## _cr13369 - INTRODUCTION

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### Macroeconomic performance and outlook
- Growth and capacity
  - Real GDP expanded by 8 percent in 2012.
  - Growth projected to rise to 8¼ percent in 2013 and moderate to 7½ percent in 2014.
  - Staff’s medium-term baseline predicated on authorities’ announced policy intentions (weaker than staff recommendations), depends on vigorous resource-related FDI, growing electricity demand from neighboring countries, pickup of nonresource investment after WTO accession, and tax system/administration reforms.
- External position
  - Current account deficit: 15½ percent of GDP in 2011 to 28½ percent of GDP in 2012.
  - FDI covered approximately 54 percent of the current account deficit in 2012.
  - Core balance of payments (portion not financed by FDI or ODA) estimated deficit at 10½ percent of GDP.
  - Reserves: 0.8 month of prospective imports (June 2013); reserve levels inadequate by LIC metrics at less than 1½ months of imports.
  - Current account deficit expected to remain close to 30 percent of GDP in 2013–14 before large-scale power projects in 2015–16.
  - Staff model-based assessment indicates a growing real exchange rate overvaluation relative to medium-term fundamentals.
- Prices and inflation
  - Headline inflation: 6.9 percent (y/y) in September 2013, driven mostly by fresh food prices.
  - Consumer price inflation projected to reach 7½ percent by end-2013 and average at that level in 2014.
- Fiscal position and public finances
  - Overall deficit estimated at 6½ percent of GDP and nonmining deficit of 8¾ percent of GDP in FY2012/13.
  - Government deposits covered around 1 month of current spending (June 2013), down from 3¼ months at end of previous fiscal year.
  - Wage and other arrears of about 2–3 percent of GDP emerging.
  - Drivers: 37 percent increase in public sector salaries and 140 percent increase in benefits; higher capital spending (some off-budget and financed by BOL); lower natural resource revenue from declining copper and gold prices.
  - Public sector wage bill rose to 50 percent of revenue.
  - With suspension of additional benefits payment and reduced capital spending announced September 2013, headline deficit projected to decline to around 4 percent of GDP in 2014 (nonmining deficit of 6½ percent of GDP).
  - Headline deficit expected to rise to around 5½ percent of GDP in 2015 (FY2014/15) due to further salary increases, then decline to 3½ percent of GDP over the medium term.
  - Public sector debt expected to peak at 64 percent during 2014–16.
- Financial and credit conditions
  - Credit growth: 35 percent (y/y) (June 2013).
  - Deposit growth: 28 percent (y/y) (June 2013).
  - Banks’ excess reserves at BOL: 11 percent of total deposits (June 2013).
  - Banks’ claims on the economy have exceeded 90 percent of deposits.
  - Signs of foreign currency liquidity shortage; parallel FX market trading at a premium since mid-August.
  - Urban land prices reportedly up by 30 percent during the past few years.
  - Capital of two state-owned commercial banks is well below the regulatory minimum, posing fiscal risk.
  - Financial soundness indicators not up-to-date; supervisory capacity and risk management practices may be weak.

### External-sector diagnostics (Box 1 highlights)
- Labor costs and REER
  - Overall labor costs rose by approximately 25 percent per year during 2009–2012.
  - Kip REER appreciated by about 7 percent during the past 12 months (July 2013), roughly half due to higher domestic inflation.
- Exchange rate valuation findings
  - Current account approach: a 24 percent real depreciation (in effective terms) needed to bring the deficit down to the current account norm, ceteris paribus.
  - External sustainability approach: a 16 percent real depreciation needed to stabilize NFA at 2012 levels; targeting NFA of -80 percent of GDP implies degree of overvaluation of 30 percent.
  - Equilibrium exchange rate approach: indicates no misalignment of the kip (within margin of error).
- Reserves adequacy
  - As of June 2013, international reserves cover 0.8 months of prospective imports and 10 percent of broad money.
  - Optimal reserves estimated close to 4 months of imports (noted as a lower bound given high dollarization).
- Staff assessment
  - External position vulnerable to shocks; would benefit from fiscal consolidation, tighter domestic monetary conditions, and structural reforms to improve productivity in nonresource sectors.

### Fiscal policy and civil service compensation (Box 2 highlights)
- Compensation changes
  - Civil service salary index rose by 37 percent in 2013 and is expected to rise by the same percent each year in 2014 and 2015 (as part of a stated three-year plan).
  - Benefits rose by 140 percent in 2013; this increase was reversed in 2014, returning benefits to 2012 levels; for 2015 assumed to rise with inflation.
- Magnitude and comparators
  - Public compensation doubled from 5 percent of GDP in 2012 to 10 percent of GDP in 2013 (LIC comparator: 6.3 percent).
  - Compensation as share of revenue rose from 25 percent to 50 percent.
  - Compensation as share of expenditure rose from 24 percent to 38 percent.
- Implication
  - Civil service pay increases are a major driver of the fiscal deterioration and require measured pacing and civil service reform.

### Financial stability and credit growth (Box 3 & related)
- Credit boom indicators
  - Credit gap (deviation of credit-to-GDP from trend) suggests credit growth has been excessive during the past few years.
  - Credit expansion exceeded most regional comparators in initial financial deepening stages (Vietnam, Bangladesh, Cambodia, Thailand).
  - Credit-to-GDP ratio has grown beyond the warning threshold of 3 percentage points over a period of time.
- Pre-crisis associated indicators
  - Large capital inflows; expansionary macro policy; lack of macroprudential attention; higher-than-normal current account deficits; buoyant domestic demand.
  - Specific contributors to future distress probability: loose fiscal stance and lack of macroprudential control.
- Vulnerabilities and risks
  - External spillovers from China, Thailand, Vietnam slowdown could weaken exports and FDI.
  - Financial sector risks: deterioration in asset quality could erode capital and create contingent liabilities; foreign currency lending and elevated external debt increase credit risk.
  - De-dollarization: foreign currency deposits/broad money declined from 76% in 2000 to 43% in 2012.
  - Public debt sustainability: external PPG debt-to-GDP close to safety threshold; stress scenarios could push it beyond sustainable levels.

### Executive Board and staff recommendations (summarized)
- Macro stance
  - Tighten monetary policy to stem rapid credit growth and replenish reserves.
  - Fiscal restraint, notably contain civil service compensation increases.
- External and structural measures
  - Strengthen reserves through fiscal consolidation and tighter monetary conditions.
  - Implement structural reforms to improve productivity, especially in nonresource sectors.
- Financial sector measures
  - Improve supervisory capacity and bank risk management.
  - Address capital shortfalls at state-owned commercial banks; implement prompt corrective action.
- Note: Staff baseline incorporates authorities’ announced intentions which are weaker than staff’s recommendations, implying larger near-term risks if loosening occurs.

### Key projections and indicators (selected, 2010–14)
- Real GDP growth: 2010: 8.1; 2011: 8.0; 2012: 7.9; 2013 Est.: 8.2; 2014 Proj.: 7.5
- CPI (annual average): 2010: 6.0; 2011: 7.6; 2012: 4.3; 2013 Est.: 6.5; 2014 Proj.: 7.5
- Public finances (percent of GDP):
  - Revenue: 2010: 18.3; 2011: 18.3; 2012: 19.6; 2013 Est.: 19.6; 2014 Proj.: 20.6
  - Expenditure: 2010: 23.0; 2011: 21.3; 2012: 21.0; 2013 Est.: 26.1; 2014 Proj.: 24.5
  - Net lending/borrowing: 2010: -4.7; 2011: -3.0; 2012: -1.4; 2013 Est.: -6.5; 2014 Proj.: -3.8
  - Nonmining balance: 2010: -6.5; 2011: -5.5; 2012: -4.5; 2013 Est.: -8.8; 2014 Proj.: -6.4
- Balance of payments (US$ millions):
  - Current account balance: 2010: -1,251; 2011: -1,243; 2012: -2,606; 2013 Est.: -2,946; 2014 Proj.: -2,956
  - In percent of GDP: 2010: -18.2; 2011: -15.2; 2012: -28.4; 2013 Est.: -29.5; 2014 Proj.: -27.3
- Gross official reserves (US$ millions): 2010: 728; 2011: 677; 2012: 740; 2013 Est.: 666; 2014 Proj.: 712
  - In months of prospective imports: 2010: 1.8; 2011: 1.2; 2012: 1.2; 2013 Est.: 1.1; 2014 Proj.: 1.1

*Source: IMF staff summary of “INTRODUCTION” (content unit _cr13369 - INTRODUCTION) from the IMF country report text provided.*

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### Box 3 — Lao P.D.R.: Normal Financial Deepening or Excessive Credit Growth?

### Identifying a credit boom
- Credit gap indicator: deviation in percentage points of credit-to-GDP from trend; threshold of 4 percentage points:
  - Predicts past crises within three years with close to 80 percent probability.
  - Correctly identified 5 out of 9 banking crisis episodes in LICs.
- Lao P.D.R. assessment
  - Credit gap suggests credit growth has been excessive in recent years.
  - Credit expansion exceeded most regional comparators during initial financial deepening stages.
  - Credit-to-GDP ratio has been growing beyond the warning threshold of 3 percentage points over time (GFSR, September 2011).

### Other indicators and vulnerabilities
- Typical pre-crisis signals: large capital inflows; expansionary macro policy; lack of macroprudential attention; higher-than-normal current account deficits; buoyant domestic demand.
- Specific contributors to distress probability: loose fiscal stance and lack of macroprudential control.
- Financial sector and macro context (key statistics)
  - International reserves coverage reported by authorities: around 2½ months of officially reported nonresource imports.
  - Risks to growth and stability include external spillovers, financial sector risks from asset quality deterioration, and fiscal risks from social spending or natural disasters combined with higher wage bills.
  - De-dollarization: foreign currency deposits/broad money declined from 76% in 2000 to 43% in 2012.
  - Inflation fell from a peak of 128% in 1999 to an average around 5% in 2005–12.
- Public debt sustainability note
  - External PPG debt-to-GDP closer to safety threshold compared to prior assessment; stress scenarios could push it beyond sustainable levels.

### Policy recommendations (engineering a soft landing)
- Urgent priority: tighten fiscal and monetary policies to reduce external and financial vulnerabilities, replenish reserves, and restore macro stability.
- Fiscal policy actions
  - Adopt medium-term budget strategy anchored around nonmining fiscal deficit target of no more than 5 percent of GDP starting in FY2013/14 to reduce public debt to 40 percent of GDP by 2020.
  - Staff projects authorities’ announced plans are less ambitious: nonmining deficit would fall below 5 percent of GDP only by FY2017/18 under staff baseline.
  - Contain compensation increases; urgent civil service reform and rationalization of spending.
  - Trim capital spending in FY2013/14 to average level of previous two years (equivalent to 7 percent of 2014 GDP) and draw up plan to eliminate arrears.
  - Raise revenue (excluding grants) from about 18 percent of GDP to at least 19½ percent of GDP by 2015—requiring additional tax effort of 1–1½ percent of GDP via tax system/administration reforms.
  - Specific revenue measures: simplify VAT, unify profit tax rates across firms, introduce lump-sum tax for small businesses, taxes on property value, increases in petrol and vehicle excise duties.
  - A VAT rate increase (from current 10 percent) may be needed starting in the emerging fiscal year.
- Monetary and exchange rate policy
  - Allow kip nominal exchange rate to move with market conditions to enhance competitiveness and build reserves.
  - Tighten domestic monetary conditions: issue sufficient securities; increase reserve requirement ratio on kip deposits in small increments with guidance; unwind quasi-fiscal lending to local governments and SOEs.
  - Ensure access to bank reserves (including foreign currency) via BOL facilities and interbank borrowing; raise interest rates at BOL lending facilities and move toward interest-rate-based monetary policy.
  - Use technical assistance to strengthen monetary policy framework, liquidity forecasting/management, and interbank market development.
- Financial sector supervision and prudential policies
  - Strengthen supervision to reduce leverage and balance sheet mismatches.
  - Improve accounting framework and ensure effective prompt debt resolution.
  - Enhance risk-based supervision, limit currency mismatches, and build higher reserves to mitigate dollarization risks.

