Real GDP growth of Lao PDR, which was estimated at 7 percent in 2009, is expected to increase to 7.8 percent in 2010 driven largely by resource sectors. Out of this growth of 7.8 percent, nearly 3 percentage comes from NT2. Fiscal performance is on track toward achieving the GOL’s targets in FY2010. In the first six months of this fiscal year (from Oct 2009 to Mar 2010), the GOL’s revenue collection has reached nearly 50 percent of the annual revenue target while expenditure implementation has been around 44 percent of the plan. With projected sustained economic growth and strong revenues, the overall budget deficit is expected to decrease to 4.5 percent of GDP in FY2010 from 6.8 percent in FY2009. The increase in revenue is supported by improved domestic taxes (both direct and indirect taxes), implementation of VAT and some contribution from NT2. Decline in off-budget spending is likely to push down the overall expenditure in this fiscal year.
The year-on-year inflation has increased notably in recent months to 4.8 percent in April 2010 from 1.5 percent in November 2009 due to energy (fuel) and food prices. After maintaining a de facto peg of the kip to the US dollar in 2009 and early 2010, BOL has allowed the kip to appreciate against the dollar. This has resulted in monthly appreciation of the kip by 2.1 percent against the US dollar and 0.9 percent against the baht in April 2010.
Although international reserves remained fairly stable during the last six months, net foreign assets dropped by 25 percent. Gross official Reserves at the Bank of Lao PDR were estimated at about $635 million during Oct 2009-Mar 2010. Net foreign assets declined by 25 percent in 2009 and 23 percent in Mar 2010 due to rapid credit expansion and import growth.
Credit grew rapidly in 2009 and in the first quarter of 2010 but is expected to slow by end-2010. Credits grew by about 90 percent last year and during Jan-Mar 2010 partly due to BOL’s direct lending to local projects to finance public infrastructure and associated imports (about 22 percentage points of total credit growth). As the GOL made a decision to stop quasi-fiscal activities in September 2009 and bank liquidity tightened (loan to deposit ratio increased significantly to 73 percent by end-2009 from 55 percent in 2008), credit growth is expected to slow in 2010. Although NPLs have declined during the last two years largely because of rapid credit growth, risks in the sector remain significant in the context of relaxed bank supervision.
Ms. Genevieve Boyreau, Senior Economist, expressed "the Lao economy has weathered the global crisis relatively well, thanks to its relative insulation from the financial global markets and boosted by expansionary domestic policies. It is set for another year of strong economic growth, with large projects starting commercial operations this year. Looking forward, policymakers’ ability to sustainably exit the domestic stimulus will be critical to the sustainability of economic growth.”
Downlaod the Lao Economic Monitor May 2010