Recent Developments
- Lao PDR has so far avoided a health crisis, but it has not been immune from the global economic downturn. The COVID-19 induced economic downturn has affected Lao PDR through multiple channels including tourism, trade and investment, commodity prices, exchange rates and lower remittances.
- Lao PDR¡¯s economic growth in 2020 is projected to range between negative 1.8 and 1 percent due to the impact of the COVID-19 pandemic and the measures adopted to contain its spread. The economic downturn has particularly affected the service sector.
- The spread of COVID-19 and containment measures will further aggravate the long-standing structural macroeconomic vulnerabilities of Lao PDR. These vulnerabilities stem from high fiscal deficit and public debt levels as well as low reserves buffers.
- A sharp drop in the performance of the travel, tourism and hospitality sectors ¨C which account for 11 percent of total employment and 22 percent of employment in urban areas ¨C has caused widespread job losses. Between 96,000 and 214,000 additional people are projected to fall into poverty as a result of the pandemic.
- Since the outbreak, more than 100,000 migrant workers have returned, resulting in an estimated reduction of up to US$125 million in remittances, affecting recipient household income, particularly in rural areas.
- The impact of the COVID-19 pandemic will increase the fiscal deficit in 2020 to between 7.5 and 8.8 percent of GDP, from 5.1 percent of GDP in 2019. Consequently, debt levels are expected to increase to between 65 and 68 percent of GDP in 2020, from 59 percent of GDP in 2019, which will generate higher debt service obligations.
- The financial sector entered the COVID-19 crisis with considerable pre-existing vulnerabilities. The capital adequacy ratio significantly declined ¨C from 18 percent in 2018 to 12 percent in 2019. Nonperforming loans (NPLs), as of the end of March 2020, remained at 3 percent. However, the significant slowdown in economic activities due to the COVID-19 impact implies a higher level of NPL, which could in turn further weaken banks¡¯ balance sheets and constrain credit and growth.
Outlook and risks
- The economic outlook will depend on the depth and duration of the global outbreak and the effectiveness of domestic economic relief measures. Although subject to high uncertainty, growth is expected to gradually rebound to an average of 4.5 percent over the next two years under the upside scenario. However, under the downside case, growth would rebound to an average of 2.5 percent over the next two years.
- The medium-term outlook is characterized by significant downside risks. These include: (i) a more prolonged and/or severe outbreak of COVID-19 either globally, regionally, or domestically, exacerbated by a more sluggish recovery in Lao PDR¡¯s key trading partners; (ii) heightened challenges in meeting public external debt service obligations; (iii) adverse weather-related events; and (iv) more significant impacts on the private sector, which could cause liquidity problems in business and defaults, exacerbating the already fragile fiscal situation and further weakening the financial sector.
Policy response
- Policy options to mitigate the impacts of the COVID-19 outbreak should provide immediate economic relief while supporting recovery and fostering resilience in the medium and long-terms.
- Given the limited fiscal space, it is important to reprioritize spending and mobilize additional resources to support well-targeted social assistance to affected households and businesses.
- Accelerating revenue administration reforms would be essential to build the fiscal space for the government to mitigate shocks. Engaging in restructuring of external debt could help alleviate some of pressure on the debt service in the medium term.
- In the longer term, accelerating reforms to promote diversification and improve competitiveness in the private sector, supported by improved connectivity, will be important to strengthen economic and social resilience.
- More and better investment in human capital and social protection can also improve households¡¯ ability to handle the impacts of shocks.
- The report presents a special thematic section on ¡°Building a resilient health system for health emergency: Addressing system constraints for improving financing and service delivery¡±
- As the COVID-19 outbreak continues to rapidly evolve, the country needs to invest in building a resilient health system to effectively respond to COVID-19 and other health emergencies while maintaining essential health services for all during the crisis.
- As the country anticipates the budget impact of COVID-19, it is important to protect regular health budget while mobilizing additional resources for the COVID-19 response. Failure to rapidly mobilize financing and coordination of response across sectors would result in adverse health and socioeconomic consequences.
- Early evidence suggests that the COVID-19 outbreak has affected essential service delivery and disproportionately impacted women as well as poor and vulnerable groups who had inadequate access to quality health care services even before the outbreak. Providing financial protection and ensuring access to essential health services for those most vulnerable groups need to be prioritized to mitigate the impact of COVID-19.
- Existing public financial management (PFM) bottlenecks in the health system can become major constraints for timely reallocation and release of public funds to frontline for emergency response. Addressing key PFM challenges affecting service delivery will help shape the implementation of immediate response measures for COVID-19 and accelerate the health sector reforms to achieve Universal Health Coverage and the Sustainable Development Goals.