Information about Asia and the Pacific Asia y el Pacífico
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Lao People's Democratic Republic

Author(s):
International Monetary Fund
Published Date:
September 1998
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I. introduction and overview

1. Economic reforms in the Lao P.D.R. that started in 1986, were supported by Fund arrangements in the period 1989-97. During those years, the economy grew annually at 5 to 8 percent and through prudent macroeconomic policies, the government managed to achieve broadly stable macroeconomic conditions. Meanwhile, structural reforms took shape, so that market processes are now at work in most segments of the economy. However, in 1997 economic conditions deteriorated and progress in structural reform slowed significantly.

2. This report briefly discusses major developments in 1997 and updates the statistical tables included in last year’s report on recent economic developments.1

  • Chapter II gives an overview of developments in the real sector. It notes that real GDP growth in 1997 remained high, at 6½ percent, despite some negative impact of the East Asian crisis, and that inflation accelerated to 26 percent by the end of the year.

  • Chapter III discusses fiscal developments in 1996/97 and the first months of 1997/98.2 Revenue performance in 1996/97 was weaker than expected and, therefore, the contribution of government savings to national savings was not as high as expected. The 1997/98 budget is also coping with revenue shortfalls.

  • Chapter IV discusses developments in privatization and public enterprise management in 1997. With the privatization program coming to an end, the government’s attention is shifting to the commercialization of the “strategic” state-owned enterprises (SOEs).

  • Chapter V deals with developments in the monetary and financial sector. It discusses how the lack of monetary policy actions by the Bank of the Lao P.D.R. (BOL) in 1997 contributed to the depreciation of the kip against the U.S. dollar and the Thai baht. Developments in the financial sector are also dominated by emerging signs that most banks, including all the state commercial banks (SCBs), are insolvent. The chapter briefly discusses the initiatives currently taken to modernize the banking sector.

  • Chapter VI presents external sector developments in 1997. The exchange rate of the kip against the U.S. dollar depreciated substantially. The external current account deficit narrowed marginally to 16 percent of GDP, with a decline in timber exports offset by lower capital goods imports, linked to hydropower investments. International reserves dropped sharply on account of capital flight.

II. Real Sector

A. OVERVIEW

3. Output growth, at 6½ percent, remained substantial in 1997, but inflation accelerated to 26 percent (12-month rate, year-end). While the economy was affected by the turmoil in the region, in particular the slowdown in economic activity in Thailand, strong growth of the still dominant agriculture sector mitigated some effects of the crisis (Chart 2 and Tables 2 and 3). Growth in the agriculture sector was estimated at 5¾ percent, 3 percent higher than in 1996, reflecting a favorable rice crop. The growth in the industrial sector slowed to 6½ percent, down from 17¼ percent in 1996, as a result of the impact of the regional crisis. The service sector enjoyed buoyant growth of an estimated 10 percent. Inflation accelerated during the second half of 1997, reflecting the depreciation of the kip against the U.S. dollar and loose monetary conditions.

CHART 1LAO P.D.R.: Revenue Collection of Major Tax Categories, First Six Months of 1997/98

(In Percent of Revised Budget)

Sources: Data provided by the Lao authorities; and staff estimates.

CHART 2LAO P.D.R.: REAL GDP AND MAIN ECONOMIC SECTORS, 1993-97

Source: Data provided by the Lao authorities; and staff estimates.

Table 1.Lao P.D.R.: Selected Economic and Financial Indicators, 1993–97

Nominal GDP (1996): $1,846 million

Population (1995): 4.8 million

GNP per capita (1995): $374

Fund Quota: SDR 39.1 million

19931994199519961997
Growth (percent change)
Real GDP5.98.17.06.86.5
Prices (percent change)
Consumer prices (annual average)6.36.819.413.019.3
Government budget (percent of GDP) 1/
Revenue11.812.312.213.011.4
Expenditure17.923.821.922.121.6
Current account balance (excluding grants)0.60.41.42.81.8
Overall balance
Excluding grants-6.1-11.5-9.7-9.1-10.1
Including grants-4.4-5.2-4.2-5.6-6.6
Domestic financing1.50.5-0.4-1.10.9
Foreign financing2.94.74.66.75.7
Money and credit
(percent change, end of period)
Broad money64.631.916.426.764.9
Domestic Credit33.272.522.0-4.9137.3
Interest rates (in percent; end of period) 2/
On one-year deposits12121616½17½
On short-term loans262423-2823-2818-25
External trade (percent change)
Exports (value in US$)81.424.94.22.6-1.4
Imports (value in US$)62.730.64.417.1-6.0
Balance of payments (percent of GDP)
External current account balance
Including official transfers-3.1-6.3-6.9-12.2-10.6
Excluding official transfers-10.9-14.4-13.0-16.6-16.2
Overall balance (in ma of US$)11-111569-31
Gross foreign reserves
In millions of U.S. dollars151158191279220
Of which:
Gross official reserves636193167136
In months of total imports, c.i.f.1.81.31.92.92.5
External debt (in percent)
Ratio of debt to GDP 3/36.038.237.743.555.0
Debt-service ratio 4/4.03.35.75.38.9
Exchange rate
Kip per U.S. dollar (end of period) 5/
Official7177199259542,152
Parallel market7237309409752,205
Sources: Data provided by the Lao authorities; and staff estimates and projections.

Data are on a fiscal year basis (October-September).

Lending rates were liberalized in July 1995 and deposit rates in January 1996. The rates reported here are those quoted by the BCEL, the largest commercial bank.

Excludes debt to nonconvertible area; includes debt to the Fund (SAF and ESAF).

As a ratio of exports of goods and nonfactor services.

Average of buying and selling rate.

Sources: Data provided by the Lao authorities; and staff estimates and projections.

Data are on a fiscal year basis (October-September).

Lending rates were liberalized in July 1995 and deposit rates in January 1996. The rates reported here are those quoted by the BCEL, the largest commercial bank.

Excludes debt to nonconvertible area; includes debt to the Fund (SAF and ESAF).

As a ratio of exports of goods and nonfactor services.

Average of buying and selling rate.

Table 2.Lao P.D.R.: Real GDP Growth, 1993-97(In percent)
Est.
19931994199519961997
Agriculture2.78.33.12.85.8
Crops-11.012.7-2.52.911.5
Livestock and fishery4.24.33.72.82.4
Forestry183.74.028.22.0-4.9
Industry10.310.713.117.39.8
Mining and quarrying36.530.4-3.761.252.1
Manufacturing7.77.017.718.17.0
Construction16.117.26.812.33.0
Electricity, gas, and water21.429.0-8.815.0-2.0
Services7.75.510.28.510.0
Transportation, storage, and communications3.14.318.210.110.2
Wholesale and retail trade18.57.99.311.29.8
Banking, insurance, and real estate13.28.242.0-2.730.9
Ownership of dwellings8.08.63.46.21.5
Public wage bill-0.2-6.6-4.50.41.1
Nonprofit institutions-9.8-3.82.47.916.0
Hotels and restaurants14.853.635.021.323.5
Other3.53.015.411.817.2
GDP at factor cost5.28.07.06.97.0
Import duties52.813.225.02.9-13.0
GDP at market prices5.98.17.06.96.5
Source: Data provided by the Lao authorities; and staff estimates.
Source: Data provided by the Lao authorities; and staff estimates.
Table 3.Lao P.D.R.: GDP by Industrial Origin, 1993–97(In billions of kip, at 1990 constant market prices)
Est.
19931994199519961997
Agriculture406.2439.9453.7466.2493.2
Crops196.7221.6216.0222.3248.0
Livestock and fishery165.5172.6179.0183.9188.3
Forestry44.045.859.059.856.9
Industry125.3138.6156.8183.9195.7
Mining and quarrying1.31.71.72.74.2
Manufacturing92.498.8116.2137.2146.9
Construction22.125.927.731.132.0
Electricity, gas, and water9.512.311.212.812.6
Services175.6185.4204.3221.6243.9
Transportation, storage and communication35.436.943.648.052.9
Wholesale and retail trade58.663.269.076.784.3
Banking, insurance, and real estate7.88.512.011.715.3
Ownership of dwellings25.327.528.430.130.6
Public wage bill31.028.927.627.728.0
Nonprofit institutions10.510.19.910.612.4
Hotels and restaurants6.09.212415.018.6
Other1.11.11.31.41.8
GDP at factor cost707.1764.0814.9871.8932.9
Import duties14.716.720.821.418.6
GDP at market prices721.8780.7835.7893.2951.5
Memorandum items:
Nominal GDP at market prices9511,1081,4191,7262,173
Percentage growth12.616.528.120.625.9
Sources: Data provided by the Lao authorities; and staff estimates.
Sources: Data provided by the Lao authorities; and staff estimates.

B. DEVELOPMENTS BY MAJOR SECTORS

4. Agriculture. The sector represents over 50 percent of GDP, and apart from forestry is still predominantly subsistent in nature. Crop production increased 11½ percent over 1996, when floods had severely affected rice output, supported by improved irrigation, and more intensive use of plowing machines and fertilizers (Table 4). Output of cash crops, including coffee, sesame seeds, and tobacco, has continued to increase, mainly for export to neighboring countries. Looking ahead, the government aims to achieve self-reliance in rice by the year 2000 and has started a large irrigation program (Box 1).

Table 4.Lao P.D.R.: Output of Major Commodities, 1993-97
Est.
Item Unit19931994199519961997
Agriculture
Paddy’000 tons1,2511,5771,4181,4141,660
Corn’000 tons4856487678
Sweet potatoes and cassava’000 tons113160999294
Coffee’000 tons8991012
Tobacco’000 tons2932272628
Livestock
Buffalo’000 tons4445464747
Cattle’000 tons3436383940
Pigs’000 tons7678818385
Poultry’000 tons1415161617
Forestry
Logs’000 m3480500819659560
Industry
Tintons504810636736665
Gypsum’000 tons130131124113151
Manufacturing
Hydropowermillion khw9191,1971,0851,2481,219
Beer’000 hectoliter92102151240286
Soft drinks’000 hectoliter7692105108122
Cigarettesmillion packs3747434950
Agricultural tools’000 units54433
Corrugated iron sheetmillion sheets11122
Detergenttons400700877913870
Nailstons1355661544750
Oxygen’000 bottles12.715.017.324.024.0
Vaccinesmillion ampoules65767
Electric cord’000 m3661,7982,1922,4413,100
Plastic productstons2814605002,9403,568
Salt’000 tons9.510.010.613.815.6
Wood furnituremillion kip6,4576,5006,6227,2107,800
Rattan furnituremillion kip105110133175148
Garmentsmillion pieces911181921
Sugartons00147189400
Tobaccotons1,5409108131,2191,560
Plywoodmill, sheets12222
Cement1,000 tons07597884
Bricksmillion pieces5255565769
Wood1,000 meters94271289231255
Ventilators1,000 units0243202543420
Tissue paper1,000 meters300350365
Sources: Data provided by the Lao authorities; and staff estimates.
Sources: Data provided by the Lao authorities; and staff estimates.

5. Logging. Responding to reduced demand from Thailand, in the wake of the financial crisis, less timber was harvested in 1996/97 than planned (560,000 cubic meters, compared to the target of 626,000 cubic meters). Profitability of the industry was further adversely affected by a decline in world timber prices, accentuated in the second half of the year when Indonesia reduced its prices substantially. Consistent with the government’s medium-term strategy of keeping the annual logging quota below a sustainable pace of 500,000 cubic meters, the harvesting plan for 1997/98 aims to clear only 464,000 cubic meters, one third from the Nam Theun 2 hydropower site.

6. The management and harvesting plans for all sites are prepared by the Ministry of Agriculture, Department of Forestry. Since 1997, implementation has been brought under the control of the provincial authorities. Most of the logging is done by three state-owned enterprises under the control of the Ministry of Defense. Further innovations, however, in the government’s forestry policy include the intention to draft management plans for each individual logging site (at this time, there are only management plans for the production in each province) and to open the logging market for other companies. The government is in the preparatory stages of setting up a joint venture with a Malaysian company, to start logging in 1999.

Box 1 -Financial Implications of the Irrigation System

Faced with substantial rice supply problems in 1997, the government of the Lao P.D.R. started a project to increase rice production by enlarging the irrigated rice-growing areas from 22,000 ha in early 1997 to 100,000 ha by 2000. Such output would make the Lao P.D.R. self-sufficient in terms of rice production. The government financed the first phase, implemented in 1997, through the BOL. The investments for 1998/99 and 1999/2000 are to be included in the PIP and, thus, be financed directly through the budget.

The financing of the first phase was spread over fiscal years 1996/97 and 1997/98. Part of the financing was done directly in dollars (purchases of equipment from abroad), while the installation was financed in local currency. Based on the BOL accounts, the following reconstruction of the flows involved can be provided:

Buying pumps abroadInstallation
FY 1996/97$12.4 million
FY 1997/98$12.1 millionKN 26 billion
(Oct - Dec)
Total$24.5 millionKN 26 billion

Converted at the exchange rate at the time of the transactions, the total cost in local currency is estimated at KN 65 billion.

The purchase of the equipment abroad was paid directly by the BOL, in dollars, from its international reserves. The kip-part of the operation (to finance the installation and the power lines from Vientiane) took the form of loans from the BOL to the individual farmers. The BOL classified these loans partly as lending to the SOE’s, partly as lending to the private sector. It is the BOL’s intention to take these loans off its books by selling them to the commercial banks at a later stage. Agreements are being worked out whereby the farmers, directly or through a state agency, will repay the government. No part of this operation had entered the government budget.

To enhance transparency, the staff has brought these extrabudgetary expenses into the fiscal accounts and shown them in the monetary accounts as claims on the government, as indicated in the table below. Thus, both the 1996/97 and 1997/98 capital expenditure outturns were revised. The impact for 1996/97 is an increase in the capital budget (and the overall deficit) of about 1 percent of GDP and for 1997/98 an increase of 1½ percent of GDP. In the monetary survey, the reduction in credit to the nongovernment sector is offset by an increase in credit to the government.

