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:
February 2011
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Information about Asia and the Pacific Asia y el Pacífico
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I. Recent Economic Developments and Outlook

1. Lao P.D.R. weathered the global crisis well in 2009. Although the crisis did have an impact on exports, nonregional tourism, and capital inflows, GDP growth held up very well, at 7.6 percent, one of the highest in the region. Growth was buoyed by ongoing projects in the mining and hydropower sector, as well as the boost to construction and other sectors provided by a sizable fiscal expansion, an accommodative monetary policy and one-off events such as the South-East Asia games that were held in Vientiane in December 2009.

2. However, the economy continued to exceed its macroeconomic “speed limits” in 2009, putting pressure on the balance of payments. Although inflation remains relatively contained at 4.9 percent, prices of real estate and land have been rising rapidly and an acceleration in the growth of domestic demand put pressure on the external position. Gross international reserves of the Bank of Lao P.D.R. (BoL) remained relatively stable at around US$630 million, thanks to the SDR allocation from the IMF (US$65 million) and sales of U.S. dollar-denominated BoL securities to domestic banks (US$43 million). However, gross reserves now cover less than 80 percent of reserve money liabilities, down from 150 percent, on average, during 2000-08 (Table 4). Net foreign assets (NFA) of the banking system fell by a further US$215 million in 2009. With gross foreign assets of the banking system now covering only 51 percent of banking system liabilities, the liquidity buffer to absorb external and internal shocks is now substantially less comfortable than during 2000–07 (Box 1).

3. The pressure on the balance of payments in 2009 stemmed primarily from expansionary macroeconomic policies. The overall fiscal deficit widened by 4.4 percentage points of GDP to 7.2 percent of GDP in FY09, mainly because of a sharp increase in off-budget spending (4 percent of GDP), funded mostly by loans from the BoL to provinces to finance infrastructure projects, including for the South-East Asia Games and the celebration of the 450th anniversary of Vientiane. Monetary policy was also expansionary, with the growth of credit to the private sector rising further to 88 percent in 2009. While the bulk of the new credit continued to come from the state-owned commercial banks (SOCBs), credit growth by the smaller private banks was also very rapid, exceeding 100 percent in some cases. While the expansionary policies did support growth, the boost to domestic demand resulted in a widening of the nonresource current account deficit from 6 to 12 percent of GDP between 2007 and 2009. With FDI inflows slowing during this period, due to delays and postponements in mining and hydropower projects in the aftermath of the global crisis, this widening in the current account deficit resulted in the decline in banking system NFA noted above.

4. The outlook for GDP growth in 2010 is favorable and inflation is likely to remain moderate. Growth is projected to remain close to 8 percent, supported by a continued expansion in the mining and hydropower sectors, a rebound in nonresource exports and tourism, and continued strong domestic demand. The start of commercial operations of the Nam Theun II hydropower project in March 2010 will support growth and is expected to be an impetus for further development of the country’s hydropower potential. Inflation could rise further in the next few months because of base effects, but is expected to recede to 5½ percent by the end of the year.

Box 1.Measures of Reserve Adequacy

According to a commonly-used rule of thumb, a country’s central bank should have sufficient gross reserves to pay for three months of imports of goods and services to cope with the eventuality of a sudden stop in balance of payments inflows. The BoL estimates that its gross reserves covered 5.4 months of current-year imports at the end of 2009. However, the customs data used by the BoL may underestimate imports. For instance, exports from Thailand to Lao P.D.R., as reported by Thai customs, exceed total imports reported by Lao P.D.R.’s customs. In light of this, staff continued the practice adopted in previous staff reports of using partner-country trade data from the IMF’s Direction of Trade Statistics. Staff adds estimates of nonfactor services imports; it deducts imports of goods by the resource sectors; and it expresses reserves in months of next-year imports.

Lao P.D.R.: The Import Coverage of Gross Central Bank Reserves, 2006-09(In millions of U.S. dollars, unless otherwise indicated)
2006200720082009
BoL calculation
Gross reserves of the Bank of Lao P.D.R.336536636632
Imports of goods (c.i.f.) 1/1,0601,0651,4031,414
Gross reserves in months of current-year imports3.86.05.45.4
IMF staff calculation
Gross reserves of the Bank of Lao P.D.R.336536636632
Imports of goods 2/(1)1,6522,1082,8292,720
Imports of nonfactor services 3/(2)62768367
Imports of goods by the resource sectors 4/(3)381598641444
Relevant imports of goods and services(1)+(2)-(3)1,3331,5862,2722,343
Gross reserves in months of current-year imports3.04.13.43.2
Gross reserves in months of next-year imports5/2.52.83.32.8
Memorandum item:
Imports from Thailand 6/1,0171,3111,7761,643

Source: Customs and Ministry of Commerce of Lao P.D.R.

Source: Directions of Trade Statistics, IMF.

Source: BoL. Travel data is taken from Lao National Tourism Administration.

Source: IMF staff’s estimates based on plans of the resource sectors.

For 2009, based on projected 2010 imports of goods and services of US$2,672m.

Source: Thai customs.

Source: Customs and Ministry of Commerce of Lao P.D.R.

Source: Directions of Trade Statistics, IMF.

Source: BoL. Travel data is taken from Lao National Tourism Administration.

Source: IMF staff’s estimates based on plans of the resource sectors.

For 2009, based on projected 2010 imports of goods and services of US$2,672m.

Source: Thai customs.

In a partially dollarized economy like Lao P.D.R., the concept of the importcoverage of reserves is not as meaningful. With large amounts of foreign exchange going around in the economy, the onus will not be solely on central bank reserves in case of a sudden stop in balance of payments inflows. In that case, reserves at less than three months of imports is not necessarily problematic. It should be noted that gross reserves are equivalent to 227 percent of short-term external debt on a remaining maturity basis (116 percent if short-term trade credit—assumed at 10 percent of imports of goods and services—is included).

Adequacy of Banking System Gross Foreign Assets

Sources: Bank of Lao P.D.R. and IMF staff estimates.

It would be more important to monitor the extent to which banking system liquid gross foreign assets provide adequate coverage of the liabilities of the BoL and the banks. In a dollarized economy, the demand for domestic currency is more prone to instability and banking system vulnerabilities could be a compounding factor. However, unlike what was the case during 2000-08, BoL gross foreign assets now fall short of reserve money (Table 4). Also, banking system liquid gross foreign assets have been on a declining trend since early 2008, and now only cover currency in circulation (CIC) plus about 35 percent of bank deposits (see chart).

5. But pressures on the external position are likely to continue in the absence of further efforts to rein in credit growth. While the overall fiscal deficit is projected to narrow to 4.9 percent of GDP in 2010 (see paragraph 11), private sector credit is projected to exceed 50 percent in 2010 in the absence of further measures to reduce credit growth to the government’s target of about 25 percent. Net foreign assets of the banking system strengthened somewhat during the first quarter of 2010, following a large mining profit tax payment in March. However, with credit expanding at the current pace, staff project that NFA would decline to just over US$500 million by end-2010. At this level it would cover only 67 percent of reserve money and 23 percent of broad money. Moreover, unlike in 2009, when BoL gross reserves were boosted by the one-off SDR allocation and the sale of foreign currency BoL securities, which have now been discontinued, the decline in NFA would fall increasingly on BoL gross reserves, which staff project would fall to about US$556 million in the baseline.

