74305 TighTening demand To mainTain macroeconomic balanceS LAO PDR ECONOMIC MONITOR November 2012 Sector Focus Rice Sector in Surplus: Revising the policy mix Maternal Health: How free deliveries help Gender: Reducing vulnerability, increasing opportunities THE WORLD BANK The World bank © All rights reserved This publication is a product of the staff of the World Bank. The ï¬?ndings, interpretations, and conclusions expressed herein not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. Lao PDR Economic Monitor – November 2012 is issued in Lao and English by the World Bank Office in Lao PDR. This update reports on recent economic developments and medium-term outlook for the country. In addition, a new section (Part II) on sector focus is added to highlight sectors’ studies. The paper was prepared by the World Bank Office’s team consisting of Keomanivone Phimmahasay (Economist, Team Leader), Somneuk Davading (Senior Economist), Genevieve Boyreau (Senior Country Economist), under the overall supervision of Mathew Verghis (Lead Economist for South-East Asia Region). We are thankful for sector study contributions from Paavo Eliste (Senior Economist), Chanhsom Manythong (Rural Development Specialist), Ajay Tandon (Senior Economist), Wei Aun Yap (Health Specialist), Helene Carlsson Rex (Senior Social Development Specialist) and Philaiphone Vongpraseuth (Consultant). The team would like to express gratitude to the Government (especially BOL, MOF, MPI/LSB, MEM, MOIC, LNTA, MAF and other ministries) and LNCCI for providing inputs. This report also beneï¬?ts from inputs from Konesawang Nghardsaysone (Trade Analyst), Minh Van Nguyen (Sr. Public Finance Specialist), Richard Record (Trade Specialist) and Saysanith Vongviengkham (Public Finance Specialist). We would like to also thank our World Bank colleagues: Vattana Singharaj, Kaysone Vongthavilay, Meriem Gray, Souridahak Sakonhninhom, Viengsamay Srithirath, Alounsavath Davong for dissemination of the Monitor. “THE WORLD BANK TEAM APPRECIATES FEEDBACK ON STRUCTURE AND CONTENT OF THE MONITORâ€? For further information please contact World Bank Lao PDR Country Office. • Mr. Somneuk Davading on overall content (sdavading@worldbank.org) • Ms. Keomanivone Phimmahasay on data and content issues (kphimmahasay@worldbank.org) • External Affairs and communications Team on communications and copyright issues (worldbanklaos@worldbank.org) The World Bank Lao PDR Country Office Patouxay Nehru Road P.O Box 345 Vientiane, Lao PDR Phone: (856-21) 266 200 Fax: (856-21) 266 299 Lao PDR Economic Monitor - November 2012 e XecUTiVe S UmmarY global and regional economic development continues to face uncertainties in 2012. East Asia and the Paciï¬?c region’s growth is estimated to slow down compared to 2011, but remains robust compared with other regions thanks to sustained domestic investment and consumption. lao Pdr continues to maintain robust growth this year but faces a challenge to manage domestic demand. On the supply side, the construction, services, industry and agriculture sectors are the main drivers of growth; while on the demand side, public spending and private investment including demand driven by preparations for the Asia-Europe Meeting (ASEM) has played an important role in boosting the economy this year. In spite of robust growth, inflation has been declining, mostly on account of declining food and fuel inflation. However, home-grown and external risks associated with low reserves coverage, increased exposure to mining revenues, fast banking expansion with limited supervision capacity and a large number of newly announced large investment projects warrant close monitoring to preserve macroeconomic stability and sustainable growth. Stronger than expected revenue performance from the mining sector and external grants contributed to an improvement in the ï¬?scal performance in FY11/12. With the contribution of mining revenue increasing, closely monitoring commodity price fluctuations is becoming increasingly important. The ï¬?scal deï¬?cit in FY12/13 is expected to slightly widen as a result of a planned wage increase. lao Pdr’s risk of debt distress has been reclassiï¬?ed from high to moderate following the country’s improved policy performance. The Public and Public Guaranteed (PPG) debt stock as a ratio of GDP has declined due to strong economic growth and the appreciation of the Lao kip against the US dollar. While multilateral creditors still hold the majority of public external debt, bilateral creditors have an increasing share of external PPG debt. Recently announced mega-projects raise concerns about debt sustainability if these projects are to go forward. Strong pressure on external reserves calls for tightening of aggregate demand. Reserves are reaching a critical low, raising concerns over the country’s capacity to absorb any adverse external shock. The overall balance of payments is estimated to remain in a deï¬?cit of 0.7 percent of GDP at the end of 2012 as a result of continued demand for imports. The expected gains from investments in both resource1 and non-resource sectors are to be offset by the deterioration of the current account deï¬?cit associated with growing imports and higher net income payments from the natural resources sector2. As a result, foreign reserves are expected to fall by about 9 percent year-on-year (YOY) reaching a critically low level of about $620 million in December, or 2.5 months of non-resource imports. Slowing down internal demand through ï¬?scal and credit tightening is therefore becoming essential. credit growth remains high and is putting pressure on falling reserves. Credit growth has picked up in June 2012 driven by increased credit to the private sector and SOEs. Private sector credit growth is driven by buoyant performance in construction, manufacturing and service sectors. The Bank of Lao PDR’s disbursements to local infrastructure projects have moderated compared to their peak in 2009, but are ongoing as a result of previous commitments. 1 Hydro projects under construction and mining upgrade and new projects. 2 These include hotels and constructions most of which are related to the preparation for the ASEM 1 Acronyms and Abbreviations a cronYmS and a bbreViaTionS aSem Asia-Europe Meeting bol Bank of Lao PDR boP Balance of Payment cod Commercial Operation Date cPi Consumer Price Index dmFaS Debt Management and Financial Analysis System eaP East Asia & Paciï¬?c edl Electricité du Lao eU European Union Fdi Foreign Direct Investment FY Fiscal Year gdP Gross Domestic Product gFiS Government Financial Information System gol The Government of Lao PDR imF International Monetary Fund hc Health Centre iPP Independent Power Producers ldc Least Developed Country lSX Lao Securities Exchange mch Mother and Child Health moF Ministry of Finance na National Assembly neer Nominal Effective Exchange Rate nFa Net Foreign Assets nPl Non-Performing Loan nSedP National Socio-Economic Development Plan nT2 Nam Theun 2 Project ooP Out-of-Pocket PPg Public and Public Guaranteed Debt Po Public Offering reer Real Effective Exchange Rate ro Right Offering Socbs State-Owned Commercial Banks Soe State-Owned Enterprise VaT Value Added Tax Wb World Bank Weo World Economic Outlook WTo World Trade Organization YoY Year on year 2 Lao PDR Economic Monitor - November 2012 T able oF c onTenTS eXecUTiVe SUmmarY 1 ParT i RECENT ECONOMIC DEVELOPMENTS 4 GROWTH AND INFLATION 4 GOVERNMENT’S REVENUE AND EXPENDITURE 6 EXTERNAL SECTOR 10 MONETARY DEVELOPMENTS 12 ParT ii SECTOR FOCUS 14 I. RICE SECTOR IN SURPLUS: REVISING THE POLICY MIX 14 II. MATERNAL HEALTH: HOW FREE DELIVERIES HELP 18 III. GENDER: REDUCING VULNERABILITY, INCREASING OPPORTUNITY 21 anneXS ANNEX 1 – THE GLOBAL ECONOMIC OUTLOOK IN SUMMARY 24 ANNEX 2 – LAO PDR AT A GLANCE 25 FigUreS Figure 1. Growth and Inflation (percent change) 5 Figure 2. Real GDP Growth (at factor cost): Contribution by Sector (percentage points) 5 Figure 3. Monthly Inflation (yoy percent change) 5 Figure 4. Contributions to Food Inflation 6 Figure 5. Rice price Index 6 Figure 6. Total Government Revenues (percent of GDP) 7 Figure 7. Key Fiscal Expenditures (percent of GDP) 7 Figure 8. Composition of total current expenditure (percent) 7 Figure 9. GOL’s Fiscal Performance (percent of GDP) 8 Figure 10. Merchandise Exports (US$ million) 10 Figure 11. World Commodity Price Indexes 10 Figure 12. Merchandise Imports (US$ million) 11 Figure 13. Gold and Copper exports 2006-12 11 Figure 14. FDI in Lao PDR, 2007-12 (US$ million) 11 Figure 15. Balance of Payments 12 Figure 16. Kip Exchange Rate (Index Dec-2006 =100) 12 Figure 17. Nominal and Real Effective Exchange Rate (Index Dec-2006 =100) 12 Figure 18. Credit Growth