Laos Economic Growth Rating Lowered by ADB

Lao kip to go digital

The Asian Development Bank (ADB) reduced the economic growth recovery predictions for Laos due to supply disruptions and rising commodity prices that have increased inflationary pressures.

The inflation rate of the country had jumped to 30% in August and now ADB has gone back from its earlier prediction in April. It lowered the forecast for gross domestic product (GDP) growth in 2022 to 2.5% from the earlier 3.4% projection and to 3.5% from 3.7% for 2023.

Although most businesses returned to normal operations in the first half of the year, and international tourist arrivals have increased, volatile prices, especially for oil, have increased the cost of living, leading to a softening of domestic consumption. Sharp increases in the prices of fertilizers, animal feed, food, and fuel discouraged activity in agriculture and manufacturing. These trends suggest a delay in economic recovery.

“Rising prices are threatening the welfare of households in the Lao PDR, particularly poor households, entailing risks to food and nutrition security for families,” said ADB Country Director for the Lao PDR Sonomi Tanaka. “This is creating challenges not only for the people but also for public finances. Sound macroeconomic management, along with interventions to safeguard purchasing power, are needed to restore market confidence.”

The country has reported an average inflation rate of 15.5% over the first 8 months of the year. Administered prices for fuel increased 13 times from January to September, resulting in a 90.3% rise in diesel prices and a 62.3% increase in gasoline prices. In parallel, the kip fell by one-third against the US dollar and Thai baht, respectively, from January to August. The forecast for inflation has been sharply revised up to 17.0% for 2022 on higher-than-expected oil prices and the weaker kip, before moderating to 4.5%.

According to the ADB, “Public and publicly guaranteed debt—a large portion of which is external—was also reported at 88% of GDP in 2021, up from 72% in 2020, as domestic borrowings were raised through bond issuances while the dollar value increased on weaker local currency.

“Debt relief from several creditors, accumulating to $984 million over 2019–2021, has helped mitigate near-term pressures. Coordinating these efforts among all creditors is critical for reducing the country’s high risk of debt distress.”