## _cr11257

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### Mining and Hydropower Outlook
- Growth and recent performance:
  - Lao P.D.R. GDP growth averaged 7 percent per annum over the last decade.
  - Growth in 2010 estimated at 7.9 percent.
  - Staff project GDP growth to rise to 8.3 percent in 2011, supported by mining and hydropower expansion, nonresource exports, tourism, and strong domestic demand.
- Copper:
  - Export revenue from copper is projected to exceed US$1.3 billion in 2011 (more than double the 2009 level).
  - Total copper production by the two main mining companies projected to peak in 2013 at about 163,000 tons (a 27 percent increase from the 2010 level).
  - On WEO price forecasts, export revenue from copper is projected to stabilize at US$1 billion over the medium term.
- Gold:
  - Export revenue from gold is projected to exceed US$0.24 billion in 2011 (a 50 percent increase from 2009).
  - Total gold production by the two main mining companies projected to peak in 2014 at about 338,000 ounces (a doubling from the 2010 level).
  - On WEO price forecasts, export revenue from gold is projected to rise to almost US$0.56 billion by 2016.
- Large projects and electricity:
  - Nam Theun 2: 1,080 MW; commenced operation in March 2010 — doubled Lao P.D.R.’s electricity generating capacity.
  - Hongsa Lignite thermal power plant: 1,800 MW; total cost US$3.71 billion (47 percent of 2011 GDP); financing 75:25 debt-to-equity; equity held by Lao Holding State Enterprise (20 percent) and two Thai power companies.

### Fiscal Outlook, Scenarios, and Key Ratios
- Recent fiscal developments:
  - Overall fiscal deficit narrowed from 6.9 to 4.8 percent of GDP in FY10 (October 2009–September 2010).
  - Revenue rose by 1.5 percentage points, to 18.6 percent of GDP.
  - Spending reduced by 0.7 percentage points, to 23.4 percent of GDP.
  - Introduction of VAT in January 2010; higher royalties and dividends from hydropower and mining sectors.
- Authorities’ near-term FY11 projections:
  - Government net borrowing projected to decline from 4.8 to 2.6 percent of GDP in FY11.
  - Revenue projected to decline by 0.2 percent of GDP; higher mining revenue projected at 1.1 percent of GDP is more than offset by lower nonresource revenue and lower grants.
  - Expenditure projected to decline by 2.4 percent of GDP; net acquisition of nonfinancial assets projected to decline by 1.4 percent of GDP.
- Baseline fiscal scenario (selected series, 2010–2016):
  - Revenue: 18.6; 18.4; 19.4; 19.5; 19.3; 18.6; 18.5
  - Domestic revenue: 16.2; 16.6; 17.7; 17.8; 17.6; 16.9; 16.8
  - Nonresource revenue: 13.6; 13.0; 12.9; 13.2; 13.3; 13.4; 13.7
  - Mining revenue: 1.8; 2.9; 3.8; 3.6; 3.3; 2.4; 2.1
  - Expenditure: 23.4; 21.0; 20.8; 21.4; 21.1; 21.2; 21.2
  - Net lending/borrowing: -4.8; -2.6; -1.4; -1.9; -1.8; -2.6; -2.7
  - Nonmining balance: -6.6; -5.5; -5.2; -5.6; -5.1; -5.0; -4.8
- "Nonresource revenue effort" scenario (selected series, 2010–2016):
  - Nonresource revenue rises to 15½ percent of GDP by FY16 (from 13.6 in FY10).
  - Revenue: 18.6; 18.4; 19.9; 20.2; 20.4; 20.1; 20.2
  - Expenditure: 23.4; 21.0; 21.3; 21.5; 21.8; 22.0; 22.3
  - Net lending/borrowing: -4.8; -2.6; -1.4; -1.3; -1.4; -1.9; -2.0
- Fiscal recommendations:
  - Focus fiscal debate on the path of the nonmining fiscal deficit; key recommendation: gradually bring down the nonmining fiscal balance to less than 5 percent of GDP over the medium term.
  - Save higher mining and hydropower revenues projected in the next few years and smooth the path of expenditure over the medium term.
  - Strengthen tax administration, transparency, and governance for resource revenues.

### Monetary Policy, Liquidity, and Financial Sector
- Reserve money and liquidity:
  - Reserve money doubled over the past two years as BoL’s quasi-fiscal activities expanded net domestic assets.
  - On-budget BoL financing of the government contributed 7 percentage points to the growth of reserve money during 2009 and 2010.
  - BoL provided some 9 percent of GDP in credit to local governments (kip 3.1 trillion) and kip 1.4 trillion in credit to commercial banks and the policy bank over two years.
  - Banks’ excess reserves peaked at more than 5 percent of GDP; recent peak expected to decline as IPO proceeds are invested.
- Monetary indicators (selected):
  - Credit to the private sector growth slowed from 88 percent in 2009 to 44 percent in 2010.
  - Reserve money growth (annual percent change): 20.2; 34.5; 34.7; 30.0; 26.5; 25.9; 48.6; 48.2; 16.5 (series by year in Table 4).
  - Broad money growth accelerated to 37 percent (y/y) in February 2011 (text) and series show broad money growth 39.1; 42.8; 25.2 (selected years).
- BoL intended actions:
  - Minimize and stop BoL lending to local governments by end-year.
  - Reduce excess liquidity by putting more BoL securities on offer; next step to raise interest rates on BoL securities.
  - If needed, consider raising reserve requirements and develop interbank and treasury bill markets.
- Financial sector safeguards:
  - Recapitalization of SOCBs needs completion; capital adequacy of three SOCBs increased but remains below regulatory minimum for two.
  - Strengthen banking supervision and prudential regulations; continue independent audits of SOCBs.
  - AML/CFT: follow-up on APG evaluation; start work on recommended actions.

### Reserves, Exchange Rate, and External Position
- Reserves and exchange rate:
  - Gross reserves recovered to US$727 million (2.5 months of prospective nonresource imports) at end-2010.
  - Gross official reserves (selected series): 636; 633; 727; 813; 945; 973; 1,005; 1,072; 1,234 (Table series).
  - Authorities committed to maintain a stabilized exchange rate regime; kip appreciated 6 percent vs. U.S. dollar and depreciated 4 percent vs. Thai baht (comparison to end-2009 in text).
- Balance of payments and external flows (selected):
  - Exports: 1,609; 1,521; 2,217; 2,801; 3,215; 3,262; 3,285; 3,569; 4,012 (2008–16 series selected).
  - Imports: 2,837; 2,893; 3,582; 4,649; 5,367; 5,918; 6,975; 7,002; 6,859.
  - Current account balance (in millions U.S.$): -982; -1,174; -1,173; -1,530; -1,755; -2,138; -3,004; -2,681; -2,238.
  - Core balance (CA+FDI+ODA) and reliance on private capital inflows noted as key to external strengthening.

### Debt Sustainability Analysis (DSA) — Key Findings
- Headline results:
  - Results similar to previous DSA; improved revenue and export outlook lowered related debt-burden indicators.
  - PV of debt-to-revenue ratio now below the threshold level under the baseline scenario.
- External PPG debt (end-2010):
  - PV of debt: 37 percent of GDP or 86 percent of exports at end-2010.
  - External PPG debt stock (nominal): US$3.5 billion in 2010.
  - External PPG debt as a share of GDP: 51.8 percent of GDP in 2010.
- Creditor composition (end-2010):
  - Multilateral: US$2.16 billion (60.2 percent of external PPG debt).
  - Bilateral: US$1.23 billion (35.7 percent).
  - Commercial: US$0.14 billion (4.1 percent).
  - As of end-2010, China signed 24 loan agreements amounting to US$1.35 billion; about US$958 million remained undisbursed.
- Baseline projections and vulnerabilities:
  - Baseline projects annual average growth 7.7 percent (next six years).
  - PV of debt-to-GDP ratio remains above policy-dependent indicative thresholds until 2019 under baseline.
  - Debt service ratios remain well below indicative thresholds throughout 20-year projection, due to high concessionality.
  - Key vulnerabilities: one-off 30 percent depreciation of the kip; a decline in export growth (one standard deviation in 2012–13) could push PV debt-to-exports to 151 percent by 2014.
- Public sector debt dynamics:
  - Recorded domestic public debt rose to 7 percent of GDP in 2010 (from 5.6 percent in 2009); 82 percent of recorded domestic debt is BoL lending.
  - Total PPG domestic and external debt stood at 58.8 percent of GDP in 2010.
  - Domestic debt projected to decline from 7 percent in 2010 to about 3 percent of GDP in 2016 assuming BoL phases out quasi-fiscal lending.
- DSA policy recommendations:
  - External borrowing should normally be obtained on concessional terms.
  - Carefully assess implications of undisbursed loan overhang (notably from China) before signing new loans.
  - Improve debt management capacity and develop a medium-term borrowing strategy.
  - Limit recourse to nonconcessional foreign financing to commercially viable projects.
  - BoL should follow through on exiting direct lending to local governments.

### Macroeconomic Risks, Medium-Term Framework, and Staff Appraisal
- Inflation and growth:
  - Inflation rose to 9 percent in April 2011; staff projected inflation could rise to 10 percent by June and average almost 9 percent in 2011.
  - Medium-term inflation projected to moderate to about 4 percent.
- Medium-term growth assumptions (Box 1):
  - Real GDP growth: projected to average 7.7 percent in 2011–16; moderate to 6.4 percent in 2017–31.
  - Commodity price assumptions: copper projected to soften to US$6,700 per ton by 2016 (from US$9,000 in 2011); WEO-based gold and copper prices through 2016 then constant in real terms.
  - FDI: high through first half of projection period as large projects proceed, then gradually decline.
- Principal risks and recommended priorities:
  - External risks: global uncertainties, high oil prices, volatility in copper and gold prices, strength of FDI inflows.
  - Internal risks: pressures on the external position and inflation if stabilized exchange rate not supported by tight macro policies; safeguarding financial sector soundness.
  - Priorities: tighten macroeconomic policies near term; phase out BoL quasi-fiscal operations; strengthen tax administration and PFM; complete SOCB recapitalization and enhance banking supervision; strengthen external debt management and disclosure.