picked up in ï¬?rst half 2012 13 Figure 19. Credits by sector (percent in total lending) 13 Figure 20. NFA and international reserves have declined 13 Figure 21. Declining Net Foreign Asset Coverage (percent) 13 Figure 22. Laos’ growth rates in total paddy rice output, harvested area and paddy yields (compound average annual growth rates in percent) 14 Figure 23. Laos’ rice surplus since 1990 (tons of raw milled rice) 14 Figure 24. Simulations of milled rice surpluses under different production and consumption scenarios 15 Figure 25. Location of Births and Maternal Health Out-of-Pocket Expenditure 18 Figure 26. Out-of-Pocket Maternal Health Expenditure compared with Average Monthly Household Expenditure, for Institutional and Non-Institutional Births 19 Figure 27. Impact of Free Deliveries (Red Line) compared with Matched Control Districts (Blue Line), when Free Deliveries was introduced in Nov 2009 (Orange Line) 20 TableS Table 1: Thresholds for External Debt (percent) 8 Table 2: Composition of external PPG at end 2011 8 3 Recent Economic Developments ParT i r ecenT e conomic d eVeloPmenTS Volatility in the global economy has continued to affect a slowdown in the growth of the East Asia and Paciï¬?c Region (EAP). GDP growth for EAP in 2012 has been revised downward to 7.2 percent from 7.6 percent projected in May, due to continued weak demand from advanced economies for EAP’s exports. Consequently, EAP growth hardly beneï¬?ts from gains in net trade with advanced economies. China’s growth is now projected at 7.7 percent compared to 8.2 percent earlier, as a result of the measures taken last year to contain the real estate market. Despite the overall slowdown in 2012, EAP’s growth performance remains relatively robust compared with other regions, as a consequence of sustained growth in domestic demand. This trend is likely to continue in 2013 for many EAP economies, indicating a growth rebound for the region to 7.6 percent in 2013, while China’s economy is projected to grow at 8.1 percent. Nevertheless, the Euro area crisis and a weak economic recovery in the US still present major risks to growth in the EAP region (EAP Data Monitor, 2012). The direct impacts of the economic crisis on the Lao PDR economy seem to be modest; however, the near to medium-term outlook for Lao PDR does remain vulnerable to secondary impacts through developments in regional economies (particularly China, Thailand and Vietnam)3. In this context, the risk of a continued slowdown in China and other key trading partners of Lao PDR could pose a bigger concern; given the potential impact on commodity prices, demand for Lao exports and foreign direct investment. groWTh and inFlaTion The lao economy is expected to grow at 8.2 percent in 2012: beneï¬?ting from growth in the construction, manufacturing, mining and service sectors. This is slightly lower than the projection of 8.3 percent in May, due to a projected fall in garment exports this year (Figure 1). Nevertheless, growth will remain strong at above 8 percent for the third consecutive year as targeted under the 7th National Socio-Economic Development Plan (NSEDP 2011-15). One key driver for this performance on the demand side is the surge in investment this year in infrastructure and housing, some of which are related to preparation for the ASEM in Vientiane Capital as earlier projected (Figure 2). On the supply side, this development has a positive spillover to manufacturing sectors through increased demand for cement and construction materials. In addition, food and beverages beneï¬?t from greater domestic demand. Additionally, higher wholesale and retail trading as well as transport and telecommunications will drive the service sector this year. Agricultural output also rebounded from the impacts of floods last year. In the mining sector, increased resource extraction as a result of the current copper-gold project upgrades and the operation of a new gold-silver project will offer a higher contribution to growth compared to last year. This is reflected in positive performance in the sector over the last three quarters and this trend is expected to continue in the ï¬?nal quarter. 3 Lao PDR’s country-level projections are based on the regional and global economic outlook from EAP Data Monitor October 2012, Global Economic Prospects September 2012 and World Economic Outlook October 2012), as summarized in Annex 1. 4 Lao PDR Economic Monitor - November 2012 F igure 1 growth and inflation (percent change) F igure 2 real gdP growth (at factor cost): contribution by Sector (percentage points) Nonresource sectors (percentage points) Resource sectors (percentage points) 8.2 Services Real GDP growth (percent) 9 8.5 8.0 CPI 7.5 7.6 7.5 8 8.5 Electricity, gas, 9 8.0 8.2 7.6 7.5 7.6 7 and water 8 7.5 ŽŶÆ?ƚƌƵÄ?ƟŽŶ 6 7 7.6 7.6 5 6 3.7 Manufacturing 5 6.0 6.0 4 4.4 5.5 4 3 4.5 4.9 5.8 Mining and 3 5.7 5.7 quarrying 2 2 1 Agriculture and 1 7.7 1.9 2.6 4.8 3.6 2.4 1.9 forestry 0 0 Real GDP growth -1 -0.2 0.1 -1 2007 2008 2009 2010 2011 2012 (percent) 2007 2008 2009 2010 2011 2012 2013-15 Source: Government, LNCCI data and staff Source: Government, LNCCI data and staff estimates and projections estimates and projections * Yearly average for 2013-15 * Yearly average for 2013-15 Taking into account uncertainties in the global economy and the continued implications for F igure 3 monthly inflation (yoy percent change) regional economic developments, lao Pdr’s &ŽŽĚÅ?ŶŇĂƟŽŶ;ƉĞƌÄ?ĞŶƚĂÅ?ÄžƉŽÅ?ŶƚÆ?Í¿ average annual growth rate is projected to be ŶĞrÅ?LJÅ?ŶŇĂƟŽŶ;ƉĞƌÄ?ĞŶƚĂÅ?ÄžƉŽÅ?ŶƚÆ?Í¿ ŽƌĞÅ?ŶŇĂƟŽŶ;ƉĞƌÄ?ĞŶƚĂÅ?ÄžƉŽÅ?ŶƚÆ?Í¿ 7.6 percent in the medium-term. This outlook ,ĞĂĚůÅ?ŶĞÅ?ŶŇĂƟŽŶ;ƉĞƌÄ?ĞŶƚÄ?ŚĂŶÅ?ĞͿ assumes the successful operations of key large 12 9.8 9.5 9.2 8.1 8.0 7.9 7.9 power projects under construction and in the 7.7 7.7 10 7.1 6.8 6.7 6.7 6.7 6.6 6.3 6.3 6.1 6.0 5.8 pipeline4. The non-resource sector is expected 8 5.3 4.9 4.9 4.8 4.8 4.7 4.4 4.2 3.8 6 3.7 to maintain dynamic growth in the context of 3.6 3.5 3.4 2.9 continued strong domestic consumption and 4 2 sustained demand from key trading partners. 0 -2 inflation has trended downward driven by lower Apr-12 Oct-12 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Jul-12 food and energy inflation. The headline inflation rate fell notably from 5.3 percent (YOY) in March Source: MPI (LSB) and staff calculations 2012 to 3.5 percent in October (Figure 3). Food inflation signiï¬?cantly declined from 8.2 percent in March to 3.6 percent in October driven by the continued fall in rice prices (Figure 4, Figure 5), resulting from government controls of rice exports (further analysis is summarized in Part II - Lao Rice Policy Study). Falling rice prices have led to some farmers switching to other more proï¬?table cash crops or alternatively moving to non-farm employment. Recently, the government reportedly introduced a minimum price for paddy 4 Hongsa Lignite power plant, Xepian-Xenamnoi, Nam Khan 2, and other potential projects. 5 Recent Economic Developments rice at 2,500 kip/kg in an attempt to help farmers. The effectiveness of this policy remains to be monitored. The rice price reduction has offset the increase in meat and vegetable prices, which is associated with higher demand from local residents as well as the inflow of foreign workers. However, fuel inflation has signiï¬?cantly declined from 7.9 percent (YOY) in March to 3.8 percent in October. Core inflation has picked up moderately from 3 percent (YOY) in March to 3.5 percent in October mainly due to the higher price of construction materials, cooked food, and electricity tariffs5. Figure 4 contributions to Food inflation F igure 5 rice price index Rice (percentage points) Vegetables (percentage points) Meat (percentage points) Poultry (percentage points) Fish (percentage points) The rest (percentage points) Index Dec 2005=100 Total food CPI (percent change) Thai tÅšÅ?ƚĞ'ůƵƟŽƵÆ?ƌŽŬĞŶ A.1 Special 14.2 14.0 14.1 13.9 dŚĂÅ?Å?ůƵƟŶŽƵÆ?ÆŒÅ?Ä?ÄžϭϬй;ĞdžƉŽƌƚƉƌÅ?Ä?Ğ͕ĨŽÄ?Í¿ 13.6 13.2 16 >ĂŽZÅ?Ä?ÄžƉƌÅ?Ä?