6. Lao P.D.R’s medium-term prospects are promising, provided that macroeconomic stability is maintained and structural reforms continue. The recovery of copper prices and strong demand for electricity in neighboring countries are bringing forward expansion plans in the mining and hydropower sectors, which were delayed in the wake of the global crisis. Activity outside of the mining and hydropower sectors is also projected to pick up, although this will need to be supported by continued reforms to strengthen the foundation of the economy (see Section III). Nevertheless, the draft seventh five-year plan (2011-15) is very ambitious, targeting annual average growth of 8 percent, and care will need to be taken that the pursuit of this target, and the associated target of maintaining investment at 30 percent of GDP, is consistent with the outlook for FDI and concessional funding sources, to avoid risks to macroeconomic and external stability.

Lao P.D.R.: Medium-Term Macroeconomic Framework, 2007-15
200720082009201020112012201320142015
Est.Proj.
Real GDP growth7.87.87.67.77.57.36.47.69.3
Real GDP growth excluding resource projects5.06.55.36.26.36.47.37.27.5
Consumer prices (end-period)5.63.23.95.55.75.24.13.53.5
Overall fiscal balance (percent of GDP)-2.7-2.8-7.2-4.9-2.4-1.3-1.5-1.8-1.9
Current account balance (percent of GDP)-15.9-18.5-17.6-10.2-13.6-15.4-19.9-25.8-19.9
Resource current account balance-10.1-8.4-5.03.90.9-0.5-3.5-7.4-0.7
Nonresource current account balance-5.8-10.2-12.5-14.1-14.5-14.9-16.4-18.5-19.2
Gross official reserves
In millions of U.S. dollars5286366325555516998239931,168
In months of imports of goods and nonfactor services,
excluding imports associated with large projects2.83.32.82.01.81.91.92.32.7
Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates and projections.
Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates and projections.

7. The seventh five-year plan will need to take into account a number of potential risks to the medium-term outlook. Specifically, on the external side, the global economic outlook remains uncertain. The outlook for Asia is promising, but the sovereign debt problems haunting many developed countries could slow the global recovery and have negative spillover effects. The uncertainty could also weigh on the price of copper and hold back FDI inflows. The five-year plan will need to take steps to guard against potential internal risks, including (i) to macro and external stability, if the pursuit of the growth targets leads to over-expansionary macroeconomic policies; (ii) to the efficiency of public investment, if the prioritization and transparency of project selection does not improve; and (iii) to the soundness of the financial system, if reforms aimed at strengthening the bank supervision are not accelerated. Finally, the achievement of the plan’s ambitious growth targets rests on the implementation of deep structural reforms which could prove challenging.

8. The staff’s updated debt sustainability analysis (DSA) suggests that Lao P.D.R. continues to have a high risk of debt distress. Prudent foreign borrowing amid strong economic growth, and an ongoing real appreciation of the kip, has put the external debt to GDP ratio on a declining path both in face value and in net present value terms. However, under the baseline scenario, two of the three external debt stock indicators continue to exceed policy-dependent indicative threshold levels over the medium term. And debt vulnerabilities are higher under the alternative scenarios and stress tests. Reflecting the high level of concessionality of Lao P.D.R.’s external debt, external debt service indicators do not breach relevant policy-dependent thresholds under the baseline scenario and also do not breach the thresholds under the stress tests.

9. The rapid expansion of the number of banks in Lao P.D.R. and the rapid growth of credit in some banks poses risks. Reported NPL ratios remain low, but experience in other countries has shown that NPL ratios tend to rise only during the later stages of a credit boom. Capitalization of the three state-owned commercial banks remains below the prudential limits. Collectively, commercial banks are maintaining a net long position in foreign exchange of about 2 percent of GDP and some banks are exceeding the prudential limits on the net open position. And currency mismatches in the nonbank private sector may be substantial with many borrowers in foreign currency lacking foreign currency income.

II. MACROECONOMIC POLICY DISCUSSIONS

10. Discussions centered on policies required to maintain near-term macroeconomic stability and stem the decline in NFA of the banking system, including by keeping the overall fiscal deficit on a consolidation path and by reducing the growth of credit to the private sector. Discussions also covered longer-term policies to support growth through strengthening the soundness of the financial system, and improving the business climate and trade integration.

A. Fiscal Policy

11. The projected fiscal consolidation in FY2010 seems appropriate. As noted above, staff projects the fiscal deficit to narrow to 4.9 percent of GDP in FY2010. This presumes a continuation of the strong revenue collection observed during the first half of the fiscal year, which would push domestic revenue to 15.5 percent of GDP (from 14.9 percent of GDP in FY2009). It presumes that total on-budget spending is broadly in line with the original budget plan—to which the authorities are firmly committed. And it assumes that direct loan disbursements from the BoL to local governments are phased out—in line with the decision not to enter into new lending commitments from September 2009 onward. Accordingly, and taking into account that the BoL disbursed about 2 percent of GDP during the first six months of FY2010, off-budget capital spending is projected to decline to about 3.1 percent of GDP in FY2010, down from 4.1 percent of GDP in FY2009.

12. Staff noted that the overall fiscal deficit should be put on a medium-term consolidation path, building on recent revenue gains and the phasing out of off-budget spending, while strengthening expenditure management. Staff noted that given the strong growth of credit to the private sector, the large public debt, and in support of the stabilized exchange rate regime, the overall fiscal deficit including grants should not exceed concessional external financing (net), which is projected at about 2.4 percent of GDP in FY2011. Recourse to nonconcessional foreign financing should be strictly limited to viable projects. Staff made several suggestions on how to achieve the needed fiscal consolidation while striking a balance with the authorities’ objective to support growth. For the most part, these build on reforms that have already been initiated:

  • Staff welcomed the government’s September 2009 decision to stop new BoL lending to local government outside the budget for infrastructure projects. It called for all (infrastructure) development projects to be brought on the budget. Staff welcomed the government’s ongoing campaign to prioritize these projects to bring them in line with available financing.

  • Staff encouraged to further articulate the plans to repay the BoL loans through the central government budget starting with the FY2011 budget. It indicated that the strengthening revenue performance would provide room for doing so without crowding out key social expenditure programs. Staff noted that the BoL loans to local governments could also be repaid using the proceeds from Treasury Bonds issuance timed to coincide broadly with the amortization payments to the BoL. Staff’s medium-term fiscal projections implicitly assume this. This could contribute to mopping up banks’ excess liquidity and develop the government bond market. The authorities noted that repayments to the BoL from the central government budget had already started on a small scale.

