Outlook for 2011-12

There is little likelihood that the ruling Lao People's Revolutionary Party (LPRP) will face a serious challenge to its authority in the next two years. Continued rapid economic growth and an extensive security apparatus will keep the LPRP's position secure, despite the risks posed by an increasing gap between rural and urban incomes and the unpopular practice of the state leasing land to foreign companies. Real GDP growth will remain strong in 2011-12, at an annual average of 7.8%, buoyed by high global prices for exported commodities. The government will maintain its commitment to regional political and economic integration, but regional ties could be strained by Laos's desire to dam the Mekong river.

The political scene

Two major events in the Lao political calendar took place in March and April: the ninth congress of the LPRP, which was followed by elections for the National Assembly (parliament). Neither event produced any surprises-they confirmed both the dominance of the LPRP over Lao politics and the apparent acceptance of this by the majority of the population.

Economic policy

Inflation is a growing concern for the government, which fears that rising food prices may lead to a failure to meet macroeconomic targets and public unrest across the country. State media reported in early May that food prices in markets were now "out of control", despite a government decree designed to hold the prices of selected products in check. The deputy planning and investment minister, Bounthavy Sisouphanthong, said that the government was re-analysing measures to minimise the impact of inflation.

The domestic economy

According to the Ministry of Planning and Investment, officials approved 188 private domestic and foreign investment projects over the first six months of fiscal year 2010/11 (October-September) with a value of around US$1bn. This means that private investment has already reached 84% of the target for the fiscal year. Mining revenue is increasing as commodity prices continue to rise in global markets. According to the planning and investment ministry, mining earned Laos around K6.9trn (US$830m) in the first six months of 2010/11, representing a year-on-year rise of 58%.

Foreign trade and payments

Laos's trade deficit has expanded to US$211m in the first six months of 2010/11 as imports increased. According to the planning and investment ministry, Laos imported goods worth just over US$1bn, while exports amounted to US$836m.

Land area

236,800 sq km

Population

5.76m (2006, IMF data)

Main towns

Population of the province in which a main town is situated (2005 population census):

Vientiane (capital): 698,318

Savannakhet: 825,902

Champasak: 607,370

Luang Prabang: 407,039

Climate

Tropical; rainy season, May-October; dry season, November-April

Weather in Vientiane (2006, 531 ft above sea level)

Hottest month, March, 33.4°C; coldest month, January, 17.5°C; wettest month, July, 440 mm rainfall; driest months, November, December and January, 0 mm rainfall

Language

Lao and others

Measures

Metric system; local measures include:

1 va = 5 sok = 10 khup = 2 metres

1 rai = 4 ngane = 1,600 sq metres

1 kang = 10 hoi = 1.2 kg

Currency

Kip (K). Average exchange rate in 2010: K8,259:US$1

Time

7 hours ahead of GMT

Fiscal year

October 1st-September 30th

Public holidays

January 1st (New Year); March 8th (International Women's Day); April 13th-15th (Pi Mai Lao, or Lao New Year); May 1st (International Labour Day); June 1st (Children's Day); June 26th (Khao Pansa); October 12th (End of Buddhist Lent); October 13th (Boat Racing Festival); November 10th (That Luang Festival); December 2nd (National Day)

Official name

Lao People's Democratic Republic

Form of state

One-party rule by the Lao People's Revolutionary Party (LPRP)

The executive

The Council of Ministers is the highest executive body; the vice-chairmen of the council (deputy prime ministers) oversee the work of ministers; all members of the council are appointed by the chairman of the Council of Ministers (the prime minister)

Head of state

The president, Choummaly Sayasone

National legislature

A unicameral National Assembly, which was expanded to 132 seats at the last election

National elections

The last National Assembly election took place in April 2011; the next is due in April 2016

National government

The LPRP dominates the government and the bureaucracy

Main political organisations

Lao Front for National Reconstruction (LFNR), a mass organisation of pro-LPRP groups

Main members of Council of Ministers

Prime minister: Thongsing Thammavong

Deputy prime ministers:

;Somsavat Lengsavad

;Thongloun Sisoulith

;Asang Laoly

Douangchay Phichith

Key ministers

Agriculture & forestry: Sitaheng Rasaphone

Defence: Douangchay Phichith

Education: Phankham Viphavanh

Energy & mining: Soulivong Daravong

Finance: Somdy Douangdy

Foreign affairs: Thongloun Sisoulith

Industry & commerce: Nam Viyaketh

Information & culture: Mounkeo Oraboun

Justice: Chaleuan Yiapaoheu

Labour & social welfare: Onechanh Thammavong

National post & telecommunications: Khamlouat Sidlakone

Planning & investment: Sinlavong Khoutphaythoune

Public health: Ponmek Dalaloy

Public security: Thongbanh Sengaphone

Public works & transport: Sommat Pholsena

Water resources & environment: Khempheng Pholsena

Central bank governor

Phouphet Khamphounvong

Download the numbers in Excel

Download the numbers in Excel

Download the numbers in Excel

Please see graphic below

There is little likelihood that the ruling Lao People's Revolutionary Party (LPRP) will face a serious challenge to its authority in the forecast period. A relative lack of exposure to global trade and investment flows protected the economy from the worst of the 2008-09 global financial crisis, ensuring that the government did not face significant protests by newly unemployed workers or greater agitation for democratic reform. This has made it easier for the LPRP to maintain its tight grip on power and control over society. In 2011-12 continued rapid economic growth and an extensive security apparatus will keep the LPRP's position secure.

