LAOS: PM TALKS ECONOMY AT OPENING OF NATIONAL

UNCLAS VIENTIANE 000306 SENSITIVE SIPDIS STATE FOR EAP/MLS STATE PASS TREASURY FOR SUSAN CHUN STATE PASS COMMERCE FOR HPPHO E.O. 12958: N/A TAGS: ECON EFIN EINV EAID PREL LA SUBJECT: LAOS: PM TALKS ECONOMY AT OPENING OF NATIONAL ASSEMBLY REF: VIENTIANE 264 -------------- -------------- GOL Sees Lao Economy Brushing Off Great Recession -------------- -------------- ¶1. Prime Minister (PM) Bouasone Bouphavanh's address at the opening of the National Assembly (NA) on June 22, attended by the Ambassador, focused on Laos' economic situation in light of the global economic crisis and widespread flooding that hit Laos in August 2008. Of note was the PM's declaration that the Lao economy had grown 7.1% during the first 6 months of FY 2009, bringing average GDP per capita to approximately $922. Average inflation was listed at 3.17%, while foreign reserves were said to cover 5.5 months of imports. In light of global and Lao economic conditions, the PM proposed that the full FY 2009 target GDP growth rate should be cut from 8% to 7.5%, without any adjustment to government spending. This would increase the government's projected budget deficit from 4.56% to 5.25% of GDP. ¶2. The budget shortfall will be financed via improvements in revenue collection, including reduced "leakage" (a tacit reference to inefficiencies and corruption),external loan and ODA mobilization, and a possible bond issuance. Cutting spending is not an acceptable option--public "investment" is needed to stimulate economic growth, and the PM noted the importance of continuing growth in the next year at 7.5% or greater in order to meet goals laid out in the 6th 5 year plan. The PM's short term optimism conflicts with the IMF (reftel),which is forecasting perhaps 4.5% growth in 2009 and 5% in 2010, with the possibility of macroeconomic instability should the Government of Laos (GOL) not curtail its IMF-estimated 8% budget deficit. This threat received a one-line note from the PM, who mentioned the GOL would "study and implement necessary measures to deal with those (financial and monetary stability) issues." -------------- Comment -------------- ¶3. The PM's statement showed recognition of some difficult times ahead. He mentioned that economic growth was based on unsustainable natural resource exploitation, and admitted that there is no detailed program for stopping still widespread slash and burn farming. The elephant in the room, however, remains the GOL's economic projections, and the spending plans which flow from them. The PM's speech appeared to reflect a government that has not embraced the IMF's recommendations to begin making tough budgetary choices. HUSO