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 weakened and inflation is soaring. This situation affects poorer 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 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 estimated at 2.7% for 2022 and forecast at 3.9% for 2023. Between July of 2021 and 2023, the currency — the kip — lost more than half of its value against the US dollar, 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 food price inflation. As public debt service obligations rise and revenues decrease, spending on crucial social services such as education, health care, and social protection is down.

By February 2023, inflation had surpassed 40% year-on-year and while this figure had eased to 26% by August, prices continue to rise. The Lao government is looking to adapt to the changing economic situation, but has limited fiscal space for maneuver, while growth remains reliant on mining and hydropower, which only employ 1% of the workforce and, according to the Bank of the Lao PDR, retain only about 30% of their export earnings in-country. 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 under lockdowns.

Last Updated: Oct 06, 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 and the 2021 National Agenda to Address Economic and Financial Difficulties. 

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 26 projects in Laos, with a funding value of $886 million. The largest sectors in the portfolio, by total financing, are transport (25%), social protection (14%), plus environment, natural resources and blue economy, and education (both 8.5%).

The International Finance Corporation (IFC) is also active as one of the five institutions that make up the World Bank, 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 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; 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: Oct 06, 2023

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. It has extended its Business Assistance Facility to an additional 300 firms and raised the target to 500 by April 2024. 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 readily 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 a breakthrough at the March 2023 Lao Business Forum, with an agreement on a new dialogue mechanism for addressing major business issues.

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

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 involving 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.

With poverty and malnutrition threatening to grow again in areas of Laos, the Reducing Rural Poverty and Malnutrition Project provides tools for protecting the most vulnerable from economic shocks and addressing 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 mean that more people are using essential local 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 ANC sessions. The project supported development of the country's first national social registry, which has so far registered over 1.2 million households and is being used by the government and UN agencies to prioritize support for poor and vulnerable families. Dovetailing with five other World Bank-financed projects on nutrition convergence (coordination of activities to address the multi-dimensional causes of malnutrition), the project has helped mitigate the effects of COVID-19 and high inflation on child nutrition. A recent study estimated that without the convergence approach, 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 2,634,000 people through better access to farms, markets, health services, schools, and jobs, while also boosting trade.

Last Updated: Oct 06, 2023