Fiscal accounts before and after inclusion of irrigation financing(in percent of GDP)
1996/971997/98
withoutwithwithoutwith
Capital and onlending11.011.912.614.1
Overall deficit (excl. grants)-9.2-10.2-10.0-11.4
Monetary accounts at end-1997 before and after reclassification of irrigation financing(KN billions)
beforeafter
Net credit to the government-4422
Credit to the nongovernment sector399334

7. Industry. The share of industry (mining, manufacturing, construction and electricity) in GDP was about 20 percent. Industrial output grew by only 6½ percent in 1997, affected by the Thai crisis and difficulties in negotiating preferential trading terms with the United States and the European Union. Manufacturing, accounting for 75 percent of the total, grew more slowly than in 1996 (7 percent compared with 18 percent). Growth of output of garments and wooden products was sluggish, offsetting a major expansion of beer production. Garment exports rebounded only marginally and one garment factory was closed, following the closing down of 10 enterprises the year before when the Generalized System of Preference (GSP) status was withdrawn. Though there had been high hopes of the United States according the Lao P.D.R. Most Favored Nation status, negotiations were not concluded and GSP status was restored by the European Union only in October 1997 (under the new arrangement, the Lao P.D.R. received a one-year derogation from the local content regulation, to allow all ASEAN inputs to count as local value-added). Two new factories are planned to open in 1998.

8. Long periods of drought resulted in a general shortage of water during most of 1997 and lower electricity production. In April 1998, a new hydropower dam (Theun Hinboun) came into operation, more than doubling the country’s electricity capacity and contributing to an expected increase in production of 1582 GWH in 1998. Activity in the construction sector slowed down in the second half of the year, when several Asian investors decided to delay projects.

9. Services. Representing 25 percent of GDP, growth in the services sector in 1997 continued to be strong with both wholesale and retail trade and transportation and communication recording growth rates of about 10 percent. New roads to the suburbs of the capital contributed to higher levels of transportation. Tourism also was a strong performer during 1997, with hotel and restaurant turnover increasing by 23 percent. However, the number of tourists dropped in early 1998, reflecting a decrease in visitors from Asian countries and recent problems encountered by Lao Aviation. The largest airplane in its fleet has been grounded at Bangkok airport because of lease payment arrears, disturbing the daily flight schedule to and from Bangkok.

C. PRICES, EMPLOYMENT AND WAGES

10. Inflation increased from about 13 percent in December 1996 to over 25 percent one year later and to 45 percent by March 1998 (Table 5). Sharp increases in food prices, especially rice as a result of shortages in the wake of the 1996 floods, began to push up inflation during the second quarter in the southern provinces, spreading to other cities during the second half of the year. Shortages were also accentuated because Thai traders started buying rice paddy in Lao cities, preventing prices from falling after the new crop became available. Starting in July, a sharper rise in consumer prices also reflected higher import prices following the depreciation of kip against the dollar—nonfood prices rose by 23 percent between August 1997 and January 1998. The pressure on prices continued in early 1998, affected by the depreciation of the kip against Thai baht.

Table 5.Lao P.D.R.: Consumer Price Indices, 1993–98
1993199419951996199619971998
BOL Index (December 1987 = 100)NSC Index (December 1995 = 100)
January284.4305.6329.1417.9101.4113.0148.3
February284.9305.8331.9428.4103.3115.7167.3
March286.9313.7346.8433.1105.6118.7172.9
April295.5319.1366.1438.3107.5120.7
May299.3321.1388.9442.4109.5127.3
June305.2326.4388.4433.8110.0127.5
July317.7334.0399.3444.9111.2133.0
August324.8341.1425.2444.6111.3139.9
September327.9347.2441.1454.1113.9145.4
October314.2341.3433.4457.9112.5142.7
November311.7333.8423.4453.0111.8139.9
December308.8329.7414.3444.5112.8142.8
Period average305.9326.6390.6441.1109.2130.6
(Twelve-month percentage change)
January6.47.57.926.711.431.3
February6.47.38.529.112.044.6
March6.19.310.525.012.445.6
April7.68.014.819.712.3
May5.77.321.113.716.2
June5.27.019.013.315.9
July4.45.119.611.419.6
August5.25.024.74.625.7
September6.55.927.12.927.7
October6.75.326.95.726.9
November7.07.126.97.025.1
December8.96.825.77.312.826.6
Period average6.36.819.413.019.3
Source: Data provided by the Lao authorities.
Source: Data provided by the Lao authorities.

11. Wages increased significantly in 1997. The average monthly wage for civil servants was KN 45,000 at the end of the year, following a salary increase of 8 percent on average (KN 3,300 per month was awarded across the board), given at the beginning of the 1997/98 fiscal year (Table 10). Average wages in the private sector were unofficially reported to have increased by about 35 percent in 1997. Moreover, the minimum wage for civil servants and workers in production, business and service sectors was increased by 40 percent in October 1997 (from 26,000 kip to 36,400 kip per month). There are no official statistics on unemployment and private sector wages in the Lao P.D.R—according to a census carried out by the National Statistical Center, in 1995 the unemployment rate was 2.4 percent and no further information has been made available.

III. Public Finance

A. Overview

12. Whereas the 1995/96 budget outcome was generally better than expected (the current surplus reached 2¾ percent of GDP, ½ percent more than planned and the overall deficit was, at 9 percent, marginally lower than budgeted), the fiscal position worsened in 1996/97, and the outcome of the first six months of 1997/98 again indicates that it will be problematic to achieve the budget targets (Tables 7, 8 and 9). Thus, fiscal consolidation has not made substantial progress in the last and current fiscal year.

Table 6a.Lao P.D.R.: Wages by Economic Sector, 1992, 1994(In kips per month)
19921994Average annual increase
Agriculture33,72542,70712.5
Mining37,691101,59164.2
Electric gas and water supply50,593
Manufacture26,03151,17740.2
Public service27,83041,91122.7
Construction43,16352,85110.7
Trade33,98750,07421.4
Hotels, Restaurants24,62749,82242.2
Communication and transport35,60049,36217.8
Finance29,46243,16921.0
Business management31,83949,82525.1
Community services21,13741,42540.0
Source: Data provided by Ministry of Labor.
Source: Data provided by Ministry of Labor.
Table 6b.Lao P.D.R.: Wages by Occupation, 1994(In kips per month)
1994
Managers69,354
Professionals50,280
Technicians42,706
Clerks44,482
Service workers57,491
Skilled agricultural and fishery workers44,472
Craft and related trade workers49,763
Plant and machine operators43,610
Elementary occupations45,977
Armed forces42,164
Other38,060
Source: Data provided by Ministry of Labor.
Source: Data provided by Ministry of Labor.
Table 7.Lao P.D.R.: General Government Operations, 1993/94-1997/98
Budget 1/
1993/941994/951995/961996/971997/98
(In billions of kip)
Revenue131.6161.7212.4228.3360.8
Tax106.7134.7176.0189.6287.4
Nonax24.927.036.438.773.4
Grants67.372.757.763.999.2
Expenditure 2/254.7289.8360.7430.2685.4
Current expenditure127.1142.7166.0192.2283.5
Wages and salaries56.168.378.591.8113.7
Materials and supplies43.242.752.056.970.5
Transfers15.418.623.426.069.2
Interest payments8.610.910.416.329.0
Severance payments3.82.31.81.21.0
Capital expenditure and amortization127.6147.1194.7238.0402.0
Capital expenditure and on-lending131.8150.9199.7246.8425.9
Overall balance 3/-55.8-55.4-90.6-132.0-225.4
Total financing55.855.490.6132.0225.4
Domestic (net)5.2-5.0-18.618.5-2.3
Bank-1.8-10.2-15.2-13.7-7.0
Nonbank0.03.0-7.3-15.71.3
Asset sales7.02.24.047.83.4
Foreign (net)50.660.4109.2113.5227.7
(In percent of GDP)
Revenue12.312.213.011.412.7
Tax10.010.210.89.510.1
Nontax2.32.02.21.92.6
Expenditure23.821.922.121.624.1
Current expenditure11.910.810.29.610.0
Of which: Wages and salaries5.25.24.84.64.0
Capital expenditure and amortization11.911.111.911.914.1
Current balance 4/0.41.42.81.82.7
Overall balance
Including grants-5.2-4.2-5.6-6.6-7.9
Excluding grants-11.5-9.7-9.1-10.1-11.4
Domestic fit Slicing 5/0.5-0.4-1.10.9-0.1
Foreign financing4.74.66.75.78.0
Memorandum item:
GDP fiscal year (in billions of kip)1,0691,3231,6311,9942,841
Sources: Data provided by the Lao authorities; and staff estimates.

Includes revisions made in March 1998.

Excludes KN 14 billion of government bonds issued to recapitalize the state-owned commercial banks in August-September 1994.

Including grants.

Excluding grants.

Comprising bank and nonbank financing, and receipts from government asset sales.

Sources: Data provided by the Lao authorities; and staff estimates.

Includes revisions made in March 1998.

Excludes KN 14 billion of government bonds issued to recapitalize the state-owned commercial banks in August-September 1994.

Including grants.

Excluding grants.

Comprising bank and nonbank financing, and receipts from government asset sales.

Table 8.Lao P.D.R.: General Government Revenue, 1993/94-1997/98(In billions of kip)
Budget 1/
1993/941994/951995/961996/971997/98
Tax revenue106.7134.7176.0189.6287.4
Profits tax11.517.320.723.434.0
Income tax7.210.713.511.516.9
Agricultural land tax2.21.62.12.55.3
Business licenses0.10.20.10.20.6
Turnover tax19.927.633.940.061.0
Tax on foreign trade33.838.746.753.381.2
Import duties25.733.840.647.068.0
Export duties8.14.96.06.313.2
Excise tax5.15.515.517.929.0
Timber royalties21.026.734.631.742.0
Hydro royalties0.00.00.00.04.4
Other6.06.58.89.113.0
Nontax revenue24.927.036.438.773.4
Payment for depreciation/dividend transfers3.03.05.29.414.0
Other21.824.031.229.359.4
Leasing income4.65.03.84.88.0
Concession0.40.40.40.20.4
Overflight7.27.99.810.024.2
Interest7.86.810.58.320.8
Other1.83.96.75.96.1
Total revenue131.6161.7212.4228.3360.8
Sources: Data provided by the Lao authorities; and staff estimates.

Includes the revisions made in March 1998.

Sources: Data provided by the Lao authorities; and staff estimates.

Includes the revisions made in March 1998.

Table 9.Lao P.D.R.: General Government Expenditure, 1996/97 and 1997/98(In billions of kip)
1996/971997/98 1/
TotalCurrentCapitalTotalCurrentCapital
Total430.2192.2238.0541.3241.5299.8
Ministries:
Public health8.84.14.717.34.113.2
Social welfare19.47.212.214.96.18.8
Education31.04.626.437.48.429.0
Information and culture7.63.83.86.22.33.9
Agriculture and forestry10.70.99.817.51.416.1
Industry43.60.243.445.210.135.1
Communication, transport and post66.90.566.4108.55.0103.5
Commerce0.20.10.10.40.30.1
Interior15.312.72.617.314.33.0
Defense49.247.41.853.551.42.1
Justice0.40.30.10.50.50.0
Finance1.41.30.11.91.80.1
Administration24.520.04.517.916.31.6
Foreign affairs4.94.60.37.77.50.2
Committee for Planning and Coordination0.30.30.00.40.40.0
Provinces:
Phongsali7.32.35.07.22.44.8
Louangnamtha6.72.14.66.82.44.4
Oudomxia4.32.32.06.32.93.4
Bokeo3.51.71.86.92.24.7
Louang Prabang8.74.64.111.55.46.1
Houaphan5.02.82.212.13.38.8
Xaignabouli6.43.92.510.54.46.1
Xiang Khoang4.22.71.56.63.53.1
Vientiane Prefecture21.07.014.013.68.05.6
Vientiane Province6.24.31.98.64.64.0
Bolikhamxai4.22.51.75.83.12.7
Khammouan5.53.71.89.24.44.8
Savannakhet13.07.75.315.08.76.3
Salavan4.52.71.86.43.13.3
Xekong4.01.62.45.22.03.2
Champassak10.47.62.815.18.17.0
Attapu2.81.41.44.32.02.3
Xiasomboun Special Region2.91.41.54.01.52.5
Memorandum items:
(in percent of total)
Public health2.02.12.03.21.74.4
Social welfare4.53.75.12.82.52.9
Education7.22.411.16.93.59.7
Industry10.10.118.28.44.211.7
Defense and security15.031.31.813.127.21.7
Provinces27.932.024.628.629.727.8

Original budget.

Original budget.

B. 1996/97 BUDGET

13. Targets. The 1996/97 budget, presented in September 1996, aimed to raise the current surplus to 3½ percent of GDP and reduce the overall deficit (before grants) to below 8 percent of GDP, to enhance fiscal sustainability. Revenue at that time was targeted to increase by ½ percent of GDP on account of the full-year effects of tax measures taken in 1995/96 and the introduction of excise duties on electrical goods. Current expenditure would remain broadly unchanged at 10 percent of GDP. The wage bill would remain below 5 percent of GDP, notwithstanding a 12 percent increase in base salaries. The capital budget targeted a further increase in spending on social sectors, in line with the Public Expenditure Review (PER) recommendations. An increase in government deposits with the banking system was foreseen because foreign financing of the budget was expected to exceed the planned deficit and because of the planned sale of Lao Telecom.

14. Revenue fell 1½ percent of GDP short of its target for a number of reasons. The tax administration encountered staffing and equipment problems while implementing the more sophisticated rules under the new tax law, leading to a shortfall of profit and income tax receipts. Excise duties were lower than planned because of the delayed implementation of the measure to replace exceptional import tariffs (those above 40 percent) by an equivalent rise in excise duties.3 Import duties, although as expected in the GDP terms, could have been higher if appropriate valuation techniques had been applied.4 Timber royalties fell short of their target because sales to Thailand stalled in the last quarter of the fiscal year in the wake of the Thai crisis. In the nontax categories, shortfalls in leasing, overflight and interest receipts were largely offset by higher dividend payments. Given that several of these revenues are collected in U.S. dollars, this was still a disappointing result in light of the depreciation of the kip during the fiscal year. Leasing income was lower because several leases were not renewed and some companies facing financial difficulties obtained an exemption from lease payments. The shortfall in overflight receipts was related to the outdated and inaccurate equipment used to record overflying aircraft.