### Selected Key Statistics (high-frequency exact values cited)
- Growth: GDP growth in 2010 estimated at 7.9 percent; staff project 8.3 percent in 2011.
- Inflation: CPI year-on-year 9.2 percent in April; projected average almost 9 percent in 2011; could reach 10 percent by June.
- Reserves: Gross reserves US$727 million at end-2010; series include 636; 633; 727; 813; 945; 973; 1,005; 1,072; 1,234 (selected years).
- Fiscal: Revenue 18.6 percent of GDP in 2010; Expenditure 23.4 percent of GDP in 2010; Overall balance -4.8 percent of GDP in 2010; projected -2.6 percent of GDP in FY11.
- Hongsa project cost: US$3.71 billion (47 percent of 2011 GDP).
- BoL credit to local governments: kip 3.1 trillion (about 9 percent of GDP).
- Undisbursed Chinese loans (end-2010): about US$958 million.

*Source: IMF staff report excerpt — "The Outlook for the Mining and Hydropower Sectors" and related sections from _cr11257.*

### 1. The Outlook for the Mining and Hydropower Sectors ..................................................5

### 1. The Outlook for the Mining and Hydropower Sectors

### Introduction and recent performance
- Lao P.D.R. GDP growth averaged 7 percent per annum over the last decade.
- Poverty: share of population below the national poverty line fell to less than 25 percent.
- 2010 performance:
  - Growth in 2010 estimated at 7.9 percent.
  - Inflation rose to 9 percent in April 2011.
  - Gross reserves recovered to US$727 million (2.5 months of prospective nonresource imports) at end-2010.
  - Core balance of payments (current account net of FDI and ODA) remained in deficit by over 5 percent of GDP.
- Structural and institutional progress:
  - Stock market began operating in January 2011.
  - New Statistics Law adopted (mid-2010).
  - Implementation decree for the new Investment Promotion Law approved; law is WTO-compliant.

### Fiscal and monetary developments (recent)
- Fiscal:
  - Overall fiscal deficit narrowed from 6.9 to 4.8 percent of GDP in FY10 (October 2009–September 2010).
  - Revenue rose by 1.5 percentage points, to 18.6 percent of GDP.
  - Spending reduced by 0.7 percentage points, to 23.4 percent of GDP (driven mostly by reduction in off-budget capital spending).
  - Introduction of VAT in January 2010; higher royalties and dividends from hydropower and mining sectors.
- Monetary and banking:
  - Credit to the private sector growth slowed from 88 percent in 2009 to 44 percent in 2010.
  - BoL overdraft lending rate raised by 100 basis points to 5 percent in September 2010.
  - Net domestic assets (NDA) of the Bank of Lao P.D.R. expanded rapidly due to direct lending to local governments, net injections of liquidity, and expansion of other assets, producing a significant build up of excess reserves in the banking system.

### Outlook and staff projections (2011 and medium term)
- Growth:
  - Staff project GDP growth to rise to 8.3 percent in 2011, supported by mining and hydropower expansion, nonresource exports, tourism, and strong domestic demand.
  - Construction for the Hongsa Lignite thermal power plant started in Q3 2010; commercial operations of Nam Theun II began in March 2010.
- Inflation:
  - Inflation could rise to 10 percent by June.
  - Inflation is expected to average almost 9 percent for 2011 as a whole.
- External position:
  - Strengthening in 2011 is projected but dependent on continued strong private capital inflows.
  - Reliance on private capital inflows poses risks if monetary policy does not address banks’ excess reserves.
- Medium-term prospects:
  - Growth projected broadly in line with the 7th five-year plan annual target of 8 percent (2011–15).
  - Investment target associated with the plan: maintain investment at 32 percent of GDP.
- Key risks identified:
  - External: uncertainties in the global outlook, high oil prices, volatility in commodity prices (copper and gold), and strength of FDI inflows.
  - Internal: pressures on the external position and inflation if the stabilized exchange rate regime is not supported by appropriately tight macroeconomic policies; safeguarding financial sector soundness.
  - Implementation challenges: need to improve efficiency of public investment and strengthen public financial management to ensure resource wealth translates into broad-based improvement in living standards and MDG progress.

### Mining and hydropower sector outlook (Box 1 — findings and projections)
- Copper:
  - Export revenue from copper is projected to exceed US$1.3 billion in 2011 (more than double the 2009 level).
  - Total copper production by the two main mining companies projected to peak in 2013 at about 163,000 tons (a 27 percent increase from the 2010 level).
  - On WEO price forecasts, export revenue from copper is projected to stabilize at US$1 billion over the medium term.
- Gold:
  - Export revenue from gold is projected to exceed US$0.24 billion in 2011 (a 50 percent increase from 2009).
  - Total gold production by the two main mining companies projected to peak in 2014 at about 338,000 ounces (a doubling from the 2010 level).
  - On WEO price forecasts, export revenue from gold is projected to rise to almost US$0.56 billion by 2016.
- Electricity generation and large projects:
  - Nam Theun 2 hydropower project: 1,080 MW; commenced operation in March 2010 — doubled Lao P.D.R.’s electricity generating capacity.
  - Hongsa Lignite thermal power plant: 1,800 MW; construction will boost activity during 2010–15 and raise electricity exports thereafter.
  - Total cost of Hongsa project: US$3.71 billion (47 percent of 2011 GDP).
  - Hongsa financing: 75:25 debt-to-equity ratio; debt financing mostly from Thai commercial banks; equity held by Lao Holding State Enterprise (20 percent) and two Thai power companies.

### Reserve money, banks’ excess reserves, and BoL quasi-fiscal activity (Box 2 — findings)
- Reserve money dynamics:
  - Reserve money doubled over the past two years as BoL’s quasi-fiscal activities expanded net domestic assets.
  - On-budget BoL financing of the government contributed 7 percentage points to the growth of reserve money during 2009 and 2010.
  - BoL provided some 9 percent of GDP in credit to local governments (kip 3.1 trillion) and kip 1.4 trillion in credit to commercial banks and the policy bank over two years.
  - Including credit to Vientiane municipality converted into a land asset, this contributed 95 percentage points to reserve money growth during 2009 and 2010.
  - BoL sold about kip 0.8 trillion in BoL securities to the banks, a negative contribution of 17 percentage points to reserve money growth during 2009 and 2010.
- Banks’ excess reserves and liquidity:
  - Commercial banks are required to hold unremunerated deposits with the BoL equivalent to 5 percent of their kip-denominated deposit liabilities and 10 percent of their foreign-currency denominated deposit liabilities.
  - In the absence of an interbank market and a treasury bill market, banks hold large excess reserves with the BoL (3½ percent of GDP), which are not remunerated.
  - Excess liquidity was exacerbated by successful local-currency IPOs that converted substantial offshore foreign currency into kip deposits.
  - By end-February 2011, IPO-ed companies were still holding the bulk of new funds in the local banking system; as they implement investment plans, commercial banks can be expected to reduce excess reserves from the recent peak of more than 5 percent of GDP.

### Fiscal policy near-term stance (authorities’ plans and projections)
- Fiscal consolidation path and FY11 projections:
  - Government net borrowing projected to decline from 4.8 to 2.6 percent of GDP in FY11.
  - Revenue projected to decline by 0.2 percent of GDP; higher mining revenue projected at 1.1 percent of GDP is more than offset by lower nonresource revenue and lower grants.
  - Expenditure projected to decline by 2.4 percent of GDP.
  - Implementation of the budget would see expenses decline by 1 percent of GDP.
  - Net acquisition of nonfinancial assets projected to decline by 1.4 percent of GDP, driven mostly by lower off-budget capital expenditure financed by the BoL (1 percent of GDP).
  - Fiscal consolidation relies heavily on an increase in mining revenue.

### Policy implications and priorities highlighted by staff and authorities
- Near-term macroeconomic policy:
  - Need to tighten macroeconomic policies in the near term to address potential pressures on the external position and ensure inflation remains contained while maintaining the stabilized exchange rate regime as the monetary anchor.
  - Monetary policy should address substantial excess reserves held by commercial banks to reduce external vulnerability to volatile capital flows.
- Structural and public finance reforms:
  - Improve efficiency of public investment to fund critical economic and social investments within existing resource constraints.
  - Continue implementation of structural reforms to complete transition to a market economy and strengthen the business climate.
  - Strengthen public financial management on both tax and spending sides to ensure natural resource wealth yields generalized improvement in living standards and MDG progress.
- Financial sector safeguards:
  - Safeguard soundness of the rapidly developing financial sector; complete enhancements in banking supervision and anti-money laundering frameworks.

*Source: IMF staff report excerpt — "The Outlook for the Mining and Hydropower Sectors."*

### 13.      Under current copper and gold price projections, the fiscal framework in the

### _cr11257 - 13.      Under current copper and gold price projections, the fiscal framework in the

### Baseline fiscal projections (overview)
- Baseline scenario projects the nonmining fiscal deficit to be contained below 5 percent of GDP over the medium term.
- The baseline fiscal scenario projects total domestic revenue (including from the mining sector) at about 17 percent of GDP per annum, broadly in line with the 16–17 percent of GDP target in the 7th five-year plan.
- In FY12 and FY13, the overall deficit would narrow to less than 2 percent of GDP, thanks to higher mining revenue.
- In the baseline scenario, total government expenditure, including any off-budget spending, is maintained at about 21¼ percent of GDP.
- Policy implication: maintain expenditure at about 21¼ percent of GDP to keep public debt on a sustainable path.

### Baseline scenario — key fiscal ratios (2010–2016)
- Years: 2010 2011 2012 2013 2014 2015 2016
- Revenue: 18.6 18.4 19.4 19.5 19.3 18.6 18.5
- Domestic revenue: 16.2 16.6 17.7 17.8 17.6 16.9 16.8
- Nonresource revenue: 13.6 13.0 12.9 13.2 13.3 13.4 13.7
- Mining revenue: 1.8 2.9 3.8 3.6 3.3 2.4 2.1
- Hydropower revenue: 0.8 0.7 1.0 1.0 1.0 1.1 1.0
- Grants: 2.4 1.9 1.7 1.7 1.7 1.7 1.7
- Expenditure: 23.4 21.0 20.8 21.4 21.1 21.2 21.2
- Net lending/borrowing: -4.8 -2.6 -1.4 -1.9 -1.8 -2.6 -2.7
- Nonmining balance: -6.6 -5.5 -5.2 -5.6 -5.1 -5.0 -4.8

(Source: IMF staff estimates.)

### "Nonresource revenue effort" scenario — key fiscal ratios (2010–2016)
- Years: 2010 2011 2012 2013 2014 2015 2016
- Revenue: 18.6 18.4 19.9 20.2 20.4 20.1 20.2
- Domestic revenue: 16.2 16.6 18.2 18.5 18.7 18.4 18.5
- Nonresource revenue: 13.6 13.0 13.4 13.9 14.4 14.9 15.4
- Mining revenue: 1.8 2.9 3.8 3.6 3.3 2.4 2.1
- Hydro revenue: 0.8 0.7 1.0 1.0 1.0 1.1 1.0
- Grants: 2.4 1.9 1.7 1.7 1.7 1.7 1.7
- Expenditure: 23.4 21.0 21.3 21.5 21.8 22.0 22.3
- Net lending/borrowing: -4.8 -2.6 -1.4 -1.3 -1.4 -1.9 -2.0
- Nonmining balance: -6.6 -5.5 -5.2 -4.9 -4.7 -4.3 -4.1

(Source: IMF staff estimates.)

