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Gross Domestic Product and Other Macro-Indicators

GDP growth, which had averaged seven percent for the past six years, slowed in 1998 to four percent, the lowest rate since 1991. Although the Lao People’s Democratic Republic has experienced positive GDP growth since the early days of reform in 1989, government efforts to diversify its narrow manufacturing base—most of which relies on imported inputs have progressed slowly. Moreover, although both the industrial and service sectors’ share of GDP continue to grow annually (by 8.5 percent and 4.8 percent, respectively, in 1998), more than 85 percent of the Lao population remains engaged in subsistence agriculture.
The Lao economy is based primarily on agriculture, with 80 percent of the population employed in agriculture, forestry, and fisheries. The country's gross domestic product (GDP) is thus heavily reliant upon a good harvest, but other key contributors to GDP are exports of hydroelectricity and garments. Agriculture accounted for 51 percent of GDP in 1999, with industry comprising 22 percent and services at 27 percent. The Lao People's Democratic Republic's GDP grew at impressive rates in the mid-1990s until the Asian economic crisis slowed growth in 1998 to four percent (see Table 1). The four percent growth rates of 1998 and 1999 were bolstered by a strong performance in agriculture, which benefited from a major government irrigation programme and the rebound in garment production largely due to increased penetration of European markets. Like most countries in the region affected by the crisis, the projected growth rates are a modest 4.5-5.0 percent for 2000 and 2001, and the Lao People's Democratic Republic's economic recovery is naturally intertwined with its neighbours' recovery, particularly Thailand.

Table 1. Major economic indicators 1997-2001 (percent)

Item 1997 1998 1999 2000* 2001*
GDP growth 6.9 4.0 4.0 4.5 5.0
Gross domestic investment/GDP 26.2 26.1 23.7 24.0 25.0
Gross savings/GDP 9.4 15.5 13.4 13.0 13.0
Inflation rate ( consumer price index)a 26.6 142.0 86.7 30.0 10.0
Money supply (M2) growth 65.8 113.3 86.3 50.0 30.0
Fiscal balance/GDP b -8.8 -13.9 -9.3 -8.5 -8.0
Merchandise exports growth -1.2 7.7 2.9 5.0 6.0
Merchandise imports growth -6.0 -14.7 -2.9 7.0 6.5
Current account balance/GDPc -16.8 -10.6 -10.3 -11.0 -12.0
Debt service/exports 9.0 11.1 12.0 12.5 12.0
Sources: Bank of Lao People’s Democratic Republic; IMF; Ministry of Finance; National Statistical Centre
Notes: figures for 1999 are preliminary estimates

