LAO PEOPLE’S DEMOCRATIC REPUBLIC

Lao People’s Democratic Republic (Lao PDR) is a unitary and socialist republic. The political system is structured around a single political party, the Peoples’ Revolutionary Party (LPRP). The executive branch is headed by the President, the head of state, elected by the National Assembly for a five-year term (for not more than two consecutive terms) who is also the General Secretary of the LPRP. The executive branch is also led by the Prime Minister, the head of government. The prime minister and the Council of Ministers are appointed by the president with the approval of the National Assembly for a five-year term. The country has a unicameral Parliament, the National Assembly (Sapha Heng Xat), which should reflect the country’s multi-ethnic dimension. It is composed of 164 members, elected for five-year terms. Lao PDR has been independent since 1975 and the country’s last elections were held in 2021. The People's Courts constitute the judicial branch of the state.

The current Constitution of Lao PDR was enacted in 1991, sixteen years after the country’s independence, and was revised in 2015. Based on the 1991 Constitution (Chapter IX), the role of local administration is to supervise the management of public policies at the local level. The Law on Local Administration No. 68/NA (14 December 2015) expands the principles enshrined in the Constitution and defines the scope of rights and duties of the local administration. Local administration is divided into three levels: provincial level (which comprises provinces and municipalities), districts, and villages. They each have their own budget, but villages are the only elected local government level.

Decentralisation in Lao PDR has not been linear since the country’s independence. From 1975 to 1986, multi-level governance was characterised by the coexistence of a significant level of autonomy allocated to provinces and a centrally planned economy. 1986 marked an acceleration of the processes of fiscal and administrative devolution to the provinces, with the implementation of the New Economic Mechanism. In 1991, the new Constitution enacted a recentralisation of power.

Starting from the 2000s, a new wave of decentralisation unfolded, allocating more power and autonomy to the provinces and districts (under the so-call Sam sang, or “Three-Blocks”, policy). To further facilitate the decentralisation process, an Inter-Ministry Committee (IMC) was established. The policy defines three pillars for regional and local governance: “provinces as strategic units, districts as planning and budgeting units, and villages as implementation units”. It was first experimented as a pilot in 51 districts and 109 villages, until it was extended nation-wide. More recent developments on decentralisation include updates to the Constitution leading to the Establishment of People’s Provincial Assemblies (PPAs) (as regional branches of the National Assembly), and to the enactment in 2017 of the Law on Government, and the Law on Local Administration.

Since the launch of the New Economic Mechanism in the 1980s, and the shift from a “centrally planned” to a “market economy”, poverty eradication has been at the core of Lao PDR’s development objectives. In 2002, the government established the National Growth and Poverty Eradication Strategy (NGPES) and associated Socio-Economic Development Plan (SEDP). Inputs from the latest SEDP (2016-2020) indicate that regional disparities remain high and achieving poverty reduction had been complicated by the increasing poverty gap between rural and urban areas. These topics are then addressed in the 9th National Socio-Economic Development Plan (NSEDP, 2021-2025). Local development planning in Lao PDR starts with Village Development Plans, upgraded to Kumban (or village cluster) Development Plans, and ends with the endorsement of District Socio-Economic Development Plans (DSEDP).

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
8 507 village (ban)	148 districts (muong)	17 provinces (khoueng) and the capital city (nakhon louang)
Average municipal size: 855 inhabitants
8 507	148	18	8 673

OVERALL DESCRIPTION: Lao PDR is divided into 17 provinces and the Vientiane capital city. The provinces are further divided into 148 districts, which encompass cities, municipalities and metropolises, which are themselves divided into 8 507 villages. Lao PDR is one of the South-East Asia countries with the largest share of rural land, as three-quarters of the total population is estimated to live in a rural area.

REGIONAL LEVEL: The regional level in Lao PDR is composed of 17 provinces and the capital city, Vientiane.

Provinces are governed by provincial governors, while Vientiane Capital City is governed by a mayor. Provincial governors are nominated by the president. There are also Provincial People’s Councils, which are the regional branches of the National Assembly (NA), and whose members are elected simultaneously to the NA. The National Assembly may vote to establish new provinces as “Special Zones”. There was previously a Special Zone at the regional level, Xaisomboun, which was created in 1994, but it was then dissolved in 2006.

