Language:
English
Pages:
1 Online-Ressource
Series Statement:
Economic Updates and Modeling
Keywords:
Debt
;
Economic Forecasting
;
Economic Growth
;
Fiscal Developments
;
Inflation
;
Macroeconomics and Economic Growth
;
Real Sector
;
Revenue Mobilization
Abstract:
Despite persistent macroeconomic instability, economic growth continued to recover in 2023, underpinned largely by a steady improvement in the service sector. GDP growth is forecast at 3.7 percent in 2023, slightly down from the projection in May 2023, primarily reflecting higher-than-expected kip depreciation and inflation, labor shortages, and unfavorable weather. Nevertheless, growth is still expected to have picked up in 2023, when compared to 2.7 percent in 2022, owing to tourism, transport and logistics services, and foreign investment. However, merchandise export growth has been muted, partly affected by higher business costs, labor shortages, and lower external demand. The Lao kip continued to depreciate in 2023, driven by debt pressures and external imbalances. On the official market, the kip weakened by 30 percent and 35 percent on average against the Thai baht and the US dollar during January-October 2023, if compared to the same period last year. As banks continue to ration access to foreign currencies at the official rate, the parallel market premium has risen to about 15 percent for the US dollar and 8 percent for the Thai baht. While the US dollar has strengthened over the past few years, domestic structural imbalances have played a much greater role in driving depreciation. The large external debt service burden (despite deferrals of principal and interest payments) and rising imports continue to exert pressure on forex demand, while official reserves remain low. Recent monetary and foreign exchange management measures have included increases in the policy rate, reserve requirements, issuance of kip savings bonds, closure of foreign exchange bureaus, implementation of repatriation requirements for exporters and increased official exchange rate flexibility. However, since these measures are not addressing the root causes of depreciation, they have had only a limited and temporary impact in easing exchange rate pressures. Restoring macroeconomic stability requires a strong commitment to ambitious reforms in five crucial policy areas: (i) raising public revenue to protect spending on education, health, and social protection; (ii) improving the governance of public and public-private investment; (iii) restructuring public debt; (iv) strengthening financial sector stability; and (v) improving the business environment to promote investment and exports. In addition, improving the availability, timeliness, and quality of data is essential for informing evidence-based policy making. Finally, while domestic reforms are critical, they are not sufficient to restore fiscal and external sustainability without addressing the underlying solvency issues through adequate debt treatment
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