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Lao PDR Economic Monitor April 2015: Restoring Macroeconomic Stability and Building Inclusive Growth



Key Findings

  • Growth is projected to slow to about 6.4% in 2015 from 7.5% in 2014. Investment in the power sector continues to be strong, but is partly offset by flat output in mining, efforts to reduce the fiscal deficit, and slowdown in credit growth.
  • The adoption of expansionary economic policies in the past few years has resulted in macroeconomic vulnerabilities. Policy corrections, such as fiscal consolidation and slower credit growth, are expected to help restore macroeconomic stability.
  • Inflation is projected to average 4-5% in 2015. Inflation decelerated in 2014 driven by slower growth in food prices and a decline in fuel prices. On average, food prices were 7% higher in 2014 compared to 2013. Fuel prices fell by an additional 0.8% in 2014.
  • The fiscal deficit is expected to decline slightly to 4.2% in the fiscal year 2014/15 due to controls on spending, and will be supported by lower public service recruitment and a wage freeze for civil servants. 
  • Foreign exchange reserves increased but remained low, covering less than 2 months of goods and services imports. Building up reserves to increase buffers against shocks remains critical to macroeconomic stability.
  • Lao PDR’s risk of debt distress remains moderate, though risks have increased. Total debt is expected to rise over the medium term as financing needs remain high and outlook is sensitive to shocks, such as exchange rate depreciations. 
  • To be addressed are systemic risks in the financial sector where continued monitoring will be necessary to safeguard stability.

ASEAN Economic Community 2015

  • The launch of the ASEAN Economic Community (AEC) in 2015 presents many opportunities for Lao PDR through to benefit from more intra-regional trade and increase in exports.
  • In order to benefit from regional integration, Lao PDR should create a conducive business environment by maintaining regulatory reforms to enable diversified and quality investments; implementing commitments especially in the services trade; and improving labor skills.

Creating productive jobs for inclusive growth

 

The Lao PDR Development Report 2014, highlighted in the Lao PDR Economic Monitor (April 2015), explains how improving key workforce skills, agricultural productivity, and removing investment constraints can help inclusive growth and poverty reduction in Lao PDR.

  • Despite impressive growth in the last decade, driven by the hydropower and mining sector, very few jobs were created. The majority of the Lao workforce is in the agriculture sector, where productivity is low. 
  • A challenge is the lack of productive, higher-income generating jobs, which result from the high cost to doing business in the country. In addition, Lao PDR faces a shortage of skilled workers, stemming from low literacy levels in the country. 
  • The report provides suggestions to resolve some of these issues, such as boosting agricultural productivity to raise incomes and free up workers to explore non-farm jobs, which can be promoted with the creation of an enabling business environment. At the same time, improving technical skills and strengthening early childhood education can help prepare the workforce to take up higher-productivity opportunities that become available.