Äž 11.1 11.0 11.0 10.7 14 10.2 9.7 9.7 400 9.4 9.1 12 8.1 8.8 8.8 8.2 350 7.0 7.1 10 6.8 300 6.0 5.2 8 250 4.5 4.7 4.3 4.3 3.6 4.0 6 200 2.9 150 4 100 2 50 0 0 Apr-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Jan-08 Apr-08 Apr-09 Jul-08 Oct-08 Jan-09 Jul-09 Oct-09 Jan-10 Jul-10 -2 -4 Apr-10 Apr-12 Jan-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Jul-12 Source: MPI (LSB) and staff calculations Source: Thai Rice Exporters Association and LSB goVernmenT’S reVenUe and eXPendiTUre The overall ï¬?scal performance has slightly improved in FY11/12 compared to FY10/11 due to faster than expected revenue growth. The total ï¬?scal deï¬?cit is estimated to fall from 2.7 percent of GDP in FY10/11 to 2.3 percent in FY11/12, which is lower than the initial projection. Higher-than-expected grants received to support the 9th ASEM preparations and over-performance in domestic revenues are likely to drive an increase in total revenue from 18.6 percent of GDP in FY10/11 to 19.7 percent in FY11/126 (Figure 6). Domestic revenue is estimated to outperform the plan by about 5 percent, bringing its ratio to GDP to 17.2 percent in FY11/12 from 16.4 percent in FY10/11. This is owing to a combination of i) higher gold and copper output; ii) higher revenue from hydropower projects and iii) certain non-resource revenues especially turnover tax, value added tax and income tax. However, the non-resource revenue to GDP ratio remains at around 13 percent as non-resource revenue grows at a similar pace to nominal GDP growth. Total ï¬?scal outlays are estimated to rise, but at a slower pace than total revenue growth. Total expenditure is estimated to increase from 21.3 percent to 22.0 percent in FY11/12, attributable to higher expenses on materials and supplies based on the revised budget plan, higher wages, and expenditure supporting preparations for the 9th ASEM (reported ASEM related spending is estimated at around 5-6 percent of total expenditure in FY11/12). Off-budget spending has moderated substantially since its peak in 2009. Non- 5 According to Electricity du Lao PDR (EDL), electricity tariffs will increase by 5 percent annually from 2012 to 2015. 6 Total revenue and expenditure exclude technical assistance which is not included in the budget. 6 Lao PDR Economic Monitor - November 2012 mining and non-resource ï¬?scal deï¬?cits are expected to widen to 8.2 and 9.2 percent F igure 6 Total government revenues (percent of gdP) respectively in FY11/12 from 7.7 and 8.3 percent Hydropower Mining Non-resource in FY10/11 with the expansion in expenditure Grants Total Revenue 19.7 19.8 increasingly being ï¬?nanced by larger mining 20 18.6 16.5 16.4 2.5 2.1 revenues. This trend reinforces the role of mining 15.4 2.1 16 2.2 1.9 revenue in ï¬?nancing the budget. Therefore, 1.3 12 monitoring the disaggregated revenue sources 13.0 12.9 12.8 10.9 11.7 12.5 and ï¬?scal deï¬?cits (mining and non-mining) will 8 be helpful in keeping informed about the risks to 4 3.9 2.4 2.8 3.3 the budget associated with commodity price 0 0.7 2.1 0.5 1.6 0.4 0.6 1.0 1.0 fluctuations. FY08 FY09 FY10 FY11 FY12 FY13 Source: MOF and staff estimate and projection The ï¬?scal deï¬?cit in FY12/13 is projected to marginally widen to 2.7 percent in FY12/13 due to a planned public wages and compensation increase, compared with a revenue share to gdP F igure 7 Key Fiscal expenditures (percent of gdP) Recurrent spending that is expected to stabilize at around 19.8 percent Capital spending (on-budget) Capital spending (oÄ«-budget) this ï¬?scal year. The phase out by end 2012 of KƚŚĞƌÆ?ͬÄ?ŽŶƟŶÅ?ĞŶÄ?Å?ÄžÆ? Total expenditurte most grants related to ASEM preparations (Figure 25 23.5 22.5 7) will be compensated by domestic revenue, which 21.3 21.3 22.0 18.3 will continue to beneï¬?t from the resource sector, 20 11.4 10.3 10.4 10.8 due to the expected higher mineral output in 15 13.0 10.0 2012. This increase will bring the domestic revenue 10 7.1 7.0 to GDP ratio up to 17.7 percent in FY12/13. 5 6.5 7.8 9.0 7.4 3.9 2.8 1.5 0.6 1.4 1.0 0 Total spending is projected to climb to 22.5 FY08 FY09 FY10 FY11 FY12 FY13 percent in FY12/13 driven by the planned wage Source: MOF and staff estimate and projection and compensation increase. Wage expenditure is expected to increase by 35 percent bringing its ratio to GDP up to 5.8 percent from 4.8 percent 7 (Figure 7, Figure 9). Wages and F igure 8 composition of total current expenditure (percent) compensation are projected to account for 63 Ç?Ä‚Å?ÄžĂŶĚÄ?ŽŵƉĞŶÆ?ĂƟŽŶ percent of recurrent spending and 65 percent of KƚŚĞƌÆ?;ŶŽŶͲÇ?Ä‚Å?ÄžĂŶĚŶŽŶͲÄ?ŽŵƉĞŶÆ?ĂƟŽŶͿ Interest payment non-resource domestic revenue in FY12/13 100% compared to 58 and 49 percent in FY11/12 respectively (Figure 8). The growing share of 80% 31.2 32.9 34.6 35.4 31.3 wages and compensation to recurrent spending 60% highlights the tradeoff with the non-wage recurrent 40% budget, which covers operation and maintenance 58.8 59.9 58.0 57.9 63.5 20% spending. The growing share of wages and compensations to non-resource revenue implies 0% less flexibility in ï¬?nancing the wage bill rise from FY09 FY10 FY11 FY12 FY13 stable revenue sources. Source: MOF and staff estimate and projection 7 in an attempt to improve living standards of civil servants, the government issued a decree on wages and allowances increase during 2013-2015 (No. 221/GOL dated 30 May 2012) introducing an equivalent 35 percent increase in wages for FY12/13. 7 Recent Economic Developments Finally, in FY12/13 the government plans to bring on to the budget additional debt repayment F igure 9 gol’s Fiscal Performance (percent of gdP) to ï¬?nance expenditure commitments previously Revenue and grants Total expenditurte ƵĚÅ?ĞƚĚĞĮÄ?Å?Æš EŽŶŵÅ?ŶÅ?ŶÅ?ĚĞĮÄ?Å?Æš EŽŶƌĞÆ?ŽƵƌÄ?ÄžĚĞĮÄ?Å?Æš made off-budget. In the FY12/13 budget, there 30 23.5 22.5 are plans to mobilize 1,800 billion Lao kip 22.0 21.3 21.3 19.8 19.7 25 18.6 18.3 (equivalent to about $220 million) through bond 16.5 16.4 15.4 20 issuance, in addition to traditional treasury bill 15 operations. Around half of the bond amount is 10 intended for repayment of off-budget spending 5 0 commitments made to support infrastructure -2.3 -2.7 -2.7 -2.7 -5 projects. Nevertheless, the implementation of -4.9 -6.9 -7.4 -10 -8.3 -6.7 -8.8 -7.7 -9.2 -9.7 -8.2 -8.4 -8.6 this plan remains to be monitored. -11.8 -11.3 -15 FY08 FY09 FY10 FY11 FY12 FY13 Source: MOF and staff estimate and projection Public debt The recent Joint imF-World bank debt Sustainability analysis (dSa) 2012 concluded T able 1 Thresholds for external debt (percent) external Public that lao Pdr’s risk of debt distress was Thresholds debt indicators reclassiï¬?ed from high to moderate due to an at end 2011 improvement in policy performance from weak Indicator Before Now to moderate.8 As a result, in this analytical Present value of Debt to GDP 30 40 29.8 framework, Lao PDR is now subject to higher Present value of Debt to exports 100 150 78.1 indicative debt distress thresholds (Table 1). Under the baseline assumptions, all external Present value of Debt to revenue 200 250 182.9 debt distress indicators remain below the new Debt service to exports 15 20 3.2 policy-dependent indicative thresholds, although Debt service to revenue 1/ 25 20 7.5 some breaches occur under the stress tests. This Source: Source: DSA 2012 improvement has implications for possible 1/ for debt service to revenue ratio, the applicable thresholds have been reduced. increases in external resources available to Lao PDR. While the stock of external Public and Publicly T able 2 composition of external PPg at end 2011 guaranteed (PPg) debt has been declining Share of total $ billion Percent substantially during recent years, bilateral public dollars of gdP external debt borrowing has been gaining a larger share. The stock of external PPG debt fell to 44.4 percent of Total 3.7 100 44.4 GDP in 2011 ($3.7 billion), from 50.3 percent in Multilateral 2.1 55.8 24.7 2010, as a result of strong economic growth and Bilateral 1.4 37.9 16.9 appreciation of the Lao kip against the US dollar. Commercial # 0.2 6.3 2.8 Multilateral creditors (mainly the Asian Source: IMF and WB Debt Sustainability Analysis 2012 Development Bank and the World Bank) still Note: # includes direct borrowing by state-owned enterprises on non-concessional terms. account for the majority of the total external PPG 8 The average rating of Country’s Policy and Institutional Assessment for Lao PDR has been above 3.25 thresholds for two consecutive years, bringing Lao PDR’s policy performance from weak to medium. This is based on the Joint IMF-WB Debt Sustainability Framework for Low Income Countries. 