The party has meanwhile managed a period of political change effectively. The LPRP's ninth party congress, which was held in mid-March, saw the traditional round of reshuffles in the politburo and central committee. The jockeying for position between different factions took place behind closed doors, and if any groups became disillusioned, their views were not made public. The resignation of the prime minister, Bouasone Bouphavanh, in December 2010 presaged a greater fall from grace-he lost his positions in the party's politburo and central committee at the congress, which will curtail his influence over his successor as prime minister, Thongsing Thammavong. A number of other resignations by senior members of the politburo have further cemented Thongsing's position. The parliamentary election held on April 30th was another success for the party, with the LPRP winning 128 of the 132 seats in the newly expanded parliament, and polling proceeding peacefully. The election of four non-party legislators, compared with two in the previous government, points to a desire for greater plurality among the electorate, but the Economist Intelligence Unit does not expect the government to repeal its ban on opposition parties in the forecast period.

The growth of an urban middle class and the awareness among provincial party members of an increasing gap between rural and urban incomes could put the LPRP under pressure in this parliamentary term, as could the unpopular practice of leasing land to foreign companies. Having imposed a two-year moratorium on the granting of such concessions in 2007, the government is again leasing out vast areas of land, much of it agricultural, for use in plantation, mining, logging and hydropower projects. Many villagers complain that they have been forced off land that their ancestors had worked for centuries. Protests so far have been small and isolated, but they could coalesce and escalate as more land is leased.

A recent acceleration in the rate of consumer price inflation has increased concerns about food security. The government is aware of the sensitivity of the Lao people to rising food prices, but has found itself unable to match rhetoric with action regarding plans to increase food production and protect arable land. Despite repeated calls to cease the conversion of farmland to other uses, the construction of residential and commercial property has continued on rice paddies in and near urban areas. Although investment in the road and railway network-most notably, the announcement of a US$7bn rail link to China-will help to reduce transport costs, the country's food output remains dependent on imported inputs, increasing its vulnerability to fluctuations in international commodity prices, which raises the potential for political unrest.

Despite these risks, our central forecast is that the LPRP will continue to exert full control. This means that it will lack the motivation to introduce a democratic political system. Bouasone permitted a degree of reform during his time as prime minister, but his departure has cast doubt on whether further steps will be taken in this direction. It remains to be seen whether the intensity of the government's crackdown on illegal mining and logging operations will be sustained, given that the previous prime minister was the driving force behind this campaign. Parliament has passed a law permitting the formation of civil-society organisations, thereby providing a legal framework for Lao citizens to organise groups independent of control by the LPRP, but such organisations are unlikely to voice overt criticism of the political system for fear of a government crackdown.

Despite continued ethnic tensions, there have been no recent reports of attacks by ethnic-Hmong rebels or other insurgents on government or civilian targets. The government will continue to face allegations of human-rights abuses until the Hmong issue is resolved. The treatment of more than 4,000 ethnic-Hmong refugees who were repatriated from camps in Thailand's Phetchabun and Nong Khai provinces in 2009 will continue to be closely monitored from abroad. The death in January 2011 of Vang Pao, the informal leader in the US of exiled Hmong, may take some of the sting out of the problematic relations between the LPRP and exiled Hmong dissidents.

The next parliamentary election is not due until April 2016. In the meantime, parliament will continue to be utterly dominated by the LPRP, given that only four seats belong to non-party candidates. Furthermore, these four were vetted by the Lao Front for National Reconstruction (a mass organisation of pro-LPRP groups comprising representatives of trade unions, peasant associations, religious bodies and business organisations), which weeds out any potential candidates that it deems to be unsuitable.

Laos will continue its policy of regional and international integration in 2011-12. Its traditionally close ties with the communist government in Vietnam have been strained by the Lao authorities' plan to build a dam on the lower Mekong river, although they now appear to have ceded to Vietnamese pressure to postpone the project, ensuring that Laos will continue to benefit from aid and training from its neighbour. The government's stance on international affairs is firmly based on the principles of non-interference and peaceful co-operation. The leadership places great emphasis on regional prosperity, and it will support efforts by China and other countries to improve trade arrangements with the Association of South-East Asian Nations (ASEAN), of which Laos is a member. Ties with the US have also strengthened, and in July 2010 the foreign minister, Thongloun Sisoulith, led the first official visit to that country by a high-ranking Lao official since the 1975 revolution. However, pressure will continue to be applied in relation to the Lao authorities' human rights record. The overarching desire of the government to attract investment and aid means that it will attempt to avoid becoming entangled in contentious international issues, such as political repression in neighbouring Myanmar.

