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Lao People’s Democratic Republic: Staff Report for the 2013 Article IV Consultation—Informational Annex

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
December 2013
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Information about Asia and the Pacific Asia y el Pacífico
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Fund Relations

(As of September 30, 2013)

Membership Status: Joined on July 5, 1961.

General Resources Account:

SDR MillionPercent Quota
Quota52.9100.0
Fund holdings of currency (Exchange Rate)52.9100.0
Reserve Tranche Position0.00.0

SDR Department:

SDR Million% Allocation
Net cumulative allocation50.68100.00
Holdings51.07100.78

Outstanding Purchases and Loans: None

Latest Financial Arrangements:

TypeDate of

Arrangement
Expiration

Date
Amount

Approved
Amount

Drawn
ECF104/25/200104/24/200531.7018.12
ECF106/04/199305/07/199735.1935.19
SAF09/18/198909/17/199220.5120.51

Projected Payments to the Fund2

(SDR Million; based on existing use of resources and present holdings of SDRs):

Forthcoming
20132014201520162017
Principal
Charges/Interest0.000.000.000.00
Total0.000.000.000.00

Exchange Rate Arrangement

The de jure arrangement is floating. The kip followed a depreciating trend against the U.S. dollar within a 2 percent band from mid-April 2013. Therefore, the de facto arrangement is reclassified retroactively as crawl-like from its previous classification as stabilized, effective April 18, 2013. The authorities’ objective is to limit currency fluctuations vis-à-vis major currencies, including the U.S. dollar and Thai baht, within ±5 percent per annum. The Bank of the Lao P.D.R. (BOL) sets a daily official reference rate, which is calculated as a weighted average of the previous day’s interbank rates. Commercial banks and foreign exchange bureaus are required to maintain their buying and selling rates within ±0.25 percent of the BOL’s daily reference rate for the U.S. dollar. For the euro and baht, the buying and selling rates may not exceed a margin of 0.5 percent. For other currencies, a margin of 2 percent applies.

On May 28, 2010, Lao P.D.R. accepted the obligations under Article VIII, Section 2, 3, and 4, following the elimination of one restriction subject to Fund jurisdiction under Article VIII arising from a requirement to obtain tax payment certificates for some transactions. Lao P.D.R. now maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions, except for restrictions imposed solely for the preservation of national or international security notified to the Fund pursuant to Decision No. 144-(52/51).

Article IV Consultation

The last Article IV consultation discussions were held in Vientiane during June 26–July 5, 2012 and were concluded by the Executive Board on August 31, 2012. The staff report (Country Report No. 12/286) was published on October 18, 2012.

Technical Assistance

Over the past three years, Lao P.D.R. has received technical assistance in the areas of customs and tax revenue administration; price statistics; external sector statistics; and the national accounts. A new Bangkok-based IMF office that will facilitate technical assistance to Lao P.D.R. as well as Myanmar was set up in September 2012.

Resident Representative

Mr. Sanjay Kalra assumed the Resident Representative post for Vietnam and Lao P.D.R., based in Hanoi, on October 16, 2011.

IMF-World Bank Collaboration

The World Bank and the IMF country teams for Lao P.D.R. met on August 30, 2013 to discuss the economic outlook for Lao P.D.R. and the two teams’ work for FY2014. The teams were led by Ms. Keiko Miwa (Country Manager, EASPR, World Bank), and Mr. Ashvin Ahuja (IMF Mission Chief for Lao P.D.R.).

The teams agreed that although Lao P.D.R. had made significant progress, macroeconomic policies have been overly expansionary, resulting in growing macroeconomic and financial sector vulnerabilities. Prudent fiscal and monetary policies, and a strengthening of policy frameworks, are essential to restore fiscal buffers, replenish international reserves, and safeguard banking sector soundness. Most urgently, fiscal policy needs to be put back on a consolidation path over the next few years, which will require lower growth in civil service compensation as well as reforms to public sector financial management.

In the longer run, a key challenge is to achieve more diversified growth, and ensure that the country’s natural resource wealth is developed in a sustainable way that benefits the entire population.

Lao P.D.R.: Bank and Fund Planned Activities in Macro-Critical Structural Reform Areas, June 2013–May 2014
TitleProductsProvisional Timing of

Missions
Expected Delivery Date
1. World Bank ProgramNew series of Poverty Reduction Support Operations (PRSOs)Preparatory work and missions throughout fiscal year 2013–14 (identification mission for PRSO 10 tentatively scheduled in early 2014)Implementation throughout fiscal year. PRSO9 Board discussion in September 2013. PRSO 10 Board discussion expected in September 2014
Customs and Trade Facilitation Project (CTFP) and Trade Development Facility (TDF)OngoingImplementation

throughout fiscal year TDF2 approved in September 2013
Multi-Donor Trust-Fund Project supporting the Government Public Financial Management Strengthening Program (PFMSP)Recently closedSeptember 2013
Hydro-Mining Technical Assistance ProjectOngoingImplementation

throughout fiscal year 2014
Technical Assistance on improving financial soundness indicatorsOngoingImplementation

throughout fiscal year 2014
Lao Statistical Capacity Building Project (LAOSTAT)OngoingImplementation