### Authorities’ views (as reported)
- Authorities broadly agreed medium-term outlook generally favorable but acknowledged vulnerabilities and elevated near-term uncertainty.
- Authorities noted reserves coverage around 2½ months of officially reported nonresource imports and expected reserves to rise toward end-2013 from scheduled foreign banks’ registered capital increase and domestic foreign currency debt repayment to BOL.
- Authorities emphasized containing financial sector risks, declining credit growth, ensuring lending channels to productive use, and willingness to monitor conditions.
- Authorities indicated near-term fiscal adjustments: boost revenue, limit capital spending and civil service compensation increases, allow USD/kip exchange rate to move within current band; lower credit and broad money growth targets as public investment demand softens.

*Source: Box 3, Lao P.D.R. — IMF staff report content provided.*

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### 22. Strengthening financial supervision

### Regulatory and supervisory priorities
- Pace financial deepening in line with regulatory and supervisory capacity.
- Apply and enforce laws/regulations rigorously for consistent compliance.
- Enforce BOL regulation on net open foreign exchange positions and limits on foreign currency lending to borrowers without sufficient foreign currency income.
- Enforce BOL requirement for banks to publish balance sheets online.
- Update and complete financial soundness indicators.

### Capital, leverage, and corrective action
- Require commercial banks to increase registered capital (to be completed in 2014).
- All banks should achieve minimum mandated CAR of 8 percent.
- Riskier banks should be required to maintain higher CARs than the 8 percent minimum.
- Under-capitalized banks should not be allowed to increase loan portfolios or incur additional risk.
- Develop and implement a prompt corrective action framework.

### Risk-based supervision and contingency planning
- Develop forward-looking, risk-based supervision to identify and mitigate emerging risks early.
- Prepare a contingency plan for the banking sector in event of distress.
- Enhance size and operational readiness of the Depositor Protection Fund.

### AML/CFT and technical assistance
- Move forward on AML/CFT Law to address FATF-identified deficiencies during upcoming fiscal year.
- Encourage authorities’ participation in an FSAP.
- IMF technical assistance on banking supervision planned in 2013Q4; IMF ready to provide further TA and training on financial stability, crisis management frameworks, and stress testing.

### Authorities’ view
- Authorities agreed with staff’s assessment and recommendations; internal CAMEL-based indicators point to a generally sound banking system.
- Plan to require riskier banks to maintain higher CARs needs careful consideration.
- BOL has started addressing supervisory weaknesses (strengthening loan origination process based on income flow projection and collateral) and will receive IMF TA in 2013Q4.
- BOL plans to build framework and capacity for risk-based supervision as financial system complexity increases.

*From: _cr13369 - 22. Strengthening financial supervision.*

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### Debt sustainability (selected findings and scenarios)

### Overall classification and headline findings
- Risk of debt distress: moderate.
- Policy-dependent indicative thresholds for medium CPIA category:
  - PV of debt-to-GDP ratio: 40 percent
  - PV of debt-to-exports ratio: 150 percent
  - PV of debt-to-revenue ratio: 250 percent
  - Debt service-to-exports ratio: 20 percent
  - Debt service-to-revenue ratio: 20 percent
- End-2012 indicators:
  - PV of debt-to-GDP: 32.5
  - PV of debt-to-Exports: 73.8
  - PV of debt-to-Revenue: 184.9
  - Debt service-to-Exports: 4.1
  - Debt service-to-Revenue: 10.1
- Nominal external PPG debt: US$4.2 billion (2012); PPG external debt-to-GDP: 46.1 percent (2012).
- Total domestic and external PPG debt: 61.8 percent of GDP in 2012 (up from 56.2 percent in 2011).

### Main risks and sensitivity tests
- Exchange rate sensitivity: one-off 30 percent depreciation of the kip vis-à-vis USD would sharply raise PV of debt-to-GDP and PV of debt-to-revenues, breaching thresholds.
- Historical-average scenario: historical average current account deficit 16 percent of GDP (vs. 9.4 percent baseline) and historical average FDI 5.1 percent of GDP (vs. 9.3 percent baseline) — results in ~9 percentage points more in debt accumulation than baseline and unsustainable long-run path if realized.
- High-speed railway megaproject (Lao–China railway) illustrative scenario:
  - Additional external borrowing: US$6.7 billion over 5 years (US$1.34 billion per annum), starting 2014.
  - Financing: 2 percent fixed rate, 20-year maturity, 10-year grace period, USD-denominated.
  - Fiscal multiplier during construction: 0.5.
  - Projected outcomes: overall external PPG debt would peak at around 80 percent of GDP in 2022; total external debt would surpass 125 percent of GDP in 2014 and remain above 100 percent for the next decade; ratio of debt service to revenue exceeds 20 percent threshold in 2021 and remains elevated.

### Policy implications and recommended capacity strengthening
- Obtain bulk of external borrowing on concessional terms.
- Carefully manage fiscal and quasi-fiscal liabilities to build buffers.
- Strengthen debt and cash management capacity.
- Scale up public investment management capacity.
- Phase out quasi-fiscal BOL lending to local governments to limit domestic-public-debt buildup.
- Conduct cautious assessment and monitoring of large-scale projects and private external debt, especially if financed on commercial terms.

*Source: LAO PEOPLE'S DEMOCRATIC REPUBLIC — STAFF REPORT FOR THE 2013 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS (prepared by IMF and IDA, October 31, 2013).*

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*Content unit: _cr13369 — IMF country report excerpts and boxes as provided.*

### INTRODUCTION __________________________________________________________________________________ 3

### _cr13369 - INTRODUCTION __________________________________________________________________________________ 3

### Introduction
- Since the global financial crisis, the Lao economy has been growing at an average annual rate of 8 percent, supported by brisk credit expansion and robust foreign direct investment (FDI) inflows.
- Growth has been among the least volatile in the region over the past decade.
- The country made significant progress toward the Millennium Development Goals (MDGs) and became a member of the World Trade Organization (WTO) in early 2013.
- Authorities are committed to achieving middle-income country status by 2020 (Vision 2020) and are targeting 8 percent annual growth over the medium term.
- The 2013 Article IV consultation focused on policies to return the economy toward macroeconomic and financial stability while building foundations for broader-based growth.

### Pressing challenges, outlook, and risks — macroeconomic performance and outlook
- Growth and capacity:
  - Real GDP expanded by 8 percent in 2012, buoyed by investment and private consumption.
  - Investment in hydropower, infrastructure, and real estate lifted construction activities and imports.
  - Growth is projected to rise to 8¼ percent in 2013 and moderate to 7½ percent in 2014.
  - Staff’s medium-term baseline projection is predicated on the authorities’ announced policy intentions, which are weaker than staff’s recommendations, particularly regarding a re-loosening of public employee compensation.
  - Baseline also depends on vigorous resource-related FDI inflows, growing electricity demand from neighboring countries, a gradual pickup of investment inflows into nonresource sectors following WTO accession, and progress on tax system and administration reforms.

- External position:
  - The current account deficit surged from 15½ percent of GDP in 2011 to 28½ percent of GDP in 2012.
  - International reserves declined further to 0.8 month of prospective imports (June 2013) and remain inadequate for precautionary needs.
  - FDI covered approximately 54 percent of the current account deficit in 2012.
  - The core balance of payments (portion not financed by FDI or official development assistance) is estimated to be in deficit at 10½ percent of GDP.
  - Staff’s model-based assessment indicates a growing real exchange rate overvaluation relative to medium-term fundamentals.
  - The current account deficit is expected to remain close to 30 percent of GDP in 2013–14 before large-scale power projects come on stream in 2015–16.
  - Reserve levels would be inadequate by low-income country (LIC) metrics at less than 1½ months of imports.

- Prices and inflation:
  - Headline inflation accelerated to 6.9 percent (y/y) in September 2013, mostly from fresh food prices.
  - Core inflation has picked up momentum during the past few months despite earlier moderation.
  - Consumer price inflation is projected to reach 7½ percent by end-2013 and average at that level in 2014.

- Fiscal position and public finances:
  - Fiscal position deteriorated in FY2011/12–FY2012/13, with the overall deficit estimated at 6½ percent of GDP and a nonmining deficit of 8¾ percent of GDP in FY2012/13.
  - Government deposits covered around 1 month of current spending (June 2013), down from 3¼ months at the end of the previous fiscal year.
  - Wage and other arrears of about 2–3 percent of GDP are emerging.
  - Drivers of the deterioration include:
    - a 37 percent increase in public sector salaries and an additional 140 percent increase in benefits;
    - higher capital spending, some off-budget and financed by the Bank of the Lao P.D.R. (BOL);
    - lower revenue from the natural resource sector from declining copper and gold prices.
  - As a result of the wage increase, public sector wage bill has risen to 50 percent of revenue.
  - With the suspension of additional benefits payment and reduction in capital spending announced in September 2013, the headline deficit is projected to decline to around 4 percent of GDP in 2014 (nonmining deficit of 6½ percent of GDP).
  - The headline deficit is expected to rise to around 5½ percent of GDP in 2015 (FY2014/15) due to further increases in public sector salaries, before declining gradually to 3½ percent of GDP over the medium term.
  - Public sector debt is expected to peak at 64 percent during 2014–16.

- Financial and credit conditions:
  - Credit growth remains vigorous at 35 percent (y/y) (June 2013).
  - Deposit growth is rapid at 28 percent (y/y) in June 2013.
  - Banks’ excess reserves at the BOL are high at 11 percent of total deposits (June 2013).
  - Banks’ claims on the economy have exceeded 90 percent of deposits.
  - Signs of foreign currency liquidity shortage have emerged; the parallel foreign exchange market has been trading at a premium over the BOL’s reference exchange rates since mid-August.
  - Urban land prices reportedly up by 30 percent during the past few years.
  - Overall, financial soundness indicators are not up-to-date; supervisory capacity and risk management practices may not be robust enough.
  - Capital of two state-owned commercial banks is well below the regulatory minimum, posing potential fiscal risk.

### External sector assessment (Box 1) — key diagnostics
- Labor costs and REER:
  - Overall labor costs rose by approximately 25 percent per year during 2009–2012.
  - The Kip real effective exchange rate (REER) appreciated by about 7 percent during the past 12 months (July 2013), roughly half due to higher domestic inflation.
- Exchange rate valuation findings:
  - Current account approach: underlying current account deficit is significantly higher than the norm; a 24 percent real depreciation (in effective terms) is necessary to bring the deficit down to the current account norm, ceteris paribus.
  - External sustainability approach: a 16 percent real depreciation would be needed to stabilize net foreign asset (NFA) at 2012 levels; targeting NFA of -80 percent of GDP implies a degree of overvaluation of 30 percent.
  - Equilibrium exchange rate approach: indicates no misalignment of the kip (noted to be within the margin of error).
- Reserves adequacy:
  - As of June 2013, international reserves cover only 0.8 months of prospective imports and 10 percent of broad money.
  - Reserve coverage levels are the lowest among Asian LICs and significantly below traditional metrics of at least three months of prospective imports or up to 50 percent of broad money.
  - The optimal reserves level is estimated to be close to 4 months of imports (noted as a lower bound given high dollarization).
- Staff assessment:
  - The external position is vulnerable to shocks and would benefit from fiscal consolidation, tightening of domestic monetary conditions, and structural reforms to improve productivity over time, particularly in the nonresource sectors.