* Estimates for 2000 and 2001
a. End of period
b. On a fiscal year basis ending 30 September; exclude official transfers
c. Excludes official transfers
Services represent about 28 percent of GDP and output in this sector grew by 4.8 percent in 1998. The nascent tourism industry is among the fastest-growing areas in this sector, generating nearly US$80 million in revenue in 1998. The Lao government expected revenue to grow by 15 percent in FY 1999-2000, when the country launched an official tourism promotion programme.
Industrial output grew by 8.5 percent in 1998 and represented 21 percent of GDP. Electricity generation, boosted by the completion of a 210 megawatt (MW) power plant, jumped by 63 percent that year, while manufacturing went up by almost 10 percent and mining by around 14 percent. Construction on the other hand declined by 20 percent during the year.
Agriculture, which accounts for 51 percent of GDP, grew by nearly four percent in 1998.
Livestock production increased by more than six percent, while rice production went up by 2.5 percent. Timber production, in contrast, declined by more than four percent for the year. The country's fiscal performance improved in 1999 largely as a result of the government reduction in public investment from 14 percent in 1998 to 9.3 percent in 1999. Revenues also improved to about 11.3 percent because of improvements in both tax and non-tax revenue collections. At the same period, the government reduced current expenditure from 7.1 percent in 1998 to 5.5 percent in 1999.
After reaching manageable inflation rates of less than 10 percent from 1992-1996, the Asian economic crisis and subsequent currency depreciation (especially due to the Thai baht) fueled inflation in 1998 to 142 percent. The rate fell to around 87 percent in 1999, but the forecast for 2000 and 2001 predicts a further drop to 30 percent in 2000 and 10 percent in 2001.
Both the current account and trade balance improved in 1998 largely due to the currency depreciation. Improvements in some macroeconomic indicators such as the current account balance continued in 1999, but with the heavy reliance on imports, the trade related indicators are not expected to improve in 2000 and 2001 (see Table 3).
The Lao People's Democratic Republic relies heavily on official development assistance for meeting its budget expenditures. Foreign aid averages US$150 million a year (around 45 percent of the annual budget), with around 70 percent of this deriving from the major multinational agencies such as the Asian Development Bank, International Monetary Fund, United Nations Development Programme, UNICEF. Bilateral assistance is also an important component of the annual budget, and the Lao People's Democratic Republic received a major boost in 1995 when the United States lifted aid restrictions. The major bilateral donors are Japan, Australia, Sweden,
France, Germany, and the US. Foreign direct investment and official development assistance disbursements increased slightly in 1999 whilst the gross official reserves increased from US$112.8 million to US$115.9 million. As a result of the high levels of foreign aid and improved fiscal management, the Lao People's Democratic Republic has a low and manageable foreign debt.
As one of the world’s poorest countries, the Lao People’s Democratic Republic receives extensive foreign assistance (both loans and grants) from a range of multilateral and bilateral sources, amounting to 44 percent of the national budget in 1997. In 1998, however, foreign aid, which had financed the budget deficit in previous years, declined from the previous year. In 1998, recorded disbursements of grants and loans were US$74 million and US$151 million respectively, compared with 1997 disbursements of US$98 million in grants and US$275 million in loans.
The Lao currency has had a floating exchange rate since 1995, when the exchange rate was 804 kip to the US dollar. The currency declined sharply between June 1997 and June 1999 because of its close link with the Thai baht and ended up losing 87 percent of its value (see Table 2). As of November 2000, the currency stands around 7,900 kip to the US dollar. The currency has remained steady at this level for much of 2000. Two positive outcomes of the currency depreciation are that it boosted exports and reduced imports.

Table 2. Average exchange rate of the Lao kip to US$, 1995 - 1st half of 1999 

Country 1995 1996 1997 1998 1999
Lao People’s Democratic Republic 804.69 921.14 1,256.74 3,299.2 5,967.25
Source: ASEAN Secretariat, Statistics of Foreign Direct Investment in ASEAN, 1999 

The forecast for 2000 and 2001 is generally optimistic. Growth in agriculture is expected to continue with the support of continued investment in irrigation, while export earnings from hydropower are expected to rise as Thailand's energy consumption returns to pre-crisis levels. Furthermore, inflation rates should continue to decline, as currencies become more stable in the region.

Main Economic Sectors

Since the economic reform movement commenced in the late 1980s, the Lao People's Democratic Republic’s economy has made noticeable improvements in terms of growth rates and opportunities for a variety of commercial activities. However, overall the Lao economy remains heavily oriented towards agriculture and has a narrow manufacturing and services base despite attempts to promote industry. Agriculture continues to account for more than 50 percent of GDP, and the heavy reliance on imported goods shows few signs of ending any time soon.

Agricultural

The agricultural sector remains the most important sector for the Lao People’s Democratic Republic’s economy, and as a result the government has paid much attention to upgrading its production technology, infrastructure network, and human resource development. Agriculture, which accounts for 51 percent of GDP, grew by nearly four percent in 1998. Also in that year, livestock production increased by more than six percent. Glutinous rice is the primary crop grown throughout the country, but other important crops include maize, sugar cane, root crops, beans, tobacco, cotton, fruits, tea, and coffee.

