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publication January 11, 2021

Lao Economic Monitor, January 2021: Supporting Economic Recovery

Key Findings

  • The COVID-19 outbreak has intensified the growth slowdown, plunging the Lao economy into its first recession since the Asian financial crisis of the late 1990s. Recovery is expected over 2021 and in the medium term.
  • GDP growth will decline to −0.6 percent in 2020, as all sectors experience adverse effects of varying intensity. The service sector and industry have been most affected.
  • The pandemic is having a deeply negative impact on travel and tourism. From January to September 2020, Lao PDR saw a 74 percent year-on-year drop in total tourist arrivals.
  • Pressure on the Lao kip remains high. The gap between the official exchange rate and the rates quoted by exchange bureaus is wide, although it has fallen slightly from its peak of 9.7 percent at the end of July 2020 following stricter controls placed on the parallel foreign exchange market.
  • Headline inflation is high because of rising food prices and depreciation of the kip.
  • The government faces unprecedented fiscal challenges. Revenue collection from January to November 2020 reached only 77 percent of the revised budget. The fiscal deficit is projected to increase to 7.6 percent of GDP in 2020.
  • Structural vulnerabilities have increased the public debt burden and difficulties in servicing debt. Public debt is expected to rise to 69 percent of GDP in 2020. External debt-service payments stood at US$1.2 billion for 2020.
  • Under a baseline scenario, growth in 2021 is expected to rebound to 4.9 percent. Medium-term growth is projected to gradually recover due to infrastructure investment allied with growth of services, exports, and private consumption.
  • Downside risks which challenge the growth outlook include a prolonged COVID-19 outbreak, sluggish recovery among trading partners, difficulties in meeting public debt-service obligations, financial sector vulnerabilities, rising food prices, and job uncertainty.

The COVID-19 pandemic and its containment measures have affected livelihoods

  • The pandemic has put jobs at risk. By July 2020, nearly 13 percent of workers employed before the pandemic had lost their jobs, pushing the unemployment rate to over 25 percent.
  • Rising food prices have led to growing food insecurity among the poorest. In June — July 2020, 70 percent of households reported being affected by rising food prices. In response, approximately 37 percent of affected households reduced their food consumption.
  • Remittances have declined. From March to July 2020, 58 and 54 percent of households receiving remittances experienced a reduction from domestic and international sources respectively.
  • COVID-19 has exposed social safety net gaps. The government’s financial assistance for those unemployed by the pandemic only reaches workers with access to the social insurance scheme: just 12,000 affected workers (0.4 percent of pre-pandemic employment) have claimed the benefit.
  • Policy options to safeguard the livelihoods of the most vulnerable include: i) Expanding coverage of cash and in-kind food transfers; ii) Facilitating transport of agricultural inputs and outputs; and iii) Promoting skill development for laid-off workers and returned migrants.