### Revenue dynamics and risks
- Nonresource tax and nontax revenue strengthened recently; a new high of 13.6 percent of GDP was achieved in FY10 owing to:
  - introduction of the VAT in January 2010; and
  - channeling of Road Fund revenues through the budget.
- With continued strength of international copper prices, resource revenue could reach almost 5 percent of GDP in FY12, implying a near doubling from FY10.
- Data for the first half of the fiscal year suggests nonresource revenue could decline by 0.8 percent of GDP in FY11, suggesting the revenue effort may already be waning.
- Except for the VAT, collection of other nonmining taxes (nonmining profit tax, excise, import duties) is not keeping up with expansion of the overall economy.

### Benefits of raising nonresource revenue (staff analysis)
- In the “nonresource revenue effort” scenario, nonresource revenue rises to 15½ percent of GDP by FY16, up by almost 2 percentage points of GDP from FY10.
- This would allow the government to:
  - increase expenditure to around 22¼ percent of GDP by FY16; and
  - reduce the overall and nonmining fiscal balance while continuing development of social and economic infrastructure in a macroeconomically sustainable manner.

### Strengthening the fiscal framework for resource revenues
- Many countries develop frameworks to address budget dependence on natural resources, covering:
  - tax administration, transparency, and governance;
  - short-term revenue fluctuations; and
  - preservation of resources for future generations.
- IMF action mentioned: recently launched “Management of Natural Resources Wealth Topical Trust Fund” (reference in source).

### Staff’s fiscal recommendations and views
- Focus fiscal policy debate on the path of the nonmining fiscal deficit.
- Key recommendation: gradually bring down the nonmining fiscal balance to less than 5 percent of GDP over the medium term (as illustrated in the baseline scenario).
- Implication: save the higher mining and hydropower revenues projected in the next few years, smoothing the path of expenditure over the medium term to address Lao P.D.R.’s development needs.

### Box 3 — The Nonmining Fiscal Balance (summary of principles)
- Definition: nonmining fiscal deficit = fiscal deficit excluding revenue from mining but including revenue from hydropower.
- Recommendations:
  - Limit budget dependence on mining revenues due to volatility; avoid temporary increases in mining revenue leading to permanently higher spending.
  - Hydropower revenue can generally be treated like other economic activity revenues (renewable, long-term contracts). However, staff’s FY12 projections assume both higher mining and hydropower revenues are saved to preserve macroeconomic stability.

### Nonmining revenue and public spending quality (staff views)
- Important to avoid weakening nonmining revenue effort during higher mining revenues.
- A realistic objective: raise nonresource revenues to 15½ percent of GDP by FY16 (up by almost 2 percentage points from FY10).
- Improve quality and efficiency of public spending, including:
  - enhancing expenditure control through phasing out off-budget capital expenditure; and
  - ensuring public resources are devoted to improving economic and social welfare.

### Technical assistance and PFM reform
- Staff encouraged authorities to advance tax system reforms and use technical assistance financed from the recently launched trust fund.
- IMF willing to support development of a roadmap to modernize operations of customs and tax departments.
- Public financial management (PFM) reform priorities:
  - improve accounting and cash management;
  - establish the treasury single account;
  - draw up concrete plans to quantify and resolve arrears and debts to contractors related to public investment projects (PIPs).
- FY11 budget established Government Debt Resettlement Committee to quantify and resolve arrears and debts to contractors related to PIPs.

### Natural resource expenditure priorities and wage considerations
- Authorities commend continued passthrough of international petroleum price movements to retail pump prices.
- Priority: increase investments in physical and human capital and accelerate poverty reduction.
- Caution: a large increase in civil servant wages (media reported 33 percent increase was being contemplated) without civil service reforms could undermine fiscal sustainability and exacerbate demand pressures and private credit growth.

### External debt management (staff concerns and recommendations)
- External debt sustainability analysis suggests Lao P.D.R. continues to face a high risk of debt distress.
- Undisbursed amount of debt from China currently estimated at almost US$1 billion or 12 percent of GDP (few details available).
- Projected loan disbursements from China over next six years are about US$600 million higher than assumed in last year’s DSA.
- Recommendations before signing new loan contracts:
  - carefully assess implications for macroeconomic stability and debt sustainability given undisbursed loan overhang;
  - improve debt management capacity and develop a medium-term borrowing strategy, including for resource sector activity;
  - greater disclosure of borrowing plans;
  - strictly limit recourse to nonconcessional foreign financing to commercially-viable projects;
  - build capacity and governance structures to assess viability and growth benefits of debt-financed projects.
- Ongoing steps: strengthening external debt management, analyzing appropriate level of annual external borrowing, resolving debt data weaknesses with new software and UNCTAD technical assistance.

### Authorities’ views (summary)
- Authorities broadly shared staff’s views.
- Working with AsDB and World Bank on a medium-term fiscal strategy; ongoing fiscal reforms.
- Budgetary spending increasingly focused on education and health to reduce poverty in remote areas.
- Implementing a centralized Treasury Single Account and strengthening PFM systems.
- Improving ODA management; customs reforms ongoing; VAT rollout proved challenging and additional TA may be requested from the IMF.
- Authorities would consider technical assistance from the “Management of Natural Resources Wealth Topical Trust Fund.”
- FY11 budget created Government Debt Resettlement Committee.

*Source: IMF staff estimates and staff views as presented in the provided content.*

### 29.      Efforts to contain inflation are being stepped up. As inflation currently exceeds the

### _cr11257 - 29.      Efforts to contain inflation are being stepped up. As inflation currently exceeds the

### Inflation, monetary policy, and liquidity management
- Efforts to contain inflation are being stepped up; inflation currently exceeds the official target.
- Bank of the Lao P.D.R. (BoL) intended and planned policy actions:
  - Minimize BoL lending to local governments and stop it completely by the end of the year.
  - Reduce excess liquidity by putting more BoL securities on offer.
  - A next step would be to raise interest rates on BoL securities.
  - If need be, consider raising reserve requirements.
- BoL view: given the strong outlook for growth driven by FDI in a variety of sectors, there is no risk that formulating the inflation target in terms of real GDP growth would trigger a procyclical spiral of increasingly tight monetary policy.

### Exchange rate stance
- Authorities are committed to maintain a stable exchange rate.
- Efforts to stabilize the value of the kip vis-à-vis the U.S. dollar and Thai baht have contributed greatly to overall macroeconomic and financial stability.

### Financial sector issues — supervision, capitalization, and AML/CFT
- Banking sector development and supervision:
  - Entry of new banks and rapid banking-sector development require strengthening of banking supervision.
  - Reported NPL ratios remain low and compliance-based onsite and offsite inspections take place regularly.
  - Concerns about possible recurrence of NPL problems given untested risk management capacities and strong credit growth.
  - Staff encouraged authorities to strengthen prudential regulations and supervision, building on recommendations of recent AsDB-provided technical assistance.
  - Staff, jointly with World Bank staff, presented the content, requirements, and potential benefits of the Financial Sector Assessment Program (FSAP) and suggested authorities consider participating.
- State-Owned Commercial Banks (SOCBs) recapitalization:
  - Capital adequacy of the three SOCBs has increased but remains below the regulatory minimum for two of them.
  - Plans to complete recapitalization need to be drawn up.
  - Recapitalization plans should be linked with memoranda of understanding laying out structural conditions and performance criteria for government capital injections, as with expired Governance Agreements during the AsDB-sponsored 2005–09 restructuring program.
  - Independent audits of SOCBs should continue.
- Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT):
  - Follow-up under way on the Asia Pacific Group’s (APG) recent evaluation of Lao P.D.R.’s AML/CFT framework.
  - Final mutual evaluation report to be discussed for adoption during the APG annual meetings in India in July.
  - Authorities should start to work on the APG’s recommended actions based on the report.
- Authorities’ steps:
  - BoL continues to monitor banks’ implementation of existing prudential regulations and is studying AsDB TA recommendations.
  - BoL separated the supervision of commercial banks from supervision of other financial institutions.
  - Difficulties persist in collecting and compiling banking data and financial soundness indicators (FSI) data; authorities prefer to improve FSI compilation before requesting an FSAP.

### Structural reforms, trade integration, and business climate
- Business environment and trade integration:
  - Continued decline in Lao P.D.R.’s ranking in the World Bank’s Doing Business Survey indicates need to streamline procedures and strengthen policy frameworks to boost private sector-led growth.
  - Authorities acknowledged need to accelerate reforms, noting phased mandatory tariff reductions under the ASEAN Free Trade Agreement.
  - Following adoption of the implementation decree for the new Investment Law, work under way to streamline business registration procedures.
  - Good progress in simplifying international trade, strengthening customs procedures, and introducing the ASYCUDA customs system.
  - Government continues revising relevant laws and passing WTO-compliant implementing decrees as part of accession preparations.
  - Tax code being reviewed to eliminate differential treatment of domestic and foreign companies; FAO experts to assist with WTO-consistent legal and regulatory framework for Sanitary and Phytosanitary measures.
  - Authorities imposed a rice export ban during November 2010–February 2011 in response to a price spike.
- Statistics and data modernization:
  - Serious data shortcomings hamper surveillance, analysis, and policy making; balance of payments, national accounts, and the FSI most in need of strengthening.
  - Ongoing delays in monetary and FSI statistics associated with implementation of the new chart of accounts are worrisome.
  - Staff welcomes adoption of the Statistics Law and commitment to upgrade and expand the Department of Statistics; encourages implementation of the new Statistics Strategy 2010–20.
  - Expedited action and additional investment in capacity of key economic institutions are needed.
  - IMF stands ready to increase its TA to Lao P.D.R. to support efforts to strengthen macroeconomic statistics.