15. Current expenditure was slightly lower than budgeted in GDP terms, reflecting firm government control over spending in light of the unfavorable revenue developments. External interest payments remained low, because of the concessional nature of government debt. Domestic interest payments rose after the government agreed, in the course of the year, to bear the interest cost of securities issued by the BOL to absorb excess liquidity. The wage bill was marginally higher than originally planned because 900 new staff were hired during the second half of the year. These new staff were employed by the Ministries of the Interior, Justice and Foreign Affairs, respectively to strengthen the courts and the police force and to fill newly created ASEAN-related jobs (including for diplomatic representations in other ASEAN capital cities). Following the transfer of the personnel department to the party headquarters in December 1996, civil service reform slowed down markedly. No progress was made in standardizing hiring procedures. In addition, coordination problems emerged between hiring and departures as these issues were handled by different departments. At the end of 1996/97 there were 69,610 civil servants (Table 10).5

Table 10.Lao P.D.R.: Personnel and Salaries of Civil Servants, 1993/94-1997/98
1993/941994/951995/961996/971997/98
(In number of people)
Civil servants 1/73,73069,11568,10869,01372,670
(percentage change)-0.6-6.3-1.51.45.3
(In kip)
Monthly average of basic salaries per civil servant 2/34,42035,67236,50640,70345,078
(percentage change)83.23.62.311.510.7
Memorandum item:
Total wage bill 3/
(millions of kip)56,10268,31378,52489,470103,668
Sources: Data provided by the Lao authorities.

Data relate to beginning of fiscal year (October). Military personnel is excluded. Number for 1997/98 is target for the year. Actual number at the beginning of the year was 69,610.

Excludes bonuses and other compensations.

Includes wages, salaries, and other compensations of military and nonmilitary personnel.

Sources: Data provided by the Lao authorities.

Data relate to beginning of fiscal year (October). Military personnel is excluded. Number for 1997/98 is target for the year. Actual number at the beginning of the year was 69,610.

Excludes bonuses and other compensations.

Includes wages, salaries, and other compensations of military and nonmilitary personnel.

16. Capital expenditure was about 1 percent of GDP higher than projected, mainly on account of the extrabudgetary expenditures related to the building of irrigation systems. During the last quarter of the fiscal year, the BOL spent KN 18 billion on this operation on behalf of the government; these expenditures were included in the budget presentation to enhance fiscal transparency. In line with the World Bank recommendations in the PER, spending on education was increased to 3 percent of GDP and health to 1.8 percent of GDP. Spending on the economic sectors (infrastructure, transportation, agriculture) was slightly reduced to 9 percent of GDP.

17. The disappointing revenue outcome caused the current surplus to be only 1¾ percent of GDP, a deterioration compared with the previous year. The overall deficit (before grants) was 9¼ percent, more than 1½ percent worse than planned. This deficit was totally foreign-financed (grants and concessional loans). Thus, the receipt of KN 48 billion from the partial sale of Lao Telecom, although partly offset by the financing of irrigation equipment, allowed the government to increase its deposits with the banking system by KN 14 billion. Lao Telecom was the last large company on the government’s privatization list. The government also reduced its debt towards the nonbank sector by reimbursing a stock of older securities.

C. 1997/98 BUDGET

18. Targets. The government presented to the National Assembly, as part of the 1997/98 budget, a package of revenue enhancing measures to regain the grounds lost in 1996/97 and to increase reliance on domestic taxes, away from trade taxes. The budget was presented in the new budget nomenclature, a condition under the World Bank Structural Adjustment Credit (SAC III). This new nomenclature, specifying expenditure by ministry and for headquarters and provinces separately, will allow the government to monitor current and capital expenditure more closely. The budget targeted revenue at 13¾ percent of GDP, more than 2 percentage points higher than the 1996/97 outcome. This increase was to come from:

  • rationalizing income tax rates;

  • reducing turnover tax rates from four (3, 5, 10 and 15 percent) to two (7 and 10 percent);

  • imposing excise duties on those items that would go from the 15 to the 10 percent turnover tax rate, to make this part of the operation revenue-neutral;

  • increasing excise duties on petroleum products;

  • introducing a stamp duty; and

  • increasing land tax on commercial and residential land in urban areas.

Total expenditure was set to increase slightly to 21 percent of GDP. Current expenditure (10½ percent of GDP) would be affected by the inclusion, for the first time, of funds to finance the restructuring of the state-owned electricity and water companies, explicit interest subsidies for agricultural lending,6 the cost of ASEAN membership and a contingency for state commercial bank (SCB) restructuring. The budget also incorporated a 13 percent increase in the wage bill with the first 8 percent to be given at the beginning of the fiscal year and the remainder at the time of the introduction of new salary scales. Planned spending on defense and security was reduced as a share of total spending (by 2 percentage points). The capital budget was set at 10¾ percent of GDP, with a further increase in outlays for health and education. A larger proportion of the capital budget was allocated to the provinces as part of a policy of decentralization (4 percent more than in 1996/97). The overall deficit would be more than financed through grants and concessional loans, allowing a further build-up of government deposits at the banking system (2.3 percent of GDP). Part of these foreign inflows would be a disbursement by the World Bank under SAC III of $19.2 million.

19. Fiscal performance during the first six months has been disappointing, in particular on the revenue side, mainly because the package of revenue enhancing measures, proposed by the government to the National Assembly, was not approved. In addition, import duties suffered from lower-than-expected imports and from the use of outdated exchange rates, while low timber exports led to reduced timber royalties. Moreover, timber royalty rates were lowered in January 1998 in an attempt to improve the Lao P.D.R.’s competitive position. As a result, tax revenue, at 40 percent of the amended full-year target, was much lower than expected, despite the gains that should have been realized from the exchange rate depreciation and inflation. Nontax revenue, however, did benefit from the depreciation—at 61 percent of the full-year target, receipts were better than planned.

20. Concerned by the poor revenue performance, the government presented a new package of revenue measures to the National Assembly in March 1998, consisting of the original measures plus some additional actions to offset some of the losses due to the delays incurred. However, the package was still under consideration in late May and it is expected that there will be a revenue shortfall of about 1 percent of GDP in 1997/98.

21. Current and budgetary capital expenditure were broadly on track after six months, having been managed conservatively in light of the slow revenue developments. The first wage increase was given in the form of a “cost of living” adjustment, involving an across-the-board salary increase of KN 3,300 and an increase in transfers to spouses, children and retirees, bringing the total increase to KN 12 billion, on an annual basis (a 13 percent increase in the wage bill). Allocation of an additional KN 5 billion to the base salary bill (including cost of living adjustment) and KN 12 billion to function benefits has been held up pending the introduction of a more competitive wage structure. The new structure has yet to be approved by the government and some savings are expected this fiscal year.7 Adjustments in other current expenditure items were made to reflect the effect of the exchange rate depreciation (materials and supplies, restructuring of SOEs, and interest payments).

22. In light of the disappointing revenue developments, the government decided to cut non-priority capital expenditure. However, these cuts were more than offset by the inclusion of the spending on irrigation systems (with an impact of 1½ percent of GDP in 1997/98), leading to an estimated capital budget of over 14 percent of GDP (compared with the original target of 10¾ percent of GDP).

23. As a result of these developments, the current surplus will be smaller than budgeted (3 percent of GDP) and the overall deficit much wider (over 11 percent of GDP). Mainly as the outcome of the financing of the irrigation systems, there will be no room for further building up government deposits with the banks.

IV. Privatization and commercialization of State-owned enterprises

A. Privatization

24. Following the sale of Lao Telecom in late 1996 and the decision to retain Lao Tobacco in the government portfolio for the time being, the privatization momentum has dissipated. The remaining nonstrategic SOEs to be divested were all small in size and did not employ a sizable number of staff. During 1997, the government divested 13 enterprises, for a total value of $3 million (Annex II), through management buyouts, divestment to provincial authorities and a few liquidations. Lao Tobacco was retained in government hands because no acceptable price and terms could be obtained.

25. The government recognizes that the remaining 32 nonstrategic enterprises, for a total value of about $3 million, and employing about 1,100 workers, will be hard to sell since their assets are limited and several of the companies are not viable. All enterprises have been advertized for sale, but the government will soon start liquidating several of them, with the aim to divest them all by the end of 1998. This will be the end of one of the most successful parts of the Lao P.D.R.’s structural reforms thus far. In the early 1990s, the Lao government controlled more than 800 enterprises. The remaining 33 “strategic companies” are in the process of being commercialized so that they can compete with the private sector on equal terms and give impetus to private sector development.

B. Commercialization

26. In 1997, the government’s attention shifted from the privatization program to the commercialization of the 33 strategic enterprises (32 original ones and Lao Tobacco) that will remain in government hands. The value of these enterprises is estimated at KN 245 billion and they employ about 11,000 staff. Of these enterprises, eight are commercial banks and the remainder are utility companies and the three holding companies primarily engaged in logging. In 1996, the government started a pilot project under which five SOEs would be commercialized (Electricité du Laos (EDL), Nam Papa (water), Postes du Laos, Industrie Pharmaceutique No. 2, and Imprimérie Nationale (printing)). The commercialization program consists of (i) converting and registering them into public joint-stock companies; (ii) appointing Boards of Directors; and (iii) agreeing on performance plans setting out technical, commercial and financial objectives and specifying performance improvement criteria.

27. Despite some delays, significant progress has been made. For EDL, all three parts of the restructuring operation were finished in early January 1998. Meanwhile, the government has started a financial restructuring of the company (as envisaged in the 1997/98 budget). EDL is not paying dividends toward this year’s budget and will undergo a debt rescheduling operation. Boards have also been appointed for Nam Papa, the Post company and Lao Tobacco. The two other parts of the program (legal transformation and performance contract) are expected to be in place for these companies by mid-year. A similar timetable is envisaged for the printing and the pharmaceutical company. The government aims to finish similar operations for most of the other nonbank enterprises before the end of the year.8 Simplification of the performance contracts, compared to the ones prepared for the pilot companies would expedite the operation. The largest stumbling block seems to have been the appointment of boards of directors because of shortage of qualified people. Financial restructuring will be necessary for several of these SOEs. In this regard, the government has undertaken audits of the three holding companies engaged in logging, contemplating a reorganization of these enterprises because they are involved in too wide a variety of social and economic activities.

V. monetary policy and financial system

A. Developments in Money and Credit

28. Monetary developments in 1997 took place against a backdrop of the unfolding crisis in Thailand, Lao P.D.R.’s major trading partner. Though the importance of the depreciation of the baht against the U.S. dollar should not be understated, monetary policy inaction contributed to the disappointing outcome. Particularly during the second half of the year, monetary policy was subordinated to other policy considerations.

29. During the first half of 1997, growth in the money supply was moderate (Tables 11 and 12). Reserve money grew by only 2 percent, which served to hold the growth in broad money to 13 percent, despite the valuation effects of a 12 percent depreciation of the kip in this period. However, the moderation was achieved partly through a $10 million drawdown of international reserves (partly the result of capital flight spurred by the crackdown in the parallel exchange market in May). Direct credit from the BOL, which represented about 13 percent of the stock of credit to the nonbank public at the beginning of the year, grew only slightly in the six months to June 1997. However, net domestic credit grew by 24 percent in the same period. While this increase included valuation effects, it also reflected the effects of the BOL’s decision to discontinue bank-by-bank credit ceilings at the beginning of the year.

Table 11.Lao P.D.R.: Monetary Survey, 1994-97
1994199519961997
MarchJuneSept.Dec.
(In billions of kip; end of period)
Net foreign assets5978156164163171253
Net domestic assets1071158994112144151
Domestic credit129157150176203267356
Net credit to government 1/131-43-39-36-2622
Credit to nongovernment sector 1/116157193214240293334
Public enterprises17283737437177
Private sector99129156177197222257
Other items (net)-22-42-60-82-91-123-205
Broad money166193245258276315404
Narrow money61677670777480
Currency outside banks39424345464853
Demand deposits23253325312627
Quasi-money105126169188199241325
Time and savings deposits46447082869097
Foreign currency deposits598299106113151228
(Annual increase in percent)
Domestic credit7322-552159137
Credit to nongovernment sector 2/553523-650-778-181151
Broad money32162721284565
Memorandum items:
Velocity of money (period average)807.97.87.2
Reserve money (in billions of kip)7484104105106110150
Money multiplier 3/2.223232.52.62.72.7
Sources: Data provided by the Lao authorities; and staff estimates.

Net credit to Government in 1994 included KN 14 billion of government bonds issued for recapitalization of state-owned commercial banks. Bad loans amounting to KN 14 billion were written off from the bank’s portfolios. Includes liabilities from borrowing under the structural adjustment facility and the enhanced structural adjustment facility.

Excluding bad loan write-off.

Broad money divided by reserve money.

Sources: Data provided by the Lao authorities; and staff estimates.

Net credit to Government in 1994 included KN 14 billion of government bonds issued for recapitalization of state-owned commercial banks. Bad loans amounting to KN 14 billion were written off from the bank’s portfolios. Includes liabilities from borrowing under the structural adjustment facility and the enhanced structural adjustment facility.

Excluding bad loan write-off.

Broad money divided by reserve money.

Table 12.Lao P.D.R.: Sources of Broad Money Growth, 1996-97(Increase as percent of previous period broad money)
19961997
MarchJuneSept.Dec.MarchJuneSept.Dec.
Broad money10.60.51.512.45.37.014.128.6
Narrow money1.2-1.0-0.34.0-2.32.7-1.11.9
Time and savings deposits2.04.14.21.84.81.61.42.2
Foreign currency deposits7.4-2.7-2.56.62.82.713.824.4
Contributions
Net foreign assets5.01.15.524.73.4-0.42.926.0
Net credit to government0.0-2.2-4.1-13.91.71.13.615.2
Net credit to nongovernment5.62.24.15.48.710.119.213.0
Other items (net)0.0-0.6-4.1-3.8-8.5-3.9-11.6-26.0
Sources: Data provided by the Lao authorities; and staff estimates.
Sources: Data provided by the Lao authorities; and staff estimates.

30. During the second half of the year, and into 1998, the situation deteriorated markedly, with expansionary policies being pursued in an environment where confidence in the currency had already been shaken. In the aftermath of the crackdown in the parallel market and the uncertainty brought about by the plummeting baht, there was a substantial expansion of direct credit from the BOL to finance the building of the irrigation system (KN 86 billion, about half of all the new credit extended between June 1997 and January 1998). The equivalent of $25 million of this credit was used directly for imports, and contributed to the $45 million decline in net foreign exchange reserves of the banking system registered during the year. The rest of these credits, around KN 26 billion, represented a direct infusion of cash into the economy. Between end-August 1997 and end-January 1998, currency in the hands of the public increased by 22 percent.

