 percent"
- Domestic public debt at end-2008: "2.1 percent of GDP"
- Total public debt (domestic + external) at end-2008: "55.2 percent of GDP"
- Baseline growth 2009–11: "averaging 6 percent"
- Medium-term baseline FDI assumption: "8.1 percent of GDP between 2009–14"
- Historical-average FDI: "2.7 percent of GDP"
- Baseline long-term NPV of public external debt: "20 percent of GDP"
- Indicative thresholds for weak CPIA category: NPV debt-to-GDP "30 percent"; NPV debt-to-exports "100 percent"; NPV debt-to-revenue "200 percent"; Debt service-to-exports "15 percent"; Debt service-to-revenue "25 percent"
- End-2008 debt service ratios: Exports "4 percent"; Revenue "12 percent"
- Stress depreciation scenario: "30 percent depreciation of the kip"
- Public debt stress results for 30 percent real depreciation: public debt-to-GDP "58 percent"; public debt-to-revenue "370 percent"; debt service-to-revenue "around 22 percent"

*Source: IMF and World Bank staffs’ estimates; Lao P.D.R. authorities.*

### Box 1: Baseline Scenario—Underlying Assumptions (2009–29)

### Box 1: Baseline Scenario—Underlying Assumptions (2009–29)

### Real GDP growth and structural change
- Real GDP growth is projected to average 6 percent during 2009–11 as the global crisis delays new resource sector-related projects, and falling rural incomes and weak external demand weigh on growth.
- Support is provided by large resource projects already under construction.
- Over the medium term, growth picks up (6½ percent average) as construction of new large projects resumes, rising incomes (domestic and foreign) boost consumption, and nonresource sector growth (mainly from agriculture, light manufactures, and tourism and other services) picks up.
- Overall growth is relatively volatile as resource sector output is subject to discrete changes as new projects come online or existing mines are exhausted.
- Over the longer term:
  - Growth in the resource sector is expected to level off (about 6 percent).
  - Nonresource sector growth would rise to a sustained level of about 7.5 percent over the second half of the projection period.
  - The share of agriculture in GDP declines as the transition to a market-based economy leads to an increasing share of industry and services.
  - Graduation from low-income status could be achieved in the second half of the projection period.

### External current account, exports, and FDI
- The external current account deficit is projected to narrow considerably in the long run.
- The nonresource current account would deteriorate over the next decade reflecting the increasing cost of industrialization, before moderating over the longer term.
- The resource current account is assumed to shift to surplus as large projects transition from construction to operation phase.
- The assumed pick up in nonresource export and services is driven by strengthened competitiveness and regional integration, supported by improvements in the investment climate, a streamlining of business regulations, and meeting trade commitments.
- Notwithstanding its recent weakening, the overall external position is expected to strengthen over time reflecting strong private capital and official inflows, and increasing international reserve accumulation in the outer years as the resource sector matures and industrialization takes hold.
- Exports are highly volatile due to the timing of production in the mining and electricity sectors:
  - Exports decline by 21 percent in 2009 mainly because of lower prices for copper.
  - Exports increase by 29 percent in 2010 due to the coming online of Nam Theun II.
- Imports in the resource sector are closely linked to the development of new resource projects.
- FDI:
  - In the near term, FDI is in line with the 2006–08 average as resource sector investments remain robust.
  - Over the long term, resource FDI declines, while nonresource FDI is assumed to grow at the same rate as the nonresource economy.

### External financing composition and terms
- External financing is assumed to remain largely on concessional terms.
- Over the long term, grant financing decreases with economic development.
- Multilateral creditors:
  - Projected loan disbursements in the medium term are relatively low since IDA and the AsDB have a pipeline of operations financed on grant terms.
  - Over the longer term, grant financing decreases with economic development, leading once again to a moderate increase in project loans.
- Bilateral creditors:
  - For 2009–10, projected loan disbursements increase as donors provide support to the government’s development agenda.
  - Over the medium and longer term, greater participation by new emerging market creditors leads bilateral finance to take on an increasing role, including for on-lending purposes to state-owned enterprises.
- Commercial creditors:
  - Over the medium term, commercial disbursements are relatively small, principally used to finance a portion of the government’s equity stake participation in new hydropower projects.
  - This includes the planned US$70 million bond issue backed by royalties from the Theun-Hinboun and Houay Ho projects.
  - Over time, as development continues and market access increases, commercial borrowing takes on a larger role but disbursements remain below those of official creditors.

### Fiscal policy and public sector balance
- Fiscal policy is expansionary in the near term:
  - The public sector balance is expected to post a deficit of nearly 8 percent of GDP in 2008/09 (including off-budget operations), and remain elevated over the next few years.
- The nonresource current balance turns negative, implying that resource revenues are used to fund current expenditures.
- Under such a scenario:
  - Government deposits would quickly be depleted and domestic borrowing would increase.
  - Financing constraints and the rising domestic debt stock provide an impetus for adjustment.
  - In addition to a sizable revenue effort, a reduction in domestically financed capital expenditure leads to a lower deficit in the second half of the medium term.
- Over the longer term, vulnerability to resource-related revenue is decreased, as shown by a return of the nonresource current balance to positive territory.

