The World Bank In Lao PDR

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

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, to which the Bank and other development partners contributed.

A new 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 new 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 24 projects in Laos, with a funding value of $890 million. These include 21 projects, worth over $775 million, financed by the International Development Association, the World Bank’s fund for the most in-need countries. The largest sectors in the portfolio, by total financing, are transport (25%), environment, natural resources and blue economy (16%), and education (10%).

The International Finance Corporation (IFC) is also active as one of the five institutions that make up the World Bank Group, and the largest global development institution focused exclusively on the private sector in developing countries. Since 2000, IFC has invested and mobilized more than $98 million in Laos 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 Group 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 include: Curb tax incentives and exemptions; 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 include: 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 include: 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 include: 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 include: Simplify business registration processes and regulations; make licensing transparent.

Last Updated: Apr 10, 2023

The Lao PDR COVID-19 Response Project, approved in April 2020 and expanded in mid-2021, has a total project value of $33 million. The project 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. Almost 75% of people were fully vaccinated. Booster doses continue to be encouraged. The project delivers emergency medical equipment and supplies, enhancing the technical capacity of health professionals at the frontline, and builds isolation facilities, intensive care units and laboratories. The Bank conducted a series of five COVID-19 Rapid Monitoring Phone Surveys across Laos to gather and analyze data on the social and economic impacts of the pandemic. Further surveys have been conducted to gauge satisfaction with the national response to COVID-19, so as to inform response to future emergencies.

Supporting the government’s green growth strategy, the recently completed Scaling-Up Participatory Sustainable Forest Management Project has helped build a solid foundation for the strategically important forest sector in Laos. The project worked with 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 tonnes 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.

Since 2018, the Lao Agriculture Competitiveness Project has supported the development of rice, maize, and vegetable value chains in five provinces, providing small-size matching grants for farmer groups to adopt good agricultural practices (GAP), while helping agribusinesses improve post-harvest management and increase processing efficiency. By February 2023, the project had supported 60 rice seed multiplication groups involving 1,377 households, and 317 farmer production groups (14,784 households). Around 30,000 farmers had been trained in GAP and early results show increases in yield, sale price, and profit, along with reduced production costs. Average rice yields in 2021-22 reportedly increased by nearly 10% for the rice seed multiplication groups, and by around 15% for the farmer production groups. The selling price increased by around 10% for certified seeds and 20% for GAP paddy. Net profits for farmers increased by 30-41%, with production costs falling by 10%. The project has also facilitated productive partnership agreements between farmer groups and agribusinesses to improve farm produce marketing. Progress has been made in policy reforms, including a rice export strategy, agriculture quality mark guidelines, and various manuals to improve rice milling standards.

By building water resource management capacity at regional and national levels, the Mekong Integrated Water Resources Management Project helps Laos address its unique water security risks and opportunities, and enables more informed and confident regional dialogue. On transboundary issues, the project supported the preparation of three joint action plans and issues papers to identify where stronger integrated water resource management is needed, and to help advance regional dialogue. Nationally, the project supported drafting and adoption of a Water Resources Law, helping develop and pilot accompanying regulations. Comprehensive water resource modelling packages were developed for eight river basins and support provided for the preparation of the basin management plans. To contribute to a cohesive country-wide meteorological and early warning system, and improve the capacity of water resource management agencies to engage in integrated planning, 89 hydrologic and meteorologic systems were established. An estimated 250,000 people, over half of whom are women, have benefited from this project’s irrigation, drainage, and fisheries management activities.

The Bank works with development partners to support the Ministry of Finance’s efforts to improve public financial management. The Enhancing Public Finance Management through Information and Communication Technology and Skills (E-FITS) project, funded by IDA, has upgraded the government’s debt management and financial information systems, enabling improved accuracy of accounting and financial reporting, and more effective and transparent debt management. The procurement process for a new financial management information system is expected to significantly improve the efficiency and reliability of budget execution, financial reporting, and the transparency and accountability of the whole system.

The recently completed second phase of the Public Finance Management Reform program helped the finance ministry advance reforms to make the budget more credible and predictable, and advised on how to improve cash management through a Treasury Single Account. The project contributed to implementing instructions for four tax laws, and introduced a modern, risk-based approach to audits in tax administration. A new public procurement website was developed and launched in April 2022, while standard bidding documents, a procurement manual, and training were provided to help government officials apply the public procurement law. To further improve civil service data records, a personnel information management system and training support were expanded to all 18 provinces, and legislation on a Code of Ethics rolled out nationwide with promotion materials.

The Lao PDR Financial Sector Development analytics and advisory services program has been working with the Bank of the Lao PDR on enhancing financial stability, modernizing financial infrastructure, and upgrading the legal and regulatory framework. Following approval of the Commercial Bank Law, which was prepared with World Bank support, the program has continued assistance with developing secondary regulations for commercial banking law, including decisions on handling dormant accounts, loan classification and provisioning, plus measures for early intervention for financial institutions and resolution of financial institutions in crisis. Together with the development of an early warning system, the development of these last two measures is timely, given the increasing risks to financial sector stability. Overall, the program has strengthened the central bank’s capacity to manage problems that may emerge in the banking sector.

The Lao PDR Southeast Asia Disaster Risk Management Project helps reduce the impacts of flooding in target areas and enhances government capacity to provide hydro-meteorological services and disaster response. The project had completed 80% of riverbank protection works in Muang Xay, Oudomxay province, by August 2022 and constructed two provincial hydro-meteorological offices, in Phongsaly and Oudomxay. Laos now has insurance in place for natural disasters through the Southeast Asia Disaster Risk Insurance Facility, which issued a policy in March 2021.

Last Updated: Apr 10, 2023