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FEATURE STORY August 20, 2021

Lao PDR Economic Update, August 2021: A Path to Recovery

Key Findings

The economic recovery in 2021 is likely to be slower than previously anticipated, mainly owing to containment measures introduced to tackle a second wave of COVID-19.

Ø  GDP growth will rebound to 3.6 percent in 2021. Agriculture and industry are expected to drive growth, supported by solid external demand. There has been strong growth in agricultural exports, while industrial growth reflects a rebound in energy, mining, and export-oriented manufacturing and processing.

Ø  Services — especially hospitality, transport and other tourism activities — are struggling to recover. The second COVID-19 wave since mid-April has reversed the initial recovery of Q1 2021.

Ø  The fiscal deficit is expected to narrow slightly to 4.7 percent in 2021, due to improved revenue collection and lower spending. Domestic revenues rose by 12 percent year-on-year in the first half of 2021, supported by a strong rebound in revenues. However, following the second COVID-19 wave and lockdown, total revenue-to-GDP ratio is projected to fall over the rest of the year, mostly on account of lower profits, income taxes, and non-tax revenues.

Ø  Total public and publicly guaranteed debt has reached critical levels, jeopardizing macroeconomic stability. PPG debt in 2020 reached $13.3 billion, or 72 percent of GDP, from 67.3 percent in 2019. The government has mostly relied on non-concessional debt to finance investment projects and refinance debt. The energy sector, mostly represented by EDL, accounted for about 36 percent of outstanding PPG debt in 2020.

Ø  External debt distress risk remains high, while reserves buffers are low, at about $1.2 billion in May 2021. The cost of financing has risen. On average, $1.3 billion of public external debt service is due each year over 2021-25, equal to over 50 percent of total public sector revenue. 

Ø  The current account deficit should widen slightly in 2021, with growing external interest payments expected to offset an improved goods trade balance. Solid export growth, supported by stronger external demand and higher commodity prices, should improve the merchandise trade balance. In contrast, high external interest payments on public debt and a reduction in remittances will offset improved export performance.

Ø  A weakening kip is fueling domestic inflation and resulting in more expensive external debt service costs. Headline inflation rose to around 4 percent year-on-year in June, from 2 percent in January. This causes problems for the urban poor in particular.

Ø  The economy is expected to gradually recover in the medium term, but growth will remain below pre-pandemic levels, at about 4.5 percent in 2022. The recovery is expected to be supported by exports, gradual pickup in the services sector, and investment in infrastructure.

Ø  To benefit from new infrastructure and trade agreements, momentum on business reforms and trade facilitation needs to increase enough to boost private investment and exports.

Ø  Significant downside risks remain, including slower-than-projected growth among trading partners, and delays in the international vaccination rollout needed to restore tourism and foreign investment. Domestic risks include possible new community outbreaks and persistent foreign exchange liquidity constraints. 

The Impacts of COVID-19 on Business and Livelihoods Recovery

Ø  While the labor market recovered in Q1 2021, the second outbreak is threatening jobs and livelihoods. Employment among adults dropped sharply in May 2021. Around a third of family businesses are temporarily closed, and of those still open, more than half have seen revenue decline.

Ø  The second wave of the pandemic has inflicted further losses to household incomes, which had only partially recovered from the first wave. Concern about food insecurity has increased with over a quarter of surveyed households very concerned about food insecurity for people in their community.

Ø  Lockdowns, health concerns, and falling demand have caused major disruptions to business operations and performance. Surveys indicate that annual sales in 2020 fell by more than 40 percent from 2019. The second outbreak has deepened the shock, with monthly sales falling by 48 percent in March/April 2021.

Ø  Many businesses face liquidity shortages and payment difficulties. Almost half of all firms have reported cashflow shortages and more than a third have delayed some payments for more than a week. While a relatively low share of firms have filed for insolvency, more than a quarter of businesses are expecting to fall into arrears over the next six months.

Ø  Further, heightened uncertainty and a pessimistic outlook may drag on future productivity. A substantial share of firms reduced investment in 2020 and most expect further decline in the next six months.

Ø  Evidence suggests that around 16 percent of Lao firms have invested in digital technologies or new delivery methods associated with lower sales losses. Support could help more firms use such methods to turn crisis into opportunity.

Ø  Government support to firms is still limited in both coverage and types of instruments. Almost half of all businesses report that they are not aware of government support programs. Access to government assistance has been largely through fiscal exemptions, tax reductions or deferrals, and has benefited large firms disproportionally.