Lao National Assembly warns govt on possible impacts of high debt
Vientiane (Vientiane Times/ANN) - National Assembly (NA) of Laos has expressed its concern about high public debt in Laos and has warned the government not to operate any projects without its approval.
The Assembly drew up a resolution at the closing ceremony of this month's session on Wednesday, which noted that public debt was already high.
The Assembly asked the government to take this matter into consideration, with members saying that operating projects without NA approval could lead to chronic debt, which may spiral out of control and lead the country into recession.
Spelling out its resolution, the NA asked the Ministry of Planning and Investment to consider any projects that have not yet been approved and put them in the plan for this fiscal year.
Assembly members observed that many provinces allow private companies to develop transport infrastructure using their own capital, which the authorities then repay at a later date.
Government officials de-fended this practice, saying it was important to carry out some projects before seeking NA approval as those projects were very important for the country's development and to sustain local people's livelihoods.
For instance, the Khammuan provincial authorities gave permission for companies to spend 3 billion kip to repair irrigation systems damaged by widespread flooding this year. If the authorities hadn't taken this step, the impact could have been much worse.
Lao economist Dr Liber Libuapao said that allowing private companies to carry out work helped to boost economic growth and national development, but the government needs to prioritise projects that are essential for the well-being of the Lao people.
He agreed that the government can allow companies to help in building irrigation or other infrastructure to facilitate productivity and ease poverty in local communities.
Dr Liber said it was also important that the government identify a source of income to pay off its debts, otherwise the country could run into financial problems.
"The most important thing is that we have to be ready to deal with debt," he said, saying that less important projects should be postponed.
According to the Ministry of Finance, public debt in Laos stands at about 45 percent of Gross Domestic Product (GDP).
Dr Liber said public debt has reached an alarming level and all sectors need to turn their attention to managing the situation.
One of the least developed countries in Asia, Laos started out with no infrastructure following liberation in 1975, so the need for rapid development is great.
This month's NA session also approved an increase in the budget deficit for this fiscal year from 2.1 trillion kip (US$263 million) to 3.21 trillion kip, equating to 4.6 percent of GDP, and an increase in budget expenditure from 17,831 billion kip to 18,977.4 billion kip, to maintain economic growth.
The Lao economy is growing at about 8 percent annually but the country mainly relies on Overseas Development Assistance and natural resources, which are considered unsustainable sources of revenue.
Lao PDR 1. Debt Burden 118. Lao PDR’s total external debt is now about $3 billion, or slightly higher than 170% of GDP (Table A2.13). At face value, this appears to be a significant debt burden. But more than half of Lao PDR’s total debt is with Russia, and is not being serviced. Lao PDR has long been negotiating with Russia on final disposition of this debt. In June 2003, the two governments agreed in principle to (i) write off 70% of the debt owed to the Russian Federation, and (ii) service the remaining debt of $380 million over a 33-year period at a preferential interest rate. This is consistent with the terms of Russia’s memorandum of understanding as a creditor in the Paris Club. A specific agreement relating to the interest rate, grace period, flow rescheduling, and payment modalities (cash, goods, and\or investment) is still pending. 119. Of the remaining debt in convertible currency, less than 5% is commercial, and the rest is long-term concessionary with bilateral and multilateral donors. Counting only debt in convertible currency, the debt stock is less than the country’s GDP, and has remained at or below 70% over the past few years. In nominal terms, this amount to about $1.2 billion or $700 million in net present value terms. For a transitional economy seeking rapid economic development, this ratio should appear neither surprising nor unwarranted, as long as borrowed resources are used productively. Compared with the other PRGF-eligible countries, this ratio would place Lao PDR in the bottom half. Before resolution of the Russian debt, Lao PDR ranked 14th highest of the 78 PRGF-eligible countries. Although the debt-to-exports ratio has stabilized in recent years, it remains high. The ratio of debt to government revenue has also declined, but at more than five times revenue it remains disturbingly high. Lao PDR has had long-standing problems with revenue collection. The country has recently instituted measures to address the problem, so hopefully the ratio will decline over time. 2. Debt Service 120. The debt stock may appear somewhat high, but various flow measures relating to debt servicing confirm that it remains manageable. The debt service ratio remains low at about 8% of the country’s exports of goods and services (Table A2.14). Lao PDR’s debt service ratio is within the 20% of countries with the lowest debt service ratio. The reserve coverage ratio also remains healthy, at about 5. None of the Russian debt was being serviced prior to the agreement reached in June 2003, so Lao PDR’s debt servicing burden will probably increase slightly because a small portion of this debt soon must be serviced. The average interest on new commitments remains low, at 1.2% in 2001. An average grace period of almost 9 years will provide breathing space 24 (Table A2.15). If the Nam Theun 2 hydropower project and the OXIANA mine of the Lane Xang Mineral Co. begin to generate revenue, the debt service burden as a share of exports is likely to diminish considerably. If the project materializes, Nam Theun 2 is expected to generate about $30 million per year for 10 years, starting in 2009. Afterward, the revenues will increase sharply as the share going to the Government increases. 121. Lao PDR is officially classified as an HIPC (highly indebted poor country) when the Russian debt is included in its debt burden. The Government believes that Lao PDR is able to comfortably service its debt, and the country has not sought debt relief. The recent in-principle agreement reached on the Russian debt further reinforces this position. Even before the agreement, Lao PDR’s inclusion in the HIPC list was borderline. Once the agreement is implemented, Lao PDR should no longer be classified an HIPC country.
