Lao Economy

IMF Sounds Concerns Despite Strong Lao Growth

Source: The Nation

Efforts by policymakers in Laos to maintain economic growth of around 7 per cent this year, a rate surpassing that of much of the region, has been praised by the International Monetary Fund.

However, the IMF also expressed concerns about the nation’s declining levels of foreign-currency reserves, a rising budget deficit and relatively high levels of public debt.

An IMF technical team paid a courtesy visit to Deputy Prime Minister and Finance Minister Somdy Duangdy in Vientiane last week to discuss the report about the potential scenarios and outlook of Laotian economy.

The IMF noted that the growth of economy had continued to be driven by resources and mining alongside the construction and commissioning of hydropower and other major power-generation projects, particularly the Hongsa lignite power plant.

Meanwhile, construction is well under way for the nearly US$6-billion (Bt200 billion) Laos-China railway project linking Vientiane to the Chinese border, which is expected to serve as a boost to momentum in the economy during both its construction phase and when it comes into service.

In addition, Laos was able to maintain an average inflation rate of 1.5 per cent last year, which was lower than the country’s economic growth rate.

The IMF projects that Laos’ gross domestic product will grow by 6.8 per cent this year despite the challenges and complex changes occurring in the global economy.

Laos is a small, landlocked economy that has experienced rapid growth based on capital-intensive investments in the energy sector, increasingly taking advantage of its location between its larger and more populous neighbours.

Progress has been made in achieving the United Nations’ Millennium Development Goals, but the rate of poverty remains relatively high.

According to an IMF report in February, Laos’ growth model needs to be more inclusive, particularly by integrating the mainly rural, primarily agrarian population into more economically productive activities.

Anchoring inflation

According to the report, Laotian policymakers have successfully maintained macroeconomic stability by anchoring inflation to a stable exchange rate.

However, the economy has ac-cumulated vulnerabilities in the form of high public debt, a progressively overvalued real exchange rate and pockets of weakness in |the banking sector. With few buffers to address shocks, the economy remains vulnerable to a rapid deterioration in the external environment, a sustained deterioration in the fiscal position, or a rapid reversal of foreign-capital flows.

Over the medium term the budget deficit is expected to improve gradually to about 5 per cent of GDP as overall revenues recover and expenditure is contained, the IMF said.

The current-account deficit is expected to widen slightly, reflecting higher imports to support the construction of hydroelectric and railway projects, financed by private capital inflows, but is expected to narrow in 2021 as project-related imports fall and electricity exports come on line.

On the wider economic landscape, a sustained reversal in the momentum of fiscal consolidation driven largely by weak revenue growth could lead to further increases in the public-debt ratio and a deterioration of the country’s external position, with potential flow-on effects for investor confidence, it said.

Meanwhile, Laotian economists have recommended that the country seek to change the structure of production towards value-added manufacturing and services.