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publication December 11, 2017

Lao Economic Monitor, December 2017: Lowering Risks and Reviving Growth

World Bank Group

Economic growth is projected to moderate to 6.7% in 2017, below historical averages, but still robust.

  • Expansion in power generation, manufacturing and agriculture are weighed down by flat mining, moderating construction and a decline in tourist arrivals.
  • On the expenditure side, the moderation has been driven by slowing domestic demand, which was only partially offset by good performance of exports of goods.
  • Inflation has declined in 2017, due to stable food prices and slowing demand, offsetting the effects of recovering oil prices.
  • Improved agriculture and manufacturing exports have offered job opportunities and support continued poverty reduction. The poverty rate, based on $1.90 per day, is projected to fall to about 13% in 2017 (compared to 18% in 2014). 

Despite improvements in macroeconomic management, risks remain.

  • The revenue shortfall so far in 2017 appears to have been offset by expenditure adjustment, while the authorities allowed some welcome flexibility in the exchange rate. Still, public debt is projected to reach around 60% of GDP in 2017.
  • The external account deficit is expected to narrow slightly due to strong exports of power, manufacturing and agricultural products as well as higher mining exports, supported by improved metal prices. This will be offset by decreased tourism revenue.
  • Greater flexibility in the exchange rate recently contributed to lowering pressure on the foreign reserves. Still, the ratio of reserves to foreign currency deposits is less than 25% and less than two months of imports, indicating a thin cushion against shocks.
  • Credit growth moderated to 17% in June 2017 with banks’ financial statements suggesting the trend has continued in the third quarter of the year.
  • Parts of the financial sector remain weak, including with low capital buffers and a weakening loan portfolio.
  • The medium-term outlook is generally favorable, but not without risks. Growth is projected to continue decelerating in 2018, but to increase in the medium-term when large power projects begin operation.

Going forward, policies should aim to lower risks and revive growth.

  • Immediate priorities to address risks will include keeping the fiscal consolidation plan through raising revenue collection, improving efficiency and control of public spending, as well as strengthening public debt management.
  • Improving financial sector soundness will require improving legal frameworks in the financial sector and addressing weaker banks.
  • Opportunities in the medium-term will open up from greater regional integration in agriculture, tourism, trade and manufacturing, if supported by an improved business environment, these sectors have the potential to create more jobs and contribute to poverty reduction.

The report also presents a special thematic section on Lao PDR’s power sector development.

  • Lao PDR’s development over the past 20 years has been significantly shaped by the power sector. Installed capacity is expected to have reached around 6,800MW in 2017, and could reach 11,000MW by 2021.
  • The sector boosted growth and poverty reduction, but also contributed to the large current account deficit, which has partially been paid off as electricity has become one of the top export earnings.
  • However, the sector still faces financial risks, particularly related to significant debt and contingent liabilities.
  • Mitigating the risks will require strengthening power system planning, project selection process, securing well-paying markets to electricity exports, and improving the commercial operations of public utilities.