79158

Public Disclosure Authorized

SuStaining growth
Maintaining MaCroEConoMiC StaBiLitY
LAOPDRECONOMICMONITOR
June 2013
Public Disclosure Authorized
Public Disclosure Authorized
Public Disclosure Authorized

Sector Focus
Improving the Eectiveness and Transparency of Mining Revenues
Government Budget at a Glance
Public Spending on Health in Lao PDR
Net Economic Benets of Sanitation Interventions

THE WORLD BANK

Lao PDR
the world Bank

All rights reserved

This publication is a product of the sta of the World Bank. The ndings, interpretations, and conclusions expressed
herein do not necessarily reect the views of the Executive Directors of the World Bank or the governments they
represent.

Lao PDr Economic Monitor June 2013 was prepared by the World Bank country team under the guidance of Sector
Manager and Lead Economist for South-East Asia Region, Mathew Verghis and Senior Country Economists, Richard
Record and Genevieve Boyreau. The team comprised of Keomanivone Phimmahasay and Somneuk Davading (recent
economic developments and overall report), Saysanith Vongviengkham, Minh Van Nguyen and Leah April (public
nance), Ratchada Anantavrasilpa (nancial sector), Konesawang Nghardsaysone and Richard Record (private sector
and trade facilitation), Morten Larsen (mining revenues), Saysanith Vongviengkham and Keomanivone Phimmahasay
(government budget at a glance), Ajay Tandon (public spending on health), WSP Lao Team, U-Primo E. Rodriguez and
Guy Hutton (economic assessment of sanitation interventions). The team would like to express its gratitude to the
Government of Lao PDR (especially BOL, MOF, MPI/LSB, MEM, MOIC, MoICT, MAF and other ministries) and the Lao
National Chamber of Commerce and Industry for providing essential inputs. We would like to also thank our World
Bank colleagues: Vattana Singharaj, Meriem Gray and Toomkham Luanglath, for administrative support and
dissemination of the Monitor.

THE WORLD BANK TEAM APPRECIATES FEEDBACK ON STRUCTURE

AND CONTENT OF THE MONITOR

For further information please contact World Bank Lao PDR Country Oce:
Ms. Keomanivone Phimmahasay on data and content
(kphimmahasay@worldbank.org)
External Aairs and Communications Team on communications, copy rights, distribution list
(worldbanklaos@worldbank.org)

The World Bank Lao PDR Country Oce

Patouxay Nehru Road
P.O Box 345
Vientiane, Lao PDR
Phone: (856-21) 266200
Fax: (856-21) 266299
 Executive Summary

E XECutiVE S uMMarY
the Lao economy is projected to grow at 8 percent in 2013. the hydropower sector (both completed projects in
operation and projects in the construction/development phase), construction, food processing and services sectors
remain the major contributors to this growth. In early 2013, Lao PDRs successful accession to the World Trade
Organization (WTO) was an important step towards the establishment of a rules-based system of economic governance
and a necessary part of eorts to diversify away from the resource sectors. Though medium-term growth projections
remain optimistic, regional and global uncertainties may aect Lao PDRs ability to comfortably absorb macroeconomic
shocks.

overall ination has risen considerably since the end of 2012, due to a notable increase in non-rice food prices.
Though rice prices remain low, ination rose due to a climb in meat prices, specically the cost of beef, as a result of
increased demand for internal consumption coupled with an insucient local supply. Vegetable and other food prices
have also risen. In response to rising food ination, the Ministry of Industry and Commerce (MOIC) recently issued an
order to temporarily suspend exports of livestock and divert them for local supply.

the scal decit as a ratio to gDP is expected to widen in FY12/13. The scal decit is expected to rise to 2.8 percent
of GDP in FY12/13 from 1.3 percent in FY11/12 in part due to increased spending on public wage increases, and also
as a result of an expected slower increase in total revenues (primarily due to lower grants after ASEM and lower mining
revenues). Despite the completion of ASEM related infrastructure activities, the total spending for this scal year is
likely to rise because of the signicant increase in public wages and allowances, as reected in the rst quarter. The
wage bill is expected to rise from FY12/13 estimates of 5.7 percent of GDP to almost 9 percent of GDP by FY14/15.
Given the recent outlook on the uncertainty of commodity prices and the continued expansionary policy, nancing
this wage policy will require an increased debate on medium term scal sustainability. Furthermore, additional eorts
to strengthen the non-resource revenue base are of critical importance in order to counter the eects of revenue
volatility arising from swings in mineral prices that aect Lao PDRs natural resource revenues.

Low levels of external reserves call for the containment of aggregate demand. Despite a rebound in the second half
of 2012 attributed to a slowdown in credit growth and commercial banks recapitalization, foreign reserves coverage
of imports reached its lowest level in the past eight years due to strong domestic demand. In addition, exchange rate
management has contributed to uctuations in the reserves level. This trend raises concerns over the countrys
resilience in absorbing any adverse shocks. Therefore, containing aggregate demand through scal and credit growth
management is essential to maintain macroeconomic balances while exchange rate management needs to be
measured given the pressures on reserves and competitiveness.

as the banking sector continues to expand and credit growth remains relatively high, bank supervision capacity
needs to be strengthened. As the number of banks has risen, their total assets have increased concurrently, although
the sector is still dominated by state-owned commercial banks. Commercial bank lending supported by continued
growth in the construction, services and commerce sectors has been increasing and reached 34 percent of GDP in
2012. This trend is contributing to broad money growth and strong domestic demand. Against the backdrop of the
credit and banking sector expansion, strengthening bank supervision capacity to improve reporting and the timely
availability of banking sector data is essential for monitoring and managing the health of the nancial sector.

1
 Lao PDR Economic Monitor - JUNE 2013

Lao PDrs robust economic performance and expansionary scal policy calls for a bolder investment in social sector
spending. Currently, public expenditures in priority areas such as health and education remain far below the
Governments targets as outlined in the 7th NSEDP. Increased allocations to non-wage recurrent spending, which have
already been underfunded, are particularly important for improving the eciency of public asset utilization. In the
health context, access to health care remains dependent on out-of-pocket spending while provision of health care is
heavily supported by external sources of nancing. In the context of the National Health Sector Reform Strategy for
2013-2025 and the time-bound commitment to achieving Universal Health Coverage (UHC) by 2025, greater
investment and improvements in spending eciency are essential to increase access to health care services.

2
 Lao PD
A cR r oE nc yo m
n os ma incd MA ob nb ir teovr i a- t iMo A
nYs 2012

aCronYMS anD aBBrEViationS

ASEAN Association of Southeast Asian Nations MAF Ministry of Agriculture and Forestry
ASEM Asia-Europe Meeting MEM Ministry of Energy and Mines
BOL Bank of Lao PDR MOIC Ministry of Industry and Commerce
CB Commercial Bank MOF Ministry of Finance
COD Commercial Operation Date MONRE Ministry of Natural Resources and
BOP Balance of Payment Environment
CPI Consumer Price Index MPI Ministry of Planning and Investment
DESIA Department of Environment and Social NA National Assembly
Impact Assessment NEER Nominal Term Eective Exchange Rate
DOM Department of Mines NFA Net Foreign Assets
EAP East Asia & Pacic NPL Non-Performing Loan
EDL Electricit du Lao NSEDP National Socio-Economic Development
EIA Environmental Impact Assessment Plan
EITI Extractive Industries Transparency NT2 Nam Theun 2 Project
Initiative ODA Ocial Development Assistance
EPF Environment Protection Fund OOP Out-of-Pocket
ESI Economics of Sanitation Initiative PBM Phu Bia Mining
EU European Union PPG Public and Public Guaranteed Debt
FDI Foreign Direct Investment PO Public Oering
FY Fiscal Year QOQ Quarter on Quarter
GDP Gross Domestic Product REER Real Eective Exchange Rate
GFIS Government Financial Information RO Right Oering
System SOCBs State-Owned Commercial Banks
GOL The Government of Lao PDR SOE State-Owned Enterprise
IMF International Monetary Fund UHC Universal Health Coverage
HC Health Centre VAT Value Added Tax
IPP Independent Power Producers WB World Bank
LDC Least Developed Country WEO World Economic Outlook
LNCCI Lao National Chamber of Commerce WTO World Trade Organization
and Industry YOY Year on Year
LSB Lao Statistics Bureau
LSX Lao Securities Exchange
LXML Lane Xang Minerals Limited
MCH Mother and Child Health