  • Staff and the authorities concurred that the introduction of the VAT needs to be completed by increasing the number of registered companies that file VAT returns, by continuing to educate tax payers and the public about the VAT, and by strengthening auditing and enforcement. Tax administration reforms, including the issuance of unified tax payer identification numbers, need to be furthered by addressing capacity constraints. The VAT law denies refunds to natural resources companies, including mining companies. The mining companies refuse to pay VAT on their invoices on the grounds that their operations are subject to specific contracts that set out the taxes they pay and VAT is not part of those contracts. To further VAT implementation, staff recommended that the authorities clarify the treatment of natural resources companies under the VAT law to the companies, their suppliers, and the tax collectors and auditors.

  • Staff welcomed the important progress that has been made in modernizing and strengthening the national treasury function, particularly steps toward introducing a treasury single account (TSA) system. It called for expeditious full implementation of the TSA, given that this could also contribute to a policy tightening by scaling down government deposits in commercial banks.

B. Monetary and Exchange Rate Policy

13. Staff welcomed the intention to reduce the growth of credit to the private sector, but urged the authorities to underpin this objective with concrete measures (Box 2). Staff noted that the target to reduce credit growth to 25 percent by end 2010 was welcome, but could be hard to achieve given strong private credit growth during the first quarter of 2010. Tentative staff calculations suggest that a deceleration of the growth of private sector credit to 33 percent, everything else equal, could be sufficient to stabilize banking system NFA during 2010. However, banks still have considerable excess reserves and it is as yet unclear how even this adjusted target for the deceleration of credit growth would be achieved. Staff suggested to the BoL to take a multi-pronged approach involving raising reserve requirement, signaling a policy tightening by raising the policy rate, and through moral suasion. The authorities indicated that they would favor using moral suasion rather than “taxing” the banking system more through higher reserve requirements. The authorities took note of the staff’s recommendation to consider also using prudential curbs, particularly for the private banks and branches of foreign banks whose lax lending standards cause their loan portfolios to grow excessively.

14. Staff welcomed the BoL’s plans to step up efforts to sell kip-denominated BoL securities to offset the stimulus from remaining loan disbursements to local governments. Indeed, the sales of BoL securities could be expected to force banks to start drawing on their reserves held with the BoL and push down reserve money growth (Table 4). To enhance the attractiveness of these securities, consideration should be given to raise their interest rates. Staff also welcomed the BoL’s decision, taken earlier in the year, to henceforth refrain from selling U.S. dollar-denominated BoL securities to domestic banks.

Box 2.Credit Booms Around the World: Lessons for Lao P.D.R.?

Financial development has long been identified as a key determinant of economic growth. Accordingly, a healthy rate of credit growth spurs financial deepening and economic growth by channeling increasing amounts of savings to viable productivity-enhancing investment projects. But excessive credit growth—together with a loosening of credit standards—can be a source of concern and credit booms have been the cause of financial distress in emerging markets in past decades. Historically, about 20 percent of credit booms have ended in a crash. For instance, Chapter 4 in IMF Country Report No. 06/19 found that, for a sample of 73 countries for the period 1980-2002, out of 150 credit booms identified, about a fifth (31) preceded systemic banking crises, with that proportion rising to about a third (47) if minor episodes of financial distress were included. Experience has shown that longer-lasting and more-pronounced booms have a higher chance of leading to a crash. Accordingly, countries experiencing credit booms have resorted to a broad array of measures to reduce macroeconomic and credit risks (see e.g., WP/05/128 and WP/05/151). Macroeconomic measures included fiscal tightening, raising reserve requirements, introducing liquid assets requirements, and moving government deposits to the central bank. Prudential measures included raising and differentiating capital requirements, differentiating loan classification and provisioning requirements, enforcing regulations on providing foreign currency-denominated loans only to those with foreign currency income or hedges, and tighter net open position limits for banks. Other measures included more intensive surveillance and onsite/offsite inspections, developing and deepening domestic government securities markets—to provide alternative assets for banks, and establishment and/or strengthening of credit registries.

Lao P.D.R’s ongoing credit boom can be partly attributed to a catching-up process. For instance, the government only recently started paying out wages through the banking system, boosting the number of bank accounts and the level of intermediation. The credit boom coincides with large capital inflows but these inflows are heavily concentrated in mining and hydropower investments that are for the most part not intermediated through the banking system. While inflation remains moderate, there are signs that prices of land and real estate have risen rapidly in recent years. Given also the association with a construction boom, it would be important to reinforce the prudential framework for credit risk.

Emerging and Developing Asia: Credit to the Private Sector
Private Sector Credit (in percent of GDP)GDP per

Capita

(US$, 2008)
Credit Growth

(avg. 2008-09,

in percent)
19902000200720082009
Malaysia1051371141121308,11810
Thailand831089294964,1086
Fiji33314548494,0759
China871121111041303,40424
Indonesia43212527252,23819
Sri Lanka19283329241,9721
Mongolia044239341,9405
Philippines20453234351,85112
Papua New Guinea29162126311,29330
Vietnam13593911141,04233
India35375558601,02118
Lao P.D.R.187101884980
Cambodia1618222482531
Bangladesh162233353752320
Nepal122942465145528
Sources: Lao P.D.R. authorities; CEIC Ltd.; Haver Analytics; and IMF staff estimates.
Sources: Lao P.D.R. authorities; CEIC Ltd.; Haver Analytics; and IMF staff estimates.

15. Staff believes that the kip is overvalued (Box 3), but that a stabilized exchange rate regime remains the appropriate monetary anchor for Lao P.D.R. The BoL has only a few monetary policy instruments and financial market development is still at an early stage. In light of this, a stabilized exchange rate regime remains appropriate. Staff noted that experience in Lao P.D.R. and many other countries around the world has shown that currency pegs and near-pegs are associated with a higher risk of financial crisis and slower and more abrupt external adjustment. In light also of the pressures on the balance of payments, this makes it all the more important to implement consistent fiscal and monetary policies. The authorities were in broad agreement with the exchange rate assessment. They were more optimistic about the outlook for the balance of payments and central bank reserves based on data on FDI commitments and the expected boost from increased electricity exports to Thailand. The authorities pointed out that the parallel exchange rate remained very close to the market rate. They confirmed their objective to limit currency fluctuations vis-à-vis major currencies within ±5 percent per annum and indicated that they would not contemplate greater exchange rate flexibility, as this could undermine the gains in reducing dollarization and fan inflation.

C. Financial Sector Issues

16. Financial sector reforms have shown results, but further steps are needed to contain risks. The restructuring program for the SOCBs, which continues for one of the three banks, is showing results. Progress has been made in strengthening their capitalization, governance, internal controls, and risk management. The SOCBs’ improved financial position has revived their intermediation activity. With the implementation decrees for the commercial banking law now issued, the institutional framework for banking supervision has significantly improved. Good progress is being made in preparing for the October 2010 evaluation by the Asia-Pacific Group on Money Laundering Activities.