### Staff appraisal — growth, risks, and policy recommendations
- Recent performance:
  - Lao P.D.R. continues to be one of the fastest growing economies in Asia.
  - Growth in 2010 buoyed by mining and hydropower projects, rebound in garment exports, nonregional tourism, and FDI inflows.
  - Domestic demand supported by fiscal and monetary stimulus; recovery of gross official reserves mostly related to capital inflows from two successful IPOs that inaugurated the new stock exchange.
- Risks and outlook:
  - Inflation has picked up and rapid expansion of domestic demand is putting pressure on the balance of payments.
  - Fiscal and monetary policy tightened in 2010 but remained accommodative.
  - Outlook for GDP growth in 2011 is favorable but inflation is projected to rise further.
  - On current policies, and given large excess reserves held by commercial banks with the BoL, credit growth is expected to remain strong, boosting domestic demand and imports and possibly raising risks in the financial sector.
  - External debt sustainability analysis suggests Lao P.D.R. continues to face a high risk of debt distress, underscoring urgent need to strengthen public external debt management.
- Policy recommendations:
  - Tighten macroeconomic policies in the near term to address potential pressures on the external position and contain inflation; projected further narrowing of the fiscal deficit in FY11 would contribute importantly.
  - Keep the nonmining fiscal balance on a consolidation path over the medium term; focus fiscal debate on the path of the nonmining fiscal deficit to reduce budget exposure to volatile mining revenues.
  - Raise nonresource revenue beyond targets implied by the new five-year plan for 2011–15 to create fiscal space for pro-poor spending while smoothing government spending over the medium term.
  - Strengthen BoL’s monetary policy framework:
    - Tighter control over the net domestic assets of the BoL by phasing out quasi-fiscal operations and/or accelerating issuance of BoL securities to mop up excess liquidity.
    - Consider raising the required reserve ratio.
    - Tightening monetary policy needed to help sustain the stabilized exchange rate regime, which remains the appropriate monetary anchor notwithstanding standardized quantitative analysis suggesting the kip is overvalued.
  - Strengthen banking supervision and prudential regulations, build on AsDB TA recommendations, and articulate plans to complete recapitalization of SOCBs.
  - Start working on APG’s anti-money laundering recommendations to strengthen the AML/CFT framework.
  - Avoid discretionary measures that seek to isolate domestic markets from international price developments (e.g., staff view that rice export ban measures are not advisable).
  - Resolve delays in compiling monetary and FSI data without delay.

*Source: IMF staff report content provided in the supplied document excerpt.*

### 46.      It is recommended that the next Article IV consultation take place on the standard

### _cr11257 - 46.      It is recommended that the next Article IV consultation take place on the standard

### Real and external sector developments
- Growth remains strong, supported by investments in the mining and hydropower sectors.
- The overall current account deficit narrowed in 2010 as the resource sector’s current account turned positive.
- Compared to end-2009, the kip has appreciated 6 percent against the U.S. dollar and depreciated 4 percent against the Thai baht.
- Inflation picked up in recent months: the year-on-year increase in the CPI reached 9.2 percent in April.
- Gross central bank reserves strengthened in the last quarter of 2010, boosted by two IPOs, before partially retreating in the first two months of 2011.
- Export growth outpaced import growth in recent months, although the gap is narrowing.
- Sources: Data provided by the Lao P.D.R. authorities; APDCORE database; Bloomberg LP; and IMF staff estimates.

### Key growth and external statistics (selected chart values and projections)
- Contributions to GDP Growth (year-on-year percentage change) shown for 2004–2011 (Proj.).
- Current Account Balance and FDI (In percent of GDP) shown for 2004–2011 (Proj.), including resource and nonresource components.
- Exchange rates, Jan. 2006–May 2011 (Inverted scale): kip per U.S. dollar and kip per baht.
- CPI Inflation, Jan. 2005–Apr. 2011 (Year-on-year percent change): Nonfood, Food, Headline, Core.
- Net Foreign Assets, Jan. 2005–Feb. 2011 (In millions of U.S. dollars): BOL gross international reserves, Commercial Bank NFA, BoL NFA.
- Exports and Imports, Jan. 2005–Feb. 2011 (Year-on-year percent change of 3-mma): Exports, Imports.

### Fiscal developments
- The fiscal deficit narrowed in FY09/10, on gains in nonmining revenue and lower off-budget spending.
- The outstanding stock of public sector external debt has continued to decline relative to the size of the economy.
- Higher copper prices are boosting resource revenues but nonresource tax collection is projected to decline in FY11.
- The decline in expenditure mainly reflects lower capital spending.
- Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates and projections.
- Note: The stock of domestic public debt includes local government borrowing from the central bank.

### Fiscal and debt indicators (selected figures)
- Fiscal Balance (In percent of GDP) series for 03/04–10/11 (Proj.): Revenue and grant; Expenditure; Overall balance; Nonmining balance.
- Public Sector Debt 1/ (In percent of GDP) series for 03/04–10/11 (Proj.): Domestic; External - commercial; External - bilateral; External - multilateral.
- General Government Revenue (In percent of GDP) series for 03/04–10/11 (Proj.): Resource (tax), Resource (nontax), Other (tax and nontax).
- General Government Expenditure (In percent of GDP) series for 03/04–10/11 (Proj.): Non wage current; Wages; Externally financed capital; Locally financed capital.

### Monetary developments
- The recovery of BOL NFA pushed reserve money growth to 45 percent (y/y) in February of 2011.
- Broad money growth accelerated to 37 percent (y/y) in February 2011.
- Credit to the economy increased by 42 percent in February (y-o-y).
- The loan-to-deposit ratio declined toward the end of 2009 as investors deposited funds ahead of the IPOs.
- Deposit and lending dollarization continue to inch down, but they remain high.
- Rates on kip loans remain substantially higher than rates on loans in foreign currency.
- Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates.

### Monetary indicators (selected series)
- Contribution to Reserve Money Growth, Jan. 2005–Feb. 2011 (Year-on-year percentage change): Reserve money; NFA; NDA.
- Contribution to Broad Money Growth, Jan. 2005–Feb. 2011 (Year-on-year percentage change): Broad money; NFA; NDA.
- Contribution to Credit Growth, Jan. 2005–Feb. 2011 (Year-on-year percent change): Forex loans to private sector; Kip loans to private sector; Credit to SOEs and local governments; Credit growth (y-o-y).
- Commercial Banks' Loan to Deposit Ratio, Jan. 2005–Feb. 2011: All currencies; Loans and deposits in kip.
- Dollarization, Jan. 2005–Feb. 2011 (In percent): Deposit dollarization; Lending, total; Lending (excluding BoL).
- Interest Rate, Jan. 2005–Feb. 2011: 3-month deposit rate (kip); 3-month deposit rate (Thai baht); 3-month deposit rate (U.S.dollar); 12-month lending rate (kip); 12-month lending rate (baht); 12-month lending rate (U.S.dollar).

### Medium-term macroeconomic framework (Table 1, 2008–16, selected figures)
- Real GDP (levels or growth shown): Real GDP and Real GDP (excluding resource projects) for 2008–2016 projections.
- Consumer prices (end-period) series: 3.2; 3.9; 5.8; 9.7; 6.0; 4.8; 4.6; 4.2; 4.1 (years aligned in table).
- Consumer prices (annual average) series: 7.6; 0.0; 6.0; 8.7; 6.7; 5.3; 4.6; 4.5; 3.9.
- GDP per capita (in U.S. dollars) series: 856; 886; 1,003; 1,202; 1,337; 1,427; 1,530; 1,653; 1,770.
- Public finances (in percent of GDP) — Revenue: 15.9; 17.1; 18.6; 18.4; 19.4; 19.5; 19.3; 18.6; 18.5.
- Of which: Mining revenue: 2.6; 2.1; 1.8; 2.9; 3.8; 3.6; 3.3; 2.4; 2.1.
- Expenditure: 18.5; 24.1; 23.4; 21.0; 20.8; 21.4; 21.1; 21.2; 21.2.
- Net lending/borrowing: -2.6; -6.9; -4.8; -2.6; -1.4; -1.9; -1.8; -2.6; -2.7.
- Nonmining balance 2/: -5.1; -9.0; -6.6; -5.5; -5.2; -5.6; -5.1; -5.0; -4.8.
- Current account balance (in millions of U.S. dollars): -982; -1,174; -1,173; -1,530; -1,755; -2,138; -3,004; -2,681; -2,238.
- Current account balance (in percent of GDP): -18.5; -21.0; -18.2; -19.4; -19.6; -22.0; -28.3; -22.9; -17.5.
- Exports (in millions of U.S. dollars): 1,609; 1,521; 2,217; 2,801; 3,215; 3,262; 3,285; 3,569; 4,012.
- Imports (in millions of U.S. dollars): 2,837; 2,893; 3,582; 4,649; 5,367; 5,918; 6,975; 7,002; 6,859.
- Gross official reserves (in millions of U.S. dollars): 636; 633; 727; 813; 945; 973; 1,005; 1,072; 1,234.
- Memorandum: Nominal GDP (in billions of kip): 46,215; 47,567; 54,195; 63,446; 73,386; 82,775; 93,196; 105,218; 117,503.

### Balance of payments (Table 2, 2008–16, selected figures)
- Current account: -982; -1,174; -1,173; -1,530; -1,755; -2,138; -3,004; -2,681; -2,238 (2008–2016).
- Merchandise trade balance: -1,228; -1,372; -1,365; -1,848; -2,152; -2,655; -3,690; -3,433; -2,847.
- Exports, f.o.b.: 1,609; 1,521; 2,217; 2,801; 3,215; 3,262; 3,285; 3,569; 4,012.
- Mining and hydropower exports: 865; 912; 1,500; 1,949; 2,270; 2,292; 2,235; 2,403; 2,715.
- Imports, c.i.f.: 2,837; 2,893; 3,582; 4,649; 5,367; 5,918; 6,975; 7,002; 6,859.
- Services (net): 331; 330; 367; 443; 515; 590; 662; 681; 706.
- Income (net): -226; -265; -354; -341; -360; -338; -266; -248; -447.
- Transfers (net): 141; 133; 179; 217; 243; 265; 290; 320; 350.
- Capital account balance: 1,086; 1,097; 1,274; 1,621; 1,890; 2,170; 3,040; 2,752; 2,403.
- Foreign direct investment (net): 921; 785; 692; 1,071; 1,374; 1,629; 2,439; 2,085; 1,729.
- Overall balance: 105; -77; 10; 91; 113; 53; 236; 367; 116; 5 (series includes projections).
- Core Balance (CA+FDI+ODA): 63; -27; 4; -3; 64; -3; -11; -22; -40; -25; -55; -16 (table context: core balance figures listed across years).
- Financing and Central bank NFA adjustments shown as series including -105; 77; -101; -91; -135; -32; -36; -71; -165.

