Press Release No. 95/6

The International Monetary Fund (IMF) today approved the second annual loan under the enhanced structural adjustment facility (ESAF)¹ for the Lao People's Democratic Republic in an amount equivalent to SDR 11.73 million (about US$17 million) to support the Government's economic reforms over the next 12 months. The loan will be disbursed in two equal semiannual installments, the first of which is available on January 31.

Background

Measures undertaken since the start of the ESAF program have yielded important initial successes in macroeconomic stabilization and structural reform. In 1994, macroeconomic performance remained broadly favorable: economic growth accelerated to 8.4 percent and although inflation, at 6.8 percent, was slightly higher than envisaged, the increase was mainly attributable to a weak harvest in 1993. The balance of payments weakened, however, in response to import demand pressures fueled by excess liquidity. Structural reforms-- including bank recapitalization, liberalizing external current account transactions, and strengthening the legal framework for private sector activity--gathered pace during the second half of 1994.

Medium-Term Strategy and the 1995 Program

The Government's medium-term economic program seeks real economic growth of 7.0 percent through 1996; a reduction in the annual rate of inflation to 4.5 percent in 1996; and a further narrowing of the external current account deficit.

The macroeconomic objectives for 1995 are to sustain real GDP growth of 7 percent; reduce inflation further to 5 percent; contain the external current account deficit (excluding official transfers) to about 12 percent of GDP; and to achieve an overall balance of payments surplus sufficient to increase gross official reserves to a level equivalent to about 2 1/2 months of imports by the end of the year, from 1 1/2 months at the end of 1994.

To these ends, fiscal policy will be tightened, while providing adequate resources for improving the social sectors and infrastructure. The authorities intend to gear monetary policy to containing inflation and maintaining external viability.

Structural Policies

As part of its strategy of promoting private sector activity, the Government intends to continue privatizing public enterprises, and to streamline the civil service by reducing staffing and enhancing incentives. The program also aims to achieve a durable improvement in the viability and efficiency of financial institutions, and to make significant progress in external sector reform by introducing a simplified tariff structure. In the area of institution building, the authorities intend to strengthen fiscal management and the legal framework, and to improve macroeconomic statistics.

Addressing Social Costs

The adjustment program undertaken by the Lao P.D.R. has already had a positive effect on poverty alleviation by facilitating growth and an attendant increase in employment opportunities. Looking ahead, the most effective means of reducing poverty lies in establishing an environment that is conducive to sustained economic growth and living standards. These efforts will be supplemented by the improved provision of essential social and economic infrastructure to enable the poor to strengthen their income earning potential.

The Challenge Ahead

The prospects for the medium and long term remain favorable provided the authorities adhere to their present policy framework, and that strong donor support continues.

Lao P.D.R. joined the IMF on July 5, 1961, and its quota² is SDR 39.1 million (about US$ 58 million). Lao P.D.R.'s outstanding use of IMF credit currently totals SDR 32 million (about US$ 47 million).

Lao P.D.R.: Selected Economic Indicators   1992 1993 1994* 1995** 1996**   (percent change) Real economic growth 7.0 6.1 8.4 7.0 7.0 Consumer price inflation (annual average) 9.8 6.3 6.7 5.0 4.5     (percent of GDP) External current account balance, excluding official transfers (deficit –) –8.8 –9.4 –12.7 –12.1 –12.0 Overall fiscal balance, excluding grants (deficit –) –9.9 –7.8 –11.0 –9.5 –9.1 Sources: Lao P.D.R. authorities; and IMF staff estimates. *Estimate. **Program. ***Projected.   1. The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent, and are repayable over 10 years, with a 5 1/2-year grace period. 2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.