Press Release No. 03/158

Press Release: IMF Completes Third Review of Lao P.D.R.'s PRGF-Supported Program and Approves US$6 Million Credit

September 15, 2003

The Executive Board of the International Monetary Fund (IMF) on September 12, 2003, completed the third review of the performance of the Lao People's Democratic Republic under a three-year Poverty Reduction and Growth Facility (PRGF—see Press Release No. 01/18) arrangement. The Board also approved a waiver for the performance criterion on external debt, and an extension of the PRGF arrangement for one year, through April 24, 2005.

In reviewing the country's Poverty Reduction Strategy Paper (PRSP) Preparation Status Report, the Board also determined that progress on the development of the full PRSP is satisfactory and provides a sound basis for continued access to the Fund's concessional financial assistance.

The completion of this review will enable Lao P.D.R. to draw an amount equivalent to SDR 4.53 million (about US$6 million) from the IMF, which would bring total disbursements under the arrangement to SDR 18.12 million (about US$25 million).

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper. This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.

After the IMF Executive Board's discussion on Lao P.D.R., Agustin Carstens, Deputy Managing Director and Acting Chairman, made the following statement:

"Under their PRGF-supported program, the Lao authorities have continued to make progress at strengthening macroeconomic performance and implementing structural reforms in key areas. Economic growth remains relatively robust and inflationary pressures have eased.

"The tax measures recently adopted by the authorities are important initial steps to strengthen the fiscal position, but further efforts are needed to generate additional resources for poverty reduction. In this connection, it will be essential to implement fully the planned institutional reforms in the tax, customs, and treasury areas. However, care will need to be exercised in designing the implementing regulations for new tax incentives in order to avoid undermining revenue raising efforts. On the expenditure side, the priorities include strengthening management and efficiency by tightening the procedures for monitoring and ensuring accountability. These actions will help to better assess and formulate cost-effective poverty programs. Continued strengthening of the fiscal position will also require closer monitoring of the external debt, especially debt contracted by the state-owned enterprises.

"The central bank has continued to pursue appropriate monetary and exchange rate policies, which have contributed to an easing of inflationary pressures. It will be important that state commercial banks remain prudent in granting new credits so as to strengthen their loan portfolios.

"Regarding structural reforms, the authorities have made a start on state bank restructuring, including improved credit appraisals and the stricter enforcement of loan repayments. Greater competition in this sector, and enhanced banking supervision, will provide further impetus to these reforms. To address the vulnerabilities identified in the safeguard assessment report, it will be important that the central bank continue to improve its accounting system, and conduct an audit of its accounts for 2003 in line with international standards. In the state-owned enterprise sector, there is a pressing need to speed up the pace of reform, including by establishing hard budget constraints, divestiture, and a strengthening of management—including through partnerships with the private sector.

"The authorities are moving toward a full Poverty Reduction Strategy Paper (PRSP), and the PRSP preparation status report provides a basis for continued concessional assistance to the Lao P.D.R. by the international community. The Fund looks forward to the final PRSP, expected by late 2003," Mr. Carstens said.