There are strong disparities in Lao PDR between Vientiane Capital, the most populated province (948 000 inhabitants in 2020) and Attapeu and Xaysomboon, the least populated (respectively 160 000 and 108 000 inhabitants). Wealth disparities across provinces have, however, decreased between 2012 and 2019. Provinces in northern Lao PDR (historically the most disadvantaged) have been catching up with Southern and Central provinces in terms of poverty rates.

The provinces are grouped into three wider planning regions, for statistical purpose: North, Central and South Lao PDR.

INTERMEDIATE LEVEL: At the intermediate level, there are 148 districts. Districts are governed by district chiefs, who are nominated by the prime minister upon recommendations from the governor of their respective provinces. The average district size was 49 159 inhabitants in 2021.

MUNICIPAL LEVEL: Villages are the lowest tier of subnational administration. Some villages are individual settlements, while others are parts of larger urban areas. Villages are administered by village heads, some of which have been directly elected since 2011.

HORIZONTAL COOPERATION: Villages can be regrouped in “village clusters” (kumban), which mainly aim to support business activities in a specific economic sector by providing joint services to enterprises (e.g. handicraft, police and public order).

The delegation of responsibilities to local authorities is stated in the 1991 Constitution (Art. 18), and the Decree N 01/PM (2001) defines the roles of provincial and district administrations. Subnational governments of the Lao PDR are assigned with responsibilities to deliver public services and infrastructure development (including the maintenance of provincial, district and rural roads). However, most of the funding for these tasks comes from the central government, sometimes matched with development partners’ financing.

The 2017 Law on Local Administration assigns to the provincial administrations the general responsibilities to manage political, economic, and socio-cultural affairs and human resources, and to protect, preserve and utilise natural resources, the environment and other resources. Provinces can also have the responsibility to manage local defence and security as assigned by the central government.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Regional level	Intermediate level	Municipal level
1. General public services (administration)	Human resources management
2. Public order and safety	Local defence and security		Public order and safety
3. Economic affairs / transports	Provincial, district and rural roads ; small energy and electricity infrastructure projects	Maintenance of district roads	Maintenance of rural roads
4. Environment protection	Protection of natural resources and preservation of the environment
5. Housing and community amenities		Urban planning and management of public services
6. Health
7. Culture & Recreation
8. Education
9. Social Welfare

Scope of fiscal data: No data are available on subnational government finance.

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Availability of fiscal data: Low

Quality/reliability of fiscal data: Low

GENERAL INTRODUCTION: Whereas provinces used to have a large degree of autonomy in their financial management, this has been reduced in recent years, and Lao PDR remains a very fiscally centralised country. At the time when the socialist central planned economy was established, in 1975, the provincial offices of the Ministry of Finance controlled the expenditure, tax collection, and budget planning of provinces, and taxes were included as provincial revenue, with only few resources being transferred to the central government. Local branches of the State Bank acted independently, including in setting up the exchange rates. This system, however, triggered large disparities between the provinces in terms of service provision due to the differences in tax base, which prompted the central government to take reversal measures and establish a greater uniformity in 2001. As of today, the lack of oversight and financial management systems among provincial governments is a key challenge at the country level, leading to a lack of subnational fiscal and financial performance data.

In 2008, several decentralisation measures, such as budget allocations through provinces, were reintroduced as part of the Sam sang policy. Provinces are today responsible for formulating their five-year and annual socioeconomic plans and related budgets, and have the power to collect revenues, on behalf of the central government, and decide on their allocation based on these plans. They are also refinanced by the central budget throughout the year in case of revenue shortfall. Recent measures have been carried out to enhance revenue administration by modernising the tax collection system, improving tax and administration policies, as well as improving public financial management. However, important challenges remain in terms of fairness, transparency, efficiency and effectiveness of the financial system, in particular below the provincial level.

