Projected revenue shortfall adds to nation’s debt burden

Domestic revenue is expected to decline further from 13.5 percent in 2019 to 10.2 percent of Gross Domestic Product (GDP) in 2020, according to a World Bank report.
Consequently, the fiscal deficit is expected to reach 7.6 percent of GDP, rising from an estimated 5.1 percent of GDP in 2019.
The elevated fiscal deficit will result in growing public debt, which will ramp up pressure on the country’s debt servicing capacity amid the Covid-19 crisis.
The cabinet’s recent monthly meeting chaired by Prime Minister Thongloun Sisoulith approved a report on pushing for greater revenue amassment for the rest of the year as part of efforts to ease the country’s financial difficulties. 
The Ministry of Finance was instructed to coordinate with the relevant authorities to elevate national income to a level approved by the National Assembly.
The finance ministry has been advised to accrue more revenue from land, fees from concession projects and other obligations owed by business units.
Royalties from hydropower projects and other fees from mining projects that have not been paid to the government need to be collected.
In June, the National Assembly approved the government’s move to adjust the budget by lowering the target for national revenue from 28.99 billion kip to 22.72 billion kip.
However, the budget deficit is projected to rise due to the prolonged impact of the Covid-19 epidemic on businesses.
Laos is undergoing an unprecedented level of macroeconomic stress and the pandemic has worsened an already fragile economic landscape.
Low domestic revenue mobilisation has been exacerbated by the economic slowdown and the Covid-19 outbreak.        
Structural vulnerabilities in Laos have led to substantial deterioration in macroeconomic circumstances, including a significant increase in the public debt burden.
Without actions to stabilise the macroeconomy and accelerate structural reforms, the economy could tip into a period of extreme macroeconomic vulnerabilities. The government is attempting to mitigate the economic impact of Covid-19 by deferring tax payments, along with other measures, to support households and SMEs.
According to the World Bank, the Bank of the Lao PDR has engaged in direct borrowing from commercial banks to help the government meet debt service obligations and provided direct credit to the government to meet its expenditure demands.
To address the budget deficit and repay debts, the government attempted to issue bonds to mobilise more funds and borrow more money from various sources.
The government is also working to expand the e-tax payment system to all provinces and more sectors. As a result, income from the tax sector rose by 20 percent in the first six months of 2019 compared to 2018.
In addition, the government will cut spending on non-essential projects that do not guarantee economic returns.
It is important that Laos significantly improves the investment climate to attract foreign investment and grow the export sector, which in the long run would benefit the economy.

By Somsack Pongkhao
(Latest Update October 9, 2020)