Laos's relative economic isolation proved beneficial during the 2008-09 global financial crisis, when the country's economy was able to continue growing rapidly. Economic growth in general, and expansion in merchandise exports in particular, will accelerate in 2011-12 in line with the global recovery, higher world agricultural and mineral prices and the development of several power projects. The main challenges for the authorities will be to keep inflationary pressures in check while maintaining support for the rapidly growing economy, and to move ahead with reforms aimed at making the business environment more conducive to private-sector activity. Foreign investment, predominantly from Asian countries and directed towards the resources sector, will increase in 2011-12. There will also be a welcome focus on infrastructure, exemplified by the construction of a US$7bn rail link between the Chinese city of Kunming and the Lao capital, Vientiane.

The government is expected to make progress on reforming Laos's foreign trade regime, with the primary objective of enabling the country to become a member of the World Trade Organisation (WTO). Laos's achievements were noted at a meeting in September 2010, when the WTO praised its progress in a number of reform areas, including tax, trade and intellectual property. Laos has signed bilateral trade agreements with China and Japan, with a condition of each being their acceptance of its membership of the WTO. Several similar agreements with other countries are being negotiated. However, there has been no formal indication of when Laos will be able to join the WTO.

The government will continue to run budget deficits in the forecast period. The fiscal deficit (including grants) will narrow only marginally in 2011-12, to an annual average of 2.9%, despite a number of revenue-raising measures. A new tax on luxury goods is to be imposed, and there are proposals to introduce taxes on land and inheritance. State-owned buildings could also be sold or leased as required. High global mineral prices will boost revenue, although prices for copper (Laos's most important mineral export) have moderated in the past quarter, falling from a peak of around US$10,000/tonne on the London Metal Exchange in mid-February to US$8,900/tonne in mid-May. Nevertheless, these levels remain high compared with long-term averages. The government will continue to receive royalties from the export to Thailand of electricity from the Nam Theun 2 hydropower facility, which began commercial operations in March 2010.

The Bank of the Lao People's Democratic Republic (the central bank) is in the process of tightening monetary policy. In response to the global recession, the bank lowered its policy interest rate by a total of 200 basis points in 2009, to 5% (a record low), and provided billions of kip to fund local infrastructure projects. However, a double-digit year-on-year increase in food prices in September 2010 pushed consumer price inflation above 8% year on year in that month. As a result, the central bank has raised interest rates, with the most recent rise in its policy rate, in September 2010, taking the rate to 12.5%, from 10% previously. The government has pledged to keep annual inflation below the rate of GDP growth, which means that further increases are likely if inflationary pressures continue to build. There will be steady improvements in the competitiveness of the banking system in the forecast period, owing to gradual reforms (such as the lowering of entry barriers) initiated by the central bank. In addition, non-performing loans held by state-owned commercial banks have been falling as a proportion of total loans, although this has been partly an effect of the overall increase in lending.

Download the numbers in Excel

Economic growth will remain rapid, at an annual average rate of 7.8% in 2011-12. High global prices for minerals have created strong foreign interest in Laos's extractive sector, and the leading mining companies operating in the country are looking to maximise their profits by increasing production. Such is the level of interest in the mining sector that parliament has put pressure on the government to slow the rate at which it is approving new concessions, as the legislature lacks the capacity to monitor them all properly. The construction of the Laos-China railway should boost economic growth, but such is the extensive use of Chinese engineers and workers on the project that Laos will benefit only from efficiency gains in the long term, when the time taken to transport goods is reduced. After slowing in 2010 owing to drought, agricultural output growth should accelerate in the next two years (weather conditions permitting), owing to improvements in productivity as large areas of farmland are leased to foreign investors. The outlook for services is partly dependent on the health of other economies in the region, given that the majority of tourists come from South-east Asia. A continued decline in the price of copper (not our central forecast) would have a negative effect on Laos's export growth, but development of the hydropower sector will improve the diversity of the export sector.

Inflation is estimated to have accelerated to 5.7% in 2010, after a year of stable prices in 2009. Year-on-year inflation reached around 8% in August-September 2010, owing to a disappointing harvest, as a result of which the government was forced to sell down its stocks of rice. Inflation accelerated again in early 2011, from 6% year on year in January to 7.7% in March. Rising food prices in Thailand and a strong Thai baht will continue to push up prices in Laos, as around 70% of the country's imported goods come from Thailand. Another source of inflationary pressure will be continued rapid growth in the money supply, which is itself driven by strong inflows of foreign investment. We expect these factors to drive up inflation in 2011, to an average of 7%. A moderate fall in global food prices will cause local inflation to slow to 6% in 2012.

The kip appreciated by 2.7% against the US dollar in 2009, to average K8,516:US$1 over the year, and by another 3.1% in 2010 to reach K8,058:US$1 by the end of the year. High global prices for Laos's commodity exports and continued inflows of foreign investment will continue to support the kip in 2011, but rapid inflation and the persistent current-account deficit will cause the value of the currency to fall in 2011 from its peak at end-2010. The kip will then fall back again in 2012, to an average of K8,137:US$1. Given the importance of Thailand as a trading partner, the Lao authorities will be keen to minimise dramatic shifts in the value of the kip against the baht and will intervene in currency markets to keep the rate as stable as possible.

