Lao Public Finance

The Government of the Lao People’s Democratic Republic (Lao PDR) aims to achieve economic growth, reduce poverty, and advance from its least-developed-country status by 2020. The National Growth and Poverty Eradication Strategy (NGPES) was approved by the National Assembly of the Lao PDR in October 2003. The NGPES provides a broad strategic framework from which future growth and poverty reduction programs will be developed and implemented. The NGPES emphasizes the need for capacity building relating to public financial management (PFM) at all levels of public administration.

The Budget Deficit

Laos ran a fiscal deficit throughout the 1980s. The deficit expanded greatly in the second half of the decade, from about 12 percent of GDP in 1985 to between 25 percent and 30 percent of GDP in 1988 and 1989. This deficit was fueled by both a sharp decrease in nontax revenue coming mainly from surpluses of state-owned enterprises and a large jump in expenditures, particularly for wages and salaries. By 1990, however, the deficit had decreased (relatively) to about 17 percent of GDP and was continuing to decrease as previously implemented reforms, especially on taxes and the banking system, took effect.

Government Revenue

From the outset of the founding of the LPDR in 1975, development expenditures depended primarily on foreign aid, continuing a pattern begun in the 1950s. In July 1990, more than half of the state's total revenue came from foreign aid and loans. Until 1988 the bulk of current government revenue-- excluding capital receipts--came from nontax sources, mainly from surpluses of state-owned enterprises. Revenue increased nearly four times between 1984 and 1986, and again by over than one-half between 1986 and 1988, due almost entirely to nontax sources. Tax collection is difficult because of the widely dispersed population and poor organization and management of the collection process

An annual rice tax was assessed on all paddy land. The tax collected was in principle divided between provincial and national budgets, but in practice much was retained in the district of collection for in-kind salary support of local officials and military personnel. Where villages had schools, a portion of the tax collected was delivered to the local teachers(s). The paddy tax rate varied between sixty and 120 kilograms per hectare, depending on the quality of the land and was reduced to forty to 100 kilograms per hectare in the early 1990s. The paddy tax rate amounted to roughly 5 percent of the seasonal yield but could be forgiven in the event of a crop failure. A separate, lower tax, was assessed on swidden rice fields. Collection from more remote villages without road access was always problematic. Between 1983 and 1986, an improved system of business taxation was implemented; despite this, by 1987 the share of nontax sources had reached over 90 percent of current revenue, from about 70 percent in the early 1980s.

Substantial qualitative changes in fiscal management beginning in 1988 were introduced at most levels of government, and the implementation of limited tax reforms changed the fiscal situation dramatically with 75 percent of state revenue coming from taxes. Nontax revenues declined by 62 percent, however, as the traditional revenue source--profits from the state-owned enterprises--continued to decrease; thus, current revenue only increased by 42 percent. To increase revenue, Decree 47--on the national tax and customs system--was promulgated in June 1989; the decree broadened the tax base by expanding coverage of personal income and corporate taxes and improving collection and revenue administration methods. Import, profit, and turnover taxes were also increased. Fiscal revenue responded positively to the new tax reforms, increasing substantially from 1989, to about 11 percent of GDP in 1990; revenue from taxes alone increased by 62 percent. Transfers from public enterprises rose by 63 percent in 1990 over 1989 figures, and other nontax revenue increased as well, including lease payments to the government and overflight charges. The composition of revenue remained about 75 percent tax-based through the early 1990s.

Government revenue actually dropped from 11 percent of GNP in 1986 to 9.6 percent in 1990. However, its annual growth rate increased dramatically, from 9 percent in 1987 to 63 percent in 1990--partially a rebound from the drop in revenue in 1989. GNP also is subject to dramatic fluctuations, falling from almost US$2.4 billion in 1985 to about US$600 million in 1988. By 1991 GNP had increased to approximately US$1 billion, from approximately US$863 million the previous year.

Government Expenditure

Capital expenditures rose slowly throughout the 1980s, from about 55 percent of total expenditures in 1983 to about 66 percent in 1988; however, by 1989 they had begun to decrease as a result of limited absorptive capacity, a critical factor in the economic picture because it seriously affects economic development. Wages and salaries accounted for the largest portion of expenditures, increasing from 11 percent of expenditures in 1983 to 42 percent in 1988. A substantial amount of this portion in the late 1980s was spent on salary increases and arrears payments: many civil servants had not been paid for up to two years. Subsidies to state-owned enterprises make up most of the remainder of expenditures, but by the end of the decade these subsidies were cut back in response to the reforms of 1988 and 1990. Expenditures for operation and maintenance of basic infrastructure remained inadequate throughout the 1980s. Defense expenditure is an important part of the government budget; however, no figures are available.

Government expenditure as a percentage of GDP increased from 10.7 percent in 1986 to 14.2 percent in 1990; capital expenditure increased from 7.7 percent to 12.1 percent in the same period. However, although the growth rate of total government expenditure increased from 8.3 percent in 1987 to 65 percent in 1990 as wage and salary payments increased, growth in capital expenditure slowed dramatically, from 14.9 percent to slightly negative growth in the same period, because of limited absorptive capacity and decreased aid from nonconvertible currency area countries.

Policy

A new "vertical management system" for budgetary allocation was implemented in 1991, directed by the Ministry of Finance. Under this system, all revenue collected by provincial and local authorities is integrated into the national budget, and all expenditures are linked to a national budget expenditure plan. The primary purpose of the system is to ensure that local level expenditures are consistent with national planned expenditures.