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Lao People’s Democratic Republic: Staff Report for the 2017 Article IV Consultation

International Monetary Fund. Asia and Pacific Dept
Published Date:
March 2018
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1. High growth has been accompanied by rising vulnerabilities. Poverty has fallen, and Lao P.D.R. has made progress towards its goal of graduation from Least Developed Country (LDC) status.1 But public debt has risen, and falling commodity prices have laid bare fiscal rigidities. A high current account deficit, a tightly managed and overvalued exchange rate, and low reserves leave the economy vulnerable to external shocks.2 The banking system remains highly dollarized, with weak profits and pockets of fragility. Capital-intensive growth based on mining and hydropower investments has been accompanied by rising inequality and environmental degradation. For Lao P.D.R. to take advantage of its strategic location, with dynamic trading partners and opportunities for regional integration, it needs to address these vulnerabilities and put in place conditions for sustainable inclusive growth.

2. The government recognizes these challenges and has charted a plan for reform, consistent with past IMF advice. It is moving to put in place the conditions for a fiscal consolidation, focusing on tax policy and administration, and has allowed some (albeit limited) currency depreciation. It has recapitalized the largest public bank and plans to restructure two smaller public banks with foreign investors, and improve regulation and supervision. The authorities have also focused on integrating the Sustainable Development Goals (SDGs) into their 5-year development plan to promote more inclusive and sustainable growth. Nevertheless, high dollarization and a tightly managed exchange rate continue to constrain monetary policy, and gross international reserves, at one month of prospective imports, are well below the recommended levels.

Developments, Outlook, and Risks

3. Growth remains robust and inflation subdued. Growth in 2017 continued to be supported by electricity exports, construction and services (wholesale and retail trade and real estate), although it slowed slightly to 6.8 percent due to the prohibition on illegal logging, tighter lending conditions, and fewer tourist arrivals. Year-on-year CPI inflation remained low at 0.2 percent in December 2017 due mainly to a decline in food prices, while core inflation (excluding food and fuels) is around 1.7 percent. Medium-term growth is expected to remain high at around 7 percent, supported by new hydropower projects and strong FDI from China in agriculture, manufacturing assembly and services, including the construction of the Kunming – Vientiane railway under the Belt and Road Initiative (BRI) which began in early 2017 (Lao P.D.R. Debt Sustainability Analysis – Box 1).

4. Credit growth has slowed to more sustainable levels, consistent with moderate financial deepening. The growth of credit to the private sector in kip remains robust at 17 percent (y/y) and credit gap analysis suggests that this is a more sustainable level compared to very high rates of credit growth up to 2014. The ratio of credit-to-GDP rose rapidly from around 20 percent in 2010 to 40 percent at end-2014, but has since risen more modestly to 49 percent in 2017. Credit remains concentrated in services (including construction of public infrastructure and manufacturing facilities), industry, and commerce. The loan-to-deposit ratio rose to 98.5 percent at Q3:2017, but reached 103 percent for loans in kip as banks have increasingly accessed foreign borrowing to finance credit. Consistent with moderate financial deepening, overall private credit growth is projected to remain at 17 percent in 2018, reflecting robust FDI, but moderate demand from the public sector.

Lao PDR: Sector Credit-to-Sector GDP Ratio

(In Percent)

Sources: CEIC; and World Bank

Lao PDR: Credit Gap

(In Percent)

Sources: IMF staff estimates.

Note: The credit-to-GDP gap is based on a Hodrik-Prescott filter.

5. External sector vulnerabilities remain high, but are being ameliorated. The current account deficit narrowed in 2016, due to higher electricity and manufacturing exports, but at an estimated 13 percent of GDP in 2017 is still high. International reserves are expected to remain well below recommended levels at around 1 month of imports in the IMF’s calculation (which does not adjust for FDI-related imports)3, around 16 percent of foreign currency liabilities in banks, and 21 percent of foreign-currency deposits. Over the next three years, construction of the Kunming-Vientiane railway will generate a widening in the current account deficit, but this will be reversed in the medium-term as project-related imports fall and electricity exports come on line. Gross international reserves are expected to remain low at around 1.5–2 months of imports due to anemic productivity growth and slow progress on economic diversification.

6. External sector assessment (Appendix I). Based on the IMF’s External Balance Assessment Lite methodology, the external position at end-2016 is assessed to be substantially weaker than implied by fundamentals and desirable policies, although there are several factors that mitigate risks. At end-2016, the kip was assessed to be overvalued by around 44– 49 percent which, given the managed exchange rate regime, calls for a continued gradual depreciation of the nominal exchange rate, and policies to consolidate the fiscal position and improve productivity over the medium-term. There is also an urgent need to increase reserve coverage. Although the presence of large flows of foreign direct investment and dollar denominated trade contracts lessens the vulnerabaility of the current account to external shocks, staff estimates that the non-FDI related trade deficit is still high at 7.6 percent of GDP for 2017.

Lao P.D.R: External Balance Assessment (Lite)
Real Exchange Rate Gap
Current account approach43.7%
REER approach49.4%
Current account
Actual current account-11.9%
Current account norm-1.3%
Current account gap-10.7%
o/w policy gap-14.1%
Elasticity of current account-0.24
Source: IMF Staff.
Source: IMF Staff.

7. The baseline outlook is subject to a number of risks (Appendix II):

  • Domestic risks

    • Government finances. A failure to contain the fiscal deficit would worsen an already weak external position and, given the high level of the public debt stock, increase the possibility of debt distress, higher interest rates, lower external financing and a slow-down in growth.

    • Agriculture. One-sixth of the total economy is in agriculture, and an extreme weather shock would damage growth prospects, worsen the current account, and risk hurting the rural population, reversing poverty reduction.

  • External risks

    • Global monetary conditions. Tighter global monetary conditions could raise funding costs, hurt domestic liquidity in the dollarized banking system increasingly reliant on external funding, and lead to a reduction in credit

    • Capital flight or deterioration in terms of trade. With a thin reserves cushion, the external position remains vulnerable to a deterioration in the terms of trade or sudden capital flight, which could cause a deterioration in confidence in the financial system.

    • Slowdown in trading partners. A significant slowdown in China would impact commodity and agriculture exports and tourist arrivals, and could be felt in Lao P.D.R. through lower foreign direct investment (China is the main source of FDI), and capital flow reversal.

  • Macrofinancial risks

    • Banking system liquidity crunch: A sudden tightening of liquidity due to banking system distress could cause a credit crunch and a slowdown in economic activity, with adverse feedback loops through further distress in bank and corporate balance sheets.

    • Banking system solvency: A macroeconomic or external shock that leads to a sudden slow down in economic activity could lead to higher non-performing loans and expose weaknesses in the banking system that could lead to further declines in credit and slower growth.

    • Exchange rate: A sudden devaluation of the exchange rate could lead to a rapid deterioration in the balance sheets of banks and corporates with currency mismatches, which could affect banking system liquidity and solvency and lead to a further decline in credit and economic activity.

Lao P.D.R.: Macro-Financial Linkages

Source: IMF Staff.

8. An adjustment scenario including recommended policies would result in lower growth in the near term, but more robust and sustainable growth over the medium-term. The economy would also become more resilient to external shocks and allow a rebuilding of policy buffers, including lower public debt, a smaller current account deficit and higher reserves (Box 1).

Authorities’ Views

9. The authorities broadly shared staff’s assessment of the outlook and risks. They acknowledged the macrofinancial risks related to the external sector and the effect of a large devaluation on the balance sheets of banks and corporates. For this reason, they opted to allow the exchange rate to move only gradually within its band. Nevertheless, they argued that the banking system is largely well capitalized and could withstand a significant shock without sparking a systemic crisis. The authorities also pointed out that the overvaluation of the exchange rate had been mitigated during the course of 2017 with the dollar depreciating against Lao P.D.R.’s major trading partners.

Box 1.Adjustment Scenario

The adjustment scenario is based on the following assumptions:

Begin multi-year fiscal consolidation. Implement tax revenue measures while containing public sector wage growth (link salaries to inflation and keep the headcount constant) to bring the fiscal deficit to 2.6 percent of GDP on average, sufficient to lower the debt to GDP ratio to 50 percent by 2022.

Gradual exchange rate adjustment. Use full flexibility in current exchange rate regime to adjust by 27 percent over 5 years, via nominal depreciation and productivity growth, to help realign the REER with fundamentals.

Banking sector reforms. Strengthen management of state-owned banks.

