Regions and Countries

	Table of Contents
p. 4 of 12 BACK | NEXT Executive Summary I. Recent Economic Developments A. Growth, Employment, Saving, and Investment B. Fiscal Developments C. Monetary Development and Prices D. External Trade and Balance of Payments II. Short-and Medium-Term Economic Prospects and Policy Issues III. Poverty Reduction

Country Economic Review: Lao People’s Democratic Republic : I. Recent Economic Developments

---

B. Fiscal Developments

20. In the 2000 fiscal year, the Lao PDR was able to increase its revenue collection from 10.6 to 14.0 percent of GDP. In the same fiscal year, current expenditures increased from 4.9 to 7.8 percent of GDP (Table 7). This improved revenue mobilization is part of the Government’s commitment to increase its spending on priority areas and to increase recurrent spending. The Government is committed to responsible spending and is currently keeping expenditures to a realistic level given the revenues collected. The central bank, the Bank of Lao (BOL) has agreed not to finance Government deficits in the future.

21. Low current spending is a concern, as is the focus of the Government budget on capital expenditures. As a result of the sharp increase in inflation in 1998 and 1999, much of the fiscal adjustment was done through a real reduction of the salaries of public workers and of real recurrent expenditure in order to maintain the existing level of capital expenditure. In particular, the Government relied on BOL financing to cover the budget deficit, which was largely created by increased investments in irrigation.⁵

1. Revenue Developments

22. In fiscal year (FY) 2000, tax revenues accounted for around 10.6 of GDP, which represents a small improvement over tax collection in the previous years, particularly in FY1998 and FY1999, which were affected by the regional crisis. Nontax revenues are playing an increasing large role in total Government revenues. Part of this increase is due to the devaluation of the kip increasing the value of exports from SOEs, especially electricity. Royalties from timber sales are also included as nontax revenues.

23. The three principal taxes (the turnover tax, excise tax, and foreign trade tax) account for 47 percent of Government revenues and have been relatively stable as a percentage of total Government revenues. The turnover tax is similar to a sales tax and is collected from importers and producers, with rates from 5 to 10 percent. Excise taxes are similar and are levied primarily on “luxury” consumption goods (vehicles, alcohol, tobacco, consumer appliances) and on fuel, with rates ranging from 5 to 104 percent. Import duties are charged on the value of imported goods, with rates ranging from 5 to 40 percent.

24. The Lao PDR has an income tax and a profit tax, which together contribute 15 percent of Government revenues. The profit tax has a general rate of 35 percent but lower rates are available to foreign investors and investors in certain zones of the country. Income tax is progressive with rates ranging from 5 to 40 percent. Interest income is not taxed and rental income is taxed in a special regime. The Lao PDR also has a property tax on durable assets such bicycles, motorcycles, televisions, and other goods. This tax is collected at the local (village) level and shared between the village and the district.

25. Although the tax system is, on paper, quite progressive with its focus on luxury consumer goods, the myriad rates is likely to create distortion in the economy and encourage tax evasion. The Government is in the process of developing a value-added tax (VAT), presumably to replace the turnover tax, scheduled for 2003. The turnover tax and the excise tax are primarily collected on imported goods, making them essentially proxy trade taxes. This also creates distortions and is likely to complicate the Lao PDR’s entrance to the ASEAN Free Trade Area and to the World Trade Organization.

26. Central to increasing tax revenues is tax reform that simplifies procedures, reduces distortions, and discourages evasion. This includes the introduction of the VAT, consolidation of excise and import tax rates, adjusting rates, and substantial reform of the income tax. In addition to reforming and simplifying the tax system, greater effort is needed to improve tax administration. The Government should focus on better enforcing tax codes. Key steps include strengthening the already existing Large Taxpayer Unit, reducing loopholes and arbitrary exemptions, and providing greater transparency in tax collection. Related to this is the need to better define the responsibility of tax collection. Currently taxes are collected at the national, provincial, district, and local levels. During the transition to greater decentralization, many local officials are unclear as to what revenues should be transferred to a higher authority and what revenues should remain under local control.

2. Expenditure Developments

27. For most of the decade of the 1990s, capital and current expenditure were approximately equal, with each accounting for approximately 10 to 11 percent of GDP. However in FY1998, capital spending as a proportion of total Government expenditures increased dramatically pushing current expenditures to historically low levels (Figure 2). In FY1999, capital expenditure accounted for 75 percent of total expenditures, dropping to an estimated 64 percent in FY2000.

28. As a result of the ongoing decentralization process, a great deal of uncertainty surrounds how expenditure is allocated to the different sectors. Until FY1998, the Government was able to monitor the allocation of resources to different sectors. Previously, line ministries (for example, education) directly requested funding from the national budget and allocated these resources among the provinces. Currently, line ministries receive an allocation for their central level activities but the bulk of resources are chanelled directly to the provinces, which are responsible for allocating resources among the sectors following national guidelines. Spending on key social and economic sectors is difficult to monitor. The Government is in the process of estimating sector expenditure as part of the public expenditure review process, conducted with the support of the Asian Development Bank (ADB), IMF, and World Bank.

29. Salaries, which have traditionally accounted for between 20 and 25 percent of total expenditures have dropped in the past two fiscal years to around 10 to 12 percent of total Government expenditures. Spending on materials and supplies have dropped even more dramatically in the same period.

30. Currently, spending is weighted too heavily to investment, with the Government committing insufficient resources to recurrent spending. The Government is not spending a sufficient amount to ensure the operation and maintenance of its existing investments. At the same time, additional loans from ADB and the World Bank will require a counterpart contribution, which will put upward pressure on the capital budget. The Government will need to increase revenues to ensure that it is able to maintain and operate Government services and invest in additional infrastructure, which the country needs to meet its development goals. If the trend is not reversed, the reduction of current spending will have serious consequences. Lower recurrent spending reduces the funds available for the maintenance of capital investment, which will lower the quality of these investments.

5. National Steering Committee of the Roundtable Process. 2000. Report of the Policy Dialogue Meeting on the Macro-Economic Policy and Reform Framework. Government of Lao PDR. Vientiane.

---

Back A. Growth, Employment, Saving, and Investment	Next C. Monetary Development and Prices