Macroeconomic Situation
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The Lao PDR has undertaken significant economic reforms to move from a command economy towards a market economy. When the Lao PDR was established in 1975, a policy of "accelerated socialization" included extensive agricultural collectivization. In 1982, "market forces" were introduced and promoted at the Third Congress of the Lao People's Revolutionary Party (LPRP). In 1986, the Government officially abandoned the central planning system and introduced the New Economic Mechanism (NEM). Important steps included near total price liberalization, exchange rate unification, removal of the Government's trade monopoly and the opening up of foreign and inter-provincial trade. Private firms were allowed to enter the market and the number of State-Owned Enterprises (SOEs) was reduced by 75 percent.

Towards the end of the 1990s, due to the Asian financial crisis and a breakdown in monetary and fiscal management, the country underwent an acute period of macroeconomic instability. In late 1999 the Government responded by launching a successful stabilization program (tightening monetary and fiscal policies). By early 2001 the currency had stabilized and inflation was reduced to single digits. Headline inflation averaged 11 percent per annum from 2001 to 2004 compared to an average of nearly 70 percent per annum during 1997-2000. Although Lao PDR's track record of maintaining single-digit inflation rates over a long period is weak, the short-term macroeconomic situation is satisfactory. Inflation rates again reached single digits (8.6 percent) in December 2004 and dropped to 5.5 percent in June 2005.

In recent years the Lao PDR has experienced relatively good economic growth ( 6.3 percent since 2002) however high income groups continue to be the main beneficiaries. The IMF projects an ongoing annual growth rate of 6-7 percent in real GDP between 2006 and 2010, incorporating strong impetus from the mining and hydro-electric sectors and growing employment . External trade is expected to continue to grow at more than 10 percent annually. Challenges to macro-economic management include the low ratio of government revenue to GDP and the high external debt burden (servicing external debts is likely to include approximately 20 percent of recorded exports and 20 percent of Government revenue). In addition many public enterprises continue to make substantial losses and the trade environment is not yet attractive enough to foreign investment. The three fundamental challenges for Lao PDR include maintaining macro-economic stability, improving competitiveness and advancing trade reforms.

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