Structural reforms to boost competitiveness and long-term productivity

Macro Framework Under Adjustment Scenario
ActualProj.Alternative Scenario Projections
Real GDP7.
Current account (percent of GDP)-12.0-13.0-10.6-9.3-8.3-7.8-7.6
Fiscal deficit (percent of GDP)-4.6-4.8-3.6-2.8-2.3-2.1-1.8
Public debt (percent of GDP)58.560.159.957.154.552.250.0
Reserves (months of imports)
Source: IMF staff projections. The fiscal multiplier is assumed to equal 1, and the exchange rate-current account elasticity is 0.47. The exchange rate-inflation pass-through is estimated to be negligble in Lao at around 0.2. The impact of a multi-year fiscal consolidation on real output is undertaken as in Bi, R., H. Qu and J. Roaf (2013), Assessing the Impact and Phasing of Multi-year Fiscal Adjustment: A General Framework, IMF Working Paper, WP/13/182.
Source: IMF staff projections. The fiscal multiplier is assumed to equal 1, and the exchange rate-current account elasticity is 0.47. The exchange rate-inflation pass-through is estimated to be negligble in Lao at around 0.2. The impact of a multi-year fiscal consolidation on real output is undertaken as in Bi, R., H. Qu and J. Roaf (2013), Assessing the Impact and Phasing of Multi-year Fiscal Adjustment: A General Framework, IMF Working Paper, WP/13/182.

Real GDP Growth

(Year-on-year average)

Fiscal Deficit

(In percent of GDP)

Public debt

(In percent of GDP)

Foreign Reserves

(In months of imports)
Source: IMF Staff.

Policy Discussions

A. Putting Debt on a Sustainable Path While Meeting Development Needs

10. The fiscal outturn in 2017 was less favorable than expected. The fiscal deficit is expected to widen from 4.6 percent of GDP in 2016 to 4.8 percent of GDP in 2017, mainly due to underperformance of tax revenues and increases in capital spending. Overall revenue is expected to rise to around 17 percent of GDP, due to an increase in non-tax revenues and grants, but tax revenue is expected to remain flat at 12.3 percent of GDP. Current expenditure is expected to fall despite an increase in the wage bill, but capital spending is expected to rise relative to 2016, as government investment gradually resumes its historical level.

Lao PDR: Tax Structure Compared to Regional Average

(In percent of GDP)

Source: IMF Staff Estimates.

11. Public debt remains elevated. The Debt Sustainability Analysis puts the public and publicly guaranteed (PPG) external debt at high risk of debt distress, despite the rebasing of GDP, which lowered ratios compared to last year. Much of the debt is denominated in foreign currency (80 percent), and although over 85 percent of external debt is on concessional terms, a decline in fiscal revenues led the external debt service to revenue ratio to breach the DSA threshold. Based on current policies, the debt-to-GDP ratio is expected to rise to 70 percent of GDP by 2022 (high by frontier market standards), with debt increasingly contracted on non-concessional terms. The recognition of government arrears to construction companies from cancelled public investment projects is expected to add about 2 percent of GDP to the debt ratio in 2018.

12. Staff’s baseline scenario projects improvement, as the authorities are poised to make changes in tax administration and policy. The authorities intend to better administer the profit and lump sum taxes (with an increase in the limit for SMEs), and to channel payment of taxes through the banking system to reduce leakages and broaden the tax base (Box 2). In addition, the authorities plan to increase the excise tax on fuels and implement a specific tax on alcohol. Some of these improvements will be counteracted by declines in VAT revenue from a better administration of the refund. On the expenditure side, the authorities plan to keep the wage bill fixed in nominal terms in 2018. Under this scenario, the deficit would fall to around 4 percent of GDP in 2018–19, but rise to around 5 percent of GDP in the medium-term as mining revenues decline and excise tax revenue moderates due to the ASEAN tariff reduction schedule.

Box 2.Fintech Comes Through the Budget

Owners of private motor vehicles in Laos must pay an annual road tax that goes into general government revenue. The Tax Department estimates there are about 1.8 million taxable vehicles in the Lao P.D.R. In the past 5 years, the average annual collection of road tax was around Kip 10 billion.

To improve compliance, the government partnered with the largest commercial bank—state-owned BCEL—to roll out an App in November 2017 to greatly simplify road tax payments. The App facilitates payments, but also displays realtime information on road tax collection and the number of vehicles that have paid by province. This will allow the government to build a province-level data base to check registered vehicles that have not paid the road tax. Between November 2017 and end-January 2018, road tax collections reached around Kip 36 billion (almost four times the previous annual figure), and are expected to reach Kip 60 billion by April 2018, the deadline for paying the 2017 road tax. The road tax App exemplifies the government’s effort to modernize tax administration and bring tax payments into the banking system to reduce revenue leakage.

Source: Lao P.D.R. Authorities.

13. To reduce debt vulnerabilities and maintain a pattern of expenditure that will support graduation from LDC status, further reforms are needed. With these reforms, the authorities should be able to reduce the fiscal deficit in line with the adjustment scenario (Box 1):

  • Establish a public debt anchor. Given the deterioration in the deficit and high debt in 2017, the authorities should anchor fiscal policy on reaching an overall public debt ratio (external and domestic public and publicly guaranteed) of 50 percent of GDP by 2022, a level consistent with low risk of debt distress under the current DSA.4 This will require maintaining an average overall deficit of 2.6 percent of GDP during 2018–2022.

  • Short term revenue policies. Continued robust growth will present a good environment to begin implementing tax reforms, in line with technical assistance advice. Text Table 1 presents some suggestions for short-term tax reform that could result in significant additional revenue. The authorities have already signaled they could implement some of these measures (particularly excise taxes on alcohol).5

  • Short-term expenditure policies. The authorities indicated they would maintain the public wage bill fixed in nominal terms in 2018 by not adjusting the wage index and allowing the civil service head count to decline through attrition. Going forward, keeping the rise in the index at the rate of inflation will help the government reach its target of limiting wage expenditures to 40 percent of revenue (45 percent of revenue in 2017), an adjustment of about 0.5 percent of GDP in current expenditure per year on average over the medium-term.6

  • Reform tax exemptions. The authorities have made an effort to better administer tax exemptions, particularly for the import of petroleum products. However, to better understand the revenue loss from exemptions and evaluate their costs and benefits the government should implement a tax expenditure review. Tax holidays should be discontinued, and incentives limited to investment, while customs incentives should be limited to firms in special economic zones that can be effectively monitored.

  • Medium-term Revenue Strategy (MTRS). Further revenue gains will be needed to increase space for priority spending in health, education and infrastructure while achieving a gradual fiscal consolidation. The government has expressed interest in developing a medium-term revenue strategy (MTRS) in 2018 with the help of IMF technical assistance, which would lay out an agenda and quantify the benefits of tax administration and tax policy reforms. An MTRS would allow greater coordination of efforts already under way and a consistent plan for how to continue the reform between 2018 and 2022.

  • Public Expenditure Reform. Over the past decade overall public spending has increased more rapidly in Lao P.D.R. compared to regional peers, yet spending on social assistance is lower, and the public-sector wage bill is among the highest (Figure 4 and 5). Health and education outcomes are also below regional averages. There is a need to reorient spending towards improvements in health and education. At the same time, public investment has been volatile as the government has attempted to deal with poor coordination between central and local authorities and governance issues in part by closing investment projects and settling arrears. To improve the efficiency and transparency of public expenditure the authorities could pursue a Public Investment Management Assessment (PIMA) to benchmark Lao P.D.R. against its peers, bearing in mind that Lao P.D.R. is ranked low (123) on Transparency International’s corruption perception index.

Figure 1.Lao P.D.R.: Growth Remains Robust and Inflation is Contained

Sources: National Authorities; CEIC; and IMF staff calculations.

Figure 2.Lao P.D.R.: External Sector Vulnerabilities High but Being Ameliorated

Sources: National authorities; IMF FAD Expenditure Assessment Tool (EAT); World Economic Outlook; and IMF staff estimates.

Figure 3.Lao P.D.R.: Fiscal Consolidation Efforts Have Been Reversed

Figure 4.Lao P.D.R.: Fiscal Policy Needs Re-Orienting to Become More Pro-Growth

Sources: IMF FAD Expenditure Assessment Tool (EAT); and IMF staff estimates.

Figure 5.Lao P.D.R.: Fiscal Policy Should Be Used to Distribute the Gains of Growth

Sources: National authorities; IMF FAD Expenditure Assessment Tool (EAT); World Economic Outlook; and IMF staff estimates.