31. The resulting growth rate for broad money for 1997 was 64 percent. Abstracting from valuation effects, money grew by 23 percent during the year. Foreign currency deposits (expressed in U.S. dollars) dropped in the wake of the May crackdown and started to recover only during the last quarter of the year, to end near the level of 12 months earlier. Reserve money, less affected by the exchange rate, grew by 44 percent. Total credit, both from commercial banks and from the BOL, rose more rapidly than had been originally envisaged (Tables 15 and 16). Credit to the economy increased by approximately KN 130 billion (excluding the effects of devaluation on foreign currency loans) during the second half of the year alone.

B. Monetary Policy

32. Efforts to use monetary policy to maintain macroeconomic stability during 1997 were sporadic and generally ineffectual. At the beginning of the year, the BOL announced its intention to abandon the use of bank-by-bank credit ceilings because they were deemed inefficient. However, resort to moral suasion did not prove very effective. The use of indirect instruments—issuance of treasury and BOL bills—was discontinued around mid-year. The use of the reserve money programming framework was stopped early in the year, depriving the BOL of a basic framework to decide on the size of intervention needed to control liquidity. Inaction was fed by growing reluctance of the government to bear the cost of monetary interventions through either BOL or treasury bills and reluctance to increase the interest rates on either securities necessitated by the acceleration in inflation.

33. As a result of the government’s indecisiveness and easing of monetary conditions, interest rates on treasury bills went slightly down during the year and the stocks of outstanding treasury bills and BOL bills decreased. Maturing treasury bills that had been issued earlier added to the liquidity of the banking system during the second half of the year. Commercial bank interest rates remained broadly unchanged throughout the year, leading to real interest rates becoming significantly negative. This rigidity in interest rates was in part a result of high levels of kip liquidity in the system (Tables 13 and 14).

Table 13.Lao P.D.R.: Interest Rates, 1993-97(In percent; end of period)
Dec.JuneDec.
199319941995199619971997
Commercial Banks
Deposit Rates
Kip accounts
Demand000000
Savings12121616-16½1616
Time:
3months12-1512-13½16-16½16-16½16¼16¼
6months12-1612-1616-1716-1716¾16¾
12months12-1812-1616-1916-1917¼17¼
Baht accounts
Demand000000
Savings4-64-63¾-61½-6
Time:
3months5-85-85½-82-86
6months6-86-95¾-82¼-96
12months7-106½-106-102½-10
U.S. dollar accounts
Demand000000
Savings2-32-32-31½-3¼
Time:
3months2-42-43-42-4
6months2½-53-53¼-52½-54
12months2½-63¼-63¼-62½-65
Lending rates
Kip accounts
Agriculture & forestry7-147-137-2810-2517-1818-19
Industry & manufacturing201822-2824-2621-2520-25
Construction & transport20-2318-1923-2825-2622-2522-25
Commerce & services22-242225-2826-2723-2724-27
Baht accounts
Agriculture & forestry121212-1910-1914-15½13½-15
Industry & manufacturing151414-1914-1914-1714-17
Construction & transport181414-1914-1914-1714-17
Commerce & services181616-1916-1916-1716-17
U.S. dollar accounts
Agriculture & forestry888-148-1411-1211-12
Industry & manufacturing999-1410-1411-1411-14
Construction & transport999-1410-1411-1411-14
Commerce & services101010-1410-1413-1413-14
Bank of the Lao P.D.R.
Overdrafts243035353535
Required reserves1.51.51.51.51.5
Treasury bills26.223.523.419.1
Source: Data provided by the Lao authorities.

In June 1995, the maximum lending rate was abolished. The guidelines on minimum deposit rate were abolished in January 1996.

Source: Data provided by the Lao authorities.

In June 1995, the maximum lending rate was abolished. The guidelines on minimum deposit rate were abolished in January 1996.

Table 14.Lao P.D.R.: Treasury Bill Auctions, January 1996-February 1998
Auction DateMaturity DateAmount of Bids Received (Million KN)Amount Issued (Million KN)Range of Bids Offered (Percent)Range of Bids Accepted (Percent)Weighted AverageYield of Successful Bids (Percent)Bills Outstanding (Million KN)
01/11/9607/14/962,4501,50025-3025.0025.005,460
02/08/9608/11/961,9401,14023-2523.2523.906,400
02/29/9609/01/961,8001,50023-2823.0023.007,800
03/14/9609/15/961,7501,50023.5-24233$23.989,200
03/28/9609/29/961,6801,50022-27210022.009,000
04/18/9610/20/964,5404,60021-2421.00210013,450
05/23/9611/24/9618018022.5-2523.6123.6113,320
06/06/9608/12/9625025023.1-2723.1-2724.4013,570
06/27/9612/29/964,0704,07024.5-2624.5-2625.9316,140
07/11/9601/12/9781081025.5-2625.5-2625.9415,450
07/25/9601/26/97850850262626.0016,300
08/08/9602/09/971,0001,00025-2625-2625.7516,160
08/22/9602/23/971,8401,84025-2625-2625.9618,000
05/09/9603/09/971,9201,92025-2625-2625.9220,000
09/19/9604/23/972,5002,50023-2623-2625.5121,000
10/03/9606/04/972,5002,50024.5-2624.5-2625.4622,000
10/17/9604/20/972,0002,00024-2624-2625-1719,500
10/31/9605/04/971,5001,500262626.0021,000
11/14/9605/18/971,5001,50024.5-25.524.5-25.525.2622,500
11/28/9606/01/971,5001,500252525.0023,820
12/12/9606/15/971,5001,50024.25-252424.0025,070
12/26/9606/29/971,5001,50023.523.523.5022,500
01/09/9707/13/971,5001,50024-23.524-23.523.9023,190
01/23/9707/27/972,5002,50024-2524-2524.1221,690
02/06/9708/10/9795095024-24.524-24.524.3423,340
02/20/9708/24/973,0505,05024-24.524-24.524.4323,290
03/06/9709/07/972,5002,50024-24.524-24.524.4724,500
03/20/9709/21/973,7502,00024-24.524-24.524.1625,000
04/03/9710/05/973,7002,50023.5-2523.5-2424.9424,500
04/24/9710/26/976,0404,50023.5-25.523.5-2423.8827,000
05/08/9711/09/974,4802,50023.75-24.123.75-23.923.8828,000
05/22/9711/23/974,8802,00023-24.523-23.523.3628,500
06/05/9712/07/972,8602,50023-2423-2423.2129,500
06/19/9712/21/972,7802,00023-2523-23.523.3130,000
07/09/9701/04/982,3001,50023.5-23.7523.523.530,000
07/17/9701/18/982,3001,50023.25-2423.2523.3430,000
07/31/9702/01/981,5001,50023232329,180
08/14/9702/15/981,5001,50022.522.522.529,680
08/28/9701/03/983,0003,00022-22.522-22.522.229,630
09/11/9703/15/982,5002,50022222229,860
09/25/9703/29/983,0003,00021.80-2421.80-2221.8730,960
10/10/9704/12/982,0002,00021-21.521.2528,660
10/23/9704/26/984,5004,500212133,160
11/06/9705/10/982,0002,000212130,660
12/04/9712/09/981,5001,500202027,660
12/18/9712/23/981,5001,50019-19.319,1527,660
01/08/9801/13/991,5001,500191925,660
01/22/9801/27/991,5001,50019.419.425,660
02/05/9802/10/982,0002,00019.519.526,160
02/19/9802/24/982,0002,000191924,660
Source: The Bank of the Lao P.D.R.
Source: The Bank of the Lao P.D.R.
Table 15.Lao P.D.R.: Balance Sheet of the Bank of the Lao P.D.R., 1993-97(In millions of kip; end of period)
19931994199519961997
Net foreign assets19,36410,43826,56294,980147,340
Foreign assets45,36343,96585,316158,840290,124
Foreign liabilities-25,999-33,527-58,758-63,840-142,784
Net claims on Government248-1,480-3,325-60,697-48,166
Claims on Government8,83312,0354,1274,1274,577
Government deposits-8,585-13,515-7,452-64,824-52,743
Claims on state-owned enterprises8601,8596,97510,86759,540
Claims on private sector3,0116,82510,39913,90138,223
Claims on other banking institutions34,61537,05246,58552,37157,944
Other items (net)2,60019,539-3,025-7,050-104,788
Other assets78,00382,84293,70083,63970,379
Restricted deposits-2-2-2-2-2
Government lending fund-18,340-12,066-16,167-18,036-31,085
Obligations 1/-400---12,984-20,657-29,310
Capital account-4,686-5,469-13,651-12,675-57,921
Other liabilities-51,975-45,766-53,921-39,318-56,849
Reserve money 2/60,69774,23284,172104,373150,093
Memorandum items:
Broad money 3/125,848165,988193,266244,929405,662
Money multiplier 4/2.12.22.32.32.7
Required reserve ratio510121212
Source: Data provided by the Lao authorities.

Mainly BOL bills

Includes clearing deposits, required reserves, and foreign capital deposits.

Includes foreign currency deposits of residents.

Broad money divided by reserve money.

Source: Data provided by the Lao authorities.

Mainly BOL bills

Includes clearing deposits, required reserves, and foreign capital deposits.

Includes foreign currency deposits of residents.

Broad money divided by reserve money.

Table 16.Lao P.D.R.: Balance Sheet of Commercial Banks, 1993-97(In millions of kip; end of period)
19931994199519961997
Net foreign assets53,54548,27351,43860,601103,106
Foreign assets62,82069,78591,195107,473180,350
Foreign liabilities-9,275-21,512-39,757-46,872-77,244
Net claims on government-9,79214,1213,97717,5774,437
Claims on government026,81219,38239,17940,775
Deposits of government-9,792-12,691-15,405-21,602-36,338
Claims on state-owned enterprises17,46515,57120,69126,06360,877
Claims on private sector62,90191,977118,457141,789247,352
Other items (net)-31,517-42,569-43,257-42,522-65,102
Other liabilities-53,461-31,853-52,782-66,353-67,080
Capital account-33,831-47,445-56,547-66,514-128,782
Restricted deposits-1,545-1,774-1,729-1,555-2,120
Credit from monetary authorities-29,574-35,044-41,925-49,115-51,481
Other assets56,23437,10165,56580,221106,659
Reserves30,66036,44644,16159,24177,702
Current deposits18,99322,72825,21832,58426,672
Time and savings deposits30,37945,60944,44870,16396,345
Foreign currency deposits43,23059,03681,64199,208229,720
Source: Data provided by the Lao authorities.
Source: Data provided by the Lao authorities.

34. Rising inflation and a rapidly declining exchange rate of the kip against the baht spurred the decision to introduce more concerted measures in early 1998. Thus, sales of treasury and BOL bills were resumed in January 1998. In addition, commercial banks were encouraged to raise interest rates. Minimum deposit rates, discontinued in 1996, were reintroduced in March 1998 in an effort to bolster demand for kip. Finally, the BOL also decided to reintroduce bank-by-bank credit ceilings. This measure, however, had not been implemented as of May 1998.

C. Banking Sector Developments

35. The Lao banking system consists of the central bank, the BOL, seven SCBs, dominated by the Banque pour le Commerce Extérieur Lao (BCEL); two small private banks; and seven branches of foreign banks, all but one from Thailand. There is also the state-owned Agricultural Promotion Bank (APB) which serves largely as a conduit for agricultural subsidies. The seven SCBs are the remnants of the original monobank system: most are composed of former provincial branches, and the BCEL emerged from the branch responsible for international transactions.

36. Efforts to reform the SCBs and bring them up to international standards have been underway for several years, notably through two Financial Sector Program Loans from the AsDB. The first program loan supported a recapitalization of these banks in 1994, as well as improvements in management. However, only the first part was implemented and the lack of changes in management practices has contributed to the re-emergence of significant levels of nonperforming loans on the balance sheets of these banks. The second program loan, which is not yet fully disbursed, supports the consolidation of the six small SCBs into two larger units, which would then be in a position to compete with each other and other banks, at least in the major towns.

37. In 1997, the authorities commissioned an international audit firm to examine the end-1996 accounts and the operations of the seven SCBs, as part of the conditions under the World Bank’s SAC III loan. The auditors found loan officers poorly-equipped to perform their work effectively, without the requisite attention to standard indicators of loan quality. Internal controls were seen as weak, and regulations, both those imposed by the BOL and internal rules, were not always followed. Loans were extended on the basis of inadequate collateral, and inappropriate provisioning for nonperforming loans has been made.9 Lack of adequate bank supervision has contributed to these practices. While the auditors had some difficulties interpreting the financial data available, the general conclusion was that recurrent problems of nonperforming loans had made the SCBs insolvent. The share of nonperforming loans in the SCBs’ total loan portfolio ranges from 25 percent to almost 70 percent (Annex III) while almost no usable collateral could be identified, making recovery of debt difficult.10 All SCBs had a negative net worth and the total for the sector was estimated at about KN 70 billion (or $70 million at the end-1996 exchange rate). Recent on-site inspections by the BOL revealed similar problems in one private bank and a local branch of a Thai bank. In addition, there are strong indications that several other banks are similarly affected.

38. It is expected that the 1997 macroeconomic events, in particular the sharp depreciation of the kip against the U.S. dollar, had a significant negative impact on the banks’ balance sheets, bringing the solvency problems to the surface. The rate of loan repayment declined further in 1997. The audits of the 1997 balance sheets, being prepared with assistance from Australia, are expected to confirm these developments. Thus restructuring of the Lao banking system has become a priority. A thorough reform of the banking system would involve (i) restructuring the SCBs, including improvement of their management practices, and following these improvements, a recapitalization; (ii) allowing new private banks to start operations, to bring in banking expertise and enhance competition; (iii) encouraging the branches of foreign banks (in particular the Thai banks) to participate more in the local economy. Supervision over them needs to be coordinated between the BOL and the Bank of Thailand; and (iv) finally, BOL banking supervision needs to be strengthened considerably, with technical assistance.