throughout fiscal year 2014
Analytical work:
Macroeconomic monitoring (Lao economic monitors);OngoingApproval expected in November 2013
Investment climate, human resource development and skills reportsOngoingReports available by June 2014
2. IMF Work ProgramPeriodic staff visits by IMF resident representative based in HanoiJune 2013May 2014
Article IV ConsultationAugust–September 2013Board discussion November 2013
TA on improvement of external sector statisticsJune 2013BTO/TA report in July 2013
TA on natural resources revenue administration (Series of six visits over 2013–16)OngoingBTO/TA report following each visit
TA on tax administration reformOngoingAide memoire in FY2014
TA on bank supervisionDecember 2013 and Q1 2014BTO/TA report in FY2014
3. Joint Work ProgramExternal Debt Sustainability AnalysisSeptember 2013October 2013

Relations with the Asian Development Bank

The Asian Development Bank’s (AsDB) current Country Partnership Strategy (CPS) 2012–2016 is aligned with the government’s development strategy (National Socio-Economic Development Plan (NSEDP, 7th Five-Year Plan)), and seeks to promote inclusive and sustainable economic growth and poverty reduction. The country assistance program evaluation, 2000–09, concluded that the AsDB’s assistance was successful, relevant, and effective. The CPS is designed to help the government diversify the economy in a sustainable and inclusive manner through agriculture and natural resources, education, energy, urban development, and public sector management. The CPS aims to maximize efficiency and sustainability through larger operations implemented over a longer period; maximize synergies with the Greater Mekong Subregion program; and increase responsiveness to emerging issues in a rapidly changing economy. It highlights four thematic areas that will influence the design and focus of activities, including private sector development, governance, gender equity, and regional cooperation and integration. The CPS focuses on four core sectors: education, agriculture and natural resources, water supply and other municipal infrastructure and services, and energy. Strengthening public sector management is a crosscutting issue, key to efficient and effective development in Lao P.D.R. The performance-based allocation of the Asian Development Fund (ADF), based on the country performance assessment (CPA) finalized in 2012, provided Lao P.D.R. with an ADF allocation in the amount of US$156.01 million for the biennial period 2013–14. The CPA for the next allocation period (2015–2016) will be finalized by the end of 2014.

As of end-2012, cumulative loans/grants approved stood at US$752.94 million, out of which a cumulative amount of US$313.84 million was awarded for contracts. During 2012, US$68.61 million were disbursed and US$73.65 million of contracts were awarded. Four new technical assistance (TA) projects for a total of US$3.8 million were approved in 2012, including project preparation; TA projects related to the water supply and sanitation project; human resource development strategy; capacity building TA to strengthen the National Commission for Advancement of Women, supporting decentralized rural infrastructure and implementing regulatory impact assessment.

Lao P.D.R.: Asian Development Bank Commitments and Disbursements, 2002–12 1/(In millions of U.S. dollars)
20022003200420052006200720082009201020112012
Commitments43.234.954.887.060.747.446.681.255.353.2073.65
Disbursements48.654.748.578.776.874.856.975.961.573.2368.61
Source: Data provided by the Asian Development Bank.

Starting from 2006, the commitments and disbursements included both loans and grants.

The commitments and disbursements are as of December of each year

Source: Data provided by the Asian Development Bank.

Starting from 2006, the commitments and disbursements included both loans and grants.

The commitments and disbursements are as of December of each year

Statistical Issues

Assessment of Data Adequacy for Surveillance

General: Data provision has serious shortcomings that significantly hamper surveillance, especially regarding national accounts, government finance, financial sector and external sector statistics. These shortcomings are due to a lack of capacity. During the recent Article IV mission, senior staff from STA held a high level seminar with government officials to discuss a strategy for improving statistics to support the country’s development goals. A comprehensive technical assistance (TA) and training program was agreed to address the specific needs, covering the areas of national accounts, prices, government finance statistics, monetary and financial statistics, and external sector statistics.

National accounts:

National accounts (NA) comprise annual estimates of GDP by activity at current and constant prices (base year =2002), broadly following the System of National Accounts (SNA) 1993. The present methodology for compiling annual GDP by activity at current and constant prices largely uses outdated indicators and ratios, which has affected the accuracy and the quality of GDP. A program of surveys has been set up to improve the situation. The Lao Statistics Bureau (LSB) conducted an economic census in 2012–2013 with the aim of constructing a business register to be used for an annual establishment survey for NA compilation. Lao P.D.R. participates in the IMF’s Statistics Department (STA) project to implement the SNA and International Comparison Project (ICP), funded by the government of Japan, and has received technical assistance (TA) to improve annual national accounts and develop quarterly national accounts (QNA). Following a February 2013 TA mission under this project, collection of quarterly data is scheduled to commence in March 2014, and the LSB plans to implement some methodological improvements at the same time. The first set of QNA is planned to be released early 2015. GDP by expenditure has not been published since 2005. Based on advice provided by a December 2011 mission, the LSB has compiled preliminary GDP by expenditure in current prices for 2007–2011 with 2007 as the base year. Compilation of GDP by expenditure at constant prices is in progress based on deflators discussed during the February 2013 mission.