3
 ETxa ebcl ue t iovf e C So un m
t emnat rs y

t aBLE oF C ontEntS
EXECutiVE SuMMarY 1

aCronYMS anD aBBrEViationS 3

Part i - RECENT ECONOMIC DEVELOPMENTS 6

GROWTH AND INFLATION 6
GOVERNMENTS REVENUE AND EXPENDITURE 8
EXTERNALSECTOR 10
MONETARY DEVELOPMENTS 14

Part ii SECTOR FOCUS 16

IMPROVING THE EFFECTIVENESS AND TRANSPARENCY OF MINING REVENUES 16
GOVERNMENT BUDGET AT A GLANCE 18
GOVERNMENT SPENDING ON HEALTH IN LAO PDR 22
NET ECONOMIC BENEFITS OF SANITATION INTERVENTIONS IN THE LAO PDR 25

annEXES
ANNEX 1 THE GLOBAL ECONOMIC OUTLOOK IN SUMMARY 27
ANNEX 2 LAO PDR AT A GLANCE 28

FigurES
Figure 1. Growth and Ination, (percent change) 7
Figure 2. Real GDP Growth (at factor cost): Contribution by Sector (percentage points) 7
Figure 3. Monthly Ination (yoy percent change) 7
Figure 4. Contributions to Food Ination 8
Figure 5. Beef and Meat Prices Index (percent change YOY) 8
Figure 6. Governments Fiscal Performance 9
Figure 7. Key Fiscal Expenditures (percent of GDP) 9
Figure 8. Quarterly revenue collection (bil. kip) 10
Figure 9. Balance of Payments 10
Figure 10. Merchandise Exports (US$ million) 11
Figure 11. Gold and Copper exports 11
Figure 12. Merchandise Imports (US$ million) 11
Figure 13. FDI in Lao PDR (US$ million) 11
Figure 14. NFA and International Reserves 12
Figure 15. Reserves Coverage (percent of total FOREX deposits) 12
Figure 16. Kip Exchange Rate (Index Dec-2006 =100) 14
Figure 17. Nominal and Real Eective Exchange Rate (Index Dec-2006 =100) 14
Figure 18. Contribution to Bank Credit Growth 15
Figure 19. Banking sector assets and credit 15
Figure 20. Credits by sector (percent in total lending) 15
Figure 21. Payment ows from extractive industries 16
Figure 22. Composition of Domestic Revenue in FY12/13 18
Figure 23. Wage Index Increase 19
Figure 24. Wages as Shares to GDP 19
Figure 25. Expenditure Scenarios 19
Figure 26. Wages to Domestic Revenue (percent) 19
Figure 27. FY12/13 Broad Sector Capital Spending Targets 20

4 4
 Lao PDR Economic Monitor - JUNE 2013

t aBLE oF C ontEntS
Figure 28. Gaps to Meeting FY12/13 Social Spending Targets 20
Figure 29. Comparing OOP and Government Spending Shares, 2010 22
Figure 30: Government Spending on Health Sector (percent of GDP) 23
Figure 31. Domestically Financed Public Health Spending 23
Figure 32: Planned Provincial Recurrent Health Expenditure per Capita, FY11/12 24
Figure 33. Planned health expenditure vs. 9% target by province, FY11/12 24
Figure 34. Benet-cost Ratios in Rural Sites 26
Figure 35. Benet-cost Ratios in Urban Sites 26

taBLES
Table 1. Total Government Spending by Major Sectors, from FY 06/07 - FY11/12. 20
Table 2: Expenditure by major administrative classication from FY 08/09 to FY11/12 21

BOX
Box 1: Lao PDRs accession to the World Trade Organization 12

5
 Recent Economic Developments

PART I r ECEnt E ConoMiC D EVELoPMEntS

global growth is expected to improve slightly in 2013 before rebounding in 2014-15. Global growth, inuenced
from prospects in developing economies, is projected at 2.4 percent in 2013 compared to 2.3 percent in 2012.
The outlook for advanced economies, however, remains challenging. In Asia, economic performance experienced
a slowdown in 2012 due to falling external demand and rebalancing in some economies. However, growth is
expected to remain solid due to an improving external demand and a sustained domestic demand. Private
demand has been stimulated through accommodative monetary policies, and scal policies in some economies.
East Asia and Pacic (EAP) GDP growth in 2013 is projected to be 7.6 percent. ASEAN-5 economic performance
is expected to remain robust at 6 percent due to a resilient domestic demand. Chinas growth is expected to
accelerate due to robust consumption and investment as well as a recovered external demand. Thailands growth
is projected to return to her usual pace after completed reconstruction following the devastating ooding in
2012. Nevertheless, there remain some substantial external risks for Asia with the falling external demand from
developed economies and internal risks arising from recent credit growth and accommodative nancial
conditions in some Asian economies. Despite these risks, Lao PDR is expected to benet from sustained demand
from its key trading partners (particularly China, Thailand and Vietnam) given their overall prospects in 2013. In
early 2013, Lao PDRs successful accession to the World Trade Organization (WTO) is an important step towards
the establishment of a rules-based system of economic governance and a necessary part of eorts to diversify
away from the resource sectors. Lao PDRs country-level projections are based on the regional and global
economic outlook from Global Economic Prospects, January 2013 and World Economic Outlook, April 2013, as
summarized in Annex 1.

growth anD inFLation

the Lao economy is projected to grow at 8 percent in 2013. This anticipated growth remains strong as in years past
and is driven by resource1 and non-resource2 sectors (Figure 1). The upward revision of 0.4 percentage points from
November 2012s projection reects recent data for cement and hydropower outputs. In addition to existing facilities,
a new cement factory, in operation since 2012, has increased cement production capacity, in response to growth in
the construction sector. Furthermore, the hydropower contribution to GDP will benet from the completion3 and
development of several large hydropower projects including Hongsa Lignite, Sayaboury, Nam Ou, and Xepian Xe
Namnoi projects, which also oer a positive spillover to the construction, food and services sectors (Figure 2). Food
and beverages will continue to benet from a robust domestic demand while expansion continues in wholesale and
retail trade, tourism, transportation and the telecommunications and banking sectors. The agricultural sector has
continued to rebound following a recovery from the oods in 2011.

Given uncertainties in the global economy and implications from regional economic developments, Lao PDRs average
annual growth rate is projected to be 7.8 percent in the medium-term. This outlook assumes the continued success
of active and planned hydropower projects. The non-resource sector is expected to maintain dynamic growth in the
context of continued strong domestic consumption, sustained demand from key trading partners and active reform
eorts to improve the enabling business climate. While the medium-term economic outlook remains positive, Lao
PDRs ability to absorb macroeconomic shocks is relatively limited.

1 Hydropower and mining

2 Manufacturing, construction, food processing, banking and other services
3 Completed projects that will commence full operations in 2013 include Nam Ngum 5 and the Theun Hinboun expansion project.

6
 Lao PDR Economic Monitor - JUNE 2013

Figure 1 growth and ination (percent change) Figure 2 real gDP growth (at factor cost):
Contribution by Sector (percentage points)

Source: Government, LNCCI data and

staff estimates and projections. Source: Government, LNCCI data and staff estimates
and projections.

ination

overall ination rose considerably since December

Figure 3
Monthly ination (yoy
2012 due to a continuous rise in non-rice food prices. percent change)
Headline ination increased from 3.4 percent YOY in
November 2012 to 5.8 percent in March 2013
primarily due to higher food ination (Figure 3), which
rose from 3.7 percent to 10.1 percent in the same
period (Figure 4). A key driver of this eect is the
signicant climb in meat prices, followed by vegetable
prices. Beef prices4, in particular, rose by almost 40
percent YOY in February 2013 (Figure 5). This
development is the result of a gap between an internal
consumption demand and the limited supply
associated with reported livestock exports to
neighboring countries and scattered livestock rearing
in the country. As a result, food ination has increased.
In response, the Ministry of Industry and Commerce
(MOIC) recently issued an order5 to temporarily
suspend exports of livestock and divert them for local
supply. The eect of this measure will be monitored.
Source: MPI (LSB) and staff calculations.
While energy ination has remained low following an
international price trend, core ination has seen a
moderate increase mainly due to the pressure from
scheduled rising electricity taris6 and restaurants and
hotels charges. Average ination in 2013 is projected
to rise to 6 percent compared to 4.3 percent in 2012.