### Balance of payments memorandum and commodity notes
- Current account balance (in percent of GDP): -18.5; -21.0; -18.2; -19.4; -19.6; -22.0; -28.3; -22.9; -17.5.
- Resource current account balance (in percent of GDP) 2/: -8.2; -5.4; 3.6; -0.9; -1.3; -3.9; -8.8; -3.2; 2.3.
- Nonresource current account balance (in percent of GDP): -10.3; -15.6; -21.7; -18.5; -18.3; -18.1; -19.5; -19.7; -19.9.
- Exports (annual percent change): 21.5; -5.5; 45.8; 26.3; 14.8; 1.5; 0.7; 8.7; 12.4.
- Imports (annual percent change): 31.5; 2.0; 23.8; 29.8; 15.4; 10.3; 17.9; 0.4; -2.0.
- Gold production (000s oz.): 140; 162; 165; 163; 282; 283; 338; 330; 325.
- Gold price (U.S. dollar per oz.): 872; 973; 1,225; 1,469; 1,510; 1,542; 1,594; 1,660; 1,734.
- Copper production (000s ton): 89; 122; 128; 145; 154; 163; 151; 153; 153.
- Copper price (U.S. dollar per ton): 6,963; 5,165; 7,538; 9,003; 8,708; 8,200; 7,200; 6,700; 6,700.
- Gross official reserves: 636; 633; 727; 813; 945; 973; 1,005; 1,072; 1,234.
- In months of prospective imports (Excluding imports associated with large resource projects): 2.6; 2.0; 1.8; 1.7; 1.8; 1.6; 1.7; 1.8; 2.1.
- Nominal GDP at market prices (in millions U.S.$): 5,313; 5,598; 6,461; 7,891; 8,937; 9,722; 10,627; 11,693; 12,763.

### General government operations (Table 3, selected fiscal figures in billions of kip and percent of GDP)
- Revenue (in billions of kip, selected years): 7,134; 8,099; 8,907; 9,779; 10,383; 11,242; 13,783 (years aligned in table).
- Resource revenue 1/ (in billions of kip): 1,486; 1,357; ...; 1,376; ...; 2,284; 3,429.
- Tax revenue (in billions of kip): 5,627; 6,208; 6,989; 7,503; 8,170; 8,877; 11,221.
- Nontax revenue (in billions of kip): 812; 823; 836; 1,035; 1,042; 1,194; 1,371.
- Grants (in billions of kip): 695; 1,068; 1,081; 1,242; 1,171; 1,171; 1,191.
- Expenditure (in billions of kip): 8,284; 11,375; 10,073; 12,302; 11,596; 12,825; 14,779.
- Expense (in billions of kip): 5,141; 6,070; 6,565; 6,656; 7,159; 7,159; 8,519.
- Net acquisition of nonfinancial assets (in billions of kip): 3,142; 5,305; 3,508; 5,646; 4,437; 5,666; 6,260.
- Off-budget capital expenditure (in billions of kip): 255; 1,933; ...; 1,823; ...; 1,500; 430.
- Net lending(+)/borrowing(-) (in billions of kip): -1,150; -3,276; -1,166; -2,524; -1,213; -1,583; -996.
- Net incurrence of liabilities (in billions of kip): 1,659; 3,159; ...; 2,668; ...; 2,934; 2,227.

- General government operations (in percent of GDP, selected rows):
  - Revenue: 15.9; 17.1; 16.5; 18.6; 17.0; 18.4; 19.4.
  - Expenditure: 18.5; 24.1; 18.6; 23.4; 19.0; 21.0; 20.8.
  - Net acquisition of nonfinancial assets: 7.0; 11.2; 6.5; 10.7; 7.3; 9.3; 8.8.
  - Net lending(+)/borrowing(-): -2.6; -6.9; -2.2; -4.8; -2.0; -2.6; -1.4.
  - Nonmining balance 2/: -5.1; -9.0; ...; -6.6; ...; -5.5; -5.2.
  - Mining revenue: 2.6; 2.1; ...; 1.8; ...; 2.9; 3.8.
  - Hydropower revenue: 0.7; 0.8; ...; 0.8; ...; 0.8; 1.0.

### Monetary survey (Table 4, 2008–11, selected figures)
- Bank of Lao P.D.R. (BoL) Net foreign assets (in millions of U.S. dollars): 614; 551; 537; 546; 471; 443; 641; 686; 731.
- Reserve money (in billions of kip): 4,776; 5,685; 6,436; 6,923; 6,509; 7,159; 9,560; 10,609; 11,134.
- Currency in circulation (in billions of kip): 2,508; 2,932; 3,580; 3,588; 3,593; 3,720; 4,505; 5,352; 5,775.
- Bank reserves (foreign currency, in billions of kip): 1,390; 1,658; 1,644; 1,905; 1,515; 1,856; 2,039; 2,550; 2,805.
- Monetary survey: Net foreign assets (in millions of U.S. dollars): 865; 685; 648; 668; 576; 528; 778; 837; 886.
- Net domestic assets (in billions of kip): 4,196; 7,653; 9,678; 10,370; 11,673; 13,560; 14,856; 18,746; 19,311.
- Credit to the economy (in billions of kip): 5,845; 9,157; 11,143; 12,323; 13,415; 14,805; 16,270; 21,115; 20,631.
  - In kip: 2,208; 3,473; 4,195; 4,688; 5,293; 6,146; 6,659; 8,657; 8,459.
  - In foreign currencies: 3,637; 5,684; 6,948; 7,635; 8,121; 8,659; 9,611; 12,458; 12,172.
- Broad money (in billions of kip): 11,564; 13,487; 15,177; 16,008; 16,415; 17,841; 21,114; 25,472; 26,436.
- Reserve money growth (annual percent change): 20.2; 34.5; 34.7; 30.0; 26.5; 25.9; 48.6; 48.2; 16.5.
- Broad money growth (annual percent change): 18.3; 25.0; 31.2; 28.6; 27.2; 32.3; 39.1; 42.8; 25.2.
- Credit to the economy (annual percent change): 84.6; 89.1; 90.7; 89.2; 62.8; 61.7; 46.0; 42.6; 26.8.
- Loan/deposit (percent): 55.2; 67.4; 73.0; 73.4; 75.9; 77.5; 74.5; 80.4; 74.4.
- Dollarization rate (FCDs/broad money; in percent): 50.4; 48.7; 46.1; 46.7; 47.6; 46.7; 44.1; 46.0; 46.0.
- Gross official reserves (in millions of U.S. dollars): 636; 648; 633; 636; 558; 531; 730; 813; 813.
- Exchange rate, end-of-period (kip per U.S. dollar): 8,514; 8,513; 8,483; 8,445; 8,236; 8,107; 8,042; 8,040; 8,040.
- Nominal GDP (in billions of kip): 46,215; 47,225; 47,567; 54,195; 54,195; 52,538; 54,195; 61,133; 63,446.

### Financial soundness indicators (Table 5, selected)
- Capital adequacy ratio (Basel I): ...; 25.0; 20.1 (years listed).
- NPL ratio: 5.9; 5.4; 3.8.
  - State-owned commercial banks: 4.2; 1.7; 1.3.
  - Joint-venture banks: 12.7; 4.5; 1.3.
  - Foreign bank branches: 0.6; 13.9; 10.5.
  - Private banks: ...; 1.4; 1.9.
- Return on assets (select SOCBs only): 0.9; 3.1; ...
  - Banque pour le Commerce Exterieur Lao: 4.7; 3.6; ...
  - Lao Development Bank: 0.8; 2.2; ...
  - Agricultural Promotion Bank: -2.8; 3.6; ...
- Number of banks: 13; 20; 23.
  - State-owned commercial banks: 4; 4; 4.
  - Joint-venture banks: 2; 2; 2.
  - Foreign bank branches: 6; 9; 10.
  - Private banks: 1; 5; 7.
- Sectoral allocation of bank credit (in percent of total) (selected): Industry and handicraft: 22; 19; 19. Construction: 4; 4; 4. Agriculture: 8; 13; 14. Commerce: 29; 26; 23. Services: 8; 10; 8.

### Millennium Development Goals (Table 6: progress summary)
- Goal 1: Poverty and hunger
  - Reduce extreme poverty by half: On Track (●).
  - Reduce hunger by half: Seriously off Track.
  - Achieve full and productive employment and decent work for all: Off Track.
- Goal 2: Universal primary education
  - Universal primary schooling: On Track (●).
- Goal 3: Gender equality and women’s empowerment
  - Eliminate gender disparity at all levels of education: On Track (●).
- Goal 4: Child mortality
  - Reduce child mortality under five years of age by two-thirds: On Track (●).
- Goal 5: Maternal health
  - Reduce maternal mortality by three-quarters: Off Track.
  - Universal access to reproductive health: On Track (●).
- Goal 6: HIV/AIDS, malaria, and other diseases
  - Halt and reverse the spread of HIV/AIDS: Off Track (●).
  - Achieve universal access to HIV/AIDS treatment: Off Track (●).
  - Halt and reverse the spread of malaria: Off Track (●).
  - Halt and reverse the spread of TB: Off Track (●).
- Goal 7: Environmental sustainability
  - Reverse the loss of environmental resources: On Track (●).
  - Reduce rate of biodiversity loss: Off Track.
  - Halve the number of people without safe drinking water in rural areas: On Track (●).
  - Halve the number of people without safe drinking water in urban areas: Off Track.
  - Halve the number of people without sanitation in rural areas: On Track (●).
  - Halve the number of people without sanitation in urban areas: Off Track.
- Source: United Nations, “Accelerating Progress Towards the MDGs.”

### Joint IMF/World Bank Debt Sustainability Analysis (June 22, 2011)
- Lao P.D.R.’s risk of debt distress is assessed to be high.
- One public external debt stock indicator is expected to remain above policy-dependent indicative thresholds over the medium term under the baseline scenario, notwithstanding recent downward trend in debt indicators and projected strong growth.
- Debt service ratios remain comfortably within the policy-dependent indicative thresholds, even under the stress tests, due to the high level of concessionality of official borrowing.
- Debt management needs to be strengthened as a matter of priority.
- Before signing any new loan agreements, it would be important to carefully assess the implications for macroeconomic stability and external and public debt sustainability of the large amount of undisbursed loan commitments from China that appear to have been signed in recent years.
- DSA prepared jointly by the IMF and World Bank, in consultation with the Asian Development Bank (AsDB). Debt data provided by the Lao P.D.R. authorities.
- CPIA note: Lao P.D.R.’s CPIA averaged 3.253 over the past three years; because this is the first year above the 3.25 threshold and the breach is less than 0.05, Lao P.D.R. is still classified in the “weak performer” category for the LIC-DSF; relevant indicative thresholds for this category are: PV of debt-to-GDP ratio 30 percent; PV of debt-to-exports ratio 100 percent; PV of debt-to-revenue ratio 200 percent; debt service-to-exports ratio 15 percent; debt service-to-revenue ratio 25 percent. These thresholds apply to public and publicly guaranteed external debt.