ⓘ No detailed data available for this country

EXPENDITURE: There is no fiscal data on subnational government expenditure in Lao PDR. Based on the World Bank’s 2019 PEFA, around 30% of total general government expenditure was spent by subnational governments in 2018 (a stable share since 2014). However, provincial budgets are centralised at the central government level, and provinces operate as spending agents, acting on behalf of the central government, and with the districts operating under their control.

Part of its fiscal consolidation programme, the central government tightly controls staff expenditure. However, fiscal pressure remains strong due to the low level of public revenue, which limits the ability of governments at all levels to allocate budget to social sectors and infrastructure maintenance needed to address the country’s development challenges.

DIRECT INVESTMENT: The management of public investment is the responsibilities of both the central government and provinces. The 9th National Socio-economic Development Plan includes the investment objective to improve the performance in six priority development areas between 2021 and 2025, including: productions and services, human resource development, research and development, rural development and poverty reduction, effective public administration, and regional and international connections. Subnational governments in Lao PDR are particularly responsible for local investment and technical issues related to electricity and energy sector (in particular small-size projects). Procurement activities at central, provincial and district levels are regulated by Lao PDR’s Public Procurement Law (2017).

However, the limited resources and capacity of staff at provincial and district government levels impedes their ability to implement investment projects. As a result, there is a significant lack of maintenance of infrastructure, and a risk of deterioration of roads, among others.

ⓘ No detailed data available for this country

Subnational government spending in Lao is limited by the lack of funding and capacity at the subnational level. Responsibilities undertaken by subnational governments in devolved areas are often carried out on a voluntary basis. Devolved funding areas are often funded through national funds, such as the Road Maintenance Fund (funded up to 37% by international development aid), of which 90% are allocated to national roads, and the remaining 10% to provincial, district and rural roads.

ⓘ No detailed data available for this country

OVERALL DESCRIPTION: There is no fiscal data on subnational government revenue in Lao PDR. Revenue administration is mainly the responsibility of the Tax Department and the Customs Department, at the central government level. Fiscal decentralisation is still developing in Lao PDR, and there is still no system of fiscal transfers.

Provincial governments own revenue mainly come from tax revenue, and land and property income. As an example, in 2021, the province of Attaphu received LAK 92 billion, of which 61% came from tax revenue and 18% from property income. In an effort to harmonise the revenue of provinces, the newly created Inter-Ministry Committee (IMC) will be responsible for supervising the allocation of grants to subnational governments (the transfer system is still to be developed).

TAX REVENUE: Provincial governments are the only subnational level allowed to administer and to keep part of the taxes assigned to the central government. Notably, they are in charge of tax revenues defined as shared revenues with subnational governments, such as the turnover or value-added tax, excise taxes and the corporate profit taxes.

GRANTS AND SUBSIDIES: When the provinces were established in the early 1990s, the Laotian state did not have any budgetary resources to transfer to the provinces; it therefore authorised governors to levy taxes at the local level, without any obligation to transfer part of them to the central level. Since the provinces have very different economic potential, this method of levying taxes has had the effect of increasing inequalities between provinces and strengthening the position of certain governors of the richest provinces. Currently, a formula-based allocation for fiscal transfers to provinces is still being developed with assistance from development partners.

Yet, subnational governments perceive capital transfers to finance investment projects. The District Development Fund mechanism (DDF), created by the United Nations Capital Development Fund (UNCDF), provides district with capital grants to support village-sponsored activities included in the Provincial and District Socio-Economic Development Plans. It provides financial and technical support to strengthen district-level public financial management processes. It has financed more than 66 local service investments as well as 578 interventions in education, health and agriculture equalling USD 2.8 million.

OTHER REVENUE: Provincial governments are in charge of collecting all import duties, the natural resource tax, and the timber royalties.

ⓘ No detailed data available for this country

FISCAL RULES: A system of Government Financial Information System (GFIS), which aims to provide real-time access to accounting information, is currently in place at the central government and provincial levels, but its implementation at the district level has been delayed. The State Audit Organisation of Lao PDR supervises activity of the central government, provinces and state-owned enterprises. However, as stated in the 2018 PEFA Assessment, central government control over the provincial and municipal budgets is limited to cash rationing, and financial reporting by the subnational level is still weak, non-consolidated and non-transparent.

