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Linking Planning and Budgetingand

Monitoring and Auditing of Budget Execution

Mid-term Fiscal Policy 2006-2010

• Evaluation of the implementation of the fiscal policy from 2000-2005.– Weaknesses and shortcomings and their causes.

• Mid-term fiscal-budgetary direction 2006-2010.– Fiscal policy to ensure macroeconomic stability,– Revenue policy and mobilization of the funding for

development– Expenditure policy,– Financing policy and,– Fiscal policy on state-owned enterprises (SOEs).

Evaluation of the Implementation of the Fiscal Policy from 2000-2005

• In the past 5 years, the fiscal policy has served the socio-economic plan. It especially contributed to the economic growth (6.2%) and basically helped stabilize the fiscal and monetary policies.

• Per capita income of US$ 492 in 2005.• Importance in expenditure allocations was given

to the priority sectors (commodity production, infrastructure development and rural development resulting in continuous poverty reduction from 39% to 33.5% in the past decade.

Budget Execution 2000-2005

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Total revenue 12.90% 14.21% 13.81% 12.50% 14.59%

Total expenditure 21.12% 21.65% 21.30% 19.51% 20.59%

Budget deficit -8.21% -7.44% -7.48% -7.01% -6.00%

2000-Œ-01 2001-Œ02 2002-Œ03 2003-Œ04 2004-Œ05

as % of GDP

6.5

4.94.4 4.0

4.9

1.7

3.4

3.1 3.5

3.9

0.1 0.1

0.1 0.1

0.1

4.6

5.8

4.0 3.7

3.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

Revenue/GDP Ratio

2.5 3.2 3.1 3.34.7

1.51.6 1.5 1.3

1.01.4

1.5 1.6 1.10.70.4

0.3 0.30.2

0.00.0

0.0 0.00.1

0.32.9

3.0 2.22.2

3.6

12.3 11.111.8

7.8

9.8

0.0 1.0 0.7

3.4

0.5

0.0

5.0

10.0

15.0

20.0

25.0

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

Expenditure Item / GDP Ratio

Domestic Revenue of Laos and Selected Countries in the Region (as % of GDP)

2003 2004 2005

Indonesia 11.9 12.4 12.7Malaysia 16.4 16.0 16.61

Philippines 12.5 12.4 12.7Singapore 12.8 12.5 13.0Thailand 15.2 12.1 -

Brunei 31.6 40.5 37.42

Cambodia 6.8 8.5 9.9Lao, PDR 9.2 9.6 9.91

Myanmar - - -Vietnam 17.8 20.2 24.0

ASEAN 43 13.5 12.8 -

Source: ASEAN SecretariatNote: 1 For the first 9 months

2 For the first half3 refers to Indonesia, Malaysia, Thailand and the Philippines- Refers to data are not available.

Budget Expenditure of Laos and Selected Countries in the Region (as % of GDP)

Recurrent Expenditure Capital Expenditure Total Expenditure

2003 2004 2005 2003 2004 2005 2003 2004 2005

Indonesia 9.3 10.5 11.8 9.1 8.8 6.9 18.4 19.3 18.7Malaysia 19.0 20.3 17.1 9.7 6.1 3.5 28.7 26.4 20.6Philippines 16.5 15.5 - 2.6 2.7 - 19.3 18.3 17.5Singapore 11.9 11.0 10.6 4.9 4.7 4.2 16.8 15.6 14.8Thailand 14.0 13.5 - 2.8 3.0 - 16.8 17.1 -

Brunei2 38.2 46.3 38.0 10.5 9.2 9.6 48.7 55.5 47.6Cambodia 10.2 8.9 9.7 6.3 6.2 4.0 16.5 15.1 13.7 Lao, PDR1 7.7 9.0 10.0 9.4 6.5 7.4 17.2 15.9 17.8Myanmar - - - - - - - -Vietnam 16.1 17.3 19.0 7.7 8.8 8.7 24.4 29.3 28.6

SEAN 43 13.2 13.6 - 6.3 5.7 - 19.5 19.5 -

Source: ASEAN SecretariatNote: 12005 figures are for the first 9 months

22005 figures are for the first half3refers to Indonesia, Malaysia, Thailand and the Philippines- refers to data are not available* Excluding Myanmar

