IMF Executive Board Concludes 2023 Article IV Consultation with Lao People’s Democratic Republic
May 22, 2023
Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Lao PDR.
Marked exchange rate depreciation following the global terms of trade shocks at the start of 2022 year brought high inflation and deteriorating living standards. Public debt has increased further, largely driven by currency depreciation, but also by additional government arrears, domestic bond issuances to recapitalize banks, and SOE debts.
The government has enacted measures intended to improve the public finances and to ease FX pressures. These include substantial fiscal consolidation, driven by expenditure cuts, a recovery in revenue collection, and by debt servicing deferrals. The central bank has tightened monetary conditions by issuing bonds and increased the policy rate and reserve requirements, and has also tightened exchange controls and prioritized access to FX.
The prospect is for a return to steady growth in 2023, supported by higher regional growth, particularly through tourism, exports of goods, and resource extraction. Falling global commodity prices would allow inflation to gradually fall. But even with higher growth and despite eliminating the primary fiscal deficit, public debt would remain at high levels for an extended period. The scale of public and external debt poses substantial risks to the outlook, including from significant financing needs, low foreign exchange liquidity and reserves, and the prospect of tight global financial conditions limiting external market access. The external environment remains uncertain; It is possible that net trade improves further, given the potential for a faster pick-up in services (e.g., logistics and tourism) and remittances, which would bring valuable foreign exchange earnings, but the external environment could be more adverse than expected in 2023.
Executive Board Assessment[2]
Executive Directors noted that the post-pandemic recovery has been challenging, marked by the acceleration in exchange rate pressures, substantial increase in inflation rates, and a worsening public debt ratio. While the near-term growth outlook appears positive, large public financing needs and liquidity pressures pose significant downside risks. Against this background, Directors encouraged the authorities to press ahead with adjustment policies and governance reforms, supported by Fund technical assistance, to address macroeconomic imbalances and promote sustainable, inclusive, and more broad-based growth. Looking ahead, Directors encouraged the authorities to strengthen Fund engagement.
Directors emphasized the urgency of strengthening public finances and ensuring debt sustainability, given significant financing needs, difficult financing conditions, and large contingent liabilities. They welcomed the authorities’ recent progress at balancing the primary budget, and called for further efforts toward a sustained, growth-friendly, and revenue-based consolidation, with spending prioritizing critical development and social needs. Directors considered that revenue measures should be focused on eliminating tax exemptions and reversing recent tax cuts, while paying particular attention to consistent application of taxes. Expenditure policies should be supported by comprehensive public financial management reforms, including for state-owned enterprises, to prevent further accumulation of arrears.
Directors agreed on the importance of continuing to tighten monetary conditions, given negative real rates and foreign exchange shortages. They noted the authorities’ efforts to contain exchange market pressures, but cautioned against excessive reliance on administrative measures. Directors emphasized the need to strengthen the operational independence of the central bank and refrain from monetizing sovereign obligations.
Directors called for vigilance in light of risks and vulnerabilities in the financial sector. They advised strengthening banking regulation and supervision and building capital buffers to help address the solvency strains in the banking sector while calling for heightened monitoring of liquidity levels and contingency planning. Directors noted the injections of capital into two state-owned banks and welcomed the authorities’ intention to end forbearance policies and implement corrective action measures in 2023.
Directors agreed that structural reforms are crucial to boost private sector development and durably sustain high growth rates. They called for measures to improve education and skills training and emphasized the urgency of improving governance and transparency. Directors welcomed progress on the AML/CFT regime and encouraged swift implementation of the Financial Action Task Force’s mutual evaluation recommendations when published. They also urged progress on improving the quality, coverage, and timeliness of economic data.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
Lao P.D.R.: Selected Economic and Financial Indicators, 2019–24 |
||||||
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
|
Est. |
Proj. |
Proj. |
Proj. |
|||
GDP and prices (percentage change) |
||||||
Real GDP growth 1/ |
4.7 |
-0.4 |
2.1 |
2.3 |
4.0 |
4.0 |
GDP Deflator |
3.3 |
5.1 |
3.8 |
17.6 |
16.1 |
3.5 |
CPI (annual average) |
3.3 |
5.1 |
3.8 |
23.0 |
15.1 |
3.5 |
CPI (end year) |
6.3 |
3.2 |
5.3 |
39.3 |
-1.4 |
7.6 |
Public finances (in percent of GDP) |
||||||
Revenue and Grants |
15.4 |
13.0 |
15.0 |
14.9 |
15.1 |
15.1 |
Expenditure |
18.8 |
18.6 |
16.3 |
16.5 |
18.5 |
18.6 |
Current Expenditure |
12.6 |
12.0 |
11.1 |
11.0 |
13.0 |
13.1 |
Net acquisition of nonfinancial asset |
6.2 |
6.6 |
5.2 |
5.5 |
5.5 |
5.5 |
Overall balance |
-3.3 |
-5.6 |
-1.3 |
-1.6 |
-3.4 |
-3.5 |
Money and credit (annual percent change) |
||||||
Broad money |
18.9 |
16.3 |
24.0 |
32.3 |
20.1 |
… |
Bank credit to the economy 2/ |
7.4 |
4.3 |
11.5 |
42.5 |
3.6 |
… |
Balance of payments |
||||||
Exports (in millions of U.S. dollars) |
5,764 |
6,115 |
7,695 |
7,993 |
8,306 |
8,660 |
In percent change |
8.9 |
6.1 |
25.8 |
3.9 |
3.9 |
4.3 |
Imports (in millions of U.S. dollars) |
6,621 |
6,092 |
6,829 |
7,755 |
7,661 |
8,306 |
In percent change |
-4.1 |
-8.0 |
12.1 |
13.6 |
-1.2 |
8.4 |
Current account balance (in millions of U.S. dollars) |
-1,711 |
-953 |
-107 |
-912 |
-368 |
-863 |
In percent of GDP |
-9.1 |
-5.1 |
-0.6 |
-6.0 |
-2.6 |
-6.2 |
Gross official reserves (in millions of U.S. dollars) 3/ |
998 |
1,320 |
1,267 |
1,101 |
1,092 |
1,457 |
In months of prospective goods and services imports |
1.8 |
2.2 |
1.9 |
1.6 |
1.4 |
1.7 |
Exchange rate |
||||||
Official exchange rate (kip per U.S. dollar; end-of-period) |
8,869 |
9,285 |
11,166 |
… |
… |
… |
Real effective exchange rate (2010=100) |
119 |
120 |
112 |
… |
… |
… |
Nominal GDP |
||||||
In billions of kip |
163,080 |
167,669 |
180,751 |
217,350 |
262,354 |
282,365 |
Memorandum items: |
||||||
Real GDP growth (published by authorities) 4/ |
5.5 |
3.3 |
… |
… |
… |
… |
Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates and projections. |
||||||
1/ Staff estimate 2019–20 numbers using leading indicators such as electricity and mining productions, harvest volumes in |
||||||
major crops, export of goods and services, and tourism revenues (due to concerns over data quality and availably). |
||||||
2/ Includes the Bank of Lao P.D.R. lending to state-owned enterprises and subnational levels of government. |
||||||
3/ Includes Swap drawings with the People’s Bank of China (PBoC). Includes the Special Drawing Right (SDR) allocations of |
||||||
SDR 41.3 million in 2009 and SDR 101.4 million in 2021. |
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4/ Lao Statistics Bureau (LSB) data. |
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