Adept Policy Response Needed to Support Lao PDR Economy amid the COVID-19 Pandemic

2020-07-29T13:44:14+08:00July 29, 2020|Press Release|

Adept Policy Response Needed to Support Lao PDR Economy amid the COVID-19 Pandemic

SINGAPORE, July 29, 2020 – Lao PDR’s growth in 2020 is expected to slow sharply due to the economic fallout from the COVID-19 pandemic, requiring strong government action to safeguard public health and to support the economy. Given the tight fiscal space, a careful reallocation of spending is necessary to help navigate the economy back to robust growth, according to the 2020 Annual Consultation Report on Lao PDR[1] published today by the ASEAN+3 Macroeconomic Research Office (AMRO).

Against the COVID-19 health crisis backdrop, Lao PDR’s growth is expected to fall to 2.0 percent[2] in 2020 as the impact of containment measures and spillovers from neighboring countries take a toll on the Lao economy. Meanwhile, inflation is expected to rise to 4.3 percent in 2020 from 3.3 percent in 2019 due to lingering effects of supply shocks from the drought and swine flu in late-2019, and higher import prices this year brought about by tighter border controls.

The fiscal deficit narrowed to 3.2 percent of GDP in 2019 from 4.7 percent of GDP in 2018 mainly due to tighter expenditure control measures, while revenue performance remained weak. With the COVID-19 outbreak, the fiscal deficit in 2020 is expected to widen beyond the budgeted target as the government rolls out measures to bolster the health systems and provide direct support to households and businesses, including micro, small, and medium enterprises (MSMEs).

After two consecutive years of sharp deceleration, credit to the economy recovered slowly last year, growing by 7.4 percent in 2019. Credit growth is expected to remain sluggish this year as the imposition of a lockdown and tighter border controls have brought the economy to a standstill. The central bank has reduced the reserve requirement ratio and the policy rate to ease liquidity constraints. Further measures such as the establishment of credit guarantees and emergency loan windows to prevent business closure may be necessary. Temporary regulatory forbearance will also help businesses survive.

Providing sufficient fiscal support is imperative to mitigate the impact of the COVID-19 pandemic and to restart the economy toward robust growth. Constrained by the limited fiscal space, additional spending should be accommodated by reprioritizing and reallocating the existing budget as much as possible. The strong commitment to a credible medium-term fiscal consolidation plan is vital to gain market confidence, particularly given the general sentiment of risk aversion during this period.

Building up international reserves is crucial to enhance the buffer against external shocks. The use of multiple currencies expose private and public entities to balance sheet mismatches. In this setting, a fully flexible exchange rate may lead to excessive volatility and raise concerns about the high level of external debt in the economy. Gradually allowing more flexibility in the exchange rate will enable the external position to adjust more readily to external shocks, fend off speculation, and allow the exchange rate to be more aligned with economic fundamentals.

To improve resilience, diversifying the economic base through effective leverage of the resource sector to develop other sectors such as manufacturing, tourism, and agro-based industries is critical. The government should lay out clear plans to maximize the economic benefits from existing and upcoming large infrastructure projects like the forthcoming railway, by creating more jobs and improving the logistics industry to enhance its competitiveness. More attention toward improving the disaster response framework and investments in disaster-resilient infrastructure will safeguard both the economy and population against natural disasters.

[1] The report was prepared based on AMRO’s Annual Consultation Visit to Lao PDR in March 2020 and data availability as of April 20, 2020.

[2] The 2020 growth forecast of 2.0 percent is based on the 2020 Annual Consultation Report on Lao PDR prepared in April 2020. For the latest growth forecast please go to the AMRO website (https://www.amro-asia.org/member-economies/lao-pdr/).

About AMRO and AMRO’s Annual Consultation Report:

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing the macroeconomic and financial stability of the ASEAN+3 region, which includes 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing, and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.

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