We estimate that the merchandise trade deficit narrowed in 2010, to US$384m, from US$408m in 2009, as exports, buoyed by electricity receipts from Thailand, grew at a slightly faster pace than imports. However, these trends will be reversed in 2011-12, when higher global oil prices and imports of equipment required for infrastructure development will cause the import bill to swell. Other factors that will support imports include lower tariff barriers in line with Laos's commitments as part of the ASEAN-China Free-Trade Area (ACFTA) and the poor competitiveness of local products. Sales of electricity to Thailand will become a major source of export revenue in 2011-12 as new hydropower projects come on stream. Tourism revenue will also increase as Laos attracts greater numbers of foreign visitors. The repatriation of profits and dividends by foreign-invested mining projects will keep the income account in deficit, although this will be partly offset by the surplus on the transfers account, which mainly reflects inflows of development assistance from international donors.

We estimate that Laos had a very narrow current-account deficit in 2010, equivalent to 0.3% of GDP, with a widening income deficit more than offsetting a rise in the services surplus. The current account will strengthen in 2011-12, with the deficit eliminated in 2011 and a forecast surplus of 1.5% in 2012. Growing services exports will be the main driver of this improvement. Private investment inflows are rising, transfers from official donors will continue and foreign-exchange reserves have been built up in recent years. As a result, the country's ability to meet its external financing requirement is not an immediate concern.

Download the numbers in Excel

Two major events in the Lao political calendar took place in March and April: the ninth congress of the ruling Lao People's Revolutionary Party (LPRP), which was followed by elections for the National Assembly (parliament). Neither event produced any surprises-they confirmed both the dominance of the LPRP over Lao politics and the apparent acceptance of this by the majority of the population.

At the congress, which was held in the capital, Vientiane, on March 17th-21st, the previous prime minister, Bouasone Bouphavanh, lost his positions in the party's politburo and central committee, completing his fall from the top echelons of leadership-at least for now. Meanwhile, Bouasone's successor, Thongsing Thammavong, reinforced his position: the retirement from the politburo of two veterans, another former prime minister, Sisavat Keobounphanh, and a former president of the legislature, Saman Viyaketh, in effect leaves Thongsing as second only in terms of power to the president, Choummaly Sayasone. As expected, Choummaly was re-elected as general secretary of the LPRP. Another stalwart, a former interior minister, Asang Laoly, stepped down as president of the LPRP inspection committee, but retained his position in the politburo. Like Saman and various other party veterans, Asang has children rising through the system, in his case within his old fiefdom, the Ministry of Public Security.

At the congress the newly elected LPRP central committee announced four "breakthrough steps" to accelerate national development. Although the first of these was an ideological call to banish "complacency and extremism", the others were more tangible. They aim to increase investment in health and education, to reform administrative barriers to business and trade, and to establish investment incentives in rural areas in order to address poverty. None of these goals are new, but as official party directives, they may add momentum to government efforts.

The legislative election was held on April 30th, with 190 candidates contesting 132 seats in parliament, compared with 115 seats in the previous assembly. In June the assembly will be expected to approve the government positions that were decided at the congress. The poll resulted in the elevation of four non-LPRP candidates to the assembly, all of whom are representatives of private companies. This compares with the election of two non-party legislators in the previous poll. The election day itself passed smoothly, with a high turnout and a celebratory mood in many wards. The prime minister endorsed the government's hope that women would take 30% of the seats in the assembly, but the results showed that 33 female lawmakers were elected, representing just 25% of the seats.

Although the LPRP remains in control of the political system, various challenges remain in its attempt to manage the economy and ensure social stability. According to the UN, in March over 110,000 people were in need of food assistance in central and southern Laos owing to rice shortages. UN agencies have reported that the shortages are a result of damage caused by Typhoon Ketsana in 2009, which was followed by drought and flash-flooding in 2010. An estimated 4,000 tonnes of rice are needed to alleviate shortages until the next main rice harvest in October. The UN says that only one-third of the rural population have enough to eat throughout the year.

The allocation of land to investment projects remains a major concern. According to the National Land Management Authority (NLMA), more than one-half of all land concessions result in detrimental effects. An NLMA spokesman, Palikone Thalongsengchanh, said in April that many investors buy concessions only to fell timber and then speculate on land values before selling the project on to other investors. For some projects, land concession fees are as low as US$1-3 per hectare per year, and the duration of concessions can be up to 90 years. The compensation paid to villagers who lose land to projects is often unreasonable, according to the president of the NLMA, Khamouan Boupha. Palikone has disclosed that there are currently over 2,000 land-concession projects nationwide. Resulting forestry loss is of particular concern: he described the management of Lao forests as "out of control" and said that the destruction of forests and watersheds could affect hydropower development and the tourism industry. Around 70% of Laos was forested in 1940, but that figure had declined to 41% in 2001 and has continued to fall since.

Nevertheless, the granting of concessions continues apace. Lao and Chinese companies are to spend US$180m developing a Mekong island, Don Chan, in Vientiane. The developer, CAMCE Investment, signed a 50-year concession in April that is extendable for another 40 years. The three-phase project will build a five-star hotel, shopping centre and rental properties. The importance of the venture to the government lies in the hotel and residences, which will first be used to accommodate the heads of states and governments attending the Asia-Europe Meeting in the capital in November 2012. A similar deal was struck by the government to develop the facilities for the 2004 Association of South-East Asian Nations (ASEAN) summit in Laos. A hotel built on Don Chan for that meeting at present struggles to attract guests, while the complex that housed visiting leaders during the summit has remained empty ever since. A representative of the Chinese investors in the new project, Luo Yan, promised Lao media that the first phase would be completed before the meeting. Following lobbying by the island's residents, five of the 36 ha of land on Don Chan are to be allocated to families affected by the development. Those who do not receive land will receive compensation of up to US$10,000 plus land around 20 km from the centre of the city.