### Fiscal policy and civil service compensation (Box 2) — facts and implications
- Details of compensation increases:
  - The civil service salary index rose by 37 percent in 2013 and is expected to rise by the same percent each year in 2014 and 2015 (as part of a stated three-year plan).
  - Benefits (salary supplements) rose by 140 percent in 2013; this increase was reversed in 2014, bringing benefits back to the level of 2012. For 2015 they are assumed to rise with inflation.
- Magnitude relative to comparators:
  - Public compensation doubled from 5 percent of GDP in 2012 to 10 percent of GDP in 2013, well above the level of 6.3 percent for LICs.
  - Compensation as a share of revenue rose from 25 percent to 50 percent.
  - Compensation as a share of expenditure rose from 24 percent to 38 percent.
- Rationale and evidence:
  - Increase justified as attracting required skills and discouraging outside employment; World Bank 2010 study found formal salary below private sector comparators but intangible benefits narrow the gap.
  - Strong perception among civil servants that remuneration was insufficient to cover basic expenses.

### Financial stability and credit growth (Box 3 highlights)
- Bank credit expansion:
  - Bank credit has expanded rapidly since 2008, considerably faster than in other Asian LICs.
  - Annual average real credit growth, 2007−12, shows Lao P.D.R. among the highest in the sample (visual ranking present in source).
- Early warning indicator performance (staff estimates):
  - Number of crisis horizons and performance statistics shown in source (tabulated values present).
- Key vulnerabilities:
  - Rapid credit growth, possible easing of lending standards, limited direct bank exposure to real estate but rising demand fueled by urban land price increases.
  - Potential for escalation of banking-sector risks given supervisory and data limitations.

### Summarized staff recommendations and implications (as reflected in analysis)
- Macro stance:
  - Tighten monetary policy to stem risks from rapid credit growth and to replenish international reserves.
  - Fiscal restraint, notably on civil service compensation increases, to protect fiscal buffers for future shocks.
- Structural and external measures:
  - Strengthen reserves through a combination of fiscal consolidation and tighter domestic monetary conditions.
  - Implement structural reforms to improve productivity, particularly in nonresource sectors.
- Financial sector measures:
  - Improve supervisory capacity and risk management practices at banks.
  - Address capital shortfalls at state-owned commercial banks to mitigate fiscal risk.
- Note: Staff baseline projections incorporate authorities’ announced policy intentions which are weaker than staff recommendations, implying larger near-term risks if policy loosening occurs.

*Source: IMF staff summary of “INTRODUCTION” (content unit _cr13369 - INTRODUCTION) from the IMF country report text provided.*

### Box 3. Lao P.D.R.: Normal Financial Deepening or Excessive Credit Growth?

### Box 3. Lao P.D.R.: Normal Financial Deepening or Excessive Credit Growth?

### Identifying a credit boom in the making
- A simple, robust indicator uses only information available to policymakers in real time: the deviation in percentage points of credit-to-GDP from trend (the "credit gap").
- The credit gap measure produces a low noise-to-signal ratio and signals a valid warning.
- A credit gap threshold of 4 percentage points:
  - enables prediction of past financial crises correctly within three years with close to 80 percent probability;
  - correctly identified 5 out of 9 banking crisis episodes in LICs.

### Is Lao P.D.R.’s credit growth excessive?
- The credit gap measure suggests credit growth has been excessive during the past few years, providing an early warning of possible distress down the road.
- Lao P.D.R.’s credit expansion exceeded most regional comparators in their initial financial deepening stages, including Vietnam, Bangladesh, Cambodia, and Thailand.
- The credit-to-GDP ratio has been growing beyond the warning threshold of 3 percentage points over a period of time (GFSR, September 2011).

### Other useful indicators associated with pre-crisis periods
- Typical pre-crisis signals:
  - large capital inflows;
  - expansionary macroeconomic policy stances;
  - lack of macro-prudential attention;
  - higher-than-normal current account deficits;
  - buoyant domestic demand.
- Specific contributors to the probability of future financial distress:
  - a loose fiscal stance;
  - lack of macro-prudential control.
- Current assessment: these indicators suggest credit overheating in Lao P.D.R merits close monitoring.

### Financial sector and macroeconomic context (key statistics and vulnerabilities)
- International reserves coverage reported by authorities: around 2½ months of officially reported nonresource imports.
- Risks to growth and stability are skewed to the downside and include:
  - external spillovers: a deeper-than-expected slowdown in China, Thailand, and Vietnam could weaken nonresource exports and foreign investment flows;
  - financial sector risks: deterioration of banks’ asset quality would erode capital and could create contingent liabilities for the state; foreign currency lending and elevated external debt increase credit risk; a large loss of international reserves and sudden currency devaluation is assessed as medium likelihood in the most adverse scenario;
  - fiscal risks: pressure to meet social spending targets or respond to natural disasters, combined with higher public sector wage bills, could weaken the fiscal position and give rise to larger off-budget capital spending and contingent liabilities.
- De-dollarization progress and risks:
  - foreign currency deposits as a ratio of broad money declined from 76% in 2000 to 43% in 2012;
  - inflation fell from a peak of 128% in 1999 to an average of around 5% in 2005–12;
  - risks of partial dollarization include inability of banks to accommodate persistent foreign currency deposit withdrawals and currency mismatches in balance sheets.
- Public debt sustainability note: external PPG debt-to-GDP is closer to its safety threshold compared to last year’s assessment; stress scenarios (sharp currency devaluation, less favorable FDI inflows, deterioration in domestic/external environment, higher borrowing costs linked to new infrastructure mega-projects) could push external PPG debt-to-GDP beyond sustainable levels.

### Key policy recommendations (engineering a soft landing)
- Urgent priority: tighten fiscal and monetary policies to reduce external and financial sector vulnerabilities, replenish international reserves, and restore macroeconomic stability.
- Fiscal policy:
  - adopt a medium-term budget strategy anchored around a nonmining fiscal deficit target of no more than 5 percent of GDP starting in FY2013/14 to reduce public debt to 40 percent of GDP by 2020;
  - staff projects the authorities’ announced plans are less ambitious: the nonmining deficit would fall from 6½ percent of GDP in FY2013/14 below 5 percent of GDP only by FY2017/18 under staff’s baseline projection;
  - contain compensation increases—civil service pay increases need a more measured pace; progress on civil service reform and rationalizing other spending is urgent;
  - trim capital spending in FY2013/14 to the average level of the previous two years (equivalent to 7 percent of 2014 GDP) and draw up a plan to eliminate arrears;
  - raise revenue (excluding grants) from about 18 percent of GDP to at least 19½ percent of GDP by 2015—requiring an additional tax effort of 1–1½ percent of GDP via tax system and administration reforms;
  - specific revenue measures include simplification to the VAT system, profit tax rate unification across firms, introduction of a lump-sum tax for small businesses, taxes on property value, and increases in petrol and vehicle excise duties;
  - a VAT rate increase (from the current 10 percent) may be needed starting in the emerging fiscal year to achieve recommended consolidation.
- Monetary and exchange rate policy:
  - allow the kip nominal exchange rate to move in line with market conditions to enhance competitiveness and gradually build up international reserves;
  - tighten domestic monetary conditions to contain inflation and credit growth: issue a sufficient amount of securities; increase the reserve requirement ratio on kip deposits in small increments with guidance; accelerate unwinding of quasi-fiscal lending operations to local government entities and SOEs;
  - ensure access to bank reserves (including foreign currency) through BOL facilities and interbank borrowing to avoid market disruption; raise interest rates at BOL lending facilities and over the medium term make interest rates central to monetary policy conduct;
  - staff encourages the BOL to use technical assistance to strengthen the monetary policy framework, liquidity forecasting and liquidity management, and interbank market development.
- Financial sector supervision and prudential policies:
  - strengthen supervision and regulatory measures to reduce leverage and balance sheet mismatches;
  - improve accounting framework consistency and ensure an effective and prompt debt resolution process;
  - enhance risk-based supervision, limit currency mismatches on bank balance sheets, and build higher international reserves to mitigate dollarization risks.

### Authorities’ views (as reported)
- Authorities broadly agreed the medium-term outlook remains generally favorable but acknowledged growing vulnerabilities and elevated uncertainty around the near-term outlook.
- Authorities noted international reserves coverage remains around 2½ months of officially reported nonresource imports and expected international reserves to rise toward the end of 2013 from scheduled foreign banks’ registered capital increase and domestic foreign currency debt repayment to the BOL.
- The authorities emphasized: containing financial sector risks, slowly declining credit growth, ensuring lending is channeled toward productive use, and willingness to monitor financial market conditions closely.
- The authorities indicated near-term fiscal adjustments would be borne by fiscal policy: actions taken to boost revenue, limit capital spending and civil service compensation increases, and room for USD/kip exchange rate to move within the current band; credit and broad money growth targets would be lowered as public investment demand softens.

*Source: Box 3, Lao P.D.R. — IMF staff report content provided.*

### 22.      Strengthening financial supervision.

### 22. Strengthening financial supervision.

### Regulatory and supervisory priorities
- Ensure the pace of financial deepening is in line with progress in regulatory and supervisory capacity.
- Apply and enforce laws and regulations more rigorously to ensure consistent compliance.
- Enforce the Bank of the Lao P.D.R. (BOL)’s regulation on net open foreign exchange positions and limits on foreign currency lending to borrowers without sufficient foreign currency income.
- Enforce the BOL requirement for banks to publish their balance sheets online.
- Update and complete financial soundness indicators.

### Capital, leverage, and corrective action
- Commercial banks are required to increase registered capital (to be completed in 2014).
- All banks should be required to achieve the minimum mandated capital-to-asset (CAR) ratio of 8 percent.
- Riskier banks should be required to maintain higher CARs than the minimum mandated CAR of 8 percent to contribute to leverage control.
- Under-capitalized banks should not be allowed to continue increasing their loan portfolios or incur additional risk.
- Develop and implement a prompt corrective action framework.

### Risk-based supervision and contingency planning
- Develop a forward looking, risk-based approach to supervision to identify and mitigate emerging risks at an early stage.
- Prepare a contingency plan for the banking sector in the event of financial distress.
- Enhance the size and operational readiness of the Depositor Protection Fund.

### Anti-Money Laundering and technical assistance
- Move forward on the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) Law to address deficiencies identified by the Financial Action Task Force during the upcoming fiscal year.
- Continue to encourage the authorities’ participation in a Financial Sector Assessment Program (FSAP).
- IMF technical assistance on banking supervision planned in 2013Q4; IMF is ready to provide further technical assistance and training on financial stability and crisis management frameworks, as well as stress testing.

### Authorities’ view
- Authorities agreed with staff’s overall assessment and recommendations, noting internal CAMEL-based financial soundness indicators point to a generally sound banking system.
- The plan to require riskier banks to maintain higher CAR than the regulatory minimum would need to be considered carefully.
- The BOL has started addressing supervisory weaknesses, including strengthening the loan origination process based on income flow projection as well as collateral, and will receive IMF TA on banking supervision in 2013Q4.
- Over time, as the financial system becomes more complex, the BOL plans to build the framework and capacity for risk-based supervision.

*From: _cr13369 - 22.      Strengthening financial supervision.*

### 34.      It is recommended that the next Article IV consultation take place on the standard 12-month

### 34.      It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Growth and Inflation
- Growth remained close to 8 percent in 2012, with impetus from services, construction, and manufacturing, similar to 2011.
- Official import data indicated strong consumption, while machinery and equipment imports weakened.
- Activity continues to be supported by strong private credit growth and stimulus from fiscal policy.
- Inflation is accelerating, mainly from fresh food; core inflation has recently started to pick up.
- CPI component weights cited: Core (2010 weight 62.8), Raw food (2010 weight 28.6), Energy (2010 weight 7.9), Others (2010 weight 0.7).
- Real Effective Exchange Rates index: March-05 = 100 (series shown for Lao PDR, Vietnam, China, ASEAN-4).