8 Lao PDR Economic Monitor - November 2012 debt, with 56 percent compared to the bilateral creditors’ share of 38 percent. The share of public borrowing from bilateral sources (mainly China, India, Japan, Korea, Russia and Thailand) has gradually increased in recent years, signifying the increasing importance of bilateral creditors. Furthermore, the share of non- concessional PPG debt has increased steadily in the past few years, although from a low base. In 2011, commercial borrowing was recorded at 6.3 percent of GDP (around $200 million). As at end 2011, PPG debt servicing ratios fall comfortably under the thresholds due to the high level of concessionality of official borrowing (Table 1). The recently announced number of large projects9 raises concerns over debt sustainability and over the country’s capacity to absorb the announced new ï¬?nancial commitments. In this context, enhancing capacity in debt management, debt sustainability analysis and project viability appraisal is of crucial importance. The authorities are taking steps to encourage a transparent public debate over these mega-scale projects by publishing information in media and on the National Assembly website. The Government has also now deployed a debt monitoring system DMFAS and has developed a Presidential Decree on Public Debt management. All these efforts are steps in the right direction and should be sustained together with the development of a debt management strategy. one key example is the proposed public-guaranteed borrowing to ï¬?nance the $6.7 billion lao-china rail project. Even under concessional terms, this loan would by itself make public debt unsustainable (based on the recently acquired moderate risk thresholds in WB-IMF debt sustainability framework). Assuming a 2 percent ï¬?xed rate debt, with 20-year maturity and a 10-year grace period10 starting from 2013 onwards, the present value of external debt to GDP would increase from 30 percent at present to 70 percent by 2016, well above the threshold for debt sustainability of 40 percent in table 1. The thresholds for present value of debt to exports, and debt service to revenue would also be breached. A careful review of the implications for debt sustainability, in addition to careful cost-beneï¬?t analysis, is therefore critical before proceeding. The recorded stock of domestic public debt rose to 8.9 percent of gdP in 2011, up from 8.5 percent of gdP in 2010, as a result of continued disbursements from the bank of lao Pdr to ï¬?nance local government’s previously committed expenditures for off-budget infrastructure projects. Lending from the BoL to local government represents about three-quarters of the recorded total domestic debt, with the remainder including government bonds related to the recapitalization of state-owned commercial banks (SOCBs). Total PPG domestic and external debt stood at 53.2 percent of GDP in 2011, down from 58.8 percent in 2010. This improvement is also driven chiefly by the combination of GDP growth and exchange rate effects. The stock of BoL’s loans to local government is projected to peak in the near future as the BoL’s quasi-ï¬?scal operations are gradually phased out. Domestic debt is expected to decline from 8.9 percent of GDP in 2011 to about 5.4 percent of GDP by 2017. 9 These projects include the Satellite, radio and television project, Fiber optic project, Lao-China railway project, etc (KPL News paper 7 November 2012). 10 This assumption is from the proposed ï¬?nancing modality as cited on the National Assembly website (www.na.gov.la). 9 Recent Economic Developments eXTernal SecTor The overall balance of payments is expected to remain in deï¬?cit of 0.7 percent of gdP due to continued growth in the demand for imports offsetting expected gains from investments in both resource and non- resource sectors (Figure 15). In the resource sector, investment to support hydro projects under construction11, mining upgrades and new projects contributes to boost overall capital inflows. In addition, the non-resource sector also receives signiï¬?cant inflows of direct investment in hotels and construction; most of which are related to preparations for the ASEM (Figure 14, Figure 15). In addition, EDL GEN Company has successfully raised capital inflows of around $12 million from foreign investors through the Lao Securities Exchange.12 As a result, the capital account surplus is estimated to rise to 16.4 percent of GDP in 2012 from 10.8 percent in 2011. Nevertheless, this expansion in foreign direct investment and portfolio investment is expected to be offset by the deterioration of the current account deï¬?cit (Figure 15). F 10 merchandise exports (US$ million) igure F 11 World commodity Price indexes igure Index (2005=100) 3500 Non-resources Copper Gold ŽīĞĞ 400 Rubber Crude oil 3000 Electricity Mining 350 2500 300 2000 250 1500 200 150 1000 100 500 50 0 - 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013-15 Source: Staff estimates and projections based on Source: WB DECDG’s recent estimates and data from MOIC, LNCCI and partner projections countries The current account deï¬?cit is expected to notably widen due to growing imports and higher net income payments from the resource sector. The total current account deï¬?cit is estimated to worsen to 16.3 percent of GDP in 2012 from 11.4 percent resulting from a combination of factors. Firstly, capital goods imports are estimated to rise by about 26 percent YOY to support aforementioned resource and non-resource projects (Figure 12). Secondly, strong domestic consumption also fuels demand for imports of consumption goods, such as vehicles and fuel. In addition, higher net income repatriation in the mining sector is expected to rise, partly negating the gains from the improved export performance associated with increased copper and gold output and an expected higher gold price this year. Overall, the net income payment from the resource sector (interest payment and income repatriation from mining and hydropower sectors) is estimated at around $870 million in 2012 compared to about $600 million last year. 11 Hongsa lignite power plant, Nam Ngum 5, Theun Hin Boun Expansion, Huany Lam Phan Yai, etc. 12 Portfolio investment is estimated to rise this year with Right Offering (RO) and Public Offerings (PO) by EDL-Gen following the expected purchase of EDL’s shares in four operational Independent Power Producers (IPP) projects in 2012 (Theun Hinboun power plant including expansion, Houay Ho power plant, Nam Ngum 2 power plant, Nam Lik 1-2 power plant) and the commercial operation date (COD) of 6 MW Nam Song in Q3 2012. 10 Lao PDR Economic Monitor - November 2012 Strong pressure on external reserves calls for tightening of aggregate demand. Reserves are F 12 merchandise imports (US$ million) igure reaching a critical low, raising concerns over the 5000 Consumer goods country’s capacity to absorb any adverse 4500 Raw materials external shock. The overall balance of payment 4000 Capital goods 3500 Total imports deï¬?cit will lead to an expected fall in the level of 3000 foreign reserves. In mid- 2012, reserves and net 2500 foreign assets (NFA) were recorded at $608 2000 1500 million and $476 million, having fallen by 15 1000 percent and 48 percent YOY respectively (Figure 500 20). NFA indicators, which illustrate the banking 0 2008 2009 2010 2011 2012 2013 sector’s ability to meet demand for foreign currencies, have been continually declining Source: Staff estimates and projections based on data from MOIC, LNCCI and partner (Figure 21). In addition, the exchange rate countries stabilization policy, notably the removal of the foreign currency exchange cap, also puts pressure on reserves. As a result, foreign reserves are projected to fall by about 9 percent YOY reaching a critical low level of about $620 F 13 gold and copper exports 2006-12 igure 'ŽůĚŽƵƚƉƵƚ;ΖϬϬϬŽnj͕ůĞŌĂdžÆ?͘Ϳ million in December 2012, or 2.5 months of non- ŽƉƉĞƌŽƵƚƉƵƚ;ΖϬϬϬƚŽŶÆ?Í•ůĞŌĂdžÆ?͘Ϳ 300 'ŽůĚĞdžƉŽƌƚ;ΨŵÅ?ů͕ÆŒÅ?Å?ŚƚĂdžÆ?͘Ϳ 1500 resource imports. In response, tightening ŽƉƉĞƌĞdžƉŽƌƚ;ΨŵÅ?ů͕ÆŒÅ?Å?ŚƚĂdžÆ?͘Ϳ demand through ï¬?scal and credit tightening '000 tons or oz would be essential to maintain macroeconomic 200 1000 $ mil balances. 100 500 exchange rate 0 0 2006 2007 2008 2009 2010 2011 2012 The bank of lao Pdr has consistently pursued Source: Lane Xang Minerals Limited and Phu Bia a managed floating exchange rate regime as Mining Companies, 2012 and staff calculations the main instrument to maintain exchange rate stability. The Lao kip appreciated slightly against USD by 0.3 percent during January to October due to large inflows of foreign investment and export receipts. Over the same period, the Lao F 14 Fdi in lao Pdr, 2007-12 igure (US$ million) kip depreciated against the Thai baht by 2.8 Agriculture Manufacturing, etc. 1800 percent , as a result of the baht’s appreciation 1600 Services Mining 1400 Power 'ƌŽÆ?Æ?&/Å?ŶŇŽÇ?