### Domestic debt and domestic debt structure
- Domestic debt increases over the medium term.
- Domestic debt is initially assumed to be composed mainly of short-term debt (treasury bills) given the undeveloped nature of the domestic market for government debt.
- In the medium term, the role of medium- and long-term debt is assumed to increase, comprising about half of domestic debt.

### Indicators and stress-test context (figures and tables referenced)
- Staffs' projections and simulations produce time paths and stress-test outcomes for:
  - Debt accumulation, PV of debt-to-GDP ratio, PV of debt-to-exports ratio, PV of debt-to-revenue ratio, debt service-to-exports ratio, and debt service-to-revenue ratio for 2009–29.
  - Public and publicly-guaranteed (PPG) external debt indicators and sensitivity analyses under alternative scenarios and bound tests (including a one-time 30 percent nominal depreciation in 2010 and exports shocks).
- Selected numeric highlights from simulations and assumptions (as reported):
  - Exports decline by 21 percent in 2009, increase by 29 percent in 2010.
  - Planned commercial bond issue: US$70 million.
  - Real GDP growth (selected projections in tables): e.g., 8.4, 7.5, 7.2, 6.8, 0.9, 4.6, 5.4, 8.4, 6.7, 7.4, 7.3, 6.6, 5.0, 7.0, 6.6 (series reported under “Key macroeconomic assumptions”).
  - Grant-equivalent financing (in percent of GDP) examples: 3.3, 3.3, 3.7, 3.6, 3.7, 3.8, 3.2, 1.7, 2.7 (series reported).
  - Government revenues (excluding grants, in percent of GDP) series includes: 12.7, 14.3, 13.7, 13.2, 13.5, 13.6, 14.3, 14.6, 14.9, 15.7, 17.3, 16.1 (series reported).
  - Total gross financing need (billions of U.S. dollars) examples: 0.3, 0.7, 0.6, 0.5, 0.5, 0.6, 0.6, 0.9, 1.0, 0.8, 1.5 (series reported).
  - PV of PPG external debt (in percent of exports) examples: 91.3, 118.6, 108.3, 102.6, 96.3, 92.9, 88.4, 74.8, 62.0 (series reported).
- Stress-test note:
  - “The most extreme stress test is the test that yields the highest ratio in 2019.” Specific correspondences are provided for figure panels (e.g., one-time depreciation shock, exports shock).

*Source: Staffs' projections and simulations (Box 1: Baseline Scenario—Underlying Assumptions, 2009–29).*

### ANNEX I. LAO P.D.R.: FUND RELATIONS

### ANNEX I. LAO P.D.R.: FUND RELATIONS (As of May 31, 2009)

### I. Membership and Quota
- Joined 7/05/61; Article XIV
- Quota: 52.90 SDR million (100.00 percent)
- Fund holdings of currency: 52.90 SDR million (100.00 percent)

### II. SDR Department
- Net cumulative allocation: 9.41 SDR million (100.00 percent)
- Holdings: 9.80 SDR million
- 104.18 (value appears in source as presented)

### III. Outstanding Purchases and Loans
- PRGF arrangements: 11.78 SDR million (22.26 Percent Quota)

### IV. Latest Financial Arrangements (approval, expiration, amount approved, amount drawn)
- PRGF: Approval Date 4/25/01, Expiration Date 4/24/05, Amount Approved 31.70 SDR million, Amount Drawn 18.12 SDR million
- PRGF: Approval Date 6/04/93, Expiration Date 5/07/97, Amount Approved 35.19 SDR million, Amount Drawn 35.19 SDR million
- SAF: Approval Date 9/18/89, Expiration Date 9/17/92, Amount Approved 20.51 SDR million, Amount Drawn 20.51 SDR million

### V. Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs)
- Forthcoming principal and charges/interest, by year:
  - 2009: Principal 1.81; Charges/interest 0.06; Total 1.87
  - 2010: Principal 3.62; Charges/interest 0.04; Total 3.66
  - 2011: Principal 3.17; Charges/interest 0.02; Total 3.19
  - 2012: Principal 2.27; Charges/interest 0.01; Total 2.27
  - 2013: Principal 0.91; Charges/interest 0.00; Total 0.91

### VI. HIPC and MDRI
- Implementation of Heavily Indebted Poor Countries Initiative (HIPC): Not applicable
- Implementation of Multilateral Debt Relief Initiative (MDRI): Not applicable

### VII. 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.
- Main findings, recommendations, and progress reported in Country Report Nos. 03/308 and 05/8.
- Progress on safeguards recommendations has been slow.
- Authorities 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; the joint audit issue remains unresolved.

### VIII. Exchange Rate Arrangement
- Since September 1995: managed floating exchange rate system.
- BoL sets a daily official reference rate based on the weighted average of the previous day’s commercial bank and interbank rates.
- Effective August 2007: banks required to maintain buying and selling rates within ± 0.25 percent of BoL’s daily reference rate for the U.S. dollar (previously ± 1.15 percent), and ±0.5 percent for the baht and euro.
- For all other currencies, commercial banks may not exceed a margin of 2 percent between buying and selling rates.
- Within prescribed limits, commercial banks free to set their own rates.
- IMF de-facto classification: “other managed arrangement.”

