IMF praises Lao economic development
Deputy Managing Director of the International Monetary Fund (IMF), Mr Naoyuki Shinohara, visited Laos this week and gave an interview to Vientiane Times on Laos' economic development. The questions and answers are detailed below.
VT: How do you evaluate the Lao PDR's economic performance in recent years and its prospects going forward?
Mr Shinohara: The government of the Lao PDR has done a commendable job in creating conditions for robust economic growth, and the successful accession to the World Trade Organisation (WTO). The progress made by the Lao authorities in achieving the Millennium Development Goals is also admirable, particularly on poverty reduction and rural development. In this regard, I would like to encourage the government to continue to promote more inclusive growth through improvements in education, health, and rural infrastructure.
Near-term growth in the Lao PDR is expected to remain robust but there are some emerging risks. Real GDP growth is estimated at around 8 percent in 2012, with similar prospects expected for 2013. Inflation was below 5 percent in 2012, but we expect it to rise to about 7 percent in 2013 mainly due to strong domestic demand. The external current account deficit is estimated to have widened in 2012 and a similar outturn is expected for 2013, driven by rapid import growth and putting pressure on foreign reserves. This situation bears close watch by the Lao authorities in their conduct of monetary and exchange rate policies, in order to contain any overheating pressures and reduce external vulnerabilities.
VT: In your view, what are the policy challenges that the Lao PDR will face in the coming years? What are your recommendations for Lao policymakers?
Mr Shinohara: The key challenge going forward is to ensure that macroeconomic policy formulation and implementation remain focused on achieving sustainable and broad-based growth. This would include taking timely steps to protect macroeconomic and financial stability, as well as implementing necessary reforms to take full advantage of the WTO accession and increase regional and global integration.
While near-term economic prospects remain favourable, the strong credit growth and low international reserves coverage have emerged as important sources of vulnerability for the econo my.
Looking at this issue in a little more detail, monetary policy needs to be carefully calibrated to ensure that credit growth does not create overheating pressures going forward. Further efforts are also needed to strengthen banking supervision and enhance the central bank's prudential toolkit. It would also help contain financial r isks to the balance sheets of banks, households, and businesses.
Over the medium term, prudent fiscal management will continue to play a critical role in maintaining macroeconomic stability. Rebuilding fiscal buffers under generally favourable economic conditions will provide policy space during possible downturns to soften the impact of a slo wdown.
VT: In addition to giving advice, does the IMF engage actively with the Lao PDR in other areas?
Mr Shinohara: I would like to emphasise that the IMF is strongly committed as a partner to help the government of the Lao PDR build its ca pacity to better monitor and manage macroeconomic risks. We have provided technical assistance to the government and training opportunities to Lao officials at our institutes in Asia, Europe, and the US. The recent opening of the Technical Assistance Office for the Lao PDR and the Republic of the Union of Myanmar in Bangkok enhances the possibilities for further deepening of cooperation in important areas of capacity building such as tax policy and administration, the monetary policy framework, and banking supervision.
VT: Can y ou place the Lao PDR's performance in a regional context by discussing Asia's performance since the global financial crisis?
Mr Shinohara: Overall, Asian economies have been relatively resilient to contagion from the 2008 global financial crisis. Solid risk management by the private sector, which learned its lessons d uring the Asian financial crisis a decade earlier, together with strengthened policy frameworks has helped Asia better withstand the crisis.
Nevertheless, in a globalised economy, all regions of the world have been affected, and Asia is no exception. Asia's real GDP growth is estimated to have averaged 5.3 percent in 2012, which is the lowest rate since 2009. Unfavourable demand conditions outside of the region have led to the slowdown, but so has weaker momentum in China and India. The good news is that recent indicators suggest economic momentum is stabilising, while Japan's recession is expected to be short-lived. Fortunately, inflation remains within the comfort zones of most Asian economies, aided by generally stable global commodity prices and domestic demand conditions.
That said, the near-term outlook for a number of countries in the region is still subject to risks related mainly to the euro area and the United States. However, with the current accommodative global monetary conditions and a recent pickup in capital flows to the region, growth in Asia might surprise on the upside if European and US policy makers take decisive steps to mitigate these risks.
VT: What about the developments in the global economy?
Mr Shinohara : The IMF has just released the latest update to its World Economic Outlook. The projections are both heartening and frustrating. They are heartening because the global economy appears to be emerging from the danger zone after a prolonged crisis, with financial conditions also improving. They are frustrating because the recovery remains weak and unsteady. World growth in 2013 is projected to be around 3.5 percent, which is only a bit higher than the 3.3 percent recorded last year and still significantly below previous periods.
Policy actions have lowered the acute crisis risks in the euro area, but the ongoing contraction in that region appears to be protracted. We expect continued recession there this year instead of the slight recovery we had earlier forecasted. The US is likely to achieve about 2 percent growth. But the US continues to face considerable uncertainty because of the ongoing political stalemate over long-term fiscal issues. Policies have supported a modest pickup in growth in some emerging market and developing economies, but others continue to struggle with weak external demand and domestic bottlenecks.
Overall, we view 2013 as a “make-or-break” year for the global economy. To put it another way, the patient might finally be able to step off the operating table, but is still weak and unsteady. Recovery will take time, and we need to make sure there is no relapse.
VT: The global economy has changed over the years in many ways? How has the IMF responded to these changes in the global economy?
Mr Shinohara : The world economy has changed in irreversible ways over the last decade. As a result of an increasingly globalised economy, a number of Asian economies are now large and dynamic players in the world economy. To help them better manage risks, including those experienced during the global financial crisis, and reap greater benefits from increased regional and global integration, the IMF has significantly enhanced its surveillance capacity at the global, regional, and bilateral levels. We have also strengthened our understanding of spillover effects and the financial sector and our support for the entire spectrum of members through new lending facilities and enhanced capacity building. The IMF is also pressing ahead with the all-impor tant quota and governance reform, so that all members can see themselves fairly represented at the Fund.