Æ? against the US dollar (Figure 16). This exchange 1200 rate intervention, including the recent removal 1000 800 of the foreign currency exchange cap, also 600 contributes to the pressure on reserves. The 400 200 effective exchange rate appreciated by 2.3 percent 0 in nominal terms and by 4.3 percent in real 2007 2008 2009 2010 2011 2012 terms in the ï¬?rst 8 months of 2012 (Figure 17). Source: MPI and staff estimates and projections 11 Recent Economic Developments F 15 (percent balance of Payments igure of gdP), 2008-13 Mining CAB Power CAB Non-resource CAB CAB Overall balance (% of GDP) Overall balance Capital account balance Nonresource overall balance (% of GDP) 30 Resource overall balance (% of GDP) 16.9 19.1 20 15.7 11.6 12.3 10.7 10.8 20 10.2 8.7 10.8 8.4 7.6 5.7 10 10 4.8 1.9 1.0 1.3 1.0 -1.3 1.3 -0.6 -0.7 -1.3 -0.6 -0.7 0 0 1.9 -10 -6.2 -10 -3.7 -9.7 -5.4 -20 -11.4 -14.9 -16.3 -10.0 -10.2 -13.0 -11.3 -9.8 -18.1 -30 -20 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 Source: BOL and staff estimates and projections Source: BOL and staff estimates and projections moneTarY deVeloPmenTS credit growth remains high and the bol has taken action to mop up excessive liquidity. F 16 Kip igure exchange rate (index dec-2006 =100) Credit growth has picked up from 33 percent (Index Dec2006 = 100) (YOY) in June 2011 to 47 percent (YOY) in June 130 Kip/USD 125 2012 driven by rising credit to the private sector 120 Kip/Baht and SOEs (Figure 18). Private sector credit growth 115 USD/Baht 110 has primarily come about as a result of increasingly 105 buoyant growth in construction, manufacturing 100 95 and service sectors (Figure 19). Disbursements 90 85 to local infrastructure projects (recorded as 80 lending to SOEs) continue only on the basis of Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 previous commitments and have moderated Aug-12 compared to their peak in 2009 (Figure 18). Total credit growth coupled with a slowdown in deposits Source: BOL and Bank of Thailand and staff calculations drove up the loan to deposit ratio from 71 percent in June 2011 to 85 percent in June 2012. Non-performing loans (NPL) are reported to have increased slightly from 2.2 percent in 2011 to about 3.7 percent in mid-2012, which could be F 17 nominal igure and real effective exchange rate (index dec-2006 =100) the result of a period of high credit growth. M2 Nominal EÄ«ÄžÄ?ƟǀĞdžÄ?ŚĂŶÅ?ÄžZĂƚĞ ZĞĂůÄ«ÄžÄ?ƟǀĞdžÄ?ŚĂŶÅ?ÄžZĂƚĞ growth slowed down substantially to 29 percent 150 YOY in June 2012 from 41 percent in June 2011. 140 130 120 110 100 90 80 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Source: IMF 12 Lao PDR Economic Monitor - November 2012 as of mid-2012, strong credit growth has contributed to the reduction in net foreign assets (nFa) and foreign reserves through imports (Figure 20). High credit growth has stimulated investment and consumption which has resulted in an expanded demand for imports, both of capital and consumption goods. Reserves, recorded at $608 million in June, are projected to rebound in the second half of the year to about $ 620 million, which is partly attributed to some repayments of BOL’s direct lending. However, this level is lower than the initial projected increase and lower than the 2011 level, due to strong demand for imports and BOL’s reported policy measure to eliminate the foreign exchange cap. Therefore, managing domestic demand will be an important measure in bring down risks posed by low foreign exchange reserves. F 18 credit igure growth picked up in ï¬?rst half 2012 F 19 total credits by sector (percent in igure lending) Credit to private sector (percentage points) 100% Credit to SOEs (percentage points) /ŶĚƵÆ?ƚƌLJĂŶĚ,ĂŶĚÅ?Ä?ĂƌŌ 90% 18 19 19 20 19 Total credit (yoy % change) 24 30 120 ůŽĂŶÆ?ͬĚĞƉŽÆ?Å?ÆšƌĂƟŽ;й͕ÆŒÅ?Å?ŚƚĂdžÅ?Æ?Í¿ 90 80% Commerce 100 80 70% 25 23 23 21 21 70 Services 60% 28 80 27 60 9 8 13 15 50% 4 17 ŽŶÆ?ƚƌƵÄ?ƟŽŶ 60 50 7 4 40% 5 12 14 12 40 7 8 13 18 Agri and Forestry 40 30% 7 6 30 16 20 20% 13 9 20 TƌĂŶÆ?ƉŽƌƚĂƟŽŶ 0 10% 23 25 21 22 10 11 9 8 Materials and Technical -20 0 0% supplies (assembly) Dec-07 Mar-08 Dec-08 Mar-09 Dec-09 Mar-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-08 Sep-08 Jun-09 Sep-09 Jun-10 Sep-10 Jun-12 2006 2007 2008 2009 2010 2011 2012H1 Other Source: BOL and staff calculations Source: BOL and staff calculations F 20 nFa and international reserves igure have declined F 21 coverage declining net Foreign asset igure (percent) (yoy percent change) 160 125 'ƌŽÆ?Æ?ŽĨĮÄ?Å?ĂůƌĞÆ?ĞƌǀĞÆ? EĞƚĨŽƌĞÅ?Å?ŶÄ‚Æ?Æ?ĞƚÆ? 120 100 75 80 50 40 25 0 0 -25 6/2008 6/2009 6/2010 12/2010 6/2011 12/2011 6/2012 ZĂƟŽŽĨEFAƚŽĨŽƌĞÅ?Å?ŶÄ?ƵƌƌĞŶÄ?LJĚĞƉŽÆ?Å?ÆšÆ? -50 ZĂƟŽŽĨŽLEFAƚŽŵŽŶĞLJÄ?Ä‚Æ?Äž -75 ZĂƟŽŽĨEFAƚŽÄ?ƌŽĂĚŵŽŶĞLJ Dec-06 Mar-07 Sep-11 Dec-11 Mar-12 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Jun-12 ZĂƟŽŽĨÄ?ŽŵŵĞƌÄ?Å?ĂůÄ?ĂŶŬEFAĂŶĚ ƌĞÆ?ĞƌǀĞÆ?ƚŽĨŽƌĞÅ?Å?ŶÄ?ƵƌƌĞŶÄ?LJĚĞƉŽÆ?Å?ÆšÆ? Source: BOL Source: BOL and staff calculations 13 Sector Focus ParT ii S ecTor F ocUS i. rice SecTor in SUrPlUS: reViSing The PolicY miX13 The rice sector in lao Pdr has seen impressive developments over the last two decades as the country has moved from a rice-deï¬?cit in the 1990s to a rice-surplus country in the 2000s with self-sufficiency at national level. Lao PDR has one of the highest per capita rice consumption levels in the world and rice production has more than doubled between 1991 and 2011 (one of the highest growth rates in the region), reaching around 3.3 million tons of paddy in 2011. This production increase was driven by both yield improvements and area expansion (Figure 22). This has led to a build-up of signiï¬?cant national-level surpluses, which reached about 373,000 tons of milled rice in 2011 (Figure 23). The sector transformation is being fuelled by a combination of factors not all of which are directly related to Government rice sector policies. These include: (i) continuing GDP growth led by minerals and hydropower exports, (ii) increasing job opportunities in the non-tradable, non-agricultural sector associated with increasing incomes, (iii) increasing urbanization with consequences for rural wages and consumption patterns and (iv) stabilization of aggregate national rice consumption driven by a declining population growth rate and gradual diversiï¬?cation of diets away from rice as a source of calories. With all these factors at play, Lao rice consumption is declining, following a similar trend to other countries in the region. laos’ growth rates in total paddy rice output, laos’ rice surplus since 1990 F 22 harvested igure area and paddy yields (compound F average annual growth rates in percent) 23 (tons of raw milled rice)igure 12.0% 400,000 10.0% 300,000 200,000 8.0% 100,000 6.0% - 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 4.0% (100,000) 2.0% (200,000) 0.0% 1991-1996 1996-2001 2001-2006 2006-2011 (300,000) Surplus of raw milled rice (tons) -2.0% Produc ÆŸon Land area Yield Source: MAF data and authors calculations Source: MAF, NBS data and authors’ calculations 13 This is a summary of the study “Lao PDR: Rice Policy Study 2012â€? which was carried out in collaboration between the World Bank, Food and Agriculture Organization of the United Nations (FAO) and International Rice Research Institute (IRRI). It is a ï¬?rst attempt of a comprehensive analysis of the rice sector which combines technical aspects of rice production with a broad-based socio-economic analysis. While there have been many in-depth technical studies of speciï¬?c areas of rice sector in the past, none of them has touched the complexities of how rice markets will be shaped by emerging demographic trends, on-going regional trade integration process, and associated farmer welfare changes. For more information, please contact Meriem Gray (Communications and External Affairs, World Bank Vientiane office, mgray@worldbank.org) and Paavo Eliste (Senior Economist and task manager of the report, Peliste@worldbank.org). The report will be available at www.worldbank.org/lao. 14 Lao PDR Economic Monitor - November 2012 The government’s vision is to increase national rice production to levels which would mitigate food security concerns, but also enable the country to be a reliable supplier of milled rice to regional markets. Rice is a key staple in Lao PDR and has been an integral part of its social and political objectives of national and household food security and social stability. A signiï¬?cant amount of public resources over the last two decades has been invested to encourage rice farming and production. Ambitious targets have been set for rice production and exports by 2015 that are to be achieved through the public investment plan. Related to these targets, the Ministry of Agriculture and Forestry has initiated the rice sector study, which will lead to the development of a comprehensive national rice sector policy and public investment plan. While lao Pdr is expected to continue to build signiï¬?cant rice surpluses, this outlook may nevertheless face signiï¬?cant headwinds due to low farm gate prices of paddy caused by unpredictable export restrictions. Under the baseline production and consumption scenarios, Lao PDR will continue to build robust levels of national rice surpluses, which are expected to