### External Vulnerabilities
- After two years of stellar performance, export growth weakened substantially in 2012.
- Nonresource imports surged to an unusually high level as preparation for the Asia Europe Meeting intensified.
- The result is a substantially worsened nonresource current account position.
- FDI remains vigorous; the bulk of new FDI is still dominated by hydropower projects, with foreign-funded investment in other sectors strong.
- The international reserves position is at its weakest in a decade, and remains inadequate.
- Sharp real exchange rate appreciation threatens to erode external competitiveness further.

### Fiscal Performance
- Overall revenue performance was strong in FY2012/13 from nonresource revenue gains; mining revenue weakened from lower commodity prices.
- Expenditures surged from public pay increases and capital spending, which was not restrained like in FY 2011/12.
- Both overall and nonmining fiscal deficits are on the rise, reversing the trend observed since 2009, causing domestic public debt to rise sharply.
- With larger financing needs, the stock of government deposits has declined dramatically.
- Even before the FY2012/13 wage increase, the share of public sector compensation in Lao P.D.R.’s revenue was already on the high side.

### Monetary and Credit Conditions
- The Kip approached the upper end of the +/-5 percent band in early 2013, but has since depreciated against the US dollar.
- With weak international reserves gains, reserve money is driven by central bank lending to the government and SOEs.
- Broad money and deposit growth has slowed, but continues to be brisk, while banks’ risk appetite continues to push up loans against the deposit base.
- Kip liquidity remains ample, and banks have plenty of room to expand credit supply.
- Without pressure on interest rates to rise, real interest rates have again become negative with rising inflation.

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

### Appendix 1. Lao P.D.R.: Risk Assessment Matrix (RAM) 1/

### Appendix 1. Lao P.D.R.: Risk Assessment Matrix (RAM) 1/

### Risk Assessment Matrix — major risks, likelihood, potential impact, and policy response
- Protracted economic and financial volatility, especially for emerging markets (triggered by prospective exit from UMP).
  - Likelihood: High
  - Potential impact: Prospects of higher interest rates in advanced economies could trigger a sustained reversal of capital flows from the region, intensifying foreign currency liquidity strains.
  - Policy response: Allow the currency to depreciate and refrain from domestic demand stimulus to preserve limited international reserves and contain inflation.
- Lower than anticipated emerging market growth potential (earlier maturing of the cycle and incomplete structural reforms with spillovers to LICs and advanced economies).
  - Likelihood: Medium
  - Potential impact: Growth relies to a large extent on trade and FDI links with other Asian countries, particularly China, Thailand and Vietnam. Slowdown in trading partner growth will put pressure on the balance of payments as exports decline and domestic demand continues to be stimulated by expansionary policies. Could lead to further pressure on exchange rate and international reserves.
  - Policy response: Allow the currency to depreciate and avoid stimulating domestic demand to preserve limited external buffers and contain inflation. Over time, take advantage of WTO to diversify export destinations.
- Loss of confidence in the domestic banking system caused by a sharp loss of international reserves.
  - Likelihood: Medium
  - Potential impact: International reserves are low and expansionary monetary and fiscal policies threaten to deplete them further. High risk of loss of confidence in the currency leading to currency substitution, capital flight and exchange rate pressure, with effects on bank and corporate balance sheets and a prolonged downturn in growth.
  - Policy response: Activate banking sector contingency plan, including depositor protection. Inject kip liquidity to solvent banks. Preserve international reserves by allowing the currency to depreciate and limiting fiscal expansion. Strengthen banking supervision.
- Terms-of-trade shock (particularly declining global copper and gold prices).
  - Likelihood: Medium
  - Potential impact: Growth relies on exports of commodities and imports of intermediate goods and petroleum products. Pressure on the balance of payments, exchange rate and international reserves.
  - Policy response: Increase exchange rate flexibility and avoid stimulating domestic demand to preserve limited international reserves; Over time, diversify exports.
- Reversal of fiscal consolidation.
  - Likelihood: Medium
  - Potential impact: Pressure for greater spending and response to external shocks or natural disasters could lead to an increase in the debt ratio. Crowding out of public and private productive investments and social spending, and overvaluation of the real exchange rate could lead to a slower or stagnating growth in the medium-term.
  - Policy response: Continue fiscal consolidation, improve nonmining revenue collection, and rationalize expenditure, with a focus on fostering physical and human capital.

### Key macroeconomic projections and indicators (selected, 2010–14)
- Real GDP growth: 2010: 8.1; 2011: 8.0; 2012: 7.9; 2013 Est.: 8.2; 2014 Proj.: 7.5
- CPI (annual average): 2010: 6.0; 2011: 7.6; 2012: 4.3; 2013 Est.: 6.5; 2014 Proj.: 7.5
- CPI (end year): 2010: 5.8; 2011: 7.7; 2012: 4.7; 2013 Est.: 7.4; 2014 Proj.: 7.7
- Public finances (in percent of GDP):
  - Revenue: 2010: 18.3; 2011: 18.3; 2012: 19.6; 2013 Est.: 19.6; 2014 Proj.: 20.6
  - Expenditure: 2010: 23.0; 2011: 21.3; 2012: 21.0; 2013 Est.: 26.1; 2014 Proj.: 24.5
  - Net acquisition of nonfinancial assets 2/: 2010: 10.6; 2011: 9.2; 2012: 8.2; 2013 Est.: 8.9; 2014 Proj.: 7.8
  - Net lending/borrowing: 2010: -4.7; 2011: -3.0; 2012: -1.4; 2013 Est.: -6.5; 2014 Proj.: -3.8
  - Nonmining balance 3/: 2010: -6.5; 2011: -5.5; 2012: -4.5; 2013 Est.: -8.8; 2014 Proj.: -6.4
- Money and credit (annual percent change):
  - Reserve money: 2010: 48.6; 2011: 16.2; 2012: 27.2; 2013 Est.: 12.7; 2014 Proj.: 14.9
  - Broad money: 2010: 39.5; 2011: 28.7; 2012: 31.0; 2013 Est.: 24.7; 2014 Proj.: 20.8
  - Bank credit to the economy 4/: 2010: 48.4; 2011: 45.8; 2012: 26.6; 2013 Est.: 32.9; 2014 Proj.: 19.4
  - Bank credit to the private sector: 2010: 48.4; 2011: 39.3; 2012: 35.1; 2013 Est.: 34.2; 2014 Proj.: 21.0

### Balance of payments — headline figures (2010–14, in millions of U.S. dollars unless otherwise indicated)
- Exports: 2010: 2,196; 2011: 3,120; 2012: 3,323; 2013 Est.: 3,451; 2014 Proj.: 3,661
  - In percent change: 44.4; 42.1; 6.5; 3.9; 6.1
- Imports: 2010: 3,574; 2011: 4,635; 2012: 6,355; 2013 Est.: 6,940; 2014 Proj.: 7,242
  - In percent change: 23.6; 29.7; 37.1; 9.2; 4.4
- Current account balance (in millions of U.S. dollars): 2010: -1,251; 2011: -1,243; 2012: -2,606; 2013 Est.: -2,946; 2014 Proj.: -2,956
  - In percent of GDP: -18.2; -15.2; -28.4; -29.5; -27.3
- Gross official reserves (in millions of U.S. dollars): 2010: 728; 2011: 677; 2012: 740; 2013 Est.: 666; 2014 Proj.: 712
  - In months of prospective goods and services imports: 1.8; 1.2; 1.2; 1.1; 1.1
  - (Excluding imports associated with large resource projects): 2.6; 1.7; 1.7; 1.5; 1.5
- External public debt (in millions of U.S. dollars): 2010: 3,539; 2011: 3,664; 2012: 4,221; 2013 Est.: 4,611; 2014 Proj.: 5,167
  - In percent of GDP: 50.3; 44.8; 46.1; 47.4; 49.1
- External public debt service (in percent of exports): 4.4; 2.7; 4.1; 5.6; 5.4
- Official exchange rate (kip per U.S. dollar; end-of-period): 8,040; 8,002; 7,992; ...... (no value reported for 2013); real effective exchange rate (2000=100) 125.2; 127.6; 133.7; ......

### Selected items from the balance of payments (detailed, 2010–14)
- Merchandise trade balance (in millions of U.S. dollars): 2010: -1,379; 2011: -1,515; 2012: -3,032; 2013 Est.: -3,489; 2014 Proj.: -3,581
- Mining and hydropower exports (in millions of U.S. dollars): 2010: 1,500; 2011: 1,821; 2012: 1,924; 2013 Est.: 1,868; 2014 Proj.: 1,873
- Other exports (in millions of U.S. dollars): 2010: 696; 2011: 1,299; 2012: 1,399; 2013 Est.: 1,583; 2014 Proj.: 1,788
- Income (net) (in millions of U.S. dollars): 2010: -425; 2011: -336; 2012: -315; 2013 Est.: -265; 2014 Proj.: -249
  - Dividends and profit repatriation: -525; -616; -544; -467; -437
    - Of which: Mining and hydropower: -470; -561; -487; -409; -377

### General government operations (selected, fiscal year basis, in billions of kip and percent of GDP)
- Table 3 highlights (levels, 2009/10–2013/14; in billions of kip):
  - Revenue (in levels): 2009/10: 9,779; 2010/11: 11,571; 2011/12: 13,960; 2012/13: 15,666; 2013/14 Proj.: 18,787
  - Expenditure (in levels): 2009/10: 12,302; 2010/11: 13,461; 2011/12: 14,945; 2012/13: 20,875; 2013/14 Proj.: 22,294
  - Net lending/borrowing (in levels): -2,524; -1,889; -986; -5,209; -3,507
- Fiscal ratios (in percent of GDP):
  - Revenue: 18.3; 18.3; 19.6; 19.6; 20.6
  - Of which: Resource revenue 1/: 2.6; 3.3; 3.8; 3.2; 3.4
  - Expenditure: 23.0; 21.3; 21.0; 26.1; 24.5
  - Net lending/borrowing: -4.7; -3.0; -1.4; -6.5; -3.8
  - Nonmining balance 2/: -6.5; -5.5; -4.5; -8.8; -6.4

### Monetary survey and banking sector indicators (selected)
- Reserve money (levels, various dates; in millions of U.S. dollars equivalent reported): net foreign assets for BoL at various dates (e.g., Dec. 2010: 5,151; Dec. 2011: 4,772; Dec. 2012: 4,727; Dec. 2013: 4,220; Dec. 2014: 4,131)
- Reserve money (annual percent change, selected): 48.6; 16.2; 27.2; 12.7; 14.9
- Broad money (annual percent change, selected): 39.5; 28.7; 31.0; 24.7; 20.8
- Credit to the economy (annual percent change, selected): 48.4; 45.8; 49.3; 49.8; 34.7; 26.6; 29.6; 28.2; 31.4; 32.9; 19.4 (as reported across periods)
- Dollarization rate (FCDs/broad money; in percent): 44.0; 43.9; 45.0; 44.6; 44.7; 42.5; 41.0; 41.7; 42.8; 41.6; 41.6

