Lao PDR

Economic growth in the first 20 years of this century resulted in significant development gains in the Lao PDR, and the country is expected to leave the UN ranking of Least Developed Country in November 2026. However, much of this growth has depended on capital-intensive industries that have failed to generate large numbers of quality jobs. Meanwhile, levels of health and education in Laos are falling further behind those of its neighbors. With high levels of debt and low investment in human capital, the country is vulnerable to external shocks and is looking to reforms that will lead to more sustainable growth patterns.

Laos’ landlocked location and mountainous geography have historically shaped its development path. Recent investments in electricity generation and transport infrastructure now provide opportunities for links to global trade and value chains, and some benefits are already visible. Building on this momentum, continued reform and investment are needed to make such opportunities more widely available and to harness the potential of the country’s young population.

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The Lao PDR has achieved significant economic growth and considerable poverty reduction over the past decade. Real GDP growth rate averaged 5.3% per year between 2015 and 2024, while real GDP per capita rose by over a third, based on 2012 kip prices. In tandem with economic growth, the national poverty headcount ratio fell from 24.6% in 2012/13 to 15% in 2024/25. On a more recent scale, macroeconomic conditions began declining before the COVID-19 pandemic and were further eroded by high inflation and shortages of foreign exchange from 2022-24. The situation improved in 2025, with growth strengthening, inflation easing, and external buffers increasing.

However, the recovery remains uneven and vulnerabilities persist. Debt distress continues to constrain policy choices, real incomes remain under pressure, and the economy is still highly exposed to external price shocks, particularly through fuel imports. Sustaining recent gains will therefore require continued policy discipline, careful management of fiscal risks, and protection of expenditure that supports vulnerable households and long-term growth. Prioritizing targeted and fiscally sustainable measures, alongside more effective public spending, especially on health, can help strengthen resilience and sustain growth.

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Poverty is falling, with the national poverty rate down from 24.6% in 2012 to 15% in 2024 and about 500,000 fewer people living in poverty than a decade ago. More households now have better housing, improved sanitation, access to grid electricity, and durable assets. Inequality has also fallen, reversing a two-decade upward trend. However, poverty reduction has slowed since 2018 and household purchasing power has been eroded by high inflation, while the number of good jobs remains limited. Most workers are in informal or low-productivity work and young people aged 15-24 are significantly more likely to be economically inactive than others.

Health and education indicators in Laos lag behind those of regional and economic peers. At present, 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 limit physical and cognitive development, with stunting affecting almost a third of children under five, while the maternal mortality rate is high, at 126 per 100,000 births in 2020. Low levels of education have resulted in a lack of skilled labor that deters investment in the country. As a consequence, agriculture remains the dominant employment sector while many Lao workers who have acquired skills are attracted by higher wages in neighboring Thailand.

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The World Bank Group works with the Lao government to reduce extreme poverty and boost shared prosperity, supporting national development plans and policies. The immediate priority is to protect the most vulnerable from the economic shocks of recent years, while advising the government on reforms that can stabilize the situation in the longer term. IFC, the World Bank Group member focused on the private sector, provides advice to Lao companies and governments on key areas of private sector development, including access to finance, Environmental, Social and Governance matters, trade and competitiveness, and public-private partnerships. Since 1998, IFC has invested about $150 million in Laos whileworking with financial institutions to expand the reach of its work. IFC is exploring opportunities to scale up support in renewable energy and agribusiness, and to boost trade and regional connectivity.

The World Bank has 18 ongoing projects in Laos, mostly financed by the International Development Association, the fund for countries most in need. The total portfolio is worth over $754 million. The largest sectors by funding amount are Infrastructure & Disaster Risk Management (33%), Health & Education (22%), and Environment (16%). The portfolio has been narrowed in recent years, with a reduction in the number of projects accompanied by greater focus on the most urgent sectors and replication of strategies that have proved successful.

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The World Bank advocates reform in five crucial policy areas:

1) Raise public revenues to protect spending on education, health, social protection

Tax exemptions deprive the budget of much revenue, leaving less money for schools, health care and debt repayment. Tax exemptions for investors also reduce foreign exchange inflows.

Reforms: Curb tax incentives and exemptions; collect 1% of GDP through alcohol and tobacco taxes; strengthen tax administration; reprioritize spending to education, health care, and social protection.

2) Improve expenditure efficiency

Public investment is inefficient, and state-owned enterprises and public-private partnerships often create government liabilities.

Reforms: Make investors and contractors compete for concessions and contracts; improve state enterprise management; control public investment more tightly.

3) Restructure public debt

High public debt undermines macroeconomic stability by constraining fiscal space, and exerting pressure on the exchange rate, which drives inflation.

Reforms: Bring ongoing bilateral debt negotiations to a successful conclusion; strengthen controls over public sector borrowing; limit non-concessional borrowing.

4) Strengthen financial sector stability

Banking sector vulnerability remains high. The sector faces liquidity constraints in foreign exchange, currency depreciation, and inflation levels. Increased domestic financing of government debt increases risk and threatens to crowd out private sector financing. The eight largest banks have significantly lower capital levels than do smaller banks.

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

Burdensome processes and regulations raise business costs and undermine productivity.

Reforms: Continue to simplify business registration processes and regulations; make licensing transparent.

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