Laos, crisis opportunity for reform

Public debt and inflation are on the rise, but according to several analysts, the current problems of the Laotian economy can become a boost for the future

By Ilaria Zolia

Laos has been hit hard by the effects of the pandemic but also by the food and inflationary crisis. With rising fuel prices caused, in part, by the depreciation of the Kip, many farmers have left the countryside and gone abroad in search of work. According to the Food and Agriculture Organization of the United Nations, about 20 percent of Laotian farmers cannot afford to plant rice because of the increases. Laos' recent economic performance describes this reality. Public debt has risen from about 70 percent of GDP in 2019, to 88% in 2021, according to Lao government data. Inflation has also risen, from less than 2% in February 2021 (year-on-year) to 30% in August 2022, threatening the standard of living especially of low-income urban households. In contrast, hydropower and mining have expanded rapidly, becoming dominant sectors. Investments to expand these two sectors have been financed with external loans, but these projects have not yet generated revenue due to long gestation periods. However, according to some analysts, the crisis may be a starting point for the implementation of major development reforms. This turnaround could take place through reforms on public debt reduction and improvements regarding public expenditure management, which would ensure increased revenues. According to Nikkei Asia, the country will need to know how to make the most of the resources it already has, such as its natural capital and its young citizens. It would therefore be important for Laos to invest in its population, increasing spending on health and education in order to create a new workforce, Nikkei concludes. However, the Lao economy has good potential to embark on a path of reform. Indeed, it should not be forgotten that with a gross domestic product growth rate of 7% for more than two decades, Laos has been one of the fastest growing economies in Southeast Asia for more than two decades through 2019.