In terms of foreign policy, the LPRP congress stated that Laos aims to have a wide range of international friends and the ability to participate in regional and international integration. Among its allies, China and Vietnam are closest in ideology, and both continue to seek economic and strategic opportunities in Laos. At the close of the congress, a deputy prime minister, Somsavat Lengsavad, welcomed rapidly growing Chinese investment in Laos and the "comprehensive partnership" between the two countries. He said that the China Development Bank (a Chinese state-owned policy bank) had helped the Lao Ministry of Planning and Investment to outline the next five-year plan (2012-16) for the country and that China's Ministry of Commerce had sent a team to help with its implementation. During this period, he promised, co­operation would increase between the two countries. Total Chinese investment in Laos since 2000 has reached about US$2.9bn, and bilateral trade between the two countries was worth US$566m in the first half of 2010.

The failure of Vietnam to support a Lao proposal to build a dam on the Mekong river in Sayaboury province came as a surprise to many Lao politicians. The event shows a misjudgment of the balance of power between various interests in Vietnam, and perhaps may be interpreted as evidence of a slight weakening in the relationship between the two countries. However, Vietnam is now the largest foreign investor in Laos. Five Vietnamese projects with a combined value of over US$432m were approved in the first two months of 2011, bringing the total number to nearly 200, with total registered capital of more than US$3.3bn. Thongsing made his first official visit to Vietnam in February, meeting his counterpart there, Nguyen Tan Dung. The leaders agreed on the need to supplement existing co-operative mechanisms and policies.

Thailand's attempts to improve relations with Laos have been hit by an accusation that its treatment of Lao sweetcorn growers infringes ASEAN trade agreements. In January the Thai Ministry of Commerce imposed a 73% tax on corn imports outside fixed quotas, meaning that by late February more than 200,000 tonnes of the crop in Sayaboury province were without a buyer. Following complaints from Laos, the import tax was suspended from March 1st-June 30th, but Lao traders have already begun to seek more reliable buyers in Vietnam and China. A series of activities have been planned for this year to celebrate the 60th anniversary of Lao-Thai diplomatic relations, but the events have been low key so far. The two countries have a complex relationship; they are linguistically and culturally closer to each other than to any of their other neighbours, but they also share a history of conflict. Relations have improved in the past two years following the repatriation of Lao-Hmong refugees from a Thai camp, and Thailand is looking to strengthen its position in Laos as its relationship with Cambodia deteriorates, and as both Vietnam and China increase their investments in Laos.

Inflation is a growing concern for the government, which fears that rising food prices may lead to the failure of macroeconomic targets and public unrest across the country. State media reported in early May that food prices in markets were now "out of control", despite a government decree designed to hold the prices of selected products in check. The deputy planning and investment minister, Bounthavy Sisouphanthong, said that the government was re-analysing measures to minimise the impacts of inflation. Road and bridge tolls have already been cut and may be waived altogether. The government has pledged to keep the inflation rate below GDP growth-something it has not always managed to do. Real GDP growth in 2010 was reported at an estimated 7.9%, but the rate of inflation reached 8.1% year on year in September.

The Ministry of Finance appears loath to accept a revenue-damaging cut on fuel import tax or a fuel subsidy, which it estimated would cost at least K70bn (US$8.8m) a month. In March the Ministry of Industry and Commerce asked the cabinet to consider subsidies as one way to stabilise the price of fuel. A think-tank, the National Economic Research Institute (NERI), has warned that the government needs to respond to the situation quickly. NERI supports the idea of a fuel subsidy, suggesting that Laos "would gain more than we lose", as volatile oil prices will negatively affect the value of investment projects owing to rising construction costs.

The Asian Development Bank (ADB) has also advised that proper measures and policies are required to keep inflation-which it forecasts at 6.5% in 2011-under control. The ADB has also warned that the social and environmental impact of large projects must be closely monitored to ensure that growth remains sustainable. Meanwhile, the World Bank's projected rate of inflation for 2011, of 5­6%, is based on the rates that declined notably towards the end of 2010. It says that recent increases in global food prices have had only a limited impact on Lao inflation, but concurrent rises in world fuel prices are more likely to cause inflationary pressure.

In March the Bank of the Lao People's Democratic Republic (the central bank) announced that it would keep its policy interest rate unchanged at 12.5%, despite the pressure of rising inflation. The central bank governor, Phouphet Khamphounvong, said that because the government had committed only to keep inflation below the GDP growth rate, there was no need to introduce any specific measures for as long as the rate of inflation remained below the pace of growth. Several neighbouring countries, such as Thailand and Vietnam, have increased interest rates to help to stabilise inflation. However, Phouphet said that rather than encouraging people to keep money in banks by raising interest rates, Laos would do better to lower production costs. The central bank last raised its policy interest rate in September 2010, and although commercial bank rates have since remained unchanged, local businesses have reported difficulties in obtaining loans.

