Catalog

	Table of Contents
p. 24 of 69 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia Cambodia Indonesia Lao People's Democratic Republic Malaysia Myanmar Philippines Singapore Thailand Viet Nam South Asia Central Asia The Pacific III. Foreign Direct Investments in Developing Asia

Asian Development Outlook 2004 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia

---

Lao People’s Democratic Republic

Macroeconomic conditions were relatively stable in 2003, although inflation rose to nearly 18% at one stage and the fiscal position remained weak. The country’s major challenges include raising adequate government revenues to fund social and economic development and dampening inflation. Growth in 2004-2005 is expected to remain at around the 6% level.

Economic Assessment

The Government estimates that GDP growth in 2003 was 5.9%, or similar to rates of growth in the previous 2 years. Agriculture, which accounts for just over half of GDP, expanded by 8.3%, in part because rains in the upland areas after a dry period lifted rice output. While industry grew by 14.6%, the services sector contracted by 4.9%, stemming from regional weakness in tourism that followed the SARS outbreak as well as from security concerns. Slower private investment, due to more cautious bank lending, also hindered growth.

The overall budget deficit in FY2003 (ended 30 September 2003) was 7.8% of GDP (5.7% including grants). This represented an improvement from the deficit of 8.3% of GDP recorded in FY2002 (but a deterioration from 4.8% if grants are included). Either way, the deficit, mostly financed by grants and external concessional loans, was still above target. Revenue mobilization remains a major and worsening problem: as a share of GDP, revenues declined to 11.0% in 2003 (Figure 2.8). Fortunately, better expenditure controls prevented a repeat of the overrun in capital spending that was seen in 2002.

Inflation in the Lao People’s Democratic Republic (Lao PDR) has been running at one of the highest rates in the subregion and averaged 15.5% over 2003, up from 10.6% in 2002. Higher prices for food, water, electricity, and petroleum were contributory factors, as was the lingering impact of a depreciation of the kip against the Thai baht in 2002. The authorities took steps to restrain credit, reducing by nearly half the growth in broad money supply to about 20% in 2003. The kip depreciated by about 5% against the dollar over the year.

Merchandise imports and exports, after contracting in 2002, recovered. Exports rose by 23.0%, with the main contributors being hydropower, timber, and garments, which together account for about 80% of total exports. Imports grew by 7.2% in 2003. The merchandise trade deficit narrowed to an estimated $135.6 million from $170.1 million in 2002, continuing a narrowing trend evident for several years. The current account deficit is about $51 million, equivalent to 2.5% of GDP. Foreign exchange reserves increased to $215.5 million, sufficient to cover more than 4 months of imports. FDI rose from the weak 2002 level to a still low $19.5 million, and approvals went up sharply, indicating that FDI might head toward the much higher levels last seen 5 years ago.

With an estimated per capita income of just above $300, the country is one of the poorest in the region. The Expenditure and Consumption Survey conducted in FY1998 estimated that 39% of the population lived below the national poverty line of $1.50 a day. Preliminary results from a recent survey suggest that poverty incidence has fallen to around 30%, representing quite a sharp reduction over 5 years.

Policy Developments

The major challenge facing the Government is the fiscal weakness, because it seriously constrains resources available for social and economic development. The revenue effort has been chronically weak and it deteriorated again in 2003. The Government responded with increases in taxes on petroleum, beer, and tobacco, and committed to introduce a VAT, although the timing has not been finalized. However, it also introduced tax incentives for private investment that have the potential to erode revenues. Furthermore, the economy faces a reduction in customs revenues as it meets its commitments under the AFTA agreement to lower tariffs.

Concern over weak revenue collection and poor fiscal administration was a major impediment in 2003 to the IMF concluding a third review of its PRGF loan to the country. (These reviews are required by IMF before it disburses loan installments.) IMF finally concluded its review, which had been delayed since January 2003, in August, having found improvements in these areas, though it also indicated that further advances in revenue collection and tax administration are crucial.