Forestry

Unlike many of its neighbours, the Lao People's Democratic Republic retains much of its virgin forest. Over two-thirds of the country is still covered by forest, which renders timber and wood products a major industry and earner of foreign exchange. Wood products comprised nearly 35 percent of the Lao exports in 1997. Approximately 85 percent of the country's wood products are exported to Thailand and Japan. In effort to preserve much of the natural forest cover, the government restricts the amount of timber that can be felled each year. Also, unprocessed logs are forbidden for export.

Minerals

The Lao People's Democratic Republic is blessed with a number of minerals, including gypsum, tin, copper, gold, coal, zinc, phosphorite, and iron ore. Much of the mineral wealth is still untapped, and thus the minerals sector will certainly increase its importance to the economy in the years to come. Oil exploration has also begun mainly in the southern part of the country.

Hydropower

The Lao People's Democratic Republic is one of the world's greatest sources of hydropower potential. Currently the country has approximately 202 MW of installed capacity, but it has plans to increase to over 7,000 MW by 2009. Most of the electricity generated comes from the Nam Ngum dam near Vientiane, although over 20 power stations are in the process of being constructed or already on line. Electricity is exported solely to Thailand via high power lines across the Mekong River, and up until the drop in demand by Thailand during the crisis, electricity was one of Lao People's Democratic Republic's major foreign exchange earners.

Tourism

Lao People’s Democratic Republic possesses great natural beauty, with tracts of forests, mountains, and spectacular waterfalls. Together with its historical, cultural and artistic heritage, the country has much to offer to tourists. As a result, the tourism sector has become a promising industry for the Lao People's Democratic Republic and the supporting tourism infrastructure in terms of hotels, guesthouses, etc. is gradually emerging.
Since 1990, 34 projects worth over US$600 million have been approved in the tourism sector, averaging 50 percent growth per year over that period. National revenue from tourism reached almost US$80 million in 1998, bypassing garments for the first time. The number of tourists increased tremendously during the 1990s. In 1991, a mere 14,400 tourists visited the country compared to 403,000 in 1996. 1999-2000 was been proclaimed as "Visit Laos Year" to further boost tourism, and the government anticipated that over 780,000 visitors would arrive.

Trade

Since the Lao People's Democratic Republic adopted a new economic policy in 1986, economic relations with foreign countries have been widely expanded in line with the government policy of opening up the country.
The Lao People's Democratic Republic imports more than twice as much as it exports, relying upon its neighbours (primarily Thailand) for even basic consumer goods and some food supplies, giving the country a negative trade balance that represented 16.5 percent of GDP in 1998. The Lao government is trying to diversify its trading and investment partners, especially among the other nations of the region. Following its admission to ASEAN in 1997, the Lao People’s Democratic Republic applied for membership in the World Trade Organization (WTO) in 1998. Although the United States is the second largest source of foreign investment in the Lao People’s Democratic Republic (following Thailand), bilateral trade remains limited due in part to the lack of normal trade relations (NTR) between the two nations. Imports from the United States for 1998 totaled US$4 million, with chemicals used in industrial processing the leading import item.
Exports from the Lao People’s Democratic Republic for the same year totaled US$21 million, with garments topping the list. The country’s leading exports, in descending order, are garments, wood and wood products, minerals such as tin and gypsum, hydroelectricity, and coffee. Electricity exports experienced the sharpest rise in 1998, increasing nearly 220 percent, while coffee exports grew by 150 percent. The range of goods manufactured for export is limited primarily to garments, wood and rattan products, and handicrafts. Fuel is the leading import item.

Exports

Before the impact of the economic crisis, Lao exports had seen a steady increase throughout the 1990s (see Table 3). In 1997, before the brunt of the crisis was felt, the Lao People's Democratic Republic exported nearly US$317 million. The value of exports fell the following year to US$251 million before rebounding in 1999 at US$271 million. As seen in Table 1, garments, wood products, gold re-exports, and hydroelectricity are the leading export items. The growth in garments is a consequence of the substantial inflow of foreign investment in the garments sector.
Investors in garments took advantage of the Generalized System of Preference (GSP) trade privileges with the European Union.