The seventh National Social Economic Development Plan, to cover 2012-16, was approved at the LPRP congress in March. The plan targets an average annual income per head of US$1,700 and the raising of K120trn (US$15bn) in external funding, of which US$10bn is targeted to come from the private sector and US$5bn from public funding. Laos continues to depend on foreign aid, and the plan stipulates that US$4bn of this public funding is to be secured through overseas development assistance. Aid inflows over the past four years have averaged around K3.6trn a year. To secure the desired income, ambitious goals have been set. An annual growth target of 15% has been set for the industrial sector, which it is hoped will enable the sector to provide 39% of GDP by 2016 (from 23% in 2009) and generate 14,000 jobs. The equivalent figures set for the service sector were annual growth of 6.5%, provision of 38% of GDP and the creation of 53,000 new jobs.

The plan also calls for closer regulation of foreign labour, as the government is keen to curb rising immigration, particularly from China and Vietnam. Compliance with existing regulations is to be scrutinised regarding worker quotas, application and registration processes, work and residency permit regulations, and tax payments by foreign workers. The quota for manual workers hired from abroad must comprise less than 10% of the total number of labourers with a company or project, while the quota for white-collar staff stands at 20% of the total. Foreigners are permitted to work in Laos for two years and may then extend their contract for a further two or four years. These regulations have so far been largely ignored by all but the most high-profile companies requiring foreign labour in Laos, and various authorities may continue to turn a blind eye.

The industry and commerce minister, Nam Viyaketh, has acknowledged that Laos needs to amend a number of laws so that they meet international standards before the country will be granted membership of the World Trade Organisation (WTO)-a long-standing government target. For example, the country's law on intellectual property cannot be properly enforced, as a prime ministerial decree is required to clarify its general wording. Such a decree is now being processed. In April the chairman of the working party on WTO accession, Zhang Xiangchen, told the Lao foreign affairs minister, Thongloun Sisoulith, that Laos is making good progress in its preparations for joining the organisation. This progress consists of legislation reforms and new bilateral trade negotiations with individual WTO members. Laos has bilateral trade agreements with China, Japan, South Korea and Canada and is in discussions over a deal with the EU. US sources providing assistance to Laos's accession preparations estimate that the WTO may accept the country by the end of 2012.

The Lao economy is expected to remain strong in 2011-12 as private investment in the country surges. The World Bank projects growth of 8.6% in 2011, compared with its estimate of 8.4% for 2010. Natural resources will account for around 3.6% of this growth, but manufacturing is expected to make a greater contribution this year, of about 1%. Growth of 15-20% is expected in garment exports, owing to the relaxation of raw-material sourcing requirements in the EU. The service sector, especially the transport and tourism segments, is also expanding, and the Bank expects it to add around 2.5 percentage points to the rate of annual GDP growth in 2011. Higher regional demand for food, with ensuing higher prices, should benefit agriculture, which the Bank predicts will contribute another percentage point to growth. The ADB is more modest with its forecast, calculating that GDP growth will accelerate from 7.5% in 2010 to 7.7% in 2011 and 7.8% in 2012. The Lao government projects growth of 8% in 2011.

According to the planning and investment ministry, the government approved 188 private domestic and foreign investment projects over the first six months of fiscal year 2010/11 (October-September), with a value of about US$1bn. Private investment has therefore already reached 84% of the target for the fiscal year. Around 35%, or US$351m, of the approved investment value came from domestic private investment while the rest came from foreign firms. Following efforts to shift focus away from natural resources, the top investment sector in the past six months has been services, including hotels and banks, with investments totalling US$434m. The second-largest sector was agriculture, with US$195m, and the third was mining, with US$55m. Thongsing announced in April that the economy was on track to grow by 8.5% in 2010/11.

After declining in the final quarter of 2010, inflation has been accelerating since January 2011, driven by transport costs that have jumped by 20-30% year on year. In March the rate of inflation hit 7.7% year on year, up from 6.1% in January. Global oil prices are the major cause of the surge, with fuel prices having a direct effect on the overall price level. According to the Lao International Transport Association, in the first quarter of 2011 the cost of transporting goods within Laos and to and from other countries rose by 10-15%. These costs led to a cement shortage as producers were unable to pay the higher transport costs without raising the price of cement, which requires government permission. In March a local steel producer, Vientiane Industry, cancelled plans to increase prices after coming under pressure from the authorities. The price of the imported billet that is needed to produce steel has increased from US$500/tonne in 2010 to US$700/tonne at present.

Rising transport costs have also caused beef and pork prices to increase, owing to the higher cost of animal feed. Pork and fish prices rose further in the southern provinces when the Ministry of Agriculture and Forestry put a temporary ban on the sale of beef in April as a result of an outbreak of foot-and-mouth disease. Another increase in bus fares is also imminent, with operators in late April requesting government permission to raise prices. Diesel and petrol prices were up by around 4% in April. The Ministry of Public Works and Transport previously approved a 10-15% increase in bus fares in January.