4 Beef accounts for 18 percent of total food items or 6 percent of the total consumption basket whereas vegetables account for about 10 percent and 4 percent, respectively.
5 MOIC order no. 650, dated 1 April 2013
6 According to Electricity du Lao PDR (EDL), electricity taris will increase by 5 percent annually from 2012 to 2015.

7
 Recent Economic Developments

Figure 4 Figure 5
Beef and Meat Prices index (YoY
Contributions to Food ination
percent change)

Source: MPI (LSB) and staff calculations. Source: MPI (LSB) and staff calculations.

goVErnMEntS rEVEnuE anD EXPEnDiturE

resource revenues from mining and hydropower increasingly inuence the government budget. Fiscal decit as a
ratio to GDP in FY11/12 was 1.3 percent, 1 percentage point lower than the estimate in November 2012 due to
outperformance in revenue collection and less-than-expected o-budget spending nanced by direct borrowing from
BOL. While the non-resource scal decit declined slightly from 8.3 percent in FY10/11 to 8.1 percent in FY11/12, the
non-mining scal decit7 experienced a more substantial decline, from 7.7 percent to 7.1 percent, respectively (Figure
6). This development highlights the role of resource revenue in nancing the budget. A combination of higher grant
receipts and 9 percent outperformance in domestic revenue (particularly tax revenues) brought the total revenue to
GDP to 19.8 percent in FY11/12 from 18.5 percent in FY10/11. This was attributable to a combination of i) higher gold
and copper prices in 2011; ii) higher revenue from hydropower projects and iii) certain non-resource revenues
especially turnover tax, value added tax and income tax.

total scal outlays as a ratio to gDP in FY11/12 fell more than expected due to a reduction in o-budget spending.
Total expenditure as a ratio to GDP fell slightly from 21.3 percent to 21.1 percent in FY11/12 (Figure 6). The reduction
in o-budget investment spending was attributed to direct borrowing from BOL that more than oset higher recurrent
expenses including materials and supplies, wages, and expenditure that supported preparations for the 9th ASEM.

in FY12/13 an expansionary scal stance is expected as public sector wages increase and as mining revenues as a
ratio to gDP decreased. The scal decit is expected to more than double to reach 2.8 percent of GDP. The non-
resource scal decit is expected to rebound to 8.7 percent in FY12/13 while the non-mining scal decit is likely to
reach 7.7 percent. Total revenue as a ratio to GDP is expected to decline to 19.4 percent due to lower grants (back to
pre-ASEM levels) and a lower mining revenue in 2012 as a result of a 10 percent fall in copper prices and higher mining
production costs that partly oset the volume and gold price gains in 20128. Nevertheless, non-resource taxes
particularly VAT and excise taxes, have a positive performance outlook. VAT collection in Q1 rose by 35 percent YOY.
This reects the application of a at 10 percent rate to those taxpayers who used to be subject to the 5 percent
turnover tax and the increase in the number of VAT taxpayers from 2,300 to 4,100 units to date. Maintaining tax
collection eorts on the non-resource base of the economy is critical not only to protect scal accounts from volatility,
but also to diversify public revenue and avoid dependence on a limited number of megaprojects.

7 Non-mining scal decit is the dierence between hydropower and non-resource domestic revenue and total expenditure
8 Mining revenue monitoring is discussed further in Part II.1

8
 Lao PDR Economic Monitor - JUNE 2013

total spending is projected to climb in FY12/13 driven by the planned public wage and compensation increases.
Despite the completion of ASEM related infrastructure activities, the total spending for FY12/13 is likely to rise to 22.2
percent of GDP from 21.1 percent in FY11/12. This increase is driven by a near 35 percent increase in public wages
and allowances.9 In FY12/13, wages and compensation are projected to account for about 61 percent of both recurrent
spending and non-resource domestic revenue compared to 58 and 49 percent, respectively, in FY11/12. The eect of
this policy is already reected in Q1 where wages and compensation rose by 86 percent YOY accounting for nearly 40
percent (Figure 7) of the total expenditure compared to about 35 percent in Q1 last year (YOY). In addition, the share
of non-wage recurrent expenditure (Figure 7) reduced further to 18 percent of recurrent expenditure in Q1 of FY12/13
compared to 20 percent in Q1 during FY11/12. This might reinforce the issue of underfunding for operation and
maintenance expenditure for public assets. Given the recent outlook in uncertainty on commodity prices and a
continued expansionary stance, nancing this wage policy requires a careful assessment of its scal sustainability.
Further discussion on the FY12/13 budget plan is presented in Section II.2.

a trend of private pre-nancing infrastructure projects is emerging. Many public infrastructure projects, such as
roads and bridges, are pre-nanced by private contractors citing development priorities of concerned regions despite
limited budget allocations. This trend mirrors the increased lending taking place in the construction sector. These
projects claim to be aligned with provincial or national NSEDP and plan to borrow future revenues for current spending
to support their completion. If inappropriately managed such nancing might generate contingent liability and liquidity
squeeze for the future budget, contractors and the banking sector. Therefore, it is of crucial importance that the
government understands the current size of active and planned pre-nancing arrangements, and develops regulations
and policies in order to optimize their management to avoid the accumulation of contingent liabilities.

Figure 6 Figure 7
governments Fiscal Performance Quarterly Expenditures (percent of
(percent of gDP) total expenditure)

Source: MOF and staff estimate and projection Source: MOF and staff estimate and projection

9 In an attempt to improve living standards of civil servants, the government issued a decree to increase wages during 2013-2015 (No. 221/GOVERNMENT dated 30 May 2012).

9
 Recent Economic Developments

Figure 8
Quarterly revenue Collection (percent of
total domestic revenue)

Source: MOF and staff estimate and projection

EXtErnaL SECtor

the overall balance of payments is expected to remain in a slight surplus as strong investment inows oset a
widened current account decit. The overall balance is expected to remain in a surplus of 0.6 percent of GDP this
year due to continued large investments in the resource sector, such as the Hongsa Lignite, Nam Ou, and Sayaboury
power projects and continued capitalization of banks (Figure 19). Investment in the non-resource sector is expected
to slow in 2013 after a robust acceleration in 2012. Economic activities following large infrastructure and service sector
projects in Vientiane during 2012 are slowing down. The capital account surplus, that will mostly nance capital
imports, is expected to rise from about 16 percent to 22.5 percent in 2013 (Figure 9).

the current account decit is expected to widen due to robust resource sector imports. The total current account
decit is projected to worsen to 21.8 percent of GDP in 2013 from 15.5 percent in 2012. The causes for this are multi-
factorial. Firstly, capital goods imports are projected to rise (Figure 12) by about 32 percent YOY largely to support
construction of resource projects. Secondly, robust domestic consumption will continue to fuel demand for consumer
goods imports, such as vehicles and fuel compared with slower growth in non-resource exports. However, nominal
imports might increase at a slower pace compared to last year due to projected falling commodity prices for certain
products and the high base eect in 2012. Non-resource exports experienced slower growth in the context of economic
uncertainty in some trading partners (Figure 10). For instance, total garment exports fell by 16 percent YOY in value
term and about 30 percent drop in volume term last year driven by the lower demand from the US market. Supply
side constraints related to labor shortages and appreciation of the Kip has also played a role. Some rms have adjusted
by turning to higher value added products while shifting to other markets such as Japan with a lower base. In addition,
the net income outflow from the resource sector (interest payments and income repatriation from mining and
hydropower sectors) is projected to climb this year. Nevertheless, the current account decit will likely be oset by
the capital account surplus yielding a slight surplus in the overall balance of payments.