*Sources: Data provided by the Lao P.D.R. authorities; APDCORE database; Bloomberg LP; IMF staff estimates; IMF and World Bank joint DSA (June 22, 2011).*

### 1. The results of this DSA are similar to those of the previous DSA.

### _cr11257 - 1. The results of this DSA are similar to those of the previous DSA.

### Key findings and headline results
- The results of this DSA are similar to those of the previous DSA, but an improved outlook for revenue and exports has lowered related debt-burden indicators.
- The primary difference is that the present value (PV) of debt-to-revenue ratio is now below the threshold level under the baseline scenario.
- Baseline assumptions for economic growth, revenues, and exports are somewhat more optimistic than in the previous DSA, positively affecting longer-term debt dynamics.
- The projected rate of external debt accumulation is higher during 2012–16 due to increased borrowing from non-Paris Club bilateral creditors, mainly China.
- Calculations use a discount rate of 4 percent, unchanged from last year’s DSA.

### External public and publicly guaranteed (PPG) debt stock (end-2010)
- PV of debt: 37 percent of GDP or 86 percent of exports at end-2010 (down from 43 percent of GDP or 129 percent of exports at end-2009).
- External PPG debt stock (nominal): US$3.5 billion in 2010 (up from US$2.1 billion in 2005).
- External PPG debt as a share of GDP: 51.8 percent of GDP in 2010 (down from 82 percent of GDP in 2005).
- Private external debt: 40.4 percent of GDP at end-2010 (mostly related to mining, hydropower, and construction projects).

Stock composition (Lao P.D.R.: Stock of Public and Publicly Guaranteed External Debt at End-2010)
- Total: 3.5 (In billions of U.S. Dollar); As a Share of Total External Debt: 100.0; In percent of GDP: 51.8
- Multilateral: 2.16; 60.2; 31.2
- Bilateral: 1.23; 35.7; 18.5
- Commercial 1/: 0.14; 4.1; 2.1
- 1/ Includes direct borrowing by state-owned enterprises on nonconcessional terms.

Indicative thresholds (Lao P.D.R.: External Public Debt Indicators at End-2010)
- Present value of debt, as a percent of:
  - GDP: 30 | 36.6 (Indicative threshold | End-2010)
  - Exports: 100 | 85.9
  - Revenue: 200 | 222.1
- Debt service, as a percent of:
  - Exports: 15 | 4.5
  - Revenue: 25 | 11.5

### Creditor composition and recent lending patterns
- Around 60.2 percent of external PPG debt is held by multilateral creditors, mainly AsDB (35 percent) and IDA (19 percent).
- About 35.7 percent is held by bilateral creditors—mainly China, Russia, Thailand, and Japan; India and Korea also increased lending in the past three years.
- Remaining 4.1 percent comprises external debt incurred by public entities on nonconcessional terms, mainly for hydropower and electricity generation and including financing equity stakes.
- As of end-2010, China signed 24 loan agreements with Lao P.D.R., amounting to US$1.35 billion; about US$958 million remained undisbursed.

### Baseline macroeconomic and financing assumptions
- Baseline projects annual average growth for the next six years at 7.7 percent (in line with the average for the last five years and the authorities’ targets in the 7th five-year plan).
- Growth drivers: large resource projects (mostly mining and hydropower), improved tourism outlook, agriculture, and manufacturing.
- External financing assumed to remain largely on concessional terms over the medium term; grant financing decreases over the long term with possible graduation from low-income status in the second half of the projection period.
- Participation of nontraditional bilateral creditors expected to increase versus the previous DSA: previous DSA assumed total disbursement of US$354 million from China during 2011–16; this DSA assumes US$958 million for the same period.

### External Debt Sustainability Analysis (baseline and vulnerabilities)
- Under the baseline, the PV of debt-to-GDP ratio remains above the policy-dependent indicative thresholds until 2019.
- The PV of debt-to-revenue ratio has improved to below the threshold in the baseline scenario.
- All three external debt stock indicators are projected to remain basically flat until about 2018, reflecting about US$600 million in additional loan disbursements from China during 2011–16.
- Debt service ratios (share of exports and government revenues) remain well below indicative thresholds throughout the 20-year projection period, despite falling grant-equivalent financing.
- External debt sustainability is most vulnerable to:
  - A one-off 30 percent depreciation of the kip, which would sharply raise PV of debt-to-GDP and PV of debt-to-revenue ratios.
  - A decline in export growth (by one standard deviation in 2012–13) would push PV of debt-to-exports to 151 percent by 2014 and keep it above the indicative threshold until 2031—illustrating vulnerability to a sharp decline in copper and gold prices.

### Alternative and stress scenarios
- Historical scenario:
  - More favorable debt dynamics through 2014 due to stronger increase in the GDP deflator in U.S. dollar terms during 2001–10.
  - In later years, higher historical average current account deficit (13.6 percent of GDP per annum vs. 8.5 percent in the baseline) and lower historical average FDI (4.1 percent of GDP per annum vs. 8.7 percent in the baseline) imply almost 10 percentage points of GDP more debt accumulation per year than the baseline—unsustainable in the long run.
  - Illustrates vulnerability to a decline in FDI inflows from recent high levels.
- Stress tests:
  - Most extreme bound test defined as the bound test producing the most extreme deterioration of the debt burden indicator after 10 years.
  - Sensitivity to real depreciation: a one-time 30 percent real depreciation of the kip in 2012 would immediately raise PV of public debt-to-GDP ratio and PV of public debt-to-revenue ratio to 54 and 280 percent, respectively; debt service-to-revenue ratio would increase to around 14 percent in 2013.
  - Contingent liabilities: a 10 percent of GDP increase in other debt-creating flows (fifth bound test in Table 4) offers indication of possible effects from settling arrears, debts to contractors, and recapitalization of state-owned banks.

### Public sector debt dynamics and key public-debt projections
- Recorded domestic public debt rose to 7 percent of GDP in 2010 (up from 5.6 percent of GDP in 2009) as the central bank disbursed more loans to finance local government’s off-budget infrastructure projects.
- Lending from the Bank of Lao P.D.R. (BoL) represents 82 percent of the recorded total domestic debt; the remainder comprises government bonds, notably related to recapitalization of state-owned commercial banks.
- Total PPG domestic and external debt stood at 58.8 percent of GDP in 2010.
- Domestic debt projected to decline from 7 percent in 2010 to about 3 percent of GDP in 2016, reflecting strong revenue performance in FY10 and improved resource revenue outlook.
- Debt service-to-GDP ratio projected to decline over the projection period.
- Assumes BoL phases out quasi-fiscal lending; if phasing out does not materialize, public debt dynamics could be significantly worse.

### Risks related to resource projects and financing modalities
- Large resource-related projects account for some 10 percent of GDP now, with this share expected to nearly double over the medium term.
- Economy exposed to fluctuations in copper and gold prices and the economic outlook of neighboring countries (Thailand, Vietnam, China).
- Risk rises if projects are financed from commercial sources (e.g., bonds backed by future revenues).
- Mitigating factor: prospective returns on hydropower and mining projects (royalties, dividends, profit tax payments) may reduce risk of debt distress, though projects face construction and implementation challenges.

### Authorities’ view and data issues
- Authorities broadly agreed with the assessment and are modernizing debt management.
- Authorities acknowledged that external debt data provided for this DSA might be inadequate: government debt records cannot be easily reconciled with creditor statements; debt data of state-owned enterprises is not readily available.
- Lao P.D.R. is installing the DMFAS debt recording system to improve debt records.
- Authorities are analyzing appropriate annual borrowing levels and maintain that significant external debt finances viable large resource projects with expected high economic returns; they also note long loan maturities mitigate risks.

### Conclusions and policy recommendations
- Conclusion: Lao P.D.R. has made progress reducing external and public debt burden but still faces a high risk of debt distress.
- Key vulnerabilities: large-scale investments in hydropower and mining that deliver returns only over the medium term; large swings in the exchange rate; fluctuations in export earnings and commodity prices; lack of fiscal consolidation.
- Policy recommendations and priorities:
  - External borrowing should normally be obtained on concessional terms.
  - Fiscal and quasi-fiscal liabilities should be carefully managed to build buffers against vulnerabilities.
  - Continue prudent debt management and cautious assessment and monitoring of large-scale projects.
  - Limit recourse to nonconcessional external financing to viable projects, given high risk of debt distress.
  - BoL should follow through on its commitment to exit from direct lending to local governments.
  - Improve debt management capacity and develop a medium-term borrowing strategy for the government, including for resource sector activity.
  - Increase disclosure of borrowing plans, particularly concerning large loan amounts contracted with China.
  - Build capacity and governance structures to assess project viability.

*Source: _cr11257 - 1. The results of this DSA are similar to those of the previous DSA.*

### Box 1: Baseline Scenario—Underlying Assumptions (2011–31)

### Box 1: Baseline Scenario—Underlying Assumptions (2011–31)

### Macroeconomic growth and structure
- Real GDP growth:
  - Projected to average 7.7 percent in 2011–16.
  - Expected to moderate to 6.4 percent on average in 2017–31 as the resource sector matures.
- Near-term growth drivers:
  - Expanding production of gold, copper, and electricity.
  - US$3.7 billion Hongsa Lignite mining and power station expected to start operations in 2015–16.
  - Improved outlook for tourism and agriculture and FDI in these sectors.
- Structural change:
  - Over time, agriculture’s share of GDP declines; industry and services increase.
  - Graduation from low-income status could be achieved in the second half of the projection period.

### Commodity prices and inflation
- Commodity price assumptions:
  - Copper and gold price projections through 2016 based on WEO projections as of May 2011 and assumed constant in real terms afterward.
  - Copper price projected to soften to US$6,700 per ton by 2016, down from US$9,000 in 2011.
- Inflation:
  - Inflation could reach 10 percent in the coming months due to high food and fuel prices and strong second-round effects amid rapidly rising domestic demand.
  - Over the medium term, inflation is projected to moderate to about 4 percent.