### IX. Exchange and Payments System
- Lao P.D.R. no longer maintains restrictions on making payments and transfers for current international transactions under transitional arrangements of Article XIV, Section 2.
- Maintains restrictions imposed for preservation of national or international security (notified pursuant to Decision No. 144-(52/51)).
- Maintains a restriction subject to IMF approval under Article VIII (tax payment certificates required for some transactions).
- A joint LEG/MCM mission in August 2004 reviewed remaining measures to facilitate Lao P.D.R.’s acceptance of obligations under Article VIII, including elimination of an exchange restriction on making payments and transfers for current international transactions.

### X. Last Article IV Consultation
- Discussions held in Vientiane during April 30–May 13, 2008.
- Country Report No. 08/350 was discussed by the Executive Board on July 30, 2008 and published on October 22, 2008.

### XI. Resident Representative
- Mr. Benedict Bingham assumed the Senior Resident Representative post for Vietnam and Lao P.D.R., based in Hanoi, on October 17, 2007.

### XII. Technical Assistance (since 2004)
- STA:
  - Government finance statistics: April–May 2004; April–May 2009
  - Money and banking statistics: April–May 2004
  - National accounts statistics: November–December 2006
- FAD:
  - Expert on customs administration: January and June 2004, February 2005, October and December 2008, January 2009
  - Expert on tax administration: March–April and November 2004
  - Mission on public expenditure management: June–July 2004 and October 2004
  - Missions on tax policy and administration: October 2004
  - Expert on public expenditure management: November 2004, March–April 2005
  - Expert on customs law: January and March 2008
- MCM:
  - Expert on banking supervision: January–February, May–July, and September–October 2004; January–March, April–June, and September–December 2005
  - Expert on foreign exchange regulations: July–August 2004
  - Mission of Article VIII (jointly with LEG): August 2004
  - Mission on central bank audit: May 2005

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### ANNEX II. LAO P.D.R.: RELATIONS WITH THE WORLD BANK GROUP

### IMF-World Bank Collaboration and Joint Roles
- IMF leads on macroeconomic policy advice (tax, fiscal, monetary, exchange rate policies, economic statistical issues).
- World Bank leads on growth and poverty reduction strategy and structural reforms (public finance management; SOE restructuring; private sector development; trade, legal, and judicial development; natural resource management).
- Joint coordination on structural issues with macroeconomic implications: financial sector reform, public expenditure management, trade policy, poverty reduction strategy.

### Poverty Reduction Strategy and Bank Support
- Government prepared first full Poverty Reduction Strategy Paper (NGPES) in 2003.
- Joint Staff Advisory Note (JSAN) presented before IDA and IMF Boards in November 2004.
- Sixth National Socio Economic Development Plan (2006–2010) (NSEDP) prepared in 2006 with strong poverty focus; presented at 9th Round Table Meeting in November 2006; annual progress reports provided in November 2007 and 2008.
- Bank and Fund’s JSAN of PRS/NGPES and annual progress report presented before IDA and IMF Boards in June 2008.
- Bank support via Poverty Reduction Support Operations (PRSOs):
  - PRSO-1: $10 million (approved March 2005)
  - PRSO-2: $8 million (approved April 2006)
  - PRSO-3: $10 million (approved June 2007)
  - PRSO-4: $10 million (approved June 2008)
  - Second programmatic series PRSO4-7 approved by Bank Board in June 2008

### Public Expenditure Management and Financial Sector Reforms
- Bank provided extensive technical assistance for multi-year Public Expenditure Management Strengthening Program (PEMSP).
- Public Expenditure Review 2006 completed jointly with IMF and donors; Public Expenditure Tracking Survey (PETS) for education and health sectors in 2007; Public Expenditure Review 2009 underway.
- Assistance in preparation and implementation of a Government Finance Statistics Manual-compatible Chart of Accounts and new Budget Law, focusing on inter-governmental fiscal relations.
- Bank supported restructuring of state-owned commercial banks (SOCBs), drafting of banking sector legislation, and drafting of Financial Sector Strategy.

### Trade Policy and SOE/Private Sector Support
- Bank led Diagnostic Trade Integration Study (DTIS) with government and Integrated Framework donors.
- Multi-Donor Trust Fund established to support DTIS action matrix.
- Customs and Trade Facilitation Project (designed with IMF) approved June 2008 to support customs modernization through automated customs system.
- Bank supported SOE reform and restructuring to improve transparency, implement international standard audits of large SOEs, restructure to reduce losses or raise profits for public utility SOEs, and reform pricing policies in water, power, and telecoms.
- Private sector development supported via Investment Climate Assessments and IFC (through Mekong Private Sector Development Facility) coordination of Lao Business Forum.

### Nam Theun 2 (NT2) Hydropower Project
- Bank support in March 2005: IDA partial risk guarantee, IDA grant for environmental and social mitigation, and MIGA guarantee.
- Bank’s decision framework pillars:
  - (i) Establish and implement viable development policy framework with concrete performance, and national programs for poverty reduction and social and environmental protection.
  - (ii) Ensure technical, financial, economic, and implementation aspects and design/implementation of sound safeguards.
  - (iii) Achieve wider understanding and broader support from international donor community, and global and local civil society.
- Bank supports and monitors NT2 implementation; progress remains good; expected to be operational in early 2010.

