Regions and Countries

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p. 20 of 47 BACK | NEXT Developing Asia and the Pacific The global economy Newly industrialized economies Central Asian republics, Azerbaijan and Mongolia People’s Republic of China Southeast Asia Cambodia Indonesia Lao People’s Democratic Republic Malaysia Myanmar Philippines Thailand Viet Nam East Timor South Asia The Pacific

Lao People's Democratic Republic

Economic performance

Economic growth: In 2000, real economic growth increased to 5.5 percent, compared with 5.2 percent in 1999 and 4.0 percent in 1998, supported by a more stable macro-economic environment and strong agricultural production. Agricultural production accounted for about half of GDP. Growth in the industry sector was 7.3 percent in 2000, compared with 7.5 percent in 1999. Moderate growth of 7.2 percent was achieved in manufacturing, which accounts for over 75 percent of the industry sector. Despite a weak banking subsector, growth of 6.4 percent in aggregate services was achieved on the strength of the tourism and real estate subsectors.

Employment: The official unemployment rate for 2000 stood at 4.3 percent. Forty-five percent of the population is currently below 15 years of age; the labor force in the Lao PDR is estimated at 1 million to 1.5 million in 2000. Traditional agriculture practices still dominate the economy and currently more than 80 percent of the population is involved in agriculture.

Inflation: Since the second half of 1999, a tight monetary policy has been maintained, which included strict control of central bank credit to the Government, banks, and enterprises, as well as prudent lending by commercial banks. Broad money (M2) grew by 120 percent during the first half of 1999, but then contracted by almost 20 percent during the second half of the year. In 2000, M2 grew by about 36 percent. As a result, the annual inflation rate, as measured by the consumer price index, declined from 128.4 percent in 1999 to 23.2 percent in 2000. The exchange rate has been stable at around 7,500–8,000 kip per US dollar since October 1999.

Fiscal balance: The overall budget deficit was reduced to 8.1 percent of GDP in 2000 from 10.5 percent of GDP in 1999, financed by foreign grants and external loan disbursements. Total revenue collections in 2000 have increased to 13.6 percent of GDP from 12.2 percent in 1999. Government expenditure was reduced from 22.7 percent of GDP in 1999 to 21.7 percent in 2000. The shares in GDP of capital expenditure and current expenditures were 13 percent and 8.7 percent, respectively. Current expenditures are at substantially low levels because of the continued fiscal squeeze of the past several years. Wages and salaries of government workers and maintenance expenditures have fallen significantly in real terms.

External sector: Exports to the Greater Mekong Subregion (GMS) accounted for about 65 percent of total exports, of which 40 percent went to Viet Nam and more than 20 percent to Thailand. In turn, most imports were from the GMS, especially from Thailand. Total exports in 2000 amounted to $331 million, representing an increase of 8.3 percent compared with the previous year. Total imports amounted to $591 million, representing an increase of 6.6 percent relative to 1999. The trade deficit declined from 13.1 percent of GDP in 1999 to 12.0 percent in 2000. Foreign direct investment (FDI) and official development assistance (ODA) increased from $139 million in 1999 to $249 million in 2000; ODA—both bilateral and multilateral—amounted to about 80 percent of total investment inflows. In 2000, official foreign exchange reserves increased to around $130 million, equivalent to 2.5 months of imports. To strengthen its reserve position, the Government transferred revenues from timber royalties directly to its foreign exchange reserve account in 2000. An interbank foreign exchange market was established. Debt service was around $54 million in 2000, equivalent to 11.3 percent of exports of goods and nonfactor services.

Domestic policies: The Government’s efforts to restrain monetary expansion have contributed to economic stabilization. Fiscal reforms and ways to encourage saving are currently being discussed in conjunction with a possible new IMF Poverty Reduction Growth Facility and an ADB financial sector program loan. The current system of economic management continued to improve. The Government introduced economic reforms to realize the potential competitiveness of the Lao economy. The focus is on formulating policy reforms, implementing them, and appropriating the resources required for their implementation. The Government recognized that the private sector is critical to achieving sustainable economic growth and poverty reduction.

ADB operations

Operational strategy: ADB’s new operational strategy for the Lao PDR will be formulated in 2001, and will fully reflect the Government’s socioeconomic plan for 2001–2005. The main strategic focus will be on agriculture and rural development, sustainable natural resource management, and human resource development. Governance and private sector development will be important components.

The lending and technical assistance program in 2000 focused increasingly on efforts to reduce poverty. Activities included direct poverty interventions and continued to promote economic growth projects with a high impact on poverty reduction.

Policy dialogue: Policy dialogue with the Government dealt with developing national and regional poverty benchmarks and establishing a poverty monitoring system. To this end, ADB undertook a joint participatory poverty assessment with the Government and the World Bank to identify the nature and root causes of poverty in the Lao PDR. Dialogue also centered on fiscal management, financial sector reform, private sector development, and environmental management. A policy-based loan in support of financial sector reform was successfully completed in 2000, and a follow-up policy-based loan is planned. ADB also assisted the Government in formulating the medium-term expenditure framework with the public investment program for 2001–2003. ADB will conduct the public expenditure review—together with the Government, IMF, and the World Bank—to ensure that public expenditures appropriately incorporate the Government’s strategy for reducing poverty.

Loans and technical assistance: In 2000, ADB approved three loans totaling $60.5 million: Primary Health Care Expansion Project; Decentralized Irrigation Development and Management Sector Project; and Rural Access Roads Project. ADB also approved 13 technical assistance grants totaling $7.6 million.

Project implementation: Since joining ADB in 1966, the Lao PDR has received 49 loans, of which 20 were active at the end of 2000. Contract awards totaled $43.5 million, bringing the cumulative figure to $665.6 million. The contract award ratio was 24.5 percent, higher than the ADB-wide average of 21 percent. Disbursements during the year totaled $51.0 million, bringing cumulative disbursements to $615.6 million. The disbursement ratio was 21.3 percent, higher than the ADB-wide average of 20.5 percent.

A country portfolio review in 2000 found that the overall portfolio performance was generally satisfactory. After the 1999 review, the Government had addressed key issues for improving project implementation, such as clarifying procurement procedures and allocating appropriate counterpart funds. Portfolio performance could be further improved. A time-bound action plan, agreed between the Government and ADB during the 2000 review, includes measures for establishing effective monitoring systems for contract awards, submission of audited financial statements, and compliance of loan covenants; strengthening procurement coordination by the Ministry of Finance; improving budget preparation and allocation procedures; and simplifying fund-flow mechanisms and disbursement procedures. Implementation of the plan will be closely monitored through quarterly project review meetings between the Government and the Lao Resident Mission.

   

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