17. But the rapid expansion of the number of banks and the high credit growth in many private banks poses risks to the future health of the banking system. Staff commended the BoL’s recent decisive handling of an emerging run on one of the newer private banks in May. But it noted that the recent events were indicative of the risks introduced by the rapid development of the banking sector in recent years, and that these risks called for accelerated progress in upgrading the level of bank supervision in Lao P.D.R. In this context, staff underscored that a “box-ticking” approach when licensing and supervising banks may sow the seeds for a rise in NPLs down the road. Instead, banks’ lending standards should be scrutinized and a tightening of these standards should be mandated, if deemed necessary. Similarly, strict due diligence over (new) bank licensing should be carried out, including by the BoL’s Financial Intelligence Unit. And loan classification and provisioning should be rules-based rather than subject to negotiations with the BoL. Staff suggested that the authorities consider raising the collective provisioning requirement. The present rate of 0.5 percent is low, given the strong growth of credit amid untested credit-risk assessment and credit-risk management frameworks. The legacy of directed lending is likely to make it difficult to put in place banking sector practices in line with international practice. Staff cautioned about potential risks related to linkages between banks and the developing service and entertainment sector (e.g., casinos). The authorities took note of the staff’s recommendations. They noted that NPLs remain low and that onsite and offsite inspections take place regularly for all banks in Lao P.D.R. They looked forward to the assistance from AsDB-financed short-term experts to help strengthen banking supervision, supervision of microfinance institutions, and the Anti-Money Laundering framework. They also inquired about possible assistance that the Fund might be able to provide to improve bank supervision. In response, staff indicated that the Fund would be able to provide technical assistance to the BoL in this area, and also suggested that in view of the recent rapid developments of the financial sector in Lao P.D.R. it might be an opportune time to request an FSAP.

Box 3.Is the Level of the REER Appropriate?

The outlook for exports remains broadly favorable despite the recent appreciation of the kip. The REER is now 17 percent more appreciated than the 2007 average (Figure 1), owing to large foreign inflows into the mining and hydropower sectors through mid-2008 and the authorities’ subsequent maintenance of a stable exchange rate of the kip vis-à-vis the U.S. dollar despite downward pressures on the balance of payments. In the aftermath of the global recession, Lao P.D.R.’s exports held up relatively well compared to other Asian countries (Figure 5). However, they appear to have benefited less from the recovery in global trade during the second half of 2009. Exports of electricity to Thailand will receive a boost from the start of operations of the Nam Theun II hydropower plant.

Estimates of Overvaluation of the Kip
Estimated
Overvaluation
Approach(In percent)
Purchasing power parity6
Macro balance34 to 69
Equilibrium exchange rate1
External sustainability24 to 48
Source: IMF staff estimates.
Source: IMF staff estimates.

The exchange rate assessment suggests that the kip’s REER is overvalued, but two of the four approaches used for the assessment are likely to overestimate the kip’s misalignment as they do not properly take into account that the projected large current account deficits are related to high FDI-financed imports. Application of four quantitative approaches suggests that the REER is stronger than implied by macroeconomic fundamentals. In the case of the macro balance (MB) approach and the equilibrium real exchange rate (ERER) approach, the assessment involved using a large panel dataset covering more than 100 countries. The four approaches are described in more detail for the case of Bangladesh in Chapter II in IMF Country Report No. 10/56. The degree of misalignment varies from 1 to 69 percent depending on the method used. Using the CGER-based trade elasticity for Lao P.D.R. (0.19) suggests that the kip is overvalued by 48 and 69 percent when applying the external sustainability (ES) and MB approaches, respectively. However, applying a Lao P.D.R.-specific trade elasticity (0.38) suggests that the kip’s overvaluation is considerably smaller. The latter elasticity takes into account (i) the composition of Lao P.D.R.’s exports; (ii) incomplete pass through of changes in exchange rates and international prices to import and export prices; and (iii) Lao P.D.R.’s price-taking behavior on international markets. The MB and ES approaches are likely to overestimate the kip’s misalignment as they do not explicitly account for Lao P.D.R.’s stage in the investment cycle. The large current account deficits are related to imports for investments, including in the mining and hydropower sectors, which are financed by FDI. Foreign direct investment inflows are projected at about 18 percent of GDP in 2015 (Table 2). Assuming an import content of 60 percent, the current account deficit excluding FDI-financed imports would be only about 2 percentage points of GDP higher than the current account norm according to the MB approach. Accordingly, the kip would be overvalued by 5 percent. Moreover, once completed, the predominantly export-oriented projects would result in higher exports, reducing the current account deficit.

The overvaluation of the kip underscores the importance of tighter fiscal and monetary policy alongside structural reforms aimed at improving the business climate and trade integration with a view to narrowing the nonresource current account deficit over the medium term.

Figure 1.Lao P.D.R.: Real and External Sector Developments

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

Figure 2.Lao P.D.R.: Fiscal Developments

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

Figure 3.Lao P.D.R.: Monetary Developments

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

Figure 4.Lao P.D.R.: Monetary and Credit Developments

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

Figure 5.Lao P.D.R.: Monetary and External Developments

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

18. Staff called on the authorities to articulate plans to complete the recapitalization of the SOCBs. Capital adequacy of the three SOCBs has increased but remains below the regulatory minimum. Staff recommended to link the recapitalization plans with memoranda of understanding that would lay out structural conditions and performance criteria for disbursing capital, as was the case with the expired Governance Agreements. Staff also encouraged the authorities to continue with the independent audits of SOCBs. Staff welcomed the prohibition on bank supervisors from taking positions in commercial banks within two years of leaving the BoL, as this represents an important safeguard for supervisors’ independence. However, it would be important that this prohibition is strictly enforced.

19. Staff recommended to the BoL to start enforcing the existing prudential regulations that (i) limit banks’ net open foreign currency position (NOP); and(ii) prohibit bank lending in foreign currency to borrowers without foreign currency income. Discussions between staff and some of the private banks suggested that this should be phased in gradually with assets and liabilities currently on banks’ balance initially grandfathered. If enforced consistently across all banks, a considerably larger share of new loans would be denominated in domestic currency. In conjunction with enforcement of NOP limits, this would in turn encourage banks to vie more aggressively for kip deposits. This would cause banks to offer higher interest rates on kip deposits and offer to buy their customers’ foreign currency, which they would subsequently sell to the BoL to observe the NOP limit. Staff noted that this would need to be supported by assurances about easy availability of foreign currency for the banks and their customers. The authorities took note of the staff’s view that enforcement of relevant regulations could be expected to limit the drain on NFA of the banking system and would be consistent with the BoL’s de-dollarization policy.

III. Structural Reforms and Other Issues

20. Efforts to improve the business climate and trade integration should be intensified. Cross-country surveys conducted by several organizations (e.g., the World Bank, Transparency International) suggest that more needs to be done to make tangible progress in streamlining procedures and strengthening policy frameworks to boost private sector-led growth. The pace of reforms should be accelerated, in view also of the phased mandatory reduction of tariffs under the ASEAN Free Trade Agreement, which will expose Lao P.D.R. to increased competition:

  • The authorities are drawing up a comprehensive strategic plan to set out reform options for state-owned enterprises. Staff encouraged prompt operationalization and implementation of the plans, using expertise from multilateral and bilateral partners as needed.

  • The authorities have recently stepped up efforts to prepare for accession to WTO membership. Staff encouraged the authorities to build on the momentum and address outstanding issues raised by the WTO Working Party with regard to pricing policy, customs valuation methods, sanitary and phyto-sanitary rules, and laws and regulations with regard to intellectual property rights.