Figure 9 Balance of Payments

(percent of gDP), 2008-13

Source: BOL and staff estimates and projections

10
 Lao PDR Economic Monitor - JUNE 2013

Figure 10 Merchandise Exports (uS$ million) Figure 11 gold and Copper exports

Source: Staff estimates and projections based on data Source: Lane Xang Minerals Limited and Phu Bia
from MOIC, LNCCI and partner countries Mining Companies, 2012 and staff calculations

Figure 12 Figure 13
Merchandise imports (uS$ FDi in Lao PDr (uS$
million) million)

Source: Staff estimates and projections based on data from Source: MPI and staff estimates and projections
MOIC, LNCCI and partner countries

Despite a recent end of the year rebound, low levels of external reserves call for a containment of aggregate
demand. The balance of payments resulted in a surplus of 0.7 percent of GDP in 2012 helped by a slowdown in credit
growth (particularly in foreign currencies) in the second half of 2012 and commercial banks recapitalization and new
registration (Figure 14). As a result, foreign reserves and net foreign assets rebounded in Q4 by 24 percent (QoQ) and
35 percent QoQ after continually falling since end 2011. However, the levels of reserves fell by 5 percent QoQ in Q1
2013 while net foreign asset fell signicantly by about 30 percent QoQ attributed to a rebound in credit growth. Clearer
policy intentions on containing aggregate demand and reserves management are welcomed. Reserves stood at US$
700 million in March. The reserve level is expected to cover only 1.8 months of goods and services imports for 2013
or about 3 months of non-resource imports, which could be the lowest level over the past eight years. Reserves
coverage compared to foreign currency deposits fell progressively from about 60 percent two years ago to around 35
percent in March 2013 (Figure 15). This trend signals concerns over the countrys resilience in absorbing any adverse
shock.

11
 Recent Economic Developments

Figure 14 Figure 15
nFa and international reserves Coverage (percent of
reserves total ForEX deposits)

Source: BOL and staff estimates Source: BOL and staff estimates

as the external balance has been increasingly inuenced by the resource sector and non-resource imports, the
development of non-resource sectors is important to broaden economic base and promote sustainability in the
long term. the completion of Lao PDrs eorts to accede to the world trade organization (wto) is an important
step towards the establishment of a rules-based system of economic governance and necessary part of eorts to
diversify away from the resource sectors (Box 1). Membership means that the country commits to follow the WTO
principles of non-discrimination, transparency and predictability. To accede, substantial reform measures were needed
to bring laws in line with WTO agreements on subsidies, price controls, trade restrictions, state enterprises, and other
areas. WTO membership will contribute towards eorts of the country to diversify away from natural resource
dependency, attract quality investment outside the resource sectors, create jobs, and reduce poverty.

Box 1: Lao PDrs accession to the world trade organization

what has happened?

Following the completion of accession negotiations in late 2012, Lao PDr became the 158th member of the
wto in February 2013. The accession process required a series of negotiations with members of the working
party, including answering several hundred questions from WTO members. It is the completion of a fteen
year process, with application rst made in 1997. However, the year 2012 saw unprecedented progress
including the reaching of crucial agreements with the US and EU, and three meetings of the working party in
Geneva.
The wto general Council approved the accession protocol for Lao PDrs membership in october 2012. This
was the nal agreement on exactly what Lao has done in terms of reform, and what Lao has agreed to do over
the next 3-5 years. It includes a working party report and a schedule of commitments. The National Assembly
ratied the accession package in December 2012. Formal membership came into force 30 days after the ratied
documents were deposited with the WTO Secretariat in Geneva.

what does it mean?

Lao is a least developed country and so was allowed to receive special and dierential treatment during
the accession process, generally meaning that Lao did not need to make as deep commitments as other acceding
countries and has been given more time to fully implement commitments.
It means signing up to the WTO core principles of non-discrimination, transparency and predictability and
ensuring that these principles are incorporated into Lao law. Plus a series of more specic reform measures to
bring Lao legislation into line with the WTO agreements on issues such as subsidies, price controls, restrictions,
and state enterprises.

12
 LL a o P D
D RR EEccoonnoomm i icc MMoonni it toorr - - J M
UNAY
E 22 00 11 32

the average tari has been bound (so cannot be raised above) 18.8 percent. This will not have a signicant
impact, as Laos will have to make deeper commitments to ASEAN member states by 2015. The WTO agreements
cover both trade in goods and trade in services. Market access commitments have been made in 10 service
sectors allowing foreign access (in for example, banking, telecoms, distribution, health, environment, tourism,
construction, air transport). This means that there are limits on how the country regulates these sectors.
the terms of Lao PDr's accession package, including the extent of commitments made, are in line with other
similar recently acceding countries (such as Cambodia, Vietnam and Nepal).
while a surge in foreign investment resulting from accession is not to be expected, accession to the wto is
an important externally veried signal of reform and sustained commitment to reform. however, for Laos to
fully benet, commitments will need to be fully implemented. This is a challenge as the reform pressure will
be reduced once Lao is a WTO member and, other country experience suggestions, there will be a very real
risk of backsliding.

what are the world Bank and Development Partners doing?

the world Bank and Development Partners have been supporting the Lao wto accession process for more
than four years under the trade Development Facility Multi Donor Trust Fund nanced by AusAID, EU, Japan
and GIZ . The Facility has supported the direct costs of negotiations - including the last ve Working Party
negotiations in Geneva, drafting of legal texts in key areas (especially on sanitary and phyto-sanitary measures),
bilateral negotiations, technical assistance to the negotiating team (including the rst and only full time lawyer
in MoIC), and a series of sector impact studies in professional services, distribution services, nancial services,
transport and telecommunications. Similarly, it includes a substantial program on trade facilitation (including
the launch of the Trade Portal - which allows Lao to meet WTO Trade Facilitation Agreement requirements on
transparency and publication) and on customs reform, including the phase out of reference pricing and
movement towards compliance with the WTO Customs Valuation Agreement. The second series of the PRSO
was also instrumental in supporting a number of trade facilitation reforms required as part of Lao PDRs WTO
accession process.

the world Bank and Development Partners have recently approved a Second trade Development Facility
(tDF-2), a follow on operation to support the "beyond wto" agenda over 2013-17, co-nanced by AusAID,
EU, GIZ and Irish Aid. This will support key aspects of the next phase trade program of MoIC, including post
accession work on trade in goods, trade in services and trade facilitation.

Exchange rate

as the Bank of Lao PDr maintains exchange rate stability of the Lao Kip against major currencies, this should be
balanced against reserves management and pressures on competitiveness. The eective exchange rate appreciated
by 2.3 percent in nominal terms and by 4.3 percent in the real term from end-2011 to August 2012. This is the result
of the combined Lao Kip appreciation against USD (by 3.2 percent during November 2012-March 2013) and Kip
depreciation against the Baht in the same period (by 2 percent over the same period as the Baht continued to
strengthen against the USD as a result of strong investment inows into Thailand). The continued real appreciation of
the exchange rate signals a loss of competitiveness of Lao PDRs exports which is consistent with the continued increase
in domestic labor costs. Allowing some depreciation would relieve the pressure on reserves, and support
competitiveness.

13
 Recent Economic Developments

Figure 16 Figure 17
Kip Exchange rate nominal and real Eective Exchange
(index Dec-2006 =100) rate (index Dec-2006 =100)

Source: BOL and Bank of Thailand and staff calculations

Source: IMF
Monetary Developments

Credit growth picked up by March 2012 and continued to stimulate domestic demand. After mid-2012, overall credit
growth had decelerated to about 27 percent (YOY) in December due to the deceleration of BOLs direct lending (lending
to SOEs line item) and lending to the private sector. This trend may be due to a base eect and a slowdown after an
already high loan to deposit ratio of almost 90 percent in mid-2012. However, it rose by 31 percent in March due to
a rebound in lending to SOEs, claimed to have been supporting the agriculture sector, and still robust lending to the
private sector (Figure 18). Private sector credit growth has primarily come about as a result of increasingly buoyant
growth in construction, commerce and service sectors (Figure 20). For instance, lending to construction signicantly
rose by 77 percent YOY in 2012, making it account for 17 percent of total lending to economy. Broad money grew by
12 percent YOY supported by strong deposits and credit growth. Therefore, managing domestic demand for example
through BOL securities issuance might be an option to help remove some pressure on the external balance.

as the banking sector expands, bank supervision capacity needs to be strengthened. As the number of banks
increased, their total assets increased signicantly by 40 percent YOY in 2012. As a result, commercial banks total
assets substantially rose from about 40 percent of GDP in 2009 to about 68 percent in 2012 while their lending
increased from about 20 percent of GDP to 34 percent in the same period (Figure 18). Currently, not all nancial
institutions can comply with the mandatory requirement to publish timely and audited nancial statements as required
by the Commercial Bank Law, making it dicult to assess the sectors nancial health in a timely manner. The share
of non-performing loans was reported to be 3.7 percent of total loans outstanding in mid-2012 but there are questions
regarding the reliability of NPLs measurement, due to BOLs weak regulations, reporting and limited supervision
capacity. Given this context, strengthening bank supervision capacity is crucial.