### Bank Strategy and Lending Operations
- Country Assistance Strategy (CAS) presented March 2005; CAS update and extension through 2011 in May 2007.
- CAS priorities:
  - (i) sustaining growth through regional opportunities and better natural resource management;
  - (ii) improving social outcomes through financial management and service delivery capacity;
  - (iii) strengthening management capacities, partnerships, and monitoring for NGPES implementation;
  - (iv) implementing NT2 program as model for sustainable growth and social outcomes.
- Updated CAS: lending and non-lending program with a notional amount of about US$200 million in new commitments (grants) during July 1, 2005 to June 30, 2011 (subject to IDA Performance Based Allocation).

### Lending and IDA Commitments (as of dates in source)
- As of April 1, 2009: total amount approved US$871.9 million equivalent of IDA credits and grants.
- Average disbursement in last three years: US$31 million per year.

### IDA: Commitments and Disbursements to Lao P.D.R., 1977–2008 (In millions of U.S. dollars; as of January 1, 2009)
- Fiscal Year (to June 30) — Committed — Disbursed — Repayments*
  - 1977–93: 335.2 — 180.7 — 1.5
  - 1994: 48.4 — 45.1 — 0.6
  - 1995: 19.2 — 31.4 — 0.6
  - 1996: 60.7 — 28.6 — 0.6
  - 1997: 48.0 — 65.2 — 0.6
  - 1998: 34.7 — 26.5 — 1.3
  - 1999: 29.8 — 27.8 — 1.5
  - 2000: 0.0 — 18.1 — 3.0
  - 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: 76.0 — 36.0 — 8.4
  - 2006: 37.0 — 36.3 — 8.7
  - 2007: 28.0 — 53.4 — 9.6
  - 2008: 25.0 — 50.9 — 12.5
- Total: 888.9 committed; 748.3 disbursed; 70.8 repayments
- *Note: repayments include principal repayments and do not include commitment or service charges.

### World Bank Main Non-Lending Work (selected items)
- Completed FY05–FY08 highlights: Financial Sector Note; Economic Monitors (two issues each year); Country Economic Memorandum (CEM) – Sources of Growth; Investment Climate Assessment; Diagnostic Trade Integration Study; Integrated Public Expenditure Review and Integrated Fiduciary Assessment; Poverty Reduction Strategy Paper – Joint Staff Assessment Note; Rural Sector Strategy; Public Expenditure Tracking Survey; NT2 Revenue Management; and others.
- Ongoing and Proposed FY09–FY11 highlights: Economic Monitors (two issues each year); Financial Sector Strategy; Financial Sector Assessment; Investment Climate Assessment 2; Country Economic Memorandum on Natural Resource Management 2009; Information and Communication Technologies Strategy; Forestry Sector Strategy Note; Intergovernmental Fiscal Relations and Decentralization; Public Expenditure Tracking Survey; Health Sector Financing Strategy; and others.

*Source: _cr09284 - ANNEX I. LAO P.D.R.: FUND RELATIONS*

### ANNEX III. LAO P.D.R.: RELATIONS WITH THE ASIAN DEVELOPMENT BANK

### ANNEX III. LAO P.D.R.: RELATIONS WITH THE ASIAN DEVELOPMENT BANK

### Historical engagement and strategic alignment
- The Asian Development Bank (AsDB) has extended development assistance to Lao P.D.R. since 1968.
- Since the late 1990s AsDB has focused its activities on poverty reduction.
- AsDB’s Long-term Strategic Framework (Strategy 2020) for 2008-2020 priorities:
  - Scale up operations in support of (i) private sector development and private sector operations; (ii) environmentally sustainable development, including reduction of carbon dioxide emissions and projects to address climate change; and (iii) regional and subregional integration.
  - Sector focus: infrastructure (including rural infrastructure), finance and education.
  - Drivers of change: good governance and capacity development, gender equity, knowledge solutions and partnerships.
  - Five core areas of operations: (i) infrastructure, including rural infrastructure; (ii) environment, including climate change; (iii) regional cooperation and integration; (iv) financial sector development; and (v) education.
- AsDB’s Country Strategy and Program (CSP) for Lao P.D.R. 2007–11 (results-based) aligned with the Lao P.D.R.’s Sixth National Socio Economic Development Plan, 2006-2010 (NSEDP) and focuses on:
  - (i) promoting pro-poor sustainable growth through private sector development (small and medium-sized enterprise development, transition to commercial agriculture, and regional integration);
  - (ii) fostering inclusive social development: accelerating progress in non-income MDGs (education, primary health care, water supply);
  - (iii) addressing priority governance issues: building capacity for good governance and Nam Theun 2 Hydropower project revenue management.
- The CSP emphasizes coordinated capacity development and program/sector-based approaches and is supported by the Vientiane Declaration on Aid Effectiveness and its country action plan.
- AsDB’s Greater Mekong Subregion (GMS) strategy and program aim to foster connectivity, promote large-scale foreign direct investment, and create regional public goods; Lao P.D.R. is a key GMS land-link country.

### Geographic and sector targeting
- AsDB interventions will focus primarily on the poor northern regional provinces and along the East-West economic corridor linking Thailand to Savannakhet (Lao P.D.R.) and to Vietnam.
- AsDB aims to explore options to maximize Lao P.D.R.’s benefits from sub-regional cooperation.