Short-Term Tax Reform Priorities
Profit Tax
Reintroduce tax on capital gains on the disposition of tangible capital assets.
Lump-Sum Tax
Simplify the LST to apply a uniform‐rate turnover tax to businesses below the VAT threshold; set rate to increase revenue by 0.2% of GDP.
Switch from ad valorem to specific excises on fuel and Increase rates on gasoline and diesel by $0.03 - $0.05/Liter relative to current level.
Subject alcoholic drinks to specific excises proportional to the alcohol content of each group of drinks.
Subject tobacco products to specific excises proportional to tobacco content and increase overall effective rates to replace revenue from repeal of profit tax surcharge
Land Tax
Restore the real value of fees per hectare or square meter by indexing for cumulative inflation since the last time they were set.

Lao P.D.R.: Tax Code Needs to Be Simplified and Exemptions Reduced

Source: Authorities’ data and IMF Staff Estimates.

Lao PDR: General Government Spending 1/

(In percent of GDP)

Source: IMF FAD Expenditure Assessment Tool (EAT), World Economic Outlook.

1/ Dashlines are the average of ASEAN.

Authorities’ Views

14. Although they have no official debt target, the authorities agreed that a debt ratio of 50 percent of GDP was a safe level, and that further reforms were needed to reduce the deficit and bring down the public debt ratio. However, they emphasized the pace of consolidation was likely to be slower than staff recommended and reaching a public debt ratio of 55 percent of GDP by 2022 was more realistic. Tax policy and administration reforms were likely to require significant improvements in data gathering and revisions to tax laws in 2018–19, and the fruits of these efforts were not likely to be seen earlier than 2019–20. The authorities agreed with the goal of better targeting investment and social spending, and had already moved to better control public investments projects. The high level of debt was recognized as a concern and the government plans to institute reforms under the new Public Debt Management Law and the new Public Procurement Law to put a limit on annual borrowing and restrict new debt to (expected in 2018) concessional terms, as well as establishing an official medium-term target.

B. Safeguarding Macro-Financial Stability and Fostering Financial Market Development

Monetary and Exchange Rate Policy

15. Monetary and exchange rate developments. As of the third quarter of 2017, banking system excess reserves remained high at 7 percent of GDP, reflecting bank preferences for precautionary balances in the absence of a functioning interbank market. Dollarization has been persistent, and since the introduction of a cap on interest rates for kip-denominated loans in 2015, foreign currency credit growth has outstripped kip lending growth, increasing the risk of re-dollarization and growing balance sheet mismatches.7 The increase in dollar lending in recent years has mirrored a decline in commercial bank NFA, suggesting that credit is being increasingly financed by external non-core sources, mainly regional banks and particularly from China. The Bank of Lao P.D.R. (BOL) has allowed the kip to depreciate gradually by about 2 percent during 2017.

16. Policy recommendations. While maintaining a managed and gradually depreciating exchange rate in the near term, the authorities should work to reform the monetary policy regime, to allow the introduction of more exchange rate flexibility in the medium-term and support de-dollarization.

17. Short-term priorities include:

  • Exchange rate policy and reserves. Continue to use the flexibility in the current regime (plus or minus 5 percent per year) to allow the currency to depreciate gradually when necessary, and tighten fiscal and monetary policies to support a buildup of reserves to at least 4 months of import cover (excluding the adjustment for FDI related imports). Given the existence of currency mismatches on corporate, bank and public sector balance sheets it is not advisable to implement a more aggressive exchange rate adjustment in the near term.

  • Developing market infrastructure. The implementation of a new Law on the Payment System is welcome and will help clarify the legal framework for payments and facilitate development of local markets. In addition, to develop the local debt market, a first step is to issue government securities on a regular basis with an advance auction to develop a benchmark yield curve. Developing the Lao Securities Exchange platform to enable electronic trading of dematerialized securities will also help develop market liquidity.

  • Removing interest rate caps. The interest rate cap on kip deposits and lending is a market distorting measure that encourages dollarization and discourages lending to SMEs. Removing the cap on kip interest rates will allow banks to set interest rates to adequately price the additional risk of lending to SMEs, and will also allow banks to offer higher interest rates on deposits to attract kip liquidity, which is scarce for some banks.

18. In the medium-term it will be important to continue to develop the monetary policy framework to allow greater exchange rate flexibility. In line with past advice, the Bank of Lao P.D.R. (BOL) should work toward establishing an alternative nominal anchor for monetary policy, to allow for a more flexible exchange rate over the medium-term, help promote economic diversification and growth, and insulate the economy from external shocks.

Authorities’ Views

19. The authorities agreed on the need to increase the level of gross international reserves while noting challenges due to a scarcity of foreign exchange in the economy, partly related to the fact that large FDI projects in hydropower and mining were allowed to keep their foreign exchange earnings outside the country. The authorities also agreed that greater exchange rate flexibility was desirable in the medium-term and noted they were working to develop market infrastructure, particularly the legal framework (with new laws governing the Central Bank and Commercial Banks and the Payments System expected to be passed by the National Assembly in 2018) and payments system infrastructure. This should help bring transactions into the banking system, increasing transparency and encouraging the use of local currency. The authorities explained that the interest rate cap was imposed in response to a perceived lack of competition in the banking system, and they planned to wait until the interbank market was more developed to remove them.

Strengthening the Banking System

20. Asset quality issues, thin capital buffers, and weak profitability continue to weigh on parts of the banking system. While the system-wide capital adequacy ratio appears to be above the Basel I minimum of 8 percent, capital in some state-owned and joint-venture banks is likely below the minimum. Weak application of accounting standards mean the level of NPLs is likely understated, and the small increase in credit costs since 2013 suggests that banks have under-provisioned for potential losses.

21. The authorities have been working on improvements in regulation and supervision, bank restructuring, and the AML/CFT framework. Progress has been made in developing risk based supervision procedures and manuals, and to transition toward the Basel II framework, which will require further capital buffers. The authorities are currently working on restructuring two state-owned banks (about 10 percent of system assets) and have partially recapitalized the largest state-owned bank (BCEL – 28 percent of system assets). Lao P.D.R. also recently graduated from the Financial Action Task Force (FATF) grey list, and is implementing a new AML/CFT law to better align to the revised FATF standards.

22. The authorities plan to help commercial banks by assuming debts related to public infrastructure projects. The Ministry of Finance plans to allow banks to exchange up to 3,200 billion kip (2.1 percent of 2018 GDP) of loans for 10-year government bonds. The total of these loans, which are recognized to be related to legitimate contracts, amount to about 5 percent of the loan book to the private sector. The bonds will carry a 5 percent coupon, and the amortization of the bonds, in equal annual installments over 10 years, will be financed from the capital expenditure budget. Given that these projects were viewed as implicitly guaranteed by government, and that most lending was undertaken by public banks, it is reasonable for the government to seek to recognize these arrears, although they will add to the public domestic debt. The removal of these loans should help strengthen bank balance sheets.

23. To continue the process of financial deepening, strengthen resilience to foreign and domestic risks and reduce dollarization (Appendix III), staff recommends the following reforms:

  • Reduce foreign currency lending risks. In addition to limits in place on banks’ net open positions, additional measures to reduce potential currency mismatches, increase local currency use, and bolster financial sector resilience include:

    • ▹ Tightening macroprudential policy by raising foreign exchange reserve requirements, which will also act as a liquidity buffer that can be used in the event of a sudden tightening in liquidity;

    • ▹ Increasing capital buffers and provisioning and higher liquidity requirements for high foreign exchange credit exposures;

    • ▹ Requiring all government transactions to be based in kip, and introducing market-based policies to improve local currency attractiveness, such as ensuring convenient payment methods;

    • ▹ Gradually introducing greater two-way flexibility in the exchange rate to strengthen incentives to avoid currency mismatch risks.

  • Strengthen financial sector buffers. NPLs should be identified through due diligence with the help of independent audits as needed, and provisions increased where necessary. Forbearance on compliance with the mandatory minimum CAR of 8 percent should be eliminated.

  • Continue improving supervision and credit risk management. The increased use of risk-based supervision is welcome, and the BOL should continue to move towards full implementation. To improve credit risk management the authorities should also focus on supervising related-party lending and large exposures to align with international best practice, and conduct regular validation exercises to ensure accurate reporting as mandated in the 2013 Law on Accounting in line with IFRS.

  • Develop the crisis management and prompt corrective action framework. To complement the move towards risk-based supervision, a Prompt Corrective Action Framework should be devised alongside a Crisis Management Framework, which should have explicit interagency coordination mechanisms, an emergency liquidity assistance framework with appropriate safeguards, and a communications strategy.

