The World Bank In Lao PDR

The Lao PDR’s macroeconomic situation remains challenging. Long-standing structural vulnerabilities have been exacerbated by soaring public debt and weak public revenues. The national currency, the kip, depreciated during 2023, while average annual inflation is expected to remain above 20% for a third consecutive year. This situation affects poorer people most seriously and progress in poverty reduction is estimated to have stalled.

Economic growth is forecast to pick up to 4% in 2024, though the outlook remains subject to high economic uncertainty. Tighter monetary and fiscal policies and renewed efforts to enforce foreign exchange restrictions have had little impact in restoring macroeconomic stability. Limited foreign exchange liquidity, and hence a weaker kip, put pressure on external public debt servicing, which constrains fiscal space and exacerbates financial sector vulnerabilities.

Growth over the previous two decades had been predominantly driven by large-scale investments in capital intensive sectors, particularly in mining and hydropower. However, these investments failed to support job creation, and some entailed considerable environmental costs. Moreover, public investment in the power sector has been mostly financed by external debt, often on commercial terms, gradually jeopardizing macroeconomic stability.

The gradual economic slowdown seen since 2012 has become more pronounced. Structural challenges, macroeconomic instability, and a deteriorating external environment have curtailed recovery from the lows of the COVID-19 era, with growth recorded at 2.7% for 2022 and estimated at 3.7% for 2023. The improved performance was largely due to recovery in the services sector. Increased tourism, transport and logistics services, mining, and foreign investment supported growth, while electricity generation was weighed down by weather conditions.

The Lao kip depreciated by 23% against the US dollar between January 2023 and February 2024, a factor feeding high inflation, which stood at 25% in February 2024, with core inflation at 26%. Food and transport price increases were the key drivers.

Economic instability and challenges in social services mean that Laos is in danger of losing gains it has made in poverty eradication, education, nutritional status, and other key human development indicators. Structural reforms are needed to stabilize the economic situation and support a more inclusive growth pattern. A child born in Laos today will only be half as productive as she could be if she enjoyed full health and education. Malnutrition continues to be a critical issue affecting people’s physical and cognitive development, with stunting affecting over 30% of children under five. The maternal mortality rate is also high, at 185 per 100,000 births (2017). According to the government, malnutrition is likely to have increased during the pandemic. There has been a significant fall in school attendance since 2022, possibly because of the pressure from inflation upon household living standards.

Last updated date: April 2024

The World Bank Group works with the Lao government to reduce extreme poverty and boost shared prosperity, supporting the Ninth National Socio-Economic Development Plan 2021-25 and the 2021 National Agenda to Address Economic and Financial Difficulties. 

A World Bank Group Country Partnership Framework 2023-26 was launched in early 2023 following consultations on the most promising options that could develop a resilient economy and bring about poverty reduction and shared prosperity. The immediate priority is to protect the most vulnerable in Lao society from the effects of economic shocks, and then to help the government with reforms that can stabilize the situation in the longer term.

The current framework includes an intensive program of technical advice on macroeconomic and debt-related policies, World Bank funding for health, education, and social protection, and support from IFC and the World Bank for private sector employment. It also looks to support better management of natural resources, which are essential to the livelihoods of over 80% of Lao people. The framework follows an updated Systematic Country Diagnostic and a Country Economic Memorandum, which outline developments in Laos over the past few years, updating knowledge and filling data gaps. They identify the most pressing development challenges and explore how the country can take advantage of its strategic location and natural wealth to seize emerging opportunities and rebalance the economy for more inclusive and sustained growth.

The World Bank has an ongoing portfolio of 28 projects in Laos, with a funding value of over $938 million. These include 23 projects, worth $883 million, financed by the International Development Association, the World Bank’s fund for the most in-need countries.

The International Finance Corporation (IFC), the private sector arm of the World Bank Group is also active in Laos. Since 2000, IFC has invested and mobilized more than $98 million in the country, mainly in the power, banking, manufacturing, and services sectors. IFC is currently implementing five advisory projects valued at $12.2 million to improve the business environment, expand access to finance for small and medium enterprises, boost sustainable economic growth, and create more jobs.

To support implementation of Laos’ National Agenda on Addressing Economic-Financial Difficulties, the World Bank is advocating urgent reforms in five crucial policy areas:

1: Raise public revenues to protect spending on education, health, and social protection

Current challenge: Tax exemptions deprive the government budget of much revenue, leaving less money for schools, health care, and debt repayment. Tax exemptions for foreign investments also reduce foreign exchange inflows.

Key reforms: Curb tax incentives and exemptions; return VAT to 10% and collect 1% of GDP through taxes on alcohol and tobacco; strengthen tax administration; reprioritize spending toward education, health care, and social protection.

2: Improve expenditure efficiency

Current challenge: Inefficient public investment is costly, and state-owned enterprises and public-private partnerships often create government liabilities.

Key reforms: Make investors and contractors compete for concessions and contracts; improve state enterprise management; control public investment more tightly.

3: Restructure public debt

Current challenge: High public debt undermines macroeconomic stability by constraining fiscal space, and exerting pressure on the exchange rate, which drives inflation.

Key reforms: Restructure the debt through ongoing negotiations; limit non-concessional borrowing.

