The information provided below has become available since the issuance of the staff report. The thrust of the staff appraisal remains unchanged.
1. Headline inflation was virtually unchanged in June 2008—at 10.2 percent (y/y), held down by a further appreciation of the kip and partial pass-through of world oil prices. Since the beginning of 2008, the kip has been allowed to strengthen by around 7½ percent against both the U.S. dollar and Thai baht. Retail pump prices were increased in Lao P.D.R. on July 1, but at the time were 8–10 percent below full pass-through prices.
2. Broad money growth was 32 percent (y/y) in May 2008, continuing to be fueled by external inflows. Bank credit accelerated to 54 percent (y/y), with growth still mostly attributable to the state-owned commercial banks. Gross official foreign reserves were US$717 million at end-June 2008 (4.4 months of prospective nonresource imports)—in line with staff’s projection for year end.
3. The government presented its 2008/09 budget (October–September) to the National Assembly in early July 2008. Both total revenue and recurrent expenditure are now expected to be higher (as a share of GDP) than originally budgeted, but the overall deficit is broadly unchanged. While the revised revenue target is now closer to staff’s projection for 2008/09, higher recurrent spending appears associated with a larger-than-envisaged increase in government wages. Under current plans, the wage bill would be equivalent to 5.2 percent of GDP in 2008/09, compared to staff’s projection of 4.6 percent of GDP. Finally, the budget does not appear to account fully for the capital costs associated with hosting the Southeast Asia Games in 2009, which could now run as high as 1½–2 percent of GDP, but in part are expected to be donor financed.
4. The government has also indicated to the National Assembly that further measures are being considered to limit food price inflation. These include establishing a rice reserve and placing price controls on select agricultural inputs, as well as providing subsidies on energy used and increasing credit available for food production.