Country Report Laos June 2009

Outlook for 2009-10: Fiscal policy

The government will push ahead with efforts to improve its fiscal performance. Owing to the solid performance of the mining and energy sectors in the first half of fiscal year 2007/08, the finance minister, Somdy Douangdy, has said that the government achieved its collection target in that year. However, the 2008/09 collection target of K8.3trn (around US$980m) will be more difficult to achieve following a sharp fall in world mineral prices. On the London Metal Exchange the price of copper-Laos's most important mineral export-fell from a high of US$8,700/tonne in April 2008 to less than US$3,300/tonne in January. Although the price of copper has since rallied to US$4,400/tonne, the government has conceded that revenue will fall about K740bn (US$87m) below target. The suspension on March 1st of a value-added tax (VAT)-only two months after its introduction-will also weigh down on tax revenue. The introduction of VAT was needed in order to limit the impact of falling customs revenue as Laos fulfils its tariff-reduction obligations as a participant in the ASEAN Free-Trade Area (AFTA). The government will continue to run budget deficits in the forecast period. On the expenditure side, the government has made progress in strengthening its management of public expenditure. However, it increased public-sector salaries in 2008/09, in a move that could damage its recently earned reputation for prudence. Nevertheless, assuming that the government does not falter in its management of the economy, we forecast that the budget deficit (including grants) will average 3.2% of GDP in the forecast period.

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