21. Improving the quality and timeliness of economic statistics would strengthen policy making. The absence of timely data across all sectors impedes analysis of recent trends. Increasing delays in monetary statistics associated with implementation of the new chart of accounts has been particularly worrisome. The absence of reliable balance of payment statistics and gaps in fiscal reporting are additional areas for improvement. Sufficient resources should be dedicated to data collection and compilation, while enhanced coordination among statistical agencies would improve data quality and consistency. Participation in the IMF’s General Data Dissemination System (GDDS) could help in this regard. The draft Statistics Law would enhance the mandate of the National Department of Statistics and facilitate an increase in staffing. Staff is hopeful that its passage, which appears imminent, will contribute to a strengthening of macroeconomic statistics. Staff noted that the IMF stands ready to increase its technical assistance to Lao P.D.R.

IV. STAFF APPRAISAL

22. Lao P.D.R.’s economy has held up remarkably well, despite the global recession. The crisis had an impact on exports, nonregional tourism and capital inflows. However, supported by ongoing projects in the mining and hydropower sector as well as expansionary fiscal and monetary policies, growth has remained higher than the average for low-income countries in Asia. At the same time, the authorities managed to contain inflation below the average for low-income countries in Asia. As a result, important gains continue to be made in improving living standards and reducing poverty. The authorities deserve credit for that.

23. However, expansionary macroeconomic policies put pressure on the balance of payments. Expansionary fiscal and monetary policies alongside the rapid growth of the banking system have stimulated domestic demand and imports. In conjunction with the stabilized exchange rate regime, this has put NFA of the banking system on a downward trend since mid-2008. As a result, the liquidity buffer to absorb external and internal shocks is now substantially less comfortable than during 2000-07 and the authorities should take this into consideration when assessing the adequacy of central bank reserves.

24. The outlook for GDP growth in 2010 is favorable and inflation is likely to remain moderate, but pressures on the external position are likely to continue. The projected narrowing of the fiscal deficit in FY2010 would make an important initial contribution to the needed policy tightening. However, on current policies, the growth of credit is expected to remain strong, boosting domestic demand and imports, and raising risks in the financial sector.

25. The overall fiscal deficit, which looks set to narrow by about 2 percent of GDP in FY2010, should be kept on a consolidation path over the medium term. In this regard, staff welcomes the phasing out of the off-budget spending financed by direct lending from the central bank to provincial governments. The needed medium-term fiscal consolidation should build on recent revenue gains, including from the resources sector and the newly-introduced VAT, and a prioritization of infrastructure spending.

26. The authorities should articulate a plan aimed at reducing the growth of credit to the private sector. The extent of the further decline in banking system NFA during 2010 will depend to a large degree on the authorities’ success in reining in private sector credit growth. In light of this, all available instruments should be considered, including raising reserve requirements, stepping up sales of central bank securities to the domestic banks, raising the policy rate, and using prudential curbs.

27. Staff believes that the kip is overvalued, but that a stabilized exchange rate regime remains the appropriate monetary anchor for Lao P.D.R. In view of the higher risk of financial crisis and slower and more abrupt external adjustment typically associated with pegs and near-pegs, and in light of the downward trend in NFA of the banking system, this makes it all the more important to implement consistent fiscal and monetary policies.

28. The rapid expansion of the number of banks and the rapid growth of credit in many banks poses high credit risks and call for extra vigilance by bank supervisors. Bank lending standards should be scrutinized and a tightening of these standards should be mandated, if deemed necessary. Existing prudential regulations should be clarified and enforced, including loan classification rules and regulations which limit banks’ net open foreign currency position and prohibit bank lending in foreign currency to borrowers without foreign currency income.

29. Lao P.D.R.’s medium-term prospects are promising, provided that a concerted effort is made to preserve macroeconomic stability. Efforts to strengthen the soundness of the financial system should be complemented by efforts to improve the business climate and trade integration. State-owned enterprise (SOE) reforms and regulatory and legal reform required for accession to WTO membership can be expected to have important long-run payoffs.

30. Improvements in the quality and timeliness of statistics would improve analysis and policy making. Improvements in balance of payments and national account statistics are particularly urgent.

31. Staff welcomes the authorities’ recent acceptance of the obligations under Article VIII, Sections 2, 3, and 4 of the IMF’s Articles of Agreement.

32. It is recommended that the next Article IV consultation with Lao P.D.R. take place on the standard 12-month cycle.

Table 1.Lao P.D.R.: Selected Economic and Financial Indicators, 2005–10
200520062007200820092010
Est.Proj.
GDP and prices (percentage change)
Real GDP growth6.88.67.87.87.67.7
CPI (annual average)7.26.84.57.60.05.4
CPI (end year)8.84.75.63.23.95.5
Public finances (in percent of GDP) 1/
Revenue12.112.513.914.414.915.5
Of which: Resources 2/0.92.02.73.32.32.6
Grants1.82.01.71.62.32.1
Expenditure18.317.418.318.724.422.5
Current (includes contingency and discrepancy)10.210.110.211.512.912.6
Capital and net lending 3/8.17.28.07.211.59.9
Overall balance (including grants) 3/-4.4-2.9-2.7-2.8-7.2-4.9
Domestic financing-0.1-1.2-1.1-0.35.03.1
External financing4.54.13.83.02.21.8
Money and credit (annual percent change) 4/
Reserve money18.237.258.820.234.71.2
Broad money7.730.138.718.331.325.0
Bank credit to the economy 4/7.6-9.121.084.690.742.9
Interest rates (end-of-period)
On three-month kip deposits5.55.55.56.06.0
On short-term kip loans (one year)17.814.011.511.510.0
Balance of payments
Exports (in millions of U.S. dollars)6971,1331,3211,6051,4852,125
In percent change30.162.616.621.5-7.543.1
Imports (in millions of U.S. dollars)1,2701,6022,1582,8292,7203,031
In percent change20.326.134.731.1-3.911.5
Current account balance (in millions of U.S. dollars)-492-398-672-985-984-647
In percent of GDP-18.1-11.2-15.9-18.5-17.6-10.2
Gross official reserves (in millions of U.S. dollars)238336528636632555
In months of prospective goods and services imports 5/2.22.52.83.32.82.0
External public debt and debt service
External public debt
In millions of U.S. dollars2,2032,3512,5212,9493,1093,270
In percent of GDP80.866.059.755.555.551.6
External public debt service
In percent of exports7.43.64.04.35.04.8
Exchange rate
Official exchange rate (kip per U.S. dollar; end-of-period) 6/10,7679,6559,3418,4668,4768,291
Real effective exchange rate (2000=100) 7/99.1104.4104.5114.1120.3122.7
Memorandum items:
GDP at current market prices
In billions of kip28,94835,98140,46746,21547,56753,727
In millions of U.S. dollars2,7263,5644,2265,3135,5986,341
Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates and projections.

Fiscal year basis (October to September).

Royalties and taxes from mining and hydropower (resource) projects.

