The Lao PDR’s macroeconomic situation has become more challenging over the last three years. Long-standing structural vulnerabilities have been exacerbated by the impacts of the COVID-19 pandemic, soaring public debt, and testing global macroeconomic conditions. As a result, the national currency has devalued and inflation is soaring. This situation affects vulnerable people most seriously.
Consistent growth over the previous two decades was 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 have 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 became more pronounced during the COVID-19 pandemic, which highlighted how vulnerable Laos is to external shocks. The government moved decisively to contain the virus, but lengthy lockdowns resulted in job and livelihood losses and reduced foreign exchange earnings. Economic activity virtually stagnated in 2020, with GDP growing by only 0.5%. The second wave of the pandemic in 2021 dented hopes of a strong rebound, with a growth rate of just 2.7% estimated over 2022. The kip lost 68 percent of its value against the US dollar over the year to October, leading to temporary shortages of fuel and limited access to foreign exchange at the official exchange rate.
The cumulative effects of these setbacks mean the country faces macroeconomic instability, heightened financial risks, and negative trends in state expenditure. As public debt service obligations rise and revenues decrease, spending on crucial social services such as education, health care, and social protection is down in real terms.
By February 2023, inflation had surpassed 40% year-on-year. The Lao government is looking to adapt to the changing economic situation, but has limited fiscal space for manoeuvre. The prime minister has emphasized the need to stabilize the economy, especially by reining in inflation, and repaying debts accumulated by state-funded development projects and state enterprises.
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. Moreover, at least 70% of Lao children were unable to access online classes during the pandemic.
Last Updated: Apr 10, 2023