Lagarde urges Laos to continue fiscal consolidation

12 Sep 16

International Monetary Fund managing director Christine Lagarde has said Laos must maintain “the momentum of fiscal consolidation” to safeguard its transition to a lower-middle income country.

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Christine Lagarde. Credit: IMF Staff Photo/Stephen Jaffe

Christine Lagarde. Credit: IMF Staff Photo/Stephen Jaffe

 

Laos graduated from low-income country status in 2011, and since has been classified as a lower-middle income country with a gross national income per capita of $1,730 in 2015. The low-income country threshold is $1,025 GNI per capita.

Lagarde said the country’s growth – an estimated 7.2% last year – had been impressive. However, she pointed to a number of risks that needed addressing in order to protect economic stability.

“It will be important to maintain the momentum of fiscal consolidation to reduce public debt and diversify the economy,” she said. “Implementing fiscal reforms, including on tax policy and administration, public financial and debt management will make the public sector more efficient.”

In its last health check of the economy in 2015, the IMF noted that the deficit was closing – from 5.5% of GDP in 2013 to 4.5% in 2014. Tax revenues had, however, fallen short of budget by 2.5% of GDP.

The risk of debt distress for Laos remained, with external debt equal to 84.5% of the country’s GDP. Growth was also strong but slowing, it noted, and inequality had risen.

“Continued investments in education and health will set the conditions for productivity growth and export diversification, while distributing the benefits of growth more widely,” Lagarde said.

She then turned her attention to the success of south-east Asian nations more generally. “The Association of South East Asian Nations has growing economic and strategic importance, being located in a region featuring ample natural resources and emerging middle classes.”

The group of countries has achieved around 5% growth in recent years, but Lagarde noted that, as in Laos, real per capita incomes had slowed within ASEAN nations. ASEAN nation’s per capita income growth has also decelerated relative to advanced economies.

 “ASEAN countries need to implement growth-supporting monetary and countercyclical fiscal policies with more flexible exchange rates to help manage risks from financial volatility and subsidy reforms,” she said.

“Increased and evenly distributed infrastructure spending together with enhanced legal frameworks for private participation are also key, as well as the strengthening of public education systems.”

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