Budget Deficit of Laos and Selected Countries in the Region (as % of GDP)

2002 2003 2004 2005

Indonesia -1.5 -1.7 -1.3 -0.5Malaysia -5.6 -5.3 -4.3 -0.21

Philippines -5.4 -4.7 -3.9 -2.7Singapore -1.1 -1.6 -1.1 -0.3Thailand -1.4 0.4 0.1 1.91

Brunei -4.9 11.1 14.7 17.82

Cambodia -3.7 -3.9 -2.3 1.4Lao, PDR -4.1 -4.5 -2.7 -4.81

Myanmar - - - -Vietnam -2.4 -2.8 -1.7 -1.6

ASEAN * -2.7 -2.2 -1.7 -0.3ASEAN 43 -2.8 -2.2 -1.8 -0.3ASEAN 5 -2.7 -2.2 -1.8 -0.3

Source: ASEAN SecretariatNote: Budget deficit of Laos does not include the repayment of the principles of foreign1 For the first 9 months; 2 For the first half; 3 Refers to data are not available;- refers to data are not available* excluding Myanmar

Shortcomings• Very low revenue / GDP ratio. Revenue

collection in the local level (provinces) is in a declining trend.

• High-level Leakage in revenue. Based on a study of IMF and SIDA in 2003-2004: it was about 40-50% (tax) and 60-70% (customs duties) of the total revenue.

• Demand for expenditure increases every year resulting in difficulty/pressure in finding the financing sources and becoming a heavy burden.

Shortcomings

• Excessive and Off-budget expenditures, new payment arrears without permission.

• Ineffective or less effective public investment programs, under-utilization of the public investment programs.

• High budget deficit might pose a risk to economic stability.

• Preparation and implementation of budget plan (accounting, reporting and auditing) in the fiscal and treasury sector was weak.

Shortcomings• Revenue collection by the organizational units in the

finance sector did not match the expenditure demand in the new era.

• The existing laws, judicial acts and policies could not respond to the new requirements and the regulatory mechanism for the implementation was lacking and not well developed leading to loopholes.

• Fiscal responsibility between the central and local levels were not clearly defined. Fiscal transfers from the central to local levels and vice versa were not strictly performed and consequently financing by the macro level could not be provided for.

Causes

• Laws and regulations were not strictly observed and this led to leakage in revenue and expenditure management.

• Tax base was narrow and potential taxes were not fully collected and revenue collection relied mainly on imports.

• Commodity production expanded in a slow pace and the actual economic growth rates were lower than the rates set in the 5-year plan.

Causes

• Several forms of tax exemption were given and not in line with the laws and regulations and this led to loopholes.

• Budgetary norms were not define for budget allocations and consequently the sector expenditures varied.

• Auditing and evaluation was not well developed and carried out on regular basis. Many of its aspects were not strictly implemented.

Mid-term Fiscal Framework 2006-2010

• Revenue: Revenue is projected to increase by 19.2% annually in this period and by 2010, it will be amounted to 16.6% of GDP (3.66% increase in five years). Of which:– Domestic revenue (excluding grants) will increase by 20%

annually and by 2010 it will reach 15.73% of GDP.

– Regular forms of revenue will increase from 11.27% of GDP in 2004-05 to 11.76% of GDP in 2009-2010.

– Natural resource taxes will increase from 1.23% of GDP in 2004-05 to 3.79% of GDP in 2009-2010.

Revenue Projection 2006-2010As % of GDP

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

Grants 1.48% 1.20% 1.33% 1.17% 1.03% 0.91%

Natural resources 1.23% 1.80% 2.50% 3.51% 3.72% 3.97%

Regular taxes 11.27% 11.11% 11.20% 11.35% 11.54% 11.76%

Total 13.98% 14.11% 15.03% 16.03% 16.29% 16.64%

2004-Œ-05 2005-Œ06 2006-Œ07 2007-Œ08 2008-Œ09 2009-Œ10

Mid-term Fiscal Framework 2006-2010

• Expenditure: Expenditure is projected to increase by 17.9% annually in this period (lower rate than that of revenue) and by 2010 it will reach 23.6% of GDP.

• Budget deficit in 2010 will be approximately 6% of GDP on average, from 7% in 2005-06 to 5% in 2009-2010.

