Regions and Countries

	Table of Contents
p. 6 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

---

D. External Trade and Balance of Payments

47. Although the Lao PDR is a large country in area, much of the country’s economic activity is confined to the Mekong River corridor, and to a much less extent along the borders with the People’s Republic of China and Viet Nam. Official statistics show that the sum of imports and exports equal about 50 to 60 percent of GDP. This is relatively low compared with other countries in the region; which ranged from 85 to 125 percent in Thailand, 70 to 100 percent for Cambodia, and 90 to 100 percent for Viet Nam. However, informal trading is generally believed to be significant as large amounts of timber and rice are exported, and unrecorded consumer goods are imported. Thus the Lao economy is probably more open than official statistics suggest.

48. The Lao PDR has typically maintained a large trade deficit (Table 10), estimated at around 12 percent of GDP in 2000. The current account deficit, which was between 16 and 17 percent of GDP in 1996 and 1997, has narrowed substantially to around 6 percent of GDP. Part of this gain has been due to a narrowing of the trade deficit and part to a substantial increase in net services; the Lao PDR’s export of services improved largely because of the strong increase in tourism.

1. Exports

49. The total value of exports has grown steadily in the past five years, increasing from $321 million in 1996 to an estimated $393 million in 2000. The major factor contributing to exports is the export of electricity, which increased from $30 million in 1996 to $112 million in 2000 (Appendix, Table A5).

50. The second largest export has been wood products, primarily in raw form as logs and timber. The current rate of forest clearing is not sustainable, and the timber industry will either have to adopt sustainable forestry practices or timber will not be available for logging. The garment industry also increased its exports to $77 million in 2000, although the value-added contribution of this sector is quite small. In 2000, imports for the garment sector were estimated to be around $67 million.

51. 1997 is the last year for which detailed information is available on the direction of trade by destination of export and source of imports. The Government is currently working to reestablish its trade statistics.

2. Imports

52. Imports to the Lao PDR have been gradually declining, from $690 million in 1996 to $591 million in 2000. Part of this decline is likely due to a decline in FDI in hydropower, which is largely used for the purchase of imported capital goods. This is reflected in the large reductions of machinery, equipment and construction equipment between 1996 and 2000. The share of fuel in the total import bill rose in response to an increase in the cost of petroleum products and also to the increasing number of motorized vehicles in the country.

3. Nontrade Current Account

53. In recent years, the net export of services has made a major contribution to the Lao PDR’s balance of payments, increasing from 1.3 percent of GDP in 1996 to 6.1 percent in 2000. Although no data is available for 2000, based on the estimates from 1999, most of this increase appears to be due to the expenditure of foreign tourists in the Lao PDR. 54. The country formally opened to tourism in 1990, but tourists only started entering the country en masse in the mid-1990’s. In 1990, for example, 6,920 tourists entered the country compared with 420,000 in 1996 and more than 720,000 in 2000 (Table 11). In each year since 1995, tourism has grown compared with the previous years. In 1999 and 2000, the number of new entries grew by 100,000 per year. The average length of stay has also increased from 4.3 days in 1995 to 5.5 days in 2000.

55. The tourism sector still has the potential to grow, considering the number of tourists visiting Cambodia, Thailand, and Viet Nam. Future increases will depend on the building of appropriate infrastructure and the country’s ability to preserve its environment, which is one of the main attractions for many foreign visitors. 56. The Lao PDR receives official transfers (largely bilateral aid) that make a significant contribution to the balance of payments. In recent years, the share of official transfers has hovered around 4 to 4.5 percent of GDP. Most of these transfers do not enter the Government balance sheet.

4. The Capital Account

57. The Lao PDR receives substantial capital inflows, largely in the form of concessionary loans from international organizations, such as ADB, IMF, and the World Bank. The drop-off in concessionary lending in 1998 and 1999 was significant in response to concerns about the macroeconomic management of the country due to the high inflation levels. These concerns have largely eased. Concessionary lending currently accounts for around 3 percent of GDP.

58. The valuation of the Lao PDR’s debt stock depends on the treatment of debt that the country contracted with the Union of Soviet Socialist Republics, which is now held by the Russian Federation. At face value, this debt is worth $1.3 billion and accounts for more than half of the total debt stock. This debt is no longer being serviced and the Government is in the process of negotiating the final status of this debt with the Russian Federation.

59. The Lao PDR also has about $1.3 billion in convertible debt. This debt is largely with the multilateral organizations (primarily ADB and the World Bank), although the country has more than $200 million in debt with commercial sources and bilateral lenders. Although the total amount of this debt is almost as large as GDP, debt service is manageable as a percent of total exports. In recent years, debt services have accounted for around 10 percent of total exports of goods and services. Prudent management of the debt and increased exports will ensure that the Lao PDR is able to sustain its debt service.

60. In addition to loans from international organizations, FDI has been a major source of support for the country’s balance of payments. In 1988, the Lao PDR passed a law on foreign investment that allowed foreign participation in all sectors of the economy and established specific incentives for foreign investors. In 1999, FDI was $79 million, compared with a $22 million current account deficit (including official transfers). From 1995 to 1997, FDI in the energy sector accounted for more than half of all private FDI. However, in 1998 and 1999, the share decreased as a percentage of total FDI. In 1999, investments in the energy sector accounted for $27 million.

61. From 1996 to 2000, the country approved 263 projects for more than $1.6 billion (Table 13). The total amount of actual FDI received in this period was substantially less, although part of this represents commitments for future investments, particularly in the hydroelectric sector.

62. FDI will be increasingly important as the amortization payment of the official debt increases and trade expands as a result of the country’s greater integration in ASEAN. Of particular importance is the Nam Theun 2 hydroelectric project. The project, being built by the Government and a consortium of foreign investors, is expected to cost around $1 billion over five years; this represents 60 percent of annual GDP. Construction is likely to contribute significantly GDP growth and will also lead to an increase in imports, which will be offset by corresponding capital flows. BOL will have to take steps to sterilize this inflow of capital. Much of the capital inflow will be used to finance the import of capital equipment and thus will have little effect on money supply. However the wages of workers on the project will largely be paid in kip and this could have a major inflationary effect, particularly considering the high level of dollarization in the country.

Back C. Monetary Development and Prices	Next II. Short-and Medium-Term Economic Prospects and Policy Issues