### Balance of payments, external position, and FDI
- Balance of payments dynamics:
  - Large swings expected reflecting development of the resource sector.
  - External current account deficit projected to narrow considerably in the long run.
  - Resource current account will turn to surplus in 2016 as large projects complete and begin operations.
  - Nonresource current account would slightly deteriorate over the next decade reflecting increasing cost of industrialization, before moderating over the longer term.
- Exports and competitiveness:
  - Assumed pick up in nonresource exports and services driven by strengthened competitiveness and regional integration, supported by improvements in the investment climate, streamlining of business regulations, and meeting trade commitments.
- International reserve position:
  - Overall external position expected to strengthen over time and international reserve position will gradually improve.
- FDI:
  - Private capital inflows in the form of FDI expected to remain high through the first half of the projection period as large new projects get under way, then gradually decline.

### External financing assumptions
- General:
  - External financing assumed to remain largely on concessional terms over the medium term.
  - 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 and a moderate increase in project loans is assumed.
- Bilateral creditors:
  - For 2011–12, projected loan disbursements increase as donors support 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 onlending to SOEs.
  - Undisbursed US$958 million in loans from China assumed to have $80 million disbursed in 2011 and the rest evenly disbursed during 2012–16.
  - Terms assumed for that financing: 6-year grace period, 15-year repayment period, and an interest rate of 1.5 percent.
- Commercial creditors:
  - Over the medium term, commercial disbursements are relatively small, principally to finance a portion of the government’s equity stake in new hydropower projects.
  - DSA assumes government borrowing to finance its equity stake in the Hongsa Lignite project will be disbursed in 2014 and 2015.

### Fiscal policy and public/debt dynamics
- Fiscal path:
  - Fiscal consolidation from a 4.8 percent of GDP overall deficit recorded in FY10.
  - Deficit projected to narrow to about 2.6 percent of GDP in FY11 and following further narrowing in FY12–13 to revert back to that level in the medium term.
  - Consolidation expected to be supported by rising resource sector revenues thanks to strong commodity prices.
- Domestic debt:
  - Domestic debt decreases over the medium term driven by repayments of lending from the BoL.
  - Domestic debt increases in the long term as net external financing as percent of GDP declines and a larger share of budget deficits is financed domestically.

### Selected quantitative indicators and assumptions (as presented)
- Real GDP growth (in percent): historical and projections include 7.8; 7.6; 7.9; 7.1; 1.1; 8.3; 8.4; averages for periods cited as 7.7 and later 6.4.
- GDP deflator in U.S. dollar terms (change in percent): examples given include 16.6; -2.1; 6.9; 7.3; 7.7; 12.8; 4.5; 1.6; 1.8; 2.0; 1.6; 4.0; 3.8; 3.8; 3.6.
- Effective interest rate (percent): examples given include 1.5; 1.4; 2.3; 1.8; 0.3; 2.4; 2.0; 1.7; 1.6; 1.3; 2.8; 2.0; 2.0; 1.3; 1.8.
- Growth of exports of G&S (U.S. dollar terms, in percent): 26.3; -5.2; 43.4; 16.5; 21.7; 24.8; 15.0; 3.8; 3.0; 7.9; 10.9; 10.9; 9.7; 8.8; 7.1.
- Growth of imports of G&S (U.S. dollar terms, in percent): 30.7; 1.4; 26.7; 18.4; 13.4; 29.0; 15.4; 10.3; 17.6; 0.8; -1.6; 11.9; 7.8; 6.8; 5.7.
- Government revenues (excluding grants, in percent of GDP): examples include 14.3; 15.6; 16.5; 16.9; 17.7; 17.8; 17.5; 16.9; 16.9; 16.9; 18.3; 17.6.
- Aid flows (in billions of U.S. dollars): sequences include 0.1; 0.1; 0.1; 0.2; 0.2; 0.3; 0.3; 0.4; 0.4; 0.5; 0.3.
  - Of which: Grants examples include 0.1; 0.1; 0.1; 0.1; 0.1; 0.2; 0.2; 0.2; 0.2; 0.2; 0.1.
- Grant-equivalent financing (in percent of GDP) examples: 2.8; 2.9; 3.0; 3.0; 3.0; 3.0; 2.0; 0.5; 1.5 (for specific projection years).
- Nominal GDP (in billions of U.S. dollars): series includes 5.3; 5.6; 6.5; 7.9; 8.9; 9.7; 10.6; 11.7; 12.8; 20.4; 54.4.
- PV of PPG external debt (in billions of U.S. dollars): examples include 2.5; 2.6; 2.9; 3.1; 3.4; 3.8; 4.2; 5.5; 9.2.
- PV of PPG external debt (in percent of exports + remittances): examples include 83.7; 74.8; 72.9; 76.2; 80.7; 82.2; 81.1; 79.7; 61.7.
- Debt service of PPG external debt (in percent of exports + remittances): examples include 4.4; 4.3; 4.0; 4.2; 4.5; 4.4; 4.2; 5.1; 4.2.
- Total gross financing need (in billions of U.S. dollars): examples include 0.7; 0.9; 0.7; 1.3; 1.5; 1.9; 2.7; 1.8; 1.1; 1.1; 0.7.
- Noninterest current account deficit that stabilizes debt ratio (percent of GDP): examples include 21.0; 14.1; 26.2; 23.5; 14.4; 13.5; 15.3; 21.0; 19.1; 17.6; 6.6.

### Stress and sensitivity testing (high-level)
- The DSA presents a set of alternative scenarios and bound tests for 2011–31, including:
  - Historical scenario, most extreme shocks (e.g., One-time depreciation shock; Exports shock).
  - Bound tests include shocks to real GDP growth, export value growth, U.S. dollar GDP deflator, net nondebt creating flows, combination shocks, and a one-time 30 percent nominal depreciation in 2012.
  - Example stress outcomes reported in tables/figures: PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service-to-exports, debt service-to-revenue, and debt accumulation trajectories under shocks.
- Sensitivity analyses consider alternative financing terms (e.g., new public sector loans on less favorable terms with interest rate assumed 2 percentage points higher than baseline in footnote).

### Key policy-relevant implications (implied by baseline assumptions)
- Continued concessional external financing and high FDI in the near term are central to financing large resource-sector projects.
- Fiscal consolidation and rising resource sector revenues are essential to narrow the overall deficit from 4.8 percent of GDP in FY10 toward about 2.6 percent of GDP in FY11 and the medium-term level.
- Managing foreign-exchange exposure and ensuring competitiveness, regional integration, and investment climate reforms are critical to support nonresource exports and moderate external vulnerabilities as resource projects transition to the operating phase.

*Source: Box 1, "Baseline Scenario—Underlying Assumptions (2011–31)", Staff Report for the 2011 Article IV Consultation—Informational Annex (June 22, 2011).*

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

### ANNEX I. LAO P.D.R.: FUND RELATIONS (As of May 31, 2011)

### I. Membership and Quota
- Joined: 7/05/61
- Article VIII: Yes

### II. General Resources Account
- Quota (SDR million): 52.90
- Percent Quota: 100.00
- Fund holdings of currency (SDR million): 52.90
- Fund holdings percent Quota: 100.00

### III. SDR Department
- Net cumulative allocation (SDR million): 50.68
- Allocation percent: 100.00
- Holdings (SDR million): 50.62
- Holdings percent: 99.88

### IV. Outstanding Purchases and Loans
- ECF Arrangements (SDR million): 4.53
- Percent Quota (ECF Arrangements): 8.56

### V. Latest Financial Arrangements
- ECF: Approval Date 4/25/01; Expiration Date 4/24/05; Amount Approved (SDR million) 31.70; Amount Drawn (SDR million) 18.12
- ECF 1/: Approval Date 6/04/93; Expiration Date 5/07/97; Amount Approved (SDR million) 35.19; Amount Drawn (SDR million) 35.19
- SAF: Approval Date 9/18/89; Expiration Date 9/17/92; Amount Approved (SDR million) 20.51; Amount Drawn (SDR million) 20.51
- Note: 1/ Formerly PRGF.

### VI. Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs)
- 2011: Principal 1.36; Charges/interest 0.00; Total 1.36
- 2012: Principal 2.27; Charges/interest 0.01; Total 2.27
- 2013: Principal 0.91; Charges/interest 0.00; Total 0.91
- 2014: Principal 0.00; Charges/interest 0.00; Total 0.00
- 2015: Principal 0.00; Charges/interest 0.00; Total 0.00

### VII. Implementation of HIPC
- Not applicable.

### VIII. Implementation of MDRI
- Not applicable.

### IX. Implementation of PCDR
- Not applicable.

### X. Safeguards Assessments
- A safeguards assessment of the Bank of Lao P.D.R. (BoL) was completed in April 2003 in the context of an ECF arrangement (Country Report Nos. 03/308 and 05/08).
- Progress on implementing the safeguards assessment 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.
- The state auditor has completed the audits for 2003 and 2004, but the joint audit issue remains unresolved.

### XI. Exchange Arrangement
- AREAER classification: de jure regime is a float; de facto regime stabilized.
- Authorities’ objective: limit currency fluctuations vis-à-vis major currencies, including the U.S. dollar and Thai baht within ±5 percent per annum.
- BoL sets a daily official reference rate calculated as a weighted average of the previous day’s interbank rates.
- Commercial banks and foreign exchange bureaus are required to maintain buying and selling rates:
  - For the U.S. dollar: within ± 0.25 percent of the BoL’s daily reference rate.
  - For the euro and baht: within a margin of 0.5 percent.
  - For other currencies: margin of 2 percent.
- On May 28, 2010, Lao P.D.R. accepted the obligations under Article VIII, Section 2, 3, and 4, following the elimination of one restriction subject to Fund jurisdiction under Article VIII arising from a requirement to obtain tax payment certificates for some transactions.
- Lao P.D.R. now maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions, except for restrictions imposed solely for the preservation of national or international security notified to the Fund pursuant to Decision No. 144-(52/51).

### XII. Last Article IV Consultation Discussions
- Discussions held in Vientiane during June 2–15, 2010.
- Staff report (Country Report No. 11/44) completed on July 14, 2010 and published on February 7, 2011.

### XIII. Technical Assistance During the Past 18 Months
- FAD: Peripatetic expert in customs administration, January 2011 and July to August 2010.
- FAD: Customs Administration Mission, March 28 to April 6, 2011.
- FAD: Reforms in Tax Administration, March 28 to April 6, 2011.

### XIV. 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.
- The IMF’s local office in Vientiane was closed in July 2010.
- Contacts with the authorities are henceforth handled by the Hanoi office.

