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Lao People's Democratic Republic: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the Lao People's Democratic Republic
Summary:KEY ISSUES Context. Growth is moderating and credit growth has declined, but significant vulnerabilities remain. International reserves are inadequate by several internationally comparable metrics, the exchange rate remains overvalued, credit risks are rising, and high public debt requires attention. The authorities place a high priority on strong growth with macroeconomic stability. Policy corrections initiated over the past year were broadly in line with Fund advice, but should be further strengthened. Outlook and risks. A moderate further cooling down in economic activity is expected, but the external position will remain fragile. Fiscal expansion, a sharp regional growth slowdown, and deteriorating terms-of-trade and capital inflows are the key risks. Fiscal policy. The fiscal deficit has declined in 2014, but on current policies, is set to rise going forward. Stronger revenue efforts and expenditure rationalization are necessary to ensure continued consolidation. The tax base should be broadened and administration improved, along with containing public wages, and rationalizing off-budget capital spending and unproductive current spending. Monetary and exchange rate policy. Greater exchange rate flexibility is necessary to absorb external shocks and facilitate reserves buildup. Reducing excess liquidity will help contain inflation, prevent excessive credit growth, and support interbank market functioning. Financial stability. Immediate foreign-currency liquidity risks have receded, but bank balance sheets have weakened. Recognizing NPLs, phasing out regulatory forbearance, strengthening sound lending practices and supervision, and recapitalizing state-owned banks will support macro-financial stability. Long-term growth. Much progress has been made in recent years on product and labor market openness, and poverty reduction. Further trade integration will improve the business climate, and promote private investment and institutional reform. Upgrading health and education infrastructure will raise the growth potential and reduce inequality.
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