IMF Executive Board Concludes 2023 Article IV Consultation with Lao People’s Democratic Republic
IMF News, May 23, 2023
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- Published: May 23, 2023
Overview
- Marked exchange rate depreciation following the global terms of trade shocks at the start of 2022 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 enacted measures to improve public finances and ease FX pressures: substantial fiscal consolidation driven by expenditure cuts, a recovery in revenue collection, and debt servicing deferrals.
- The central bank tightened monetary conditions by issuing bonds, increased the policy rate and reserve requirements, tightened exchange controls, and prioritized access to FX.
Macroeconomic outlook and risks
- Prospect: 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.
- Despite higher growth and elimination of the primary fiscal deficit, public debt would remain at high levels for an extended period.
- Key risks: significant financing needs, low foreign exchange liquidity and reserves, prospect of tight global financial conditions limiting external market access, and uncertainty in the external environment.
- Possible positive channel: net trade could improve further if services (e.g., logistics and tourism) and remittances pick up faster than expected.
- Possible adverse channel: the external environment could be more adverse than expected in 2023.
Executive Board assessment and policy advice
- Post-pandemic recovery has been challenging: acceleration in exchange rate pressures, substantial increase in inflation rates, and worsening public debt ratio.
- Near-term growth outlook appears positive, but large public financing needs and liquidity pressures pose significant downside risks.
- Directors encouraged 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.
- Directors encouraged the authorities to strengthen Fund engagement.
Fiscal policy and public debt
- Directors emphasized urgency of strengthening public finances and ensuring debt sustainability given significant financing needs, difficult financing conditions, and large contingent liabilities.
- They welcomed recent progress at balancing the primary budget and called for further efforts toward a sustained, growth-friendly, and revenue-based consolidation.
- Spending should prioritize critical development and social needs.
- Revenue measures should focus on eliminating tax exemptions and reversing recent tax cuts, with 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.
Monetary policy, exchange rate, and FX management
- Directors agreed on the importance of continuing to tighten monetary conditions, given negative real rates and foreign exchange shortages.
- They noted authorities’ efforts to contain exchange market pressures but cautioned against excessive reliance on administrative measures.
- Emphasized need to strengthen the operational independence of the central bank and refrain from monetizing sovereign obligations.
Financial sector and banking stability
- Directors called for vigilance given risks and vulnerabilities in the financial sector.
- Advised strengthening banking regulation and supervision and building capital buffers to address solvency strains in the banking sector.
- Called for heightened monitoring of liquidity levels and contingency planning.
- Noted injections of capital into two state-owned banks and welcomed the authorities’ intention to end forbearance policies and implement corrective action measures in 2023.
Structural reforms
- Structural reforms are crucial to boost private sector development and durably sustain high growth rates.
- Called for measures to improve education and skills training and emphasized urgency of improving governance and transparency.
- Welcomed progress on the AML/CFT regime and encouraged swift implementation of the Financial Action Task Force’s mutual evaluation recommendations when published.
- Urged progress on improving the quality, coverage, and timeliness of economic data.
Selected economic and financial indicators (2019–24)
- Real GDP growth 1/: 2019: 4.7; 2020: -0.4; 2021: 2.1; 2022: 2.3; 2023 Est.: 4.0; 2024 Proj.: (blank)
- GDP Deflator: 2019: 3.3; 2020: 5.1; 2021: 3.8; 2022: 17.6; 2023 Est.: 16.1; 2024 Proj.: 3.5
- CPI (annual average): 2019: 23.0; 2020: 15.1; 2021: (blank); 2022: (blank); 2023 Est.: (blank); 2024 Proj.: (blank)
- CPI (end year): 2019: 6.3; 2020: 3.2; 2021: 5.3; 2022: 39.3; 2023 Est.: -1.4; 2024 Proj.: 7.6
- Public finances (in percent of GDP):
- Revenue and Grants: 2019: 15.4; 2020: 13.0; 2021: 15.0; 2022: 14.9; 2023 Est.: (blank); 2024 Proj.: (blank)
- Expenditure: 2019: 18.8; 2020: 18.6; 2021: 16.3; 2022: 16.5; 2023 Est.: 18.5; 2024 Proj.: (blank)
- Current Expenditure: 2019: 12.6; 2020: 12.0; 2021: 11.1; 2022: 11.0; 2023 Est.: 13.1; 2024 Proj.: (blank)
- Net acquisition of nonfinancial asset: 2019: 6.2; 2020: 6.6; 2021: 5.2; 2022: 5.5; 2023 Est.: (blank); 2024 Proj.: (blank)
- Overall balance: 2019: -3.3; 2020: -5.6; 2021: -1.3; 2022: -1.6; 2023 Est.: -3.4; 2024 Proj.: -3.5
- Money and credit (annual percent change):
- Broad money: 2019: 18.9; 2020: 24.0; 2021: 32.3; 2022: 20.1; 2023 Est.: …; 2024 Proj.: (blank)
- Bank credit to the economy 2/: 2019: 7.4; 2020: 4.3; 2021: 11.5; 2022: 42.5; 2023 Est.: 3.6; 2024 Proj.: (blank)
- Balance of payments:
- Exports (in millions of U.S. dollars): 2019: 5,764; 2020: 6,115; 2021: 7,695; 2022: 7,993; 2023 Est.: 8,306; 2024 Proj.: 8,660
- Exports in percent change: 2019: 8.9; 2020: 6.1; 2021: 25.8; 2022: 3.9; 2023 Est.: (blank); 2024 Proj.: (blank)
- Imports (in millions of U.S. dollars): 2019: 6,621; 2020: 6,092; 2021: 6,829; 2022: 7,755; 2023 Est.: 7,661; 2024 Proj.: (blank)
- Imports in percent change: 2019: -4.1; 2020: -8.0; 2021: 12.1; 2022: 13.6; 2023 Est.: -1.2; 2024 Proj.: 8.4
- Current account balance (in millions of U.S. dollars): 2019: -1,711; 2020: -953; 2021: -107; 2022: -912; 2023 Est.: -368; 2024 Proj.: -863
- Current account balance in percent of GDP: 2019: -9.1; 2020: -5.1; 2021: -0.6; 2022: -6.0; 2023 Est.: -2.6; 2024 Proj.: -6.2
- Gross official reserves (in millions of U.S. dollars) 3/: 2019: 998; 2020: 1,320; 2021: 1,267; 2022: 1,101; 2023 Est.: 1,092; 2024 Proj.: 1,457
- In months of prospective goods and services imports: 2019: 1.8; 2020: 2.2; 2021: 1.9; 2022: 1.6; 2023 Est.: 1.4; 2024 Proj.: 1.7
- Exchange rate:
- Official exchange rate (kip per U.S. dollar; end-of-period): 2019: 8,869; 2020: 9,285; 2021: 11,166; 2022: (blank); 2023 Est.: (blank); 2024 Proj.: (blank)
- Real effective exchange rate (2010=100): 2019: 119; 2020: 120; 2021: 112; 2022: (blank); 2023 Est.: (blank); 2024 Proj.: (blank)
- Nominal GDP:
- In billions of kip: 2019: 163,080; 2020: 167,669; 2021: 180,751; 2022: 217,350; 2023 Est.: 262,354; 2024 Proj.: 282,365
IMF Executive Board Concludes 2023 Article IV Consultation with Lao People’s Democratic Republic, Press Release No. 23/166 (May 22, 2023).