Debt-ridden Laos has been told by the International Monetary Fund to tighten its policies to avoid a major economic crisis.
An IMF mission held annual consultations recently with the government in the country's capital Vientiane, raising concerns about its rising inflation, the banking system, public spending, deteriorating current account deficit, and falling international reserves, according to the Washington-based Fund's officials.
"A tightening of macroeconomic policies is urgently needed to reduce vulnerabilities, replenish international reserves, and engineer a soft landing," Ashvin Ahuja, who led the IMF mission from Aug. 28 to Sept. 12, said on his return to the U.S. capital.
The IMF warning came amid a persistent shortfall in revenue, which led Prime Minister Thongsing Thammavong to order ministries and government agencies last month to closely control expenditures for Laos to pay its debts and avoid a financial crisis.
“In general, Laos is running a high level of debt and is at risk of a financial crisis," Thongsing said, according to the state-controlled Vientiane Times newspaper. "This means we should closely control all aspects of investment and sharpen our focus during the upcoming 2013-14 fiscal year.”
Finance Minister Phouphet Khamphounvong told the national Assembly, the country's parliament, in July that the government debt is 29.8 percent of Gross Domestic Product (GDP), or the country's national output. The debt to GDP ratio is one of the indicators of the health of an economy.
It is not immediately clear how much higher the debt level has risen since then, but the prime minister has said, according to Vientiane Times, that "to turn the situation around" the government would delay paying monies owed to contractors carrying out its own projects to "take the strain off the country's financial and currency concerns."
IMF's Ahuja said in a report this week that inflation in Laos "is accelerating" as a result of rising fresh food prices, and that credit growth—partly driven by public spending—"raises concerns about the health of the banking system."
"The current account deficit has deteriorated significantly, which is a product of a currency appreciation in real terms, a growing fiscal deficit, and strong domestic demand," he said.
He called for Laos to build up its international reserves "for precautionary needs," cautioning that "ongoing fiscal expansion has exacerbated vulnerabilities."
Ahuja said Laos's fiscal policy needs to be put back on a "consolidation path" during the next few years.
This, he said, will require improving tax collection by broadening the tax base and eliminating exemptions while rationalizing expenditure to concentrate on priority social spending and investments.
The kip, Laos's currency, should move in line with market conditions and external developments, he said.
Credit targets should be lowered, financial sector supervision strengthened, and regulatory measures put in place to reduce leverage, said Ahuja, who had met with the Lao authorities, donors, private sector representatives, and other stakeholders during his visit.
"If these policies can successfully be put in place, it would help to achieve high, sustainable growth over the medium term.”
Inflation higher than growth
The Lao economy has been growing at around 8 percent, driven by mining and hydropower.
Government spokeswoman Bounpheng Mounphoxay said last week after a meeting chaired by the prime minister that participants recognized a number of economic challenges facing Laos, including an inflation rate forecast to be higher than the growth rate, Vientiane Times reported.
No figures were given but the IMF had said in April that inflation was more than seven percent.
Bounpheng acknowledged "significant" increases in state spending amid lower-than-expected revenue, saying it posed a challenge, the newspaper said.
The government is also "struggling" with debt payments, while the distribution of salaries to state employees in some provinces has been slow, it said.
Bounpheng also said the government may halt the 760,000 kip (nearly U.S. $100) monthly allowance paid to state employees to ease its financial burden.
However, the government will stand by its commitment to increase officials' monthly salary by almost 40 percent, she said.