Real GDP growth in Lao PDR rose to 7 percent in 2005, from 6.4 percent in 2004.All sectors grew rapidly – with industry growing fastest but from a low base. The share of industry is now more than 25 percent of GDP. The stimulus of large projects in mining and power sectors more than offset the dampening effects of high international oil prices and the expiry of the Multi-Fiber Agreement (MFA) quota system. The economy is projected to grow at 7.1 percent in 2006 and to continue growing steadily at 6-7 percent in the future. However, a large part of this growth comes from increased foreign investment flows in hydropower and mining: without large projects and increased investment and exports in these sectors real growth would have been about one third lower. Therefore, promoting growth in sectors other than mining and hydropower is increasingly important for ensuring stable growth in the long-run. The government’s efforts in liberalizing trade and improving the investment climate are thus steps in the right direction. |
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The poverty headcount in Lao PDR has fallen from 46 percent of the population in 1992/3, to 39 percent in 1997/8 and to 33.5 percent by 2002/3. Even though the population grew by one million people over this period, the absolute number of poor fell from about 2.1 to 1.9 million. World Bank staff projections indicate that there is potential for Lao PDR to continue these positive trends, with simulated poverty headcount rates of between 23 and 28 percent in 2010. Macroeconomic conditions have remained broadly stable. CPI inflation fell from 15.5 percent in 2003 to 7.2 percent in 2005 – although it picked up in mid-2005, driven by higher oil prices and higher rice prices due to floods. The kip exchange rate has been stable while reserves equal three months of imports. The balance of payments held up well in 2005, despite some adverse shocks. A surge in mining exports offset the impact of oil prices. But the imports associated with the NT2 project have caused the current account deficit to plunge to 15 percent of GDP, offset by capital inflows, principally from foreign direct investment. While the cash budget deficit has been kept within the 4 percent (of GDP) target, the fiscal position has remained under pressure due to weak revenue collection combined with the ongoing lack of realism in revenue projection, plus the pressures to increase the wage bill (which grew by 24 percent in FY2004-05). Delays in implementing key tax measures contributed to negative budget pressures. High public external debt remains a concern (falling since 2002 but still very high at 83 percent of GDP in 2004 or 55 percent in NPV terms). The crude cash rationing used to control the budget deficit has resulted in budgetary distortion – with non-wage recurrent expenditures increasingly squeezed – and built up of arrears to Government suppliers. One positive contribution to fiscal revenues has however resulted from a recent decision to eliminate temporary exemptions to the prevailing tax/duty rates on gasoline and diesel, recovering more than $7 million of budget revenues. The government was also able to increase the fuel levy, revenues from which are earmarked for the road fund and are essential for supporting road maintenance. Back to top
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