### Medium-term macroeconomic framework (selected projections, 2010–18)
- Output and prices:
  - Real GDP growth (percent change): 2010: 8.1; 2011: 8.0; 2012: 7.9; 2013 Est.: 8.2; 2014 Proj.: 7.5; 2015: 7.8; 2016: 8.0; 2017: 7.7; 2018: 7.5
  - Consumer prices (end-period): 2010: 5.8; 2011: 7.7; 2012: 4.7; 2013 Est.: 7.4; 2014 Proj.: 7.7; 2015: 7.3; 2016: 6.6; 2017: 5.5; 2018: 5.8
- Public finances (in percent of GDP, selected):
  - Revenue: 18.3; 18.3; 19.6; 19.6; 20.6; 21.2; 21.1; 20.9; 20.7
  - Expenditure: 23.0; 21.3; 21.0; 26.1; 24.5; 26.7; 25.5; 24.7; 23.9
  - Net lending/borrowing: -4.7; -3.0; -1.4; -6.5; -3.8; -5.5; -4.4; -3.8; -3.3
  - Nonmining balance 3/: -6.5; -5.5; -4.5; -8.8; -6.4; -7.5; -6.3; -5.6; -4.8
- Balance of payments projections:
  - Current account balance (in millions of U.S. dollars): -1,251; -1,243; -2,606; -2,946; -2,956; -2,831; -2,579; -2,522; -2,855
  - In percent of GDP: -18.2; -15.2; -28.4; -29.5; -27.3; -23.7; -19.4; -17.0; -17.0
  - Exports (levels): 2,196; 3,120; 3,323; 3,451; 3,661; 3,997; 4,658; 5,124; 5,507
  - Imports (levels): 3,574; 4,635; 6,355; 6,940; 7,242; 7,488; 7,825; 8,330; 9,173
- Debt and reserves (selected projections):
  - Public debt (in percent of GDP): 59.1; 56.2; 61.8; 63.5; 65.4; 65.9; 65.5; 61.9; 57.6
  - External public debt (in percent of GDP): 50.3; 44.8; 46.1; 47.4; 49.1; 49.2; 48.2; 46.0; 43.0
  - Gross official reserves (in millions of U.S. dollars): 728; 677; 740; 666; 712; 889; 1,215; 1,555; 1,818
  - In months of imports (excluding resource projects): 2.6; 1.7; 1.7; 1.5; 1.5; 1.7; 2.0; 2.3; 2.5

*Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates and projections.*

### 1. Eradicate extreme poverty and hungerProportion of population below the national poverty line

### _cr13369 - 1. Eradicate extreme poverty and hungerProportion of population below the national poverty line

### Millennium Development Goals (MDG) indicators (selected)
- 1. Eradicate extreme poverty and hunger
  - Proportion of population below the national poverty line: 4627.624
  - Employment-to-population ratio: 4777.7 no target
  - Prevalence of underweight children under five years of age: 442722
  - Prevalence of stunting in children under five years of age: 483834
- 2. Achieve universal primary Education
  - Proportion of pupils starting grade 1 who reach grade 5: 487095
  - Literacy rate in the age group of 15–24 years: 7173.199
- 3. Promote gender equality and empower Women — Number of girls per 100 boys enrolled in:
  - Primary: 7791100
  - Lower secondary: 6689100
  - Upper secondary: 5683100
  - Tertiary: 4977100
  - Share of women in wage employment: 3834 no target
- 4. Reduce child mortality
  - Under–five mortality rate: 1707955
  - Proportion of one-year-old children immunized against measles: 41.85590
- 5. Improve maternal Health
  - Proportion of births attended by skilled birth personnel: 144249
  - Maternity mortality rate (per 100,000 live births): ...35780
- 6. Combat HIV/AIDS, malaria and other diseases
  - HIV prevalence among general pop. (percentage): 0.0060.1 less than 1
  - Proportion of land areas covered by forests (percentage): 7040.365
  - Consumption of ozone-depleting substances (mt): 502.50
- 7. Ensure Environmental Sustainability
  - (Indicators and values listed above are sourced from the United Nations and Government of Lao P.D.R., "The Millenium Development Goals, Progress Report for the Lao P.D.R., 2013", Table 6.)

### Debt sustainability assessment — overall classification and headline findings
- Lao P.D.R.’s risk of debt distress remains moderate.
- Relevant policy-dependent indicative thresholds for the medium CPIA category:
  - PV of debt-to-GDP ratio: 40 percent
  - PV of debt-to-exports ratio: 150 percent
  - PV of debt-to-revenue ratio: 250 percent
  - Debt service-to-exports ratio: 20 percent
  - Debt service-to-revenue ratio: 20 percent
- End-2012 indicators (selected):
  - Present value of debt, as a percent of GDP: 32.5
  - Present value of debt, as a percent of Exports: 73.8
  - Present value of debt, as a percent of Revenue: 184.9
  - Debt service, as a percent of Exports: 4.1
  - Debt service, as a percent of Revenue: 10.1
- Summary observations:
  - The nominal stock of external PPG debt increased from US$3.7 billion in 2011 to US$4.2 billion in 2012.
  - PPG external debt-to-GDP ratio climbed from 44.8 percent of GDP to 46.1 percent of GDP in 2012.
  - The net present value (PV) of debt at end-2012 was 32.5 percent of GDP, up from 29.8 percent of GDP in 2011.
  - High concessionality of official borrowing keeps debt service ratios manageable, but the PV of debt-to-GDP ratio is close to its safety threshold, leaving few buffers to shocks.

### External public debt composition (end-2012)
- In Billions of U.S. Dollar / As a Share of Total External Debt / In Percent of GDP
  - Total 4.2100 46.0
  - Multilateral 1.945.9 21.1
  - Bilateral 2.047.3 21.8
  - Commercial 1/0.36.73.1
  - Note: "1/ Includes direct borrowing by state-owned enterprises on nonconcessional terms" (as presented in source).

### Recent drivers and risks to debt dynamics
- Recent drivers:
  - Rapid increase in borrowing from China and Thailand in 2012.
  - Heavy investments in hydropower and electricity generation projects, including financing of public sector equity stakes.
  - Recorded domestic public debt rose to 15.8 percent of GDP in 2012, up from 8.9 percent of GDP in 2011, driven by BoL lending to local governments and government bonds for SOCB recapitalization.
  - Total domestic and external PPG debt stood at 61.8 percent of GDP in 2012, up from 56.2 percent in 2011.
- Key risks and sensitivities:
  - External debt predominantly denominated in foreign currency: debt dynamics most sensitive to large depreciation of the kip.
  - Composition of concessional funds is expected to shift away from grants toward loans at lower concessionality as the country graduates from low-income status.
  - Shocks to domestic and external environment or excessively loose macro policies could push debt beyond sustainable levels; certain stress tests breach thresholds.

### Stress tests and alternative scenarios (selected results)
- One-off 30 percent depreciation of kip vis-à-vis U.S. dollar:
  - Would lead to a sharp rise in the PV of debt-to-GDP and the PV of debt-to-revenues, breaching policy-dependent thresholds.
- Rise in the cost of additional financing by 200 basis points relative to baseline:
  - Would increase the PV of debt-to-exports ratio by around 29 percentage points in the long run relative to the baseline; even then, the corresponding threshold would not be breached.
- Historical-average scenario (key contrasts with baseline):
  - Historical average current account deficit: 16 percent of GDP (vs. 9.4 percent of GDP in baseline).
  - Historical average FDI: 5.1 percent of GDP (vs. 9.3 percent of GDP in baseline).
  - Assumes kip appreciated 2.4 percent per year on average during 2003–2012.
  - Results in around 9 percentage points of GDP more in debt accumulation than the baseline; puts Lao P.D.R. on an unsustainable path in the long run if realized.
- High-speed railway megaproject illustrative scenario:
  - Additional external borrowing: US$ 6.7 billion over 5 years (adding to US$ 1.34 billion per annum), starting in 2014.
  - Financing terms: 2 percent fixed rate debt, 20-year maturity, 10-year grace period, loan denominated in USD.
  - Fiscal multiplier during construction: 0.5.
  - Projected outcomes:
    - Overall external PPG debt would peak at around 80 percent of GDP in 2022, and exceed 60 percent of GDP for the next decade.
    - Total external debt would surpass 125 percent of GDP in 2014, and remain above the 100 percent mark for the next decade.
    - Ratio of debt service to revenue exceeds the 20 percent threshold in 2021 and remains elevated for the entire projection period.

### Macroeconomic baseline assumptions and projections (selected)
- Baseline scenario projects annual average real growth of 6.9 percent between 2013 and 2033.
- Real GDP growth projected to rise to 8.2 percent in 2013 before reverting toward potential of about 7½ percent in the medium term.
- Consumer price inflation projected to be around 7 percent on average in the medium term.
- Balance of payments and financing:
  - Current account deficit widened to 28.4 percent of GDP in 2012 from 15.5 percent in 2011; expected to further deteriorate to 29.5 percent of GDP in 2013.
  - Higher level of external financing is assumed to meet financing needs; external financing assumed to remain largely on concessional terms over the medium term, but grant financing expected to decline in the long run.
- Box 1 baseline assumptions (2012–32) highlights:
  - Real GDP growth average projections: 7.8 percent during 2013–18; moderating to 6.7 percent on average during 2019–33.
  - Inflation projections: about 6.5 percent in 2013, reaching 7.5 percent in 2014; projected to remain above 5 percent until 2018.
  - Current account deficit expected to widen to about 29.5 percent of GDP in 2013–14.
  - Reserve levels inadequate by LIC metrics at less than 1½ months of imports.
  - External financing assumptions by creditor type (multilateral, bilateral, commercial) and a projected gradual rise in commercial disbursements and bond issuance.

### Policy implications and recommended capacity strengthening (explicitly stated)
- Strengthen fiscal management.
- Upgrade debt and cash management capacity.
- Scale upwards the country’s public investment management capacity.
- Ensure debt sustainability considerations are taken into account when new debt is contracted, particularly as reliance rises on external loans with market terms.
- Phase out quasi-fiscal BOL lending to local governments to limit domestic-public-debt buildup.

*Source: LAO PEOPLE'S DEMOCRATIC REPUBLIC — STAFF REPORT FOR THE 2013 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS (prepared by International Monetary Fund and International Development Association, October 31, 2013).*

### 15.      In line with the previous DSA’s projections, the PV of total PPG debt in percent of GDP and

### _cr13369 - 15.      In line with the previous DSA’s projections, the PV of total PPG debt in percent of GDP and

### Baseline projections
- The PV of total PPG debt in percent of GDP and in percent of revenue are both projected to decline markedly over the long run under baseline assumptions (Figure 2 and Table 2).
- Domestic debt is expected to peak at 17.3 percent of GDP in 2016, rising from 15.8 percent of GDP in 2012.
- Domestic debt is projected to decline starting in 2017.
- The PV of debt-to-revenue ratio is projected to decline starting in 2017, driven by revenue administration reforms and maintained expenditure control after large increases in public employee remuneration.

### Sensitivity and alternative scenarios
- Exchange rate sensitivity:
  - A 30 percent depreciation of the kip against the US dollar in 2014 would immediately raise the PV of public debt-to-GDP and the PV of public debt-to-revenue.
  - Debt service-to-revenue ratio is relatively stable under the baseline but would increase permanently by a substantial margin if the kip were to depreciate sharply.
  - The scenario may overstate risks because a significant share of GDP, including most of the natural resource GDP, is earned in foreign currency.
- Contingent liabilities:
  - Public investment projects at the local government level could become liabilities of the central government if projects do not perform as expected.
  - Risk that BOL quasi-fiscal lending could continue despite the baseline assumption that it will be phased out completely by 2014.
- Alternative longer-term scenarios:
  - Historical scenario (real GDP growth and primary balance at historical average): PV of public debt-to-GDP ratio rises above 39 percent by 2033.
  - Baseline: PV of public debt-to-GDP remains at around 30 percent in 2033.
  - This divergence is because the projected primary deficit in the baseline is lower: 1.9 percent of GDP in baseline compared to 2.9 percent of GDP in the historical scenario.
  - If the primary balance is fixed at the level projected for 2013, the PV of debt-to-GDP would be much higher than the baseline in the long term (55.6 at 2033).
- Commodity price/customized scenario:
  - In a customized scenario where commodity prices decline by 10 percent in 2013 and 2014, debt stock indicators breach their policy-dependent thresholds (noted as illustrating vulnerability to commodity price shocks), though this poses less threat than the historical scenario.

