Regions and Countries

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p. 1 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Levels

Country Strategy and Program 2003-2005: Lao People’s Democratic Republic

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I. Current Development Trends and Issues

A. Recent Political and Social Developments

1. Political stability has been sustained. The leadership structure was established in March 2001. While the political leadership still remains with the generation that helped establish the Lao People’s Democratic Republic (Lao PDR) almost 27 years ago, the country has gradually moved toward on its economic reform agenda. The National Assembly election was held on 24 February 2002. Most of the newly elected National Assembly members are younger and better educated than the previous members. The National Assembly is expected to accelerate public sector and economic reforms needed by a changing society and a market-based system.

2. The Government is devolving its strategic planning and budgeting functions to the provinces and districts. Well-prepared and effectively implemented decentralization can help the development process reflect local situations and cultural and ethnic differences. However, the current institutional framework may not clearly define new subnational-level responsibilities or solve the resource imbalance among different provinces. Local technical capacity is not fully adequate to take on these responsibilities, while national coordination and monitoring capacity remains weak.

3. Political and economic ties with neighboring countries have become stronger. Heads of state and senior officials of neighboring countries meet more frequently than before. Senior officials, and communities in the Mekong region increasingly recognize the importance of trade with neighboring countries. Tourism has increased substantially in recent years. A major challenge facing the Lao PDR is to realize the benefits of regional cooperation while minimizing the negative social and environmental impacts of development.

4. The disparity in socioeconomic development is growing between the lowland communities and those in the uplands. Most uplanders still depend on traditional subsistence agriculture and have limited access to health, education, transport, electricity, and markets. The scattered and remote populations, diverse ethnic groups and cultures, and mountainous terrain make it difficult to equitably share development benefits. The Government emphasizes poverty reduction through the strengthening of national integration, rural development, stabilization of shifting cultivation, and elimination of opium production. A strategic and integrated approach with prioritized policies and programs is required to achieve and sustain broad-based development and poverty reduction. The country’s progress toward the Millennium Development Goals and Targets is in Appendix 1, Table A1.1.

B. Economic Assessment and Outlook

5. Economic performance remained steady in 2001 and the early part of 2002 with gross domestic product (GDP) growth estimated at 5.5% in 2001, compared to 5.9% in 2000.¹ This performance is strong considering the regional slowdown and the low level of economic growth in Thailand—the Lao PDR’s major trading partner. Industry remained the fastest-growing sector, with growth of 8.5%. The service sector, which accounts for about a quarter of the economy, also grew steadily at around 6% in 2001, compared with 6.2% in 2000. Agriculture grew at an estimated rate of 3.9% in 2001, less robust than in previous years. The agriculture sector employs around 85% of the population and accounts for approximately half of GDP. The outlook for 2002 and 2003 is generally positive, with 5.8–6.0% economic growth driven by new investments in the hydropower and mining sectors, provided a global economic recovery eventuates.

6. The Government and Bank of Lao PDR (BOL) have generally maintained strict policies to lower inflation. BOL has largely stopped financing the Government deficit. Price levels remained relatively stable, with inflation of 7.8% in 2001, which is a significant reduction from the hyperinflation rates of about 87% in 1998 and 134% in 1999. While the foreign exchange rate was volatile in mid-2001 and mid-2002, it has largely stabilized at KN9,500–KN10,000 per dollar. In April 2001, the International Monetary Fund’s (IMF) Poverty Reduction and Growth Facility (PRGF) was approved. IMF completed its first review of the performance of the Lao PDR under the PRGF and approved the second tranche release in February 2002. If the Government maintains prudent monetary and fiscal policies, low inflation rates could be sustained in 2003. Several years of relatively low inflation should help further stabilize the kip and reduce foreign currency use in domestic transactions.

7. To control inflation, the Government has kept a prudent course in budget management. In 2001, current revenues accounted for 14.4% of GDP. Total expenditures were around 22.5% of GDP in 2001. The Government has met the budget gap of 8% of GDP largely with grants and concessionary loans. Although recurrent expenditures have increased over the past 2 years, capital investment accounted for 65% of the total budget, which constrained spending in the social sectors as well as operation and maintenance of existing assets. The Government plans to more closely assess the recurrent expenditure requirement for new capital expenditures beginning with the Public Investment Program (PIP) of FY2002. Fiscal decentralization with insufficient institutional capacity has raised uncertainties about effectiveness of collecting revenues and managing expenditures. The Government does not have timely information on the distribution of spending by sectors, which seriously hampers planning. In May 2002, the Government issued a prime minister’s decree on PIP preparation and monitoring to address weaknesses in the PIP process. If the country accomplishes fiscal decentralization with minimal disruption, Government revenues are expected to reach 15–16% of GDP in 2003. Meanwhile, expenditures are forecast to remain at 21–22% of GDP in 2003.

8. In 2001, the trade deficit remained at about 13.0% of GDP, and the current account deficit increased to around 7.0% from 5.8% in 2000. While the total value of exports increased from $393 million in 2000 to $425 million in 2001, imports increased from $591 million in 2000 to $653 million in 2001. In 2001, foreign direct investment was estimated at $30 million, close to the 2000 level. There are prospects for a substantial rise in foreign direct investment in 2002 and 2003. The value of approved foreign direct investment during the first 4 months of 2002 already reached $58, compared to 2001 annual approval of $54 million. Gross official reserves were maintained at $136 million or equivalent to 2.5 months of imports.

9. The Lao PDR is officially classified as a highly indebted poor country (HIPC). However, the Government does not intend to seek debt relief under the HIPC initiative. Approximately half of the Lao PDR’s debt is with the Russian Federation, carried on the books at an unrealistically high exchange rate, and mostly not being serviced. The governments of the Lao PDR and Russian Federation are renegotiating the terms of the ruble debt, which could significantly reduce the Lao PDR’s foreign debt. While the current public debt service level of about 11% of exports is considered manageable, debt sustainability should be carefully assessed and monitored. IMF is conducting a debt sustainability study.

C. Implications for the Country Strategy and Program

10. A full Country Strategy and Program (CSP) (2002-2004) was prepared in September 2001, following considerable consultation with stakeholders. The CSP’s strategic thrust and priority areas remain valid. The recent stable socioeconomic development will facilitate the CSP’s implementation. ADB will focus on implementing the CSP in close coordination with the Government and other development partners.

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