VI. External Sector

A. Background

39. Developments in the external sector were characterized, on the one hand, by the new opportunity and challenge of further integration into regional markets with the official entry into ASEAN and AFTA in July 1997 and by the adverse effects of the regional crisis, on the other hand. As a result of the latter, recorded external trade, especially toward regional markets, declined and the Lao P.D.R.’s integration into the world economy was temporarily stalled. Estimates indicate that in 1997 about two-thirds of bilaterally recorded merchandise exports went to East-Asian countries, while about 60 percent of bilaterally recorded merchandise imports came from these countries, relative to 80 percent and nearly 70 percent in 1996, respectively (Tables 20 and 21).

40. The close ties to the Thai baht, combined with loose monetary conditions, led to a depreciation of over 50 percent of the kip against the U.S. dollar during 1997, with continuing depreciation of the kip in early 1998 despite a return to stability for the baht. Although it followed the baht closely during its decline in 1997, the kip was unable to rebound together with the baht in early 1998, thus depreciating over 25 percent against the baht in the first quarter.

B. Recent developments in the Balance of payments

41. The overall balance of payments deteriorated in 1997, with the ratio of the current account deficit to GDP declining only marginally to 16¼ percent, while capital flight linked to foreign exchange rationing resulted in a substantial drop in the foreign exchange reserves of the banking system (Table 17). The value of total exports remained broadly unchanged from a year earlier, reflecting a small rise in garments exports to the European Union after the Lao P.D.R. regained GSP status in October and a decline in timber exports, as prices declined and Thailand, the largest market, reduced demand during the crisis in the second half of the year (Tables 18 and 20). The value of recorded imports declined by an estimated 6 percent as import restrictions on consumption goods intensified and capital goods imports weakened, linked to lower investment in the hydropower sector (Tables 19 and 21). With the decline in nominal GDP in U.S. dollar terms, because of the loss of value of the kip, the share of exports rose from 17½ percent of GDP in 1996 to just over 18 percent of GDP in 1997, while imports retained their share in 1997 relative to 1996 with 37 percent of GDP. The share of consumption goods as percent of total recorded imports declined for the second consecutive year from 48 percent in 1995 to 45 percent in 1996 and 41 percent in 1997.

Table 17.Lao P.D.R.: Balance of Payments, 1993-97(In millions of U.S. dollars)
19931994199519961997
Est.
Total exports (fob)240300313321317
Total imports (cif)432564589690648
Trade balance-191-264-276-368-331
Services (net)3535272528
Factor income (net)3-2-7-6-21
Transfers113134131125140
Private1010224343
Official1041251098297
Current account-41-97-124-225-184
(excluding official transfers)-144-221-233-307-282
Capital account5484139294154
Long-term loans706582138163
Disbursements787398155181
Amortization-8-8-15-17-18
Foreign investment incl ext loans666095176104
Foreign direct investment36598812886
Identified private flows15
Commercial banks-36810-714
Assets-43-9-2-1428
Liabilities717127-13
Errors and omissions 1/-45-48-49-13-127
Overall balance14-121569-30
Financing-1412-15-6930
Central bank net foreign assets-1412-15-6930
Assets-222-31-7431
Liabilities810165-1
Net Fund disbursements881663
Memorandum items:
Current account (percent of GDP)-3.1-6.3-6.9-12.2-10.6
(excluding official transfers)-10.9-14.4-13.0-16.6-16.2
Official gross reserves636193167136
Official gross reserves (in months of imports, cif1.81.31.92.92.5
Gross reserves held by commercial banks88979911385
Commercial bank GR (in months of imports, cif)2.42.12.02.01.6
Total gross reserves held by the banking system151158191279220
Total gross reserves (in months of imports, cif)4.23.43.94.94.1
Sources: Data provided by the Lao authorities and Fund staff estimates.

Includes short-term private capital and unrecorded imports.

Sources: Data provided by the Lao authorities and Fund staff estimates.

Includes short-term private capital and unrecorded imports.

Table 18.Lao P.D.R.: Composition of Exports, 1993-97
19931994199519961997
(In millions of U.S. dollars)
Wood products65.896.188.3124.689.7
Logs16.841.828.734.316.7
Timber39.348.551.578.767.4
Others 1/9.85.88.111.65.6
Coffee4.13.121.325.019.2
Agriculture9.212.113.717.818.1
Manufactures 2/38.136.343.327.915.2
Garments49.058.276.764.190.5
Motorcycles36.046.217.712.517.1
Car re-exports14.54.50.00.00.0
Electricity19.624.824.129.720.8
Gold re-exports4.218.821.915.241.5
Fuel purchases by foreign carriers0.00.40.40.40.5
Others0.00.05.23.64.2
Total exports240.5300.4312.8320.7316.9
(In percent)
Memorandum items:
Total exports/GDP18.119.517.417.518.2
Growth rate exports81.424.94.22.6-1.4
Growth rate of exports
Excluding re-exports75.925.04.46.3-10.1
Sources: Data provided by the Lao authorities; and staff estimates.

Includes semi-finished and finished products.

Excludes garments and wood-products.

Sources: Data provided by the Lao authorities; and staff estimates.

Includes semi-finished and finished products.

Excludes garments and wood-products.

Table 19.Lao P.D.R.: Composition of Imports, 1993-97
19931994199519961997
(In millions of U.S. dollars)
Investment goods113.8146.1189.3277.0226.8
Machinery and equipment22.732.043.871.352.0
Vehicles 1/27.525.036.071.753.8
Fuel 1/14.721.430.832.838.2
Construction/electrical equipment48.967.778.8101.282.8
Consumption goods224.7276.5283.8308.0267.7
Materials for garments industry36.251.366.370.073.7
Motorcycles parts for assembly27.034.613.312.024.9
Cars for re-export14.54.50.00.0
Gold and silver 2/12.946.829.518.850.4
Electricity2.42.43.12.63.2
Fuel purchased abroad by Lao carriers0.52.03.51.21.3
Total imports (c.i.f.)431.9564.1588.8689.6647.9
(In percent)
Memorandum items:
Total import/GDP32.636.632.937.537.3
Growth rate total imports62.630.64.417.1-6.0
Excluding re-exports61.330.94.819.0-10.1
(In millions of U.S. dollars)
Investment goods:
from aid and grants44.265.944.636.344.6
from project loans32.136.658.177.6120.5
from hydropower investment8.415.540.971.052.5
from other sources29.028.145.792.149.0
of which: other FDI related16.725.921.07.418.5
Sources: Data provided by the Lao authorities; and staff estimates.

Estimates based on the assumption that 50 percent of total are consumption goods.

Includes gold for re-export.

Sources: Data provided by the Lao authorities; and staff estimates.

Estimates based on the assumption that 50 percent of total are consumption goods.

Includes gold for re-export.

Table 20a.Lao P.D.R.: Direction of Trade, Exports, 1993-97(In millions of U.S. dollars)
19931994199519961997
Thailand 1/74.877.283.396.770.1
Vietnam23.181.287.7157.6135.2
France12.610.311.18.220.0
United Kingdom0.00.90.96.614.9
United States10.75.05.32.77.0
Russia7.41.01.10.50.0
China25.58.18.80.80.3
Germany9.011.812.74.816.2
Taiwan10.14.65.01.30.5
Japan8.84.95.31.76.7
Finland2.01.61.70.81.5
Netherlands3.65.05.40.00.1
Italy1.90.70.81.04.7
Korea1.90.00.00.50.7
Belgium0.41.21.32.017.9
Norway0.10.60.71.83.2
Singapore0.20.10.10.80.3
Other48.486.281.632.917.9
Total240.5300.4312.8320.7316.9
Table 20b.Lao P.D.R.: Direction of Trade, Exports, 1993-97(In percent of total exports)
19931994199519961997
Thailand 1/31.125.726.630.222.1
Vietnam9.627.028.049.142.7
France5.23.43.52.66.3
United Kingdom0.00.30.32.14.7
United States4.41.71.70.82.2
Russia3.10.30.40.20.0
China10.62.72.80.20.1
Germany3.73.94.11.55.1
Taiwan4.21.51.60.40.2
Japan3.71.61.70.52.1
Finland0.80.50.50.20.5
Netherlands1.51.71.70.00.0
Italy0.80.20.30.31.5
Korea0.80.00.00.20.2
Belgium0.20.40.4065.6
Norway0.00.20.20.61.0
Singapore0.10.00.00.20.1
Other20.128.726.110.35.6
Total100.0100.0100.0100.0100.0
Source: Ministry of Trade.

Exports to Thailand may be overestimated as they may include transient goods to other countries.

Source: Ministry of Trade.

Exports to Thailand may be overestimated as they may include transient goods to other countries.

Table 21a.Lao P.D.R.: Direction of Trade, Imports, 1993-97(In millions of U.S. dollars)
19931994199519961997
Thailand 1/164.8270.3287.8310.0336.6
Japan56.145.848.852.510.4
Vietnam19.722.523.925.825.1
Singapore19.214.715.716.90.6
China18.120.221.523.24.9
France6.65.96.26.71.7
Taiwan4.84.64.95.34.3
United States4.41.41.51.60.6
Hong Kong4.37.07.58.19.5
Russia2.72.62.83.00.0
Cambodia3.02.62.83.00.0
Korea2.32.22.32.53.3
Australia3.40.40.40.50.3
Denmark0.50.50.60.60.0
Macao0.40.40.40.51.3
Pakistan0.80.70.80.80.0
Other 2/120.8162.3160.9228.6249.5
Total431.9564.1588.8689.6647.9
Table 21b.Lao P.D.R.: Direction of Trade, Imports, 1993-97(In percent of total imports)
19931994199519961997
Thailand 1/38.247.948.945.051.9
Japan13.08.18.37.61.6
Vietnam4.64.04.13.73.9
Singapore4.42.62.72.50.1
China4.23.63.73.40.8
France1.51.01.11.00.3
Taiwan1.10.80.8080.7
United States1.00.20.30.20.1
Hong Kong1.01.21.31.21.5
Russia0.60.50.50.40.0
Cambodia0.70.50.50.40.0
Korea0.50.40.40.40.5
Australia0.80.10.10.10.0
Denmark0.10.10.10.10.0
Macao0.10.10.10.10.2
Pakistan0.20.10.10.10.0
Other 2/28.028.827.333.138.5
Total100.0100.0100.0100.0100.0
Source; Data provided by the Ministry of Trade.

Imports from Thailand may be overestimated as they may include some transient goods originating from other countries.

Imports from Other may be overestimated as they may include imports of unidentified origin.

Source; Data provided by the Ministry of Trade.

Imports from Thailand may be overestimated as they may include some transient goods originating from other countries.

Imports from Other may be overestimated as they may include imports of unidentified origin.

42. A sharp rise in interest and dividend payments associated with the hydropower projects resulted in net factor income becoming more negative (Table 22). Interest payments on official borrowing remain very low relative to total debt given the concessional nature of most loans. Net nonfactor services remained broadly unchanged—income continued to be dominated by travel, and payments were largely determined by travel and construction-related services (Table 23). In contrast to the global trend, grants rose from $82 million in 1996 to $98 million in 1997. Bilateral grants accounted for about 80 percent of total official transfers, with Japan remaining the most important donor. Japan also provided program grants in the form of commodity aid.

Table 22.Lao P.D.R.: Composition of Factor Income, 1993-97 1/(In millions of U.S. dollars)
19931994199519961997
Net factor income2.8-2.1-6.5-6.2-21.0
Receipts8.66.87.49.011.5
Payments to Lao workers by embassies abroad2.60.50.40.50.5
Interest on Bank of Lao reserve assets2.52.43.34.57.3
Interest on commercial banks foreign assets3.53.93.74.03.6
Payments5.99.013.915.232.5
Payments to foreign workers in Lao embassies0.20.5040.40.4
Income from direct investment0.32.75.87.111.9
Interest on official borrowing4.24.45.95.318.4
Interest on Bank of Lao foreign liabilities0.70.10.40.40.4
Interest on commercial banks foreign liabilities0.51.21.42.01.4
Sources: Data provided by the Lao authorities; and staff estimates.

Excludes workers remittances.

Sources: Data provided by the Lao authorities; and staff estimates.

Excludes workers remittances.

Table 23.Lao P.D.R.: Composition of Nonfactor Services, 1993-97(In millions of U.S. dollars)
19931994199519961997
Nonfactor services (net)35.135.027.525.027.5
Receipts91.185.796.6104.3100.4
Transportation19.211.415.216.017.7
Overflight11.38.410.39.910.5
Freight to Lao carriers (exports) 1/2.00.12.73.33.7
International fares to Lao carriers3.11.91.21.42.5
Lao port charges2.81.00.91.51.0
Travel34.042.751.462.354.0
Communications2.60.00.40.40.6
Insurance0.30.40.40.40.5
Embassies (nonsalary) and international organizations35.031.229.225.227.6
Payments56.050.769.179.372.9
Transportation6.07.93.77.16.3
International fares to foreign carriers3.67.93.36.35.4
Foreign port charges2.40.00.40.80.9
Overflight0.00.00.30.00.0
Travel11.018.029.622.221.0
Communications1.10.80.40.60.7
Construction18.710.824.036.135.4
Hydropower3.02.97.416.912.0
Other projects15.77.916.619.223.5
Technical assistance (50 percent of inflow)16.410.58.49.95.9
Lao embassies abroad (nonsalary)2.82.73.03.43.6
Memorandum items:
Exports of goods and services (nonfactor)331.6386.1407.8426.9417.2
Imports of goods and services (nonfactor)490.0624.5657.9768.9720.8
Sources: Data provided by the Lao authorities; and staff estimates.

Includes only receipts from ticket sales.

Sources: Data provided by the Lao authorities; and staff estimates.

Includes only receipts from ticket sales.

43. Loan disbursements increased to $180 million, led by concessional project loans from the AsDB, primarily for hydropower and infrastructure, including road construction and utilities (Table 24). Foreign investment fell sharply from $176 million in 1996 to $89 million in 1997, reflecting a decline of investment in hydropower, with two large projects approaching completion and the start of new projects being delayed as regional investors halted activity in the second half of the year. There was also a sharp decline in foreign investment approvals (Tables 26 and 27). There was a substantial drop in the net foreign assets of the banking system from $167 million in 1996 to $116 million in 1997, as a result of large unrecorded consumption imports and significant capital outflows linked to foreign exchange rationing and restrictions. The level of gross reserves of the banking system declined from about five to four months of imports in the course of 1997. Official gross reserves fell from the equivalent of three to two and a half months of imports (Table 25).

