Lao PDR economic monitor : recent economic developments

The Lao economy has performed relatively well in the midst of the global financial crisis, supported by higher than initially forecasted commodity prices and significant expansion in public outlays which have acted as a fiscal stimulus. The impact of the global financial crisis is felt through declining commodity export earnings, reduced Foreign Direct Investment (FDI) inflows and remittance income, as well as a decline in non-resource exports, especially agriculture. Real gross domestic product (GDP) growth in 2009 is projected to slow to about 6.4 percent, as the impacts of the global financial crisis are felt in the domestic economy. This impressive growth rate, the second highest in the East Asia region after China, was possible for the following reasons: first, the Laotian economy is relatively insulated from the global financial system and its exposure to global trade is relatively limited, thereby mitigating the direct impact of external shocks. Second, it has benefited from a sustained demand for exports (minerals from China, garments from Europe, electricity from Thailand) and for tourism services, and from lower energy (fuel) prices. Third, a significant fiscal stimulus also contributed in 2009 to sustain economic growth and to compensate for the decline in foreign investment. This fiscal stimulus was driven by increased on-budget expenditures (wages and domestic capital spending) and by off-budget quasi-fiscal spending by the Bank of Laos financing local public infrastructure projects.