Regions and Countries

	Table of Contents
p. 2 of 20 BACK | NEXT I. Country Performance Assessment A. Economic Performance Assessment B. Poverty Assessment C. Assessment of Socio-Environmental Performance D. Governance: Sound Development Management E. Implementation Assessment II. Country Operational Strategy III. Sector Strategies IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Lao People's Democratic Republic : I. Country Performance Assessment

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A. Economic Performance Assessment

1. After a number of years of significant macroeconomic deterioration, the economy of the Lao People’s Democratic Republic (Lao PDR) has stabilized since the second half of 1999. Real economic growth was about 5.2 percent in 1999 due to stronger agricultural growth, compared to 4 percent in 1998 (see Appendix 1, page 1). In 2000, real economic growth is projected to remain at around 5-5.5 percent. Maintaining monetary discipline will be critical for sustained economic growth. If the Government's efforts to restrain monetary expansion, which helped stabilized prices and the exchange rate, are maintained, the prospects are good for modest improvement in economic growth over the medium term.

2. The agriculture sector will continue showing strong growth in 2000 owing to the recent irrigation investments. Rice harvest is expected to reach 2.2 million tons, compared to 1.8 million tons in 1999. While no hard estimates are yet available for livestock production, anecdotal evidence suggests that unrecorded exports of livestock together with mechanization of crop production are increasing. Thus, recorded growth in livestock value-added will be modest. Weakness in regional timber markets is expected to continue to limit performance in the forestry sector.

3. Somewhat slow growth in industrial value-added will occur based on moderate growth in the manufacturing subsector (which accounts for over 75 percent of industry), The garment industry, a principal manufacturing export and one of the three large export earners, along with timber and electricity, is expected to rebound from a slump, based on improved prospects in European markets. Lao PDR will also benefit from a pickup in regional demand, particularly the Thai economy. The possibility of obtaining normal trading relations with the United States (US) translates into significant potential for growth in manufacturing in the medium term.

4. A continued construction slump is expected largely because of completion of on-going large hydropower projects and the delay of new energy projects resulting from a slowdown in Thai electricity demand. However, hydropower export earnings are expected to grow by more than 30 percent in 2000 with the start of operations at the Nam Leuk and Houay Ho sites. It is estimated that tourist arrivals rose by about 40 percent in 1999. Modest growth in the service sector is expected, despite a weak banking sector, on the strength of a continued increase in tourist arrivals.

5. The Government plans to slightly reduce the overall fiscal deficit to 9 percent of the gross domestic product (GDP) in fiscal year (FY)2000. In FY1999, the fiscal deficit reached 9.3 percent of GDP and was financed by foreign grant and external loan disbursements. The Government’s revenue target for FY2000 is 12 percent of GDP, compared to 11.3 percent of GDP in FY1999. To meet this target, the Government needs to take important measures, including effective utilization of the Large Taxpayer Unit, and the reduction of tax exemptions. The Government has recently rationalized the exchange rate used to value imports for tax purposes. In addition, in line with its commitments under the Association of Southeast Asian Nations (ASEAN), the Government has begun implementing the tariff reduction program under the ASEAN Free Trade Area (AFTA), which will result in reduced levels of custom duties during 2000-2008. Alternative tax revenue sources will need to be tapped to compensate for the expected reduction in customs revenue.

6. The Government will maintain spending about 20 percent of GDP in FY2000. Capital expenditure, at 12 percent of GDP, is budgeted to decline to less than 70 percent of the total spending in FY2000. In the last fiscal year, capital expenditures exceeded 75 percent of total expenditures as current spending was severely compressed. Notwithstanding the expected improvement in FY2000, current expenditures are still at unsustainably low levels because of the continued squeeze over the past several years. Wages and salaries of government workers have fallen significantly in real terms and the efficiency of government operations is suffering accordingly. Low maintenance expenditures threaten to shorten the economic life of past investments. There is also a need to increase recurrent expenditure allocations to the social sectors to enhance the nation’s human capital, which is acknowledged to be Lao PDR’s binding constraint.

7. Since the second half of 1999, tight monetary policy has been instituted. Broad money supply (M2) grew by 120 percent during the first half of 1999, but then quickly shrank by almost 20 percent during the second half of the year. In 2000, the Bank of Lao PDR (BOL) is expected to continue tightening liquidity. As a result, the annual inflation rate has declined from 120 percent in September 1999 to 45 percent in March 2000, and the monthly inflation rate has also fallen to under 1 percent since the end of last year. The exchange rate has been stabilized at around 7,500-8,000 kip per US dollar since October 1999. However, effectiveness of domestic monetary policy is limited in Lao PDR due to the shallowness of the financial system (i.e., the M2/GDP ratio is only 18 percent in 1997) and an 80 percent dollarized economy.

8. It is estimated that in 1999 exports grew by about 3.0 percent, while imports shrank by about the same percentage. The current account deficit declined marginally from 10.6 percent of GDP in 1998 to 10.3 percent in 1999. Balance-of-payments data suggest that foreign direct investment and official development assistance increased modestly in dollar terms in 1999. The debt-service ratio rose to 12 percent of GDP in 1999 from 11.1 percent of GDP in 1998. Gross official reserves increased from $112.8 million, equivalent to 2.4 months of imports of goods in 1998, to $115.9 million, equivalent to 2.6 months of imports of goods in 1999. In order to further strengthen its reserve position, the Government will transfer revenues from timber royalties directly to its foreign exchange reserve account in 2000. BOL also recently issued regulations governing the establishment of an interbank market in foreign exchange.

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