Table 24.Lao P.D.R.: External Aid and Loan Disbursements, 1993-97(In millions of U.S. dollars)
19931994199519961997
Grants 1/103.5124.7109.381.797.5
Bilateral65.393.389.373.277.8
Program grants3.73.922.511.110.4
Project grants61.689.366.862.167.4
Multilateral38.231.420.18.519.6
UN agencies25.318.89.22.39.4
Asian Development Bank6.25.21.10.21.5
Other (including NGOs)6.77.59.86.08.7
Loan disbursements77.873.297.8154.9181.1
Program loans35.024.414.923.18.9
World Bank (IDA)14.018.00.019.60.0
Asian Development Bank21.06.414.93.58.9
Project loans 2/42.848.883.0131.8172.2
Of which:
World Bank (IDA)24.614.727.140.242.0
Asian Development Bank17.815.947.063.889.0
Memorandum item:
Technical assistance32.820.913.714.119.4
Sources: Data provided by the Lao authorities; and staff estimates.

Includes project-related and general technical assistance.

Also includes OPEC, the International Fund for Agricultural Development, the Nordic Fund, and bilateral loans from China.

Sources: Data provided by the Lao authorities; and staff estimates.

Includes project-related and general technical assistance.

Also includes OPEC, the International Fund for Agricultural Development, the Nordic Fund, and bilateral loans from China.

Table 25.Lao P.D.R.: International Reserves, 1993-97(In millions of U.S. dollars)
19931994199519961997
Net official reserves of the Central Bank27.014.530.399.769.2
Foreign reserves 1/63.361.192.5166.7135.5
Foreign liabilities-36.3-46.6-62.2-67.0-66.4
Net foreign assets of commercial banks74.767.156.963.649.1
Foreign assets87.697.198.6112.784.8
Foreign liabilities-12.9-29.9-41.7-49.235.7
Net foreign assets of the banking system101.781.787.2163.2118.2
Memorandum items:
Total gross reserves of the banking system151158191279220
(in months of imports c.i.f.)4.23.43.94.94.1
Of which:
Foreign reserves of the Central Bank1.81.31.92.92.5
Source: Data provided by the Lao authorities.

Including gold in the amount of $0.6 million.

Source: Data provided by the Lao authorities.

Including gold in the amount of $0.6 million.

Table 26.Lao P.D.R.: Approved Foreign Investments by Value and Sector, 1993-97(In million of U.S. dollars)
19931994199519961997
By investment value
Less than $100,000
Number of projects0281397
Total value0.01.20.60.50.4
$100,000-$999,000
Number of projects11761354243
Total value33.722.414.215.620.0
More than $1,000,000
Number of projects3641151216
Total value321.12,574.7600.21,276.5122.3
Total investments
Number of projects153130556366
Total value354.82,598.3615.01,292.6142.4
By economic sector
Agriculture
Number of projects2373611
Total value16.96.85.11.96.3
Garments/textiles
Number of projects148644
Total value13.612.313.12.72.6
Wood-based industries
Number of projects55122
Total value6.822.40.612.02.1
Other manufacturing
Number of projects342091413
Total value59.618.046.0320.113.4
Mining/petroleum
Number of projects53902
Total value18.09.627.10.014.0
Trade
Number of projects24164118
Total value6.98.90.47.95.0
Hotels/tourism
Number of projects66132
Total value4.8279.30.3211.70.5
Electric power
Number of projects13110
Aggregate value191.72,146.0498.4231.80.0
Other
Number of projects4162212224
Total value36.530.124.0504.418.5
Total investments
Number of projects153130556366
Aggregate value354.82,598.3615.01,292.6142.4
Source: Data provided by the Lao authorities.
Source: Data provided by the Lao authorities.
Table 27.Lao P.D.R.: Approved Foreign Investments by Country Source, 1993-97(In millions of U.S. dollars)
19931994199519961997
Thailand6354211715
Value58.62,013.035.2761.59.5
United States78244
Value5.64.90.16.70.9
Taiwan Province of China66112
Value5.88.26.70.50.3
France1711685
Value231.511
China1913964
Value12.68.98.13.23.5
Malaysia31225
Value53.45.1211.273.2
United Kingdom41131
Value0.93.5417.90.2
Australia117606
Value12.17.11.705.6
South Korea75263
Value1.12.8277.4276.86.9
Singapore81113
Value7.30.50.2102.2
Japan15548
Value0.215.22.84.3
Germany14001
Value1.51.5000.1
Canada51101
Value0.90.10.300.2
Other201461115
Value10.66.515.71.15.8
Total licensed investments 1/172131636372
(Total value in millions of U.S. dollars) 2/122.82,064.3366.31,292.6113.8
Source: Data provided by the Lao authorities.

Some investments have multiple foreign partners.

The total aggregate value of overall investment excludes the proposed capital contributions of domestic Lao investors as well as some energy-related investments.

Source: Data provided by the Lao authorities.

Some investments have multiple foreign partners.

The total aggregate value of overall investment excludes the proposed capital contributions of domestic Lao investors as well as some energy-related investments.

C. External debt

44. Debt, other than to the Council of Mutual Economic Assistance-countries (CMEA), is estimated to amount to $0.96 billion at end-1997 (Tables 28 and 29), while debt incurred through the CMEA is valued at $1.36 billion at the official exchange rate of the Soviet Union Ruble of SUR 0.6 per U.S. dollar. Russia’s participation as a creditor in the Paris Club beginning in September 1997 created an additional mechanism through which the Russian claim of the Lao P.D.R. can be handled. Total debt is equivalent to 134 percent of GDP, or in net present value terms under existing loan agreements, to about 70 percent of GDP and 290 percent of exports of goods and non-factor services. About 93 percent of non-CMEA debt is to multilateral creditors, of which the main ones are the AsDB ($430 million) and IDA ($348 million).

Table 28.Lao P.D.R.: External Debt Service, 1993-97(In millions of U.S. dollars)
19931994199519961997
Non-CMEA9.39.013.915.530.1
Principal4.54.57.79.611.3
Interest4.84.56.25.918.8
Bilateral creditors1.81.93.45.114.0
Principal1.31.42.54.42.1
Interest0.50.50.90.711.9
Multilateral creditors7.57.110.510.416.0
Principal3.23.15.25.29.2
Of which: IMF 1/0.00.0-1.8-3.0-4.8
Interest4.34.05.35.26.8
Of which: IMF 1/-0.7-0.1-0.5-0.6-0.4
CMEA3.83.83.83.83.8
Principal3.83.83.83.83.8
Interest0.00.00.00.00.0
Memorandum item:
Debt-service ratio 2/4.03.35.75.88.9
Sources: Data provided by the Lao authorities; IBRD; and Fund staff estimates.

Includes operations under the Trust Fund.

In percent of total exports of goods and nonfactor services.

Sources: Data provided by the Lao authorities; IBRD; and Fund staff estimates.

Includes operations under the Trust Fund.

In percent of total exports of goods and nonfactor services.

Table 29.Lao P.D.R.: External Debt Outstanding, 1993-97(In millions of U.S. dollars; end of period)
19931994199519961997
Non CMEA492579687803955
Bilateral creditors3134414667
France44321
China22222
Japan2527262220
Other--1102143
Multilateral creditors461546646756889
AsDB191222280343430
EU33333
IDA215251267307348
FAD1114141618
OPEC54333
Nordic Fund16131721
IMF3646656867
CMEA 1/1,4011,3911,3821,3721,368
Russia1,3741,3661,3571,3491,344
Other 2/2626252424
Sources: Data provided by the Lao authorities; Fund accounts; and Fund staff estimates.

Valued at the official exchange rate of SUR 0.6 per U.S. dollar.

Includes Bulgaria, (former) Czechoslovakia, (former) G.D.R., Hungary, and Poland.

Sources: Data provided by the Lao authorities; Fund accounts; and Fund staff estimates.

Valued at the official exchange rate of SUR 0.6 per U.S. dollar.

Includes Bulgaria, (former) Czechoslovakia, (former) G.D.R., Hungary, and Poland.

D. Exchange and trade system

45. In September 1995 the Lao P.D.R. formally adopted a managed floating exchange rate system. In practice, however, the BCEL, the largest state-owned commercial bank and the dominant transactor in the bank exchange market, has been setting the commercial bank rate in consultation with the authorities. Other banks and exchange bureaux follow it with a maximum margin of 2 percent. The bank rate has generally been following the parallel exchange rate market, although at times of downward pressure, the bank rate was usually slow to adjust, thus creating increasing spreads between the two exchange rates. During the course of 1997 the kip had lost more than 50 percent of its value against the U.S. dollar reaching KN 2,153 per dollar and in addition had fallen against the Thai baht by about 15 percent, despite the baht’s large depreciation after it began to float on July 2 (Table 30). The sharp decline in the value of the kip took place in an environment of loose monetary policies, exacerbated by the authorities’ lack of resolve regarding measures to improve the functioning of the foreign exchange system, a process that reduced the public’s confidence and intensified the problem of capital flight. In the first half of the year, the authorities resisted the downward pressure on the rate by cracking down on the parallel market and revoking licences from foreign exchange bureaux in May and June, and resorting to foreign exchange rationing. As pressure intensified on the kip following the floating of the Thai baht in July, and the premium on the parallel rate widened sharply, the authorities gradually lifted the restrictions on the parallel market and commercial banks were encouraged to set their rates in line with the parallel rate.11 Later in the year, new foreign exchange bureaux were licensed, including some operated by hotels. At end-December 1997 the parallel market premium was about 3 percent.

Table 30.Lao P.D.R.: Exchange Rates, 1996–1998(In kip per U.S. dollar)
Parallel (Monthly average)Commercial Bank (Monthly average)
BuyingSellingBuyingSelling
1996-January938945922928
February938946919928
March934943925928
April938945918927
May940948918927
June943949919927
July943948919927
August945950919927
September954959919927
October963968919927
November969974939941
December978983935943
Average949955923930
1997-January990998961966
February1,0251,037985990
March1,0391,0491,0031,008
April1,0581,0701,0181,023
May1,1201,1501,0181,023
June1,1241,1391,0361,041
July1,2311,2771,1351,141
August1,3781,4571,2101,217
September1,5261,6171,3431,351
October1,6461,7031,5991,604
November1,7861,8211,7561,764
December2,0602,1052,0152,023
Average1,3321,3691,2571,262
1998-January2,4282,4932,4042,414
February2,4582,5472,4312,442
March2,4252,5392,4062,421
April2,5342,6312,5062,523
Source: Data provided by the Lao authorities.
Source: Data provided by the Lao authorities.

46. The trade system is free of formal restrictions. In practice, however, a number of informal trade barriers, such as priority lists and excessively restrictive licensing requirements, limit imports in certain categories of goods. De facto restrictions intensified during the course of 1997 as foreign exchange rationing became more binding. The import tariff structure maintained six tariff rates (5, 10 15, 20, 30 and 40 percent). The exceptional, higher rates, applied to vehicles, cigarettes and beer, were abolished in April 1997 and replaced by equivalent excise duties on these items. As part of the Lao P.D.R.’s membership in ASEAN and AFTA, the authorities prepared, according to AFTA regulations, the lists of import goods which would be: (i) subject to a maximum 5 percent import tariff beginning in January 1998 (inclusion list); (ii) temporarily excluded from the maximum 5 percent import tariff and to be moved into the inclusion list beginning in 2000 in five equal installments, with all goods having been moved by 2007 (temporary exclusion list); (iii) permanently excluded from the maximum 5 percent import tariff (general exclusion list); and (iv) listed as sensitive goods, constituting primarily unprocessed agricultural products.

ANNEX I Lao P.D.R.: Summary of Tax System as of May 1998
TaxNature of TaxExemptions and DeductionsRates
1.Taxes on income and profits
1.1Taxes on enterprise profits (profit tax)Annual levy on profits derived in the Lao P.D.R. by enterprises from business operations (production, trade, and service), payable in advance on a quarterly basis.a. Expenses normally incurred in producing income with limits for gifts (0.10 percent) and travel costs (0.15 percent for each trip) of annual income.
Tax Rate (In percent)
General rate35
Discount rates:
For enterprises in designated areas/city20
For enterprises in rural and lowland areas15
For enterprises in mountain and remote areas.10
b. Asset amortization of each asset permitted, using fixed line or declining balance methods and using the following four annual rates: 50 percent: business formation; 20 percent: land transportation, machines and other equipment; 10 percent: sea transport equipment, office improvement, supplies and temporary trade premises: 5 percent: industrial, permanent trade premises and air transport Unallowed residue is deducted from the sale price to compute the profit or loss.
c. Carry-forward of losses available for up to 3 years.
d. Three computational regimes. Full real regime: based on extended accounting system for foreign investors, import-export traders and businessmen with annual turnover greater than KN 240 million; partial real regime: based on ordinary or common accounting system, for other businessmen with annual turnover between 24 million and 240 million kip; contract regime: for those with primary accounting system, based on agreed estimation for turnover less than 24 million kip with progressive rates for production, construction, and transport (1-7 percent), trade (2-8 percent), and services, drinking bars (3-9 percent).
e. Amounts appropriated to savings or recapitalization accounts, bonuses, meeting allowances or received from capital reduction, enterprise merging, share transfer, bankruptcy or debt liquidation.
f. Reliefs: Case-by-case tax relief given to new and rehabilitated domestic enterprises (1-5 years) under Decree 47/SNA of June 1989 and to foreign and jointly owned enterprises (2-4 years), under Law 1/94
1.2Minimum profit tax

(Impôt minimum fiscal)
Applicable to gross turnover of the previous year of those enterprises subject to the extended or ordinary accounting system. Advance once-and-for-all payment on a quarterly basis. Creditable against final liability but no reimbursement of over paymentForeign and local investors who are in a system of annual profit tax exemption.0.5 percent
1.3Tax on social/ religious/ cultural organizations and associationsIncomes from immovable property leasing and non-business activitiesNone10 percent
1.4Tax on personal income from employmentLevied on wages, salaries, bonuses, and other emoluments derived from employment in Lao P.D.R. or, when deputed to international organizations, by Lao citizens receiving emoluments abroad on which they are not taxed. Withheld at source by the employer on a monthly basis.All persons with monthly wages or salaries below KN 30,000.