Local economists have expressed concern that raising the minimum wage could stoke inflationary pressures. The basic minimum wage is K348,000 (US$42)/month at present, but the Lao Federation of Trade Unions has proposed that it rise by more than 100%, to K700,000/month. In addition to increasing workers' spending power, labour is in short supply for industrial projects and a more attractive minimum wage is seen as one way of enticing Lao migrant workers back from jobs in Thailand. The ADB mission in Laos has suggested that although raising the wage might have some impact on exports, industry and mining, the effect on inflation should be slight as few people receive the formal minimum wage. The ADB has projected a rate of inflation of 6.5% for 2011 and says that GDP growth would be unaffected if inflation came in at a higher rate.

The higher cost of imported fuel and vehicles has also had a negative effect on the level of foreign-exchange reserves. According to the central bank governor, foreign reserves have fallen to the equivalent of four months of import cover, from the usual level of five or six months. Given the declining availability of foreign currency, commercial banks have started to limit purchases of foreign currency to main branches or headquarters. The official limit on buying foreign currency is K20m (US$2,500) per day per person.

The agriculture and forestry ministry has said that it requires US$1.8bn to ensure that the sector meets its target under the new five-year plan of average annual growth of 3.5%. The ministry expects at least 60% of total funding for the sector to come from foreign aid, with 20% coming from private investment and the rest from the state budget and farmers. The government has pledged to reduce taxes for investors in agriculture and forestry in order to encourage participation from the private sector.

Plans are progressing for new national irrigation networks to boost agricultural production. Laos will rely on its main supporters, notably China, to fund this development, with the first project set to begin in the southern province of Saravan. An agreement for a project survey was signed in mid-April between the Lao Department of Irrigation and China's Guangdong Water Conservancy and Hydroelectric Board. The US$90m project will build irrigation systems with funding from a loan provided by the Export-Import Bank of China. Traditional paddy fields are to be consolidated and linked to roads, warehouses and a rice-processing complex. The irrigation department says that the project will help farmers to increase production, but the authorities will first have to convince them of the virtue of altering traditional field ownership and management systems.

The high price of animal feed, combined with rising interest rates on agricultural loans, is causing livestock production to fall. As demand has remained high, the illegal import of pigs is increasing, in some cases with the blessing of local authorities. Although pork shortages, caused by poor supply chains for both pigs and feed, are not new in urban markets, the problem has been aggravated by an outbreak of blue-ear pig disease in 2010. The government asked banks to postpone loan payments and provide new loans to farmers affected by the outbreak, but this has not occurred. The government is also seeking funding to stimulate production of animal feed and fish fry. Laos imports about 150,000 tonnes of animal feed a year, plus most of its fish fry and young egg-laying chickens, from Thailand. Hungary is already providing assistance, through a US$48m interest-free loan to expand fish and livestock farms and to construct fish, pig and poultry feed production facilities. Laos aims to produce sufficient fish and animal feed to supply 70% of the market by 2015.

A local cassava processor, Lao Indochina Group (LIG), expects to list on the Lao Securities Exchange by early 2012. The company signed an agreement with Laos's sole brokerage, Lanexang Securities Company, in May to help with preparations for listing. The chairman of LIG, Sengmaly Sengvatthana, said that many improvements are required to bring LIG to the standard of a public company, so the process is likely to be delayed. LIG hopes to use the capital raised by listing to open another tapioca plant in Bolikhamxay province. Its plant at present, in Vientiane province, produces 320 tonnes of cassava powder a day, of which about 90% is exported to China.

Government policy has managed to keep rice prices in check. Traders who bought rice at high prices in November and December 2010 have seen prices fall in the first three months of 2011, following a government ban on rice exports. The ban came in response to rice shortages in southern and central provinces. The price of rice peaked in 2010 at K7,000-9,000 per kg for polished rice. This year, however, it has been selling at K5,500-6,000 per kg, and traders believe that prices will remain stable in the coming months. Some traders have also surmised that business groups are buying large amounts of dry season rice and stockpiling it for a time when prices rise again.

Mining revenue has increased as commodity prices have risen in global markets. According to the planning and investment ministry, mining earned Laos around K6.9trn in the first six months of 2010/11, representing a year-on-year rise of 58%. Copper, which accounted for 28% of total exports in value terms in the period, is now selling for about US$8,000-9,000/tonne, compared to US$3,500/tonne in early 2009.

In April 2011 a local firm, Lan Xang Minerals, paid the government more than US$92m in profit taxes from its Sepon mine in 2010. Other sources of state income generated by the mine in 2010 included royalties from gold and copper sales worth US$26.5m, income-tax payments of US$5m and a dividend payment of almost US$33m. The company is the biggest single taxpayer in the country. An Australian firm, Aurum Resources, is investing about US$6.5m in the gold-exploration activities of another Australian company, Argonaut, in central Laos. In March Aurum agreed to take a majority interest in Argonaut's exploration rights to an area of 226 sq km in Vientiane province. Argonaut suspended its explorations in the area in mid-2009 owing to the global financial crisis.

Two other Australian mining firms, Atomic Resources and Indochina Coal, formed a joint-venture agreement in March to explore and develop potential coal fields in Laos. Indochina will search for coal in two prospective tenement areas and sell the exploitation rights to Atomic for a lump sum and a gross royalty of 2% on coal sales for the duration of the project. Laos is thought to have reserves of low-grade coal, the sale of which would depend on the future development of transport or power-plant infrastructure.

