Lao PDR

The Lao PDR achieved impressive growth in the first 20 years of this century, attaining significant development gains. In the early 2000s, it was among the fastest growing economies in the world, with average annual growth of around 7%, driven by capital-intensive mining and hydropower industries. It attracted foreign investment and fostered regional integration. From 2000 to 2019, many human development indicators improved, including for child and maternal mortality, access to education, income poverty, and gender equity.

However, this natural-resource dependent growth has not translated into widespread job creation or increased equality. While poverty decreased, it did so at a slower pace than in neighboring countries. Inequality rose from 30.5 to 38.8 on the Gini Index between 1991 and 2019, while stocks of natural capital have been depleted. Public debt increased to critical levels, estimated at about 88% of GDP in 2025, driven by low revenue collection and an accumulation of debt in the electricity sector.

The economy began slowing in 2018 following costly floods and was then hit by the COVID-19 pandemic, when foreign tourism halted. These shocks exacerbated long-standing structural vulnerabilities. In recent years, the national currency has depreciated. In August 2020 a US dollar bought around 9,000 kip, while in October 2025 it bought over 21,500 kip. This led to inflation that topped 31% across 2023, with many households struggling to cope with falling living standards. Meanwhile, limited spending on education, health, and social protection has undermined human capital and increasing numbers of Lao workers have migrated abroad, mostly to Thailand, leaving labor shortages at home.

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While economic conditions have been challenging since 2020, with high public debt and persistent inflation affecting household incomes and development progress, improvements have been apparent since mid-2024, with improved state revenue collection and tighter monetary policy helping to stabilize exchange rates. The Lao economy is projected to grow by 3.7% in 2025, but economic volatility will likely continue to limit spending on health, education, social protection remaining inadequate. Public and publicly guaranteed debt is still high, making Laos dependent on loan repayment deferrals, which were worth about 16% of GDP by the end of 2023.

Economic growth in 2024 was driven by tourism, transport, electricity generation, mining, agriculture, and manufacturing. High inflation and declining real wages in 2023-24 drove many workers from wage and unpaid family work to self-employment, while also increasing outmigration. Labor shortages are a critical constraint for private business, with the 2025 Enterprise Survey finding a lack of workers to be the biggest constraint on private business in the country.

While nominal wages and household incomes are growing, prices are still rising faster. A January 2025 World Bank survey showed that around a third of households reduced spending on food, health and education. Macroeconomic instability affects the labor market, household living standards, and development of human capital —the knowledge, skills, and health that people accumulate throughout their lives, enabling them to reach their potential.

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Laos is sparsely populated and mountainous, located in the center of mainland Southeast Asia, with no sea coast. Its position and rugged terrain have historically limited access to trade and thus economic development, but Laos’ position between China, Thailand, and Viet Nam now offers strategic access to Chinese and ASEAN markets. Investments in hydropower projects, roads, bridges, and the Laos-China railway have given Laos the potential to greatly benefit from regional trade and to export large volumes of clean electricity. It is also emerging as a significant tourism destination, offering nature and culture based experiences to growing numbers of visitors.

The World Bank Lao PDR Country Economic Memorandum explores how the country can take advantage of its strategic location and natural resources to seize opportunities and rebalance its economy for more inclusive and sustained growth. At present, a child born in 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.

Education also lags behind the results achieved in most regional and economic peers, with the resulting lack of skilled labor deterring investment in the country. As a consequence, agriculture remains the dominant employment sector and many Lao workers who have acquired skills are attracted by higher wages in neighboring Thailand. Investment in human capital can help Laos take advantage of its young population, while the funding of better roads and infrastructure will help those working the land connect to emerging trade routes and substantial markets, bringing capital back to rural areas.

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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. The immediate priority of the World Bank Lao PDR Country Partnership Framework 2023-26 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.

The World Bank has 20 ongoing projects financed by the International Development Association, the fund for countries most in need, with a value of over $966 million. The largest sectors by funding amount are infrastructure (34%), environment (17%), and health, nutrition and social protection (14%).

IFC provides funding and advisory solutions to enhance access to finance for Lao businesses and drive economic growth and productivity. Since 1998, IFC has invested about $150 million in Laos. IFC is exploring opportunities to scale up support in renewable energy and agribusiness. To boost trade and regional connectivity, it focuses on improving logistics infrastructure. In support of low-carbon growth, it is working with the government to establish green finance standards and strengthen the banking sector's climate lending capabilities.

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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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