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 Lao PDR Economic Monitor - JUNE 2013

Figure 18
Contribution to Bank Credit growth
(percent and percentage points) Figure 19 Banking Sector assets and Credit
(percent of gDP)

Source: BOL and staff estimates Source: BOL and staff estimates

Figure 20 Credits by Sector (percent in total

lending)

Source: BOL and staff calculations

15
 Sector Focus

PART
PART IIII S ECtor FoCuS
I. IMPROVING THE EFFECTIVENESS AND TRANSPARENCY OF MINING REVENUES10

the natural capital of Lao PDr including its agriculture, forests and increasingly its hydropower and mineral resources
forms the backbone of the countrys economy. The government aims to utilize this natural capital to drive socio-
economic development through the generation of foreign direct investment (FDI), export earnings, government
revenues, GDP growth, employment and skills development. Over the last decade signicant investments have been
made to develop the Lao mining sector. Of the 58 companies with active production agreements in Lao PDR, Phu Bia
Minings (PBM) copper-gold operation and Lane Xang Minerals Limiteds (LXML) Sepon gold and copper mine are the
most signicant accounting for over 90 percent of total national copper and gold production (Figure 10).

Mineral production has grown dramatically from modest production in 2003 estimated at some uS$ 10 million to
an estimated combined sales value of almost uS$ 1.5 billion in 2012. The sector now directly contributes between
8-11 percent of the GDP and between 1520 percent when indirect induced eects are accounted for. The signicant
increases in production have been accompanied by similar increases in government revenue in the form of: a) fees
and service charges; b) taxes and royalties; c) dividends; d) duties and VAT; and e) funds and in-kind payments. Mining
sector revenue now accounts for approximately 20 percent of total government domestic revenue. The two biggest
operations, PBM and LXML contribute the bulk of these revenues some US$200 - 300 million annually.
With this rapid increase in production and revenues a number of barriers to revenue collection and management have
arisen including:

Limited monitoring and enforcement capacity including a limited number of sta with an understanding of
linkages between monitoring, inspection (of mine production) and revenue collection methods;
limited capacity to audit production and revenue information supplied by companies; and limited
capacity to follow up with companies that do not report on revenues.
Lack of information on revenues / payments from small to medium size operations: There is currently
little or no information available on the production levels, revenues and payments from small to medium
size operations.
Diculty tracking donations and sub-national revenue ows: It is dicult to track and account for
in-kind payments made directly to provincial and district governments.

Figure 21 Payment flows from extractive industries

10 This summary is based on a larger study undertaken by the World Bank in 2012 Improving the Eectiveness and Eciency of Mining Revenues in Lao PDR: An Initial Scoping
Study for the Extractive Industries Transparency Initiative (EITI).

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transparency is recognized globally as a critical ingredient for best-practice management of the extractive industries
sector. In terms of scal policy this means establishing an environment in which the objectives of policy and legislation
are set based on clear and accessible data and information, made available and accessible on a timely basis.
Transparency improves governments ability to monitor and enforce existing legislation by creating certainty, stability
and a level playing eld for businesses.

in recent years Lao PDr has begun to take steps to increase the level of transparency, but in reality there is very
limited reporting of mining revenues. In the mining sector, transparency (information disclosure) is legislated in the
Decree on EIA (2010), EIA Guidelines (Draft, 2011) and the Public Involvement Guidelines (Draft, 2009). In practice,
however, transparency within the sector is still very limited, particularly in relation to mining payments and revenues
which are not part of the disclosure requirements stipulated above. Starting from FY12/13, the Budget preparation
instruction requested revenue departments to separate mining, hydro and non-resource revenues in their budget
plans in order to help monitor developments in each revenue sources. Currently, the Government publishes the
summary of the budget in the print media and details in the national gazettes. However, the disclosed budget summary
does not yet include detailed resource revenue information.

Key barriers to transparency in Lao PDR include:

Limited capacity (governance, understanding mineral revenues, public sector nancial
management, accounting and auditing);
Decentralised management of revenues;
Lack of legal framework for disclosure;
Practice of case-by-case negotiations of mining agreements, including scal terms, non-disclosure of these
agreements;
Limited systems within government for putting information into the public domain; and
Lack of tradition or public expectation of transparency.

the Eiti has the potential to support the governments mining sector reform eorts, both in terms of the reporting
process itself and the collaborative framework provided by the Eiti implementation process. The EITI is a voluntary
global coalition, aimed at enhancing transparency and accountability. Countries implementing the EITI commit to
publishing all payments made by oil, gas, and mining companies to Government, and all revenues received by the
Government from those companies. Specic benets to Lao PDR could include:
Increased and better investment in mineral resource development;
Possible identication and recovery of previously unaccounted-for funds;
Increased trust between civil society, Government and extractive companies; and
General improvements in budget monitoring and oversight

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 Sector Focus

ii. goVErnMEnt BuDgEt at a gLanCE

FY12/13 Budget Plan: a selective look

FY12/13 budget plan continues eorts to mobilize domestic revenue. A combination of prot tax, VAT, excise tax,
customs and non-tax revenue is expected to constitute 70 percent of domestic revenue (Figure 22). Resource revenue
is projected to account for about 22 percent of total domestic revenue. However, uncertainty in commodity prices in
2013 may aect the achievement of the government target. According to the NA resolution for the FY12/13 NSEDP
and the Budget Implementation Instruction, the Government is following an expansionary scal policy, and thereby
focuses its eorts to strengthen revenue administration by promoting VAT collection; strengthening technical revenue
reporting and administration; and employing automation in revenue collection. In addition, incentives will be oered
to local authorities to increase their eorts in revenue collection.

Figure 22 Composition of Domestic revenue in FY12/13 Budget plan

Source: MOF and staff calculations

total expenditure in FY12/13 is expected to climb due to the planned wage and compensation increases. With an
aim to improve living standards of civil servants, the government plans to raise a salary multiplier in three consecutive
scal years, which is equivalent to about 35-40 percent each year (Figure 23). At the same time, a once-o increase
in compensation and allowances is also planned in FY12/13 in order to cover uniforms and basic living costs for civil
servants. This raises its ratio to GDP from 1.5 percent of GDP to 2.4 percent in FY12/13. As a result, wages as a share
to GDP is estimated to increase from 5 percent to about 5.7 percent this scal year. If this policy follows through until
FY14/15, it is expected to progressively climb up to 7 percent in FY13/14 and will eventually reach almost 9 percent
in FY14/15 (Figure 24). According to the Lao PDRs civil service pay and compensation study, wage bills of 8 percent
of GDP or more can become problematic. Nevertheless, some countries experience two digits of wage share to GDP.
Assessing the scal implications of this policy warrants close government attention. If the new policy is fully
implemented, wages and compensation will therefore rise from about 8 percent of GDP this scal year to more than
11 percent in FY14/15. As a result, recurrent expenditure as a share of total expenditure would increase from 52
percent to 60.2 percent this scal year. Alternatively, if a conservative scenario of smaller increases for several years
were considered11, the ratio to GDP would remain relatively stable below 6 percent of GDP (Figure 24).

the wage and compensation increase policy will contribute to underfunding of non-recurrent expenditure. Even
with a conservative scenario, non-wage recurrent expenditure, which covers maintenance and operating costs of
created assets and facilities, would still be expected to decline from 5.2 percent of GDP in FY12/13 to 4.6 percent in
FY14/15. With the wage increase policy, the ratio would be slightly worse at 4.4 percent in FY14/15, assuming the
total recurrent budget envelope is not xed. Compared to revenue outlook, the wages are expected to cover about
60 percent of non-resource domestic revenue (which is considered more stable) in FY12/13 and likely to reach almost
83 percent by FY14/15 (Figure 26). This would imply a smaller portion of revenue to cover other non-wage recurrent

11 Assume nominal wage increase by 10 percent each year

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expenditures and capital expenditure. This raises concerns for scal sustainability and may require higher needs for
expenditure nancing from other sources such as the reserves fund, domestic and external borrowing and pre-
nancing from the private sector in the case of capital spending. On the other hand, in the conservative scenario,
wages would account for about 31 percent of domestic revenue by FY14/15. Consequently, some resources could be
freed up for other expenditures such as non-wage recurrent expenditure if a xed ratio of capital spending to total
expenditure was assumed.

