Lao People’s Democratic Republic—Staff Report

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INTERNATIONAL MONETARY FUND:

LAO PEOPLE’S DEMOCRATIC REPUBLIC

Staff Report for the 2011 Article IV Consultation1

Prepared by the Asia Pacific Department in Consultation with Other Departments

Approved by Masato Miyazaki and Dominique Desruelle

June 22, 2011

Key Issues and Recommendations:

Macroeconomic situation: The Lao P.D.R. economy performed well in 2010. Fiscal and monetary policy were tightened but both remained accommodative. Inflation has picked up and the rapid

expansion of domestic demand is still putting pressure on the balance of payments.

Outlook: The outlook for growth in 2011 is favorable but inflation is projected to rise further.

Medium-term prospects: Given the pipeline of large hydropower and mining projects, the authorities’ objective to graduate from low-income country (LIC) status by 2020 looks achievable but a

strengthening of macroeconomic policy frameworks is needed to mitigate risks to macroeconomic and financial stability.

Focus of the discussion: (i) the need to tighten macroeconomic policies in the near term to address potential pressures on the external position and ensure inflation remains contained;

and (ii) the agenda to upgrade the broader framework for macroeconomic policy making and financial sector supervision

as Lao P.D.R. pursues its ambitious development objectives.

Fiscal policy: The nonmining fiscal deficit should be kept on a declining path supported by sustained efforts to raise nonresource revenue to ensure that all elements of society contribute their fair share to the funding of Lao P.D.R.’s development and that adequate fiscal space is created for pro-poor spending. Public external debt management needs urgent strengthening.

Monetary and exchange rate policy: The Bank of Lao P.D.R. (BoL) should strengthen its monetary policy framework in order to effectively tighten monetary policy with a view to help sustain the

stabilized exchange rate regime which remains the appropriate monetary anchor.

Supporting frameworks: The financial sector supervision framework needs to be strengthened starting with the regular compilation and monitoring of financial soundness indicators. The quality and availability of macroeconomic statistics needs to be upgraded building on the recent adoption of the new Statistics Law.

See: http://www.imf.org/external/pubs/ft/scr/2011/cr11257.pdf