### The authorities' views
- Authorities broadly agreed with the overall assessment and emphasized that debt service ability should be more important in measuring debt sustainability.
- Authorities expect better access to official financial resources, improving ability to finance capital needs.
- Authorities anticipated an increase in disbursements of new funds from some bilateral donors between 2013 and 2018; staff assumes US$961 million of projected disbursements from China between 2013–2018 based on information provided by the authorities (noted as much larger than the 2012 DSA assumptions of $600 million).
- As Lao P.D.R. is expected to rely more on commercial funds as it graduates from its low-income country status, authorities expect better access to nonconcessional loans in the future and attach great importance to fiscal consolidation.
- Authorities highlighted that an important part of external debt is related to viable large projects in the resource sectors, expecting high and stable economic returns upon completion and noting relatively long maturity profiles that would help mitigate risks.

### Conclusion and policy recommendations
- Overall assessment: Lao P.D.R.’s risk of debt distress remains moderate, but the PV of external PPG debt to GDP ratio comes very close to policy-dependent indicative thresholds in the near term.
- Under the baseline scenario, debt distress indicators remain below their policy-dependent thresholds, but the PV of debt to GDP ratio approaches the threshold in the near term due to:
  - rising debt stock at end-2012;
  - higher projected new borrowing driven by an expansionary fiscal path, leading to higher domestic and external financing needs.
- Buffers against adverse shocks are very limited.
- Key vulnerabilities:
  - Sensitivity to assumptions regarding investment and performance of the resource sector.
  - Exposure to large swings in the exchange rate.
  - Exposure to fluctuations in copper and gold prices and economic developments in main trading partners (China, Thailand and Vietnam).
  - Lower growth, a weaker balance of payments, and sharp depreciation of the kip would worsen debt dynamics significantly.
- Recommended policy actions:
  - Tighten macroeconomic-fiscal policies to support external debt sustainability.
  - Put fiscal policy back on a consolidation path during the next few years.
  - Conduct cautious assessment and monitoring of large-scale projects and private external debt, especially if financed from commercial sources such as bonds backed by future revenues.

*IMF staff assessment as presented in the DSA excerpt.*

### 23.      To remain sustainable, external borrowing should mostly be obtained on concessional terms

### _cr13369 - 23.      To remain sustainable, external borrowing should mostly be obtained on concessional terms

### Main recommendation
- To remain sustainable, external borrowing should mostly be obtained on concessional terms.
- Fiscal and quasi-fiscal liabilities should be carefully managed with a view to establishing buffers against vulnerabilities.
- Prudent debt management, cash management, and cautious assessment and monitoring of large-scale projects are required to mitigate potential risks of adverse debt dynamics under stress scenarios.
- Enhancing the government’s public investment management capacity will increase the benefits derived from debt-financed public investments.

### Risks, stress tests, and scenario design
- Fiscal risk could arise if large-scale projects fail to generate the expected returns, including to the government’s own equity stakes.
- The most extreme stress test is defined as the test that yields the highest ratio in 2023. Specific mappings in the text:
  - In figure b. it corresponds to a one-time nominal depreciation shock.
  - In figure c. to a terms shock.
  - In figure d. to a one-time nominal depreciation shock.
  - In figure e. to a terms shock.
  - In figure f. to a one-time nominal depreciation shock.
- Bound and sensitivity tests include scenarios such as:
  - Real GDP growth at historical average minus one standard deviation (B1).
  - Export value growth at historical average minus one standard deviation (B2).
  - US dollar GDP deflator at historical average minus one standard deviation (B3).
  - Net non-debt creating flows at historical average minus one standard deviation (B4).
  - Combination of B1–B4 using one-half standard deviation shocks (B5).
  - One-time 30 percent nominal depreciation relative to the baseline in 2014 (B6).

### Lao–China railway shock (specific scenario assumptions)
- The Lao–China railway scenario assumes:
  - (1) The additional external borrowing amounts to US$ 6.7 billion over 5 years (adding to US$ 1.34 billion per annum), starting in 2014;
  - (2) The financing terms are as follows: 2 percent fixed rate debt, with 20-year maturity, 10-year grace period, and loan denominated in USD;
  - (3) A fiscal multiplier of 0.5.

### Key indicators and projected vulnerabilities (selected figures preserved exactly as in source)
- External debt (nominal) series (selected years): 88.1, 84.1, 89.9, 109.1, 125.7, 131.5, 125.7, 119.5, 112.4, 84.7, 47.1.
- Of which: public and publicly guaranteed (PPG) external debt (selected years): 50.3, 44.8, 46.1, 47.4, 49.1, 49.2, 48.3, 46.1, 43.2, 38.1, 27.6.
- Change in external debt (selected years): -14.3, -4.0, 5.8, 19.2, 16.6, 5.8, -5.8, -6.2, -7.2, -2.8, -3.8.
- Identified net debt-creating flows (selected years): -10.5, -6.0, 13.0, 16.0, 14.0, 3.8, -3.3, -4.4, -5.8, -2.5, -3.7.
- Non-interest current account deficit (selected years): 16.3, 13.8, 26.8, 16.0, 4.9, 27.9, 25.5, 21.8, 15.9, 13.8, 14.2.
- Exports (selected years): 39.9, 45.5, 44.0, 42.3, 41.7, 41.2, 42.5, 41.7, 39.8, 37.4, 36.6.
- Imports (selected years): 54.6, 59.2, 71.7, 71.8, 69.4, 65.1, 61.3, 58.4, 57.0, 50.5, 44.4.
- Net FDI (negative = inflow) (selected years): -9.9, -7.1, -6.2, -5.1, 3.4, -6.7, -5.8, -11.0, -13.3, -12.7, -14.6.
- Endogenous debt dynamics (selected years): -16.9, -12.8, -7.6, -5.2, -5.7, -7.0, -5.9, -5.5, -5.5, -3.3, -2.0.
  - Contribution from nominal interest rate (selected): 1.9, 1.4, 1.6, 1.6, 1.8, 1.9, 3.6, 3.2, 2.9, 2.1, 1.1.
  - Contribution from real GDP growth (selected): -6.8, -5.9, -5.9, -6.8, -7.5, -8.9, -9.5, -8.6, -8.3, -5.3, -3.0.
  - Contribution from price and exchange rate changes (partial series shown): -12.0 -8.2 -3.3 (as presented).
- PV of external debt (selected years): 76.3, 95.6, 112.3, 118.5, 113.3, 108.0, 101.9, 76.7, 42.5.
- PV of PPG external debt (selected years): 32.5, 33.9, 35.7, 36.2, 35.8, 34.6, 32.8, 30.1, 23.0.
- PV of PPG external debt in percent of exports (selected years): 73.8, 80.3, 85.6, 87.9, 84.2, 83.0, 82.3, 80.4, 62.7.
- PV of PPG external debt in percent of government revenues (selected years): 184.9, 186.4, 185.4, 184.6, 183.6, 178.4, 170.8, 150.5, 115.5.
- Debt service-to-exports ratio (in percent) (selected): 80.9, 53.9, 52.2, 70.7, 69.8, 62.3, 104.5, 109.2, 109.3, 76.7, 42.5.
- PPG debt service-to-exports ratio (in percent) (selected): 4.4, 2.7, 4.1, 5.4, 5.5, 5.5, 5.2, 5.1, 5.1, 5.8, 5.8.
- PPG debt service-to-revenue ratio (in percent) (selected): 11.0, 7.5, 10.1, 12.6, 12.0, 11.6, 11.4, 11.0, 10.5, 10.8, 10.7.
- Total gross financing need (Billions of U.S. dollars) (selected): 2.7, 2.6, 4.0, 5.1, 5.3, 4.3, 6.2, 6.9, 7.2, 7.7, 8.2.

### Key macroeconomic assumptions (selected exact values)
- Real GDP growth (in percent) (selected series and averages): 8.1, 8.0, 7.9, 7.6, 0.7, 8.2, 7.5, 7.8, 8.0, 7.7, 7.9, 7.8, 6.6, 6.5, 6.7.
- GDP deflator in US dollar terms (change in percent) (selected): 13.3, 10.2, 4.1, 9.8, 6.1, 0.8, 0.6, 2.5, 2.9, 3.8, 4.6, 2.5, 2.0, 2.0, 2.0.
- Effective interest rate (percent) (selected): 2.3, 1.8, 2.1, 1.8, 0.3, 1.9, 1.8, 1.7, 3.0, 2.8, 2.7, 2.3, 2.6, 2.3, 2.5.
- Growth of exports of G&S (US dollar terms, in percent) (selected): 42.7, 35.7, 8.7, 22.3, 17.7, 4.8, 6.5, 9.1, 14.9, 9.7, 7.6, 8.8, 7.8, 8.7, 8.2.
- Growth of imports of G&S (US dollar terms, in percent) (selected): 26.4, 29.2, 36.0, 24.5, 11.3, 9.2, 4.5, 3.6, 4.7, 6.5, 10.1, 6.4, 7.1, 7.4, 7.0.
- Grant element of new public sector borrowing (in percent) (selected): 26.5, 24.7, 25.0, 24.8, 23.8, 22.5, 24.5, 19.6, 10.3, 16.8 (as presented).
- Government revenues (excluding grants, in percent of GDP) (selected): 15.8, 16.4, 17.6, 18.2, 19.2, 19.6, 19.5, 19.4, 19.2, 20.0, 19.9, 19.8.
- Aid flows (in Billions of US dollars) (selected): 0.2, 0.2, 0.2, 0.3, 0.4, 0.4, 0.4, 0.4, 0.4, 0.5, 0.3.
  - Of which: Grants (selected): 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.0.
  - Of which: Concessional loans (selected): 0.0, 0.0, 0.0, 0.1, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.3.
- Grant-equivalent financing (in percent of GDP) (selected): 3.2, 3.3, 3.2, 2.9, 2.5, 2.1, 1.5, 0.3, 1.1 (as presented).
- Grant-equivalent financing (in percent of external financing) (selected): 44.7, 40.2, 41.2, 42.3, 43.6, 44.8, 36.5, 10.8, 28.0 (as presented).
- Memorandum: Nominal GDP (Billions of US dollars) (selected): 6.9, 8.2, 9.2, 10.0, 10.8, 11.9, 13.3, 14.8, 16.7, 26.0, 59.5.

### Policy implications and recommended actions (as presented)
- Obtain the bulk of external borrowing on concessional terms (high grant element / concessional loans).
- Carefully manage fiscal and quasi-fiscal liabilities to build buffers against vulnerabilities.
- Strengthen debt management and cash management practices.
- Conduct cautious assessment and monitoring of large-scale projects to avoid fiscal risks from underperforming projects or unexpected liabilities.
- Enhance public investment management capacity to increase returns from debt-financed public investments.

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

### 2. IMF  Work

### 2. IMF  Work

### Program
- Periodic staff visits by IMF resident representative based in Hanoi: June 2013 May 2014
- Article IV Consultation: August–September 2013
- Board discussion: November 2013
- TA on improvement of external sector statistics: June 2013; BTO/TA report in July 2013
- TA on natural resources revenue administration (Series of six visits over 2013–16): Ongoing; BTO/TA report following each visit
- TA on tax administration reform: Ongoing; Aide memoire in FY2014
- TA on bank supervision: December 2013 and Q1 2014; BTO/TA report in FY2014

### Joint Work Program
- External Debt Sustainability Analysis: September 2013 October 2013

### Relations with the Asian Development Bank (AsDB)
- AsDB Country Partnership Strategy (CPS) 2012–2016 aligned with National Socio-Economic Development Plan (NSEDP, 7th Five-Year Plan); aims: promote inclusive and sustainable economic growth and poverty reduction.
- CPS design priorities: diversify the economy through agriculture and natural resources, education, energy, urban development, and public sector management.
- The CPS highlights four thematic areas influencing activity design: private sector development, governance, gender equity, and regional cooperation and integration.
- CPS core sectors: education; agriculture and natural resources; water supply and other municipal infrastructure and services; energy.
- Strengthening public sector management is a crosscutting issue.
- Performance-based allocation of the Asian Development Fund (ADF), based on the country performance assessment (CPA) finalized in 2012, provided Lao P.D.R. with an ADF allocation of US$156.01 million for the biennial period 2013–14.
- The CPA for the next allocation period (2015–2016) will be finalized by the end of 2014.
- As of end-2012:
  - cumulative loans/grants approved: US$752.94 million
  - cumulative amount awarded for contracts: US$313.84 million
- During 2012:
  - disbursed: US$68.61 million
  - contracts awarded: US$73.65 million
- Four new TA projects approved in 2012 totaling US$3.8 million, including project preparation and TA related to water supply and sanitation, human resource development strategy, capacity building for the National Commission for Advancement of Women, supporting decentralized rural infrastructure, and implementing regulatory impact assessment.

