Report No: AUS17628 . Lao People's Democratic Republic Lao Economic Monitor FY15-16 { Challenges in promoting more inclusive growth and shared prosperity} Public Disclosure Authorized . {May 2016} . GMF02 EAST ASIA AND PACIFIC . Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized . Document of the World Bank . Standard Disclaimer: . This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Lao Economic Monitor Challenges in promoting more inclusive growth and shared prosperity May 2016 Thematic section: Drivers of Poverty Reduction in Lao PDR CURRENCY EQUIVALENTS (Exchange Rate Effective as of April 25, 2016) Currency Unit = LAK (Lao Kip) LAK8,141 = US$1.00 Fiscal Year=October to September ACRONYMS AND ABBREVIATIONS ASEAN Association of Southeast Asian Nations BOL Bank of Lao PDR BOP Balance of Payment COD Commercial Operation Date CPI Consumer Price Index DSA Debt Sustainability Analysis EAP East Asia & Pacific EDL Electricité du Lao FATF Financial Action Task Force FDI Foreign Direct Investment FY Fiscal Year GDP Gross Domestic Product GOL The Government of Lao PDR IMF International Monetary Fund MOF Ministry of Finance MOIC Ministry of Industry and Commerce NA National Assembly NEER Nominal Term Effective Exchange Rate NFA Net Foreign Assets NPL Non-Performing Loan NSEDP National Socio-Economic Development Plan PIP Public Investment Projects PPG Public and Public Guaranteed Debt REER Real Effective Exchange Rate SOCBs State-Owned Commercial Banks SOE State-Owned Enterprise VAT Value Added Tax WBG World Bank Group WEO World Economic Outlook YOY Year on year Vice President of EAP: Victoria Kwakwa Country Director: Ulrich Zachau Sector Practice Director: Satu Kristiina J. Kahkonen Country Manager: Sally Burningham Sector Manager: Mathew A. Verghis Primary Authors: Evgenij Najdov Keomanivone Phimmahasay ACKNOWLEDGEMENTS Lao PDR Economic Monitor - 2016 was prepared by the Lao country team under the guid- ance of Mathew Verghis (Practice Manager, Macroeconomics and Fiscal Management Global Practice) and Sally Burningham (Country Manager). The Team comprises of Evgenij Najdov (Senior Country Economist), Somneuk Davading (Senior Economist), and Keomanivone Phim- mahasay (Economist) with helpful contribution from Obert Pimhidzai (Economist) on Part II thematic topic on the “Drivers of poverty reduction in Lao PDR”. Administrative and report production assistance from Souksavanh Sombounkhanh and Maniphet Phengsavatdy is gratefully acknowledged. The team would like to express gratitude to the Government officials from the Ministry of Finance, Ministry of Planning and Investment, Ministry of Industry and Commerce, Ministry of Energy and Mines, the Bank of Lao PDR and other ministries, and representatives from the Lao National Chamber of Commerce and a number of businesses for sharing valuable views and inputs. The findings and interpretations expressed here are those of the authors and do not neces- sarily reflect the views of the World Bank Group, its Executive Directors, or the countries they represent. TABLE OF CONTENTS EXECUTIVE SUMMARY .......................................................................................................................... 6 RECENT ECONOMIC DEVELOPMENTS IN SNAPSHOT .................................................................... 11 PART I: RECENT ECONOMIC DEVELOPMENTS ................................................................................ 13 GROWTH ..................................................................................................................................... 13 INFLATION ................................................................................................................................... 18 FISCAL DEVELOPMENTS ......................................................................................................... 20 EXTERNAL SECTOR .................................................................................................................. 25 EXCHANGE RATE ....................................................................................................................... 29 MONETARY DEVELOPMENTS ................................................................................................. 30 OUTLOOK .................................................................................................................................................. 32 PART II: DRIVERS OF POVERTY REDUCTION IN LAO PDR ............................................................. 34 ANNEX 1: LAO PDR AT A GLANCE ........................................................................................................ 42 ANNEX 2: LAO PDR’s Government Budget ........................................................................................ 43 LIST OF FIGURES Figure 1: Real GDP Growth ................................................................................................................ 14 Figure 2: Sectoral contribution to real GDP growth .................................................................... 14 Figure 3: Installed capacity in the power sector ........................................................................... 14 Figure 4: Mining output and price indexes ..................................................................................... 14 Figure 5: Share of firms in SEZs by ownership .............................................................................. 15 Figure 6: Share of labour in SEZs in 2015 ....................................................................................... 15 Figure 7: Consumer Sentiment Index .............................................................................................. 16 Figure 8: Monthly Inflation ................................................................................................................ 18 Figure 9: Contribution to Food Inflation ......................................................................................... 19 Figure 10: Global crude oil price and local retail fuel prices .......................................................... 19 Figure 11: Government Fiscal Performance .................................................................................... 20 Figure 12: Government Revenues ...................................................................................................... 20 Figure 13: Government Expenditures ............................................................................................... 21 Figure 14: External balance ................................................................................................................. 25 Figure 15: Merchandise Exports ......................................................................................................... 26 Figure 16: Merchandise Imports ......................................................................................................... 26 Figure 17: Reserves coverage ............................................................................................................. 27 Figure 18: Share of China in total trade ............................................................................................ 28 Figure 19: Contribution to increase in tourist arrivals by nationality during 2012-2015 ....... 28 Figure 20: Lao kip exchange rate ........................................................................................................ 29 Figure 21: Real effective exchange rate ............................................................................................ 29 Figure 22: Lending by sectors ............................................................................................................. 30 Figure 23: Credit growth ...................................................................................................................... 31 Figure 24: Contribution to growth in banking sector asset ......................................................... 31 Figure 25: Trends in poverty in Lao PDR: 2002/3 – 2012/13 ......................................................