Asian Development BankWorld Bank2015-03-092015-03-092002-07-15https://hdl.handle.net/10986/21556During the second half of the 1980s, Lao PDR embarked on an ambitious program of economic reforms, called the New Economic Mechanism, whose main purpose was to gradually transform its centrally-planned economy into a market-oriented economy. The initial reform momentum lasted about one decade. The far-reaching reform program encompassed many critical components including: (a) promotion of private production through improved incentives; (b) institutional infrastructure to improve market economy operations; (c) the strengthening of Lao comparative advantages through trade liberalization and further specialization; and (d) the establishment of price stability through macroeconomic policy measures. The systemic changes introduced in Lao PDR have contributed to a significant transformation of the country s economic system, away from a rigorously centrally-planned economy and towards a form of market economy based on private ownership. The percentage of poor declined based on the national poverty line from 45 to 39 percent between 1992-93 and 1997-982. But the percentage of very poor did not decline and remained at slightly above 30 percent evidencing the need for even broader and faster growth. Moreover, several factors slowed down the economic liberalization process. Such factors included the lack of transparency in government-business relations, a weak civil society, the position of some interest groups at the national and provincial levels, and the existence of noncompetitive economic structures with a few firms and actors accounting for a large share of domestic production (except in agriculture). In some areas, reform policy stagnated and is lagging. This is the case in the financial sector. The creation of a two-tier banking system in the early 1990s with separate and well-defined functions for the central bank and the state-owned commercial banks, has not resulted in the expected benefits: Lao PDR is still suffering from chronic macroeconomic instability and the state-owned commercial banks are suffering from a large amount of non-performing loans. Taking into consideration the objective of the Lao leaders to improve the well-being of the Lao People, this paper argues that there are valid reasons for establishing rules that discipline the political influence on the design and conduct of economic policy, and more specifically, policy regulating the financial sector.en-USCC BY 3.0 IGOACCOUNTINGACCOUNTING FRAMEWORKACCOUNTING STANDARDSAMOUNT OF LOANSASSET CLASSIFICATIONAUCTIONSBALANCE SHEETBALANCE SHEETSBANK FINANCINGBANK RATEBANK SUPERVISIONBANKING ASSETSBANKING INSTITUTIONSBANKING MARKETBANKING SECTORBANKING SECTOR DEVELOPMENTBANKING SYSTEMBANKING SYSTEMSBANKRUPTCYBANKRUPTCY LAWBIDSBONDSBROAD MONEYBUDGET DEFICITBUDGET DEFICITSBUSINESS PLANNINGCAPITAL ACCOUNTCAPITAL ACCOUNT TRANSACTIONSCAPITAL ADEQUACYCAPITAL