Prices statistics:

Lao P.D.R. compiles a monthly CPI (December 2010=100) using weights based on the 2007/08 Lao Expenditure and Consumption Survey. A monthly producer price index (PPI), which is to be compiled on a quarterly basis, is currently under development. Its coverage is restricted to mining and quarrying, manufacturing, and electricity. In the medium term, coverage is to be expanded to include tourism and construction activities, and in the long term, to include agriculture, services and other activities.

Government finance statistics: Government finance statistics remain weak. The timeliness of fiscal reporting needs significant improvement. Off-budget activities are not included in the fiscal data, although they have expanded rapidly. Annual budget and outturn data formats do not follow international standards for government finance statistics. Except for the annual data disseminated in the Official Gazette, no fiscal data are disseminated in the country. A mission took place during July 2013 to initiate participation in the Government Financial Statistics TA project funded by the Government of Japan through the Japan Administered Account for Selected IMF activities (JSA) and to launch an enhanced GFSM2001 compilation system starting with an in-country training workshop in August 2013.

Monetary statistics: The classification of monetary data by institutional sector and by financial instrument as well as valuation principles need to be strengthened. The Standardized Report Forms (SRFs), which embody the IMF-recommended framework for compiling monetary statistics, have yet to be introduced. The authorities have requested a one-week MFS training mission that is planned for late January 2014.

External sector statistics:

Data gaps in external sector statistics include the need to implement BPM6, the compilation of the capital account, IIP and external debt statistics (EDS), and there are issues with the periodicity and timeliness of reporting. Limitations on financial resources and the number of compilers have constrained the LSB and the Bank of Lao PDR (BOL) from achieving progress in the compilation of IIP and EDS as initially expected.

Data Standards and Quality

Lao P.D.R. is currently not a General Data Dissemination System (GDDS) participant. The government has expressed its intention to collaborate with the IMF in moving Lao’s macroeconomic statistics closer to the international standards, including to join the IMF’s GDDS, and use it as a framework for development of the national data compilation and dissemination practices. No Data ROSC mission has been conducted.

Reporting to STA

Government finance statistics reporting for publication in the International Financial Statistics (IFS) and the Government Finance Statistics Yearbook, which was initiated in early 2009, is limited to budgetary central government and has been irregular and with long delays. Lao P.D.R. reports quarterly and annual summary budget data in the GFSM 2001 format for publication in IFS and the GFS Yearbook, with a time lag of six months or more, and on an irregular basis.

The reporting of monetary data is irregular and also with long delays. Quarterly BOP data are reported once a year in a highly aggregated format. The last published data in the IFS and the Balance of Payments Statistics Yearbook correspond to 2011.

Table of Common Indicators Required for SurveillanceAs of October 8, 2012
Date of Latest ObservationDate ReceivedFrequency of Data1Frequency of Reporting1Frequency of Publication1
Exchange Rates10/08/1310/08/13DDD
International Reserve Assets and Reserve Liabilities of the Monetary Authorities2June 201308/27/13MIQ
Reserve/Base MoneyJune 201308/27/13MIQ
Broad MoneyJune 201308/27/13MIQ
Central Bank Balance SheetJune 201308/27/13MIQ
Consolidated Balance Sheet of the Banking SystemJune 201308/27/13MIQ
Interest Rates3August 201310/03/13MMM
Consumer Price IndexAugust 201209/05/13MMM
Revenue, Expenditure, Balance and Composition of Financing4—General Government5June 2013 for Expenditure; July for Revenue10/04/13III
Revenue, Expenditure, Balance and Composition of Financing4—Central GovernmentJune 2013 for Expenditure; July for Revenue10/04/13QIM
Stocks of Central Government and Central Government-Guaranteed Debt6NANANA
External Current Account BalanceQ2 201308/27/13QII
Exports and Imports of Goods and ServicesQ2 201308/27/13QII
GDP/GNP2011/1209/16/13AAA
Gross External DebtDec 201209/20/13AAI
International Investment Position7NANANA

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

Any reserve assets that are pledged of otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency, but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency, but settled by other means.

Both market-based and officially-determined, including discount rates, money market rates, and rates on treasury bills, notes and bonds.

Foreign and domestic bank, nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

Any reserve assets that are pledged of otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency, but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency, but settled by other means.

Both market-based and officially-determined, including discount rates, money market rates, and rates on treasury bills, notes and bonds.

Foreign and domestic bank, nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Statement by the Staff Representative on Lao P.D.R.

November 15, 2013

1. This statement provides information that has become available since the staff report was circulated to the Executive Board on October 31, 2013. This information does not alter the thrust of the staff appraisal.

2. Inflation edged down slightly on a year-on-year basis to 6.7 percent in October, from 6.9 percent in September.

3. International reserves increased modestly to US$583 million at end-September (0.9 months of prospective imports) from US$532 million at end-June (0.8 months of prospective imports).

4. Overall credit growth was 31½ percent year-on-year in September, up from 28¼ percent in June.

1Extended Credit Facility (ECF), formerly PRGF.
2When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

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