- Lao P.D.R.: Asian Development Bank Commitments and Disbursements, 2002–12 (In millions of U.S. dollars)
  - Commitments by year: 2002: 43.2; 2003: 34.9; 2004: 54.8; 2005: 87.0; 2006: 60.7; 2007: 47.4; 2008: 46.6; 2009: 81.2; 2010: 55.3; 2011: 53.20; 2012: 73.65
  - Disbursements by year: 2002: 48.6; 2003: 54.7; 2004: 48.5; 2005: 78.7; 2006: 76.8; 2007: 74.8; 2008: 56.9; 2009: 75.9; 2010: 61.5; 2011: 73.23; 2012: 68.61
  - Source: Data provided by the Asian Development Bank.
  - Note: Starting from 2006, the commitments and disbursements included both loans and grants.
  - Note: The commitments and disbursements are as of December of each year.

### Statistical Issues — Assessment of Data Adequacy for Surveillance
- General:
  - Data provision has serious shortcomings that significantly hamper surveillance, especially national accounts, government finance, financial sector and external sector statistics.
  - Shortcomings are due to a lack of capacity.
  - Senior STA staff held a high level seminar during the Article IV mission to discuss a strategy for improving statistics to support development goals.
  - A comprehensive TA and training program was agreed covering national accounts, prices, government finance statistics, monetary and financial statistics, and external sector statistics.

- National accounts:
  - Annual estimates of GDP by activity at current and constant prices (base year =2002), broadly following SNA 1993.
  - Present methodology uses outdated indicators and ratios, affecting GDP accuracy and quality.
  - A program of surveys set up to improve situation.
  - Lao Statistics Bureau (LSB) conducted an economic census in 2012–2013 to construct a business register for an annual establishment survey for NA compilation.
  - Lao P.D.R. participates in STA project to implement the SNA and ICP, funded by the government of Japan, and has received TA to improve annual national accounts and develop quarterly national accounts (QNA).
  - Following a February 2013 TA mission under this project:
    - collection of quarterly data scheduled to commence in March 2014
    - LSB plans to implement some methodological improvements at the same time
    - the first set of QNA is planned to be released early 2015
  - GDP by expenditure has not been published since 2005.
  - Based on advice from a December 2011 mission, the LSB compiled preliminary GDP by expenditure in current prices for 2007–2011 with 2007 as the base year.
  - Compilation of GDP by expenditure at constant prices is in progress based on deflators discussed during the February 2013 mission.

- Prices statistics:
  - Monthly CPI compiled (December 2010=100) using weights from the 2007/08 Lao Expenditure and Consumption Survey.
  - A monthly PPI, to be compiled on a quarterly basis, is under development with coverage restricted to mining and quarrying, manufacturing, and electricity.
  - Medium-term plan: expand PPI coverage to tourism and construction.
  - Long-term plan: include agriculture, services and other activities.

- Government finance statistics:
  - Remain weak; timeliness of fiscal reporting needs significant improvement.
  - Off-budget activities are not included in fiscal data, although they have expanded rapidly.
  - Annual budget and outturn data formats do not follow international GFS standards.
  - Except for annual data in the Official Gazette, no fiscal data are disseminated in the country.
  - A mission in July 2013 initiated participation in the Government Financial Statistics TA project (funded by the Government of Japan through the JSA) and launched an enhanced GFSM2001 compilation system starting with an in-country training workshop in August 2013.

- Monetary statistics:
  - Classification of monetary data by institutional sector and by financial instrument and valuation principles need strengthening.
  - Standardized Report Forms (SRFs) have yet to be introduced.
  - Authorities requested a one-week MFS training mission planned for late January 2014.

- External sector statistics:
  - Data gaps include need to implement BPM6, compile the capital account, IIP and external debt statistics (EDS), and issues with periodicity and timeliness of reporting.
  - Limitations on financial resources and number of compilers have constrained LSB and Bank of Lao PDR (BOL) progress on IIP and EDS.

- Data Standards and Quality:
  - Lao P.D.R. is not a GDDS participant.
  - Government expressed intention to collaborate with IMF to move macroeconomic statistics closer to international standards and to join the GDDS.
  - No Data ROSC mission has been conducted.

- Reporting to STA:
  - Government finance statistics reporting for IFS and the GFS Yearbook initiated in early 2009 limited to budgetary central government and has been irregular with long delays.
  - Lao P.D.R. reports quarterly and annual summary budget data in GFSM 2001 format for IFS and the GFS Yearbook with a time lag of six months or more, and on an irregular basis.
  - Reporting of monetary data is irregular and with long delays.
  - Quarterly BOP data are reported once a year in a highly aggregated format.
  - The last published data in the IFS and the Balance of Payments Statistics Yearbook correspond to 2011.

### Table of Common Indicators Required for Surveillance (As of October 8, 2012)
- Exchange Rates
  - Date of Latest Observation: 10/08/13
  - Date Received: 10/08/13
  - Frequency of Reporting: D
  - Frequency of Publication: D
  - Frequency of Data: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Latest Observation: June 2013
  - Date Received: 08/27/13
  - Frequency of Reporting: M
  - Frequency of Publication: I
  - Frequency of Data: Q
- Reserve/Base Money
  - Latest Observation: June 2013
  - Date Received: 08/27/13
  - Frequency of Reporting: M
  - Frequency of Publication: I
  - Frequency of Data: Q
- Broad Money
  - Latest Observation: June 2013
  - Date Received: 08/27/13
  - Frequency of Reporting: M
  - Frequency of Publication: I
  - Frequency of Data: Q
- Central Bank Balance Sheet
  - Latest Observation: June 2013
  - Date Received: 08/27/13
  - Frequency of Reporting: M
  - Frequency of Publication: I
  - Frequency of Data: Q
- Consolidated Balance Sheet of the Banking System
  - Latest Observation: June 2013
  - Date Received: 08/27/13
  - Frequency of Reporting: M
  - Frequency of Publication: I
  - Frequency of Data: Q
- Interest Rates
  - Latest Observation: August 2013
  - Date Received: 10/03/13
  - Frequency of Reporting: M
  - Frequency of Publication: M
  - Frequency of Data: M
- Consumer Price Index
  - Latest Observation: August 2012
  - Date Received: 09/05/13
  - Frequency of Reporting: M
  - Frequency of Publication: M
  - Frequency of Data: M
- Revenue, Expenditure, Balance and Composition of Financing — General Government
  - Latest Observation: June 2013 for Expenditure; July for Revenue
  - Date Received: 10/04/13
  - Frequency of Reporting: I
  - Frequency of Publication: I
  - Frequency of Data: I
- Revenue, Expenditure, Balance and Composition of Financing — Central Government
  - Latest Observation: June 2013 for Expenditure; July for Revenue
  - Date Received: 10/04/13
  - Frequency of Reporting: Q
  - Frequency of Publication: I
  - Frequency of Data: M
- Stocks of Central Government and Central Government-Guaranteed Debt
  - Latest Observation: NA
  - Date Received: NA
  - Frequency of Reporting: NA
  - Frequency of Publication: NA
  - Frequency of Data: NA
- External Current Account Balance
  - Latest Observation: Q2 2013
  - Date Received: 08/27/13
  - Frequency of Reporting: Q
  - Frequency of Publication: I
  - Frequency of Data: I
- Exports and Imports of Goods and Services
  - Latest Observation: Q2 2013
  - Date Received: 08/27/13
  - Frequency of Reporting: Q
  - Frequency of Publication: I
  - Frequency of Data: I
- GDP/GNP
  - Latest Observation: 2011/12
  - Date Received: 09/16/13
  - Frequency of Reporting: A
  - Frequency of Publication: A
  - Frequency of Data: A
- Gross External Debt
  - Latest Observation: Dec 2012
  - Date Received: 09/20/13
  - Frequency of Reporting: A
  - Frequency of Publication: A
  - Frequency of Data: I
- International Investment Position
  - Latest Observation: NA
  - Date Received: NA
  - Frequency of Reporting: NA
  - Frequency of Publication: NA
  - Frequency of Data: NA

### Statement by the Staff Representative on Lao P.D.R. (November 15, 2013)
- This statement provides information that became available since the staff report was circulated to the Executive Board on October 31, 2013; the information does not alter the thrust of the staff appraisal.
- Inflation: edged down to 6.7 percent in October from 6.9 percent in September (year-on-year).
- International reserves:
  - US$583 million at end-September (0.9 months of prospective imports)
  - US$532 million at end-June (0.8 months of prospective imports)

*Source: _cr13369 - 2. IMF Work (PDF chapter/section).*

### 4.      Overall credit growth was 31½ percent year-on-year in September, up from

### _cr13369 - 4.      Overall credit growth was 31½ percent year-on-year in September, up from

### Background and macroeconomic snapshot
- Overall credit growth was 31½ percent year-on-year in September, up from 28¼ percent in June.
- Lao P.D.R. became a member of the World Trade Organization (WTO) in 2013.
- The economy has been overheating from expansionary macroeconomic policies.
- Fiscal deficit is estimated to have widened to 6½ percent of GDP, mainly from a doubling of public sector employee compensation and higher capital spending.
- Government liquidity is tight; wage and other arrears of 2–3 percent of GDP have emerged.
- Monetary policy has been accommodative; credit growth remains vigorous.
- Real GDP growth is projected at 8¼ percent this year, led by investment and private consumption.
- Consumer price inflation is projected to rise to 7½ percent by year-end.
- Current account deficit expected to remain close to 30 percent of GDP.
- International reserves amounted to US$0.5 billion (0.8 month of prospective imports) in June 2013 and are described as very low.

### Executive Board assessment and policy priorities
- Directors commended strong growth and MDG progress but noted sharp deterioration of fiscal and external balances due to expansionary policies.
- Immediate need to further tighten fiscal and monetary policies to:
  - support the exchange rate anchor,
  - replenish international reserves,
  - build up fiscal buffers,
  - guide the economy toward a soft landing.
- Fiscal consolidation recommended, anchored by a nonmining fiscal deficit of no more than 5 percent of GDP.
- Recommended measures:
  - restrain increases in public sector compensation and implement future increases at a more measured pace;
  - adopt a medium-term budget strategy;
  - continue improvements in tax collection;
  - cautiously assess large-scale projects and strengthen public debt management capacity.
- Monetary/exchange rate guidance:
  - exchange rate anchor requires lower broad money and credit growth;
  - mop up excess liquidity;
  - accelerate unwinding of quasi-fiscal lending;
  - raise policy interest rates;
  - allow the kip to move in line with market conditions to replenish international reserves (exchange rate assessed to be overvalued).
- Financial sector recommendations:
  - strengthen financial supervision;
  - improve compliance with macroprudential regulation;
  - raise banks’ capital;
  - participate in an FSAP and use Fund technical assistance to address supervisory weaknesses and strengthen financial stability and crisis management frameworks.
- Directors welcomed efforts to strengthen the anti-money laundering and combating the financing of terrorism regime.

