Washington, DC: On November 4, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the 2024 Article IV Consultation 1 with Lao People's Democratic Republic.
Notwithstanding solid growth this year, supported by the tourism and resources sectors, the economic situation remains very challenging. Despite fiscal consolidation, public debt remains elevated and government financing needs are expected to increase. Exchange rate depreciation continues and high inflation persists.
The government has continued reforms to improve the public finances and to ease foreign exchange pressures. These include ongoing fiscal consolidation through revenue mobilization and expenditure constraints. The central bank has further tightened monetary conditions by increasing the policy rate and reserve requirements and has also tightened exchange controls and prioritized access to foreign exchange.
Growth is projected to accelerate to 4.1 percent in 2024 on the back of recovering tourism, while inflation is expected to only decline moderately and remain elevated. However, the large financing needs arising from the significant level of public debt poses challenges to the medium-term economic outlook. Based on current conditions and policy settings, inflation and debt revaluation would likely intensify, implying a significant drag on growth over time. Substantial uncertainties also cloud the outlook, with risks of an intensification of labor emigration and a decline in investment should exchange rate pressures exacerbate, increased pressures on the banking sector from deteriorating asset quality and continuing currency mismatch, and potentially more frequent and more damaging natural disasters. The external economic environment could also turn out to be less favorable, if growth in major trading partners were weaker than expected or commodity prices more volatile.
Executive Board Assessment22F 2
Executive Directors noted that growth gathered momentum in 2023 on the back of recovering external demand. Important progress has been made on many fronts: a primary fiscal surplus has been sustained, the current account balance has improved substantially, and inflation has fallen
from its peak in 2023. Nonetheless, the economy continues to face challenges: pressures on the exchange rate remain, inflation is still high, public debt is assessed to be unsustainable, and FX reserves remain low. Growth is expected to be substantially below pre pandemic levels over the medium term. Against this difficult background, Directors urged the authorities to press ahead with coordinated, ambitious, and comprehensive policies to stabilize the economy and boost potential growth while avoiding scarring effects. Continued Fund capacity development will be critical to support these efforts.
Directors welcomed the authorities' recent progress in achieving primary surpluses, while emphasizing the need for a balanced and credible medium term fiscal consolidation and financing plan to restore debt sustainability and regain international market access. They called for rebalancing fiscal adjustment via revenue mobilization–focused on removing tax exemptions and improving tax administration and compliance–to create more fiscal space for growth enhancing spending on education, health, and critical infrastructure, that has been cut to very low levels. A credible and clearly communicated multiyear financing and debt management strategy will also be key. Alternative options to bring debt toward a sustainable level could also be considered.
Directors stressed that monetary policy should prioritize reducing inflation. They welcomed the authorities' recent measures to modernize monetary tools and tighten monetary policy, but noted further efforts are needed to help stabilize the exchange rate, including more significantly raising the policy rate to slow the expansion of broad money and achieve positive real interest rates, stopping monetary financing, and issuing Bank of the Lao P.D.R. (BoL) bonds to soak up excessive liquidity. They welcomed greater exchange rate flexibility and encouraged phasing out distortionary exchange restrictions and capital flow measures.
Directors called for proactive, risk based financial supervision, given vulnerabilities in the banking sector. They recommended that the authorities implement new capital and liquidity requirements, and end loan forbearance decisively to safeguard the financial system.
Directors agreed that structural reforms are crucial to improve the business climate and support growth and employment. They called for measures to strengthen institutions, legal and regulatory frameworks, and invest in human capital. Directors emphasized the need to improve governance and transparency, implement anti-corruption measures, and address remaining gaps in the AML/CFT framework, including swift implementation of the Financial Action Task Force's mutual evaluation recommendations. They also urged progress on addressing data gaps.
Directors stressed the importance of structural and climate reforms to achieve sustainable, green, and inclusive growth. Accelerating the transition to upper-middle income status will require further efforts to improve the business environment, step-up critical infrastructure, and invest in human capital. Directors welcomed the latest Power Development Plan and the planned Emissions Trading System to help achieve Vietnam's climate goals and promote energy security. They emphasized the importance of moving ahead with implementation of the strategy and developing the appropriate regulatory framework to promote investment in renewable energy and secure funding for the green transition. Conducting a Climate-Public Investment Management Assessment would be useful.
Directors welcomed the authorities' anti-corruption efforts and emphasized the need to continue strengthening governance, improving the AML/CFT framework, and simplifying regulatory frameworks. Greater efforts in closing data gaps will be important.
Lao P.D.R.: Selected Economic Indicators, 2020–25 |
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1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
2 At the conclusion of the discussion, the Managing Director, as Chair of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
