Country Report Laos June 2009

Economic policy: The government calls for economic assistance

The government of Laos continues to look to international donors for support in minimising the effects of the global economic crisis. In May the prime minister, Bouasone Bouphavanh, travelled to Japan where he called for support from the government and private investors. Stressing the importance of sustainable development, Bouasone said that Laos was committed to helping to combat climate change and to expanding the country's forests if it could obtain assistance from other nations. He also said that although Laos had not been as severely affected by the global financial crisis as many other countries, the domestic economy was vulnerable to slower world growth and lower global commodity prices. Mineral exports fell by 13% in the first quarter of 2009. Bouasone also stressed the political stability that has been brought by the communist regime, as well as recent efforts to improve the investment environment.

Despite the prevailing global economic gloom, Laos continues to encourage foreign investment. In April the cabinet approved plans to merge existing laws on the promotion of domestic and foreign investment. At present, proposals for foreign investment are dealt with differently and separately from domestic proposals; a single process for all investors should assist in the country's efforts to attract foreign investment and to gain accession to the World Trade Organisation. In this respect the government is also focusing on improving the regulations that govern tax, trade and foreign exchange. In late May the government approved a draft decree on import procedures in order to streamline and standardise imports in line with international trading obligations. A similar decree on export procedures is under preparation, as is a national export strategy, which will promote priority sectors, such as electricity, mining, tourism, garments and handicrafts. However, despite the decrees, overall progress remains slow. The foreign minister, Thongloun Sisoulith, recently complained that the various government departments responsible for economic integration policies have yet to come up with plans for joining regional and global organisations.

The authorities' approach to dealing with the economic crisis remains piecemeal, with a number of officials still convinced that the country's isolation means that it will not be affected by the downturn. The Ministry of Finance has recommended that plans for ambitious state projects be reconsidered, urging the postponement or cancellation of several proposed schemes in order to focus available funds on the construction of roads and the repair of irrigation systems that were damaged by flooding in 2008. The construction industry has applauded the large amounts that have been dedicated to basic infrastructure projects, saying that this has enabled many companies to survive the economic slowdown. The finance ministry is also looking to improve the collection of fees that are charged for government services, including licences, certificates and other official documents, transport, immigration and broadcasting rights. The cabinet has approved in principle budget allocation for priority projects and debt payment in fiscal year 2009/10 (October-September). The budget will be submitted to the National Assembly (the legislature) by October.

The government is planning to cut leakage within provincial administrations by setting up a national treasury. A law on the matter will be presented to the next session of the National Assembly in June, but the proposal could face strong opposition from vested interests within the legislature. The ruling Lao People's Revolutionary Party (LPRP) depends on provincial fixers around the country to maintain its image of national unity, and any attempt to reduce the financial independence of rural powerbrokers will not be welcomed. The law will seek to control both revenue and expenditure in every province by requiring all transactions to be conducted through official banking channels.

A value-added tax (VAT), introduced at the beginning of 2009, was officially withdrawn in March owing to the financial crisis and following pressure from the private sector. The government has announced that VAT will be reintroduced in 2010. Although opposition to the new tax is expected from retailers and other groups, notably in the tourism industry, it is unlikely that the government will again postpone VAT implementation and risk upsetting agreements with the donors and international financial institutions that have long pressed for tax reform.

The government hopes to raise more than US$72m by selling foreign-currency denominated bonds that are guaranteed by royalties from operational hydropower projects. The funds will be partly used to develop future electricity projects, and the five- or ten-year bonds may prove popular with local investors looking for reliable returns on cash generated in the last few years of market growth. The scheme is backed by the Asian Development Bank (ADB) as part of the Association of South-East Asian Nations' (ASEAN) +3 Asian Bond Markets Initiative and, according to the finance ministry, foreign commercial banks (including HSBC and Standard Chartered of the UK, Siam Commercial Bank of Thailand and the Thai Military Bank) are interested in managing the sale. The move will mark Laos's first venture into the international debt markets. Two different schemes for the bond issue are under consideration, but both will probably feature a US dollar swap and will be guaranteed by the Export-Import Bank of Thailand. If the bonds are well received, more auctions may be expected in the future, based on mining royalties.

Work is also ongoing on the national stock exchange, which is scheduled to open by October 2010. Laos's major state-owned bank, Banque pour le Commerce Extérieur Lao (BCEL), has said that it will list on the exchange and that it will aim to use the funds generated to expand operations across the country. BCEL reported profits of US$21m in 2008. The bank also plans to establish a stockbroking arm to service the new bourse. The government will continue to own a majority shareholding in all state enterprises listed on the exchange.

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