The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation* with the Lao People's Democratic Republic in late January.
Real GDP growth is expected to moderate from 7.5% in 2015 to 7% in 2016. Domestic activity has slowed following a less favorable external environment, and credit growth has also moderated from a high level, the IMF said. While the overall banking system is well capitalised, state-owned bank balance sheets show signs of weakness, with rising non-performing loans (NPLs) and weak capital and profitability.
Inflation is expected to remain low and stable at around 2% at end-2016, aided by a strengthening kip exchange rate. As growth continues to moderate in the near-term, inflation is projected to remain in low single digits.
A failure to consolidate the fiscal position and bring down public debt could undermine confidence in the government’s macro policy framework, raise public debt further and worsen the external position. The economy is also exposed to external shocks, notably a further regional growth slowdown and a deterioration in terms-of-trade and capital inflows.
Executive Directors commended the authorities for their strong macroeconomic performance and progress on poverty reduction despite economic challenges. Directors noted, however, that there are significant vulnerabilities in the external, fiscal, and financial sectors, and that risks to the outlook could materialise from a regional growth slowdown, tightening in global monetary conditions, and capital flow volatility. Against this background, Directors emphasised the need to resume fiscal consolidation, tighten monetary conditions with gradually increased exchange rate flexibility over the medium-term, strengthen financial sector supervision, and introduce reforms to support economic diversification and private sector development.
Directors noted the rise in NPLs and the under-capitalisation of state-owned banks. To safeguard macro-financial stability, they recommended promptly addressing NPLs, phasing out regulatory forbearance, strengthening sound lending practices and supervision, and recapitalising the state-owned banks. Directors emphasised the importance of addressing supervisory weaknesses and developing a crisis management framework. They also welcomed the Anti Money Laundering/Countering Financing of Terrorism (AML/CFT) law, and encouraged full implementation of the action plan as agreed with the Financial Action Task Force.
Directors welcomed progress on product and labour market openness and gains in poverty reduction. To support more inclusive and broad-based growth, they encouraged further reforms aimed at diversifying the economy, boosting private sector activity, and improving the business climate. In this context, trade integration and improvements in education and health infrastructure were encouraged. Enhancing financial deepening and financial access by small and medium-sized enterprises (SMEs) would also support macro stability and growth.
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*Under Article IV of the IMF's Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country's economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.
