Laos Public and Private Debt to Cross 100 Percent of GDP by 2022-End

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Photo credit: eccil.org

Despite signs of economic recovery in early 2022, Laos faces increased challenges from currency depreciation and high inflation, according to the World Bank’s latest economic update for the country.

The Lao Economic Monitor for October 2022: Tackling Macroeconomic Vulnerabilities, released on Monday, identifies ambitious reforms that could help the country restore economic stability and sustain growth.

The report notes that the kip lost 68 percent of its value against the US dollar over the year to October, undermining recovery and fueling inflation, which in turn has squeezed private consumption and investment. Meanwhile, public and publicly guaranteed debt is projected to surpass 100 percent of GDP by the end of the year. The World Bank has lowered its 2022 economic growth forecast for the country to 2.5 percent, down from an earlier projection of 3.8 percent.

Although employment had risen by mid-2022, Lao people’s earnings have not kept pace with inflation. Year-on-year consumer price inflation had risen to 37 percent by October 2022, with food price inflation at almost 39 percent. This particularly affects the urban poor, with some families forced to reduce their consumption of food and fuel. In a World Bank survey, two-thirds of households reported spending less on health and education, which could undermine long-term human development.

“The World Bank and other development partners are discussing with the government a roadmap of reforms that can help stabilize the situation, protect essential spending on education, health, and welfare, and create a solid environment for long-term recovery,” said World Bank Country Manager for Laos Alex Kremer.

Five vital reforms are proposed: cutting costly tax exemptions to raise public revenue and protect social spending; improving the governance of public and public-private investment, and of state-owned enterprises; restructuring public debt through ongoing negotiations; strengthening financial sector stability through legal and regulatory tools; and lastly, improving the business environment and promoting exports through effective regulatory reform.

The report gives a medium-term outlook that assumes gradual recovery, driven by tourism and exports, though this is dependent on successful debt negotiations with bilateral creditors. In addition, the economic outlook is subject to significant external risks, including tighter global macroeconomic policies and the protracted impacts of the war in Ukraine.

This economic update features a thematic section on Exports for Jobs, which shows that the labor market remains characterized by high informality, reliance on public sector jobs, and a large number of agricultural workers who face seasonal demand. The lack of high-quality formal jobs means that the country’s previous economic growth did not reduce poverty as much as expected, while inequality rose. The section provides recommendations on how to boost exports in manufacturing, commercial agriculture and services, so as to raise revenue, increase productivity, and create jobs.