Figure 23 wage index increase Figure 24 wages as Shares to gDP

Figure 25 Figure 26
wages to Domestic revenue
Expenditure Scenarios
(percent)

Capital expenditure will increase in absolute terms but will account for a smaller share of total spending in FY12/13.
The government plans to increase capital expenditure by 16 percent compared to the FY11/12 plan12 but its share to
total expenditure appears to decline to about 38 percent compared to 44 percent in the FY11/12 plan. This is partly
due to the increased share in recurrent expenditure as mentioned above. The major source of public investment still
comes from ODA, which accounts for about 68 percent of total capital expenditure. Most of public investment is
expected to ow to economic sectors with a relatively smaller amount to the social sector (Figure 27).13 While this
trend may support growth, improving social sector nancing remains a big challenge.

a strong high-level commitment was introduced to improve social sector planned allocations. For the FY12/13
budget, the National Assemblys Resolution14 in 2012 dened the allocation for the health and education sectors as
9 percent and 17 percent of total government spending, respectively. This top-down budgeting approach will only
apply to health and education while bottom up budgeting is applied for other sectors. For these ambitious targets to
be met, a bolder budget allocation is required. Figure 28 shows considerable gaps between the planned allocation to
health and education in FY11/12 and the planned allocation for FY12/13.14 While the increase in wages will attract
human resources to the sector, the issue of non-wage recurrent underfunding would persist. If the total envelope
remains stable, closing the gap between targets and planned allocations in health and education could be achievable
by lowering allocations to other sectors, which poses a unique set of challenges.

12 This is based on governments budget presentation for FY12/13.

13 Based on the target allocation set in PM decree on Implementation of FY12/13 Budget and NSEDP, 30.2 percent of public investment to economic sectors, 34.5 percent to
social sectors, and 35.3 percent to infrastructure and government assets such as buildings.
14 National Assembly Resolution, No. 089/NA dated 13 July 2012. Actual FY11/12 budget implementation information is not available yet.

19
 Sector Focus

Figure 27 FY12/13 Broad Sector Capital

Spending targets
Figure 28 gaps to Meeting FY12/13
Social Spending targets

Source: FY12/13 Budget plan and NSEDP

resource allocations over time15

Priority Sector Spending

the total spending of the four priority sectors (agriculture, public works and transport, education and health) has
been uctuating since FY06/07 (table 1). The total actual spending of the four priority sectors as a share of the total
expenditure declined from about 41 percent in FY06/07 to 27.6 percent in FY09/10. The government then planned to
increase priority sector allocation to 39 percent in the FY11/12 budget plan due to a signicant increase in spending
within the public works sector. The capital expenditure of this sector increased from about 9 percent of the total actual
spending in FY10/11 to about 19 percent in the FY11/12 plan partly to nance the growing infrastructure that was
necessary to hosting ASEM and other notable events in recent years. The health sector encountered signicant
variability in spending, reaching a peak of 6.7 percent of the total expenditure in FY10/11 and subsequently suering
a substantial decrease to 2.9 percent due to a large decline in donor-funded capital expenditure in the FY11/12 plan.
Education sector spending has remained relatively stable around 11 percent of the total expenditure in the past several
years. Nevertheless, as a percentage of the total expenditure, the non-wage recurrent spending of all four sectors
doubled in the FY11/12 budget compared to FY10/11, reserving additional budget resources for operational activities.

Main Sector Spending

table 1: total government Spending by Major Sectors, from FY 2006/07 - FY11/1216.
FY07/08 FY08/09 FY09/10 FY10/11 FY11/12
actual actual actual actual plan

Economic sector 20.5% 14.9% 12.3% 13.8% 25.9%

Agriculture and Forestry 4.8% 3.3% 2.4% 3.7% 5.1%
Energy and Mines 2.6% 0.6% 0.5% 0.6% 0.8%
Public works and transport 12.7% 10.6% 9.0% 9.2% 19.7%
Industry-Commerce 0.4% 0.5% 0.3% 0.3% 0.3%

Social cultural sector 19.3% 21.9% 20.3% 21.4% 17.5%

Education 11.0% 11.8% 11.8% 10.8% 11.3%
Health 3.0% 6.1% 4.3% 6.7% 2.9%
Information and Culture 2.5% 1.6% 2.0% 1.2% 1.4%
Labour-Social Welfare 2.8% 2.4% 2.2% 2.7% 1.9%
others (total) 60.1% 63.2% 67.4% 64.8% 56.7%
Source: Official gazettes from FY06/07 - FY10/11 and the FY11/12 Budget Plan, MOF, Lao PDR

15 The gures presented are on budget spending and include external funded capital expenditures as published by MOF.
16 To keep classications consistent FY11/12 expenditure data of only four agencies are included in the Economic and Social-Cultural Sectors. However, in FY11/12 spending of
two and seven more agencies is added in the Economic and Social-cultural Sectors, respectively.

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Changes in categorization in past annual budget presentations has yielded a mixed picture of actual and planned
sector spending priorities. The public expenditure (on budget) is classied in three major categories namely 1)
Economic Sector, 2) Social-Cultural Sector and 3) Other Organizations/Expenditures17. From FY06/07 to FY10/11, the
Social-Cultural Sector spending share to total expenditure remained relatively stable around 21 percent while the
Economic Sector spending share declined from 25.8 percent to 13.8 percent in the same period. However, this might
not have represented the full scope of the Economic Sector because some of its capital expenditure was included
in the Other Organizations/Expenditures category. The spending of the Other Organizations/Expenditures category
has played an important role and accounted for a major share of the total spending from 52 percent in FY06/07 to
almost 65 percent in FY10/11. This has likely acquired a signicant portion of total expenditure since FY06/07 partly
due to heavy infrastructure investments in facilities and in preparatory works for the regional sporting events such as
Southeast Asian Games and ASEAN University Games and other notable events like the ASEM Summit in 2012.

However, the FY11/12 Budget Plan18 structure looked slightly dierent. The allocation share of the Other
Organizations/Expenditures category dropped to 56.7 percent while the Economic Sectors share rose signicantly
due to an increased allocation to the Public Works Sector, specically on capital spending. Inversely, the allocation
to the Social-Cultural Sector declined by about four percent points in FY11/12 largely due to the signicant decline
in the Health Sector due to decreased donor-funded capital expenditure. The large share of the Other
Organizations/Expenditures category has raised a concern of the general public and the development agencies
working in the Lao PDR on transparency of public resource utilization.
FY08/09 FY09/10 FY10/11 FY11/12
actual actual actual plan

(% of Total Expenditure)
Published agencies 25.6 12.2 27.7 19.9
Other Organizations/agencies 16.4 15.4 14.2 24.0
Other Expenditures (Non-classied expenditure) 10.7 40.9 22.1 21.1
Local Level 33.1 19.3 23.5 22.0
Debt Repayment 14.2 12.2 12.5 13.0

Source: Official gazettes from FY06/07 - FY10/11 and the FY11/12 Budget Plan, MOF, Lao PDR

In an attempt to clarify non-classied expenditures, Table 1 presents outturned spending and budget plan data by
sectors, of which the Other or Non-classied Expenditures category accounts for a large portion of the total spending.
Table 2 presents outturned spending and budget plan data by the published agencies. At the central level, expenditure
outturns of 20 agencies were published while data from the other 23 agencies were aggregated into so-called Other
Organizations/agencies. The local level spending and the debt repayment are classied as two separate items and
the remaining item is Other Expenditures or Non-classied expenditure category. The detail breakdown of this
Non-classied category shows that the capital spending accounted for 82 percent in FY09/10 and 70 percent in
FY10/11. It was likely that some capital spending supported the big events mentioned above. As a result, the amount
of the Non-classied Category remains around 20 percent of the total expenditure, which was lower than the
proportion presented in the classication by sectors. Some changes to the FY11/12 budget plan structure were
observed. The Published Agencies spending declined to about 20 percent from 27.7 percent in FY10/11 whereas the
spending share of Other Organizations/Agencies increased largely to 24 percent of the total expenditure compared
to just 14.2 percent in FY10/11 outturn. This change might have resulted from the fact that some expenditure is not
yet classied in the state budget plan. A clearer picture will prevail once the FY12/13 State Budget Plan is available.

17 Previously, the spending data were classied into four categories, including the Security Sector. After FY2005/06, the budget data of the security sector was not published due
to the lengthy bureaucratic procedures in obtaining publication permissions.
18 FY12/13 State Budget Plan is not available yet as of the time of the report.