### Operations, approvals, and financing (historical and planned)
- Since 1970 AsDB has approved 76 loan and grant financed projects for a total of $1.27 billion—of which 25 projects were currently active—and 235 technical assistance projects for a total of $122.8 million (as of end December 2008).
- 2007: AsDB program operations shifted to 100% grant.
- 2008 approvals:
  - Two grants comprising JFPR for Alternative Livelihood for Upland Ethnic Group in Houaphan Province and GMS Sustainable Tourism Development amounting to 1.8 million and 10.0 million, respectively.
  - 9 TA projects amounting to $3.5 million were approved.
- 2009 approvals and plans:
  - AsDB approved 2 grants totaling $43 million and expects to approve another 3 totaling 45 million in the later half of 2009 (a total of $88 million) and 9 TAs amounting to $4.7 million.
  - AsDB proposes to approve $42 million ($22 million grants and $20 million concessional loan) for regional projects which Lao PDR is party to. Lao PDR’s share would be $7.67 million.

### Commitments and disbursements (2001–09)
- Commitments (In millions of U.S. dollars):
  - 2001: 65.0
  - 2002: 43.2
  - 2003: 34.9
  - 2004: 54.8
  - 2005: 87.0
  - 2006: 60.8
  - 2007: 56.0
  - 2008: 30.8
  - 2009 /1: 95.7 /2
- Disbursements (In millions of U.S. dollars):
  - 2001: 44.7
  - 2002: 48.6
  - 2003: 54.7
  - 2004: 48.5
  - 2005: 78.7
  - 2006: 78.5
  - 2007: 76.6
  - 2008: 49.0
  - 2009 /1: 59.1
- Notes:
  - Source: Data provided by the Asian Development Bank.
  - 1/ Planned figures.
  - 2/ This includes $88 million from the national operations and another $7.67 million (Lao Share) for the Subregional projects involving Lao PDR.

### Statistical capacity and data adequacy — key findings
- General assessment:
  - Macroeconomic and financial data provided to the Fund have serious shortcomings that significantly hamper surveillance.
  - Priority areas for improvement: balance of payments statistics, national accounts, external public debt, and subnational fiscal accounts.
  - Improvements needed in timeliness and accuracy and greater coordination among agencies compiling macroeconomic statistics.
  - A GDDS coordinator has been appointed, but the GDDS metadata and a strategy for statistical improvement have yet to be finalized.
  - Macroeconomic and financial data are published in periodic reports by the National Statistical Center (NSC) and the Bank of Lao P.D.R. (BoL).

- National accounts:
  - Annual estimates of GDP by activity at current and constant 2002 prices broadly follow the System of National Accounts 1968.
  - Limitations: lack of regular surveys and use of inadequate methods for collecting comprehensive data on current economic activities; heavy reliance on production and volume indicators from line ministries.
  - LECS: Lao Expenditure and Consumption Survey 2002–03 (LECS) finalized and released in 2005 with support from the Swedish International Development Agency.
  - NSC progress: implementation of annual enterprise and household surveys; a late 2006 STA regional advisor identified data gaps and issues in deflators and expenditures.

- Price statistics:
  - NSC compiles a monthly CPI; latest basket introduced in January 2006 using results of the 2002/03 LECS.
  - CPI basket excludes own consumption (only market purchases).
  - Progress on a producer price index has stalled.

- Government finance statistics (GFS):
  - MOF’s Budget Department produces monthly, quarterly, and annual revenue, expenditure, financing, and government debt statistics; most data recorded on a cash basis.
  - External and domestic debt data compiled by the MOF’s External Financial Relations Department and Budget Departments; debt data are comprehensive and available by type of debt holder and instrument.
  - Efforts ongoing to improve debt data coverage, particularly relating to state-owned enterprises’ debt.
  - 2009 GFS technical assistance mission recommended bringing valuation of stock and flow foreign debt data in local currency in line with international standards.
  - Weaknesses: accuracy, transactions coverage, timeliness; provincial monitoring systems are weak after decentralization in 2000/01; off-budget activities not included.
  - Reforms: establishment of the Finance Statistics Division (FSD) in the Fiscal Policy Department; FSD staff attended a GFS Workshop in early 2008 and began mapping fiscal source data to the Government Finance Statistics Manual 2001 (GFSM 2001) framework.
  - Reporting to IFS has been irregular; except for annual data in the Official Gazette, no fiscal data are disseminated in-country.
  - 2009 GFS mission recommendations aimed to (1) enable compilation of more detailed quarterly and annual fiscal data in GFSM 2001 framework, and (2) regular dissemination of these data on the MOF’s website and to the IMF.

- Monetary statistics:
  - 2004 monetary and financial statistics mission identified problems in compilation and made recommendations on sectorization, classification, valuation, chart of accounts for BoL and commercial banks, and reconciliation with government finance statistics.
  - Many recommendations remain unimplemented, including sectorization of the commercial bank balance sheet.
  - Authorities have not submitted test data in Standardized Report Forms methodology of the Monetary and Financial Statistics Manual.
  - Financial soundness indicators should be compiled and published.