The Government plans to tighten expenditure controls, improve its fiscal information system, and give stricter financial evaluations to proposed projects in an effort to make sure that spending does not again run out of control. In terms of the budget components, there has been a long-standing imbalance between capital and recurrent expenditures, with capital items receiving priority, though recent efforts have rectified this imbalance somewhat, as seen in a declining share of capital expenditures. Social sector spending as a share of expenditures has also risen, in particular on health and education, although in absolute terms these areas are still seriously short of funding.

Reforms of the state banking system are moving forward, but further progress is needed to put it on a commercially sound basis. The banks have strengthened their credit management and four international banking advisors were appointed to assist in various areas, including credit appraisal. Two small state-owned commercial banks were merged and the Government plans to seek strategic shareholders in another one. In contrast, few advances were made in reforming the debt-burdened SOEs, which need to be restructured to reduce their NPLs, a move that would complement the banking reforms.

Total external debt currently stands at around $3 billion, or just around 150% of GDP. At face value, this appears to be a significant debt burden. However, more than half of the total debt is owed to the Russian Federation and is currently not being serviced. After extended negotiations, the two governments in June 2003 agreed in principle to write off 70% of the bilateral debt and service the remaining debt, valued at $380 million, over 33 years at a preferential interest rate. This is consistent with the terms of the Russian Federation’s memorandum of understanding as a creditor in the Paris Club.

A specific agreement relating to the interest rate, grace period, rescheduling, and payment modalities (cash, goods, investment) is still pending. Nevertheless, this is a major policy development that has the potential to significantly improve the overall debt position of the country. Of the remaining debt in convertible currency, less than 5% is commercial and the rest consists of long-term concessional loans with bilateral and multilateral institutions. The debt service ratio is about 7% of exports and will rise slightly when the Lao PDR starts servicing the renegotiated part of the debt to the Russian Federation.

Outlook for 2004-2005

GDP growth is expected to edge higher to around 6% in 2004-2005. Exports are likely to rise because of the improvement in global economic activity and the particularly rapid growth of the country’s major trading partners-Thailand and Viet Nam-as well as the PRC. Furthermore, as part of Thailand’s Economic Cooperation Strategy, the Lao PDR has been granted zero tariff rates on eight major agricultural products, while the Lao PDR and the US have signed a bilateral trade agreement that may pave the way to the US granting Normal Trade Relations status in 2004, which would not only help exports but also assist the country move toward membership of WTO. Receipts from tourism are also likely to increase in 2004 from the 2003 level, when they were affected by the regional SARS outbreak and security concerns. The lowering of tariffs in line with the AFTA agreement will lift imports.

The investment outlook is also improving. The Government is promoting FDI and is committed to support private sector development. Nevertheless, inflation needs to be curtailed and further progress made in developing infrastructure and the financial system in order to make the investment environment more attractive. The Government forecasts single-digit inflation in 2004, but inflation rates of 10-15% over the forecast period look more likely.

Among investment projects, the outlook for the construction of the Nam Theun 2 hydropower project has improved with the Electricity Generating Authority of Thailand agreeing to buy electricity from the plant over 25 years, while the Sepon mine plans to expand output, having produced 165,000 ounces of gold in 2003. The mine is also scheduled to start producing copper in early 2005.

Although it seems that the poverty incidence has fallen over the past 5 years, reducing poverty-generally worse and more concentrated in northern areas-remains a major challenge. The National Poverty Eradication Program and the Poverty Reduction Strategy Paper include specific policies, though the program requires prioritized action plans and effective follow-up to be successful. The expected growth in the economy will contribute to reducing the poverty incidence further, and, if the economic momentum is maintained over the medium term, the poverty reduction target of 25% or less by FY2006, as specified in ADB’s poverty reduction partnership agreement with the Government, seems achievable.

These outcomes are contingent on the maintenance of macroeconomic stability, continued implementation of fiscal reforms, and relatively stable oil prices. The main risk to the outlook is the weak fiscal system: any further deterioration in revenue collection or sudden excessive expenditures would be particularly damaging.

Back Indonesia	Next Malaysia