Lao P.D.R.: Sequencing of Policy Recommendations for Exchange Rate Reform

* Measures: Macro-prudential measures

Authorities’ Views

24. The authorities noted that the policy recommendations were in line with plans and actions already in train to improve the resilience of the banking system, particularly through the implementation of risk based supervision, the introduction of Basel II standards, public bank restructuring and the assumption of debts related to cancelled infrastructure projects. In addition, they highlighted the new Commercial Bank Law, expected to be passed by the National Assembly in 2018, contains provisions for crisis management and bank resolution. The authorities planned to develop financial soundness indicators to better track developments in the banking system in 2018, and to conduct a national risk assessment for the AML/CFT framework in 2019 in preparation for an AML/CFT evaluation under the revised FATF standards planned for 2020.

C. Promoting Competitiveness and Inclusive Growth

25. Improving the framework for public and private investment. Lao P.D.R. is a land-locked country, and infrastructure needs have been estimated at around 14 percent of GDP. To promote private participation, it will be important to continue development of the legal framework for public private partnerships (PPPs), which will be included in the new Public Debt Management Law. A Public Investment Management Assessment (PIMA) would also be useful to set priorities for public investment reform. Improving the environment for private investment will also be key. In this connection, the government is focused on improving indicators for ease of doing business, and Small Medium Sized Enterprises (SME) development. Reforming and simplifying the tax code and facilitating tax compliance should contribute to improve the business climate.

26. Promoting inclusive growth. Lao P.D.R.’s impressive growth has been accompanied by rising income inequality and persistent gender disparities (Figure 10). The labor force participation rate has been falling for both men and women, which could be explained by the pattern of development, based on capital- and natural resource-intensive investments, that has not produced enough formal employment to keep up with entrants into the labor force. However, female labor force participation has not fallen as fast, and from 2010 female labor force participation was higher than male labor force participation. This is most likely due to:

  • Migration of men to neighboring countries where there are employment opportunities at much higher wages. The possibilities of mobility for women are much more restricted;

  • The fact that the majority of the population remains in rural areas where female labor force participation is higher, related to unpaid work on family-run farms;

  • The predominance of women in low-skilled services (trade and hospitality, for example) that have been an important driver of employment growth recently in Lao P.D.R.

Figure 6.Lao P.D.R.: Financial Conditions Have Loosened

Figure 7.Lao P.D.R.: Bank Profitability Remains Weak Due to High NPLs

Figure 8.Lao P.D.R.: Credit Expansion Has Raised Concentration Risks and Squeezed Capital Buffers

Figure 9.Lao P.D.R.: Increased Foreign Borrowing and Interest Rate Caps Risk Re-Dollarization

Figure 10.Lao P.D.R.: Income and Gender Inequality Remain Very High

Lao PDR: Social Assistance Spending

(In percent of GDP)

Sources: IMF FAD Expenditure Assessment Tool (EAT), World Economic Outlook, ASPIRE, and IMF Pension Indicators.

Women are thus concentrated in low-skilled and low-productivity employment, a fact which reflects gender disparities in access to education, health and other services. This also leads to a concentration of women workers in the informal sectors. Raising human capital, especially among women and poorer households, and increasing connectivity through infrastructure investments, will thus be critical to promote sustainable and inclusive growth, improve productivity and promote diversification as Lao P.D.R. integrates into the larger ASEAN economy

27. Improving statistics. Weak data impose significant constraints on policymaking in Lao P.D.R., particularly in the external sector, fiscal accounts and banking system. The authorities have expressed an interest in joining the IMF’s Enhanced General Data Dissemination Standard (e-GDDS) and taken up technical assistance in balance of payments compilation, national accounts and fiscal accounting, and improvements are expected.

Authorities’ Views

28. The authorities recognize the importance of improving the environment for private investment, and noted that the 8th National Socio-Economic Development Plan 2016–2020 (NSEDP) focuses on the non-resource private sector (especially SMEs), and improving human capital through education and health to compete more effectively within the gradual integration in the ASEAN Economic Community. They also noted that in 2018 there would be a focus on improving the financial performance of key state owned companies (including Electricite du Laos (EDL) and Lao Airlines) with possible equitization. Inclusive growth was also one of the main goals of the 8th NSEDP, which has explicitly integrated the SDGs (see Box 3) with specific targets set by the National Assembly for spending on health and education in 2018.

Box 3.Welfare and the Sustainable Development Goals

While per capita income has risen rapidly, a consumption equivalent welfare measure has not kept pace. This is due mainly to a focus on investment-led growth, lower life expectancy and the costs of deforestation. The authorities’ focus on integrating the SDGs into development planning augurs well for a correction of these trends going forward.

Lao P.D.R.’s focus on meeting the SDGs illustrates the authorities’ goal of improving economic welfare, social inclusion and environmental sustainability. Lao P.D.R. has integrated the SDGs into its 8th National Social Economic Development Plan (NSEDP for 2016–2020) through a consultative process, including academia, civil society, government agencies, the private sector and development partners. As a result, around 60 percent of the monitoring and evaluation indicators in the 8th NSEDP are explicitly linked to the SDGs, covering most areas of social wellbeing and environmental action. In addition, Laos has designated the removal of unexploded ordinance (UXO) as an additional goal.

Laos will present its voluntary national report (VNR) on progress in implementing the SDGs at the UN high-level political forum (HLPLF) in July 2018. This report will allow Laos to share its experiences, progress and challenges in implementing its SDGs, and will inform the overall review of progress on the Agenda 2030 for Sustainable Development.

A key challenge for Laos’s implementation of the SDGs is the quality of data to monitor progress. While data for basic economic analysis are adequate, many detailed indicators needed to monitor the full range of the SDGs are either of poor quality or do not exist. Data quality issues are compounded at the provincial level.

Table 1.Indicators of Welfare, 2014
IndicatorSDGsLao PDRASEANU.S.World 1/
Life expectancy (years)366.172.478.971.7
Real consumption (percent of U.S. income)1, 2, 38.018.783.025.5
Real consumption (percent of income)1, 2, 372.571.783.081.1
Annual hours worked per capita3, 8870.41132.7820.1753.0
Inequality (Gini coeff.)1037.940.035.236.5
GHG emissions per unit of consumption13, 14, 150.620.130.010.07
GDP per capita (percent of US)11.031.8100.036.8
Welfare per capita (percent of the US) 2/2.517.3100.030.6

Sample of 150 countries.

Consumption equivalent welfare calculations; Bannister and Mourmouras (2017).

Sample of 150 countries.

Consumption equivalent welfare calculations; Bannister and Mourmouras (2017).

As is well-known, the dimensions of well-being codified in the SDGs go well beyond GDP and are difficult to quantify with traditional economic statistics. For example, although Lao P.D.R. has enjoyed growth in real GDP per capita of over 5 percent per year in the last 20 years, inequality has risen and growth has been associated with the depletion of natural resources.

To quantify these trade-offs, staff use an index of consumption equivalent welfare.1 This index aggregates indicators linked to the SDGs in an economically consistent way by measuring their impact on consumption-equivalent welfare. The components of the index (life expectancy, real consumption, hours worked/leisure, inequality and green-house gas equivalent (GHG) emissions) encompass the core SDGs.

The index calculations reveal how the pattern of growth in Laos has had implications for welfare (Table 1). While per capita income in Laos has grown rapidly to reach 11 percent of the U.S. level in 2014, consumption equivalent welfare was only 2.5 percent of the U.S. level, as a result of lower life expectancy, lower consumption and leisure, and higher inequality and GHG emissions. Consumption in particular is not only low in proportion to US income (8 percent), but also in proportion to Laos’ own level of income (at 73 percent), a feature that Laos’ shares with some other ASEAN economies and China, reflecting a focus on capital intensive investment-led growth which limits the distribution of benefits. GHG equivalent emissions are also high in Laos relative to other countries, reflecting the cost of deforestation. The components of the index enter into the calculation in a multiplicative manner (Chart 1). Consumption and GHG emissions are the two elements that are most binding in the welfare calculation, followed by life expectancy.2

Table 1.Lao P.D.R.: Selected Economic and Financial Indicators, 2013–18
GDP and prices (percentage change)
Real GDP growth8.
CPI (annual average)
CPI (end year)
Public finances (in percent of GDP)
Revenue and Grants20.921.017.915.816.717.0
Of which : Mining2.
Of which : Hydro power0.
Of which : Grant4.
Net acquisition of nonfinancial assets 1/
Overall balance-4.3-2.8-4.5-4.6-4.8-4.3
Nonmining balance 2/-6.2-4.6-5.4-5.5-5.7-5.0
Public and public guaranteed debt (in percent of GDP)56.357.957.758.561.165.3
Money and credit (annual percent change)
Reserve money7.730.36.6-
Broad money18.823.414.710.912.922.8
Bank credit to the economy 3/34.514.216.820.915.018.5
Bank credit to the private sector36.311.719.322.016.516.7
Balance of payments
Exports (in millions of U.S. dollars)3,5014,2993,7434,3795,0845,303
In percent change5.422.8-12.917.016.14.3
Imports (in millions of U.S. dollars)7,1637,8177,3666,6367,5388,313
In percent change15.19.1-5.8-9.913.610.3
Current account balance (in millions of U.S. dollars)-3,400-2,657-2,586-1,903-2,204-2,728
In percent of GDP-28.4-20.0-18.0-12.0-13.0-14.9
Gross official reserves (in millions of U.S. dollars)6628169878159791,023
In months of prospective goods and services imports1.
Exchange rate
Official exchange rate (kip per U.S. dollar; end-of-period)8,0308,0968,1198,2318,279
Real effective exchange rate (2010=100)113.9120.9131.1134.5125.9
Nominal GDP
In billions of kip93,868106,797117,252129,279140,019152,822
In millions of U.S. dollars11,97413,26614,36315,91616,98418,337
Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates and projections.