- Balance of payments (BOP):
  - BoL compiles quarterly and annual BOP with inputs from NSC, MOF, Ministry of Planning and Investment, and commercial banks.
  - Certain major activities are unreported; improvements needed across current account categories, foreign direct investment, and private capital flows.
  - Data reconciliation between fiscal accounts and BOP on external loans and grants needs strengthening.
  - New customs procedures adopted in 2000 have yet to produce more accurate trade data on a regular basis due to technical reasons.
  - Government of Japan provides technical assistance to address some issues.
  - BoL reports to STA quarterly BOP data once a year in a highly aggregated format; last published data correspond to 2007.

### Data standards, ROSC and reporting status
- Not a GDDS participant.
- No data ROSC is available.
- Reporting to STA:
  - Quarterly and annual GFS statistics for Lao PDR appeared in the Fund’s publications in the second half of 2008; subsequent reporting of quarterly data for IFS publication has been irregular.
  - Except for fiscal data reported to APD and annual data compiled by the Budget Department (disseminated in the Official Gazette), no fiscal data are disseminated domestically.
  - No monetary data are currently reported to STA for publication in the International Financial Statistics.

### Table of Common Indicators Required for Surveillance (As of June 5, 2009) — selected entries
- Exchange Rates:
  - Date of Latest Observation: 06/05/09
  - Date Received: 06/05/09
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities:
  - Date of Latest Observation: April 2009
  - Date Received: 05/22/09
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: I
- Reserve/Base Money:
  - Date of Latest Observation: Mar 2009
  - Date Received: 05/12/09
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Broad Money:
  - Date of Latest Observation: Mar 2009
  - Date Received: 05/12/09
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Central Bank Balance Sheet:
  - Date of Latest Observation: Mar 2009
  - Date Received: 05/12/09
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Consolidated Balance Sheet of the Banking System:
  - Date of Latest Observation: Mar 2009
  - Date Received: 05/12/09
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Interest Rates:
  - Date of Latest Observation: Mar 2009
  - Date Received: 04/29/09
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: I
- Consumer Price Index:
  - Date of Latest Observation: May 2009
  - Date Received: 06/02/09
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Revenue, Expenditure, Balance and Composition of Financing — General Government:
  - Date of Latest Observation: Mar 2009
  - Date Received: 05/19/09
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: I
- Stocks of Central Government and Central Government-Guaranteed Debt:
  - Date of Latest Observation: Dec 2008
  - Date Received: 03/25/09
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: I
- External Current Account Balance:
  - Date of Latest Observation: Q4 2008
  - Date Received: 03/25/09
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: I
- Exports and Imports of Goods and Services:
  - Date of Latest Observation: Q4 2008
  - Date Received: 03/25/09
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: I
- GDP/GNP:
  - Date of Latest Observation: 2008
  - Date Received: 05/12/09
  - Frequency of Data: A
  - Frequency of Reporting: A
  - Frequency of Publication: I
- Gross External Debt:
  - Date of Latest Observation: Dec 2008
  - Date Received: 03/25/09
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: I
- International Investment Position:
  - Date of Latest Observation: NA
  - Date Received: NA
  - Frequency of Data: NA
  - Frequency of Reporting: NA
  - Frequency of Publication: NA

*Prepared by the Asian Development Bank; data and statements as presented in the source document.*