*Source: _cr11257 - ANNEX I. LAO P.D.R.: FUND RELATIONS (As of May 31, 2011).*

### 1.5 percentage points, to 18.6 percent of GDP. The introduction of the VAT in January 2010,

### _cr11257 - 1.5 percentage points, to 18.6 percent of GDP. The introduction of the VAT in January 2010,

### Fiscal developments and public finance
- Revenue rose by 1.5 percentage points, to 18.6 percent of GDP, driven by:
  - introduction of the VAT in January 2010,
  - higher royalties and dividends from the hydropower and mining sectors.
- Corporate income tax/profit tax slumped in 2009 because of low international copper prices, but was more than compensated by the revenue measures above.
- Spending was reduced by 0.7 percentage points, to 23.4 percent of GDP, largely reflecting a reduction in off-budget capital spending.
- Overall balance (including grants) improved from -6.9 percent of GDP in 2009 to -4.8 percent of GDP in 2010; authorities expect it to narrow to -2.6 percent of GDP in FY11.
- Nonmining balance (percent of GDP): -3.7 (2006), -4.6 (2007), -5.1 (2008), -9.0 (2009), -6.6 (2010), -5.5 (2011).
- Authorities' fiscal strategy:
  - emphasis on strengthening the revenue side (baseline domestic revenue target for the seventh five-year plan is 16-17 percent of GDP),
  - ongoing tax and customs reforms,
  - VAT introduced in 2010 to broaden the revenue base,
  - installation of DMFAS debt recording system and improved debt management technical capacity,
  - introduction of a government debt ceiling for certain projects (ceiling details noted: for social and economic development projects the ceiling is not to exceed 25 percent of the annual government revenue; interest rate not to exceed 3 percent per annum; repayment period over 13 years).

### Monetary policy, liquidity, and exchange rate
- Growth of credit to the private sector slowed from 88 percent in 2009 to 44 percent in 2010.
- Bank of Lao P.D.R. (BoL) raised its overdraft lending rate by 100 basis points to 5 percent in September 2010.
- Net domestic assets (NDA) of the BoL continued to expand rapidly due to:
  - direct lending activities to local government,
  - net injections of liquidity into the banking system,
  - expansion of other assets.
- Resulted in a significant build up of excess reserves in the banking system.
- Authorities have implemented measures to absorb excessive liquidity, including a gradual exit from direct lending; BoL now considers loans only for some necessary and productive projects with National Assembly approval.
- Policy tools and framework improvements under way:
  - mop up excess liquidity through additional sales of central bank securities (as recommended by Directors),
  - consideration of raising reserve requirements,
  - promote interbank operations and develop treasury bill and interbank markets to strengthen monetary transmission,
  - enhance BoL liquidity forecasting and prepare foreign exchange cash-flow projections.
- Exchange rate regime:
  - stabilized exchange rate regime endorsed as appropriate monetary anchor,
  - Kip slightly appreciated against the US dollar by 4.3 percent (first half of 2011) and depreciated against the Baht by 2.9 percent,
  - authorities committed to reduce exchange rate volatility and promote greater use of the Kip.

### Banking sector and financial stability
- Rapid expansion of the banking sector calls for strengthened banking supervision and prudential regulations.
- Priority actions:
  - complete recapitalization of state-owned commercial banks and improve governance,
  - strengthen AML/CFT framework based on Asia Pacific Group recommendations,
  - continue implementing AsDB technical assistance recommendations,
  - strengthen data quality and reporting before participating in the FSAP.
- Banking-sector indicators (selected):
  - Bank credit to the economy (annual percent change): -9.1 (2006), 21.0 (2007), 84.6 (2008), 90.7 (2009), 46.0 (2010), 26.8 (2011).
  - Interest rates (end-of-period): three-month kip deposits: 5.5 (2006), 5.5 (2007), 6.0 (2008), 6.0 (2009), 5.5 (2010), 5.4 (2011); on short-term kip loans (1 year): 14.0 (2006), 11.5 (2007), 11.5 (2008), 10.0 (2009), 14.2 (2010), 14.0 (2011).

### Growth, inflation, and external outlook
- GDP growth:
  - Real GDP growth: 8.6 (2006), 7.8 (2007), 7.8 (2008), 7.6 (2009), 7.9 (2010), projected 8.3 (2011).
  - Drivers: expansion in mining and hydropower sectors, growth of nonresource exports and tourism, strong domestic demand. Noted projects: Hongsa Lignite thermal power plant construction started Q3 2010; Nam Theun II commercial operations started March 2010.
- Inflation:
  - CPI (annual average): 6.8 (2006), 4.5 (2007), 7.6 (2008), 0.0 (2009), 6.0 (2010), projected 8.7 (2011).
  - CPI (end year): 4.7 (2006), 5.6 (2007), 3.2 (2008), 3.9 (2009), 5.8 (2010), projected 9.7 (2011).
  - Staff projected inflation could rise to 10 percent by June 2011; expected to average almost 9 percent for 2011 as a whole.
  - Risks: shocks to food and fuel prices could quickly translate into higher inflation; stabilized international oil prices and good rice harvest noted as mitigating factors.
- External position:
  - Exports (U.S. dollars, millions): 1,178 (2006), 1,324 (2007), 1,609 (2008), 1,521 (2009), 2,217 (2010), 2,801 (2011).
  - Imports (U.S. dollars, millions): 1,602 (2006), 2,158 (2007), 2,837 (2008), 2,893 (2009), 3,582 (2010), 4,649 (2011).
  - Current account balance (U.S. dollars, millions): -352 (2006), -663 (2007), -982 (2008), -1,174 (2009), -1,173 (2010), -1,530 (2011).
  - Current account (percent of GDP): -9.9 (2006), -15.7 (2007), -18.5 (2008), -21.0 (2009), -18.2 (2010), -19.4 (2011).
  - Gross official reserves (U.S. dollars, millions): 336 (2006), 536 (2007), 636 (2008), 633 (2009), 727 (2010), 813 (2011). Memorandum: international reserves increased to $780 million at end-April 2011 from $636 million at end-2009 (authorities' statement).
  - Months of prospective goods and services imports: 3.0 (2006), 3.3 (2007), 3.7 (2008), 2.6 (2009), 2.5 (2010), 2.5 (2011).

### Medium-term prospects and risks
- Medium-term outlook:
  - Pipeline of large hydropower and mining projects, record-high copper and gold prices, and rising regional electricity demand are projected to keep growth broadly in line with the annual average growth target of 8 percent in the 7th five-year plan (2011–15).
  - Activity outside mining and hydropower projected to remain buoyant conditional on continued reforms to strengthen the economic foundation and business climate.
- Principal risks and reform priorities:
  - External risks: ongoing global uncertainties, high oil prices, weak sovereign balance sheets, and real estate imbalances could slow global recovery and affect commodity prices (copper and gold) and FDI inflows.
  - Internal risks: threats to macroeconomic and financial stability from rapid liquidity expansion and banking sector growth.
  - Policy priorities: improvement in efficiency of public investment; strengthen public financial management on tax and spending sides; preserve prudent borrowing policies and improve external debt management given high risk of debt distress.

### Executive Board assessment and recommendations
- Directors commended authorities for sound policies and progress on development and poverty reduction.
- Near-term recommendations:
  - further fiscal and monetary tightening to curb inflation and support the external position,
  - keep the non-mining fiscal balance on a consolidation path to reduce budget exposure to volatile mining revenues,
  - raise non-resource revenue beyond development-plan targets and improve public financial management to create space for pro-poor spending.
- Monetary and financial sector recommendations:
  - phase out direct lending by the central bank and mop up excess liquidity via central bank securities; consider raising reserve requirements,
  - specify a numerical inflation objective to avoid policy pro-cyclicality,
  - develop interbank and treasury bill markets to reinforce monetary transmission,
  - maintain stabilized exchange rate regime and tighten monetary policy to sustain current exchange rate level,
  - strengthen banking supervision and prudential regulations, complete recapitalization of state-owned commercial banks, improve governance, and strengthen AML/CFT framework.
- Data and statistics:
  - Directors welcomed the adoption of the Statistics Law and encouraged authorities to use IMF technical assistance to address remaining shortcomings.

### Authorities' statement (Aida Budiman and Thamnuvong Soulysak, July 5, 2011)
- Authorities view the consultations as constructive and broadly agree with staff appraisal; will consider recommendations.
- Achievements and objectives:
  - Completed 6th five-year plan (2005-2010) with annual average growth of 7.9 percent,
  - Launched 7th five-year plan (2011-2015) including goals to graduate from least-developed country status and lower poverty rate by 10 percent by end of period.
- Policy stance:
  - Near term: tighten macroeconomic policies to address external position pressures and contain inflation,
  - Medium/long term: pursue structural reforms, mobilize FDI, improve business climate, and sustain broad-based growth to reduce poverty and meet MDGs.
- Recent measures and positions:
  - VAT introduced in 2010; authorities considering a request for further Fund technical assistance to enhance VAT implementation in provincial areas and natural resource management,
  - temporary rice export ban from November 2010 until February 2011 was applied to protect domestic rice stocks; future bans would follow WTO procedures,
  - commitment to strengthen macroeconomic data quality and availability and to modernize banking systems, while prioritizing data quality before FSAP participation.

### Key quantitative indicators (selected exact values)
- Revenue: 14.5 (2006), 15.6 (2007), 15.9 (2008), 17.1 (2009), 18.6 (2010), 18.4 (2011) percent of GDP.
- Expenditure: 17.4 (2006), 18.3 (2007), 18.5 (2008), 24.1 (2009), 23.4 (2010), 21.0 (2011) percent of GDP.
- Mining revenue (percent of GDP): 0.9 (2006), 1.9 (2007), 2.6 (2008), 2.1 (2009), 1.8 (2010), 2.9 (2011).
- Hydropower revenue (percent of GDP): 1.1 (2006), 0.8 (2007), 0.7 (2008), 0.8 (2009), 0.8 (2010), 0.8 (2011).
- Grants (percent of GDP): 2.0 (2006), 1.7 (2007), 1.6 (2008), 2.3 (2009), 2.4 (2010), 1.9 (2011).
- External public debt (U.S. dollars, millions): 2,351 (2006), 2,521 (2007), 2,949 (2008), 3,109 (2009), 3,491 (2010), 3,682 (2011).
- External public debt (percent of GDP): 63.1 (2006), 58.2 (2007), 54.0 (2008), 55.4 (2009), 51.8 (2010), 46.7 (2011).
- Real effective exchange rate (2000=100): 102.8 (2006), 102.8 (2007), 111.5 (2008), 118.1 (2009), 122.3 (2010), 124.5 (2011).
- GDP at current market prices (U.S. dollars, millions): 3,564 (2006), 4,226 (2007), 5,313 (2008), 5,598 (2009), 6,461 (2010), 7,891 (2011).

*Source: IMF staff report and authorities' statement contained in the provided PDF content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11257.pdf_