Includes off-budget investment expenditures.

Net lending/borrowing excluding mining revenue.

Includes Bank of Lao P.D.R. lending to state-owned enterprises and subnational levels of government.

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

Includes off-budget investment expenditures.

Net lending/borrowing excluding mining revenue.

Includes Bank of Lao P.D.R. lending to state-owned enterprises and subnational levels of government.

Lao PDR: Components of the Welfare Index

The welfare calculation illustrates how structural reforms are necessary to secure more sustainable and inclusive growth in line with the SDGs. Reforms to promote diversification of the productive base and facilitate private economic activity will create opportunities for more productive employment and reduce rural/urban and gender inequality. These include infrastructure investments, reform to the business environment to promote SMEs, training and education, and investments in health, especially for children and women. In addition, the ongoing efforts of the authorities to more tightly regulate illegal logging and mining activities will help secure environmental sustainability.

1/ Charles I. Jones and Peter J. Klenow, “Beyond GDP? Welfare across Countries and Time” American Economic Review 2016, 106 (9) 2426–2457, and Geoffrey J. Bannister and Alexandros Mourmouras, “Welfare vs. Income Convergence and Environmental Externalities” (IMF working paper WP/17/271).2/ A level of 1 represents the maximum attainable for each components and for the index.

Staff Appraisal

29. Lao P.D.R. has charted a plan for reform to address its vulnerabilities and development challenges. Growth has slowed slightly, in part because the government has begun to address issues of illegal logging and rationalize public investment, but is expected to remain robust in the medium-term. Inflation remains low, anchored by the tightly managed exchange rate, even though there has been a moderate depreciation over the last 12 months. The government recognizes the high level of public debt as a key concern, and is moving to implement revenue and expenditure reforms. It has also moved to reduce vulnerabilities in the banking system through better regulation and supervision and recapitalization/restructuring of public banks. It has integrated the Sustainable Development Goals into its 8th five-year plan (2016–2020) to promote more inclusive and environmentally friendly growth.

30. A transition to more sustainable and inclusive growth will require further reforms to address risks. Under staff’s baseline scenario the economy continues to be subject to fiscal risks and potential debt distress, and a deterioration of the external environment could lead to tighter financial conditions, a slowdown in external financing, and lower growth that could put further pressure on debt sustainability. In addition, macro-financial feedback loops between lower growth, external shocks, the exchange rate, fiscal revenues and bank and corporate balance sheets, could exacerbate the impact on growth, financial conditions, public debt and poverty.

31. To remove the risk of debt distress, debt should be anchored on a ratio of 50 percent of GDP and a gradual fiscal consolidation resumed. Short-term revenue and expenditure policies and a reform of exemptions could begin to contain the fiscal deficit while a medium-term revenue strategy is designed, oriented at bringing the fiscal deficit down to an average of 2.6 percent of GDP over the next 5 years. At the same time, changing the mix of public expenditures towards investment and social spending would help improve health and education outcomes. A PIMA could help establish priorities for public investment reforms. Staff welcomes authorities’ efforts to settle past investment arrears, better manage public investment projects and debt under the new Public Debt Management Law and initiatives to reduce leakages and better administer the tax regime.

32. The external position is vulnerable, underscoring the need for fiscal consolidation and allowing greater exchange rate flexibility over the medium-term. In the near term, using the flexibility afforded under the 5-percent band will help regain competitiveness and accumulate reserves, and removing interest rate caps will improve the allocation of credit. Ongoing efforts to develop the payments system are welcome, but further reforms are needed to improve the functioning of the interbank and local debt markets. These are important steps in the process of moving towards an alternative anchor for inflation which, together with efforts to address currency mismatches in corporate and bank balance sheets, should allow greater exchange rate flexibility in the future.

33. Progress has been made in strengthening banking regulation and supervision, and reform of public banks, but vulnerabilities remain. The removal of doubtful loans related to cancelled infrastructure projects that amount to five percent of the loan book should help significantly strengthen bank balance sheets. However, further efforts are needed to reduce foreign currency lending risks, identify NPLs and strengthen capital buffers. Staff welcomes the new Central Bank Law and Commercial Bank Law that will put in place crisis management and prompt corrective action frameworks, and progress in developing the AML/CFT framework.

34. The gap between income per capita and welfare indicators illustrates the need to pursue policies for more inclusive and sustainable growth (Box 3). Promoting economic diversification and investing in human capital are key. Developing public infrastructure and putting in place better conditions for private investment will contribute to these ends. In addition, improving public education and health services, particularly for women and children, will help support growth while reducing regional and gender inequality. Finally, improving statistics will be important to support economic policy and attaining the SDGs. Staff welcomes the authorities interest in joining the e-GDDS.

35. It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

Table 2.Lao P.D.R.: Balance of Payments, 2014–22
(In millions of U.S. dollars; unless otherwise indicated)
Current account-2,657-2,586-1,903-2,204-2,728-2,751-2,786-2,707-2,761
Merchandise trade balance-3,518-3,624-2,257-2,454-3,010-2,979-2,970-3,023-3,010
Exports, f.o.b.4,2993,7434,3795,0845,3035,8436,3905,8886,209
Mining and hydropower1,8461,8832,4442,7762,8793,2313,5432,8062,891
Other exports2,4541,8591,9352,3082,4242,6122,8473,0823,319
Imports, c.i.f.7,8177,3666,6367,5388,3138,8229,3598,9119,219
Mining, hydropower, railway2,7882,5852,4682,9593,2443,2363,2192,2001,847
Mining projects463435435422406412230770
Hydropower and railway projects2,3252,1502,0332,5382,8372,8232,9892,1231,847
Petroleum imports734383331435527533553595657
Other imports4,2964,3993,8374,1444,5435,0545,5876,1176,716
Services (net)373450425360383412417430443
Of which: Tourism621684653609651703732769807
Income (net)-290-217-479-569-593-712-800-720-845
Interest payments-256-181-392-434-442-465-541-466-463
Of which: Public-180-117-159-185-211-234-253-268-281
Mining and hydropower-58-52-215-233-210-201-181-162-145
Mining projects0008110000
Hydropower projects-59-52-216-240-221-201-181-162-145
Dividends and profit repatriation-307-302-387-505-554-682-708-583-756
Of which: Mining and hydropower-241-233-314-443-463-527-618-489-656
Of which : Mining projects-171-158-135-263-268-260-21400
Hydropower projects-71-75-178-180-195-267-404-489-656
Transfers (net)778805409458492528566607651
Capital and financial account2,3242,1941,5012,3692,7732,9542,9362,9302,939
Public sector7381,318840842802746720688700
Banking sector (net)-187898131713634157131110
Private sector1,60587-1531,3561,9352,1742,0602,1102,128
Foreign direct investment (net) 1/2,5982,0762,1102,8142,8982,7542,3532,5662,713
Of which: Mining and hydropower projects2,3251,8141,7892,2412,0841,6911,2941,4321,553
Of which: Mining projects10-520-25-25-252000
Hydropower projects2,3151,8201,7692,2662,1101,7161,2741,4321,553
Other private flows 3/-993-1,989-2,263-1,458-963-580-293-456-585
Overall balance-333-392-40316545202150223178
Central bank net foreign assets-159-174403-165-45-202-150-223-178
Assets (increase -)-154-171404-164-44-201-149-222-177
Liabilities (reduction -)-5-3-1-1-1-1-1-1-1
Memorandum items:
Current account balance (in percent of GDP)-20.0-18.0-12.0-13.0-14.9-13.7-12.7-11.3-10.6
Excluding official transfers-24.6-22.3-13.3-14.5-16.4-15.2-14.2-12.8-12.1
Resource current account balance (in percent of GDP) 2/-9.4-6.9-3.5-5.1-5.7-3.7-2.2-0.20.9
Nonresource current account balance (in percent of GDP)-10.7-11.1-8.5-7.9-9.2-10.1-10.5-11.1-11.5
Imports excluding hydropower and mining related9.3-4.9-12.89.910.710.
Non-FDI financed CA (in percent of GDP)-7.6-8.4-9.1-7.6-5.1-2.7-0.6-1.4-1.8
Gold production (000s oz.)1692222112101951801801200
Gold price (U.S. dollar per oz.)1,2661,1601,2481,2601,3081,3371,3711,4011,431
Copper production (000s ton)15616616616515516013000
Copper price (U.S. dollar per ton)6,8635,5104,8686,1796,9757,0107,0137,0087,008
FDI (in percent of GDP)19.614.513.316.615.813.710.710.710.4
Gross official reserves8169878159791,0231,2241,3731,5951,772
In months of prospective imports of goods and nonfactor services1.
(Excluding imports associated with large resource projects)
Nominal GDP at market prices13,26614,36315,91616,98418,33720,05921,93823,90626,022
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.