Mid-term Fiscal Policy 2006-2010

• To ensure macroeconomic stability,

• Revenue policy and funding mobilization for development,

• Expenditure policy

• Financing policy,

• Fiscal policy on SOEs

• Division of the fiscal responsibility between the central and local levels

Measures to Ensure Macroeconomic Stability

• Reduce the foreign debt / GDP ratio gradually:– Present: 80% of GDP

– By 2010: < 70% of GDP

– Budget deficit: not exceed 4% of GDP (based on GFS and GFIS)

• Restructure foreign debt:– Negotiate for roll-over of the debt or duration of servicing

– Service foreign debt on regular basis

Measures to...(con’t)

• Expenditure growth should be consistent with that in revenue.

• Establishing “National Finance Accumulation Fund” used to allocate miscellaneous expenditures: bird flu, economic crisis.

• Preventing risks in creating debts: MOF guarantees for SOEs

Revenue Policy and Funding Sources for development

1. Measures to mobilize funding sources for investment.

1.1 Government budgeta. Implementing measures to prevent leakage in revenue in

order to achieve or exceed the revenue targets set out in 2006-2010 plan, making efforts for revenue collection to exceed the projected targets by 10-15%. To achieve the above targets the following measures should be carried out:

Revenue Policy...(con’t)

• Restructuring the revenue collection agencies– Revise and introduce new instruments for the

decentralized revenue collection. Revenue is divided into 3 categories (100% to the central budget, 100% to the local budgets and revenues for sharing)

– Concerning the customs duties, the Customs Department shall design the collection system from the central level to the border checkpoints.


– The centralized tax administration shall be responsible for collecting taxes, property taxes and land taxes nation-wide.

– The National Treasury shall be (centralized) responsible to the central level directly to ensure the transfer of funds from the central level to the local level and vice versa on time and as provided for by the laws and regulations.


• Ensuring the strict revenue collection

– Build up database for business units and then categorize them in order to set the tax rates in a transparent and stable manner.

• The Tax Department should be provided with more staff and training for its staff so they will become competent to respond to the new requirements in tax administration.

• Provide incentive for the local level collecting the central revenues exceeding the targets


b. Reviewing the Tax Law and revenue collection policy promulgated in order to improve or introduce new tax policy for the purpose of creating revenue sources for the Government budget. 5 tasks to be undertaken as follows:

Preparation for the introduction of VAT

Prevention of loopholes by improving the collection of some taxes such as minimum tax


Revise instructions and notices on tax exemption or reduction to reflect on the current economic situation and include them as provisions in the law.

Introduce tax policy on natural resources (land, mining, etc.)

Formulate action plan for tax rate reduction once Laos integrates into the international community.


c. Introduce saving options particularly in recurrent expenditure so that more fund can be allocated to investment expenditure.

1.2 Issuance of the Government bondsSales of bonds shall be used to fund the investment projects with reasonable rate of return and the repayment sources shall be clearly defined. Make preparation for the introduction of the secondary market and later the security market.


1.3 Funding sources from other economic sector:

a. Define the investment promotion areas clearly,

b. Create conditions (tax incentive and subsidized interests) in fiscal-monetary policy to promote the private investment,

c. Introduce a clear monetary policy to attract savings (in informal and formal markets) of the people which can be mobilized for investment.


d. Investment promotion policy should be in line with the credit policy in order to expand credits and provide capital for the business operations.

1.4 Funding sources from Lao people in foreign countries

Introduce a policy to attract Lao people living in foreign countries to make investment (in term of capital and intellectual property) and facilitate the transfer of their funds into Laos.


1.5 Funding sources from international financial institutions (ODA)

a. Take initiative to negotiate with donors and selectively approve the projects with high rate of return.

b. co-fund those projects.

1.6 Foreign direct investment:To attract FDI, provide adequate infrastructure and create favorable conditions like simple procedures to apply for investment licenses and tax-customs incentives.

Expenditure Policy

Ensure that the public expenditure management is effective,

transparent, accountable and consistent with the policy

step by step.

• Improve and formulate a complete set of legislation in the public expenditure management:– Budget law

– Treasury law

– Public accounting law, etc.