ALLOCATIONCAPITAL MARKETSCENTRAL BANKCENTRAL BANK BILLSCENTRAL BANK INDEPENDENCECERTIFICATE OF DEPOSITSCERTIFICATES OF DEPOSITSCOMMERCIAL BANKCOMMERCIAL BANK CREDITCOMMERCIAL BANKINGCOMMERCIAL BANKSCONTINGENT LIABILITIESCREDIT AVAILABILITYCREDIT PROGRAMSCREDIT RISKCREDIT RISKSCRISIS COUNTRIESCURRENCYCURRENCY BOARDDEBT OBLIGATIONSDEBTSDEFICIT FINANCINGDEPOSITDEPOSIT INSURANCEDEPOSIT MOBILIZATIONDEPOSITSDEVELOPING COUNTRIESDEVELOPMENT BANKDIRECTED CREDITDISBURSEMENTSDISCLOSURE REQUIREMENTSDOMESTIC CREDITDOMESTIC DEBTECONOMIC DEVELOPMENTECONOMIC EFFICIENCYECONOMIC LIBERALIZATIONECONOMIC TRANSACTIONSEXCESS LIQUIDITYEXCHANGE RATEEXCHANGE RATESEXPENDITUREEXPENDITURESFINANCESFINANCIAL ASSETSFINANCIAL CRISESFINANCIAL CRISISFINANCIAL DEVELOPMENTFINANCIAL HEALTHFINANCIAL INSTITUTIONFINANCIAL INSTITUTIONSFINANCIAL INSTRUMENTSFINANCIAL SECTOR DEVELOPMENTFINANCIAL STABILITYFINANCIAL STATEMENTSFINANCIAL SYSTEMFINANCIAL SYSTEMSFISCAL CONSTRAINTSFISCAL DEFICITFISCAL DEFICITSFISCAL DISCIPLINEFISCAL POLICIESFISCAL POLICYFIXED ASSETSFLOATING EXCHANGE RATEFOREIGN CAPITALFOREIGN CURRENCIESFOREIGN CURRENCYFOREIGN DIRECT INVESTMENTFOREIGN DIRECT INVESTMENTSFOREIGN EXCHANGEFOREIGN EXCHANGE MARKETFOREIGN INVESTMENTFOREIGN INVESTORSGOVERNMENT ACCOUNTING SYSTEMGOVERNMENT BUDGETGOVERNMENT DEFICITSGOVERNMENT SECURITIESGOVERNMENT SECURITYGROSS DOMESTIC PRODUCTHOLDINGHOLDINGSINFLATIONINFLATION RATEINFLATIONARY PRESSURESINFORMAL LENDERSINFORMATION ASYMMETRYINFORMATIONAL ASYMMETRYINSTRUMENTINSURANCE COMPANYINSURANCE INDUSTRYINTEREST BURDENINTEREST COSTSINTERNAL AUDITINTERNATIONAL DEVELOPMENTINTERNATIONAL FINANCIAL INSTITUTIONSINTERNATIONAL SETTLEMENTSISSUANCEJUDICIAL ENFORCEMENTJUDICIAL PROCESSLACK OF TRANSPARENCYLEGAL FRAMEWORKLEGAL SYSTEMLENDERLENDER OF LAST RESORTLENDING DECISIONSLENDING INTEREST RATESLEVEL OF INFLATIONLIABILITYLIFE INSURANCELIQUIDITYLOANLOAN PORTFOLIOSLOCAL BUSINESSLONG TERM ASSETSLOSS STATEMENTSMACROECONOMIC ENVIRONMENTMACROECONOMIC INSTABILITYMACROECONOMIC MANAGEMENTMACROECONOMIC POLICIESMACROECONOMIC POLICYMACROECONOMIC STABILITYMARK TO MARKETMARKET ECONOMYMARKET INFRASTRUCTUREMARKET INSTRUMENTMARKET MECHANISMMARKET SHAREMATURITYMICROFINANCEMONETARY AUTHORITIESMONETARY CONTROLMONETARY FUNDMONETARY POLICIESMONETARY POLICYNATIONAL SAVINGNON-PERFORMING LOANSOUTSTANDING LOANPAYMENT SYSTEMPOLITICAL STABILITYPRICE STABILITYPRIVATE BANKSPRIVATE INVESTMENTSPRODUCTIVE INVESTMENTSPROPERTY RIGHTSPRUDENTIAL REGULATIONSPUBLIC BANKSPUBLIC FINANCEPUBLIC INVESTMENTPUBLIC INVESTMENTSREAL INTERESTREAL INTEREST RATESREGULATORY FRAMEWORKRESERVERESERVESRETURNRETURNSREVOLVING FUNDSRISK MANAGEMENTSAVINGS DEPOSITSSAVINGS RATESAVINGS RATESSECONDARY TRADINGSHARE OF CREDITSHAREHOLDERSOLVENCYSTATE BANKSTOCK EXCHANGESTOCK MARKETSTOCK MARKETST-BILLSTAXTAX DEDUCTIONTAX SYSTEMTRADE LIBERALIZATIONTRADINGTRANSACTIONTRANSACTION COSTSTREASURYTREASURY BILLTREASURY BILL AUCTIONSTREASURY BILLSTURNOVERUNDERLYING ASSETVALUATION10.1596/21556