reach about 450,000-500,000 tons by 2015 and between 700,000 to 800,000 tons by 2020 (Figure 24). However, ï¬?ndings also suggest that low input/low output rice farming households will not be able to obtain sufficiently high incomes due to low farm gate prices of paddy, thereby limiting their incentives to respond to planned Government investments. There is already evidence of a gradual switch away from rice farming to other crops or non-farm employment. Rice production is also becoming increasingly concentrated in regions with a natural comparative advantage, such as Mekong lowland areas, where it can still generate appropriate returns, especially through multi- cropping when irrigation is available. The key factor behind suppressed farm gate prices has been the unpredictable application of export restrictions on the milled rice trade by central and provincial authorities, and a complete ban on formal or informal exports of paddy to neighboring countries. F 24 Simulations igure of milled rice surpluses under different production and consumption scenarios 1,040,000 940,000 Surplus milled rice (tons) 840,000 740,000 640,000 540,000 440,000 340,000 11 12 13 15 16 17 18 19 20 14 20 20 20 20 20 20 20 20 20 20 Source: MAF data for 1990-2011, and estimates for 2012, and authors’ calculations 15 Sector Focus With the rice sector having moved from a national deï¬?cit to a national surplus, there is a need to revise the policy mix for achieving the key government objectives of food security and economic growth. The present situation is characterized by numerous policies stemming from different Government sectors with sometimes conflicting policy and political objectives. Focusing on just one policy instrument (essentially trade policy in the form of export restrictions focused on keeping low domestic rice prices) to address such emerging food security challenges may not be optimal in a situation of increasing rice surpluses. Lao PDR would beneï¬?t from developing a comprehensive rice policy that cuts across different Government institutions. First, improving the incomes of rice producers in areas of competitive advantage should be a priority if government wants farmers to respond to policy goals. Following a signiï¬?cant expansion in production areas and productivity of rice in the 1990s, the country has been producing stable and increasing surpluses over the last decade. There are emerging labor shortages and increases in the cost of farm labor as a result of an on-going shift of farm labor to non-farm sectors, which, in turn is undermining competitiveness of traditional rice production systems. Second, well-articulated trade policies are the best instruments to achieve government policy goals, while helping to increase farmer incomes. Even a conservative estimate of around 100,000 tons of Lao paddy being exported annually translates to at least US$ 30 million in export value. It not only means rice is already a potentially important export commodity for Lao PDR, but it is also one with a high labor content (unlike minerals or hydropower), signifying its potential to contribute to job creation, equitable growth and export earnings. Thirdly, lao Pdr has reached the point where food security should no longer be seen as a singular function of increasing rice surpluses; addressing nutritional deï¬?cits more broadly should also be considered. As Lao PDR has moved from deï¬?cits to sizable rice surpluses and the caloriï¬?c intake from rice has increased signiï¬?cantly; the most pressing nutritional gaps have shifted from those provided by rice to other foodstuffs in many situations. A broader focus on food security would therefore require addressing issues related to nutritional deï¬?cits more broadly, rather than just shortages of rice (which are now localized issues). options for improving rice sector policies eliminating export bans on rice and creating a transparent trade environment with clear and easily monitored rules at the border would go a long way to address suppressed farm gate rice prices. Lao PDR shares borders with the two largest exporters of rice in the world (Thailand and Vietnam), which are also signiï¬?cant producers and exporters of glutinous rice. They also have highly competitive milling and transport infrastructure, which makes their milled rice cheaper compared to Lao PDR. However, there is interest by Thai and Vietnamese traders to import cheaper Lao glutinous paddy which could be milled in their countries and sold to domestic or international markets. 16 Lao PDR Economic Monitor - November 2012 overcoming milling constraints will require signiï¬?cant private sector investments (from domestic or foreign sources) for the development of large modern mills and polishing factories. While there have been increasing investments in the milling capacity in Lao PDR over the past years, a vast majority of commercial mills are small and operate with obsolete equipment. The main constraint for export of Lao PDR milled rice in the short and medium term will be its high cost of milled rice relative to low quality which makes it unattractive to consumers in neighboring countries. These same issues will affect potential exports of non- glutinous rice. Experiences from neighboring emerging rice exporters, such as Cambodia, show that such changes in the milling sector will happen once the country starts to produce sizable surpluses of paddy (supported by clear rice export policies), which could be potentially turned into milled rice exports. a more balanced allocation between investments in extension activities, technology development and transfer and irrigation could improve the efficiency of budgetary resources allocated to agriculture. Scenarios looking at various investment options (extension related investments, including the availability of good quality seed, along with access to fertilizer and improved farming skills, and irrigation related investments) have been considered. Findings show that while irrigation investments are an important component of a public investment package, the highest incremental production volumes and returns on public spending come from comprehensive extension packages. In addition, from a productivity perspective, ï¬?ndings support the targeting of public investment programs to geographical areas with the highest production potential and farmers able to achieve the largest incremental productivity (yield) gains. 17 Sector Focus ii. maTernal healTh: hoW Free deliVerieS helP lao Pdr has some of the poorest maternal health outcomes in the world: at 470 per 100,000 live births, Lao PDR’s 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. Even among women utilizing services, poor quality of care remains a key challenge facing the Lao health system. household and Facility baseline Survey 201014 analysis of a recent household and facility survey covering 2,741 households in 193 villages across 21 rural and high-priority districts in six central and southern provinces of the country is helping shed light on some of the issues underlying poor maternal and child health (mch) in lao Pdr. The survey intentionally sampled households with at least one child under two years of age and includes modules covering maternal health, child health, and nutrition. The survey also collected detailed facility information from a sample of 38 health centers in the same area. The survey conï¬?rms the continuing poor state of utilization of maternal services in rural areas F 25 location igure of births and maternal health out-of-Pocket expenditure of central and southern lao Pdr. Facility-based deliveries (including those at health centers, district hospitals, and provincial hospitals) accounted for only 15 percent of all deliveries in the two years prior to the survey (see Figure 25). More than 70 percent of surveyed women delivered at home for their latest pregnancy. While national trends suggest that facility-based deliveries are increasing in prevalence, they remain relatively rare in rural parts of the country. When asked to provide reasons for delivering outside of health facilities, most women cited convenience (45 percent), tradition (20 percent), and ï¬?nancial constraints (11 percent). An additional 18 percent of women reported that they did not have time to get to a health facility, suggesting lack of prior planning and access problems. 