• Improve the chart of accounts and budget nomenclature gradually in line with the international standard

Expenditure Policy

• Adjust share of the capital and recurrent expenditure step by step. (2000-2005: 1:1 and 2006-2010: 1.2-1.4:1)

• Improve the expenditure structure in line with the socio-economic development plan by allocating more expenditure into the social sector (education and health)

– Share of the education sector expenditure was 3.1% of GDP in 2005-2006 4% of GDP in 2009-2010.

– Share of the health sector expenditure was 0.8% of GDP in 2005-2006 1.5% of GDP in 2009-2010.

Expenditure Policy

• Set budgetary norms for the priority sectors, which can be a guideline for the sectors and local level in allocating their expenditure in an equitable manner.

• Strengthen the budget preparation process, budget execution, reporting, auditing-evaluation and central-local fiscal transfers.

• Double the base salaries by 2009-2010.

Expenditure Structure 2006-2010

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2005-06: I. 135, M. 1,800 264,240 311,040 386,640 491,040 624,240 937,500

2006-07: I. 140, M. 2,000 301,240 348,040 423,640 528,040 661,240 993,667

2007-08 I. 150, M. 2,500 396,240 443,040 518,640 623,040 756,240 1,136,583

2008-09 I. 170, M. 3,000 531,240 578,040 653,640 758,040 891,240 1,319,500

2009-10 I. 200, M. 3,500 721,240 768,040 843,640 948,040 1,081,240 1,557,417

Grade 1 Grade 2 Grade 3 Grade 4 Grade 5 Grade 6

Base wages and salaries: by grade (average)

Increase indices and multiplier at the same time

Reduce disparity of between base salaries between Grades 5 and 6 & Grades 1, 2 and 3.

Expenditure Structure 2006-2010

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

2005-Œ06: I. 135, M. 1,800, No. 96.048 396,1662006Œ-07: I. 140, M. 2,000, No. À²š´ 5% 433,1932007-Œ08 I. 150, M. 2,500, No. À²š´ 5% 528,2682008Œ-09 I. 170, M. 3,000, No. À²š´ 5% 663,3412009-Œ10 I. 200, M. 3,500, No. À²š´ 5% 853,417

Average monthly salaries

Base salaries x staff (assume 5% increase per year). 2009-2010, index of 200 x multiplier of 3,500 and 116,747 civil servants

Lao kip

Policy on Financing

• Budget deficit should be at the level set out.

• Fund from financing should be used to fund the capital expenditure only.

• Borrowings should be used for projects with high rate of soci0-economic returns only.

• Rely less on external borrowings but more on domestic borrowing sources by utilizing the financial instruments like issuance of long-term, mid-term and short-term bonds

Fiscal Policy on SOEs

• SOEs should operate in the key economic sector that has spillover effects: electricity, water supply, telecommunications, banking, etc. and in natural resources: mining in which the Government should take at least a share of 10-20%.

Fiscal Policy on SOEs

• SOEs should operate in an effective and profitable manner.– Clear definition: owners of the capital or managers?– Owners employ professional managers– Board of directors make decisions on policies and

business operation

• Government budget are not allowed to be provided as credits to SOEs.

Central-Local Fiscal Arrangements

• Redefine revenues between the central and local levels into 3 categories: 100% to central budget, 100% to local budget and revenue for sharing.

• Redefine responsibility in revenue assignments by restructuring the revenue collection agencies.

• Recentralize the tax administration, customs administration and national treasury.


• Redefine expenditure responsibilities as follows:– The central level is responsible for expenditures

related to the national importance for the purpose of socio-economic stability and equitable development: national defense-security, foreign affairs, international finance.

– The local level is responsible for expenditures related to the benefits of the localities: local governance, basic education, primary health care and projects associated to the local level...


• Fiscal transfers/grants should be designed in two principles:

– General grants: to finance the budget deficit of the local level.

– Earmarked grant: to provide funding for programs, projects, sectors or priority tasks of the Government.

Debt Management

• All debts should be centrally managed (MOF), all borrowings from external sources shall be approved by MOF.

• Restructuring the public debts and mobilizing more funding from domestic sources. Maintain foreign debts in a more acceptable and credible level recognized by the international community.

• Solve the problem of payment arrears– Unplanned debts are not allowed

– Include them in the annual budget plan

– Roll over the debt payments by transforming debts into mid-term and long-term bonds.

Thank you

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