Includes off-budget investment expenditures.

Excludes debt write-offs. Includes Bank of Lao P.D.R. lending to state-owned enterprises and local governments.

Excludes imports associated with large resource projects.

Figure for 2010 is as of June 11, 2010.

Figure for 2010 is as of May 2010.

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

Fiscal year basis (October to September).

Royalties and taxes from mining and hydropower (resource) projects.

Includes off-budget investment expenditures.

Excludes debt write-offs. Includes Bank of Lao P.D.R. lending to state-owned enterprises and local governments.

Excludes imports associated with large resource projects.

Figure for 2010 is as of June 11, 2010.

Figure for 2010 is as of May 2010.

Table 2.Lao P.D.R.: Balance of Payments, 2007-15
200720082009201020112012201320142015
Est.Projections
(In millions of U.S. dollars, unless otherwise indicated)
Current account-672-985-984-647-944-1,148-1,592-2,253-1,921
Merchandise trade balance-837-1,225-1,235-906-1,200-1,421-1,903-2,609-2,352
Exports, f.o.b.1,3211,6051,4852,1252,4672,7642,8473,0393,170
Mining and hydropower6638659121,4591,6531,8341,8641,9461,962
Other exports6587405736678139309841,0931,208
Imports, c.i.f.2,1582,8292,7203,0313,6674,1864,7515,6485,522
Mining and hydropower8869938767951,0821,3711,6932,2071,772
Petroleum imports311422293417490564650753823
Other imports9611,4141,5511,8192,0952,2502,4092,6882,927
Services (net)202331330352370392418447479
Of which: Tourism189276268283297315336358382
Income (net)-141-232-207-263-305-326-331-335-318
Interest payments-83-79-79-135-148-146-143-158-151
Of which: Public-19-26-27-44-59-65-69-79-83
Mining and hydropower-36-35-40-84-83-75-67-70-59
Dividends and profit repatriation-216-308-322-402-507-537-544-517-450
Of which: Mining and hydropower-169-281-279-335-427-424-384-311-197
Other159154195274349358356340283
Transfers (net)104141128170191207224244270
Private516435445358647178
Official537793126138149159174192
Capital account8731,0899065759451,2991,7202,4262,100
Public sector140124155161207184202228275
Disbursements186185222238300286309344406
Amortization-45-61-67-78-93-102-108-115-131
Banking sector (net)-117651406010-10-10-10-10
Private sector8509006113547281,1251,5292,2081,835
Foreign direct investment (net) 1/7909307693947681,1051,4892,1581,785
Of which: Mining and hydropower projects6707817121985646679021,5311,092
Other private flows and errors and omissions60-29-158-40-4020405050
Overall balance202105-77-721151128174179
Financing-202-1057772-1-151-128-174-179
Central bank net foreign assets-202-1057772-1-151-128-174-179
Assets (increase -)-200-1004774-147-125-170-175
Liabilities (reduction -)-2-474-5-5-4-4-4-4
Memorandum items:
Current account balance (in percent of GDP)-15.9-18.5-17.6-10.2-13.6-15.4-19.9-25.8-19.9
Excluding official transfers-17.1-20.0-19.2-12.2-15.6-17.4-21.9-27.8-21.9
Resource current account balance (in percent of GDP) 2/-10.1-8.4-5.03.90.9-0.5-3.5-7.4-0.7
Nonresource current account balance (in percent of GDP)-5.8-10.2-12.5-14.1-14.5-14.9-16.4-18.5-19.2
Exports (annual percent change)16.621.5-7.543.116.112.13.06.74.3
Imports (annual percent change)34.731.1-3.911.521.014.113.518.9-2.2
Excluding hydro and mining related0.421.315.68.98.712.59.0
Gold production (000s oz.)134140162148160160110110110
Gold price (U.S. dollar per oz.)6978729731,1831,2211,2451,2811,3291,380
Copper production (000s ton)6389122135140145135135135
Copper price (U.S. dollar per ton)7,1326,9635,1657,2007,5007,0006,5006,0005,000
Gross official reserves (in millions of U.S. dollars)5286366325555516998239931,168
In months of prospective imports of goods and nonfactor services2.22.72.41.81.51.71.72.12.6
(Excluding imports associated with large resource projects)2.83.32.82.01.81.91.92.32.7
Nominal GDP at market prices (in millions of U.S. dollars)4,2265,3135,5986,3416,9547,4638,0118,7229,667
Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates and projections.

Includes repayment of private debt. FDI in the balance of payments includes both equity and debt, whereas only the nondebt portion is included in the debt sustainability analysis.

Pertains to large mining and hydropower (resource) projects.

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

Includes repayment of private debt. FDI in the balance of payments includes both equity and debt, whereas only the nondebt portion is included in the debt sustainability analysis.

Pertains to large mining and hydropower (resource) projects.