14 This is a summary of a forthcoming World Bank report, Maternal and Child Health & Nutrition in Lao PDR: Evidence from a Household Survey in Six Central and Southern Provinces. The report analyzes a household survey conducted to inform the design and implementation of the World Bank- and EU-ï¬?nanced Community Nutrition Project (CNP), which is currently supporting a pilot conditional cash transfer and community-based nutrition program in the catchment area of 62 health centers across seven central and southern provinces of the country (Borikhamxay, Khammuane, Savannakhet, Saravane, Sekong, Champasack, and Attapeu). Note that Sekong province was not included in the household survey. For more information, please contact Meriem Gray (Communications and External Affairs, World Bank Vientiane office, mgray@worldbank.org), Ajay Tandon (Senior Economist and task manager of the report, atandon@worldbank.org) and Wei Aun Yap (Health Specialist, wyap@worldbank.org). The report will be available at www.worldbank.org/lao. 18 Lao PDR Economic Monitor - November 2012 Physical access to health facilities is a major problem in these rural areas. The mean distance from village to the nearest health center or hospital is 5.2km and 32.2km, respectively. For non-emergencies during the rainy season, these journeys take a mean time of 64 minutes and 149 minutes respectively. These averages hide the fact that some communities are 180km away from the nearest hospital and a journey to the nearest hospital could take up to 24 hours during the rainy season. Financial barriers are a further hindrance. average out-of-pocket (ooP) expenditure for a health center (hc) delivery was 218,000 kip, six-times the average amount spent for a birth outside health facilities (35,000 kip).15 OOP expenditures are especially high for hospital deliveries: the average OOP expenditure for vaginal deliveries at district hospitals and provincial hospitals was 477,000 kip and 945,000 kip, respectively. By way of contrast, average monthly household expenditure in these communities was 1,511,000 kip. Hence, average OOP expenditures (including transportation costs) for a woman seeking antenatal care, vaginal delivery at a provincial hospital, and postnatal care, equaled 63 percent of average monthly household expenditure. More importantly, because these OOP expenditures are highly variable, many households incurred expenditure in excess of average monthly household expenditure and cross the horizontal ‘black line’ of Figure 26. F 26 with out-of-Pocket maternal health expenditure compared igure average monthly household expenditure, for institutional and non-institutional births. reductions in ooP payments are key to increasing utilization of key maternal health services in the country. In addition, the quality and readiness of health facilities in terms of training and equipment needs to be bolstered if increased utilization of maternal health services is to result in improved health outcomes. The survey found that overall qualiï¬?cations of health center staff were poor: only 63 percent of all staff in the 38 HCs had completed primary education, and only 32 percent of staff responsible for providing delivery services had received any technical training in the last two years. HCs were also poorly equipped: only 58 percent had access to a safe water supply and only 75 percent had an electricity supply. Crucial medical equipment was also missing: only 26 percent of HCs had a working infant resuscitation kit, for instance. 15 OOP spending for deliveries includes spending on antenatal care, postnatal care, and all associated transportation costs. 19 Sector Focus Free delivery Pilot In order to increase institutional deliveries and enhance ï¬?nancial protection, GoL is implementing a national Free MCH policy. This builds on the ï¬?ndings of a promising two-year World Bank-funded pilot of free deliveries in two districts in Savannakhet, where a three-fold (300 percent increase) rise in the rate of pregnant women delivering at facilities was observed when ï¬?nancial barriers were lowered by offering free deliveries to all eligible in the catchment areas of the facilities. By way of contrast, and over the same period, the rate of increase in health facility deliveries was much lower – only about 40 percent -- in similar districts outside the pilot area that did not offer free deliveries (Figure 27). Although many challenges remain to achieve the maternal and child health-related Millennium Development Goals by 2015, efforts such as the national Free MCH policy are expected to accelerate progress towards these goals. This policy is expected to start wider rolling out from end 2012 onward. F 27 (blue impact of Free deliveries (red line) compared with matched control districts igure line), when Free deliveries was introduced in nov 2009 (orange line) 20 Lao PDR Economic Monitor - November 2012 iii. gender: redUcing VUlnerabiliTY, increaSing oPPorTUniTY gender equality is a core development objective. It is also smart economics. Greater gender equality can enhance productivity, improve development outcomes for the next generation, and make institutions more representative. As Lao PDR continues its development, the empowerment of women and girls will be key to translating the country’s economic growth and the energies of its young people into improved living standards that beneï¬?t women and men alike. Since the introduction of economic reforms in the mid-1980s, strong growth and development have lifted thousands of poor women and men out of poverty, changing traditional ways of life in Lao PDR. In this environment of change, gender relations — within the family, village and society at large — are changing too. how will gender equity be achieved as lao Pdr’s development continues? The 2012 joint World Bank and ADB Lao PDR Gender Assessment16 stresses two main messages: on the one hand, there is a need to focus on reducing gender inequality and vulnerability in remote rural areas that are home to smaller ethnic groups. These groups are at particular risk of being left behind during this period of rapid economic development. On the other hand, there is also a need to focus on increasing women’s ability to take full advantage, on equal terms, of the expansion of new economic opportunities in the market, particularly among women in urban, lowland areas. a key challenge for the government is to successfully manage development and poverty reduction efforts in a manner that is inclusive, pro-poor and gender-responsive. With economic change comes social change, in both the family and the community. New risks and emerging issues affect women and men differently, and will need to be addressed with appropriate services and skills that meet the needs of each gender. many of the gender issues cut across multiple aspects of social and economic life. This assessment presents gender issues into three main dimensions of gender equality – endowments, economic opportunities and agency – using the framework developed by the World Bank’s World Development Report on Gender. In addition to these three areas, gender issues related to emerging areas of development and growing risks are also considered. • endowments: Development challenges are inconsistent throughout the country due to myriad factors that include geographic to socio-cultural and linguistic barriers. Although strong government commitment to achieving gender equity has progressed, persistent imbalances remain in human development endowments such as in health and education. Chapter 1 of the Gender Assessment discusses these imbalances. 16 This is a summary from the report “Lao PDR Country Gender Assessment: Reducing Vulnerability – Increasing Opportunity.’ which is a joint World Bank (WB) and Asian Development Bank (ADB) assessment which synthesizes information and ï¬?ndings from recent literature and research on gender issues in Lao PDR for the ADB and the WB’s country partnership strategies. The assessment contributes to the work of the government and development partners by bringing the latest information on gender issues to the forefront. It reviews and updates the main gender issues that were outlined in the ADB’s 2004 Country Gender Assessment and in the 2005 Country Gender Proï¬?le prepared by the Lao Women’s Union and the Lao Gender Resource Information and Development (GRID) Center, supported by the World Bank. The assessment draws from existing sources of data and analysis to provide a broad multi-sectoral review. The lack of consistent and credible sources of data remains a signiï¬?cant challenge across all sectors in Lao PDR; this shortage is intensiï¬?ed for sex-disaggregated data and analysis. With this said, a number of important new issue-centered and sectoral analyses have recently appeared and have been integrated into the report. For more information, please contact Meriem Gray (Communications and External Affairs, World Bank Vientiane office, mgray@worldbank.org), Helene Carlsson Rex (Senior Social Development Specialist, hcarlsson@worldbank.org) and Philaiphone Vongpraseuth (pvongpraseuth@worldbank.org). The report will be available at www.worldbank.org/lao. 21 Sector Focus • economic opportunities: How will a growing economy ensure equity and inclusion? Chapter 2 questions the beneï¬?ts and risks of economic opportunities that range from an expanding private sector to the commercialization of agriculture, all realized through year-round access to roads and electricity. Without a doubt, the private sector is creating opportunities for entrepreneurs in Lao PDR, and 30-40 percent of these new entrepreneurs are women. With this said, emerging opportunities and new risks affect women and men differently, and need to be addressed in gender-informed and sensitive ways. • agency: Agency, or women’s voice and participation, has steadily advanced in Lao PDR. To begin with, women’s rights are recognized in the legal system, and women’s political representation in the National Assembly has grown nearly 20 percent since 1990. It is now among the highest in the region. However, as Chapter 3 demonstrates, women’s increasing representation within central government structures has not ï¬?ltered down to the provincial and local levels, where signiï¬?cant gender gaps in representation persist, despite the efforts of the Lao Women’s Union (LWU) to reach out to women from the national down to the village level. • emerging areas and growing risks: Lao PDR’s current growth environment hosts a number of emerging opportunities and threats. Chief among these are the potential challenges associated with regional integration and trade; the question of migration (and its mirror image of trafficking); and growing risks due to climate change. There remains an important role for public policies in lao Pdr aimed at reducing the most costly gender disparities that are non-responsive to growth and those that have a signiï¬?cant impact on vulnerable groups. Lao PDR is at a critical juncture to harness the power of its economic growth to improve its human development and to ensure that society can holistically beneï¬?t from its natural resources. To achieve these goals, it will be necessary to place gender equality and women’s empowerment at the center of national development plans. The following table summarizes the recommendations related to the above focus areas of endowments, economic opportunity, agency, emerging areas and overall gender mainstreaming. 22 Lao PDR Economic Monitor - November 2012 Endowments • recommendation 1.1: Increase coverage and quality of health services, with a focus on remote areas, particularly in areas of maternal health, sexual and reproductive health, and nutrition, and with attention to demand-side issues and the role of men in maternal health-seeking behavior. • recommendation 1.2: Improve access to education, through investments in rural schools and educational services, to reduce gender gaps, regional disparities, and gender stereotypes in secondary and tertiary education, vocational training, and adult female literacy. • recommendation 1.3: Increase access to clean water and sanitation, especially in rural areas, while ensuring women’s voice is reflected in design and maintenance. Economic Opportunities • recommendation 2.1: Pursue a labor-intensive growth strategy that expands wage labor opportunities for both women and men, especially in such emerging industries as tourism, garments, and food processing. • recommendation 2.2: Expand women’s access to and control over inputs for farm and non-farm enterprises, including ï¬?nance, land, agricultural extension, and business training. • recommendation 2.3: Improve gender mainstreaming in infrastructure investments, by expanding electricity access for female-headed households, and improving beneï¬?t-sharing and female participation in transport, hydropower, and mining operations. Agency • recommendation 3.1: Improve capacity and institutional support for gender mainstreaming machinery. • recommendation 3.2: Support progress in women’s representation in national and local government. • recommendation 3.3: Reduce incidence of violence against women through legal reform efforts, and efforts to increase public awareness, and capacity of health, law enforcement and protective services. Emerging Areas • recommendation 4.1: Through regional fora such as the GMS Working Group on Human Resources Development and the Coordinated Mekong Ministerial Initiative against Trafficking, support regional policy dialogue on enhancing women’s human capital base to gain opportunities and minimize risks from regional integration. • recommendation 4.2: Improve outcomes for vulnerable migrant populations through legal reform, improved services, and strengthened anti-trafficking mechanisms. • recommendation 4.3: Mainstream gender considerations into climate mitigation, adaptation actions and disaster planning, and ensure that women participate in related consultation and decision- making processes at local, regional and national levels. Gender Mainstreaming • recommendation 5.1: Use sex-disaggregated indicators and targets in planning, implementation, and monitoring, and strengthen capacity among GOL agencies in this area. • recommendation 5.2: Analyze gender trends with a view to interaction with existing rural/urban, regional and ethnic disparities in the country. 23 Annex anneX 1 – The global economic oUTlooK in SUmmarY (Percentage change from previous year, unless otherwise speciï¬?ed) 2010e 2011 2012e 2013f global conditions World trade volume 13.0 6.1 5.3 7.0 Consumer prices Advanced Economies 1/ 1.2 2.4 1.9 1.8 Commodity prices (percentage change of USD terms) Non-oil commodities 22.5 20.7 -8.5 -2.2 Oil price (percent change) 2/ 28.0 31.6 2.5 -3.4 London Interbank Offered Rate (%) on USD Deposits 0.5 0.5 0.7 0.8 on Euro Deposits 1.0 1.6 1.2 1.4 real gdP growth 3/ World 4.1 2.7 2.5 3.0 Advanced Economies 3.0 1.6 1.4 1.9 United States 3.0 1.7 2.1 2.4 Euro Area 1.8 1.6 -0.3 0.7 Japan 4.5 -0.7 2.4 1.5 Emerging and Developing Asian Economies 7.4 6.1 5.3 5.9 East Asia and Paciï¬?c 4/ 9.7 8.3 7.2 7.6 China 10.4 9.2 7.7 8.1 Indonesia 6.2 6.5 6.1 6.3 Thailand 7.8 0.1 4.5 5.0 South Asia 8.6 7.1 6.4 6.5 India 9.6 6.9 6.6 6.9 Latin America and the Carribean 6.1 4.3 3.5 4.1 Source: WB Global Economic Prospects (June 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) 24 Lao PDR Economic Monitor - November 2012 anneX 2 – lao Pdr aT a glance (Percentage change from previous year, unless otherwise speciï¬?ed) pre. Est Proj. growth and inflation 2009 2010 2011 2012 2013 Real GDP 7.5 8.5 8.0 8.2 7.5 Resource contribution 2.6 4.8 3.6 2.4 1.4 Non-resource contribution 4.9 3.7 4.4 5.8 6.2 Inflation (aanual average) 0.1 6.0 7.6 5.5 6.0 GNI per capita (Atlas method, US$) 900 1010 1130 1300 ... Public Finance (FY, % of gdP) Total revenue (including grants) 16.5 16.4 18.6 19.7 19.8 Domestic Revenue 14.4 14.5 16.5 17.2 17.7 Mining 2.1 1.6 2.8 3.3 3.9 Hydro 0.5 0.4 0.6 1.0 1.0 Grants 2.2 1.9 2.1 2.5 2.1 Total Expenditure 23.5 21.3 21.3 22.0 22.5 Current expenditure 11.4 10.3 10.4 10.8 13.0 Capital expenditure 11.1 9.8 9.3 10.4 8.4 Overall surplus/deï¬?cit -6.9 -4.9 -2.7 -2.3 -2.7 non-resoource domestic balance -11.8 -8.8 -8.3 -9.2 -9.7 non-mining domestic balance -11.3 -8.4 -7.7 -8.2 -8.6 balance of Payments (% of gdP, unless other wise speciï¬?ed) Current account balance -9.7 -6.2 -11.4 -16.3 -18.1 Resource current account 0.0 5.0 3.2 -0.1 -2.2 Non-resource current account -9.7 -11.3 -14.6 -16.2 -15.9 Exports of goods ($ million) 1489 2149 2619 2845 3003 o/w resource (% in exports) 62.4 68.3 68.3 71.6 71.6 Imports of goods ($ million) 2215 2573 3446 4162 4580 o/w resource (% in imports) 32.1 23.7 25.1 28.2 30.3 Capital account balance 8.4 7.6 10.8 15.7 19.1 o/w resource 8.7 6.5 9.2 10.8 13.0 Overall balance -1.3 1.3 -0.6 -0.7 1.0 external Public debt (% of gdP, unless other wise speciï¬?ed) Total external debt 102.3 87.1 82.8 87.8 94.6 Total Public Debt 62.4 59.6 52.8 52.2 50.5 Total external public debt (% of GDP) 56.0 50.3 44.3 43.8 43.1 Total public debt service (% of exports) 4.9 4.3 3.2 4.7 4.6 monetary Sector Reserves, excl. gold ($ million) 633 730 679 617 719 Months of imports of goods and services 3.3 3.2 2.3 1.7 1.8 Credit growth 90.7 46.0 38.2 32.9 26.5 Real Effective Exchange rate 118.1 122.3 127.2 .. .. memorandum items Nominal GDP (billion kip) 49,492 59,098 65,979 74,796 82,249 Nominal GDP (US$ millions) 5,812 7,156 8,194 9,430 10,411 Exchange rate (period average, kip per 1 US$) 8516 8259 8052 7932 7900 Source: Lao authorities, trading partners and staff estimates and projections 25 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 November 2012 Free coPY (NOT FOR SALE) 26 26