### ANNEX V. LAO P.D.R.: MILLENNIUM DEVELOPMENT GOALS INDICATORS, 1990–2015

### ANNEX V. LAO P.D.R.: MILLENNIUM DEVELOPMENT GOALS INDICATORS, 1990–2015

### Millennium Development Goals — selected indicator highlights (1990–2015)
- Eradicate extreme poverty and hunger:
  - Population below $1.25 a day (%) 1/ : 55.7 (1990); 44.0 (2001); [26.5] (2015 target note)
  - Poverty gap at $1.25 a day (%) : 16.2 (1990); 12.1 (2001)
  - Percentage share of income or consumption held by poorest 20% : 9.3 (1990); 8.5 (2001)
  - Prevalence of child malnutrition (% of children under 5) : 40.0 (1990); 40.0 (1995); 40.0 (2000)
  - Population below minimum level of dietary energy consumption (%) : 29.0 (1990); 28.0 (1995); 21.0 (2005); [14.5] (2015 target note)
- Achieve universal primary education:
  - Net primary enrollment ratio (% of relevant age group) : 61.4 (1990); 70.0 (1995); 76.9 (2001); 78.5 (2002); 82.7 (2005); 83.7 (2006); [100] (2015 target)
  - Percentage of cohort reaching grade 5 (%) : 53.3 (1990); 55.4 (1995); 62.3 (2001); 64.1 (2002); 62.0 (2005); [100] (2015 target)
  - Youth literacy rate (% ages 15–24) : 70.1 (1990); 71.1 (1995); 78.5 (2001); 82.5 (2006); [100] (2015 target)
- Promote gender equality:
  - Ratio of girls to boys in primary education (%) : 79 (1990); 86 (1995); 86 (2001); 88 (2002); 89 (2005); [100] (2005 target)
  - Ratio of young literate females to males (% ages 15–24) : 76 (1990); 81 (1995); 90 (2001); 93 (2006); [100] (2015 target)
  - Share of women employed in the nonagricultural sector (%) : 42 (1990); 50 (1995)
  - Proportion of seats held by women in national parliament (%) : 6 (1990); 9 (1995); 21 (2001); 21 (2002); 23 (2005); 23 (2006); 25 (2007)
- Reduce child mortality:
  - Under 5 mortality rate (per 1,000) : 163 (1990); 131 (1995); 105 (2001); 100 (2002); 79 (2005); 75 (2006); [54.3] (2015 target note)
  - Infant mortality rate (per 1,000 live births) : 120 (1990); 99 (1995); 59 (2005)
  - Immunization, measles (% of children under 12 months) : 32 (1990); 68 (1995); 50 (2001); 55 (2002); 41 (2005); 48 (2006)
- Improve maternal health:
  - Maternal mortality ratio (modeled estimate, per 100,000 live births) : 660 (2005); [162.5] (2015 target note)
  - Births attended by skilled health staff (% of total) : 19.4 (2006)
- Combat HIV/AIDS, malaria and other diseases:
  - Prevalence rate of HIV (% ages 15–24) : 0.1 (2001); 0.2 (2006); [0.0] (2015 target note)
  - Contraceptive prevalence rate (% of women ages 15–49) : 25.1 (2001); 32.2 (2005)
  - Incidence of tuberculosis (per 100,000 people) : 162 (2001); 159 (2002); 155 (2005); [0.0] (2015 target note)
  - Tuberculosis cases detected under DOTS (%) : 24 (1995); 40 (2001); 48 (2002); 72 (2005); 77 (2006)
- Ensure environmental sustainability:
  - Forest area (% of total land area) : 75.0 (1990); 69.9 (2005)
  - Nationally protected areas (% of total land area) : 16.0 (2002); 16.0 (2005); 16.0 (2006)
  - CO2 emissions (metric tons per capita) : 0.1 (1990); 0.1 (1995); 0.2 (2001); 0.2 (2002); 0.2 (2005)
  - Access to an improved water source (% of population) : 41.0 (1995); 60.0 (2005); [74.0] (2015 target note)
  - Access to improved sanitation (% of population) : 13.0 (1995); 22.0 (2001); 48.0 (2005); [60.0] (2015 target note)
- Develop a global partnership for development (selected connectivity and labor indicators):
  - Youth unemployment rate (% of total labor force ages 15–24) : 5.0 (1995)
  - Fixed line and mobile telephones (per 1,000 people) : 1.6 (1990); 3.9 (1995); 15.2 (2001); 21.2 (2002); 120.0 (2005); 181.9 (2006); [Increase] (2015 target note)
  - Internet (per 1,000 people) : 0.0 (1990); 0.0 (1995); 1.9 (2001); 2.7 (2002); 8.4 (2005); 11.6 (2006)
  - Personal computers (per 1,000 people) : 1.1 (1995); 3.0 (2001); 3.3 (2002); 4.0 (2005); 16.9 (2006); [Increase] (2015 target note)

### Macro performance and near-term outlook (summary of 2009 Article IV consultation)
- 2008 performance and shocks:
  - GDP growth moderated only slightly despite severe flooding; construction and mining offset agricultural losses.
  - Surge in credit growth supported activity.
  - Inflation eased from a mid-year peak as food and fuel prices abated and currency appreciation continued.
  - Nonresource current account deficit widened due to higher import bills from soaring commodity prices, offset by strong FDI inflows.
- Deterioration from late-2008 and channels of impact:
  - External environment deterioration hit mining hardest, and affected tourism, remittances, and agriculture.
  - Decline in copper prices and tighter global financing lowered export revenue, depressed mining financial performance, and delayed mining expansion and new hydropower investments.
  - Lower-than-budgeted profit tax collection from the mining sector strained fiscal revenues.
- Recent external position:
  - International reserves fell from June-2008 highs as FDI flows and exports weakened amid a strong and stable exchange rate.

### Projections (IMF staff assessment)
- Growth:
  - Projected around 4½ percent in 2009, supported by projects already in train, rapid past credit expansion, and strong public investment.
  - Growth expected to tick up in 2010 as Nam Theun II comes on stream, with continued softness in other sectors.
- Inflation and external:
  - Inflation expected to remain low and stable, predicated on currency stability and flat commodity prices.
  - External position projected to continue weakening in the near term as expansionary policies, export softness, and lower FDI drive international reserves lower.
- Medium-term:
  - As the global crisis abates and mining and hydropower investment resume, increased FDI and capital inflows should more than offset investment-related import rises, strengthening the external position and restoring international reserve coverage.
  - External debt projected to remain high; concessionality should keep public debt service manageable.
- Risks:
  - External: weaker global recovery could further depress demand for tourism, garments, and other exports; FDI to mining and hydropower could be adversely affected.
  - Domestic: excessively expansionary policies could jeopardize macroeconomic stability.
  - Near-term horizon: the next 18 months appear particularly challenging.