Includes errors and omissions.

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.

Includes errors and omissions.

Table 3.Lao P.D.R.: General Government Operations, 2014–2022
(In billions of kip)
Revenue and Grants23,55421,96820,49023,37025,90529,32832,38634,97837,800
Of which: Resource revenue 1/2,3701,9792,0512,4352,0613,3913,8613,7833,435
Nonrenewable resources1,4451,1001,0821,1911,0931,6901,6971,082380
Renewable resources9248809691,2439681,7012,1652,7023,055
Nonresource revenue16,17817,28516,69118,45721,09222,91025,19527,53230,336
Of which: Resource revenue 1/1,8411,4931,4511,8101,3382,6312,9082,4451,978
Nonrenewable resources1,3521,0259821,1281,0251,6271,601961358
Renewable resources4884674696813131,0041,3061,4841,621
Nonresource revenue13,65914,65014,61715,41617,52018,91920,82923,01625,271
Income and profit taxes3,1303,3173,3753,3054,0994,8715,1985,2645,418
Income taxes1,0691,4701,6241,2471,8802,1832,4822,8803,344
Profit taxes2,0611,8471,7512,0592,2192,6882,7162,3842,074
Of which: Mining6264965085415101,0221,029623256
Of which: Nonmining1,4351,3511,2431,5181,7091,6671,6871,7611,818
Excise duties3,3613,5674,0424,2554,8425,2075,5886,0156,428
Import duties1,3961,8251,8101,3761,4711,7221,9942,2572,493
Other taxes2,2232,0231,6961,5741,7601,5391,9112,0782,301
Other revenues3,0483,1222,6743,6664,2954,7515,3205,8546,521
Of which: Dividends8977477001,0771,1001,1651,3941,8101,972
Of which: Resource revenue 1/5294876006257237609541,3381,456
Nonrenewable resources93741006368639512123
Renewable resources4364135005626556978581,2181,434
Nonresource revenue2,5192,6352,0743,0413,5723,9924,3664,5165,065
Compensation of employees8,7148,8959,19410,50910,50010,97312,14513,40314,709
Interest payments1,0641,3221,5851,6612,3702,7083,0603,4203,796
Of which: External7131,0881,2381,3441,8401,9212,1162,2882,437
Other recurrent (including arrears)3,0964,5575,0213,4443,7875,2055,7476,3316,969
Net acquisition of nonfinancial assets11,2489,9867,81811,23312,35213,58715,11616,66318,309
Domestically financed (including arrears)3,8973,3432,9474,0004,6005,1605,9546,7017,478
Externally financed7,3506,6424,8717,4787,7528,4279,1629,96110,832
Net lending/borrowing-3,080-5,551-5,965-6,757-6,504-6,839-7,783-9,350-10,990
Net acquisition of financial assets260-1,726-2,301000000
Net incurrence of liabilities5,9306,4625,9656,7576,5046,8397,7839,35010,990
Memorandum items:
Net lending including discrepancy
Nonmining balance 2/-4,526-6,650-7,047-7,948-7,597-8,528-9,480-10,432-11,370
Operating balance8,1674,4351,8534,4765,8486,7497,3337,3127,319
Domestic financing2,4113,1101,9024,6114,3764,7525,3086,6037,890
Mining revenue1,4691,1001,0821,1911,0931,6901,6971,082380
Hydropower revenue9248809691,2439681,7012,1652,7023,055
Nonresource revenue16,17817,28516,69118,45721,09222,91025,19527,53230,336
Real expenditure (percent, year-on-year) 3/000000000
(In percent of CY GDP, unless otherwise indicated)
Revenue and Grants21.017.915.816.717.017.417.417.116.8
Of which: Resource revenue 1/
Nonrenewable resources1.
Renewable resources0.
Nonresource revenue14.414.012.913.213.813.613.513.413.4
Of which: Resource revenue 1/
Nonrenewable resources1.
Renewable resources0.
Nonresource revenue12.211.911.311.011.511.
Income and profit taxes2.
Income taxes1.
Profit taxes1.
Of which: Mining0.
Of which: Nonmining1.
Excise duties3.
Import duties1.
Other taxes2.
Other revenues2.
Of which: Dividends0.
Of which: Resource revenue 1/
Nonrenewable resources0.
Renewable resources0.
Nonresource revenue2.
Grants 3/
Compensation of employees7.
Interest payments0.
Of which: External0.
Other recurrent (including arrears)
Net acquisition of nonfinancial assets 3/
Externally financed6.
Net lending/borrowing-2.8-4.5-4.6-4.8-4.3-4.1-4.2-4.6-4.9
Net acquisition of financial assets-0.7-1.4-
Net incurrence of liabilities5.
Net lending including discrepancy-4.6-3.9-6.4
Nonmining balance 2/-4.1-5.3-5.5-5.7-5.0-5.1-5.1-5.1-5.0
Operating balance7.
Domestic financing2.
Mining revenue1.
Hydropower revenue0.
Nonresource revenue14.414.012.913.213.813.613.513.413.4
Real expenditure (percent, year on year) 3/2.60.9-
GDP (calender year)106,797117,252129,279140,019152,822168,514186,086204,991225,640
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.

Net lending/borrowing minus mining revenues.

Data was revised to bring on budget grant-financed capital expenditure.

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.

Net lending/borrowing minus mining revenues.

Data was revised to bring on budget grant-financed capital expenditure.

Table 4.Lao P.D.R.: Monetary Survey, 2015–18
(In billions of kip, unless otherwise indicated)
Bank of Lao P.D.R. (BoL)
Net foreign assets7,4447,2458,3958,5098,2368,6189,004
In millions of U.S. dollars9158841,0211,0309911,0511,098
Net domestic assets13,68613,59013,58114,05414,19414,28516,062
Government (net)418-1,212-365350-983-983
State-owned enterprises6,4756,4546,4596,4376,4156,4546,456
BoL securities-2,066-2,903-2,912-3,338-3,357-3,100-3,100
Other items (net)4,0063,5534,8324,6434,1085,5007,013
Reserve money21,13120,83521,97622,56322,43022,90325,067
Currency in circulation8,2907,8378,7688,6298,6389,65810,571
Bank Reserves12,84012,99813,20813,93413,79213,24414,496
Of which: Foreign currency5,4265,4935,5815,8885,8285,5976,126
Monetary survey
Net foreign assets-2,029-11,268-9,712-11,743-9,903-12,800-14,101
In millions of U.S. dollars-249-1,374-1,181-1,421-1,195-1,561-1,719
Of which: Commercial banks-1,165-2,258-2,201-2,451-2,186-2,612-2,817
Net domestic assets62,02877,80879,62682,97682,18987,897106,357
Government (net)4,7944,3963,8735,1933,9235,1799,555
Credit to the economy54,76666,19967,73469,70071,57076,12990,213
In kip27,25029,30332,59734,19335,74738,66945,823
In foreign currencies27,51634,58935,13735,50735,82337,46044,390
Of which: Private credit43,47653,02854,58057,01558,81361,75572,076
In kip23,93128,17729,17530,80732,391
In foreign currencies19,54524,85125,40526,20826,422
Other items (net)2,4677,2128,0208,0836,6966,5896,589
Broad money59,99966,54069,91471,23372,28675,09892,257
Currency in circulation5,8805,5346,1436,0926,1197,3599,041
Kip deposits27,48629,30330,34530,90331,46034,40342,263
Foreign currency deposits (FCDs)26,63331,70233,42634,23734,70833,33640,953
(Annual percent change, unless otherwise indicated)
Reserve money6.6-1.43.914.
Broad money14.710.917.316.412.412.922.8
Credit to the economy16.820.920.917.113.315.018.5
Credit to the private sector19.322.024.220.417.316.516.7
In kip17.217.722.624.623.4
In foreign currencies22.
Deposit growth17.612.718.717.212.611.022.8
Memorandum items:
Money multiplier2.
Loan/deposit (percent)80.397.996.197.198.5102.9100.7
In kip (percent)
In foreign currency (percent)73.478.476.076.576.1
Gross official reserves (in millions of U.S. dollars) 1/9878159519599219791,023
Exchange rate, end-of-period (kip per U.S. dollar)8,1328,2008,2258,2628,286
Nominal GDP (in billions of kip)117,252129,279140,019140,019140,019140,019152,822
Dollarization rate (FCDs/broad money; in percent)44.447.647.848.148.044.444.4
Gross reserve/Reserve Money38323635343533
Required reserves3,2263,7203,9033,9924,0514,0384,960
Excess reserves (percent of GDP)
Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates.

