News Brief No. 02/90

News Brief: IMF Completes Second Review of Lao P.D.R.'s PRGF-Supported Program and Approves In Principle US$6 Million Credit

August 26, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the second 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 reviewed the country's Poverty Reduction Strategy Paper (PRSP) Preparation Status Report and 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 the 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 13.59 million (about US$18 million).

The Board's decision today will become effective after the World Bank's review of the PRSP Preparation Status Report, which is currently scheduled for August 28, 2002.

The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs will in time be 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., Deputy Managing Director and Acting Chairman, Eduardo Aninat, made the following statement:

"The Lao authorities have continued to make progress in implementing their three-year program, which seeks to improve the environment for high growth and poverty reduction. Economic performance under the first-year program was satisfactory, as macroeconomic stability was generally sustained, notwithstanding the recent pick up in inflation, which required expeditious corrective actions. Progress was also made in initiating structural reforms.

"Looking ahead, the effective implementation of fiscal and monetary measures will be crucial for strengthening macroeconomic stability. Strong revenue efforts and restraint of non-priority spending will be needed to meet near-term fiscal targets. The tax and customs departments will need to focus on large taxpayers, and develop a stronger central management, while the timely implementation of the VAT will be an important further step in securing a sustained improvement in revenue performance. Developing a medium-term plan to strengthen significantly public expenditure management will also be crucial, and should, in particular, aim at improving expenditure tracking and increasing fiscal transparency and accountability. The tightening of monetary policy should ensure that both central bank and state commercial bank credit are brought back under the program ceilings.

"The authorities now need to press ahead with the phased restructuring of the state commercial banks. Priority should be given to improving loan quality and strictly applying commercial lending criteria, as well as to strengthening banking supervision. The plan for the upfront restructuring of the insolvent Lao May Bank is welcome, and will need to be comprehensively implemented.

"Key next steps in reforming the large and heavily indebted state-owned enterprises include operational restructuring, significant asset sales, and price adjustments. It is expected that initial progress at commercialization will be followed by stronger participation of the private sector.

"The authorities' progress in preparing the National Poverty Eradication Program is encouraging, and the Executive Board considers that the PRSP Preparation Status Report provides a sound basis for continued concessional assistance from the Fund. Further steps should focus on prioritization of budget expenditures for pro-poor programs, and on upgrading the statistical base with external technical assistance," Mr. Aninat said.