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Lao Peoples Democratic Republic

Resource-based industries, manufacturing, and services generated robust growth in , and are

expected to drive similar growth rates during the forecast period. Inflation, after speeding up last year,

is projected to moderate. The country signed agreements that bring it closer to joining the World Trade

Organization. However, generating well-paying jobs remains a major challenge.

Economic performanceDespite severe ooding that damaged agriculture in 2011, the economy

grew by 7.8% (Figure 3.25.1), mainly owing to expansion o hydropower,manuacturing, mining, and services.

yphoons in the second hal o the year brought oods that took

down rice output by 11% to about 2.9 million tons. Production o corn,

beans, and vegetables also ell, although sugarcane, fsheries, and

poultry perormed better than in 2010. Output o timber declined as

the government curbed illegal logging and restricted logging quotas.

Agriculture as a whole, which accounts or just under one third o GDP,

was virtually at in 2011.

By contrast, industry expanded by 15.6%. Production o copper

rom the countrys two biggest minesPhu Bia and Seponrose by

about 5% to 139,000 tons. Silver production also gained, by about

6% to 538,000 ounces, though output o gold ell by about 22% to128,000 ounces.

Hydropower output rose by 18.5% in 2011, spurred by new plants

coming online, including the 615 megawatt Nam Ngum 2 in April 2011,

and by heavy rainall during parts o the year. Most o the electricity

generated is exported to Tailand. Investment in mining and power

plants contributed to growth: several mines, including the Ban Houayxai

gold and silver mine as well as eight hydropower plants and a lignite

power plant were being built. Other construction ocused on housing,

commercial buildings, and hotels in Vientiane, Luang Prabang, and

Savannakhet. Construction overall increased by about 6% in 2011.

Garment manuacturing benefted rom the European Unions

relaxation, rom January 2011, o rules o origin or imports o garments

rom certain developing countries, including the Lao Peoples Democratic

Republic (the Lao PDR) (Figure 3.25.2). Garment exports to the European

Union and United States, the two main markets, rose by about 17% to

Te services sector grew by 7.9% last year. ourist arrivals went

up by 9% to 2.7 million (Figure 3.25.3), supporting the hotels and

restaurants as well as transport subsectors. Te rollout o third-generation

3.25.1 GDP growth

6

7

8

1312111009082007

%5-year moving average

Forecast

Source:Asian Develop ment Outlook database.

This chapter was written by A . Barend Frielink and Soulinthone Leuangkhamsing of the

Lao PDR Resident Mission, ADB, Vientiane.

3.25.2 Garment exports to the European

Union and United States

0

50

100

150

200

11100908072006

$ million

United States

European Union

Notes: Using import data from US OTEXA and Eurostat.

Data from Eurostat were converted to US dollars using /average exchange rate for the year.

Sources: Office of Textiles and Apparel. http://otexa.ita.doc.gov (accessed 20 March 2012); Eurostat. http://epp.eurostat.ec.europa.eu (accessed 21 March 2012).

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200 Asian Development Outlook 2012

mobile telephone and Internet services contributed to growth o

telecommunications and banking continued to expand.

Ination peaked at 9.8% in May (Figure 3.25.4) and averaged 7.6%

or the year (up rom 6.0% in 2010). Rising global oil prices drove up

domestic uel costs and the disruption to supplies o ood during theoods pushed up prices o ood. Higher ination in neighboring countries

that supply consumer goodsthe Peoples Republic o China (PRC),

Tailand, and Viet Namadded to pressure on prices.

Growth in credit moderated rom very high rates in recent years

to a still high 34.2% in December 2011 (Figure 3.25.5). Te deceleration

stemmed rom reduced direct lending by the central bank or

inrastructure projects and steps the bank took to curb lending or real

estate speculation. A shortage o longer-term bank deposits constrained

commercial bank lending to the private sector.

Te central bank also maintained its policy o keeping the kip

broadly stable against the US dollar and Tai baht. During 2011 the kip

appreciated by 2.7% against the US dollar and by 1.6% against the baht.Dollarization has gradually declined rom 79% in 1999 to about 45% last

year.

Strong ows o revenue to the government rom mining and

hydropower, coupled with reduced o-budget spending, brought down the

overall fscal defcit to about 2.0% o GDP in FY2011 (ended 30 September

2011) rom 5% the previous year. A value-added tax introduced in 2010

supported growth in total revenue, which is estimated to have reached the

equivalent o 19.4% o GDP (including grants). Government spending is

estimated at 21.4%.

Merchandise exports, mainly minerals, hydropower, garments, and

equipment or the resource industries and two Airbus aircra or Lao

Airlines. Aer dividend and proft repatriation and interest payments by

resource-based companies, the current account defcit was estimated at

15.9% o GDP.

Accounting or oreign direct investment and other capital ows,

2.5 months o nonresource imports.

Te Lao PDR has moved closer to joining the World rade

Organization, aer reaching bilateral agreements with major trading

partners. (It has sought membership in that body since 1997 to oster

trade and investment.) Under the market access agreement signed last

year with Australia, or example, the government agreed to an average

ceiling on import taris o about 25%, and as low as 5% on some goods. It

committed to allow market access or suppliers o a range o services and

to allow majority oreign ownership o joint ventures.