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 Sector Focus

iii. PuBLiC SPEnDing on hEaLth in Lao PDr19

although economic performance has been robust in the past decade, improving social development outcomes,
particularly on health, remains a challenge. Lao PDR continues to have some of the worst maternal and child health
(MCH) outcome indicators, both globally as well as in the EAP region. At 357 per 100,000 live births, Lao PDRs maternal
mortality rate is double that of Cambodia, almost eight times higher than that of Vietnam, and much higher than
expected for its income level. Low levels of utilization of key maternal health services such as antenatal care, skilled
birth attendance, institutional deliveries, and postnatal care, are key contributors to the problem. In addition, there
are large inequalities in the utilization of health services by socio-economic status.

the high level of out-of-pocket (ooP) spending, estimated at 46 percent of total health expenditure, is a challenge
to Lao PDrs health sector (Figure 29). The reliance on OOP payments represents a nancial barrier to utilization of
health services, contributing to extremely low levels of utilization, inequalities in access and health outcomes, and
signicant health-related nancial risk. On the ipside, government spending on health, from both domestic and
external sources, is very low (1.1 percent of GDP) even after adjusting for the countrys economic status. Economically
comparable neighboring governments in Cambodia and Vietnam spend more on health as a percentage of GDP than
Lao PDR (Figure 29a).

Figure 29a (left) and Figure 29b (right)

Lao PDr is also very dependent on external sources of nancing, which in some years (e.g., from FY07/08 to FY10/11)
comprise a larger share of government spending on health than domestically sourced nancing, but is inherently
erratic (Figure 30). Meanwhile domestically nanced government health spending, as a percentage of GDP has
remained stagnant at about 0.5 percent of GDP in recent years. In absolute terms it has increased from 108.1 billion
Kip in FY05/06 to 248.4 billion Kip in FY09/10, representing an average increase of 23.4 percent per year in nominal
terms (Figure 31).

19 This is a summary of a World Bank report, Government Spending on Health in Lao PDR: Evidence and Issues. This report analyses overall trends in government health nancing
and expenditure patterns and discusses some of the eciency and equity issues pertaining to current government health spending patterns, primarily covering scal years
(FY05/06 to FY11/12. For more information, please contact Meriem Gray (Communications and External Aairs, World Bank Vientiane oce, mgray@worldbank.org) and Ajay
Tandon (Senior Economist and task manager of the report, atandon@worldbank.org). The report will be available at www.worldbank.org/lao.

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 Lao PDR Economic Monitor - JUNE 2013

Figure 30 Figure 31
government Spending on Domestically Financed Public
health Sector (percent of health Spending
gDP)

wages account for a large but declining proportion of domestic government health spending, both in nominal and
real terms (Figure 31). This trend may not hold as the government plans to raise wages and allowances during 2013-
2015, with a 35 percent increase in wages for FY12/13, The increase in wage spending, in an attempt to improve the
living standards of civil servants, is likely to strain non-wage recurrent spending required for operational costs and the
purchase of health commodities.

in FY11/12, the budget health allocation stood at 2.9 percent, a signicant decline from the previous scal year due
to decreased external nancing of health activities through the government budgetary system. In the NSEDP, the
government has committed to increase its health expenditure to 9 percent of the total expenditure, implying roughly
a three-fold rise compared to this planned spending. This ambitious target implies a contribution from both domestic
and external funds and also raises a signal to the donor community that an increase in external health nancing may
be matched by a decrease in domestically sourced health spending if the total government health spending envelope
remains xed.

Most government health spending occurs at the central level. in FY09/10, less than a third of government health
spending occurred at the provincial level. In addition to disparities in sub-national spending between the central and
provincial level, individual provinces also dier in the share of total government spending dedicated to health:
provinces with higher levels of overall government spending per capital tended to spend more on health. Per capita
health spending was higher in more sparsely populated and poorer provinces such as Sekong and Attapeu as opposed
to Champasack, Savannakhet, and Vientiane Capital (Figure 32). If the 9 percent target policy goal were applied
equitably on a sub-national level, achieving it will be challenging. Some provinces, notably the more heavily populated
ones, will have large expenditure gaps to bridge, both for total and recurrent expenditure (Figure 33).

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Figure 32 Figure 33
Planned Provincial recurrent Planned health expenditure
health Expenditure per Capita, vs. 9% target by province,
FY11/12 FY11/12

increasing and improving the eectiveness of existing government health spending is likely to be the most viable
strategy for improving access to health care services and enhancing nancial protection. As underscored in the
National Health Sector Reform Strategy for 2013-2025, Lao PDR has made a time-bound commitment to achieving
Universal Health Coverage (UHC) by 2025, ensuring that a vast majority of its population has access to an adequate
service package and appropriate nancial protection. It is expected that over 95 percent of the population will be
covered by the prepayment scheme, and that OOP payment will be reduced to less than 30 percent of total health
expenditure. Although the planned increases in government health spending are welcome, challenges remain in
improving the eectiveness of increased spending. These include ensuring that the additional resources are used to
improve access to and utilization of quality health services, especially in remote areas. Furthermore, additional
domestically nanced resources need to be made available to reduce both dependence on external funding and OOP
spending for health. To attain these objectives, the government should consider an appropriate mix of both demand-
side and supply-side incentives. While setting a target for budgetary outlays for health is a necessary step, the
government needs to improve the eciency of existing outlays, the measurement of which requires the monitoring
of key population health outputs. These should include a specic focus on the level and equity of basic immunization
rates, of skilled birth attendance, of institutional delivery rates, of need-based outpatient and inpatient utilization
rates, and on adequate levels of nancial protection from adverse health shocks.

the planned implementation of the free maternal and child health policy is a welcome step towards improving
health outcomes in Lao PDr. Implementation of this policy will need to be complemented by improvements in the
capacity of health facilities, not just in clinical and service availability terms, but also in terms of their ability to manage
and allocate revenues appropriately. Current weaknesses include inconsistent implementation of user fee regulations
and revenue management, variation in management practices, weak procurement practices for drugs, and inadequate
service provision levels. In addition, the planned removal of user fees, as envisioned under the free maternal and child
health policy, may not be sucient to improve utilization and inequalities across the country. To achieve this, the
government should consider additional demand-side incentives, especially in rural areas.

20 The Economics of Sanitation Initiative is a multi-country study launched in 2007 as a response by the World Banks Water and Sanitation Program to address major gaps in
evidence among developing countries on the economic aspects of sanitation. This paper is based on selected ndings of the following study: Economic Assessment of Sanitation
Interventions in Lao Peoples Democratic Republic. Rodriguez, U., Hutton, G. and Boatman A. World Bank, Water and Sanitation Program, 2013.
21 Economic impacts of sanitation in Lao PDR. Hutton G, Larsen B, Leebouapao B and Voladet S.World Bank, Water and Sanitation Program. 2009.
22 For more information on methodology and the study, please refer to Economic Assessment of Sanitation Interventions in Lao Peoples Democratic Republic. Rodriguez, U.,
Hutton, G. and Boatman A. World Bank, Water and Sanitation Program, 2013.

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IV. NET ECONOMIC BENEFITS OF SANITATION INTERVENTIONS IN THE LAO PDR20

an additional challenge in achieving health improvement outcomes beyond low public spending on health is the
lack of access to improved sanitation. Although the proportion of the population having access to improved sanitation
facilities rose from 17 percent in 1995 to 63 percent in 2010, sanitation remains a major concern. Three of ten persons
still practiced open defecation in 2010. Sanitation conditions were worse in rural areas, where about 41 percent of
the population practiced open defecation and 8 percent of the population used unimproved sanitation facilities. Such
lack of access to improved sanitation facilities imposes a heavy burden on society and may have cost implications for
the economy.

