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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program 2005-2006: Lao People’s Democratic Republic
I. Current Development Trends and IssuesA. Recent Political and Social Developments1. The Lao People’s Democratic Republic (Lao PDR) has maintained a stable political environment toward 2004. Former cabinet chief of the Party Central Committee, Bouasone Boupavanh, was assigned as a deputy prime minister and the standing member of the government in October 2003. He oversees the financial and banking sector. During 2003, the government reassigned a number of important positions, including finance minister, Bank of Lao PDR governor, industry and handicraft minister, commerce minister, and National Tourism Authority president. Responsibility for aid coordination and management was transferred from the Committee for Planning and Cooperation (CPC) to the Ministry of Foreign Affairs (MOFA). To support the decentralization process, each minister has been entrusted with providing guidance to one province. 2. Regional trade flows have increased and economic cooperation with neighboring countries has been strengthened. The prime minister participated in the Ayeyawaddy-Chao Phraya-Mekong Economic Cooperation Strategy (ACMECS) summit between Cambodia, Lao PDR, Myanmar, and Thailand, held in Myanmar in November 2003, to discuss an action plan on priority areas for cooperation. A joint cabinet meeting led by the prime ministers of Lao PDR and Thailand was held in Pakse, Lao PDR in March 2004 to discuss bilateral cooperation. The prime minister participated in the Commemorative Summit of the Association of Southeast Asian Nations (ASEAN) and Japan held in Tokyo in December 2003 to discuss a number of issues, including free trade agreements and Mekong region development. The government of Lao PDR successfully hosted the ASEAN Tourism Forum in February 2004. Lao PDR will also host the ASEAN Summit in November 2004 and the 13th Greater Mekong Subregion (GMS) Ministerial Conference in December 2004. The Mekong River Commission Secretariat relocated to Vientiane in July 2004. In September 2003, Lao PDR signed a bilateral trade agreement with the United States. 3. While Lao PDR did not report any cases of severe acute respiratory syndrome (SARS), the government enhanced regional and international cooperation to implement preventative measures. In April 2003, the Prime Minister attended the ASEAN plus People’s Republic of China (PRC) Summit on SARS in Thailand. The Prime Minister organized and chaired a consultative meeting on increasing prevention against SARS with development partners based in Lao PDR. The government gave increasing attention to the issue of human trafficking and illegal labor migration to neighboring countries during 2003, and reached agreement with Thailand and Malaysia on allowing selected categories of workers to obtain work permits in these countries. The government also established a high-level commission on trafficking of women and children in 2003. 4. The government’s National Supervisory Committee for the Millennium Development Goals (MDGs) and the United Nations (UN) country team jointly prepared the first MDG progress report in January 2004 to monitor the achievement of the goals in Lao PDR as well as to help raise awareness of the MDGs among political leaders, media, and local communities. According to the report, the country’s progress toward the MDGs is generally on track. However, it is necessary to secure sufficient financial resources to sustain progress and to achieve the MDG targets. The details are set out in Appendix 1, Table A1.1. B. Economic Assessment and Outlook5. The government estimates that gross domestic product (GDP) growth in Lao PDR for fiscal year (FY) 2003 was 5.8%, little changed from the growth rate in the previous two years. Agriculture, which accounts for just over half of GDP, expanded by 3.8%, industry grew by 11.5%, and services by 5.8%. Preliminary estimates for the 6-month period from October 2003 to March 2004 indicate growth of 6.4%. Lao PDR is expected to achieve GDP growth of more than 6% in FY2004. 6. Inflation rose from 10.6% in 2002 to 15.5% in 2003. The main contributors were depreciation of the kip against the baht; increases in the price of basic necessities such as food, water, and electricity; and increases in petroleum prices. However, more recent monthly figures suggest that inflation has started to decline, in line with government efforts to reduce the budget deficit. Inflation dropped to 13.7% in November and fell further to around 11.5% for the first 3 months of 2004. Annual inflation is estimated to drop to 12% in 2004. The monetary authority also took steps to restrain credit, reducing by almost half the growth in broad money supply to about 20% in 2003. The kip depreciated by about 5% against the dollar over 2003. 7. In FY2003, the government had an overall budget deficit of 7.8% of GDP (5.7% including grants). This is an improvement on 8.3% of GDP recorded in FY2002—although a deterioration from 4.8% including grants—but it has again failed to meet the government’s target. The overall budget deficit was mostly financed by grants and external concessional loans. Government revenue was 11% of GDP in FY2003, compared to 13.4% in FY2002. Government expenditure was lower in FY2003 at 18.8% of GDP, compared to 21.7% in 2002. In an attempt to address the budget deficit, the government introduced a package of revenue and expenditure measures in May 2003. Preliminary estimates for the first 6 months of FY2004 suggest that revenue collection came in at 42% of the annual target, higher than the 36% achieved for the same period in the previous year. Although this is an improvement, further reforms are needed to increase revenue collection (e.g. reducing tax exemptions) and to strengthen the capacity of the tax administration authorities. 8. Imports and exports recovered in 2003 after contracting in 2002. Exports rose by 23%, the main contributors being mining, hydropower, timber, and garments, which together account for about 80% of total exports. Imports grew by 7.2% in 2003. The trade deficit narrowed to an estimated $135.6 million from $170.1 million in 2002, continuing a narrowing trend that has lasted 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. Foreign direct investment (FDI) disbursement rose marginally to $19.5 million in 2003. However, building on recent successes, interest in industry—particularly mining and hydropower—and services such as tourism significantly increased FDI approvals in 2003 over 2002. 9. Lao PDR’s total external debt currently stands at around $3 billion, slightly more than 170% of GDP. At face value, this appears a significant burden. However, more than half of Lao PDR’s total debt is with Russia and is currently not being serviced. Lao PDR has long been negotiating on final disposition of this debt. In June 2003, the two governments agreed in principle (i) to write off 70% of the debt owed to the Russian Federation, and (ii) to service the remaining debt valued at $380 million over a period of 33 years at a preferential interest rate. This is consistent with the terms of Russia’s memorandum of understanding as a creditor in the Paris Club. A specific agreement relating to the interest rate, grace period, flow rescheduling, and payment modalities (cash, goods, and/or investment) is still pending. Nevertheless, this is an important policy development that has the potential to significantly improve Lao PDR’s overall debt position. Of the remaining debt in convertible currency, less than 5% is commercial and the rest is long-term concessionary debt to bilateral and multilateral donors. The debt service ratio remains low at approximately 8% of exports of goods and services. C. Implications for the Country Strategy and Program10. The current full country strategy and program (CSP) was prepared in September 2001. There have been no significant changes in the country’s socioeconomic development since the last CSP update in August 2003, and the CSP’s strategic thrust and priority areas remain valid. The importance of the private sector in such areas as hydropower, mining, forestry, agriculture, and tourism has increased. Border development and subregional integration have been increasingly emphasized in the country’s development plans and processes. These positive developments support CSP implementation.
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