In another market-opening development, the government sold

stakes o about 30% in two state-owned companiespower company

EDL-Generation Co. and Banque Pour Le Commerce Exterieur Lao

through initial public share oerings, and listed the shares on the new

Laos Securities Exchange last year. Further such listings are planned.

.. Selected economic indicators (%)

0 0

GDP growth 7.9 7.7

Inflation 6.7 6.

Current account balance

(share of GDP)

-. -.

Source: ADB estimates.

3.25.3 Tourism indicators

0

1

2

3

0

150

300

450

Revenue from tourismNumber of tourists

111009082007

Million persons $ million

Source: Ministry of Information, Culture and Tourism.

3.25.4 Inflation

-4

0

4

8

12

Jan12

JulJan11

JulJan10

JulJan2009

%

Source: CEIC Data Company (accessed 21 March 2012).

3.25.5 Monetary indicators

0

25

50

75

100

125

0

6

12

18

24

30

Money supplyDomestic credit

111009082007

Growth, % Kip billion

Sources: Bank of Lao PDR; Asian Develop ment Outlook

database.

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Economic trends and prospects in developing Asia: Southeast Asia Lao Peoples Democratic Republic 201

Economic prospectsGrowth looks likely to continue in 20122013 at similar rates to last year.

thermal power plant (1,878 megawatts) and associated coal mine. Work

will get under way this year on Nam Ngum 3 (440 megawatts), joiningeight other hydro plants under construction. Expansion o Teun Hiboun

(280 megawatts) is due to be completed in July 2012.

Te Ban Houayxai mine is scheduled to start production in the frst

hal o 2012, at a ull-year rate o 100,000 ounces o gold and 700,000

ounces o silver, and the Phu Kham coppergold project, one o the

biggest in the country, is being expanded. A potash mine and processing

company rom Viet Nam has started work on a larger potash project

potash plants will be exported.

In the capital Vientiane, the government is investing more than

senior ocials rom 50 countries to be held in November 2012. Te PRC is

providing loans or conerence acilities and airport expansion.

ourism will get a li rom international promotion o 2012 as

Visit Laos Year and rom the ASEAN University Games to be held in

December 2012. Lao Airlines has launched ights between Vientiane and

Singapore aer acquiring the Airbus planes in late 2011.

Rice production is expected to recover rom last years ood-

suppressed level. Agricultural production is expected to increase by 23%

in 2012, depending on the weather. Te government is repairing irrigation

systems damaged by the oods and building new irrigation systems to

support dry-season crops.

Fiscal policy is more expansionary in FY2012, and the fscal defcitis projected to widen to 4.6% o GDP. Te government has budgeted

to increase spending considerably, in part to repair the ood-damaged

inrastructure. Te central bank is targeting 25% growth in M2 money

supply and aims to curtail expansion o credit to 28% (such targets have

been missed in recent years, though).

Ination is orecast to moderate to average 6.7% this year and 6.0% in

2013. Lower global ood prices and a better domestic harvest will ease the

pressures on ood, which has a large share in the consumer price index.

Tere will be some upward impact on prices rom an increase o about

18% in administered electricity taris in the frst hal o 2012.

Sluggish global economic growth is expected to weigh on prices o

copper, holding back merchandise export growth to about 19.0% in 2012.

Imports o capital equipment needed or new mining and power projects

will underpin an increase o about 17.0% in merchandise imports. Te

current account defcit is orecast to widen to 21.0% o GDP.

2011, although as a ratio to GDP it ell to about 47%. An external-debt

sustainability analysis by the International Monetary Fund in 2011 ound

that the country still aces a high risk o debt distress, and that the

projected rate o debt accumulation could increase in the next ew years,

reecting borrowings mainly rom the PRC.

.9. Policy challengegenerating

more jobs

Poverty incidence declined rom o the population in to a still

high in . Consequently,major development goals are to sustaingrowth o income and employment,and better distribute income andwealth.

Central to these tasks is raisingproductivity and incomes in agriculture,which employs about three-fhs othe workorce. Rural areas are home tothe majority o the poor. As improvedproductivity reduces the numbero workers in agriculture, however,industry and services must grow i thesurplus workers are to fnd jobs.

Investment in recent years hasocused on mining and hydropower.Tey have indeed driven much o thegrowth, but, being capital intensive,have not generated enough jobs to takein all the workers leaving agriculture.

Industries that could create manywell-paid jobs include:

Agribusiness. Processing crops likerice, corn, and natural rubber adds

value and is labor intensive. As linksstrengthen between the Lao PDR andits neighbors Cambodia, the PRC,

Myanmar, Tailand, and Viet Nam,market access or agribusinessproduction will expand.

Tourism. Tis group o countriesalso oers a cluster o tourismdestinations that could be developedand promoted to achieve aster growth.Services associated with tourism, suchas hotels, have a strong employmentresponse to growth in output.

Services. It is ecient to clusterdevelopment o services in towns andcities to capture economies o scale andagglomeration. Moves in this directionrequire the government to addressissues including inadequate urbanplanning and provision o water andsewerage systems.

More broadly, development othese and other industries dependson bringing down the high cost ofnance, expanding education andskills training, building transportinrastructure, and addressingweaknesses in governance.