The major partners in a potential bauxite mining project in southern Laos, Ord River Resources (ORD) of Australia and China's Non-Ferrous Metal Industry (NFC) are considering floating the project on the Australian stock exchange. The two companies hope to raise A$180m-200m (US$175m-198m) through an initial public offering for their shares in Sino Australian Resources (SARCO) at the end of 2011 or in early 2012. The funds raised from the flotation will be used to finance the construction of an alumina refinery in Laos with a minimum capacity of 600,000 tonnes per year. ORD and NFC own 49% and 51% of SARCO respectively and would continue to hold substantial equity in the venture after the offering. The bauxite project remains dependent on a series of future hydroelectricity projects to power the refinery, but progress is gradually being made on this front.

Laos expects to import 50% less electricity in 2011 than in the previous yeark following the opening of several hydropower plants. The state utility firm, Electricité du Laos (EDL), estimates that imports, which come mainly from Thailand, China and Vietnam, will reach 555m kwh in 2011, compared with 998m kwh in 2010, when the total outflow of foreign currency to cover imports was around US$50m. In 2011 EDL expects to purchase 781m kwh from domestic independent power plants, representing a 31% year-on-year rise. Total electricity consumption is forecast to reach 2.6bn kwh-a rise of 10%. Electricity production totalled almost 3.9bn kwh in the first half of 2010/11, or a 188% increase from the first half of 2009/10. The country's largest hydropower plant, the 1,070-mw Nam Theun 2 dam, is largely responsible for the increase. Around 3.4bn kwh of the power was exported, generating revenue of US$164m. At the same time, provinces not linked to the national grid have imported 338m kwh of power at a cost of US$18m.

The country now has ten hydropower plants in operation. Another 17 plants are in the planning stage, while 45 projects are in construction or are awaiting feasibility studies. An additional 11 power grid projects are under way to improve the domestic network and allow imports to be reduced still further. However, Laos's ambitions to fully develop its power potential face opposition. The proposed 1,260-mw hydro dam on the Mekong river in Sayaboury is on hold following criticism of the project from neighbouring countries. In April at a special meeting of the Mekong River Commission (MRC), a regional body that helps to co-ordinate use of the river, the three other MRC member states-Cambodia, Thailand and Vietnam-deferred approval of the project to ministerial level. Later in the month the Vietnamese natural resources and environment minister, Pham Khoi Nguyen, said that his government had not been satisfied by the information provided on the project and that it had requested that Laos delay all dam projects on the river for ten years. The Sayaboury project is seen as a test case, as another ten hydro dams are planned on the lower Mekong river in Laos, Cambodia and Thailand. Advocacy groups and potential funders such as the ADB have said that the dams could cause severe and irreversible social and environmental consequences.

Prior to the MRC decision, resistance to the Sayaboury project became vocal within the Cambodian, Thai and Vietnamese political systems. In mid­April a Thai parliamentary committee on development and public participation announced its unanimous opposition to the proposal and called on its prime minister, Abhisit Vejjajiva, to re-analyse the electricity purchase agreement. The Cambodian prime minister, Hun Sen, and Nguyen Tan Dung were also reported as expressing concerns about the project's impact on fish and rice production along the Mekong. As a result of this pressure, on the sidelines of an ASEAN summit in the Indonesian capital, Jakarta, in early May, Thongsing told Mr Dung that Laos would suspend construction of the dam pending further environmental studies.

Laos's trade deficit expanded to US$211m in the first six months of 2010/11 as imports increased. According to the planning and investment ministry, Laos imported goods worth just over US$1bn in the period, while exports amounted to US$836m. The value of imports amounted to 83% of the planned total for the fiscal year and represented year-on-year growth of 48%. Goods imported for investment projects accounted for 28% of the total value of imports, while the rest were consumer goods, including fuel, vehicles and spare parts. The value of exports reached 68% of the planned total for 2010/11, and saw a 15% year-on­year increase. Copper exports, which rose by 2%, covered 28% of the total export value.

India has put into place a duty-free tariff preference scheme for least developed countries that grants Laos duty-free access to 94% of India's tariff lines. In addition, the India-ASEAN trade in goods agreement, which was recently ratified by Laos, provides duty-free access to Lao products for the remaining 6% of India's tariff lines. Bilateral trade between the two countries is still relatively small, but is expected to pick up in the next five years as India looks to develop relationships in South-east Asia. According to the industry and commerce ministry, Indian entrepreneurs have invested about US$354m in Laos in the past ten years, mainly in agriculture, industry, education and services, and India has also granted substantial loans to Laos in the past two years.

Australia is providing A$3m (US$3m) over three years to help Laos adjust to the Australia and New Zealand Free-Trade Agreement (AANZFTA), which came into force for Laos at the start of 2011. Lao trade officials and exporters will have the opportunity to learn about the AANZFTA rules of origin and how to prove qualification for substantial tariff reductions. Laos has special privileges when exporting to Australia and New Zealand. Bilateral trade between Laos and Australia since 2008/09 has generated A$15m, but Lao exports represented only A$1m of this. Laos imports specialised machinery and parts, cereals, wine and fabrics from Australia and exports clothing, wood, handicrafts, and measuring and analytical instruments.