Country Report Laos June 2009

The domestic economy: The government lowers its growth forecasts

The Lao government has lowered its forecast for economic growth in fiscal year 2008/09 (October-September) by 1-2 percentage points to 6-7% owing to falling merchandise exports and lower income from mining and tourism. Although the Asian Development Bank (ADB) is less bullish, forecasting growth of 5.5% in 2009, this is still the bank's highest growth forecast for a South-east Asian country. Meanwhile, a government think-tank, the National Economic Research Institute, has forecast growth of 7%. The government expects agriculture to expand by 3%, industry by 13.4% and services by 7.2%. It has also predicted that the inflation rate will remain in single digits, while government revenue collection will reach 15% of GDP and expenditure 20% of GDP. According to the Ministry of Planning and Investment, in the first half of 2008/09 merchandise exports fell by 5.6% year on year to US$533m. Merchandise imports also fell, by 8%, to US$554m, leaving a trade deficit of about US$39m. The ministry estimated that total foreign direct investment in the country reached US$2.8bn, with another US$800m coming from domestic sources.

The ADB has said that it will help the government achieve its 2008/09 revenue targets after the bank projected a 10% shortfall in expected government revenue owing to the global financial crisis. The government expects revenue to fall about K740bn (US$87m) below its target of K8.3trn (US$980m) due to lower prices for its main exports, such as agricultural commodities and minerals. Delays in building new hydropower projects have also affected revenue. The ADB will provide about US$5m in grants to a programme aimed at supporting small and medium-sized enterprises if the government is able to meet certain expenditure conditions. The ADB has pre-existing plans to provide grants worth US$85m to Laos in 2009. Meanwhile, the EU has said that it will provide additional funding of about US$14m over three years for the specific purpose of countering the effects of the global recession. The funds will be provided in addition to already arranged grants worth US$50m. The EU ambassador to Laos, David Lipman, has expressed concern that the economic downturn will increase hunger among poor people.

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