Even though the Lao financial system is not directly linked to the global financial system, the global financial crisis (GFC) is having a negative effect on the Lao economy. According to an International Monetary Fund (IMF) projection, the world economy will experience negative growth (about -2%), and the growth in emerging and developing economies will be reduced to 2% in 2009. IMF projects that Laos will grow about 4.5% in 2009 and 5.50% in 2010 (IMF, 2009a).
The GFC can affect the Lao economy in a variety of ways. To begin with, a downturn in the global economy has led to declining demand for Lao exports; exports of mineral, garments, and agriculture products have been affected. Mineral exports claim one of highest shares of export, accounting for about 37.4% of total export during 2004-2006 (IMF, 2007). With sharply falling mineral prices during the GFC, mineral exports are expected to continue to decline, which will have a severe impact on trade and other macroeconomic factors. Secondly, declining foreign direct investment (FDI) from lower market demand and falling commodity prices is also taking its toll. Since 2003, FDI has mainly focused on the natural resources sector (mining, hydropower), accounting for about 90% of all sectors. As mineral prices fall sharply, FDI in mining will decline. In addition, ongoing mining and hydropower projects will be suspended and delayed. Thirdly, durin