4: Strengthen financial sector stability

Current challenge: Vulnerabilities in the banking sector remain high, despite the restructuring of two state-owned banks. The sector is faces liquidity constraints in foreign exchange, rapid currency depreciation and record inflation levels. Recent increases in the banking sector’s financing of government deficits increases risk and threatens to crowd out private sector financing. The largest eight banks have significantly lower capital levels than do smaller banks.

Key reforms: Enhance bank monitoring; operationalize existing legal and regulatory tools to manage vulnerability, and develop plans to remove special banking measures brought in during COVID-19.

5: Improve the business environment and promote exports

Current challenge: Burdensome processes and regulations raise business costs and undermine productivity.

Key reforms: Simplify business registration processes and regulations; make licensing transparent.

Last updated date: April 2024

The Lao PDR COVID-19 Response Project, approved in April 2020 and expanded in mid-2021 to a total value of $33 million, helped Laos upgrade its initial target of vaccinating 50% of the population by the end of 2021 to a revised goal of 70%. According to the Ministry of Health, by January 2023 over 6.2 million people in Laos had been given at least one dose of COVID-19 vaccine, or 84% of the population. Over 76% of Lao people were fully vaccinated in under two years. The project has also strengthened national disease surveillance and testing throughout the country — 94% of COVID-19 test sample results were reported within 48 hours of testing — and established 24 new acute health facilities with isolation centers. It delivered emergency medical equipment and supplies, assisting health professionals at the frontline. Both the Bank and the national authorities demonstrated practical flexibility: Having received sufficient COVID vaccines from donors, Laos was one of the first countries to reallocate funds marked for their purchase to non-COVID-19 vaccines and essential drugs, thereby filling critical gaps in essential service availability.

Since 2018, the Lao PDR-World Bank Competitiveness and Trade Project has been helping Laos simplify business regulations, facilitate trade, and improve the competitiveness of private firms. Under its Business Assistance Facility by mid-2023 over 364 firms, 65% of them led by women, had received grants to upgrade productivity. For 192 companies, that support directly helped them weather the impact of COVID-19. Many have also benefited from free business advisory services. The project has worked with the government on a series of business regulatory reforms, reducing the number of steps needed to register a business from nine to three, and simplifying the business licensing regime. It is now also easier for troubled firms to restructure so that capital does not get stuck in insolvent businesses but can flow to more productive uses. Support to the Lao National Chamber of Commerce in its reform dialogue with the government led to breakthroughs at the March 2023 and April 2024 Lao Business Forums, with agreements and progress on new dialogue mechanism for addressing major business issues.

The recently completed Scaling-Up Participatory Sustainable Forest Management Project supported over 100,000 people, largely from ethnic minorities, in over 650 forest villages. Livelihood support and casual employment in forest restoration have reduced the deforestation rate and saved an estimated 1.8 million metric tons of carbon dioxide-equivalent emissions. The Second Lao Environment and Social Project has strengthened environmental management policy and capacity, updating the country’s Environmental and Social Impact Assessment Decree, and the Environment Protection Law. Laos is now publicly disclosing air pollution data, environmental compliance monitoring reports, and a state of the environment report. The project also strengthens forest management systems, promoting conservation-friendly livelihoods in 191 villages and strengthening the capacity to curb the illegal wildlife trade. With support from the wider Resilient Green Growth Program, the government has also finalized a National Plastic Action Plan, setting out goals, strategy, and activities for improving plastic management and reducing pollution.

With poverty and malnutrition threatening to grow again, the Reducing Rural Poverty and Malnutrition Project protects the most vulnerable from economic shocks and addresses longstanding nutrition problems. The first nutrition sensitive conditional cash transfer program in Laos has so far delivered cash to over 38,600 people, with a focus on poor and vulnerable pregnant women and children aged under two. These transfers are conditional on the use of basic health services: In the target areas, around 99% of children under 2 now receive regular growth monitoring, and 94% of pregnant women have attended at least four ante-natal care sessions. The project also set up the country's first national register of poor and vulnerable people, which has so far registered over 1.2 million households and is being used by the government and UN agencies to allocate assistance. In coordination with five other World Bank-financed projects, the project has addressed the root causes of child malnutrition. A recent study estimated that without these ‘nutrition convergence’ projects, the incidence of stunting and wasting among children under two would have been 7.7% and 3.4% higher in the target area. Consumption of diverse foods needed for adequate nutrition has increased by 12.7% among children aged 6–12 months.

The Bank provides support to the Lao transport sector to improve trade, road connectivity, and sector management. Improvements to National Roads 13 North and South have upgraded the safety and climate resilience of 98 km of these major national arteries. Under the Southeast Asia Regional Economic Corridor and Connectivity Project, the Bank is supporting the improvement of 136 km of National Road 2, which facilitates connectivity and trade with Vietnam and Thailand, plus 300 km of local roads in the northern provinces to improve domestic access to the regional corridor. This project also encompasses development of border facilities, dry-ports, and consolidation to promote agricultural exports. So far, the improvement and maintenance of roads is estimated to help 2.63 million people through better access to farms, markets, health services, schools, and jobs, while also boosting trade.

Last updated date: April 2024