Lao Economic Monitor, May 2025 - Weathering Risks: Key Findings

The Lao economy grew by 4.1% in 2024, driven by strong performance in services, electricity, mining, agriculture, and manufacturing. Foreign tourist arrivals rose by 21% while domestic travel increased. Improved connectivity has supported exports and tourism. Industry grew moderately, despite persistent labor shortages. Agriculture remained resilient, bolstered by export demand for non-rice crops and livestock. Challenges persist, however. Double-digit inflation continues to erode household purchasing power, dampen consumption, and increase business costs, while the shortage of workers poses a risk to sustained growth.

Part A: Recent Economic Developments and Outlook

• Inflation remained in double digits in early 2025 but decelerated over 2024 due to a more stable exchange rate and continued monetary tightening. This was supported by improved government revenue collection. The introduction of a Treasury Single Account improved liquidity management and the kip has gradually appreciated since August 2024. Foreign exchange regulations, such as mandatory conversion of export proceeds, pose medium-term risks to investor confidence and liquidity if prolonged, and could test the sustainability of recent exchange rate stability.
  
• Fiscal consolidation progressed in 2024, supported by stronger domestic revenue performance, while spending in the social sector and on infrastructure maintenance remains constrained. Higher domestic revenue enabled a fiscal surplus of 1.6% in 2024, which partially offset rising interest payments on debts.
• Increased domestic borrowing by the government could crowd out the credit available to private companies, which would be particularly damaging for small firms.
• Public debt remains at unsustainable levels, despite falling to an estimated 99% of GDP in 2024. Laos started paying interest payments in full in 2024, while deferrals of principal to key creditors continued. External debt in foreign currencies exposes Laos to exchange rate risks. Fiscal risks from contingent liabilities associated with state-owned enterprises and public-private partnerships remain a concern.
• The financial sector continues to face vulnerabilities, with interest receivables rising for some banks, and bank performance uneven. The growing dependence on domestic financing risks further raising interest rates. Dollarization remains high, with foreign currency deposits accounting for 69% of broad money. Asset quality risks are emerging as special measures brought in during COVID-19 are phased out.
• Economic growth is projected to soften to 3.5% in 2025. Tourism and transport services are expected to grow, albeit more moderately, as external demand slows. Amid continued monetary and fiscal tightening, and softened demand side pressures, inflation is expected to continue easing but will stay in double digits in 2025.
  
• Debt repayments will peak in 2025, elevating financing needs and limiting the room for essential public spending. Revenue collection is projected to strengthen, supported by the reinstatement of fuel excise rates and improvement in tax administration.

This outlook is subject to significant risks. Global uncertainty regarding trade policies could further affect external demand and investment from trading partners. Domestically, tight foreign exchange liquidity, limited access to international capital markets, slow progress on structural reforms, and weakening bank balance sheets present challenges.

Part B: Unlocking Finance for Micro, Small and Medium Enterprises (MSMEs)

• Laos’ financial sector is bank dominated and highly vulnerable to macroeconomic volatility. A high degree of dollarization, foreign exchange liquidity constraints, rapid currency depreciation, and record inflation have affected bank operations on various scales.
• Expanding access to finance for MSMEs is important for macroeconomic stability and healthy financial sector development.
• MSMEs make up the majority of enterprises in Laos, dominating employment. They remain largely informal, and are mainly concentrated in trade, services, and manufacturing.
• Access to finance is a significant challenge for MSMEs, which largely rely on internal funds for short-term expenses and financing of fixed assets. Access to credit is impeded by a lack of collateral, irregular income streams, low financial literacy, high informality, and unreliable financial management and reporting.
• MSMEs also face credit supply constraints, with expanded bank lending to the government and large companies limiting the amount of credit available to small firms. In addition, financial products remain traditional and lack innovation, while financing sources from non-bank financial institutions are limited.
• Reforms that would promote more sustainable access to finance include:

1. Addressing macroeconomic vulnerabilities to cushion impacts on MSMEs and reduce the crowding-out effect on MSME lending
2. Supporting microfinance institutions so they can expand to underserved areas and diversify their range of financial products
3. Enhancing credit infrastructure
4. Phasing out concessional finance-based programs and transitioning governmental MSME lending initiatives to an independent fund for improved governance
5. Adopting rigorous monitoring and evaluation mechanisms for government support programs.