Defined as foreign assets of the Bank of the Lao P.D.R.

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

Defined as foreign assets of the Bank of the Lao P.D.R.

Table 5.Lao P.D.R.: Medium-Term Macroeconomic Framework, 2013–22
Output and prices(Percent change, unless otherwise indicated)
Real GDP8.
Consumer prices (annual average)
Consumer prices (end-period)
GDP per capita (in U.S. dollars)1,9002,0752,2122,4172,5422,7062,9183,1463,3803,627
Public finances (in percent of GDP)
Tax and nontax revenue16.116.615.614.514.915.215.615.615.315.0
Hydro power0.
Net acquisition of nonfinancial assets 1/
Overall balance-4.3-2.8-4.5-4.6-4.8-4.3-4.1-4.2-4.6-4.9
Nonmining balance 2/-6.2-4.6-5.4-5.5-5.7-5.0-5.1-5.1-5.1-4.9
Balance of payments
Current account balance-3,400-2,657-2,586-1,903-2,204-2,728-2,751-2,786-2,707-2,761
In percent of GDP-28.4-20.0-18.0-12.0-13.0-14.9-13.7-12.7-11.3-10.6
Trade balance-3,662-3,518-3,624-2,257-2,454-3,010-2,979-2,970-3,023-3,010
In percent change5.422.8-12.917.016.14.310.29.3-7.85.5
Of which: Resources2,0341,8461,8832,4442,7762,8793,2313,5432,8062,891
In percent change0.6-
In percent change15.19.1-5.8-9.913.610.36.16.1-4.83.5
Of which: Resources2,5612,7882,5852,4682,9593,2443,2363,2192,2001,847
In percent change33.88.9-7.3-4.519.99.6-0.3-0.5-31.7-16.1
Services and income (net)2483233-54-208-210-300-382-290-401
Capital account balance3,3232,3242,1941,5012,3692,7732,9542,9362,9302,939
Of which: FDI2,1252,5982,0762,1102,8142,8982,7542,3532,5662,713
Overall balance-77-333-392-40316545202150223178
Debt and debt service (excluding unidentified arrears)
Public and public guaranteed debt (in percent of GDP)56.257.957.758.561.165.365.966.267.970.1
External debt (in percent of GDP)90.7100.1102.7104.5113.7119.8122.1120.5113.8107.8
External public and public guaranteed debt (in percent of GDP)45.845.645.446.649.149.948.847.446.946.5
Gross official reserves
In millions of U.S. dollars6628169878159791,0231,2241,3731,5951,772
In months of imports1.
In months of imports (excluding resource projects)
Memorandum items:
Nominal GDP (in billions of kip)93,868106,797117,252129,279140,019152,822168,514186,086204,991225,640
Sources: Data provided by the Lao P.D.R. authorities; and IMF staff estimates and projections.

Includes off-budget investment expenditures.

Net lending/borrowing minus mining revenue.

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

Includes off-budget investment expenditures.

Net lending/borrowing minus mining revenue.

Appendix I. External Sector Assessment1,2

Lao PDR’s external position is assessed to be substantially weaker than implied by fundamentals and desirable policies, although several factors are mitigating risks. The vulnerable external position needs strengthening and building-up of buffers. The EBA-lite methodology estimates the real effective exchange rate to be overvalued by 44 to 49 percent at end-2016, and reserves are inadequate for precautionary needs.

1. High external debt raises vulnerability concerns. Lao PDR’s Net Foreign Asset position is estimated to be mostly composed of FDI liabilities which do not pose a major concern for external sustainability, and public and publicly guaranteed external debt. PPG external debt remains high at around 47 percent of GDP at end-2016, of which more than half is in U.S. dollars. It is estimated to have increased to 49 percent at end-2017. With this high level of foreign-currency denominated debt, and a small cushion of international reserves, the economy remains vulnerable to abrupt exchange rate depreciation.

External Balance Assessment (Lite)
Real Exchange Rate Gap
Current account approach43.7%
REER approach49.4%
Current account
Actual current account-11.9%
Current account norm-1.3%
Current account gap-10.7%
o/w policy gap-14.1%
Elasticity of current account-0.24
Source: IMF staff estimates.
Source: IMF staff estimates.

2. The current account deficit is weaker than implied by fundamentals and desirable policies. In 2016, Lao PDR’s current account deficit was estimated at 12 percent of GDP, a considerable improvement of 6 percentage points over 2015. This can mostly be explained by an increase in electricity exports, as well as a fall in import values on the back of lower commodity prices. Some of this improvement was reversed in 2017, with the current account deficit estimated at 13 percent of GDP. For end-2016, the current account approach under the EBA-lite methodology estimates a cyclically-adjusted current account deficit norm of -1.3 percent of GDP, implying a gap of -10.7 percent. The resulting current account gap translates into a REER overvaluation of 44 percent.

Nominal exchange rate developments

(Kip/Baht: LHS; Kip/Renminbi: RHS)

Sources: Haver; IMF staff calculations

3. The EBA-lite methodology estimates the real effective exchange rate to be strongly overvalued. The REER on average appreciated by 4 percent between 2015 and 2016. For end-2016, the IREER model under the EBA-lite methodology estimates an overvaluation of 49 percent compared to the underlying fundamentals and desirable policies. Given that the kip is pegged to the U.S. dollar, which strengthened considerably in 2016, and positive but narrowing inflation differentials with respect to its main trading partners (Thailand and China), the appreciation is mostly related to a nominal appreciation of the kip to the baht and renminbi. This nominal appreciation trend has reversed in 2017.

4. Trends in the balance of payments are consistent with an overvaluation of the kip. A significant proportion of Lao’s balance of payments is inelastic to price and exchange rate movements, particularly imports related to FDI projects, electricity exports under fixed price and quantity contracts, and natural resource exports (metals) priced in dollars. Nevertheless, as the overall current account deficit fell by 6 percentage points of GDP from 2015 to 2016, the non-resource current account deficit (which remains high at 8½ percent of GDP in 2016), only fell by three percentage points, mainly reflecting a slowdown in tourism. For 2017, it is estimated that the non-resource current account deficit fell half a percentage point.

5. Reserves continue to be inadequate for precautionary needs. Reserve coverage metrics are significantly lower than the level desirable for countries with a fixed exchange rate regime and highly dollarized financial sector, according to the Fund’s reserve adequacy metric. As of December 2016, reserves were equivalent to about 1 month of prospective imports of goods and services, 10 percent of broad money, 21 percent of foreign currency deposits and 5 percent of GDP. These reserve coverage levels are significantly below the recommended level of at least three months of prospective imports or up to 20 percent of broad money, respectively, and have further deteriorated compared to 2015. For 2017, reserve coverage levels are expected to remain broadly in line with their 2016 values. The authorities have an alternate accounting which excludes imports related to FDI and improves import cover to around 4 months.

Reserve Adequacy, 2016

Sources: IMF staff calculations

6. Staff’s overall assessment is that the external position is vulnerable to shocks and requires strengthening. Though several factors, such as the high FDI-cover of imports or recent depreciation of the U.S. dollar mitigate risks, build-up of buffers are needed to address vulnerabilities. Fiscal consolidation and a gradual depreciation of the exchange rate within the current regime would help reverse the trend appreciation and increase international reserves.

