Lao PDR:

A Discussion on
Macroeconomic implications of COVID-19

April 8, 2020

1
 Outline of Discussion

1. Recap of macroeconomic situation prior to crisis

2. Channels of Impact

3. Estimated impact

4. Government’s mitigation measures

 Recap of macroeconomic situation prior to crisis

Lao PDR’s macroeconomic situation had deteriorated significantly prior to COVID-19

which had heightened macroeconomic fragility:

1. Growth rate is declining and inflation rising;

2. Fiscal deficit and debt levels are on an upward trajectory;

3. Foreign exchange reserves critically low;

4. Government is increasingly finding it difficult to finance its deficit and

refinance its rising debt service burden

 Recap of macroeconomic situation prior to crisis
Growth was trending downwards, inflation upwards Fiscal deficit and Debt levels are trending upwards

External debt servicing burden is also trending upwards Foreign currency reserves remain critically low
 Channels of Impact
The extent of macroeconomic effects will depend on the duration, pervasiveness and
severity of the outbreak affecting Lao PDR.
Immediate impacts:

1. Depreciation of Kip and increase in kip/US$ spread

2. Falling commodity prices
3. Rising inflation rate due to (i) depreciation of currency; (ii) increase in food prices of certain goods
(pork, rice) and getting food to market challenges.
4. Income loss – decline in remittances; loss of employment

Direct sectoral impact Indirect impacts

 Tourism and hospitality  Trade & FDI inflows (particularly from China)
 Retail and wholesale trade  Remittance inflows – Thailand and other
 Transport countries
 Construction  Employment & poverty-inequality impact
 Mining and hydropower  Fiscal impact – Deficit, Debt and Financing
 Agriculture  Banking sector
 Manufacturing  Growth
Estimated impact (preliminary)
Estimated impact (preliminary)
 Government’s mitigation measures
1. Fiscal and Debt Management
 Converting debts to investments or selling some SOEs’ shares to reduce external debts,
 Deferred tax payments for COVID-affected businesses and
 Accelerating revenue mobilization (especially from those less affected taxpayers),
 Expenditure restructuring and prioritizing nearly-completed public investment projects and postponing new
infrastructure projects
 Saving non-wage recurrent spending (by 10 percent) to be used to fight against COVID-19.

Loss in revenue of Kip 5000 billion – deficit will increase and no fiscal space to undertake most of
these actions.

2. Monetary and Exchange Rate

 Interest rate cut for commercial bank borrowing
 Reduction of reserve requirement by BOL
 Speeding up ongoing negotiation with China to reach a currency swap agreement (for Lao Kip and Chinese
renminbi) between BOL and PBOC. The objective is to increase the country’s flexibility and access to foreign
currency (however, details of the agreement are still under negotiation).
 Reducing interest on banking loans

Given existing financial sector vulnerabilities => limited impact

Thank you for your kind attention!