Exemptions are granted to a selected list (12) of incomes, including income from agricultural production by peasants themselves, from cultural events, etc.
Monthly Wage or Salary (In kip)Tax Rate (In percent)
30,001-125,0005
125,001-250,00010
250,001-500,00015
500,001-1,000,00020
1,000,001-2,000,00025
2,000,001-3,000,00030
3,000,001-5,000,00035
5,000,001 and above40
1.5Tax on personal incomes of persons in self-employmentLevied on net profits made by individuals from business operations, and immovable property leasing. Payment on an advance quarterly basis.First KN 360,000 is exempt
General activities (In kip)Tax Rate (In percent)
360,001-1,500,00010
1,500,001-3,000,00015
3,000,001-6,000,00020
6,000,001-12,000,00025
12,000,001-24,000,00030
24,000,001-36,000,00035
36,000,001-60,000,00040
60,000,000 and above45
1.6Tax on investment incomeLevied on incomes of entities and individuals from gross market-based rents, dividends, lending interest rates, and guarantee fees on a global basis, where appropriate.Interest on bank deposits10 percent
1.7Tax on property rightsLicenses and other intellectual property rights.None5 percent
2.Taxes on land and property
Tax Rate (In per-cent)
Transfers between:
direct descendants0.5
second-degree relatives1
third-degree relatives2
other land and houses3
undeveloped land4
2.1.Transfer taxesApplied to the market value of real estate property transferred between private persons through inheritance, sale, or giftNone
2.2.Land taxAnnual tax levied on land area. Tax is collected from January to end-April.



Taxable land is divided in three categories:

  • Occupied land (i.e., land occupied by buildings and factories)

  • Agricultural land

  • Other

  • Land occupied by temples, public welfare buildings, embassies, and housing for disabled persons (for extensions of less than 5,000 sq km).

  • Agricultural land, not exceeding two hectares per family, occupied by disabled military personnel and civilians.

  • Agricultural land situated in mountainous areas yielding less than 150 kg rice per person per year.

  • Agricultural land affected by natural disaster or other damages in accordance to the damage.

  • Newly cleared rice fields in mountainous (5 years) and flat land (3 years).

  • Industrial orchards (2-3 years).

1. Occupied land:



Rates vary from KN 0.5 to KN 30 per square meter per year in accordance with the use (housing, production factories, business or service and unused open land) and location.



2. Agricultural land:



Rates vary from KN 500 to KN 6,000 per hectare per year in accordance with: (i) land use (rice land, garden land, and farm land); (ii) location (level field and mountainous areas); and (iii) type of production (for rice, number of crops per year and for garden, type of trees).



3. Other land:



KN 1,000-6,000 per hectare per year.
3.Taxes on goods and services
3.1Turnover taxThe tax is levied on the turnover of importers, domestic manufacturers, and service providers (but not retailers) and allows for a credit for tax paid at earlier stages. Importers and domestic distributors pay tax monthly on their sales and receive credit for the turnover tax they may have paid on their imports. Domestic manufacturers pay monthly, on their sales (at wholesale prices inclusive of 20 percent profit margin) and receive credit for any tax that has been paid on their raw material purchases or imports (but not on their capital good purchases or purchases of services). Service providers also pay tax monthly, on their sates receipts and receive credits for their input purchases. Retailers are not subject to tax. Thus, the tax is a wholesale stage sales tax with partial credit mechanism. All imports, not exempt from import duties, are subject to turnover tax and the base of taxation is customs value plus customs duty, and fees plus excise duty, if any.



Large suppliers, with an annual turnover of more than KN 7.2 million, who are subject to accounts-based profits tax, pay turnover tax based on the issued invoices and their sale invoices are required to show the payment of the tax separately.
The following activities are exempt from turnover tax:

  • import of crop seeds, animal breeds and insecticides;

  • import of materials, instruments and chemical components for research purposes;

  • import of gold for the notes issuing institution;

  • import of bank notes or coins;

  • import or activity relating to tax or post stamps;

  • import of planes and instruments for international air transportation;

  • import of goods or accessories for components of international air transportation;

  • import of goods for selling to diplomats and international organizations in the Lao PDR according to permissions of Ministry of Foreign Affairs;

  • import of goods with tax exemption or temporary import;

  • import and sales of animal treating medicines;

  • sales of self-produced agricultural products by peasants

  • forestation activities, industrial trees and fruits planting;

  • sales of agricultural and handicraft products by the government employees or cooperative members on family basis or limit;

  • export of goods and services;

  • sales of allowed text books, newspaper and magazines;

  • international transportation and relevant services; (international transportation-transportation of passengers or cargos from abroad or to abroad by land, air and sea/river)

  • transport by people, animals and boats without engines;

  • provision of leasing immovable properties, such as land, houses and others by persons who do not have business activities;

  • export services;

  • independent job-occupation by one’s own labor;

  • educational activities: child schools, primary schools, secondary and high schools, universities and professional technical schools;

  • activities for public benefits held by government authorities and international organizations; and

  • banking and insurance activities.

The turnover tax is levied at these rates:

3 percent (which is the low rate), 5 percent (which is the basic rate), 10 percent and 15 percent Illustrations of items subject to these rates follow:

CategoryTax Rate (In percent)
Agricultural products, fertilizers, and insecticide3
Chemicals and mineral products3
All foodstuff3
Machinery and equipment3
Medical services3
Agricultural services3
************
Electricity and fuel5
Consumer durables5
Furniture, clothes, tea and coffee5
Capital equipment, raw materials, and spare parts5
Motorcycle, trucks, minibus, bus and their spare parts5
Construction and land development5
Softdrinks and non-alcoholic drinks Transportation5
Goods and services not specifically mentioned in 3, 10 and 15 percent rates5
************
Imports and sales of TV, radio and other electronic equipment10
Passenger car, jeep, pickup, plane ship, motorboat for recreation10
Precious metals and jewelry10
Hotels and tourism10
Telecommunication services10
************
Alcoholic drinks and cigarettes15
Games15
Entertainment activities15
3.2Excise dutiesLevied equally on imports and domestic supplies of petroleum products and selected consumer goods. Imported items are subject to tax on customs duty-inclusive values while domestic suppliers are subject to tax on ex-factory costs.The following are exempt:

  • Purchases by embassies and international organizations

  • Kerosene

  • Accon (90) for medical purposes

  • Purchases of petroleum products for externally-funded projects

  • Exports of excisable goods

The ad valorem excise duties are as follows:

ItemTax Rate (In per-cent)
Petroleum products:
Super gasoline23
Regular gasoline20
Diesel and aviation fuel10
Lubricants, grease, and brake fluids2
There is an additional excise duty on:
Regular21 kip/Kr
Diesel10 kip/hr
Kerosene for aeroplanes10 kip/hr
Spirits40
Beer and wine30
Soft drinks20
Cigarettes and cigars30
Cosmetics and perfumes10
Playcards and the like50
Vehicles- Cars
Pick up two doors14
Pick up four doors12
Bus, mini-bus14
Jeep19
Cars hp1000-1500cc51
1500-3000cc60
more than 3000cc92
Motorbikes30
Miscellaneous Items
Electrical appliances (freezer, heater, a.c. unit, washing machine, vacuum, color TV, camera, VCR, VCR camera)5
3.3Business and professional licenseLevied annually on registered industrial and commercial enterprises, based on turnover and on import-export enterprises, based on capital Payable during the first three months of the year on a current basis.NoneDifferent rates apply to enterprises producing for the local market and import-export enterprises.

TurnoverRates applicable to local enterprises
(In millions of kip)(In kip)
0-10.0
1-56,000
5-1010,000
10-2020,000
20-5040,000
50-10070,000
100-200100,000
200 and above150,000
CapitalRates applicable to import-export
(In millions of kips)(In kip)
10-50100,000
50-100200,000
100-150300,000
150-200400,000
200 and above500,000
3.4Road taxLevied annually on all motor vehicles (motorcycles, cars, trucks, etc.)The following are exempt:
  • Government cars

  • Cars of the diplomatic corps, international organizations, and foreign experts

  • 50 percent reduction for government staff, soldiers, policemen, students for one vehicle

  • 60 percent reduction for pensioners

Fees vary according to size of engine (for cars and motorcycles), weight (for trucks), and number of seats (for buses).KN 2,000 to KN 360,000
3.5Air travel feesLevied annually for:NoneFees vary according to weight.
(i) Civil aviation registrationKN 7,000–KN 70,000
(ii) Examination issuance and renewal of permits
KN 5,000–KN 40,000
3.6Airspace overflight feesLevied on all aircraft without regard to nationality overflying the territory of the Lao P.D.R.
  • VIP special aircraft

  • Hospital aircraft carrying patients

$160–5250 per overflight
3.7River transport feesLevied annuallyNone
Fees vary according to size of boatsKN200–KN 20,000
3.8Border entry and exit fees

Persons Vehicles
  • Diplomatic personnel and relatives

  • Foreign experts and relatives

Nationals:KN500 $5
Foreigners
Land and water vehiclesKN 1,500–KN 11,000
3.9Fees for extended residence in the Lao P.D.R.
  • Diplomatic corps, foreign experts, and their relatives

Fees vary according to length of stay.KN 6,000–KN 12,000
3.10Fee for temporary border passesNoneKN200–KN 3,000
3.11Fees on delivery of passports, visas, and laissez-passer documentsNoneFees vary according to nature of document and applicant:

Foreigners:$10-$80
Lao nationals:KN300–KN 10,000
3.12Consular fees overseasNone
Fees vary in accordance with the location of the consular office and type of document$2–$32
3.13Fees on possession of personal armsLevied every five years.NoneKN 3,000–KN 4,00
3.14Television and audio use feesLevied annually.None
Television sets:KN 500
Video cassette recorders:KN 1,000
4.Taxes on international trade
4.1Import dutiesUntil recently, imposed on values fixed in U.S. dollar terms. Such values were fixed for most items, jointly by the Ministry of Trade and the Customs Department The main exceptions are motor vehicles and selected computer equipment, for which invoice values are accepted. The U.S. dollar values are converted into local currency at the market rate.



Increasingly, duties are being levied on c.i.f, values.
Imports of diplomats and army/police are exempt Goods imported by the Government for use in externally-financed development projects are also exempt; the Government otherwise pays duties on its other imports. Imports of fuel by Lao Aviation for international transport is exempt Also exempt are imports under bilateral grants and externally-funded humanitarian imports.



Imported inputs (raw materials, machinery and equipment, building materials) for approved foreign-financed private sector and joint venture investment projects are subject to an import fee of 1 percent.



There are no discretionary exemptions. The Minister of Finance does not have the power to grant duty exemptions.



Currently, there is no drawback scheme for import duties paid on inputs for exports.
Six rates ranging from 5 to 40 percent. The kinds of goods subject to these rates are as follows:Tax Rate (In percent)
Raw materials, chemicals (including fertilizers), packaging materials, some machinery (incl. tractors and tools for agriculture), and essential consumer goods (rice, wheat flour, salt, baby foods, medicines, books and printed materials), cameras.5
Other machinery and spare parts, and less essential goods (sugar, cheese, butter, chocolate, cooking oils, footwear, garments, photographic films, refrigerators, dishwashers, household electrical appliances, stereo systems, carpets, pearls and diamonds).10
Selected luxury consumer goods (premium petrol, cosmetics and toiletries, TVs and VCRs, radio cassette players, table games and funfair articles, buses, minibuses, a.c. units).20
Other luxury consumer goods (prepared meats and fish, cereals and prepared foods, white chocolate confectionery, toilet soaps and deodorants, perfumes, wines, and spirits), pick up trucks.30
Soft drinks, liquors, beer, tobacco, detergents, processed wood, jeeps, cars, motorbikes, cigarettes, cigars.40
In addition, one highest rate applies:

Essentially a protective tariff rate (on unprocessed vegetables and fruits, unroasted coffee, roasted coffee, furniture, soft drinks, motorcycles).
50
4.2Export dutiesLevied on selected products. (Duties on exports of logs and wood products are included in timber royalties or stumpage prices.)NoneElectricity: 20 percent of invoice value; coffee: 5 percent of FOB value; livestock: 5 percent of FOB value; logs: specific rates; sawwood: specific rates; semifinished wood products (lumber, parquet): 30 percent of FOB value; finished wood products (plywood): 3 percent of FOB value.
4.3Transit taxImposed on “transit” vehicles shipping traded commodities between Thailand, Vietnam, and China via the Lao P.D.R.
4.4Tax on foreign investmentsImposed on declared profits of new government ventures and private enterprises with foreign capital.Several tax holidays.20 percent
5.Taxes on timber and other natural resources
5.1.Timber royaltiesLevied as a fixed dollar amount per cubic meter of timber sold, both for domestic consumption and export. Timber royalties incorporate other taxes previously levied on timber products, i.e., the reforestation tax, the resource tax levied on the timber production rate, and the export duties, levied by the Customs department on exported timber.NoneRoyalties established by the Ministry of Commerce and the Forestry Department of the Ministry of Agriculture. Since February 1995, royalties average about US$15,650, depending on the timber quality.
5.2.Taxes on natural resourcesLevied in the form of specific duties on volume of mineral extraction, or ad valorem duties on sale price of mineral products.None
Ferrous metals2% of sale value
Non-ferrous metals2-5%
Coal2-3%
Construction MaterialsKN50 per 100m3
Source: Ministry of Finance.This summary incorporates the revised tax rates and revisions in other aspects of the tax system which are part of the new tax law, adopted by the National Assembly at the end of 1995.
Source: Ministry of Finance.This summary incorporates the revised tax rates and revisions in other aspects of the tax system which are part of the new tax law, adopted by the National Assembly at the end of 1995.
ANNEX II Lao P.D.R.: Summary of Privatization of State-Owned Enterprises
A. Privatization during 1989-97
Mode of PrivatizationContractNumber of Employees
Year PrivatizedEnterprise NameLeaseHire PurchaseSaleTransfer to provinceOrigin of InvestorPeriod (Years)Value US ’000TotalRetainedDismissed
1989Sheet metal factoryX15175
Tobacco factoryX514,0001,03793998
14,175
1990The Ngone mechanical workshop #1XDomestic1050
Dong Doc poultry farmXDomestic1015126260
First-of-May sawmillXForeign101,82021114962
2,021
1991
Rattan and bamboo factoryXDomestic10216311912
Lao plywood factoryXForeign158,40037834929
Wood product factory #2XForeign156202362306
Irrigation pump repair workshop km 14XForeign1012120200
Lao-Czech pig farm km 18XDomestic105718180
Lao-Swedish mechanical workshopXForeign154731071070
Tha Ngone fish farmXDomestic10109
Veune Kham agriculture technical service centerXDomestic57841401
Parquet factory at km 14 #1XDomestic102,245
Wood product factory #1XForeign101,055
Paske people’s buildingXDomestic20200
Inter-Lao tourismXXJoint65
13,373
1992
Lao-Hungarian poultry farm 1/X222
Thanaleng warehouse and ferryXForeign152,67812210022
Latkhouay pig farmXDomestic2024127270
Lao-Cuban poultry farmXDomestic53227261
Tha Ngane agriculture mechanical workshopXDomestic52844440
Car rent company #1X1579874047
Car rent company #2XDomestic1521
Champassak people’s buildingX20400
Praksab sugar factoryXDomestic153,20031310
Savannakhet buildingX60
Nabong cattle breedingXJoint2030933330
Electrical wire and plastic bag factoryXForeign1525381792
Detergent factoryXForeign1576381810
Tha Ngare vegetable centerXForeign20108
Phou Vao Hotel at Luang PrabangXJoint35700
Na Phank seed production centerXForeign20232
Animal feed factoryXDomestic1552389890
Baby food factoryXDomestic1531
Tha Ngone ferryXDomestic5115660
Lao-Australian heavy mechanical workshop at Tha NgoneXJoint1,5301101100
Borikharnsay sawmillXForeign1554030300
Lane Xang hotelXJoint3,500
11,865
1993
Lao breweryXJoint10,2001971970
Sikhay sawmillXForeign15346926527
Parquet factory at Km 14 #2XJoint152,26319067123
Tannery factory, prefectureXJoint251,250
Pancheng sugar factoryXForeign35125
Phonehang production unit at Km 62XDomestic20123
Phousy hotel, Luang PrabangXJoint30252
That Khoa Garment factoryXDomestic1563
Lao soft drink companyXJoint2,3801071070
Cultural product factory (wood sculpture)XDomestic2042
Muang Lao HotelXForeign30881
Lao textile factory of the women’s federationXJoint304,500
Garment factory #1X
Pharmaceutical factoryXForeign
22,424
1994Lao-Russian workshop at Dang ChongXDomestic10665
Expert service buildingXJoint301,350
Lao-Hungarian poultry farm 2/XDomestic10
Building construction #2X5215
Building construction #3X585
Laovieng textile factory prefectureXJoint40150
Construction company #2X1,035
Agricultural Transport Co.X1062
Agricultural machineriesX11
Forestry enterprise #2X83
Autotransport #1XDomestic735
4,391
1995
Lao Freight ForwarderXDomestic023739390
Thong Pong Cement FactoryXJoint Foreign01,500330
Agro Machinery and OxygenXDomestic020495950
Transit Transport No. 2XDomestic040
Animal SlaughterXDomestic150
Agricultural Equipment SupplyXDomestic01541410
Veum Kham Agric. Co.XDomestic010839390
Road Construction Co. VientianeXDomestic0611
Bridge Road Construction No. 20XDomestic01,400
River Transport ChampassakXDomestic09113130
Chomthong Timber FactoryXForeign036
4,415
1996Transport Co. #4XXdomestic498
Dongdok Wood Ent.Xforeign104517170
Building construction #1Xdomestic3612120
Building construction #4Xdomestic3011110
Vehicle Repair Workship #1Xdomestic31323230
Transport Co. #2Xdomestic42457570
Unipipe Industry Co.Xforeign1592
Vehicle Repair Workship #2Xforeign89
Irrigation pump repair and pipe workshopXforeign20250
Lao Concrete Co.Xdomestic10149490
Shending Telecommunications MaterialXforeign15116
Hydropower Consultancy Co.Xdomestic6236297
Transport Co. #3Xdomestic12120200
Wooden Construction MaterialsXforeign3088
Lao Telecommunications Co.X 3/joint2545,000 3/8508500
47,185
1997Limestone Mining Co.X238168168
Architectural Construction Co. No. 5Xdomestic121515
National Main Road Rehabilitation Co.X1,200380380
Southern Road No. 13 Construction Co.XChinese51,084230230
Bridges Roads Construction Co.Xdomestic224120120
Vientiane Province Bridge Road Co.Xdomestic21713838
Construction Co. No. 1, LuangprobangXdomestic363131
Printing Shop, LuangprebangXdomestic141515
Provincial Printing Factory, KhammouaneXdomestic61414
Architectural Construction Co., KhammouaneXdomestic83838
Communication Co. No. 2, KhammouaneXdomestic766
Provincial Bus Service Co., SaravaneXdomestic703232
Provincial Cargo-Transport Co., SaravaneXdomestic161818
3,086
Total of 103 privatized enterprises122,935 4/

This enterprise was first privatized in 1992. The lease was renewed in 1994.

This enterprise was first privatized in 1992. The lease was renewed in 1994.

Sale of 49 percent of equity. Total value of enterprise estimated at $32 million.

Total for enterprises for which data are available.

This enterprise was first privatized in 1992. The lease was renewed in 1994.

This enterprise was first privatized in 1992. The lease was renewed in 1994.

Sale of 49 percent of equity. Total value of enterprise estimated at $32 million.

Total for enterprises for which data are available.

B. Remaining enterprises to be divested in 1998 5/
No.Enterprise NameAssets Value (mil.kip)No. of EmployeesRemarks
I.Ministry of Industry and Crafts
1Lao Concrete Co.1,23361Difficult to sell-bad location
2Lao Tobacco Co.3,600450Government decided to keep for the time being 6/
II.Ministry of Trade
3Lao Trade Co.
4437Perhaps liquidated
III.Ministry of Communication Transport, Post and Construction
4Communication Survey & Design300157Management buyout
5Construction Materials Survey and Analysis Co.12046Management buyout
6Bridge Const. Co. No. 1445163Management buyout
7Communication Cons. Co.37185Management buyout
8River Transport Enterprise1,60745Nonviable, WB financed boats
9Lao-Sweeden Road Rehabilitation Co. (Nakhouy)43557To be given to Vientiane Municipality
10Southern Road No. 13 Const Co. (Savannakhet-Pakse)2,740230Joint venture preferred (Chinese interest)
11Road Construction Co, No.81,786120Joint venture preferred (Japanese interest) road must be finished first
IV.Ministry of Health
12Pharmaceutical Products Co.2912Liquidate
V.Vientiane Province
13Agricultural Production Co. No. 119336Liquidate
14Agricultural Production Co. No. 242342Liquidate
15Irrigation Designing Com.3934Management buyout
16Vientiane Province Rural Dev. Com.20079Management buyout
17Architectural Designing & Urban Co.214Liquidate
VI.Luangprabang Province
18Northern Bridge-Road No. 1315842Management buyout after transfer to province
VII.Xayaboury Province
19Provincial Irrigation Const Co.50131Management buyout
20Provincial Bridge-Road Const. Co.27241Management buyout
VIII.Oudomsay Province
21Oudomsay Hotel13012No interest shown
IX.Borikhamsay Province
22Wood Processing Co. No. 11,805276difficult to sell
23Provincial Irrigation Const. Co.21546Management buyout
X.Savannakhet Province
24Savan Wood Co.1,291204Only low price seems possible
XI.Champasack Province
25Irrigation Survey-Design Division1016Liquidate
26Provincial Irrigation Const Station1,01798Management buyout
27Provincial Printing Factory1914Management buyout
XII.Saravane Province
28Provincial Road Const. Machinery Co.17052Management buyout
29Provincial Bridge-Road Rehabilitation Co.48649Management buyout
XIII.Bokeo Province
30Bridge-Road Co.25057Management buyout
31Irrigation Co.44834Management buyout
XIV.Xaysomboun Special Region
32Irrigation Const Co. No.11,058178Management buyout after transfer to Special Region

All remaining enterprises were publicly offered in the newspaper in May 1998.

In the text Lao Tobacco is, for this reason, being treated as a strategic enterprise.

All remaining enterprises were publicly offered in the newspaper in May 1998.

In the text Lao Tobacco is, for this reason, being treated as a strategic enterprise.

C. Strategic Enterprises to Remain State-Owned, timetable for commercialization
No.Enterprise NameAssets Value (million in Kip)Number of EmployeesLegal transformationPerformance contractBoard Approval
Effective dateExpected dateEffective dateExpected date
I.The Prime Minister’s Office
1Lao National Tourism350295/988/98
II.Ministry of Industry and Crafts
2Electricité Du Laos (EDL)139,5482,68811/971/9811/97
III.Ministry of Trade
3Lao Trade Import-Export Company1,320965/987/98
4Magazin d’Etat Pour les Missions Etrangères (MEPME)1,413405/987/98
5Technical-Materials Supply Company65795/987/98
6Vehicle and Spare Parts Supply Company1,229405/988/98
7Lao (State) Fuel Company4,9142545/988/98
IV.Ministry of Communication, Transport, Post and Construction
8Lao Water Supply Company2,5003754/984/981/95
9Lao Post Office Company7,5601,1674/984/986/97
V.Ministry of Education
10Editing and Printing Enterprise506808/9810/98
11Educational Material Products Factory11468/9810/98
VI.Ministry of Culture and Information
12The Lao State Printing Enterprise4921294/985/98
VII.Ministry of Health
13Pharmaceutical Factories No. 2 and 34,2583394/986/98
VIII.Ministry of Finance
14Lao National Lottery2,459365/986/98
15Mountains Development Company (Phoudoi)17,0933,2006/989/98
16Development of Agro-Forestry Industry (DAFI)19,8658726/989/98
17Agro-Forestry and Service Company (Northern Wood Company)17,1797846/989/98
IX.The Bank of the Lao P.D.R.
18Sethathirath Bank3,920997/983/99
19Nakhoneluan Bank995747/983/99
20Bank for Foreign Trade/BCEL4,4961417/983/99
21Lane Xang Bank2,3382087/983/99
22Agricultural Promotion Bank (APB)1,0003817/983/99
23Lao Mai Bank2,3941297/983/99
24Pak Tai Bank3,2241897/983/99
25Aloun Mai Bank663537/983/99
X.Ministry of Labor and Social Welfare
26Employment Service Company155208/9810/98
XI.The Central Youth Federation
27Youth Printing Factory256248/9810/98
XII.Vientiane Municipality
28Bus Transport Service Commission3,2761719/9812/98
29Vientiane Municipality’s Printing-Works310519/9812/98
XIII.Luangprabang Province
30Irrigation Company378499/981/99
31Luangprabang Tourist Company133289/981/99
XIV.Savannakhet Province
32Savan Wood Company6113410/982/99
Total:245,05611,895
Sources: Data provided by the Lao authorities; the World Bank; the Asian Development Bank; and staff estimates.
Sources: Data provided by the Lao authorities; the World Bank; the Asian Development Bank; and staff estimates.
ANNEX III Lao PDR: Indicators of Financial State of Banking System
BanksFinding of Audits or InspectionsNet Worth 1/ (KN billion)Share of nonperforming loans in total loans (in percent) 1/Other Findings of Audits/InspectionsDevelopments in 1997
State commercial banksAudits were conducted for SCB’s (not for APB), based on 1996 accounts. Audits concluded that each bank has net negative worth, the total for the sector being around KN 70 billion.Estimated net negative worth ranging from KN 1 billion to KN 35 billionNonperforming loans ranging from 25 percent to 70 percent of total loansIn all SCBs, the auditors found inadequate management practices with respect to cash treatment, nostro account reconciliation, credit operations, trade finance activities, retail transactions, accounting practices and risk management Among the specific problems encountered are: inappropriate loan classification, shortfalls in loan loss provisions, capitalization of interest not received.Audits of 1997 accounts are to start soon. Given the depreciation of the kip, a further deterioration of most banks’ balance sheets is expected
Private BanksOn-site inspection by BOL (with TA) of the 12/31/97 trial balance revealed that one private bank had a negative net worth of KN 1.5 billion. There are indications that the other bank has also a net negative worth.estimated at 90 percent of total loansThe inspection discovered several of the above practices. In addition, the bank rolls over a lot of overdue loans into new loans, a practice that hides nonperforming loans(Inspection was on 1997 accounts)
Branches of foreign banksOne branch was inspected by BOL and it was found that 70 percent of its loan portfolio, on account of one loan, was nonperforming. No concrete evidence is available for other branches, but it can be reasonably assumed that several others have a significant portion of nonperforming loans as well.Estimated at 70 percent for one branch. No concrete evidence is yet available for others.(Inspection was on 1997 accounts). A deterioration in nonperforming loans is most likely. In addition, some of thes branches’ headquarters in Thailand have run into problems.

Estimates based on audits of 1996 accounts, calculated as the percentage of the provisions needed according to auditors’ report. No estimate is made for one bank because the auditors could not provide an estimate for the provisions needed.

Estimates based on audits of 1996 accounts, calculated as the percentage of the provisions needed according to auditors’ report. No estimate is made for one bank because the auditors could not provide an estimate for the provisions needed.

SM/97/136 “Lao P.D.R.- Recent Economic Developments,” May 1997.

The fiscal year starts on October 1.

This measure took effect only during the last five months of the fiscal year.

Customs continued to use old exchange rates to compute kip values, and hence duty payable.

Planned new hiring was 3,400 and 2,500 staff departed. Not all new positions were filled at the end of the fiscal year.

Starting with the 1997/98 budget, commercial banks and the Agriculture Promotion Bank (APB) would charge market-related interest rates on loans to the agriculture sector and the subsidy to the farmers would be borne by the budget.

The government’s 1997/98 target for civil servants is 72,670. In 1996, the government had set itself a ceiling of 70,000 civil servants in the period through 2000 as part of the ongoing civil service reforms.

SCBs are restructured under a separate program (Chapter V).

Whereas the nonperforming loans inherited from the monobank system were to a large extent due to directed loans to state-owned enterprises, only a small proportion of the nonperforming loans generated since 1994 were of this nature. SCBs still provide some directed credit, but the main part of the nonperforming portfolio seems to relate to lending to the farming community.

These numbers do not include the APB which was not audited.

Thailand is by far the largest trade partner, buying 22 percent of recorded Lao exports and providing 52 percent of recorded Lao imports. There is also an estimated large amount of unofficial trade across the long Lao-Thai border.

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