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Financial Sector Reform

The formal Lao financial sector remains dominated by State Owned Commercial Banks (SOCBs), but signs of competition have been seen recently due to the role that joint-venture and private banks have been playing in the very recent past. The financial system is dominated by banks, with non-bank financial institutions (NBFI) representing only 3% of overall financial sector assets. SOCBs are still dominant with around a 60 percent share of total banking sector assets, but this share is declining. The assets of private and joint venture banks have increased recently as new private banks emerged. In the past year, 5 new commercial banks commenced operations in Lao PDR and brought the total number of banking institutions to 20, consisting of 4 SOCBs, 3 joint-ventures, 1 private and 12 foreign bank branches. Increased competition by recent entries of new private banks has provided an incentive for SOCBs to improve their performance, risk management, governance, and products and services.

Growth and Inflation in Laos

Lao PDR is one of the best performers in the region with real GDP projected to grow at 6.4 percent in 2009 (although slightly lower than the 7.3 percent in 2008). This projection has been revised upwards from 5 percent earlier in the year because most sectors, including mining, manufacturing (garment, food and beverages, cement and metal industries), construction, agriculture and services have been performing better than expected due to the recent recovery of commodity prices (copper and gold), increased public expenditures and recovery in regional demand (especially from China).

Recent Economic Developments in Laos

Economic growth in Lao PDR is projected to slow to a limited extent in 2009, down to 6.4 percent, as a result of higher than first anticipated production and prices in the mining sector, more resilient growth in the non-resource sectors, and the support of a significant fiscal stimulus. In the past, Lao PDR has succeeded in maintaining a robust economic growth with real GDP growing at an average rate of 7.2 percent per annum in 2003-2008 driven largely by natural resources sectors and services (mainly trade and tourism). The key impacts of the crisis on Lao PDR were felt through a decline in foreign direct investment, prices and demand for exports (especially in late 2008 and early 2009), and government revenue falling below the planned target. Tourism and manufacturing (garments) were less affected by the crisis than initially projected. Headline inflation has declined significantly since late 2008 due to lower fuel and food prices.

Mining in Laos

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Assessments of mineral reserves are imprecise, because by 1991 most of the country had not been geologically surveyed in a detailed manner. According to 1991 estimates, deposits of gemstones, gold, gypsum, iron, lead, potash, silver, tin, and zinc have relatively high commercial development potential, but mining activity is on an extremely small scale. In addition, Laos has small deposits of aluminum, antimony, chromium, coal, and manganese, as well as potential for oil and natural gas. In 1989 exploration agreements for oil and gas were signed with British, French, and United States companies.

Energy in Laos

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Mountainous terrain and heavy annual rainfall give Laos considerable hydroelectric potential. The Mekong River and its tributaries in Laos have an estimated hydroelectric potential of between 18,000 and 22,000 megawatts, or roughly half that of the river as a whole. The remaining potential belongs to Cambodia and other riparian countries. Total installed capacity in 1991 was 212 megawatts, the majority of it hydroelectric, or only about 1 percent of the potential.

Production of hydroelectricity, the country's major export until 1987, expanded slowly throughout the 1980s, from 930 thousand megawatt-hours in 1980 to about 1.1 million megawatt-hours in 1989, an increase of about 17 percent. The majority of electricity produced--approximately 75 to 80 percent, as of 1992--is exported to Thailand, which has an agreement to purchase all surplus electricity. The remainder is supplied to power networks for domestic consumption. Through 1986 the sale of electricity to Thailand was the country's most important source of foreign exchange. Despite increased production, in 1987 hydroelectricity yielded its place as the principal export to wood products, because of the drought, which lowered water levels, and a reduction in the unit price of electricity to Thailand. By 1991 a new agreement between Laos and Thailand had raised the unit price of electric power.

Construction in Laos

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Throughout the 1980s, the construction subsector grew at an average annual rate of 1.1 percent, surging by 24 percent in 1989. Vigorous growth continued the following year at a rate of 15 percent, reflecting a big increase in private demand for new construction. Several sources estimate the construction subsector's contribution to the gross national product at about 5 percent throughout the decade. According to one estimate, the construction subsector employed more than one-fourth of all industrial workers in 1986.

Manufacturing in Laos

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There is a paucity of any real industry in Laos outside of timber harvesting and electricity generation. Nonetheless, "manufacturing" represents about half of all industrial activity. Other manufacturing activities include the production of agricultural tools, animal feed, bricks, cigarettes, detergents, handicrafts, insecticides, matches, oxygen, plastics, rubber footwear, salt, soft drinks and beer, textiles and clothing, and veterinary products. Manufacturing employed only approximately 2 percent of the labor force in 1991. A few factories in the Vientiane area have been rehabilitated since the mid-1980s. As of 1994, the garment industry was "booming" with investment from China, France, Taiwan, and Thailand; there were more than forty garment factories in the Vientiane area.

Industry in Laos

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Laos has relatively little industry. This sector employed only 3.3 percent of the workforce in 1995. There is no heavy industry and much of the country's industry is comprised of smaller companies. In 1999, there were only 108 establishments in the whole country with more than 100 employees. However, there were 19,797 establishments with fewer than 9 employees. These small establishments are involved primarily in the production of textiles and handicrafts. Laos is well known for the high quality of its aesthetically attractive textiles. Even though industry plays a small role in the Lao economy, its importance has increased significantly. In 1987, industry represented only 11 percent of the GDP of the Lao PDR, while in 1999, it represented 22 percent, doubling since the introduction of the New Economic Mechanism policy.

Capability Development In Laos

National ability to develop attracts much attention, especially urban development. The government has divided development areas into three zones.

Zone 1. This is in the north. Husbandry will be developed in Xiengkuang, which is traditionally a large livestock source. Luangprabang is to be developed into an important tourist attraction while Huoixai District in Bokeo Province is to be an industrial estate for a project named the Economic Quadrangle (Laos-Thailand-Myanmar-South China). Major projects requiring urgent implementation are the development of a highway linking Bokeo and Luangnamtha and the transportation infrastructure in general; the development of industry and commerce; the development of a Lao Culture & Tradition Conservation Centre and the basic facilities to handle a tourism boom. In addition, Laos is planning to provide more privileges for foreign investors who invest in the north. For example, in commercial areas, tax exemption may last 8-12 years and tax exemption for industrial areas may last up to 15 years, instead of only 2-4 years as is normally provided. Investor confidence would be bolstered regarding risk guarantees and foreseeable benefits.

Import And Export Policy In Laos

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Import Policy

The government regulates the import of goods by systematically classifying them into groups or types of goods like those encouraged, controlled and prohibited by the state through a taxation and duties scheme.

The encouraged imported goods are machinery and equipment required for the construction of the basic economic infrastructure.

The importers of foreign goods must be enterprises registered correctly under the relevant laws of Laos and operating in authorized business sectors.

The goods prohibited for import under regulation No. 482 dated 8/2/1994 of the Ministry of Commerce include all types of war items, all kinds of drugs, toxic chemicals and dangerous industrial products and all types of obscene items.

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