VZCZCXRO5895
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHVN #0285/01 1370807
ZNR UUUUU ZZH
R 160807Z MAY 08
FM AMEMBASSY VIENTIANE
TO RUEHC/SECSTATE WASHDC 2016
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 VIENTIANE 000285 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAID ECON EFIN ENRG LA PGOV
SUBJECT: IMF ANTICIPATES STRONG MACRO-ECONOMIC PERFORMANCE 
 
¶1.  (SBU) Summary:  The IMF expects Laos's economy to 
continue to grow at a strong 8 percent annual rate, driven by 
mineral and electricity exports.  Inflation is relatively low 
at 5 percent, but the IMF is concerned that the government is 
expanding commercial credit too quickly raising the specter 
of a new round of non-performing loans.  The long-term 
challenge for the government will be to encourage more 
broadly based growth that creates more employment 
opportunities for the vast majority of Lao who still depend 
on subsistence agriculture for their livelihoods.  End 
summary. 
 
¶2.  (SBU) An IMF team briefed selected donors on the outcome 
of their Article IV consultation with Lao government on May 
¶13.  The team leader reported that he had been impressed by 
the candid performance assessments he had received from 
Minister of Finance Somdy Douangdy, Governor of the Central 
Bank Phouphet Khamphounvang, and other Lao senior officials. 
Overall, his team judged Lao macro-economic management as 
good.  The Lao had achieved 8 percent growth in 2007 and were 
on track for a similar growth rate in 2008.  Reserves had 
doubled in the past eighteen months. 
 
¶3.  (SBU) Inflation is the IMF and government's principal 
concern.  The core rate of inflation is near 5 percent, 
largely driven by cost-pull factors -- principally rising 
fuel and food costs -- while the year-to-year inflation rate 
in April was 9 percent.  The IMF was interested in knowing 
what measures the government was considering to limit the 
impact of fuel price hikes.  Although unwilling to provide 
details in advance of a government announcement, the IMF team 
leader indicated that the measures the Lao government was 
considering to curb fuel prices were "temporary, targeted at 
the most vulnerable and the least market-altering." 
 
¶4.  (SBU) The team also raised its concerns over the 
inflationary impact of a sharp increase in commercial credit. 
 The team stated that commercial credit had grown 42 percent 
year-to-year; last year credit growth was negative as the 
focus was on the restructuring of the state-owned banks and 
their burden of non-performing loans (NPLs).  Although Laos's 
economy is heavily dollarized, the government has allowed the 
"Kip" money supply to grow 75 percent. 
 
¶5.  (SBU) The IMF team expressed worry not only over the 
quantity of the credit expansion, but also the quality, and 
said they had cautioned the government against creating a new 
round of NPLs.  The Lao, the IMF said, had made effective use 
of exchange rate policy (linking the Kip to the Thai Baht), 
but were not as skilled in managing monetary policy or 
liquidity.  In a rare unguarded comment, an IMF team member 
suggested that the government was using credit extended by 
state-owned banks -- some technically insolvent -- to "pump 
prime" the economy in order to meet ambitious growth targets. 
 The IMF team added that they had encouraged the Lao Central 
Bank to step up its regulatory capacities and offered 
technical assistance. 
 
¶6.  (SBU) On the fiscal side, the budget outlook was good. 
Revenues from taxes on mineral imports were better than 
expected, but so too were other tax revenues reflecting 
improved administration of the tax collection system. 
Expenditures were consistent with the budget previsions, and 
the IMF saw no indication of any significant off-budget or 
unreported budgetary expenditures.  Looking ahead, the IMF 
warned the government against allowing wage increases now 
under consideration to crowd out other recurrent spending in 
essential areas such as education and health. 
 
¶7.  (SBU) The IMF team, in their responses to questions, 
acknowledged donor concerns that the government may not use 
its revenue windfalls from the mining sector to address 
poverty alleviation and strengthen essential human welfare 
services.  They said they had briefed the government in some 
detail regarding the best practices for a "state accumulation 
fund" intended to use revenues from resource exports to meet 
long-term development needs.  The government is considering 
one, but did not offer the IMF any details regarding their 
plans. 
 
¶8.  (SBU) The team also mentioned their concerns regarding 
the unreliability of some statistics.  For example, balance 
of payments data do not fully capture -- and may deliberately 
under-report -- remittances from Lao working in Thailand and 
elsewhere overseas from relatives.  The Lao also were 
unwilling to discuss or estimate the parallel, informal or 
illegal economy. 
 
¶9.  (SBU) Comment:  The fundamental question for the Lao 
economy remains the quality of growth.  The government faces 
 
VIENTIANE 00000285  002 OF 002 
 
 
a significant challenge in translating recent and future 
surges in revenues and GDP growth driven by the resource 
sector into more broadly based growth that generates 
significant employment.  The good news, according to the IMF, 
is that the Lao planning authorities seem to have a strong 
appreciation of the need to direct government resources 
towards infrastructure and human resource development 
necessary to stimulate growth in sectors such as tourism, 
plantation agriculture and light manufacturing.  The rate of 
new flows of foreign direct investment and official 
development assistance appears, in the IMF's judgment, 
sufficient to finance these capital requirements and sustain 
current growth rates for at least several years. 
HUSO