DEBT: The financial sector in Lao is slowly developing but the capital market remains small. A new Public Debt Management Law was passed in 2018 to strengthen debt management policy. Subnational governments may borrow from the Bank of Lao for off-budget infrastructure.

Lao PDR has received significant amounts of climate finance, and the domestic Environmental Protection Fund (EPF) is in the process of becoming an Accredited Entity to various international funds. The EPF has funded 150 projects between 2005 and 2013, and subnational governments are eligible recipients.

TERRITORIAL MANAGEMENT OF THE CRISIS

The Lao government started to take measures to prevent the spread of COVID-19 starting in March 2020, by closing its borders to human traffic, and implementing a general lockdown with exemptions for essential activities and services. A National Taskforce Committee for COVID-19 Prevention and Control was created to manage the crisis and follow-up on its evolution. The government held televised daily briefings and circulated official announcements and decrees on social media. In 2021, the successive COVID-19 outbreak led to the re-introduction of containment measures.

COVID-19 management policies were agreed upon at the central government level, and then implemented, through line ministries, at the provincial level. To ensure good coordination, the Department of Communicable Disease Control (DCDC) conducted a series of workshops in the provinces to discuss provincial preparedness and response in the scenarios of cluster of COVID-19 and widespread community transmission in the province. The Department of Healthcare and Rehabilitation (DHR) was, on its end, responsible for coordinating with provincial hospitals regarding the status of hospital preparedness to inform procurement and training needs.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: The economic impact of the COVID-19 pandemic in Lao PDR was strong, leading the country into recession for the first time in over 20 years, due to the economic slowdown in sectors such as travel and tourism, and the disruption of supply chains and manufacturing.

An Inter-ministerial committee, comprising the Ministry of Finance, the Ministry of Health, the Ministry of Welfare and other relevant ministries, was organised in 2020 to implement fiscal measures for COVID-19 response. Individual tax relief measures included tax exemption on the first LAK 5 million of monthly salaries from April to June 2020. Business tax relief measures include tax exemption for microenterprises and postponement of tax payments in the tourism sector. In addition, a COVID-19 unemployment benefit program was introduced for employees who are members of their business’s social insurance scheme, and one-time cash transfers were distributed to garment workers affected by COVID-19 in March 2021.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: Whereas total public revenue contracted by -12% between 2019 and 2020, it increased again in 2021, with a 12% growth between 2020 and 2021. This was due to an increase of tax revenue by 10% between 2020 and 2021, driven by the profit tax, excise tax and import and export duties, as well as an increase in other revenue, including fees and dividends. On the other hand, total public expenditure has decreased, as governments at all levels have attempted to contain spending levels in the face of the weak revenue performance in 2020.

As of 2021, the level of public spending was still below the pre-pandemic spending level, and budget previsions for 2022 estimated that 15% of central government budget and 10% of local government budget will be cut, and non-urgent expenditure will continue to be postponed. Public investment has remained relatively stable, compensated by more capital grants. These expenditure measures are financed from Reserve fund (State accumulation fund etc.) and external grants. As a result, total public debt reached 88% of GDP

ECONOMIC AND SOCIAL STIMULUS PLANS: At the 11th national congress of the Lao People’s Revolutionary Party (LPRP), held in January 2021, the LPRP reinforced key that the pandemic had encouraged a shift in economic emphasis, towards increasing the stability, quality and sustainability of economic growth, mainly focused on the energy sector and development of hydropower. Part of the 9^th National Socio-Economic Development Plan (2021-25), the government also announced that creating “quality and productive” jobs was a top priority for the recovery, particularly in the agriculture and tourism sectors.

The recovery is supported by aid from international donors, such as through the assistance package of USD 5.6 million set up by USAID in 2022, to address the impacts of COVID-19 on economic growth and primary education in Lao PDR. Other grant by USAID, the World Bank and the governments of Australia and Ireland, will support the Lao PDR’s efforts to improve the business environment and assist Lao businesses to recover from COVID-19.