### Executive Board assessment — policy recommendations and priorities
- Macroeconomic stability:
  - Immediate priority: safeguard macroeconomic stability while supporting growth.
  - Support exchange rate as a nominal anchor until market-based monetary policy instruments are implemented.
  - Prompt and determined tightening of fiscal and monetary policies necessary to support exchange rate stability.
- Fiscal policy and public finances:
  - Reduce the fiscal deficit, curtail quasi-fiscal operations, and bring all fiscal operations on budget.
  - Boost revenue and bring forward revenue measures; however, expenditure restraint (including postponement of non-priority spending) should bear most of the consolidation burden to protect social program spending.
  - Improve public financial management and recentralize tax, customs, and treasury operations.
  - Broaden the tax base to reduce vulnerability to resource revenues.
  - Strengthen budget planning by introducing a medium-term expenditure framework.
  - Prudent debt management stressed given high risk of debt distress.
- Monetary and financial sector policy:
  - Bank of Lao P.D.R. encouraged to rein in bank credit growth and limit lending to temporary liquidity support for banks.
  - Improve effectiveness of monetary policy by developing indirect instruments, fostering an interbank market, and strengthening domestic liquidity management.
  - Deepen financial intermediation and address banking sector weaknesses, particularly in state-owned commercial banks: sound risk management and banking practices, improved supervisory oversight capacity, and full implementation of the banking law.
- Structural reforms:
  - Bold structural reforms needed for sustained growth: improve investment climate, reduce regulatory uncertainty, and advance trade integration to expand private sector participation and diversify growth sources.
  - Further World Trade Organization compliance encouraged.
- Data and statistics:
  - Improve quality and timeliness of statistics for surveillance; enhance coordination among statistical agencies and draw upon Fund technical assistance.

### Selected economic indicators (annual and levels, 2004–2009)
- Real sector and prices:
  - GDP at constant prices (annual percent change) : 6.4 (2004); 7.1 (2005); 8.4 (2006); 7.5 (2007); 7.2 (2008); 4.6 (2009 Est.)
  - Inflation (CPI) (end year) : 8.6 (2004); 8.8 (2005); 4.7 (2006); 5.6 (2007); 3.2 (2008); 3.3 (2009 Proj.)
  - Inflation (CPI) (annual average) : 10.5 (2004); 7.2 (2005); 6.8 (2006); 4.5 (2007); 7.6 (2008); 0.2 (2009 Proj.)
- Public finances (percent of GDP, fiscal year basis October to September):
  - Revenue and grants : 12.1 (2004); 13.6 (2005); 14.5 (2006); 15.8 (2007); 15.6 (2008); 15.0 (2009 Proj.)
  - Expenditure : 15.1 (2004); 18.2 (2005); 17.4 (2006); 18.6 (2007); 17.7 (2008); 22.9 (2009 Proj.)
  - Overall balance (- deficit) : -2.9 (2004); -4.6 (2005); -3.0 (2006); -2.9 (2007); -2.0 (2008); -7.8 (2009 Proj.)
  - Domestic financing (net) : -0.7 (2004); 0.2 (2005); -1.1 (2006); -0.9 (2007); -1.0 (2008); 5.4 (2009 Proj.)
  - External financing : 3.6 (2004); 4.4 (2005); 4.0 (2006); 3.8 (2007); 3.0 (2008); 2.4 (2009 Proj.)
- Monetary and credit:
  - Broad money : 22.8 (2004); 7.7 (2005); 30.1 (2006); 38.7 (2007); 18.3 (2008); 16.7 (2009 Est.)
  - Credit to the economy 2/ : 9.0 (2004); 7.6 (2005); -9.1 (2006); 21.0 (2007); 84.6 (2008); 82.3 (2009 Est.; data as of end-March)
- Balance of payments and external sector:
  - Exports (in millions of U.S. dollars) : 535 (2004); 697 (2005); 1,133 (2006); 1,321 (2007); 1,639 (2008); 1,293 (2009 Est.)
  - Imports (in millions of U.S. dollars) : 1,056 (2004); 1,270 (2005); 1,589 (2006); 2,156 (2007); 2,816 (2008); 2,517 (2009 Est.)
  - Current account balance (in percent of GDP) : -16.9 (2004); -17.8 (2005); -10.3 (2006); -15.8 (2007); -16.5 (2008); -15.4 (2009 Proj.)
  - Gross official reserves (in millions of U.S. dollars) : 228 (2004); 238 (2005); 336 (2006); 536 (2007); 636 (2008); 536 (2009 Est.)
  - In months of prospective nonresource imports 3/ : 3.3 (2004); 2.8 (2005); 3.2 (2006); 3.9 (2007); 3.4 (2008); 3.0 (2009 Est.)
  - External public debt (in millions of U.S. dollars) : 2,109 (2004); 2,203 (2005); 2,351 (2006); 2,521 (2007); 2,931 (2008); 3,085 (2009 Est.)
  - External public debt (in percent of GDP) : 84.1 (2004); 79.8 (2005); 65.7 (2006); 60.5 (2007); 54.5 (2008); 53.9 (2009 Est.)
- Other aggregates:
  - GDP at current market prices (in billions of kip) : 26,549 (2004); 29,369 (2005); 35,983 (2006); 39,874 (2007); 46,700 (2008); 48,955 (2009 Est.)

Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates and projections. 1/ Fiscal year basis (October to September). 2/ For 2009, data as of end-March. Excludes debt write-offs. Includes Bank of Lao P.D.R. lending to state-owned enterprises and lower levels of government. 3/ Excludes imports associated with large resource projects.

*IMF Public Information Notice No. 09/115 (September 11, 2009), Executive Board conclusions on the 2009 Article IV Consultation with the Lao People’s Democratic Republic.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09284.pdf_