Appendix II. Risk Assessment Matrix
EventUp/Down-sideProbabilityImpactTransmissionPolicy Recommendations
Inadequate fiscal consolidationMediumHighPublic debt rises further, current account deficit deteriorates, loss of confidence, capital outflows, exchange rate pressure, and forced fiscal retrenchment.Maintain fiscal consolidation efforts; gradually raise non-mining tax revenues; rationalize current expenditures; limit non-concessional external borrowing.
Capital positions for SOCBs deteriorate further due to rising NPLsHighHighSharp slowdown in credit growth, tightening in domestic liquidity conditions, capital outflows, putting further pressure on the exchange rate.Recapitalization of systematically important banks. Eliminate forbearance and ensure that all banks meet the mandatory minimum CAF to reduce possibility of external shocks being amplified by banking system failure. Accelerate NPL resolutions.
Poor agriculture harvest due to slow growth in productivity and extreme weatherMediumLowLower exports to China, Thailand and Vietnam, worsening of current account deficit. Limited contribution to poverty reduction, increase in food price inflation.Strengthen supply chain connectivity to improve access to markets and improve range of agricultural products, including seeds selection. Promote structural reforms to diversify the economy and improve agricultural productivity.
Tighter global monetary conditionsHighMediumFX deposit outflow, foreign reserves fall further, exchange rate pressure and the parallel market rate widens.Build up foreign reserve to buffer against external shocks; allow for greater exchange rate flexibility; where appropriate release limited short-term liquidity to troubled banks; expedite work on a crisis management framework; maintain fiscal consolidation path.
Significant China slowdown and its spilloversMediumMediumLower commodity prices, a slowdown in tourism and agriculture exports coupled with weaker FDI and banking sector flows.Expedite structural reforms to accelerate diversification. Improve the business climate and accelerate compliance with WTO commitments. Ensure adequate emergency liquidity.
Lower commodity prices, terms of trade shockLowMediumLower mineral revenues, fiscal deficit and current account deficit widen, public debt levels rise; tightening in domestic liquidity conditions. Abrupt exchange rate deprecation leads to capital flight and banking system instability.Maintain a fiscal consolidation path, allow limited exchange rate depreciation and build up international reserves and government deposits. Expedite efforts to raise non-mineral tax revenues.
The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term (ST)” and “medium term (MT)” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.
The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term (ST)” and “medium term (MT)” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.
Appendix III. De-Dollarization in Lao P.D.R.1

1. Dollarization, the domestic use of foreign currencies, has been relatively prevalent in Lao PDR, both in currency and assets. Relatively low levels of domestic currency in circulation suggest high levels of currency substitution, the use of foreign currency as a means of payment and unit of account. Similarly, financial dollarization, which involves banks taking deposits and lending in more than only the local currency, has remained high.

2. Financial dollarization in Lao PDR has been on a declining trend, but has remained at around 50 percent of both deposits and credit over recent years (Figure 1). Compared to other countries in the region, this is a much higher ratio than Vietnam which has managed to successfully de-dollarize to around 10 percent deposit and 8 percent credit dollarization. Financial dollarization in Cambodia, on the other hand, remains high at over 90 percent. Yet in all three countries, foreign currency deposits have been rising. A fall in the deposit dollarization ratio is therefore mostly related to faster growth of local currency deposits and local currency in circulation than that of foreign currency deposits, possibly due to financial deepening.

Figure 1:Dollarization in the Region

Source: Country authorities; and IMF staff calculations

3. Some de-dollarization is desirable for Lao PDR. While there are benefits to dollarization, such as support of financial development, or facilitation of foreign investment via lower transaction costs and exchange rate risk, adverse effects on macroeconomic policies and financial stability make lower dollarization levels desirable. In Lao PDR, the corporate and banking sectors have been exposed to large risks through currency mismatches, and balance sheet vulnerabilities to foreign exchange risks can make exchange rate flexibility costly. The limited ability of the BOL to provide funding in foreign currency could increase the likelihood of a liquidity crisis.

4. Analytical work on the drivers of financial de-dollarization for Lao PDR and Vietnam shows the importance of macroeconomic stabilization policies and adequate financial policies. Vietnam has successfully de-dollarized on the back of credible macroeconomic policies, prudential measures, a well-functioning foreign exchange market, and domestic financial market development. The empirical results for both countries suggest that well anchored inflation, and exchange rate policy that allows for more volatility and low parallel market premia support de-dollarization; as dollarization is very persistent, further measures such as domestic financial market development and prudential regulation encourage the shift to local currency-denominated products.

Appendix IV. 2017–2019 Surveillance Agenda
Multi-Year Strategic Surveillance and TA Matrix: Lao PDR
Issues to CoverMacro-criticalityTraction with authoritiesXArticle IVIntegration with TA and capacity building
201720182019Planned and ongoingFY2017
1. Traditional macroeconomic Issues (Real, Fiscal, BOP, MON)HHXXXXX
Issues for Further Integration
2. Macro-financial Issues
2–1. Capital Inflows and SpilloversMMFF
2–2. Monetary reform and exchange rate liberalizationHHFFFXX
2–3. Banking Sector SoundnessHHFFFX
2–4. Balance Sheet Currency MismatchHHF
2–5. Macroprudential PolicyMMXFFX
2–6. Financial Supervision and RegulationHHFFFXX
2–7. Currency Substitution and De-dollarizationMMXFF
3. SDGs/FfD Commitments
3–1. Domestic Revenue mobilizationHHXFFXX
3–2. Infrastructure InvestmentHHXFFXX
3–3. Building Policy space/economic resilienceHHXF
3–4. Environmental sustainability equity/inclusionHMXFF
3–5. Fragile and Conflict-Affected States needN/AN/A
3–6. Domestic financial market promotionHMXF
3–7. Data enhancementHMFFFXX
4. Fund’s New “Core” Issues
4–1. GenderLLX
4–2. Income InequalityMMX
4–3. Climate Change and SustainabilityHHX
Key: X, new topic; F, follow up on previous year
Key: X, new topic; F, follow up on previous year
Appendix V. Rebasing of the National Accounts1

1. The Lao Statistics Bureau (LBS) released rebased GDP numbers for 2012 – 2016, which are based on industry sector weights from 2012, and show nominal GDP to be around 14 percent larger in nominal terms than previously estimated. By incorporating real estate and education sectors, the rebasing has increased the share of service sector activity in total GDP from 43 to 48 percent. The share of agriculture has declined from 25 to 20 percent. The revised series shows that real GDP growth was 0.2 percent lower in 2014 and 2015 compared to the old GDP based series, but 0.1 higher in 2016.

Sectoral shared under 2002 base

(In percent, FY2016)

Sectoral shared under 2012 base

(In percent, FY2016)

Level of GDP under rebasing

(In U.S million dollars)

Real GDP growth under new and old base

(In percent, y/y change)

Lao P.D.R.’s aspiration, as stated in 8th National Socio-Economic Development Plan (NSEDP), is to graduate from LDC status by 2020. An upcoming Triennial Least Developed Countries (LDC) Review, to be held in 2018 by the UN Committee for Development Policy (CDP) will determine how close Lao P.D.R. is to reaching the threshold for graduation.

The de jure exchange rate arrangement is a managed float, but the de facto classification has been changed from a “stabilized arrangement” to a “crawl-like” arrangement in late 2016 and 2017 as the kip has followed a depreciating trend (by about 2 percent in total) with respect to the U.S. dollar.

The authorities exclude a measure of FDI-related imports from the calculation which results in an estimated reserve adequacy of about 4 months of non-FDI-related imports.

Under this alternative scenario, the domestic debt to GDP ratio remains broadly stable (in line with the authorities’ intention to develop the local debt market) and the external public and publicly guaranteed (PPG) debt is reduced, resulting in an overall public debt ratio of 50 percent of GDP. The reduction of PPG external debt would lead to a low risk of debt distress with all debt indicators below their relevant thresholds, including under stress tests. For an overall debt target of 55 percent of GDP some indicators would breach the indicative threshold under the most extreme stress test.

This table is based on information gathered from recent technical assistance on tax policy reform. Due to a lack of data, staff is unable to make precise estimates of revenue gains from these reforms. Current technical assistance in tax administration, as well as a medium-term revenue strategy (MTRS) mentioned below, would aim to quantify the gains from these reforms and others.

This is compared to a scenario where the public wage bill remains constant as a percent of GDP.

Mismatches are currently estimated conservatively at around 4.5–5 percent of GDP for the bank and non-bank private sectors.

Prepared by Anne Oeking.

This assessment is prepared with the latest annual data available for the EBA-lite methodology, which is for 2016.

Prepared by Anne Oeking.

Prepared by Reach Long.

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