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BRIEFJuly 5, 2022

Lao PDR Systematic Country Diagnostic 2021 Update Brief

The World Bank

This Systematic Country Diagnostic (SCD) updates the analytical work of the 2017 SCD in the light of new evidence. In 2017, the World Bank Group published the first SCD for the Lao PDR, which comprehensively assessed the binding constraints to economic growth, inclusion, and sustainability. This SCD uses recent evidence to describe developments since 2017, revisit the previous pathways and priorities for achieving the twin goals of ending extreme poverty and boosting shared prosperity, and update knowledge and data gaps. It identifies the most pressing development challenges supported by new data and analytical work and emerging opportunities.

The full SCD is published in English, with the Executive Summary available in a combined Lao-English document.

Key Findings 

Recent evidence suggests that poverty has been reduced but income inequality is increasing.

While significant development progress has been achieved, several challenges have become more prominent since 2017 and amplified by the COVID-19 pandemic. Key risks identified in the 2017 SCD to macroeconomic stability, the inclusiveness of growth, and environmental degradation have materialized.

High public debt levels are fueling macroeconomic instability and threatening development prospects. Laos is facing both liquidity and solvency challenges owing to a high debt burden, poor revenue collection, limited financing options, and low foreign currency reserves, which have edged the country toward sovereign debt distress.

The current growth model is showing its limitations, particularly through its inability to support job creation.

COVID-19 brought unprecedented and cascading shocks with a profound impact on households and firms. While COVID-19 was declared a health crisis, its impact has been experienced in multiple dimensions. Laos has been largely successful in containing the spread of the virus, yet the pandemic and response measures have affected households and firms, especially vulnerable groups.

The regional context plays a key role in shaping opportunities for trade, investment, and migration. Trade has grown considerably over the past decade. Thailand, China, and Vietnam are the largest destination markets, mainly receiving commodity exports.

This SCD presents three pathways that address the most pressing development challenges facing Laos in the context of fostering an inclusive, sustainable and resilient recovery from COVID-19. Recent evidence suggests there have been improvements in socioeconomic outcomes, such as rising average income levels and poverty reduction. However, there remain significant constraints to inclusive, resilient, and sustainable development.

Chart 1 showing framework for Lao PDR SCD Update 2021

SCD Framework

Source: World Bank staff.

The Stabilize pathway emphasizes the urgency of restoring macroeconomic stability. Macroeconomic instability has become a critical concern hampering progress toward poverty reduction and shared prosperity by threatening living standards through high inflation, economic recessions, and reductions in social spending.

The Share pathway highlights the need for a more inclusive growth process, which could deliver stronger benefits for the poor and the most vulnerable. Fostering inclusive growth will require improving the labor incomes of vulnerable households.

The Sustain pathway envisages the promotion of green growth and improved resilience to shocks. Green and sustainable development will require better institutions and processes to sustainably manage natural resources and enhance action on climate change.

The cross-cutting theme aims to ensure that governance arrangements and institutions support policy implementation. Good governance and institutions are critical to supporting macroeconomic stability, private sector development, public service delivery, and natural resource management.

A reassessment of the challenges and opportunities facing Laos led to the identification of three High-Level Outcomes (HLO) and sixteen development objectives.

Chart showing framework and objectives for Lao PDR SCD Update 2021

Source: World Bank staff.

Development objectives were prioritized in line with new evidence, providing insights that can inform the formulation of the upcoming Country Partnership Framework.

Sustainable debt levels and increased fiscal space were identified as top priorities under the Stabilize pathway as they require immediate attention.

A dynamic private sector and enhanced learning outcomes were identified as top priorities under the Share pathway owing to the importance of reversing the trend of jobless growth.

Improved management of natural resources and enhanced agricultural productivity were identified as top priorities under the Sustain pathway.