Table 3.Lao P.D.R.: General Government Operations, 2005/06-2010/11
2005/062006/072007/082008/092009/102010/11
BudgetArt. IVEst.BudgetStaffStaff
Proj.Proj.Proj.
(In billions of kip)
Revenue and grants4,9626,1347,1348,0657,2758,0998,9079,18411,126
Revenue4,2665,4606,4397,3136,2767,0307,8258,1039,963
Of which: Resource revenue 1/6801,0481,4861,7011,3381,0752,1851,3472,185
Tax revenue3,6414,7115,6276,3385,5576,2086,9897,2248,953
Of which: Resource revenue 1/3908381,2431,4681,1341,0751,9591,1151,959
Income and profit taxes6931,1701,6551,8041,4791,7281,4871,6992,556
Income taxes234252333364358425494449522
Profit taxes4599191,3221,4401,1211,3039931,2512,034
Turnover tax8871,0461,2291,3471,1781,4011,6971,7362,040
Excise duties8009991,1901,4321,4121,4321,7991,7162,001
Import duties515573674834635726746846943
Royalties275322373373336297377527681
Mining218274317312261219258410496
Hydropower574856617578118117186
Other taxes471601507549517623884700730
Nontax revenue6257498129757198238368791,010
Of which: Dividends157293482274338372309386
Of which: Resource revenue 1/2892112432342040233233226
Grants6966746957529991,0681,0811,0811,163
Expenditure5,9387,1928,3689,88111,05811,50110,10511,73812,505
Current expenditure3,1243,4454,5765,7025,7455,5705,9155,9206,946
Wages, salaries, and benefits1,2631,5342,0822,7932,7932,7722,8302,8593,215
Transfers6748061,0951,3271,4541,3691,3911,3031,499
Interest payments277277361388388264502316555
Of which: External244244291329329205422238329
Other recurrent9118281,0371,1951,1101,1661,1921,4421,676
Capital expenditure and onlending2,4653,1613,2273,6674,8005,4313,5405,1674,974
Domestically financed4038339911,4852,6083,3871,2652,7132,292
Of which: Off-budget2551,1511,9331,613
Externally financed and onlending 2/2,0622,3282,2352,1812,1922,0442,2752,4552,682
Externally financed2,1922,2482,1852,1922,2082,0852,4042,4042,165
Onlending (net)-1308150-11-16-42-12950517
Others and contingencies 3/348586566512512500650650585
Overall balance-976-1,058-1,234-1,816-3,783-3,403-1,198-2,553-1,379
Overall balance (excluding off-budget)-979-2,632-1,470-941
Nonresource balance 4/-1,655-2,107-2,721-3,517-5,121-4,478-3,900-3,564
Primary balance-699-782-873-1,428-3,395-3,139-697-2,237-824
Financing9761,0581,2341,8163,7833,4031,1982,5531,379
Domestic financing (net)-415-426-1296642,6312,3592431,5970
Bank financing-179-265-6505671,9281,788811,2400
Of which: Off-budget (local government)6151,3971,4160
Of which: State Accumulation Fund-234-50-50-50-110-110-50
Nonbank financing160519177046381613580
Of which: Off-budget (SEA game related)118536536196
Other financing (including discrepancy)-252-161100-6700
Foreign financing (net)1,3901,4841,3631,1511,1511,0449569561,379
Disbursements1,7031,8361,7651,6051,6051,5541,5231,5232,005
Amortization-312-352-402-454-454-510-567-567-626
Memorandum items:
Nonresource current balance462967377-91-807385836832
GDP (in billions of kip)34,22339,34644,77850,59148,39147,22554,10052,18758,522
(In percent of GDP)
Revenue and grants14.515.615.915.915.017.116.517.619.0
Revenue12.513.914.414.513.014.914.515.517.0
Of which: Resource revenue 1/2.02.73.33.42.82.34.02.63.7
Tax revenue10.612.012.612.511.513.112.913.815.3
Of which: Resource revenue 1/1.12.12.82.92.33.62.13.3
Income and profit taxes2.03.03.73.63.13.72.73.34.4
Income taxes0.70.60.70.70.70.90.90.90.9
Profit taxes1.32.33.02.82.32.81.82.43.5
Turnover tax2.62.72.72.72.43.03.13.33.5
Excise duties2.32.52.72.82.93.03.33.33.4
Import duties1.51.51.51.61.31.51.41.61.6
Royalties0.80.80.80.70.70.60.71.01.2
Other taxes1.41.51.11.11.11.31.61.31.2
Nontax revenue1.81.91.81.91.51.71.51.71.7
Of which: Resource revenue 1/0.80.50.50.50.40.40.40.4
Grants2.01.71.61.52.12.32.02.12.0
Expenditure17.418.318.719.522.924.418.722.521.4
Current expenditure9.18.810.211.311.911.810.911.311.9
Wages, salaries, and benefits3.73.94.75.55.85.95.25.55.5
Transfers2.02.02.42.63.02.92.62.52.6
Interest payments0.80.70.80.80.80.60.90.60.9
Of which: External0.70.60.70.70.70.40.80.50.6
Other recurrent2.72.12.32.42.32.52.22.82.9
Capital expenditure and onlending7.28.07.27.29.911.56.59.98.5
Domestically financed1.22.12.22.95.47.22.35.23.9
Of which: Off-budget0.62.44.13.1
Externally financed and on-lending 2/6.05.95.04.34.54.34.24.74.6
Externally financed6.45.74.94.34.64.44.44.63.7
Onlending (net)-0.40.20.10.00.0-0.1-0.20.10.9
Others and contingencies 3/1.01.51.31.01.11.11.21.21.0
Overall balance-2.9-2.7-2.8-3.6-7.8-7.2-2.2-4.9-2.4
Overall balance (excluding off-budget)-2.2-5.4-3.1-1.8
Nonresource balance 4/-4.8-5.4-6.1-7.0-10.6-7.5-6.1
Primary balance-2.0-2.0-1.9-2.8-7.0-6.6-1.3-4.3-1.4
Financing2.92.72.83.67.87.22.24.92.4
Domestic financing (net)-1.2-1.1-0.31.35.45.00.43.10.0
Bank financing-0.5-0.7-1.51.14.03.80.22.40.0
Of which: Off-budget (local government)1.33.00.02.7
State Accumulation Fund-0.5-0.1-0.1-0.2-0.2-0.1
Nonbank financing0.00.01.20.01.51.40.30.70.0
Of which: Off-budget (SEA game related)0.31.10.4
Other financing (including discrepancy)-0.7-0.40.00.00.0-0.10.00.0
Foreign financing (net)4.13.83.02.32.42.21.81.82.4
Disbursements5.04.73.93.23.33.32.82.93.4
Amortization-0.9-0.9-0.9-0.9-0.9-1.1-1.0-1.1-1.1
Memorandum items:
Nonresource current balance1.32.50.8-0.2-1.70.81.61.4
GDP (in billions of kip)34,22339,34644,77850,59148,39147,22554,10052,18758,522
Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates and projections.

Resource revenue comprises royalties, taxes, and dividends from the mining and hydropower sectors.

Onlending includes gross repayments of funds.

Includes payments on liabilities carried over from the previous budget years and for arrears clearance.

Overall balance net of resource revenue.

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

Resource revenue comprises royalties, taxes, and dividends from the mining and hydropower sectors.

Onlending includes gross repayments of funds.

Includes payments on liabilities carried over from the previous budget years and for arrears clearance.

Overall balance net of resource revenue.