Table 1. Main exports, 1993-1997 (in millions of US dollars)

Export Item 1993 1994 1995 1996 1997
Garments 49.0 58.2 76.7 64.0 90.5
Wood & wood products 65.8 96.1 88.3 125.0 89.7
Gold re-exports 4.2 18.8 21.9 15.2 41.5
Hydroelectric power 19.6 24.8 24.1 30.0 20.8
Coffee 4.1 3.1 21.3 25.0 19.2
Other manufactured goods 38.1 36.3 43.4 27.9 15.2
Total exports 240.5 300.4 312.8 320.7 316.9
Source: Economist Intelligence Unit and International Trade Centre UNCTAD/WTO Sept. 1999 

Figure 1 shows the leading export items for 1998. Wood products far surpassed other items including garments to once again become the leading export category.

Figure 1. Exports by commodity, 1998


Source: EXIM Bank of Thailand

Currently, the Lao People's Democratic Republic has trading relations with more than 30 nations. Trade volume has increased by an average of 18.7 percent a year. At present, the most important trading partners are mainly Asian and Pacific nations such as Thailand, Vietnam, Japan and China. The United States has not yet extended NTR to the Lao People’s Democratic Republic. The two countries signed a Bilateral Trade Agreement that will take effect once NTR status has been granted by the US Congress. The bilateral trade agreement was concluded in August 2000. Among the elements of the agreement are limitations on the use of non-tariff impediments to trade, specific commitments to market access in a broad range of service sectors, and comprehensive commitments to protect all forms of intellectual property, and enforcement requirements against intellectual property piracy.
On becoming a member of ASEAN in 1997, the Lao People's Democratic Republic committed to bringing all of its tariffs in line with its ASEAN Free Trade Area (AFTA) commitments by 2008. The following countries have granted Most Favored Nation status to the Lao People's Democratic Republic: People's Republic of China; Myanmar; Thailand; the European Union; and Russia. The Lao People's Democratic Republic has signed trade agreements with 2 countries, most recently with the United States.

Figure 2. Leading trade partners, 1997


Source: EXIM Bank of Thailand
 

Imports

The Lao People's Democratic Republic is heavily dependent on imported finished goods as a result of its small manufacturing base. Imports rose continuously throughout the 1990s until the Asian economic crisis struck in 1997 (see Table 2), when a three-year decline in the value of imports began. From 1997 to 1998, imports fell from nearly US$648 million to US$596 million, and then dropped to US$497 million in 1999.

Table 2. Main imports 1993-1997 (in millions of US dollars)

Imports 1993 1994 1995 1996 1997
Consumer goods 224.7 276.5 283.8 308.0 267.7
Investment goods 113.8 146.1 189.3 277.0 226.8
Construction & Electrical equipment 48.9 67.7 78.8 101.2 82.8
Intermediate goods 77.7 90.8 79.6 82 98.6
Inputs for garment Industry 36.2 51.3 66.3 70.0 73.7
Motorcycle parts 27.0 34.6 13.3 12.0 24.9
Gold & Silver 12.9 46.8 29.5 18.8 50.4
Total Imports 431.9 564.1 588.8 689.6 647.9
Source: Economist Intelligence Unit (EIU)

Major imports are consumer products, equipment and machinery for construction works and agriculture, material for the garment industry, electrical appliances, medicine, and fuels. Figure 3 shows the breakdown of imports for 1998.

Figure 3. Imports by commodity, 1998


Source: EXIM Bank of Thailand
For years Thailand has been the principal supplier of imports to the Lao People’s Democratic Republic, typically accounting for over half of all goods imported. Other main sources of imported goods are Singapore, China, Japan, Vietnam, and Myanmar, but individually these countries comprise only a small share of Lao imports.

Foreign Investment

The Lao People's Democratic Republic first opened to foreign investment in 1988. Foreign investment since the beginning has been dominated by Thailand both in terms of the number of projects and their monetary value. Table 1 shows the top fourteen foreign investors between December 1988 and January 2000.

