Source: International Monetary Fund
Natural disasters slowed Lao P.D.R.’s economic growth and accentuated the need to address structural vulnerabilities. GDP growth slowed down to 6.3 percent in 2018 from 6.8 percent in 2017, as both agricultural and industrial production declined mainly due to natural disasters. Heavy rainfalls from tropical storms resulted in flooding across the country, followed by the tragic collapse of Xe-Pian Xe-Namnoy dam. Notwithstanding these disruptions, inflation remained below 3 percent. Credit growth declined due to the economic slowdown, the legacy of non-performing loans, and fiscal tightening. In 2018, the current account deficit widened due to the mega-projects and disaster related imports, while electricity exports grew. International reserves declined to around one month of imports. Fiscal consolidation, driven by lower capital spending, brought the fiscal deficit down to 4.4 percent of GDP in 2018 from 5.5 percent in 2017. Revenues underperformed in 2018 and a part of the spending was diverted towards natural disaster recovery needs. The government has allocated emergency assistance for public works, transportation, the agriculture and forestry sectors. New investment projects pipeline has been suspended and the authorities are taking stock of all existing projects with the view of re-prioritizing capital investment to address further infrastructure repair needs.
Long-term economic prospects remain favorable. Economic growth is expected to remain strong and gradually rise close to 7 percent over the medium-term supported by private investment, electricity exports, and the completion of the Kunming-Vientiane railway project. Headline inflation is projected to remain moderate. Large current account deficits are expected to persist from import demand keeping gross international reserves between one and two months of import coverage. Fiscal consolidation is also expected to continue, supported by efforts to improve revenue administration and optimization of spending, given the government’s plans for reducing civil service recruitment and continued re-focusing of capital spending to post-disaster reconstruction efforts with the temporary suspension of new investment projects. The government has adopted a comprehensive reform package directed towards strengthening economic governance starting with the modernizing of various legal frameworks.
Risks mainly stem from external developments, slower than the anticipated implementation of committed structural reforms, and weather-related shocks. In an uncertain global environment, a sharper than expected slow-down in China – Lao P.D.R.’s largest trading partner and FDI investor – may reduce exports and decelerate FDI inflows. On the upside, faster regional growth and deepening integration within the ASEAN will help boost investment, trade, and tourism. Vulnerabilities to natural disasters may affect growth and reduce potential gains in poverty reduction.
Executive Board Assessment 
Executive Directors welcomed Lao P.D.R.’s sustained strong economic growth, stable inflation, and progress made towards graduating from the Least Developed Country status despite challenging circumstances. Directors noted that, while the outlook for growth remains favorable, risks are tilted to the downside. They welcomed the authorities’ commitment to maintaining sound macroeconomic policies and further deepening the reform agenda to reduce vulnerabilities, address structural weaknesses, and promote sustainable and inclusive growth.
Directors emphasized that gradual fiscal consolidation, supported by comprehensive public financial management reforms, is important for fiscal and debt sustainability. They noted that reorienting consolidation efforts from expenditure compression to revenue generation would be helpful to build the fiscal space needed for social development and infrastructure needs as well as to achieve the sustainable development goals. In this regard, Directors welcomed the development of a medium‑term revenue strategy and encouraged the authorities to implement the strategy and to improve tax legislation and administration, as well as broaden the tax base.
Directors underscored the need to reduce risks to debt sustainability. They highlighted that effective implementation of the new Public Debt Management Law and developing debt management strategy, supported with capacity building, would help strengthen the debt carrying capacity. Directors concurred that the on‑going assessment and targeting of infrastructure projects with high social returns and financing these at concessional terms, to the extent possible, would also support debt sustainability. Noting the scale of the projects, they called for further strengthening the public investment framework, continuing assessment and monitoring of fiscal risks, and actively diversifying export markets.
Directors emphasized that further efforts to modernize monetary governance and strengthen liquidity management would support reserves build‑up and macroeconomic stability. In addition, improving liquidity forecasting and gradually increasing exchange rate flexibility, will also contribute to increasing international reserves. Directors highlighted that boosting productive investments to enhance competitiveness and diversification are necessary to strengthen the overall external position.
Directors agreed that financial sector reforms should focus on financial deepening and boosting resilience to risks. Implementing risk‑based supervision would help identify and reduce risks, while transitioning towards the Basel II framework would help build buffers. Directors also agreed that providing guidance on forthcoming regulatory changes would improve predictability of the regulatory environment, while facilitating SME financial literacy and access to finance would support inclusive growth.
Directors noted the progress in improving the quality and timeliness of economic statistics. They encouraged bringing the monetary and financial sector indicators to regional reporting standards. Directors called for further strengthening of the AML/CFT framework in preparation for the 2020 FATF assessment.
Directors highlighted that spreading the benefits of economic growth would require consistent investment in human capital. Improving education attainment, skills training, reducing the regulatory burden on SMEs, increasing access to finance, easing trade regulations, and introducing policies that support greater participation of women in the formal economy would make growth more inclusive. Technical assistance from the Fund and development partners remains critical to support these ambitious reforms, taking into account Lao’s absorptive capacity.