### Recent economic developments and authorities’ views (Statement by Lao authorities)
- WTO accession noted (became the 158th member on February 2, 2013).
- Poverty headcount dropped to 20 percent in 2012.
- Authorities remain committed to achieving 2015 MDGs and graduating from least developed country status by 2020 (Vision 2020).
- 2012 growth maintained near the medium-term target of 8 percent, driven by hydropower, infrastructure, real estate, and domestic consumption; mining production increased.
- Authorities expect continued strong FDI-driven expansion in 2013, fueled by hydropower and labor-intensive sectors.
- Fiscal deficit deteriorated in fiscal year 2012/2013 due to wage increases and lower-than-targeted revenue.
- Authorities commit to rein in fiscal deficit to 5 percent of GDP via strengthened tax administration and expenditure measures.
- Expected revenue measures for fiscal year 2013/2014 include unification of corporate income tax rates, introduction of a lump-sum tax for SMEs, taxes on property transfer, and increases in petrol and vehicle excise duties.
- Inflation developments:
  - average inflation in 2012 was 4.26 percent;
  - average inflation over first nine months of 2013 was 6.22 percent, driven by food and nonalcoholic beverages (meats and rice up by 12.3 percent), restaurant-hotel category up by 8.6 percent, and housing, water supply, electricity and fuel up by 7.7 percent;
  - authorities expect annual average inflation of 6.34 percent for 2013.
- Exchange rate and reserves:
  - kip nominal exchange rate appreciated 0.26 percent in 2012 and 0.62 percent in 09/2013 (y.o.y) against the US dollar;
  - official–parallel market gap widened from less than 0.04 percent pre-August to a peak of 3.4 percent in early September, narrowing to 0.7 percent in late October after BOL communications;
  - international reserves level declined but gradually risen recently and expected to increase by end of 2013.
- Credit growth outlook:
  - growth of credit to the economy expected to decelerate to about 20.7 percent in 2013 from 26.6 percent in 2012;
  - authorities emphasize strengthening prudential regulations and banking supervision despite low NPL ratio.

### Fiscal policy actions and intentions
- Authorities recognize fiscal consolidation is crucial to preserve macroeconomic stability and debt sustainability.
- Recent and planned measures:
  - enhance tax collection and curb non-critical public spending to offset larger wage bills;
  - strengthen tax administration by enforcing investment promotion law compliance on tax and duty exemptions and VAT deductibles, and effectively implement the revised tax law;
  - temporarily halted monthly living allowance payment to civil servants, reducing expenditure by more than 2 percent of GDP;
  - reconsider future civil servant salary policy with a more measured pace;
  - cut low-priority current expenditures and suspended state infrastructure projects commissioned by local governments and financed by private contractors with government repayment upon completion;
  - review procurement processes and strengthen project management regulations per the State Investment Law before lifting suspensions.
- Medium-term fiscal priorities:
  - secure more sustainable revenue from non-resource sectors;
  - enhance public financial management capacity;
  - impose new valuation method for automobile and fuel imports to increase customs duty and tax collection;
  - implement a new 5 percent tax on value of real estate transactions effective in 2013;
  - fully implement the revised tax law approved in 2011 to raise income tax from new foreign investment projects.

### Key statistics and projections (selected)
- Real GDP growth: 8.1 (2010), 8.0 (2011), 7.9 (2012), 8.2 (2013 est.), 7.5 (2014 proj.)
- CPI (annual average): 6.0 (2010), 7.6 (2011), 4.3 (2012), 6.5 (2013 est.), 7.5 (2014 proj.)
- Fiscal deficit (net lending/borrowing): -4.7 (2010), -3.0 (2011), -1.4 (2012), -6.5 (2013 est.), -3.8 (2014 proj.)
- Nonmining balance: -6.5 (2010), -5.5 (2011), -4.5 (2012), -8.8 (2013 est.), -6.4 (2014 proj.)
- Reserve money (annual percent change): 48.6 (2010), 16.2 (2011), 27.2 (2012), 12.7 (2013 est.), 14.9 (2014 proj.)
- Broad money (annual percent change): 39.5 (2010), 28.7 (2011), 31.0 (2012), 24.7 (2013 est.), 20.8 (2014 proj.)
- Bank credit to the economy (annual percent change): 48.4 (2010), 45.8 (2011), 26.6 (2012), 32.9 (2013 est.), 19.4 (2014 proj.)
- Bank credit to the private sector: 48.4 (2010), 39.3 (2011), 35.1 (2012), 34.2 (2013 est.), 21.0 (2014 proj.)
- Current account balance (US$ millions): -1,251 (2010), -1,243 (2011), -2,606 (2012), -2,946 (2013 est.), -2,956 (2014 proj.)
- Current account balance (percent of GDP): -18.2 (2010), -15.2 (2011), -28.4 (2012), -29.5 (2013 est.), -27.3 (2014 proj.)
- Gross official reserves (US$ millions): 728 (2010), 677 (2011), 740 (2012), 666 (2013 est.), 712 (2014 proj.)
- Gross official reserves (months of prospective imports): 1.8 (2010), 1.2 (2011), 1.2 (2012), 1.1 (2013 est.), 1.1 (2014 proj.)
- External public debt (US$ millions): 3,539 (2010), 3,664 (2011), 4,221 (2012), 4,611 (2013 est.), 5,167 (2014 proj.)
- External public debt (percent of GDP): 50.3 (2010), 44.8 (2011), 46.1 (2012), 47.4 (2013 est.), 49.1 (2014 proj.)
- Nominal GDP (millions of U.S. dollars): 6,855 (2010), 8,162 (2011), 9,169 (2012), 10,002 (2013 est.), 10,814 (2014 proj.)

*Source: IMF Executive Board Concluding Statement and Lao P.D.R. authorities’ statement, November 15, 2013.*

### 14. Despite higher pressures on fiscal accounts, the authorities are committed to keep

### _cr13369 - 14. Despite higher pressures on fiscal accounts, the authorities are committed to keep

### Fiscal and debt management
- Authorities committed to keep public debt on a sustainable path and to reduce the level of external debt to lessen vulnerability to external shocks.
- Bath bond issuance in Thailand under the ASEAN+3’s Asian Bond Markets Initiative (ABMI) was a resounding success, evidenced by almost three times oversubscription.
- Debt Management and Financial Analysis System (DMFAS) has been rolled out to significantly improve public debt data recording and strengthen debt management capacity.

### Monetary policy stance and liquidity management
- Monetary policy geared toward preserving macroeconomic stability in response to heightened inflationary pressures.
- Authorities note staff’s recommendation that monetary policy should be tightened by lowering M2 growth to the level consistent with a sustainable nominal GDP growth in order to anchor inflation.
- Bank of the Lao PDR (BOL) actions:
  - Continuously issuing central bank bills to absorb liquidity.
  - Hiking repurchase interest rates from 3.5 percent to 6.55 percent for kip and from 2.65 percent to 3.93 percent for FX.
  - Strictly enforcing FX net open position regulation.
  - Rationally providing FX liquidity support to commercial banks.
  - Reserving raising banks’ reserve requirement ratios as a last resort.
  - BOL bills are regularly used to absorb liquidity and can be additionally issued as necessary.

### Exchange rate policy and reserves
- BOL committed to keeping the exchange rate flexible and in line with financial and economic conditions.
- Rules and regulations on foreign currency related operations are being enforced more actively following recent irregular FX market movements:
  - Commercial banks must pay up registered capital in foreign currency according to capital adequacy regulation.
  - Banks may extend credit in foreign currency only for activities that can generate revenues in foreign currency.
  - Efforts aim to contain currency mismatches in bank balance sheets.
- BOL preparing to request technical assistance in development of the interbank market.
- Authorities welcome staff’s assessment that current exchange rate policy is a generally appropriate anchor and have committed to maintain a stabilized exchange rate scheme while pursuing de-dollarization and promoting greater use of the kip.
- Steps taken to enhance regulation of foreign exchange transactions to monitor daily trading activities more in real time.
- Reserve strengthening measures:
  - Abortion of foreign currency lending to local governments and state-owned enterprises since last year.
  - Collecting outstanding loans.
  - Intensifying enforcement of foreign currency related regulations.
- Despite a widening current account deficit, authorities consider the current international reserve level adequate at 2.9 months of officially reported imports data in June 2013.
- Authorities expect foreign reserves to gradually increase and reach a more comfortable level by the end of the year.
- Authorities view 2013 import figures as likely to slow down from 2012 (which witnessed high import volume related to the ASEM meeting preparation) and caution staff against relying solely on trading partners’ export data as a proxy for Laos’ import because a significant part of unrecorded import content is re-exported.
- Authorities agree there could be scope for exploring the discrepancy in measurement of imports and enhancing authorities’ data collection system.

### Financial sector health and supervision
- BOL regards a sound and robust financial system as crucial for efficient allocation of financial resources for long-term economic development.
- Overall banking sector assessment:
  - Remains sound with strong capital adequacy, ample liquidity, and low NPL.
  - Credit growth viewed positively as financial deepening that drives economic growth and poverty alleviation.
- Risks and regulatory responses:
  - Awareness of potential risks from extended rapid credit growth; prudential regulation tightened to monitor credit quality and supervisory interventions to ensure good underwriting standards.
  - Special focus on banks with NPL ratio of more than 3 percent.
  - New regulations to control single lending limits to mitigate concentration risk and to prohibit connected lending to shareholders, directors and subsidiaries.
- Plans and capacity building:
  - Adoption of Basel II capital standard planned with technical support from the WB and the Bank of Thailand.
  - Strengthening supervisory capacity and regulatory framework to preserve a safe and sound banking system.
  - Ongoing enhancement of regulatory framework under the ASEAN Banking Integration Framework to improve banking capacity and financial stability.

### AML/CFT and legal frameworks
- Authorities drafted an AML/CFT Law and are conducting consultations and reviews by the Ministry of Justice.
- The World Bank will help review the draft law to ensure compliance with international standards.
- Tentative plan for BOL to propose the draft AML/CFT Law to the National Assembly by 2014.

### Structural reforms and trade facilitation
- Lao PDR became the 158th member of WTO in February 2013 and has granted foreign access to domestic sectors.
- Progress on structural reforms:
  - More than 90 laws and regulations enacted, including those related to import licensing, custom valuation, investment, sanitary and phytosanitary measures, technical barriers to trade, and intellectual property rights.
  - Establishment of a one-stop shop to coordinate foreign investment applications across approval levels.
  - Modernization of electronic data interchange system to better facilitate cross-border trades.
  - Introduction of the Lao trade portal (www.laotradeportal.gov.la) to facilitate trade and enhance transparency.
- Authorities believe these initiatives will create a favorable business climate conducive to more broad-based and inclusive growth.

### Statistics and data capacity
- Authorities recognize the importance of high-quality and comprehensive macroeconomic and financial sector statistics for surveillance and policy formulation.
- Efforts underway to improve official statistics and reporting systems to align with international guidelines.
- Authorities welcome Fund technical assistance to enhance statistical capacity.

### Conclusion and strategic objectives
- Government envisages Lao PDR to achieve LDC graduation by 2020.
- Authorities reaffirm commitment to carry out the 7th national socio-economic plan to sustain investment and growth momentum while preserving macroeconomic and financial stability.
- Policy priorities and intended reforms:
  - Enhancing business environment.
  - Improving efficiency of public services.
  - Reforming public financial management.
  - Building up necessary fiscal and monetary policy space.
  - Strengthening banking regulation.
- Authorities welcome productive policy dialogue with the mission team and appreciate continued Fund support, especially in technical assistance.

*Source: IMF country report content unit _cr13369.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13369.pdf_