Table 1: Foreign investment in the Lao People's Democratic Republic by country of origin

Country Number of Projects Amount of Capital ($US million)
Thailand 257 2,932
United States of America 46 1,491
Republic of Korea 34 634
Malaysia 19 290
China 72 86
United Kingdom 18 69
Taiwan Province of China 35 67
Australia 44 42
France 90 38
Hong Kong 20 26
Singapore 17 20
Russia 15 19
Japan 27 18
Viet Nam 20 14
Total* (including other countries)    7,058
Source: Foreign Investment Management Committee

* Includes Lao investment in joint ventures
The Lao People’s Democratic Republic reached a bilateral investment guarantee treaty with the United States. The treaty, which is the first of its kind for the United States with a South-East Asian country, is pending the advice and consent of the United States Senate. The investment treaty guarantees investors of each country the right to invest in the other country on terms no less favorable than those accorded domestic or third-country investors in most sectors. It also guarantees the free transfer of capital, profits and royalties, freedom from performance requirements that distort trade and investment flows, access to international arbitration, and internationally recognized standards for expropriation and compensation. 
Data on foreign investment by sector reveal that electric power is the by far the leading sector in terms of capital cost, accounting for nearly 64 percent of the total amount of foreign investment.
However, the services sector has attracted the largest number of projects from foreign investment (150). Table 2 shows the number of projects and amount invested by sector between December 1988 and January 2000.

Table 2: Foreign investment in the Lao People's Democratic Republic by sector, December 1998-January 2000 

Country Number of Projects Amount of Capital (US$ million)
Agro-business 88 135
Textiles and garments 79 73
Industry and handicrafts 141 516
Wood industry 37 167
Mining and oil 33 139
Trading 117 69
Hotel and tourism 35 601
Banking and insurance 12 84
Consultancy 34 7
Services 150 63
Construction 39 65
Telecom. and transport 16 638
Electric power 7 4,500
Total 788 7,058
Source: Foreign Investment Management Committee

National Economic Policies and Priorities

In 1986, the government of the Lao People’s Democratic Republic embarked on the “New Economic Mechanism” (NEM) in an attempt to transform the country into a market economy. The NEM represented the transformation of the economy from a state planning model to a market oriented economy. Subsequently, additional laws have been passed to support the NEM, including a business law in 1994 and a domestic investment law in 1995. The transformation of the economy is evidenced by the fact that approximately 90 percent of state-owned enterprises have been converted to another system of management (many via leases) or liquidated. The old state planning legacy has not been entirely disbanded, however, as the government still sets production targets for the agricultural sector, as well as for some other industries, and controls the price on a few essential goods such as cement and gasoline.
In an effort to reduce the country’s import dependency and trade deficit, the government is seeking ways to promote production for domestic consumption and for export, especially in targeted sectors such as agriculture, construction materials, and light industry. To achieve these objectives, the government encourages import companies to also develop plans for increasing or initiating domestic production.
The economic reform process is ongoing in the Lao People's Democratic Republic, and thus as part of its aim to strengthen the macroeconomic fundamentals of the country, the government intends to accomplish the following:
• Improvement of the banking sector performance by full interest rate liberalization, introduction of new monetary instruments, stabilization of exchange rates and inflation, enhancement of credit and saving mechanisms, and reinforcement of the Bank of Lao People’s Democratic Republic’s supervisory capacity.
• Enhance fiscal discipline by improving revenue collection and expenditure rationalization through the development of a multi-year integrated macro-economic framework.
• Strengthen the government organizational structure to foster better coordination among the various layers of administration.
• Continue decentralization at the provincial and district levels while also strengthening their institutional development.
• Improve the legal and regulatory frameworks to enhance private sector development.
• Establish planning and evaluation departments in a number of major ministries.
• Participate more fully in ASEAN and ensure the timely implementation of ASEAN obligations such as the ASEAN Free Trade Area (AFTA).
In addition to the aforementioned policy priorities, the current Socio-Economic Development Plan (1996-2000) targets eight areas for reform and assistance:
1. Food production
2. Commercial production
3. Shifting cultivation stabilization
4. Rural development
5. Infrastructure development
6. External economic relations
7. Human resources development
8. Services development
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