In the above context, Economics of Sanitation Initiative (ESI) was initiated and has been implemented in two phases
to date. Phase I of the ESI estimated the overall economic costs of poor sanitation in Lao PDR to be US$193 million
per year at 2006 prices.21 Translating to about US$34 per person per year, these costs are equivalent to about 5.6
percent of GDP. Phase II of the ESI, which supports the current study,22 aims to provide evidence from cost-benet
analysis to relevant policy makers about alternative sanitation options in dierent contexts. Some key ndings show
that improved sanitation in all contexts can oer common benets of access time savings and decreased health care
costs.

rural areas: Highly Favorable Economic Returns on Pit Latrines - When Used

Figure 34 summarizes the benet-cost ratios (economic return per currency unit invested) for the four rural sites.23 It
indicates that all of the sanitation options examined have a benet-cost ratio that exceeds one, thus implying that the
present value of economic benets are larger than the economic costs. With an estimated economic benet of at
least 9 Kips per every Kip invested in the facilities, the most favorable results were found for shared wet pits and
private dry pits. The study also found that it takes less than one year to recover the economic value of the initial
investment costs for these facilities. Access time savings was the largest source of economic gains. Avoided health
care costs were estimated to have the second largest contribution to net benets. For the options presented in Figure
34, these represent at least 53 percent of the net benets from improved sanitation.

urban areas: Favorable Economic Returns on Full Excreta Management Options

Figure 35 shows the benet-cost ratios for urban areas. As with rural areas, all the sanitation options evaluated had
benet-cost ratios that exceed one. The most favorable results were found for wet pit latrines (shared and private)
with benet-cost ratios of about 6. For these facilities, it also requires less than one year to recover the economic
value of the initial investment cost. As in rural areas, the largest sources of benets were access time savings and
avoided health care costs. For facilities examined, access time savings alone exceeded the annual costs of the facilities.

Sanitation Links to tourism and Economic Development

Other key linkages of sanitation to economic development were examined in the study. A survey of 235 foreign visitors
reveals that the general sanitation conditions need to be improved in Lao PDR. In Vang Vieng, availability of public
toilets appears to be of concern. While a fth of the respondents experienced gastrointestinal problems during their
stay, close to half said that when outside their hotel, they could not nd a toilet at a time of need. Those days of illness
represent foregone earnings for the tourism industry.

About 17 business owners and managers operating in Vientiane Capital were asked to rate dierent aspects of
sanitation in their areas of operation. On a scale of 1 (best) to 5 (worst), the most favorable average ratings were given
to the water quality of rivers (2.4 points), air quality from human excreta (2.6 points) and pollution from low household
coverage of sanitation (2.6 points). In contrast, the least favorable ratings were given to the presence of toilets in
public places (4.2 points). While sanitation did not appear to be a serious consideration for rms in selecting their
locations, the study found evidence that it has an eect on business operations. All respondents cited that poor water
quality has a serious impact on their business, suggesting a direct link between poor sanitation and business
operations.

23 Estimates of the other efficiency indicators are available from the full report of the study.

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 Sector Focus

in summary, this study found that all sanitation interventions had benets that exceed costs. The high net benets
from low-cost sanitation options, such as wet pit latrines in urban areas and all types of pit latrines in rural areas,
suggest that these technologies should be at the center of national plans for sanitation improvements, especially
where funds are scarce. It is worth noting that the net benets of sanitation interventions also vary considerably from
one site to the next.24 This suggests a careful consideration of site-specic conditions when interventions are designed.

Figure 34 Benet-cost ratios in rural Sites Figure 35 Benet-cost ratios in urban Sites

24 The interested reader may consult the full report for the site-by-site ndings.

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 Lao PDR Economic Monitor - JUNE 2013

annEX 3 thE gLoBaL EConoMiC outLooK in SuMMarY

(Percentage change from previous year, unless otherwise specied)
2010e 2011f 2012f 2013f 2014f
Global conditions

World trade volume 13.0 6 2.5 3.6 5.3

Consumer prices
Advanced Economies /1 1.2 2.7 2.0 1.7 2.0
Emerging Markets and Developing Economies 7.2 5.9 5.9 5.6

Commodity prices (percentage change of USD terms)

Non-oil commodities 3/ 22.5 17.8 -9.8 -0.9 -0.9
Oil price (percent change) 2/ 28.0 31.6 1.0 -2.3 -2.3
London Interbank Oered Rate (%)
on USD Deposits 0.5 0.5 0.7 0.5 0.6
on Euro Deposits 1.0 1.4 0.6 0.2 0.4

Real GDP growth 3/

World 4.1 4.0 3.2 3.3 4.0
Advanced Economies 3.0 1.2 1.2 2.2 2.3
United States 3.0 1.8 2.2 1.9 3.0
Euro Area 1.8 1.4 -0.6 -0.3 1.1
Japan 4.5 -0.6 2.0 1.6 1.4

Developing Asian Economies 7.4 8.1 6.6 7.1 7.3

East Asia and Pacic 4/ 9.7 8.3 7.5 7.6 7.6
China 10.4 9.3 7.8 8.0 8.2
ASEAN-5 4.5 6.1 5.9 5.5

Source: Source: IMF WEO April 2013, EAP Data Monitor Oct 2012
Note:
1/Canada, France, Germany, Italy, Japan, the UK, and the United States.
2/ Simple average of Dubai, Brent and West Texas Intermediate.
3/Aggregate growth rates calculated using constant 2005 dollars GDP weights.
4/ EAP Data Monitor Oct 2012

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 Annex

annEX 4 Lao PDr at a gLanCE

Lao PDr: Key indicators
2009 2010 2011 2012 2013
Prelest Proj

output and prices (percent change, unless otherwise indicated)

Real GDP 7.5 8.5 8.0 8.2 8.0
GNI per capita (in US dollars) 880 980 1100 1260
Consumer prices (% change, period-average) 0.1 6.0 7.6 4.3 6.0
Public nances (in percent of gDP) 1/
Total revenue 16.5 16.4 18.5 19.8 19.4
Total revenue 16.2 18.5 19.7 19.3
Domestic Revenue 14.3 14.5 16.4 17.3 17.3
Domestic Revenue (non-resource) 11.7 12.5 12.9 13.0 13.5
Grants 2.2 1.9 2.1 2.5 2.1

Expenditure 23.4 21.2 21.3 21.1 22.2

Current 11.3 10.2 10.4 11.0 13.4
Capital and onlending 11.0 9.8 9.3 9.3 7.9
Overall budget balance (decit) -6.9 -4.9 -2.7 -1.3 -2.8
Overall budget balance (decit, excl. mining) -11.2 -8.3 -7.7 -7.1 -7.7
Overall budget balance (decit, non-resource) -11.7 -8.8 -8.3 -8.1 -8.7

Balance of payments (% of gDP, unless otherwise specied)

Current account balance (CAB) -9.8 -6.4 -10.4 -15.4 -21.8
Resource CAB -0.2 4.8 4.1 1.1 -6.1
Non-resource CAB -9.7 -11.2 -14.5 -16.6 -15.7
Trade balance (US$ million) -734 -440 -762 -1,482 -2,258
o/w Resource (US$ million) 209 841 983 790 156
o/w non-resource (US$ million) -943 -1,282 -1,745 -2,272 -2,413
Capital account balance 8.5 7.8 9.7 16.1 22.5
Overall balance -1.3 1.3 -0.6 0.7 0.6

External public debt stock /4

External public debt service 56.0 50.3 44.3 44.1 43.7
PPG debt service-to-exports ratio (in percent) 4.9 4.3 3.2 4.5 4.5
PPG debt service-to-revenue ratio (in percent) 10.8 11.0 7.5 9.6 9.3

gross ocial reserves

In millions of US dollars 633 730 679 740 807
In months of imports of goods and services 3.2 3.2 2.3 1.9 1.8
Memorandum items:
Nominal GDP (billions of Kip) 49,673 59,310 66,293 74,754 84,010
Nominal GDP (millions of US dollars) 5,833 7,181 8,227 9,366 10,504
Exchange rate (kip/US$, average) 8,516 8,259 8,058 7,982 7,998

Sources: Sta estimates and projections based on data provided by the Lao authorities.
1/ Fiscal year basis (October to September).
2/ Includes payments on liabilities carried in from the previous budget years and arrears
clearance.
3/ Excluding resource imports and exports

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4/ DSA 2012 data
Lao PDR Economic Monitor - JUNE 2013

29
 Executive Summary

THE WORLD BANK OFFICE, VIENTIANE

P.O. Box 345, Patou Xay Nehru Road

Vientiane, Lao PDR
Tel: (856-21) 266 200
Fax: (856-21) 266 299
www.worldbank.org/lao

THE WORLD BANK OFFICE

1818 H Street, N.W.

Washington, D.C. 20433
Tel: (202) 472-1653
Fax: (202) 522-1560/1557
www.worldbank.org

LAO PDR ECONOMIC MONITOR June 2013

FREE COPY (NOT FOR SALE)

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