Table 4.Lao P.D.R.: Monetary Survey 2007-10
2007200820092010
Dec.Sep.Dec.Mar.Jun.Sep.Dec.Mar.Sep.Dec.
Proj.Proj.
(In billions of kip)
Bank of Lao P.D.R. (BoL)
Net foreign assets4,8035,4575,2305,0124,9674,6904,5554,6134,0883,933
In millions of U.S. dollars510632614585583551537546482464
Net domestic assets-829-1,229-4543111799951,8802,3102,6992,581
Government (net)-456-1,396-1,057-636-1,502-761-815-881-658-701
Claims9075339731,160978936925950900975
Deposits-1,363-1,929-2,030-1,796-2,480-1,698-1,740-1,831-1,558-1,676
Of which: Foreign currency-1,042-1,520-1,501-1,367-2,113-1,269-1,143-1,209-1,023-1,101
State-owned enterprises1612966858761,5891,6922,3122,7392,9392,883
Of which: kip000202250290373405475465
Local governments003895811,2931,3972,0172,4432,6432,587
Banks1925005386288651,0291,1731,2621,4781,550
BoL securities0-151-223-301-557-670-660-844-1,144-1,250
Other items (net)-726-477-397-256-216-295-1303584100
Reserve money3,9744,2284,7765,3245,1465,6856,4366,9236,7876,514
Currency in circulation1,8381,7762,2232,3772,2712,4093,08862,9443,0603,800
Bank reserves (kip)1,0401,1331,1631,3071,5421,6081,70852,0742,1641,585
Of which: Capital deposits77305170133251148168306306306
Bank reserves (foreign currency)1,0951,3191,3901,6381,3331,6581,6441,9051,5631,129
Monetary survey
Net foreign assets7,7797,9327,3687,3016,8595,8355,5005,6494,6504,367
In millions of U.S. dollars826918865852805685648669549516
Of which: Commercial banks3162872512672221341111236651
Net domestic assets1,9952,8574,1965,1436,0427,6539,67810,35812,31514,608
Government (net)-275-990-643-274-1,192-472-627-1,082-479-479
Budget-667-1,451-1,104-885-1,803-1,060-1,215-1,670-1,066-1,066
Claims1,3127581,1941,1751,1181,0171,0801,1731,3621,224
Deposits-1,979-2,209-2,298-2,060-2,920-2,076-2,294-2,843-2,428-2,290
Other392461461611611588588588588588
Credit to the economy3,1664,8425,8456,5128,2429,15711,14312,32313,63115,924
In kip1,1152,0242,2082,5733,0343,4734,1954,6395,1315,994
In foreign currencies2,0522,8183,6373,9395,2085,6846,9487,6848,5009,930
Of which: private credit2,6544,0824,5544,9946,3947,1988,5659,31410,39012,673
Other items (net)-896-994-1,005-1,095-1,008-1,032-838-883-838-838
Broad money9,77410,78911,56412,44412,90013,48815,17816,00816,96518,975
Currency outside banks1,8381,7762,2232,3772,2712,4093,0862,9443,0603,800
Kip deposits2,6123,2733,5173,9174,1544,5145,1005,5876,3776,950
Foreign currency deposits (FCDs)5,3245,7405,8246,1506,4756,5656,9927,4767,5288,225
(Annual percent change, unless otherwise indicated)
Reserve money58.829.620.232.019.634.534.730.019.41.2
Broad money38.721.718.311.325.225.031.328.625.825.0
Credit to the economy21.065.584.678.598.289.190.789.248.942.9
Credit to the private sector28.870.371.662.581.976.388.186.544.448.0
Memorandum items:
Money multiplier (at current exchange rates)2.52.62.42.32.52.42.42.32.52.9
Velocity4.14.34.03.83.73.53.13.43.22.8
Loan/deposit (percent)37.950.455.256.062.667.473.073.476.985.9
In kip (percent)42.761.862.8860.567.070.574.975.873.079.6
Gross official reserves (in millions of U.S. dollars)536654636604602648633636574555
Net international reserves (in millions of U.S. dollars) 1/393479451394426356343546
Issue of debt clearance/bank recapitalization bonds 2/392461461611611588588
Exchange rate, end-of-period (kip per U.S. dollar)9,4238,6368,5148,5678,5238,5138,4838,445
Nominal GDP (in billions of kip)40,46746,21546,21547,56747,56747,56747,56753,72753,72753,727
Dollarization rate (FCDs/broad money; in percent)54.553.250.449.450.248.746.146.744.443.3
Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates.

Defined as gross official reserves minus BoL foreign liabilities and the foreign exchange component of reserve money.

Cumulative since end-June 2003.

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

Defined as gross official reserves minus BoL foreign liabilities and the foreign exchange component of reserve money.

Cumulative since end-June 2003.

Table 5.Lao P.D.R.: Medium-Term Macroeconomic Framework, 2007-15
200720082009201020112012201320142015
Est.Projections
Output and prices(Percent change, unless otherwise indicated)
Real GDP7.87.87.67.77.57.36.47.69.3
Excluding resource projects5.06.55.36.26.36.47.37.27.5
Consumer prices (end-period)5.63.23.95.55.75.24.13.53.5
(Annual average)4.57.60.05.45.75.25.23.63.3
GDP per capita (in U.S. dollars)6888498789761,0501,1061,1651,2481,360
Public finances (in percent of GDP) 1/
Revenue13.914.414.915.517.018.218.418.217.7
Of which: Resources2.73.32.32.63.74.74.43.93.3
Grants1.71.62.32.12.02.02.02.02.0
Expenditure18.318.724.422.521.421.521.922.021.5
Current (including contingency and discrepancy)10.211.512.912.612.912.812.712.712.6
Capital and onlending8.07.211.59.98.58.79.29.38.9
Of which: Off-budget capital expenditure0.64.12.7
Overall balance-2.7-2.8-7.2-4.9-2.4-1.3-1.5-1.8-1.9
Balance of payments(In millions of U.S. dollars; unless otherwise indicated)
Current account balance-672-985-984-647-944-1,148-1,592-2,253-1,921
In percent of GDP-15.9-18.5-17.6-10.2-13.6-15.4-19.9-25.8-19.9
Exports1,3211,6051,4852,1252,4672,7642,8473,0393,170
Of which: Resources6638659121,4591,6531,8341,8641,9461,962
Imports2,1582,8292,7203,0313,6674,1864,7515,6485,522
Of which: Resources8869938767951,0821,3711,6932,2071,772
Services and income (net)629912389656687112161
Transfers104141128170191207224244270
Capital account balance8731,0899065759451,2991,7202,4262,100
Of which: FDI7909307693947681,1051,4892,1581,785
Overall balance202105-77-721151128174179
Trade (percent change)
Exports16.621.5-7.543.116.112.13.06.74.3
Imports34.731.1-3.911.521.014.113.518.9-2.2
External public debt and debt service
External public debt (in percent of GDP)59.755.555.551.650.049.048.246.945.2
External public debt service (in percent of exports)4.04.35.04.85.25.15.25.45.7
Gross official reserves
In millions of U.S. dollars5286366325555516998239931,168
In months of imports of goods and nonfactor services2.22.72.41.81.51.71.72.12.6
In months of imports (excluding resource projects)2.83.32.82.01.81.91.92.32.7
Memorandum items:
Nominal GDP (in billions of kip)40,46746,21547,56753,72760,12166,95473,87281,94192,204
Nominal GDP (in millions of U.S. dollars)4,2265,3135,5986,3416,9547,4638,0118,7229,667
Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates and projections.

Fiscal year basis (October to September).

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

Fiscal year basis (October to September).

Table 6.Lao P.D.R.: Financial Soundness Indicators, 2007-10
2007200820092010 1/
Captal adequacy ratio (Basel I)25.020.121.6
State-owned commercial banks (SOCBs)1.73.84.8
Joint-venture banks30.69.09.9
Foreign bank branches26.234.037.7
Private banks41.533.534.1
NPL ratio5.95.43.83.8
State-owned commercial banks4.21.71.31.5
Joint-venture banks12.74.51.31.6
Foreign bank branches0.613.910.510.8
Private banks1.41.91.2
Return on assets (select SOCBs only) 2/0.93.1
Banque pour le Commerce Exterieur Lao4.73.6
Lao Development Bank0.82.2
Agricultural Promotion Bank-2.83.6
Number of banks13202323
State-owned commercial banks4444
Joint-venture banks2222
Foreign bank branches691010
Private banks1577
Sectoral allocation of bank credit (in percent of total)
Industry and handicraft2219
Construction44
Materials and technical supplies89
Agriculture813
Commerce2926
Transportation13
Services810
Other1917
Source: Bank of Lao P.D.R., External Audit Reports.

As of March 10, 2010.

Profit before tax divided by total balance sheet assets.

Source: Bank of Lao P.D.R., External Audit Reports.

As of March 10, 2010.

Profit before tax divided by total balance sheet assets.

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