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Cablegate: Imf Anticipates Strong Macro-Economic Performance

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

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